Greenlight Turns Red: US SEC Warns Ethereum and Solana Staking ETFs May Violate Federal Law

SEC Flags Legal Hurdles For Ethereum And Solana ETFs With Staking Features

Two asset managers are facing new scrutiny from U.S. regulators over their plans to introduce cryptocurrency exchange-traded funds (ETFs) that offer staking rewards.

Despite initial approval, the U.S. Securities and Exchange Commission (SEC) is questioning whether these products meet the legal definition required to be listed as ETFs under federal law.

Are These Crypto Funds Actually Investment Companies?

REX Financial and Osprey Funds had secured what they believed was the green light to launch Ethereum and Solana ETFs that include staking exposure—allowing investors to earn rewards by helping maintain blockchain operations.

But just hours after their registration became effective on 30 May, SEC staff raised concerns in a formal letter to ETF Opportunities Trust, the legal issuer of the funds.

According to the SEC, the ETFs may not qualify as investment companies under the Investment Company Act of 1940, a status that is mandatory for listing on public exchanges.

The agency pointed out that the funds “improperly filed their registration statement” using Form N-1A and said their disclosures “may be potentially misleading.”

Staking In Etfs Sparks Regulatory Tension

The core issue lies in the ETFs’ staking feature.

The SEC remains uncertain whether funds that generate returns through staking can be considered to be “primarily engaged in investing in securities,” which is central to being recognised as an investment company.

Under U.S. law, an entity is considered an investment company if more than 40% of its assets consist of investment securities or if its main business involves investing or trading securities.

REX general counsel Greg Collett said the firm is aware of the concerns and intends to address them before listing.

He told Bloomberg,

“We think we can satisfy the SEC on the investment company question, and we don’t intend to launch the funds until we do that.”

Crypto-Friendly Policies Face Internal Pushback

While the SEC under President Donald Trump’s administration has eased pressure on the crypto sector—dropping or pausing several lawsuits, including one involving Binance and its founder Changpeng Zhao—internal disagreements remain.

Commissioner Caroline Crenshaw, the commission’s only Democrat, criticised the agency’s inconsistent messaging on what qualifies as a security.

Crenshaw said in a statement on 31 May,

“How is it that these crypto assets are supposedly not securities when it comes to registration requirements, but conveniently are securities when a registrant sees an opportunity to sell a new product? If you’re confused, join the club.”

The comment follows new staff guidance released on 29 May clarifying that certain types of staking—such as self-staking and custodial staking—do not constitute the sale of securities.

Though not legally binding, the guidance represents a notable shift from the SEC’s prior enforcement tone.

Staking Etfs May Still Have A Future

REX received effective registration for its Ethereum and Solana ETFs on 30 May, just ahead of the SEC’s objections.

REX founder Greg King had said the company intended to launch both funds by mid-June.

The registration also included ETFs linked to other digital assets such as Bitcoin, XRP, Dogecoin, and even the TRUMP meme coin.

Despite regulatory uncertainty, analysts remain optimistic.

James Seyffart, ETF analyst at Bloomberg Intelligence, said,

“Even if the SEC doesn’t allow this structure to list, we still believe the more straightforward attempts to allow staking in a U.S. ETF will ultimately be successful. It’s a matter of when, not if. But the SEC doesn’t seem to be a fan of the way REX tried to push these listings through.”

The SEC has said that unless the concerns are resolved, its staff will consider “appropriate next steps” to enforce compliance with securities laws.