SEC’s Crypto Conundrum Grows as Next-Gen ETFs Push Boundaries
A new line of yield-chasing crypto funds is pushing the Securities and Exchange Commission to address unresolved gaps in its regulatory framework, particularly as the Trump administration relaxes oversight of digital assets.
The immediate controversy revolves around two proposed funds from ETF firms REX Financial and Osprey Funds that would enable investors to earn rewards by using Ether and Solana tokens to assist in validating blockchain transactions, a process known as staking. The firms indicated they had cleared an initial SEC registration hurdle last week, but agency staff took the rare step of objecting that very same evening. Staff cautioned that these products may not meet the criteria to qualify as investment companies under federal law, raising broader inquiries about the regulation of a rapidly evolving sector in crypto investment.
SEC staff highlighted that to qualify as an investment company, a firm must primarily invest in securities. This becomes problematic with digital assets, as there are no clear delineations regarding which crypto activities trigger securities laws and which do not.
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“When ETFs generate income from staking, they may begin to resemble traditional investment companies under the Investment Company Act — especially if investors depend on the managerial efforts of others to achieve those returns,” stated Adam Gana, an attorney at Gana Weinstein LLP. “Yet, these types of ETFs are challenging the definitions of what constitutes an investment company, and the SEC is sending mixed signals.” Gana also remarked that “merely including some stocks in the mix doesn’t guarantee the SEC will overlook the situation.”
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The SEC, along with REX and Osprey, declined to comment. The general counsel at REX previously noted that the firm anticipates addressing the SEC’s inquiries. The crypto sector has long contended that many tokens do not qualify as securities and should not be subjected to SEC regulations. Under Trump, the agency appeared receptive to these arguments, and its new chair, Paul Atkins, advocates for digital currencies. SEC staff guidance has indicated that memecoins and stablecoins may fall outside of securities definitions. As recently as May 29, the staff asserted that federal securities laws typically do not apply to staking activities — further complicating the regulatory landscape as firms strive to introduce innovative products.
Such inconsistent statements create a fragmented policy framework, according to Corey Frayer, director of investor protection at the Consumer Federation of America.
“The SEC and the industry cannot pick and choose when to treat crypto assets as securities based on convenience,” asserted Frayer, who previously served as a senior adviser to former SEC Chair Gary Gensler, frequently criticized by the crypto sector.
At the heart of the issue is the so-called Howey test, originating from a 1946 Supreme Court decision that still dictates securities classification. Under this test, an asset may be classified as a security — thus falling under SEC regulation — if investors contribute capital with expectations based on the managerial efforts of others. Bitcoin is typically classified as a commodity, but the status of other tokens like Ether and Solana remains unclear.
SEC Commissioner Hester Peirce, head of the agency’s crypto task force, took the unusual step of emphasizing the SEC staff’s inquiries about whether the proposed funds met the definition.
“I share those same questions,” Peirce commented in a post on X.
Donald Trump embraced the digital asset sector during his reelection campaign, promising to position the US as the “crypto capital of the planet.” Since regaining the White House, he has amassed a national stockpile of Bitcoin, appointed a “crypto czar,” and hosted memecoin enthusiasts at a private dinner in Washington.
Recently, firms have succeeded in addressing SEC staff concerns regarding new offerings. Earlier this year, agency staff reprimanded an ETF by State Street Corp. and Apollo Global Management — the first to invest in private credit — mere hours after the fund’s launch due to concerns over its liquidity and compliance with valuation rules. The firms acted quickly to resolve the issues.
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Crypto executives remain hopeful that US regulators will eventually approve the staking ETFs.
“They’ve implemented a crawl-walk-run strategy — starting with futures ETFs, advancing to spot ETFs, and hopefully culminating in staking ETFs,” expressed Matt Hougan, chief investment officer at Bitwise Asset Management Inc., which acquired an Ethereum staking platform last year. “I’m optimistic that we’ll reach the finish line soon.”
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