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

The 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. The first-day trading volume has already surpassed that of the earlier launched Solana futures ETF and XRP futures ETF.

Compared to traditional cryptocurrency ETFs, the REX-Osprey Solana Staking ETF offers an innovative feature—a variable staking reward monthly dividend, with the current dividend rate at 7.3%. Bloomberg ETF analyst James Seyffart commented, “This is a healthy trading start,” and noted that the trading volume reached $8 million in the first 20 minutes of listing.

Providing 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 listed 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, The Solana ETF (SOLZ) and 2x Solana ETF (SOLT). According to Yahoo Finance, as of April 1, the two products had shown stable performance since their listing, with daily average trading volumes of approximately 80,000 and 140,000 shares respectively, amounting to $1.25 million and $2.16 million, maintaining a relatively small scale and indicating that market demand had not been effectively boosted.

In contrast, in January 2024, several spot Bitcoin ETFs that were listed achieved a total trading volume of $4.6 billion on their first trading day.

“C Corporation” Structure, Bypassing Traditional Regulatory Framework

The reason why the REX-Osprey Solana Staking ETF could be launched in a relatively short period of time is partly due to its choice of the “C Corporation” registration form. This structure enabled the fund to bypass the traditional ETF approval process and go public quickly. Unlike traditional cryptocurrency 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 considered too risky for retail investors (such as futures, commodities, and Bitcoin derivatives). These restrictions make funds under the Investment Company Act of 1940 well-suited for stocks and fixed-income assets, but more complicated when dealing with commodities and futures, which are usually within the scope of “33 Act” funds—such as grantor trusts (physical trusts providing spot price access) and publicly traded partnerships or commodity pools (futures-based portfolios).

Meanwhile, the tax rules of the “40 Act” are relatively simple, with a capital gains tax rate of 20% for long-term holdings exceeding 12 months, and distributed income taxed at ordinary income rates (up to 37%). The tax treatment of the “33 Act” involves dealing with complex tax documentation.

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 regulated bank authorized to both custody and stake digital assets, serves in this role.

Double Taxation Raises Investment Costs, May Attract Other Imitators

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

Moreover, although the SEC’s approval process did not encounter significant obstacles, due to the innovative nature of this structure, the SEC has shown hesitation towards C corporations bypassing the traditional approval process, casting uncertainty over whether this model will be applicable to the launch of more funds in the future. Against the backdrop of increasingly fierce market competition, the REX-Osprey Solana Staking ETF may provide a reference structure for other future cryptocurrency ETFs, but it may also face more regulatory scrutiny in the future.

Cryptocurrency independent researcher and KOL Jason Chen explained, “So the low threshold and fast approval process mean that it can be completed within 75 days from submission to approval as long as the SEC does not object. However, the downside is that, on the one hand, since it has not undergone a very strict approval process, the subsequent disclosure requirements will be much stricter than the regular disclosures under Rule 19b-4, and daily disclosures are needed, which will increase management costs. Moreover, there will be double taxation. When the price of the cryptocurrency rises, it will be considered as corporate profit, and the company will have to pay 21% corporate income tax. Investors will also have to pay dividend taxes and capital gains taxes. Therefore, Rule 19b-4 is more suitable for mature large assets like BTC, while the Investment Company Act of 1940 is more suitable for SOL and a series of other altcoins.”

Some users also commented under the topic of market predictions, raising the corresponding risk that the price of this ETF may not accurately reflect the price changes of SOL. The SEC filings submitted by SSK indicate that “Under normal market conditions, the SSK ETF will invest at least 80% of its net assets in the reference assets and other assets that provide exposure to the reference assets. The fund will make direct investments or invest through its subsidiary, REX-Ospre SOL. Although the fund aims to seek returns corresponding to the reference assets, the fund’s performance will not perfectly replicate the performance of the reference assets (that is, due to factors such as staking rewards, trading, and other expenses, the fund’s returns may not be the same as the reference assets, although they will generally move in the same direction, whether positive or negative).”

Bumpy Application Process, but Ultimately Smooth “Passage”

In May of this year, REX Shares and Osprey Funds submitted an application to the US Securities and Exchange Commission (SEC) seeking approval to launch C Corporation ETFs focused on Solana and Ethereum.

On May 30, the SEC asked REX and Osprey to postpone the effective date of their registration statement, citing unresolved issues regarding whether the proposed fund structure met the definition of an “investment company” under the Investment Company Act of 1940.

On June 29, the SEC notified REX Shares and Osprey Funds that they had “no further comments” on their submitted Solana staking ETF application. In ETF regulatory terminology, industry observers usually regard this statement as an implicit approval from the SEC. This is similar to the “acquiescence” when companies like BlackRock and Fidelity launched spot Bitcoin ETFs.

Bloomberg analyst James Seyffart pointed out at the time that the “unique” C Corporation format of these funds might bypass the typical Rule 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, the path to staking usually means handing over tokens to cryptocurrency exchanges or setting up one’s own validator. However, the SSK ETF has significantly lowered this barrier. For the first time, traditional investors can 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, the staking mechanism of Ethereum (such as slashing and longer unlocking periods) may involve more complexities.

Some market views suggest that, at least under the current US government’s regulation, the SEC has not attempted to completely block staking. It just needs an appropriate framework: one that can handle earnings, taxes, custody, and compliance in a way that is understandable by traditional finance. Although REX and Osprey are not as well-known as BlackRock, they now have a first-mover advantage in this field that could potentially become a billion-dollar ETF category.

Currently, several 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 indicated that these funds might receive approval within two to four months. At present, there are at least 60 other altcoin ETF proposals awaiting the SEC’s review and potential approval.