Why The SEC Needs to Allow Staking in Exchange-Traded Products

For far too long, the U.S. has been falling behind the rest of the world on staking policy. Now, in just the first 30 days of the Trump Administration, staking has been mentioned in Congressional hearings, listed as a top priority by the SEC’s newly created crypto task force and is today the focus of a bipartisan letter from lawmakers challenging the previous SEC’s stance on its inclusion in exchange-traded products (ETPs).Many in the digital asset sector celebrated when the first spot ether ETFs were approved in September of last year. It was a giant leap forward for the second-largest cryptocurrency, achieving legitimacy in the eyes of U.S. regulators. But there has been one glaring omission within these financial products: the ability to stake the held assets and profit by doing so. 

Now a bipartisan group of lawmakers including Senators Cynthia Lummis (R-WY), Kirsten Gillibrand (D-NY), Steve Daines (R-Montana), Bill Hagerty (R-Tenn.), Thom Tillis (R-NC), Bernie Moreno (R-Ohio) and Ron Wyden (D-OR) is leading the way to correct that. In a letter delivered to the Securities and Exchange Commission on Friday, they are challenging the SEC’s directive to exclude protocol staking in ETPs, highlighting how this position could undermine both investor protections and the competitiveness of U.S. markets.

The SEC’s prohibition on staking within ETPs is based on a faulty understanding of how staking works on proof-of-stake networks like Ethereum. Staking is not an investment product in itself. Rather, it is a fundamental technical requirement for securing and validating transactions on proof-of-stake networks. When token holders stake their assets, they contribute to the network’s security, and in doing so earn rewards generated by the protocol itself — not from any centralized authority.

The SEC’s directive to spot ether ETP issuers to exclude staking raises serious concerns about America’s competitive position in global digital asset markets. While the United States hesitates, other major financial centers including Switzerland, Canada, Germany and Australia have embraced staking in their digital asset ETPs, recognizing its integral role in network security and operational stability. Just last month, the U.K. issued a statutory instrument acknowledging that arrangements for qualifying crypto asset staking do not amount to a collective investment scheme, reinforcing its importance in securing and maintaining blockchain networks.

Because staking is essential for securing proof-of-stake networks, it also means that if there were no one staking their ether, then all of the assets within these ETPs would be at risk. This means that, perversely, the SEC has forced American investors into a position where their investments are only protected by assets held in other jurisdictions.

Crucially, the impact of these regulations extends beyond just the Ethereum blockchain, but applies to possible future ETPs of other networks that also use proof-of-stake such as Solana, Avalanche and Polkadot. As the digital asset sector grows, the impact of this misguided regulation will only deepen.

Getting this regulation wrong hurts both American investors and the U.S. economy. Either investors accept domestic products without staking and the associated rewards, limiting their financial returns, or they seek exposure through off-shore alternatives, driving capital offshore and out of U.S. stock exchanges. Without staking, ether ETP holders gradually lose their relative network ownership position due to the inflationary nature of staking rewards.

This economic reality makes U.S. products less competitive and less attractive to investors seeking comprehensive exposure to the Ethereum ecosystem. Even more troubling, this outcome appears to contradict the SEC’s core mission of investor protection, likely pushing investors toward investment vehicles in other jurisdictions that may not meet the investor protection standards available to investors in the U.S.

The technical risks associated with staking, when managed by sophisticated validators, are minimal and well-understood. The often-cited “slashing risk” — a penalty mechanism for dishonest validation attempts — has affected just 0.001 percent of staked ether to date. This data suggests that the SEC’s cautious stance may be disproportionate to the actual risks involved.

As we await the SEC’s response to the important questions raised by Congress, American investors continue to be at a distinct disadvantage. The path forward requires a balanced approach that recognizes staking for what it is — a technical mechanism for network security — while ensuring there is appropriate oversight when it is offered within regulated investment products.

As the letter rightly points out, while only Congress can create a comprehensive regulatory framework, the SEC has the authority to permit staking in ETPs. Doing so would align with both the agency’s mandate to protect investors and the goal of maintaining U.S. leadership in global financial markets.

The bipartisan Congressional letter to SEC Commissioners Uyeda and Peirce endorsing Protocol Staking in Digital Asset ETPs is a significant milestone for investors – both crypto native and institutional. With Uyeda having criticized what he has called the “weaponization” of the SEC’s enforcement functions and crypto advocate Paul Atkins being nominated to take over the role of SEC Chair, we have a rare opportunity to make progress on one of the most common sense issues in the digital asset landscape.

It’s beyond time for the SEC to assume a leadership position when it comes to protocol staking, which powers the digital asset sector. This befits the aspirations of the American economy and the Americans who rely on it.