The world’s largest asset manager is preparing to launch a new product that could fundamentally change how institutional investors interact with the Ethereum blockchain. According to a regulatory filing submitted to the Securities and Exchange Commission (SEC) on Tuesday, BlackRock and its prime execution agent, Coinbase, plan to retain an 18% cut of the staking rewards generated by their forthcoming Ethereum exchange-traded fund (ETF), ticker symbol ETHB.
This revelation offers the first concrete look at the fee structure for the highly anticipated fund, which aims to offer investors something its predecessor could not: a steady stream of passive income derived directly from the Ethereum network.
The 82/18 Split: A New Revenue Model
This filing contains a different revenue sharing structure than an ordinary management fee structure and represents a revenue-sharing model where the majority (~82%) of the staking rewards generated on behalf of fund investors will be passed onto investors as income. The remaining 18% of staking rewards will be collected by Blackrock and Coinbase.
This model creates a financial incentive for fund sponsors to maximize the amount of ETH they stake on the network’s proof-of-staking protocol. By staking their ETH and helping to secure the Ethereum blockchain, fund sponsors are earning “rewards” in the form of additional ETH. As of the end of last week, the annualized average yield on staking Ethereum was estimated at approximately 2.8% per year. Therefore, the fund’s investors will receive an income stream from the staking rewards that effectively converts their previously static holdings to yield-bearing (like a bond or a dividend stock).
Managing Liquidity and “Excessive” Staking
The filing also brings attention to a very important issue of balancing liquidity with the need to find a proper method for investing in cryptocurrencies. The managers of this managed fund, ETHB (Ethereum Managed Fund), will only be staking between 70% to 95% of the funds’ total Ether under management; therefore, they must keep some percentage of the funds liquid enough to support daily trades on Ethereum.
The use of this reserve percentage as an investment buffer (a hedge) is critical so that if the managers decide to stake too much Ether (greater than 100% at any given time), they will be able to honor redemption requests from investors that have made the decision to sell their investment in the ETHB investment vehicle. A liquidity mismatch on the ETF fund level could create a scenario in which the NAV (net asset value) of shares in the ETF fund of ETHB can be trading at a materially different value than what should be quoted under normal conditions. Blackrock has stated that until further clarity is given regarding these issues, the management of the ETHB fund will be taking a conservative risk management approach to avoid creating an illiquid or excessive liquidity environment between investors and the underlying asset class, as well as creating a bridge between the instant liquidity on Wall Street versus long lock-ups in DeFi.
Regulatory Thaw Paves the Way
With the debut of ETHB, the crypto industry moves to an advanced stage of merging with traditional finance. The first group of spot Ethereum ETFs saw approval by the SEC, but were explicitly prohibited from utilizing staking procedures, due to confusion in ruling on what constitutes an acceptable use of staking.
In May 2021, the SEC announced new guidance confirming that a thin amount of staking may or may not be deemed a securities fraud under the regulatory framework. This message sent a flood of asset managers flooding into the market with improved offerings. BlackRock’s current non-staking Ethereum ETF, ETHA, has emerged to lead the sector with more than $9.1 billion in AUM compared to using Grayscale’s ETHE with only roughly $2.3 billion. With the possibility of each ETF creating a significant degree of yield, the ETH directed product has the potential to significantly eat into the already established locations that it operates within.
The Centralization Debate
Although the financial mechanics are good, some purists of crypto feel uneasy about the increasing power of such large players as BlackRock. The same week that BlackRock made their staking plans public, Ethereum founder Vitalik Buterin expressed concerns about centralization risks. The concern is that with a lot of staked Ether being accumulated by major Wall Street companies, they could, more or less, control too much of the government of the Ethereum network. When these players have large amounts of staked Ether, it can lead to centralized “bottlenecks” within the Ethereum network – this would threaten the premise of decentralization upon which all cryptocurrencies have been built.
Competition Heats Up
BlackRock isn’t the only player in this space. Other competitors with their own staked Etheeum ETF proposals are VanEck and CoinDesk recently announced its intention to create a staking option for its existing Grayscale Etheeum ETFs. As the fee wars heat up, the 18% “take rate” set by BlackRock and Coinbase will likely become a benchmark against which all other funds are measured.
For now, the filing signals that the marriage between traditional finance and crypto staking is officially consummated. Investors get their yield, BlackRock gets its cut, and the Ethereum network gets a massive—if controversial—new validator.
