PANEWS Depth: How does the Solana ETF SS circumvent traditional regulatory frameworks?

Original author: Weilin, PANews

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On July 3, the first Solana staking ETF in the United States—REX-Osprey Solana Staking ETF (ticker: SSK)—was officially listed on the Chicago Board Options Exchange (Cboe BZX), receiving a relatively positive market response. The trading volume on its first day was $33 million, with an inflow of $12 million, exceeding the expectations of many market observers.

The ETF not only tracks the market price of Solana (SOL) but also provides investors with native staking rewards from Solana. It is jointly managed by REX Shares and its sister company Osprey, with the first day trading volume exceeding that of the earlier launched Solana futures ETF and XRP futures ETF.

Compared to traditional crypto asset ETFs, the REX-Osprey Solana Staked ETF offers an innovative feature—variable staking rewards monthly dividends, with a current dividend yield of 7.3%. Bloomberg ETF analyst James Seyffart commented on this, saying: "This is a healthy trading start," noting that the trading volume reached 8 million dollars in the first 20 minutes after listing.

Provide direct price exposure to SOL along with staking rewards

Looking back at the recent performance of the SOL futures ETF, on March 17, the Solana futures ETF was launched on the Chicago Mercantile Exchange (CME), with a trading volume of $12.1 million on its first day, which was below market expectations. On March 20, Volatility Shares launched two Solana futures ETFs, namely The Solana ETF (SOLZ) and 2x Solana ETF (SOLT). According to Yahoo Finance, as of April 1, both products have performed steadily since their launch, with average daily trading volumes of approximately 80,000 and 140,000 contracts, which translates to $1.25 million and $2.16 million, respectively. The scale remains relatively small, indicating that market demand has not been effectively stimulated.

In comparison, in January 2024, the total trading volume on the first trading day of several spot Bitcoin ETFs that were launched reached 4.6 billion dollars.

The Solana staking ETF "SSK" has shown a decent performance since its launch, leveraging registration as a "C Corporation" to bypass traditional regulatory frameworks. Are other altcoin ETF imitators on the way?

According to the official website, SSK aims to meet the needs of various investors:

· Retail investors seeking exposure to cryptocurrencies through brokerage accounts.

· Hope to support the bridge between blockchain innovation and mass adoption for native crypto investors.

· Find financial advisors and registered investment advisors (RIA) that comply with regulations for blockchain income access pathways.

· Institutions that require ETF transparency

According to official guidance, staking rewards are paid in physical form to the fund and increase its net asset value (NAV), which may lead to taxable income for shareholders. Depending on the fund's earnings and distributions, this income may be classified as ordinary income, capital gains, or capital returns. Investors should consult a tax advisor for relevant guidance.

"C Corporation" structure, bypassing traditional regulatory frameworks

The REX-Osprey Solana Staking ETF was able to launch in a relatively short time, partly due to its choice of the "C Corporation" registration form. This structure allows the fund to bypass the traditional ETF approval process and go public quickly. Unlike traditional crypto asset ETFs, the REX-Osprey Solana Staking ETF chose to register under the Investment Company Act of 1940, rather than the Securities Act of 1933.

The Investment Company Act of 1940 requires ETFs to be diversified, regularly distribute earnings, and avoid investments that are deemed too risky for retail investors (such as futures, commodities, and Bitcoin derivatives). These restrictions make funds under the Investment Company Act of 1940 very suitable for stocks and fixed-income assets, but more complex when dealing with assets like commodities and futures, which typically fall under the category of "33 Act" funds—such as established trusts (physical trusts provide access to spot prices) and publicly traded partnerships or commodity pools (based on futures portfolios).

At the same time, the tax rules of the "40 Act" are simple, with a capital gains tax of 20% for holdings over 12 months, and distribution income taxed at ordinary income tax rates (up to 37%). The tax treatment of the "33 Act" requires handling complex tax paperwork.

Unlike existing spot Bitcoin and Ethereum ETFs, SSK falls under a different regulatory framework, registered under the Investment Company Act of 1940. This means that a qualified custodian, rather than the fund issuer, is required to hold the underlying assets. Anchorage Digital, currently the only federally authorized bank that can both custody and stake digital assets, serves in this role. REX-Osprey Solana Staking ETF filed its prospectus with the SEC Double taxation increases investment costs and may lead to imitation by other altcoin ETFs.

