Why staking was removed from Ethereum ETFs to get SEC approval

The removal of staking from Ethereum ETFs has been driven by regulatory pressures from the US Securities and Exchange Commission (SEC). Issuers amended their ETF filings to exclude staking provisions prior to the approvals on May 23. This strategic shift aims to align with the SEC’s regulatory expectations to allow the approval for their Ethereum ETFs.

Is staked ETH a security?

Staking, which involves locking up crypto to validate transactions in exchange for rewards, is a significant feature of Ethereum’s proof-of-stake (PoS) mechanism. However, the SEC views staking services as potentially constituting unregistered securities offerings. This perspective has led to actions against major crypto platforms like Coinbase and Kraken for offering staking services and alleging violations of federal securities laws. Consequently, ETF issuers removed staking from their proposals to avoid similar legal challenges.

The SEC’s classification of staked ETH as a security hinges on applying the Howey Test, which determines whether an asset qualifies as an investment contract. According to the SEC, staking involves investing money when users lock up their ETH in exchange for potential returns, satisfying the first prong of the Howey Test. The second prong, a joint enterprise, is met as stakers contribute to a shared ecosystem and rely on the collective efforts of network validators and developers to secure and maintain the network. The third prong, the expectation of profits, is fulfilled as stakers anticipate rewards in additional tokens. Finally, the SEC argues that these profits are derived primarily from the efforts of others, such as the validators and developers who ensure the network’s functionality and security. This interpretation aligns staking with the characteristics of an investment contract, thereby subjecting it to securities regulations.

Why staked ETH is not a security

Opponents contend that staking should not be classified as a security because it…