While the Securities and Exchange Commission has grudgingly embraced spot bitcoin and ethereum ETFs over the past year, regulators now find themselves grappling with a more complex question: whether exchange-traded funds that earn staking rewards can legally operate within existing investment company frameworks.
The SEC’s recent letter to ETF Opportunities Trust regarding REX-Osprey’s proposed ETH and SOL ETFs reveals fundamental concerns about whether crypto funds with staking exposure meet the Investment Company Act‘s definition of an “investment company”—a seemingly arcane distinction that carries enormous practical implications. Without this legal qualification, these products cannot trade on stock exchanges, effectively rendering them stillborn regardless of investor appetite.
Staking, which allows crypto holders to earn rewards by validating network transactions, represents blockchain technology’s natural evolution beyond simple asset holding. Yet regulators appear uncomfortable with this participatory element, questioning whether registration statements adequately disclose the funds’ true legal status. The SEC’s concerns center not on outright prohibition but on disclosure adequacy and structural compliance—suggesting bureaucratic caution rather than philosophical opposition.
Commissioner Hester Peirce’s newly established Crypto Task Force signals regulatory acknowledgment that existing frameworks require adaptation. Industry leaders characterize recent guidance as representing a “notable shift” toward clarity, though the timeline remains frustratingly opaque. REX Financial and Osprey Funds, while declining detailed comment, have expressed confidence in their ability to address regulatory concerns through enhanced compliance measures.
The implications extend beyond individual fund approvals. The SEC’s scrutiny of staking ETFs reflects broader tensions between traditional securities regulation and decentralized finance mechanisms. Crypto advocates emphasize staking as a core blockchain function rather than an investment strategy, while regulators worry about investor protection and market integrity. Unlike proof of work systems that rely on computational power, staking offers a more sustainable approach to blockchain validation that appeals to environmentally conscious investors. Adding to the confusion, SEC guidance states that staking participants don’t need to register transactions, creating apparent inconsistency with the stricter standards applied to ETF products.
Current regulatory friction appears focused on technical compliance rather than categorical rejection. The SEC actively solicits public comments on proposed rule changes, suggesting eventual accommodation rather than permanent prohibition. Bloomberg’s reporting on the eligibility questioning reveals that the SEC’s examination of these two cryptocurrency ETFs represents part of a broader reassessment of crypto products. Industry expectations point toward potential staking ETF approvals by late 2025, contingent upon resolving custody requirements and disclosure standards.
This regulatory limbo leaves ETF issuers suspended between innovation and compliance, awaiting clarity on whether traditional investment company structures can accommodate blockchain’s participatory rewards mechanisms—a question that may ultimately reshape how financial products integrate with decentralized networks.
