Mounting excitement around the approval of spot Ether (ETH) exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) comes with a caveat:  the issuers will likely not offer staking as part of the ETF, which could be beneficial to ETF stakers and Ethereum overall. 

Read more: ETH ETFs Will Be Approved. But Could Grayscale Outflows Depress the Price of ETH?

ETF applicants like Fidelity and BlackRock have decided to exclude staking in their filings, implying what the industry already sensed: the SEC is not willing to allow ETF issuers to include staking in their products. 

Matt Hougan, CIO of Bitwise (which will issue an ETH spot ETF), said on Unchained that he would have expected the SEC to go this route. “The first shot on goal will be let’s get to 90%, which is without staking and then let’s worry about the complications later and down the road,” he said.

Read more: After ETH, Which Crypto ETF Will Be Approved Next?

ETFs With No Staking Mean More Returns for Stakers

With the likely exclusion of staking from ETH ETFs, investors who buy these ETFs will miss out on staking rewards, currently around 3% APY, depending on the provider, per Staking Rewards data. These rewards, instead, will go to those who stake their ETH directly or with staking services such as Lido or Rocket Pool.

Read more: Could the SEC Have a Case Against Liquid Staking Protocols?

This setup would amount to a transfer of value from non-staking ETF holders to direct stakers. Staking rewards are a significant component of the potential returns from holding ETH, and by not participating in staking, ETF investors are effectively being diluted, as is every holder of vanilla ETH. This value transfer benefits those who engage in staking, enhancing their returns at the expense of non-stakers.

Fidelity is the only ETF issuer that has so far clearly stated in its filing that “Neither the Trust, nor the Sponsor, nor the Custodian, nor any other person associated with the Trust will, directly or indirectly, engage in action where any portion of the Trust’s ETH becomes subject to the Ethereum proof-of-stake validation or is used to earn additional ETH or generate income or other earnings.” However, it is expected that none of the issuers will engage in such activities given the regulatory uncertainty. 

If they did, they would have “the most profitable ETF in the world to run,” according to Global Macro Investor CEO Raoul Pal. 

Read more: ​​Why ETH Isn’t Moving Higher After SEC Approves Key Filings for Spot ETFs

ETFs Could Mitigate Staking Ratio Concerns

The exclusion of staking from these ETFs could also alleviate a growing concern in the Ethereum community about the rapidly increasing ratio of staked ETH. High staking ratios have raised fears of centralization and reduced liquidity. By not incorporating staking, these ETFs will likely help maintain a more balanced ratio of staked to non-staked ETH by sucking up ETH liquidity. 

As Ethereum researchers have pointed out, a high staking ratio can lead to centralization risks and inflationary pressures on non-stakers. Because the ETFs will effectively lock up large sums of ETH that are not staked, they may help mitigate these risks, ensuring a healthier balance within the network and addressing community apprehensions about an excessive amount of ETH being locked in staking contracts.

Read more: Why the Ethereum Community Is Up in Arms Against a Proposal to Change the Monetary Policy

However, this will depend on the SEC never approving staking to be offered as a part of spot ETH ETFs. Given the fast-moving nature of crypto politics in Washington, that’s difficult to predict with any confidence.