ARK Invest and 21Shares address cash creation and redemption process in latest spot Ethereum ETF filing

A spot Ethereum exchange-traded fund proposal from Cathie Wood's ARK Invest and 21Shares will only have a process to deliver cash in its create and redemption process, according to its latest regulatory filing.

"Authorized Participants will deliver only cash to create shares and will receive only cash when redeeming Shares," according to the filing posted on Wednesday.

The process of creating and redeeming shares in exchange traded funds had earlier been at the forefront of meetings between the Securities and Exchange Commission and issuers looking to launch spot bitcoin ETFs. The SEC likely favors a cash model, which requires issuers to move assets out of storage and sell it right away to then give cash back to the investor, which differs from an in-kind model. An in-kind model, which gives the manager greater flexibility in managing the portfolio, was preferred by some asset firms, including BlackRock in the process for getting approval for its spot bitcoin ETF.

Bloomberg Intelligence analyst Eric Balchunas noted the change in the Ark21Shares Ethereum ETF on Wednesday. 

"HERE WE GO AGAIN: ARK/21Shares has just filed an amended S-1 for their spot Ether ETF, looks like they updated to be only cash creations and some other things that bring it in line w the recently approved spot btc etf prospectus," he said in a post on X.

Staking component

The updated filing also included a new staking component. 

"[The Sponsor may, from time to time, stake a portion of the Trust’s assets through one or more trusted Staking Providers. The Sponsor generally expects to stake ether tokens from the Trust’s Cold Vault Balance," according to the filing. "In consideration for any staking activity in which the Trust may engage, the Trust would receive certain staking rewards of ether tokens, which may be treated as income to the Trust. The amount of ether the Trust may receive as reward for its staking activity can vary significantly."

Language about staking was put into brackets, which Van Buren Capital's Scott Johnsson said was a way for the issuer to start a conversation around potential staking. 

"For those not familiar with the curiosities of legal drafting, the implication of adding brackets around new block language like this is saying: 'we're putting this here, because we want to add it... but let's have the conversation because this might come across as inflammatory and its not critical to the application,'" Johnsson said in a post. 

The proposal

Ark Invest and 21Shares applied for the spot ether ETF in September, and said the fund would provide direct exposure to ether and trade on the Cboe BZX Exchange using the CME CF Ether-Dollar Reference Rate – New York Variant. 

According to that first filing, 21Shares is the sponsor of the trust, Delaware Trust Company is the trustee, and Coinbase Custody Trust Company is the custodian. ARK Investment Management is the sub-adviser of the trust and will provide assistance in the marketing of the Shares.

The SEC last pushed back the timeline on making a decision for that ETF in December and asked for public comment. The agency has also pushed back deadlines for other spot Ethereum ETF proposals, including one from Grayscale Investments last month and another on the Invesco Galaxy Ethereum ETF on Tuesday.