Fidelity registers for spot Ethereum ETF

Fidelity Investments (Fidelity) has filed a registration with the United States Securities and Exchange Commission (SEC) to apply for a spot Ethereum (ETH) exchange-traded fund (ETF). Notably, the filing featured an option to stake a portion of the fund’s assets.

According to the S-1 filing, the proposed ETF would be available for trading on the Cboe BZX Exchange, with Fidelity’s digital asset division serving as the custodion of the trust’s Ethereum holdings. However, Fidelity has not specified which staking infrastructure they will be using or partnering with.

However, incorporating staking in the ETF structure introduces additional risks, which were outlined in the application. According to Fidelity’s registration statement, current regulatory measures in the US and elsewhere may adversely impact the fund’s status.

Causes for termination may come from the SEC itself, if the Commission determines that Fidelity’s fund may be in violation of the 1940 Act. This piece of legislation was enacted in August 22, 1940 and has since codified how Congress regulates investment funds in the US.

This act, along with other financial regulations like the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940, plays a central role in the country’s financial regulation. Primarily, the 1940 Act seeks to protect investors and the investing public’s interest by requiring investment firms to disclose material information and assessing whether firms under its jurisdiction present or are operating with conflicts of interest.

The 1940 Act covers a range of investment entities, including mutual funds, closed-end funds, hedge funds, private equity funds, and holding companies. Notably, under the law, mutual funds are required to limit leverage and maintain sufficient cash reserves to accommodate investors wishing to sell their shares.

This law may present contentious and critical points to an Ethereum ETF, even if it has been updated in the past decade. This represents a risk for Fidelity in that it could encompass potential losses for the firm’s proposed Ethereum ETF by slashing penalties and liquidity risks within the staking process.

The SEC is currently unclear as to whether Ethereum (Ether/ETH) is a security, with GOP lawmakers demanding the regulator clarify its stance. The status of staking rewards as income is also unclear, and the rewards would be taxable for investors, even in the absence of an associated distribution from the trust.

Recently, the Ethereum Foundation was mired in an investigation by an undisclosed “state authority” that was later alleged by Fortune to be an initiative of the SEC as it campaigns to classify Ethereum as a security. The Commission has delayed approval from seven other applicants, with a decision timeline set for May 23 this year.