Hong Kong Eyes Ether ETF Staking, Offering 4% Yield Amid US Regulatory Hurdles

Hong Kong explores staking for Ether ETFs, potentially boosting demand and offering 4% annual yield.

By Max Weldon

5/23, 09:59 EDT
Bitcoin / U.S. dollar

Key Takeaway

  • Hong Kong is considering allowing staking for Ether ETFs, potentially boosting demand and offering passive income of about 4% annually.
  • US issuers like Fidelity and Ark have scrapped staking plans for their proposed Ether ETFs, making them less attractive compared to direct purchases.
  • This move could give Hong Kong a competitive edge in becoming a digital-asset hub over rivals like Singapore and Dubai.

Hong Kong's Staking Proposal

Hong Kong is exploring the possibility of allowing staking for exchange-traded funds (ETFs) that invest directly in Ether, potentially unlocking a new source of passive income for investors. The Securities and Futures Commission (SFC) has been in discussions with the city's crypto ETF issuers about providing staking services through licensed platforms. These talks are ongoing, and no clear timeline for a decision has been established. A spokesperson for the SFC did not immediately respond to a request for comment.

If approved, staking yields could significantly boost demand for Hong Kong's spot-crypto ETFs, which have seen lukewarm interest since their launch in April. This move could also give Hong Kong a competitive edge over the US, where regulatory hurdles have led issuers like Fidelity Investments and Ark Investment Management to scrap plans for staking in their proposed Ether ETFs. Staking involves locking tokens on the Ethereum network to help validate transactions, offering an annual yield of about 4% in the form of additional coins.

Serra Wei, CEO of Aegis Custody, described the discussions between Hong Kong ETF issuers and regulators as "healthy," noting that staking would fit within the local regulatory framework. "It would be a milestone for Hong Kong to add staking into spot-ETH ETFs," Wei said. Hong Kong is vying with Singapore and Dubai to become a leading digital-asset hub, following the introduction of a dedicated regulatory regime last year.

US Regulatory Landscape

In contrast, US issuers have removed staking provisions from their Ether ETF proposals to smooth the path with regulators. Fidelity Investments, Ark Investment Management, BlackRock, Grayscale, and Bitwise have all filed amended forms with the US Securities and Exchange Commission (SEC), eliminating plans for staking. The SEC has been cautious about staking, viewing it as akin to crypto lending, which falls under its regulatory purview. For instance, crypto exchange Kraken agreed to pay $30 million to settle SEC allegations related to its "staking as a service" products.

Brian Rudick, senior strategist at digital-asset firm GSR, highlighted the opportunity cost of holding Ether via a US ETF without staking rewards. "There will be an immediate opportunity cost to holding Ether via a US ETF from forgone staking rewards," Rudick said. Ether prices have rallied about 20% over the past three days amid growing optimism that the SEC will approve at least one ETF by the regulator's Thursday deadline for a decision on VanEck's application.

Ayesha Kiani, COO of crypto hedge fund MNNC Group, noted that owning Ether without staking means the holder is not contributing to the security of the blockchain. "This is the best example of the cross intersection of decentralization and SEC standards," Kiani said. However, some industry advocates believe that the removal of staking plans is beneficial for the decentralized nature of Ethereum. Leo Mizuhara, founder of decentralized-finance institutional asset manager Hashnote, argued that "staked Ether being part of ETFs could have been a big centralizing force."

Market Reactions and Future Prospects

The removal of staking provisions has not dampened market enthusiasm. Influential Bloomberg analysts Eric Balchunas and James Seyffart recently updated their odds of SEC approval for Ether ETFs to 75% from an earlier 25%, causing a market-wide surge. Ether rose over 17%, while Bitcoin retook the $71,000 mark for the first time since early April. The Depository Trust and Clearing Corporation (DTCC) has started listing VanEck's Ether ETF under the ticker symbol ETHV, which some interpret as a positive sign.

Ryan Watkins, co-founder of Syncracy Capital, believes that regulatory clarity will eventually allow for staking in ETFs. "I don’t expect this to last forever," Watkins said. "With clearer regulation in years to come, these ETFs will eventually feature staking. The incentives are simply too high."

Street Views

  • Serra Wei, Aegis Custody (Cautiously Optimistic on Hong Kong's spot-ETH ETFs):

    "It would be a milestone for Hong Kong to add staking into spot-ETH ETFs."