Summary
- Fidelity submitted a pre-effective amendment on August 11 to enable its spot Ethereum ETF, FETH, to stake its Ethereum holdings.
- The fund aims to stake nearly all of its assets and distribute rewards to investors in the form of quarterly cash payments.
- This initiative follows similar actions by Grayscale and BlackRock, which proceeded after a favorable ruling from the Treasury and IRS.
Fidelity has approached the SEC to gain permission to transform its spot Ethereum ETF into a yield-generating investment. The Boston-based asset management firm filed a pre-effective amendment on August 11, revealing plans for the Fidelity Ethereum Fund (FETH) to stake the Ethereum it holds.
This modification would alter the fund's primary objective. Currently, FETH tracks the Fidelity Ethereum Reference Rate, adjusted for associated fees. With the introduction of staking, its goal shifts to include an additional return based on staking rewards. According to the filing, the trust is anticipated to outperform the index prior to considering expenses.
Myriad: What’s next for Ethereum’s price? Click here to share your prediction.Staking is a process integral to Ethereum’s network security, where holders lock their ETH to assist in transaction validation and earn new tokens as a reward. Fidelity plans to direct its ETH through custodians like Anchorage Digital, BitGo, and Fidelity Digital Assets to various node operators that manage the validator infrastructure.
Under typical circumstances, the fund could stake as much as 100% of its Ethereum, although there is no minimum staking requirement. Rewards will be divided among the node operators, custodians, and Fidelity as fees, with the trust retaining a portion.
Fidelity is not the pioneer in this space. Grayscale was the first U.S. ETF provider to offer ETH staking rewards to its holders, and the SEC has recognized BlackRock's initiative to incorporate staking into its ETHA fund. These developments have emerged following a safe harbor ruling from the Treasury and IRS that allows crypto trusts to earn staking yields without the risk of tax or regulatory repercussions.
When the SEC approved spot Ethereum ETFs in 2024, these products explicitly excluded staking, and this absence of rewards has been seen as a disadvantage since then.
If the amendment is approved, FETH would provide quarterly cash distributions, converting staked Ethereum into cash for distribution to shareholders. Fidelity anticipates that these rewards will be treated as taxable income. However, the filing is clear that these distributions are not guaranteed and can be suspended or terminated at Fidelity’s discretion.
Investing in staked ETH comes with slashing risks (penalties for validators that fail to act correctly) and potential liquidity issues during the unstaking process. The fund plans to address this by extending redemption timelines if necessary.
FETH was launched alongside the first U.S. spot Ethereum ETFs in 2024, with a management fee of 0.25%. The staking amendment will take effect only after the SEC approves the registration statement.