The U.S. Securities and Exchange Commission (SEC) is raising issues with REX Shares and Osprey Funds’ put forth staking ETFs. The funds which aim to present staking rewards at the same time as exposure to Ethereum and Solana are first of their kind in the crypto ETF world. But regulators are not convinced. Their push back brings to the fore again issues which we have had for some time of how blockchain based assets do in fact fit within present financial regulations.
Osprey Funds ETFs Stir Regulatory Waters
REX-Osprey has put forth a C-Corporation structure which is a departure from the typical open ended funds that ETFS use. This structure brings in novel benefits like staking which investors can participate in, retention of earnings, and voting rights. But the SEC is of the opinion that these features complicate the daily creation and redemption processes. They see this as against Rule 6C-11 which is the regulatory framework for ETFs.
This structure is very much a first of its kind but at the same time brings up very basic issues. The SEC reports that such funds do in fact fail to meet the basic liquidity and transparency marks. In some cases assets which may not be made available for quick redemption which in turn breaks the liquidity rules. Also lack of transparency in the funds’ structure which is in part due to the fact that validator operations must be kept rather private.
Osprey Funds’ Dual-Asset Stakes In The Fire
ETFs will split in their investments of 50/50 between Ethereum and Solana. Also bringing to the table is a put in place which does not require the user to stake but which instead the platform itself does the staking of at any rate half of the total assets. This while it may produce great returns of 3-5% for ETH, and 6-8% for SOL also brings in a degree of regulatory interdependence.
Solana doesn’t even has the spot ETF approval at present. Should either the asset or the staking model be rejected that could bring the whole project down. SEC’s Corporate Finance Division reports we may see a chain reaction of regulatory issues.
Osprey Proposes Reforms Under SEC Pressure
Not to be left behind, Osprey Funds and REX Financial put forth their responses. They are,
- To meet redemption requests of 20%.
- Insurance coverage that goes up to $50M for slashes.
- Weekly reports of staking yields and validator performance.
They also have put forth that which staking rewards be classified as return of capital not taxable dividends which is a way to avoid complex IRS rules. Also reported is that Greg King CEO of Osprey is open to more rigorous disclosures if it in turn brings about SEC approval.
Broader Implications For Crypto ETFs
SEC delay the staking ETF development put on hold from 12 to 18 months. Also heavy players like Fidelity and BlackRock are reporting to have put out their related projects. Also Grayscale is looking at a C-corp conversion which is a like that of Osprey Funds.
The decision could set massive precedents: The decision is a major precedent
- Are staking rewards really dividends?
- Can ETFs be this complex?
- Will validators need SEC registration?
Market players report that a rejection may only put off but not end innovation. Should the SEC give the go ahead though we may see an altcoin ETF boom.
