Swissblock Say Owning Ethereum ETFs Means Missing Out on Staking Rewards

The crypto community has been chomping at the bit to access spot ETFs for a range of assets. Bitcoin was naturally the first cab off the rank, with Ethereum not too far behind. It’s easy to be excited about the potential of these products. As we saw with Bitcoin, a traditional financial instrument can attract a whole new demographic of institutional investors into the asset class. 

Day one of Ether ETFs going live proved this, with the new funds receiving close to US $1b in trading volume. Most are bullish that the increased legitimacy and attention toward ETH will boost its price, the same way Bitcoin ran to an ATH following ETF approval. While this may still eventuate, crypto wealth managers Swissblock believe that Ether ETFs may actually undermine some core concepts of the Ethereum ecosystem.

Related: ETH Dips as SEC Gives Green Light for ETFs, Experts Say Trading to Start Tomorrow

ETFs Unable to Offer Staking Services to Investors

The first few days of Ether ETF trading have been successful from a volume perspective. But the actual price action of the token has been fairly bearish. Over the past week, ETH has fallen 6.5%, tumbling back to US $3.1k (AU $4.8k).

Swissblock believes that spot ETH funds exclude a fundamental principle of the Ethereum platform – staking.

Since the 2022 merger, where Ethereum transformed from a Proof-of-Work network to a Proof-of-Stake consensus mechanism, validators have become an integral part of keeping the protocol secure.

As the blockchain sector’s largest decentralised finance ecosystem, you could argue that staking is more important to Ether than perhaps any other network. And a key element of the SEC approving ETH ETFs was banning fund managers from staking the tokens on behalf of investors.

This means if millions of investors access Ethereum via a traditional financial product, they are unable to participate in the Ether ecosystem. 

Ethereum: Commodity or Security?

Swissblock believes that a large portion of ETH being unstaked won’t make a huge difference to the DeFi platform’s “integrity and security”. Barely a quarter of all Ether in circulation is being staked at present, so it’s unlikely that the new ETFs will make a huge dent in that figure anyway. 

However, the bigger issue this presents, according to the asset managers, is muddying the ongoing regulatory battle in the US over Ethereum’s status as a commodity, or as a security.

We already know the SEC has gone on a litigation spree against coins, platforms and everything in-between due to the status of certain crypto assets as a security. And according to Swissblock, the ability to earn passive income from Ether, while others can also access it through the stock market, poses even further classification questions.

If Ethereum is ultimately deemed a commodity, staking may eventually come to ETFs and allow the products to truly thrive. However, if it is classed as a security, the usefulness of Ether funds will become a little less clear.

Related: ETH Dips as Analysts Predict More Trouble Ahead Post ETF Launch

The final paragraph of Swissblock’s blog post is relatively scathing of spot Ethereum ETFs in their current state.

If Bitcoin is digital gold, Ethereum is the equivalent of digital oil: It powers the machinery of Web3 and is likely to make applications possible that will drive decentralized value in everyone’s life in ways we cannot even grasp yet. An ETF is just a speculative shadow you can use to be on that future while missing out on real ownership and staking rewards for the sake of comfort.

Swissblock