The US Securities and Exchange Commission (SEC) recently approved the listing and trading of exchange-traded products (ETPs) with direct exposure to bitcoin and ether—marking a pivotal moment in the evolution of cryptocurrency regulation. This development opens new doors for institutional and retail investors seeking regulated, accessible pathways into digital assets. But what exactly are spot ETPs, how do they differ from traditional ETFs, and what do they mean for investors? Let’s explore the implications, benefits, and challenges of this landmark shift.
Understanding the Spot ETP Approval
On January 10, 2024, the SEC greenlit several spot bitcoin ETPs—investment vehicles that hold actual bitcoin rather than futures contracts. This was a watershed moment, reversing years of skepticism and rejected applications dating back to 2018. The earlier denials were primarily rooted in concerns over market manipulation, investor protection, and insufficient surveillance mechanisms in crypto markets.
The turning point came in August 2023, when the US Court of Appeals for the District of Columbia Circuit ruled against the SEC’s rejection of a spot bitcoin ETP application, effectively compelling the agency to reconsider. This judicial pressure paved the way for approval. Shortly after, in May 2024, the SEC extended similar clearance to spot ether ETPs—though with notable limitations.
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ETF vs. ETP: Key Differences Investors Should Know
While often used interchangeably, ETF and ETP are not synonymous.
An ETF is a fund registered under the Investment Company Act of 1940 (the “40 Act”), structured like a mutual fund but traded on exchanges. ETF shares are created and redeemed in-kind by authorized participants (APs), helping keep market prices aligned with net asset value (NAV).
In contrast, spot bitcoin and ether ETPs are not registered under the 40 Act. Because the SEC has consistently maintained that bitcoin is not a security, these products are instead registered under the Securities Act of 1933 as ETPs—specifically structured as grantor trusts. This distinction has significant regulatory and operational implications:
- No 40 Act oversight: Sponsors aren’t required to register as investment advisers.
- No custody rule compliance: Unlike ETFs, these ETPs aren’t subject to SEC Rule 206(4)-2, which governs asset safeguarding.
- Different reporting standards: ETPs file annual 10-K and quarterly 10-Q reports—similar to public companies—rather than the N-CSR and semi-annual filings required of ETFs.
Another critical divergence is in the creation and redemption process. Early ETP proposals allowed in-kind settlements, but all were revised to cash-only mechanisms during SEC review. This means the ETP itself buys or sells bitcoin or ether to fulfill share creation or redemption—shifting execution risk and price exposure onto the fund rather than APs.
Tax Treatment of Spot ETPs
From a tax perspective, spot ETPs are designed to qualify as grantor trusts, which are not subject to entity-level taxation. Instead, income and gains pass directly to shareholders, who report their pro-rata share on individual tax returns.
To support this structure:
- Trusts must have a single class of ownership.
- Trustees cannot alter the underlying holdings.
- Sponsors typically obtain legal opinions confirming grantor trust status—though these are not binding on the IRS.
However, uncertainty remains. The IRS could challenge this classification, potentially treating the ETP as a publicly traded partnership subject to corporate-level taxation.
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Why Staking Isn’t Included in Ether ETPs—And Why It Matters
One major limitation of current spot ether ETPs is the exclusion of staking. Initial applications included staking functionality to earn yield on ETH holdings—but all sponsors removed it just days before SEC approval in May 2024.
Why? Because staking introduces two critical issues:
- Grantor Trust Integrity: Allowing staking could be interpreted as giving trustees the power to vary investments—violating IRS rules for grantor trust status.
Tax Uncertainty: While IRS Revenue Ruling 2023-14 clarified that staking rewards are taxable upon “dominion and control,” it left unanswered questions about:
- Whether rewards are ordinary income or capital gains.
- Withholding obligations for foreign investors.
- Whether staking constitutes an active trade or business—potentially triggering effectively connected income (ECI) for non-US investors.
