Author: Weilin, PANews

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 reached $33 million, with inflows of $12 million, exceeding the expectations of many market observers.

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

Compared to traditional cryptocurrency asset ETFs, the REX-Osprey Solana Staking ETF offers an innovative feature—variable staking reward monthly dividends, with a current dividend yield of 7.3%. Bloomberg ETF analyst James Seyffart commented, "This is a healthy trading start," noting that the trading volume reached $8 million within the first 20 minutes of listing.

Direct Price Exposure to SOL and Staking Rewards

Looking back at the recent performance of SOL futures ETFs, on March 17, the Solana futures ETF launched on the Chicago Mercantile Exchange (CME) had a first-day trading volume of $12.1 million, 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 shown stable performance since their launch, with average daily trading volumes of approximately 80,000 and 140,000 shares, equating to $1.25 million and $2.16 million, respectively, maintaining a relatively small scale, indicating that market demand has not been effectively boosted.

In contrast, in January 2024, multiple spot Bitcoin ETFs listed with a total trading volume of $4.6 billion on their first trading day.

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

• Retail investors seeking cryptocurrency exposure through brokerage accounts
• Crypto-native investors wishing to support the bridge between blockchain innovation and mass adoption
• Financial advisors and registered investment advisors (RIAs) looking for compliant access to blockchain income
• Institutions requiring ETF transparency

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

"C Corporation" Structure Bypasses Traditional Regulatory Framework

The REX-Osprey Solana Staking ETF was able to launch in a short time partly due to its choice of "C Corporation" registration. This structure allows the fund to bypass the traditional ETF approval process and list quickly. Unlike traditional cryptocurrency 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 investing in assets 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 commodities and futures, which typically fall under the purview of "33 Act" funds—such as established trusts (physical trusts providing access to spot prices) and publicly traded partnerships or commodity pools (based on futures portfolios).

At the same time, the tax rules under the "40 Act" are straightforward, with long-term capital gains tax over 12 months set at 20%, and distributed income taxed at ordinary income rates (up to 37%). The tax treatment under 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 a qualified custodian, rather than the fund issuer, is required to hold the underlying assets. Anchorage Digital, currently the only federally regulated bank authorized to both custody and stake digital assets, serves this role.

REX-Osprey Solana Staking ETF's_ prospectus submitted to the SEC_

Double Taxation Increases Investment Costs, May Attract Imitators from Other Altcoin ETFs

This structure is not without controversy, with tax issues being one of its main challenges. Since staking rewards are considered ordinary income, the fund must pay corporate income tax internally, while investors also bear dividend taxes and capital gains taxes. This results in a higher overall tax burden, despite the fund's management fee being 0.75%.

Additionally, while the SEC's approval process has not encountered significant obstacles, the innovative nature of this structure has led to the SEC showing hesitance regarding C Corporations bypassing traditional approval processes, casting uncertainty on whether this model will be applicable for the launch of more funds in the future. In an increasingly competitive market, the REX-Osprey Solana Staking ETF may provide a reference structure for future cryptocurrency asset ETFs, but it may also face more regulatory scrutiny down the line.

Crypto independent researcher KOL Jason Chen explained, "So 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. But the downside is that because it has not gone through very strict approval, the subsequent disclosure requirements will be much higher than the periodic disclosures of 19b-4, requiring daily disclosures, which will increase management costs and also be subject to double taxation. When the coin price rises, it will be considered corporate profit, leading to a 21% corporate income tax, and investors will also be charged dividend taxes and capital gains taxes. So 19b-4 is more suitable for mature large assets like BTC, while the 1940 Investment Company Act is suitable for SOL and a series of other altcoins."

Some users commented under the topic of market predictions, raising corresponding risks, namely that the ETF's price may not accurately reflect the price movements of SOL. The SEC documents submitted by SSK indicate, "Under normal market conditions, the SSK ETF will invest at least 80% of its net assets in reference assets and other assets providing exposure to reference assets. The fund will invest directly or through REX-Osprey SOL subsidiaries. Although this 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)."

Application Process Twists and Turns, Ultimately Smooth "Pass"

In May of 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 Corporation ETF focused on Solana and Ethereum.

On May 30, the SEC requested REX and Osprey to delay the effective date of their registration statement, citing unresolved questions regarding whether the proposed fund structure complies with 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 typically interpret this statement as implicit approval from the SEC. This is similar to the "tacit approval" seen when companies like BlackRock and Fidelity proposed spot Bitcoin ETFs.

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

Traditionally, staking pathways usually mean handing tokens over to a cryptocurrency exchange or setting up one's own validator, but the SSK ETF significantly lowers this threshold. 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 complexities.

Some market views suggest that at least under the current U.S. government's regulatory environment, the SEC has not attempted to completely block staking. It simply requires a suitable framework: one that can handle earnings, taxes, custody, and compliance in a way that traditional finance understands. Although REX and Osprey are not as well-known as BlackRock, they now hold a first-mover advantage in this potential multi-billion dollar ETF category.

Currently, multiple companies are vying 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 receive approval within two to four months. At least 60 other altcoin ETF proposals are currently awaiting SEC review and potential approval.

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