21Shares: Ethereum ETF's removal of collateral clause will not curb institutional demand

Author: Jamie Crawley, CoinDesk; Compiler: Tao Zhu, Golden Finance

• Synder said the lack of staking is unlikely to cause concern among institutional investors, but retail investors may be uneasy.

• This difference in demand means there is a potential business reason for providers to list separate, distinct products to meet the needs of both camps.

Institutional investors are unlikely to be concerned that a U.S. spot Ethereum (ETH) exchange-traded fund (ETF) will not stake the underlying tokens to provide additional returns, although retail investors would love to have that feature built in, said Ophelia Snyder, co-founder of digital asset management firm 21Shares.

This difference means there is a potential business reason for providers to list separate, distinct products to meet the needs of both camps, Snyder said in an interview.

A spot Ethereum ETF looks set to launch in the U.S. in the near future after the Securities and Exchange Commission (SEC) approved the applicant’s key regulatory filing last month. SEC Chairman Gary Gensler told senators at a budget hearing last week that final approval would come in the coming months. Potential providers have removed staking clauses from their applications to avoid potential regulatory hurdles.

“One thing people forget is that staking assets affects liquidity,” she said. “So how do you respond if the unlocking period for Ethereum is extended to 22 days, which is indeed going to happen?”

Institutional Appeal

Some believe that the lack of staking could dampen investor interest in Ethereum ETFs. JPMorgan said in late May that it expects $3 billion worth of inflows by the end of 2024. That number could double if staking is allowed.

However, Snyder believes that the lack of collateralization is not a problem for institutional investors. If it is, they want to see that asset managers have an effective track record in dealing with withdrawal delays because this requires inherent risk management, she said.

"For example, some months the decollateralization period may be six days or nine days, and that range can be very wide, and it changes your liquidity requirements," Snyder said. "And it doesn't jump from nine days to 22 days. It actually slowly lengthens, and if you monitor these things, you can use data inputs to manage the portfolio so that you can maximize returns while minimizing the likelihood of liquidity issues."

21Shares may well have a handle on the institutional market. Not only is it one of the existing spot Bitcoin ETF providers in the U.S., it is also one of the largest exchange-traded product (ETP) issuers in Europe. Its Ethereum ETP, including collateral, has about $532 million in assets under management. Its SOL equivalent is $821 million. The company is also applying for a U.S. spot Ethereum ETF. That explicitly rules out staking as a source of income.

There’s another issue to consider: government coffers. It’s unclear how the U.S. will treat staking rewards from a tax perspective, she said.

“If you want institutions to play, you need to start by making things simple,” she said. Non-staking products are “more palatable” to an institutional audience, even if they’re less popular among retail investors.