The much-awaited listing of Ethereum and Solana staking ETFs has hit a regulatory roadblock, with the U.S. Securities and Exchange Commission (SEC) flagging a chain of compliance concerns set to keep the products off the market for months or longer. For both crypto investors and ETF sponsors, the timing of bringing staking returns to Wall Street just got a whole lot murkier. Legal Hurdles: C-Corps, Cayman Subsidiaries, and ”Investment Company” Status SEC took aim at REX Shares and Osprey Funds, issuers of the first proposed Ethereum and Solana staking ETFs, on May 30. The agency questioned whether these funds structured as unusual C-corporations and using Cayman Islands subsidiaries are an ”investment company” under the Investment Company Act of 1940. The SEC said that the registration statements could be ”potentially misleading,” and the compliance of the funds with Rule 6c-11 (the ETF rule) is unchallenged. ETF analyst James Seyffart called the filings “a bunch of clever legal and regulatory workarounds,” but the SEC isn’t convinced. In a formal letter, the agency asked issuers to delay the launch until these concerns are resolved, warning that further steps could be taken to ensure compliance. “The SEC’s letter is a clear signal: staking ETFs aren’t getting a free pass. Expect more delays and more legal wrangling,” tweeted @JSeyff. The Staking Dilemma: Yield, Slashing, and Securities Law At the heart of the SEC's concern is whether staking rewards qualify these ETFs as securities. Although the SEC separated earlier this year that protocol staking itself is not a securities transaction, the SEC is worried about the disclosure, distribution, and risk management of staking yields within a fund structure. Among key concerns are: How ETFs disclose staking rewards, and can they guarantee periodic returns? What if staked assets are punished for validator abuse of power? Are investors safeguarded? Staked ETH and SOL tend to have lock-ups, making day-to-day ETF redemptions difficult. Offshore structures for managing staking may avoid US regulations, further providing cause for concern. Legal experts inform us that the SEC's focus on these areas is not unexpected. ”The agency is ensuring that retail investors understand the risks of staking — especially slashing and variable yields,” said securities attorney Lisa Bragg. ”If disclosures are not as clear as a crystal ball, the SEC will keep these ETFs in cold storage.” Issuers Hurry to Update Filings Despite the regulatory chill, REX and Osprey are hopeful. General counsel Greg Collett told Bloomberg, ”We think we can bring the SEC on board on the investment company question, and we're not going to bring the funds to market until we do.” Issuers will likely resubmit their filings, improve risk disclosures, and disclose the treatment of staking rewards and penalties. “Even if the SEC doesn’t allow this structure, more straightforward attempts to allow staking in a US ETF will ultimately be successful. It’s a matter of when, not if,” Seyffart told Cointelegraph. What's Next? The Race to Launch At this point, the race to launch the first US staking ETF is on. Expect the SEC's pushback to prove temporary, and a more conventional fund structure—perhaps with even stronger risk management will ultimately find approval. Others warn that until the SEC is appeased on cutting, yield, and legal classification, staking ETFs will find themselves trapped in regulatory purgatory.
