SEC Explores Staking in Crypto ETFs: Insights from Jito Labs and Multicoin Meeting

Imagine your ETF not only holding crypto but also earning you rewards through staking. That’s the potential future the SEC is considering after a significant meeting with Jito Labs and Multicoin Capital on February 5, 2025, focusing on integrating staking into crypto exchange-traded products (ETPs).

• SEC discusses staking in crypto ETPs
• Two staking models proposed
• Concerns over liquidity, tax, and securities classification

What is Staking?

Staking is a process where you lock up your crypto tokens to secure a blockchain network, like Solana or Ethereum, and earn rewards in return. Think of it as a high-tech savings account where you’re paid to help keep the network running smoothly. As Proof of Stake (PoS) blockchains gain popularity, so does the interest in staking, driving the push to integrate it into traditional financial products like ETFs.

Proposed Staking Models

Jito Labs and Multicoin Capital proposed two innovative models to the SEC. The first, partial staking, involves staking only a portion of the ETF’s assets—somewhere between 40% to 60%—through third-party validators. This approach keeps enough assets liquid to comply with the SEC’s T+1 settlement rule, which requires ETFs to allow next-day redemptions.

The second model uses liquid staking tokens (LSTs), such as JitoSOL. These tokens can be traded and redeemed without the usual unbonding period, offering a seamless fit with the T+1 rule. As Lucas Bruder, CEO of Jito Labs, noted, “The LST Model addresses the redemption timeline to comply with the relevant rule and eliminates the question of how the Commission should analyze staking as a service.”

SEC’s Concerns and Considerations

The SEC has historically been skeptical about staking in ETFs, as evidenced by their previous decision to remove staking from Ethereum ETF applications due to liquidity and regulatory concerns. However, the recent dialogue suggests a potential shift. The Commission is now grappling with whether staking should be classified as a securities transaction and the tax implications of staking rewards, which must be reported as income.

Kyle Samani, Managing Partner at Multicoin Capital, emphasized, “Staking only 40% or 60% of assets would allow ETFs to maintain liquidity while still generating staking rewards.” This proposal aims to balance the benefits of staking with the need to protect investors.

Benefits and Challenges

For institutional investors, integrating staking into ETFs could be a game-changer, offering a new avenue for passive income. Yet, the challenges are significant. The SEC’s concerns about liquidity and securities classification are not just hurdles; they’re damn walls that need to be climbed. The proposed models, however, offer potential solutions.

The Services Model involves ETFs contracting with validator service providers to manage staking while keeping assets liquid for redemptions. In contrast, the LST Model mirrors precious metals basket ETFs like WITE and GLTR, where ETFs hold LSTs directly, simplifying compliance with redemption rules and accounting.

Counterpoints and Critical Thinking

While the integration of staking into ETFs holds promise, it’s not without its critics. Bitcoin maximalists might argue that such innovations distract from Bitcoin’s core purpose of being a decentralized store of value. They might see staking in ETFs as yet another centralized financial product trying to co-opt the crypto revolution.

Furthermore, the increased complexity for investors and potential risks associated with validator performance are valid concerns. The SEC isn’t just playing hard to get with crypto; they’re trying to ensure it’s a safe date for all involved.

Effective Accelerationism and Decentralization

The push to integrate staking into ETFs aligns with the principles of effective accelerationism, driving innovation and adoption in the crypto space. By embracing these financial products, the crypto community can further its goals of decentralization and financial freedom, challenging the status quo and promoting broader adoption.

The potential impact on the crypto market is significant. Increased institutional interest in staking-enabled ETFs could boost the adoption of PoS blockchains like Solana, driving further innovation and development in the sector.

Key Takeaways and Questions

• What is the SEC considering regarding staking in ETFs?

  The SEC is considering whether staking can be legally integrated into crypto exchange-traded products (ETPs) and how it can function within regulatory frameworks.

• What are the two staking models proposed by Jito Labs and Multicoin?

  The two models are partial staking, where a portion of the fund’s assets is staked through third-party validators, and the use of liquid staking tokens (LSTs) like JitoSOL, which can be traded and redeemed without unbonding periods.

• What are the SEC’s main concerns about staking in ETFs?

  The SEC’s concerns include liquidity, tax implications, and whether staking should be classified as a securities transaction.

• How do the proposed models address the T+1 settlement rule?

  The partial staking model ensures enough unstaked assets remain for next-day redemptions, while the LST model uses tokens without unbonding periods, allowing full compliance with the T+1 rule.

• What are the potential taxation issues with staking in ETFs?

  Staking rewards must be reported as income, which could complicate the tax structure of ETFs, particularly if they are set up as grantor trusts.

• What are the differences between the Services Model and the LST Model?

  In the Services Model, ETFs contract with validator service providers to stake assets while maintaining liquidity. In contrast, the LST Model involves ETFs holding liquid staking tokens directly, simplifying compliance with redemption rules and accounting.

So, are we on the brink of a new era where your ETF can earn you staking rewards, or is the SEC’s skepticism a sign that we need to pump the brakes? Only time will tell, but one thing’s clear: the conversation around staking in ETFs is far from over, and it’s shaping the future of crypto in exciting ways.