Why do Spot ETH ETFs exclude staking rewards? (SEC limitations)

Regulatory Framework and SEC Oversight

1. The U.S. Securities and Exchange Commission treats ETH as a commodity rather than a security, which places spot ETH ETFs under the jurisdiction of the Commodity Futures Trading Commission for certain aspects—but the ETF structure itself remains subject to SEC registration requirements under the Investment Company Act of 1940.

2. SEC staff has consistently emphasized that ETFs must hold only the underlying asset directly, without introducing derivative-like features or yield-generating mechanisms that could blur the line between passive exposure and active investment strategies.

3. Staking rewards involve protocol-level participation, including validator selection, slashing risk, and consensus-layer interaction—elements the SEC views as operational complexities inconsistent with the defined scope of a spot ETF.

4. In multiple no-action letters and public statements, SEC officials have indicated that any mechanism distributing staking yields would require separate registration as an investment contract or potentially trigger broker-dealer or advisory obligations.

Structural Constraints in ETF Trust Agreements

1. Trust documents for approved spot ETH ETFs explicitly prohibit the fund from engaging in on-chain activities such as delegation, block validation, or reward claiming.

2. Custodians like Coinbase Custody and Fidelity Digital Assets are contractually restricted from initiating staking transactions on behalf of the trust—even if technically feasible—because doing so would introduce third-party counterparty risk and governance dependencies.

3. The net asset value calculation for these ETFs relies solely on real-time ETH price feeds from regulated exchanges; inclusion of variable, non-tradable staking accruals would compromise NAV transparency and auditability.

4. Any distribution of staking rewards would necessitate periodic revaluation of accrued but unclaimed tokens, violating the SEC’s requirement for daily, objective, exchange-based pricing.

Precedent from Bitcoin ETF Approvals

1. The SEC’s approval of spot Bitcoin ETFs in January 2024 established a strict template: no yield generation, no network participation, no custody-based staking functions.

2. Applicants for ETH ETFs were required to affirmatively disclaim any intention to pursue staking-related income, mirroring language used in Bitcoin filings to preempt regulatory objections.

3. Legal counsel for several issuers submitted side letters confirming that staking functionality would be omitted even if Ethereum’s consensus mechanism evolved further—reinforcing the principle of structural neutrality.

4. The SEC’s rejection of prior ETH ETF applications cited “unresolved questions about staking economics” as a material deficiency, prompting subsequent filers to excise all references to yield-bearing capabilities.

Operational Risk and Investor Protection Concerns

1. Slashing penalties on Ethereum could result in irreversible ETH deductions from fund assets—a loss event not covered by standard custodial insurance policies approved by the SEC.

2. Time-locked staked ETH (e.g., pre-“Shapella” withdrawals) introduces liquidity mismatches between ETF share redemptions and underlying asset availability.

3. Reward accrual timing varies across validators and is subject to network congestion, making consistent dividend scheduling incompatible with SEC-mandated distribution rules for registered funds.

4. Cross-jurisdictional staking providers may fall outside U.S. regulatory purview, raising concerns about custody oversight, tax reporting accuracy, and anti-money laundering compliance.

Frequently Asked Questions

Q: Can an ETH ETF add staking later if SEC rules change? No. Adding staking would require filing a new registration statement, not just an amendment, because it fundamentally alters the fund’s investment objective and risk profile.

Q: Do offshore ETH funds offer staking to U.S. investors? U.S. persons accessing foreign staking-enabled ETH funds may face IRS reporting obligations under FATCA and PFIC rules—and those vehicles remain prohibited from general advertising or solicitation in the United States.

Q: Why don’t ETFs use liquid staking tokens like stETH? The SEC considers stETH a derivative instrument due to its variable redemption ratio and embedded smart contract risk, disqualifying it from inclusion in a spot ETF basket.

Q: Are there any SEC-registered products that do offer ETH staking exposure? No. As of current guidance, all SEC-registered ETH-related funds—including futures ETFs and index-based ETPs—exclude direct staking mechanics and associated yield distributions.