Until regulatory clarity emerges, staking will likely remain off-limits for US-listed ETPs.
Futures ETFs vs. Spot ETPs: A Tax Efficiency Comparison
Prior to 2024, investors relied on futures-based crypto ETFs, which track bitcoin or ether futures contracts. These funds are typically structured as regulated investment companies (RICs) under the 40 Act.
But RICs face structural challenges with crypto:
- At least 90% of income must come from passive sources like dividends or interest.
- Futures gains from BTC/ETH are often not considered “securities” income under RIC rules.
- To comply, many funds use offshore subsidiaries (e.g., Cayman Islands corporations), creating controlled foreign corporations (CFCs).
This setup leads to:
- Deemed dividends: Annual CFC earnings are taxed even if not distributed.
- No loss carryforwards: Losses can’t offset future gains.
- Tax “whipsaw”: Investors may owe taxes despite overall portfolio losses.
Spot ETPs avoid these issues by using a grantor trust model—offering greater tax efficiency and more accurate price tracking.
Potential Benefits of Investing in Spot ETPs
Why choose a spot ETP over direct crypto ownership?
- Access via Traditional Accounts: Enables inclusion in IRAs, 401(k)s, and taxable brokerage accounts—without managing wallets or private keys.
- Reduced Operational Burden: Eliminates need for self-custody or third-party custodians.
- Regulatory Comfort: Offers institutional-grade oversight and reporting.
- Ease of Use: Trades like any stock—no need to navigate crypto exchanges.
For risk-averse or compliance-sensitive investors, ETPs provide a familiar, secure gateway to digital assets.
Challenges and Market Outlook
Despite progress, concerns remain:
- Cash-only creation/redemption: Slower execution increases NAV-price spreads and reduces AP participation.
- Lack of staking: Ether ETPs saw net outflows post-launch compared to OTC products—likely due to missing yield potential.
- Volatility and cost: Cash settlements may amplify transaction costs and price swings.
Still, the trend is clear: major asset managers are embracing crypto through regulated vehicles. As infrastructure improves and regulatory clarity grows, spot ETPs could become core components of diversified portfolios.
FAQ: Frequently Asked Questions About Crypto ETPs
Q: What is a spot ETP?
A: A spot exchange-traded product that holds actual cryptocurrency (like bitcoin or ether) and trades on public exchanges—providing direct exposure without futures contracts.
Q: How is a spot ETP different from a crypto futures ETF?
A: A futures ETF tracks derivative contracts with expiration dates, while a spot ETP holds the real asset. Spot ETPs offer better price tracking and tax efficiency.
Q: Are spot ETPs safer than buying crypto directly?
A: They offer regulatory oversight, audited holdings, and integration with traditional brokerage accounts—reducing risks related to custody and exchange reliability.
Q: Can I earn staking rewards through ether ETPs?
A: Not currently. Due to regulatory and tax uncertainties, US-listed ether ETPs do not support staking.
Q: Are gains from spot ETPs taxed as capital gains?
A: Yes. As grantor trusts, shareholders report their share of gains based on the underlying crypto’s cost basis—similar to holding physical bitcoin or ether.
Q: Do spot ETPs charge management fees?
A: Yes. Like ETFs, they have expense ratios that vary by issuer—typically between 0.25% and 1.0%.
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Final Thoughts
The SEC’s approval of spot bitcoin and ether ETPs represents more than regulatory progress—it signals growing institutional acceptance of digital assets. While structural limitations like cash-only settlements and absent staking remain, these products offer a compliant, accessible bridge between traditional finance and the crypto economy.
For investors, advisors, and financial institutions, this milestone unlocks new opportunities—to diversify portfolios, enhance tax efficiency, and meet rising demand for digital asset exposure—all within a regulated framework.
As the ecosystem evolves, continued innovation and dialogue with regulators will be key to unlocking the full potential of crypto-based investment products.
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