ARK Invest and 21Shares Outline Cash Processes in New Ethereum ETF Bid

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Ark Invest and 12Shares have refiled their joint application for a spot market Ethereum ETF to address cash creation and redemption.

The amendments bring it in line with spot Bitcoin ETFs recently approved by the US Securities and Exchange Commission, according to Bloomberg ETF analyst Eric Balchunas.

HERE WE GO AGAIN: ARK/21Shares has just filed an amended S-1 for their spot Ether ETF, looks like they updated to be only cash creations and some other things that bring it in line w the recently approved spot btc etf prospectus.. pic.twitter.com/clN2oZmA6I

— Eric Balchunas (@EricBalchunas) February 7, 2024

The most notable revision elaborates on the ETFs share creation and redemption process. Creation and redemption are unique features of ETFs that make them more transparent than other investment vehicles. The mechanism keeps the share price of the funds close to the net asset value (NAV) of the underlying assets.

Essentially, authorized participants (regulator-approved institutions) are responsible for buying the underlying assets—in this case Ether—that the ETF issuer wants to hold. Authorized participants, or APs, are crucial to maintaining an ETF’s liquidity. As part of the arrangement, the AP then gets a block of shares at NAV to sell for profit on secondary markets.

When the ETF is trading at a premium or discount to its underlying asset, APs use arbitrage opportunities to close the gap.

According to Ark Invest/21Shares’ refiling, APs “will deliver only cash to create shares and will receive only cash when redeeming Shares.” 

Another new addition discusses the possibility of the sponsor, 21Shares, “from time to time” staking some of the fund’s underlying Ether in order to take advantage of staking rewards “which may be treated as income to the trust.” In the same section, the filing acknowledges the “liquidity risks” of staking tokens, which will then be “inaccessible for a period of time.”

Ethereum ETFs Are Coming

Given the SEC’s round of spot Bitcoin approvals last month, crypto and ETF analysts are certain that Ethereum is next for a number of reasons.

Firstly, the US is behind on crypto ETFs. Other territories like Canada and Europe have already green-lit them and the funds have collectively netted billions in assets-under-management.

London-based multinational Standard Chartered Bank recently suggested that approval will happen before May 23 this year. That’s the day when the SEC is expected to give a verdict on the recent round of filings for a spot Ethereum ETF. It makes sense, given that the SEC approved Bitcoin ETFs on its January 10 deadline this year.

However, Bitcoin was easier to approve from the SEC’s point of view because the agency has stated before that BTC is not a security. On the topic of Ethereum’s classification, the regulator has been more ambiguous. If the SEC views Ethereum as a security, that would pose significant hurdles for ETF approval, since the SEC would claim much greater oversight on the underlying asset.

Another potential spanner in the works arrived in the press yesterday. The only SEC-approved crypto company in the US announced it’s launching its first crypto product in late March: Ether custody. Analysts say the move could finally compel the SEC into clarifying whether or not it views Ethereum as a security.

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