New wave of crypto ETFs edge closer to launch after SEC scrutiny

US regulators have asked Wall Street firms racing to launch Solana exchange-traded funds to revise their paperwork, a sign that the novel crypto investment products may be available to investors soon.

At least three asset managers have been asked to amend their US Securities and Exchange Commission filings to address two key features of the funds that track the world’s sixth-largest cryptocurrency. At issue are how funds will handle crypto redemptions and whether they plan to allow investors to earn rewards by pledging Solana tokens to help validate blockchain transactions, a process known as staking.

The outreach suggests the Wall Street watchdog may be poised to give the next wave of ETFs its blessing, months after giving the green light to funds tied to Bitcoin and Ether. 

“The SEC’s nudge that ETF issuers amend their S-1 filings sounds like it could be just a matter of days or at the most weeks before approval becomes official,” said Noelle Acheson, author of Crypto is Macro Now newsletter. “That would be a huge change for the spot crypto market.”

The firms need approval of their S-1 registration statements, which outline details about the ETF’s structure, strategy and risks, and a document known as form 19b-4.

“We have been asked to address and file an amended S-1, which we plan to do so shortly,” said a spokesperson from 21Shares AG. 

Two other fund issuers bidding to launch Solana ETFs confirmed similar feedback from the SEC, according to people familiar with the matter. 

Blockworks was first to report the SEC requests.

Complicating the process is how far Solana fund issuers can go in replicating the structure of traditional ETFs while dealing in speculative tokens that operate differently from stocks and bonds. It’s unclear whether the funds will be allowed to redeem shares using the underlying crypto asset rather than cash, also known as in-kind redemptions. While this mechanism is relatively straightforward in traditional asset classes, it’s far more complex in crypto products due to challenges around custody, security and settlement.

Another flashpoint is staking — a core feature of so-called proof-of-stake blockchains like Ethereum and Solana — which allows holders to earn returns. Staking raises questions about whether such tokens should be treated as securities.

“Anybody who is putting cash into a product without staking is losing out on yield,” said Bloomberg Intelligence ETF analyst James Seyffart. Case in point: Solana staking yields north of 5%, according to data by Coinbase Global Inc., while Ether generates some 2%.

If in-kind redemptions and staking are allowed, “these ETFs will make products better as long-term investments,” Seyffart said. 

Currently there are at least seven issuers hoping to launch Solana ETFs, according to data compiled by Bloomberg Intelligence. This includes Grayscale Investments LLC, Bitwise Asset Management, VanEck Asset Management and Canary Capital. 

Recently, two proposed ETFs from REX Financial and Osprey Funds that would allow staking were caught in the cross-hairs of the SEC. After the issuers said they could launch in mid-June, the watchdog questioned whether these funds meet the definition of an investment company under federal law.

The situation however “may end up forcing the agency’s hand,” wrote BI’s Seyffart and Eric Balchunas, in a note. “We think the SEC may now focus on handling 19b-4 filings for Solana and staking ETFs earlier than planned.”

Solana ETFs have a 90% chance of being approved by this year, they added.