This structure is not without controversy, and tax issues are one of its main challenges. Since staking rewards are considered ordinary income, the fund needs to pay corporate income tax, and investors also need to bear dividend tax and capital gains tax. This results in a higher overall tax burden, even though the management fee of the fund is 0.75%.

In addition, although the SEC's approval process has not encountered significant obstacles, due to the innovative nature of this structure, the SEC has shown a hesitant attitude towards C corporations circumventing traditional approval procedures, which casts a layer of uncertainty on whether this model is suitable for the launch of more funds in the future. In the context of increasingly fierce market competition, the REX-Osprey Solana staking ETF may provide a reference structure for future crypto asset ETFs, but it may also face more scrutiny from regulators down the line.

KOL Jason Chen, an independent researcher in the field of cryptocurrencies, explained: "Therefore, the threshold is low and the approval speed is fast. As long as the SEC does not oppose, it can be completed within 75 days from submission to approval. However, the downside is that since it has not undergone very strict approval, the subsequent disclosure requirements will be much more stringent than the periodic disclosures under 19b-4, requiring daily disclosures. This will increase management costs and subject the profits to double taxation. When the coin price rises, it will be regarded as company profits, resulting in a 21% corporate income tax. Investors will also be charged dividend taxes and capital gains taxes. Therefore, 19b-4 is more suitable for mature large assets like BTC, while the 1940 Investment Company Act is more applicable to SOL and a series of other altcoins."

Some users also commented on the topic of the prediction market, raising corresponding risks, namely that the price of the ETF may not accurately reflect the price movements of SOL. The SEC filing submitted by SSK states, "Under normal market conditions, the SSK ETF will invest at least 80% of its net assets in reference assets and other assets that provide exposure to reference assets. The fund will invest directly or through its REX-Ospre SOL subsidiary. Although the fund aims to seek returns corresponding to the reference assets, the fund's performance will not fully replicate the performance of the reference assets (i.e., due to factors such as staking rewards, trading, and other fees, the fund's returns may not necessarily match those of the reference assets, although they will generally move in the same direction, whether positive or negative)."

The application process had its ups and downs, but ultimately it passed smoothly.

In May this year, REX Shares and Osprey Funds submitted an application to the U.S. Securities and Exchange Commission (SEC) seeking approval to launch a C-type company ETF focused on Solana and Ethereum.

On May 30, the SEC requested REX and Osprey to postpone the effective date of their registration statements due to unresolved issues regarding whether the proposed fund structure meets the definition of "investment company" under the Investment Company Act of 1940.

On June 29, the SEC notified REX Shares and Osprey Funds that it had "no further comments" on their submitted Solana staking ETF application. In ETF regulatory terminology, industry observers generally interpret this statement as an implicit approval from the SEC. This is similar to the "tacit approval" seen when companies like BlackRock and Fidelity pushed for a spot Bitcoin ETF.

Bloomberg analyst James Seyffart pointed out at the time that these funds' "unique" C-corporation format may bypass the typical 19b-4 rule change process, and the SEC's silence on the C-corporation workaround now seems to confirm it as a compliant solution.

Originally, staking typically meant handing over tokens to a cryptocurrency exchange or setting up one's own validator, but the SSK ETF has significantly lowered this barrier. Traditional investors can now gain passive exposure to Solana and earn staking rewards through the same brokerage accounts they use for stocks or index funds. The approval of the Solana staking ETF now provides a roadmap. However, Ethereum's staking mechanism (such as penalties and longer unlocking periods) may present more complexity.

There are market views pointing out that, at least under the current US government's regulation, the SEC has not tried to completely block staking. It just needs a suitable framework: a framework that can handle returns, taxation, custody, and compliance in a way that traditional finance understands. Although REX and Osprey are not as well-known as BlackRock, they currently have a first-mover advantage in this area that could become a multi-billion dollar ETF category.

Currently, multiple companies are competing for the opportunity to launch a Solana spot ETF, with Invesco and Galaxy joining the competition at the end of June. Analyst Balchunas stated that these funds could be approved within two to four months. There are currently at least 60 other altcoin ETF proposals awaiting review and potential approval from the SEC.