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ARK Invest and 21Shares Outline Cash Processes in New Ethereum ETF Bid

Ark Invest and 12Shares have resubmitted their joint application for a spot market Ethereum ETF, with amendments aimed at addressing cash creation and redemption concerns.

These changes align the proposal with spot Bitcoin ETFs recently sanctioned by the US Securities and Exchange Commission, as noted by Bloomberg ETF analyst Eric Balchunas.

Of particular significance is the enhancement to the ETF’s share creation and redemption process. Creation and redemption mechanisms are distinctive features of ETFs, enhancing transparency compared to other investment vehicles. These mechanisms help maintain the fund’s share price close to the net asset value (NAV) of the underlying assets.

In essence, authorized participants (institutions approved by regulators) play a vital role in acquiring the underlying assets—Ether in this case—that the ETF issuer intends to hold. These authorized participants, or APs, are instrumental in maintaining the ETF’s liquidity. As part of this process, APs acquire a block of shares at net asset value (NAV) to sell for profit on secondary markets.

When the ETF’s trading price deviates from the NAV of its underlying asset, APs leverage arbitrage opportunities to narrow the gap.

According to the refiling by Ark Invest/21Shares, APs will only use cash to create shares and will solely receive cash when redeeming shares.

A new addition to the filing discusses the possibility of the sponsor, 21Shares, occasionally staking some of the fund’s underlying Ether to capitalize on staking rewards, which may be considered income to the trust. However, the filing also acknowledges the liquidity risks associated with staking tokens, as they become inaccessible for a certain period.

Ethereum ETFs Are Coming

With the recent round of spot Bitcoin approvals by the SEC last month, analysts in both the cryptocurrency and ETF sectors are confident that Ethereum will be next in line for approval, citing several key factors.

Firstly, the United States lags behind other regions such as Canada and Europe in terms of crypto ETF approvals. These territories have already given the green light to such ETFs, which have collectively amassed billions in assets under management.

Additionally, Standard Chartered Bank, a multinational institution based in London, recently suggested that approval for an Ethereum ETF could come before May 23 of this year. This date aligns with the SEC’s expected verdict on the recent filings for a spot Ethereum ETF. Notably, the SEC approved Bitcoin ETFs on its January 10 deadline this year.

However, Ethereum’s approval might pose greater challenges for the SEC compared to Bitcoin. While the SEC has previously stated that Bitcoin is not a security, its classification of Ethereum remains more ambiguous. If Ethereum is deemed a security by the SEC, this could significantly impede ETF approval, as the agency would assert greater oversight on the underlying asset.

A potential complicating factor emerged recently in the press: the only SEC-approved crypto company in the US announced its plans to launch its first crypto product in late March, focusing on Ether custody. Analysts speculate that this move could prompt the SEC to provide clarity on whether Ethereum is considered a security or not.

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