Hong Kong Considers Staking for Ether ETFs, Diverging from US Stance

The Securities and Futures Commission (SFC) of Hong Kong is reportedly considering incorporating an Ether (ETH) staking option for spot ETH exchange-traded fund (ETF) issuers.

Bloomberg reports that the financial regulator is evaluating whether ETH ETF issuers should be permitted to stake Ether to generate passive income. Earlier this year, Hong Kong approved a Bitcoin ETF, following the United States’ approval of 10 spot ETFs by more than three months.

Evaluating Ether Staking for ETFs

The SFC is focused on whether to allow staking of Ether through licensed platforms. This topic has been discussed recently with the country’s crypto ETF issuers following several proposals. The regulator is still in the discussion phase, with no definitive timeline set for decision or implementation.

Unlike Bitcoin, Ethereum operates on a proof-of-stake consensus protocol, allowing users to stake their assets on the network. This contributes to network security and yields a return, currently around 3%.

If approved, staking the Ether held in Hong Kong spot Ethereum ETFs could offer investors passive income in addition to potential capital gains, potentially aiding the city’s ambitions to become a global crypto hub. However, it remains uncertain whether allowing staking will significantly boost the currently lackluster demand for ETFs in the region.

The proposal to introduce staking comes at a time when the demand for ETFs in Hong Kong has been notably weak. The city launched Asia’s first spot Bitcoin and Ethereum ETFs on April 30, managed by entities like China Asset Management (ChinaAMC), Harvest Global, and Bosera/HashKey.

Despite these developments, the new ETFs have seen minimal capital inflows compared to their U.S. counterparts, which experienced $154 million in inflows into Bitcoin ETFs on a single day. 

Contrast with the U.S. SEC’s Stance

This initiative by the SFC contrasts with the stance of the U.S. Securities and Exchange Commission (SEC), which views staking services as an investment contract and hence a potential violation of securities laws.

The SEC’s stringent position has led major financial institutions in the U.S. to exclude staking from their spot ETH ETF offerings, as evidenced by Fidelity’s removal of staking options in its latest regulatory filings. Over the past year, the SEC has actively pursued legal actions against major crypto firms for their staking products, alleging violations of federal securities laws.

In light of this regulatory uncertainty, several Ethereum ETF applicants, including Fidelity, BlackRock, Grayscale, Bitwise, VanEck, Franklin Templeton, Invesco Galaxy, and ARK 21Shares, have excluded staking from their fund plans. This development has led some market participants to argue that these funds might be less attractive to investors without staking. 

Upcoming SEC Decision

The SEC is expected to announce its decision on the pending Ethereum ETF applications today, May 23. This week, market sentiment turned positive after Bloomberg analyst Eric Balchunas raised the odds of approval to 75%, citing increasing political pressure on the financial regulator.

Notably, the chances of approval on Polymarket have also increased to 65% from a low of 10%. Meanwhile, Coinbase is challenging the SEC’s stance on staking. On March 20, it published a “Petition for Rulemaking,” asserting that core staking is not a security because it does not involve an investment of money, and the opportunity cost of staking is not an investment.

In 2024, Hong Kong emerged as a growing hub for crypto service providers due to several pro-crypto regulations. It became the first country to approve a spot ETH ETF ahead of the United States. However, the response since its launch last month has been tepid.

Allowing staking could potentially attract a new stream of investment into the country’s ETFs, boosting their appeal and supporting Hong Kong’s goal of becoming a global crypto hub.