ARK 21Shares Gives Another Crack at Ethereum ETF With Cash Infusion and Throws in Some Staking Features

ARK 21Shares has updated its application for a spot Ethereum exchange-traded fund, opting for a cash-creation model similar to its approved spot Bitcoin ETF. Additionally, they’ve outlined intentions to stake a portion of the ETF’s Ether (ETH) for extra income.

In December, ARK 21Shares and BlackRock led the way by transitioning their spot Bitcoin ETFs to a cash creation and redemption model after discussions with the U.S. securities regulator.

Initially proposing an in-kind redemption model for the Ether ETF, ARK 21Shares suggested non-monetary payments, such as BTC. Now, under the cash creation model, the company plans to buy Ether matching the order amount, depositing it in the trust’s account with the custodian to create shares for the spot Ether ETF.

Bloomberg ETF analyst Eric Balchunas noted that the changes, outlined in the latest S-1 amendment filed on Feb. 7, now align the Ethereum ETF with the approved spot Bitcoin ETFs.

HERE WE GO AGAIN: ARK/21Shares has just filed an amended S-1 for their spot Ether ETF, looks like they updated to be only cash creations and some other things that bring it in line w the recently approved spot btc etf prospectus.. pic.twitter.com/clN2oZmA6I

— Eric Balchunas (@EricBalchunas) February 7, 2024

The company led by Cathie Wood recognised that the cash creation model could have a negative impact on arbitrage transactions carried out by Authorised Participants. These transactions aim to maintain a close correlation between the share price and the value of Ether.

In its most recent S-1 filing, the ETF issuer also suggests incorporating a staking component into its spot Ether ETF.

“The Sponsor may, from time to time, stake a portion of the Trust’s assets through one or more trusted third party staking providers.”

ARK 21Shares has indicated its intention to stake Ether from the trust’s cold vault balance, with the trust expected to receive staking rewards treated as income.

Recognising the associated risks, such as potential ETH loss through slashing and the likelihood of staked ETH being locked up for extended periods, ARK 21Shares highlighted these staking-related details in brackets. This typically signifies the applicant’s desire to include them and engage in a discussion with the regulator.

Bloomberg ETF analyst James Seyffart expressed his “base case” that the SEC might not permit staking as part of spot Ether ETFs, but he acknowledged that only time will reveal the final decision. Seyffart’s colleague, Eric Balchunas, recently adjusted the odds of spot Ether ETF approval in 2024 from 70% to 60% as of January 30.

The SEC faces deadlines for decisions on various ETF applications, including VanEck’s by May 23, ARK 21Shares by May 24, Hashdex by May 30, Grayscale by June 18, and Invesco by July 5. Applications from Fidelity and BlackRock must be decided by August 3 and August 7, respectively. However, Seyffart anticipates a collective decision on all applicants by May 23, mirroring how the U.S. securities regulator handled spot Bitcoin ETFs on January 10.