Galaxy Digital’s Thorn says SEC could label staked ETH as security in ETF plans

Galaxy Digital’s Alex Thorn suggests that the SEC might classify staked Ethereum as a security in a bid to find a loop to approve spot Ethereum ETF.

The U.S. Securities and Exchange Commission (SEC) might make an eyebrow-raising turn regarding the approval of spot Ethereum exchange-traded funds (ETFs), according to Galaxy Digital head of research Alex Thorn.

In an X post on May 21, Thorn speculated that the SEC could draw a nuanced distinction between Ethereum and staked Ethereum, potentially classifying the latter as a security.

“If the speculation about a 180 from SEC on the Ethereum ETFs is true, I would guess they try to thread a needle between ‘ETH’ NOT being a security and ‘staked ETH’ (or even more flimsily, ‘staking as a service ETH’) as BEING a security.”

Alex Thorn

This differentiation could have significant implications for spot Ethereum ETFs, which the SEC has been hesitant to approve so far.

Thorn says the change of strategy would align with the SEC’s ongoing legal battles and investigations, allowing the commission to approve Ethereum ETFs while adhering to its previous arguments and positions. Yet, the chosen approach might also involve specific restrictions on spot Ethereum ETFs, Thorn says.

“In this case and perhaps for other reasons, you would expect SEC to prohibit the ETFs from staking the ETH they hold.”

Alex Thorn

By distinguishing between ETH and staked ETH, the SEC could navigate the complex regulatory landscape, potentially allowing for the introduction of Ethereum ETFs while maintaining a strict regulatory framework around staked assets and other altcoins. However, it’s not clear how exactly the SEC would treat, for example, tokenized versions of Ethereum or Bitcoin for usage in layer-2 solutions (including lending).

In the meantime, Ethereum surged by over 17% following news that the SEC might actually approve spot ETH ETFs, despite the market’s earlier consensus that the watchdog wouldn’t give the green light.

Bloomberg senior analyst Eric Balchunas, who previously said that the odds of spot Ethereum ETF approval were “slim to none,” made a U-turn on May 20. In an X post, he raised the chance of approval from 25% to 75%, implying that the SEC’s quickening pace to approve the ETF might be a result of the agency facing political pressure, as their previous stance showed little engagement with ETF applicants.