Ethereum staking yields and the new custody rules

Fidelity plans to stake up to 100% of its ether holdings within the $898 million Fidelity Ethereum Fund (FETH). This proposal seeks to generate income from the ether the fund holds. The fund retains 85% of gross staking rewards for the benefit of shareholders. Service providers Blockdaemon, Figment, and Galaxy Digital receive the remaining 15% to manage the staking infrastructure and node operations. These rewards fund quarterly cash distributions to shareholders after the fund covers all expenses. The network currently yields roughly 3% annually. You already know the basics of ETH staking, so I will focus on the specific yield mechanics. To facilitate these quarterly cash payouts, Fidelity may periodically sell a portion of its ether holdings to generate enough cash flow for payouts while maintaining sufficient liquidity for redemptions and all other operational expenses. This move follows the November 2025 IRS safe harbor bulletin, which allows qualifying crypto trusts to stake assets without losing grantor-trust status. The fund keeps enough ether unencumbered to handle redemptions, cover operational expenses, and maintain liquidity. Ethereum’s staking protocol uses a proof-of-stake mechanism. The Shanghai upgrade in April 2023 enabled withdrawals, though the protocol still uses an exit queue that can delay the unstaking process during periods of high activity.

BlackRock and the SEC timeline

The SEC decision to postpone Ethereum staking products from BlackRock, Franklin Templeton, and Fidelity shows a cautious approach to regulatory challenges surrounding asset custody and investor risk. The SEC deadline for BlackRock’s Ethereum staking amendment arrives on October 30. This amendment would add staking capabilities to the existing iShares Ethereum Trust. The SEC postponed decisions for BlackRock, Franklin Templeton, and Fidelity to allow more time for assessment. Franklin Templeton’s Solana and XRP ETF proposals face a November 14 deadline. Fidelity’s Ethereum staking proposal faces a November 13 deadline. Grayscale’s Ethereum ETF faces an October 29 deadline, while 21Shares’ Ethereum ETF awaits a decision by October 23. Other pending applications include the Bitwise Dogecoin ETF and Grayscale’s Hedera ETF, both pushed to November 12. Earlier in August, the SEC delayed the 21Shares Solana ETF and WisdomTree’s XRP Fund. Paul Atkins, the SEC Chair, noted at an OECD Roundtable in Paris that crypto’s time has come. However, the agency still holds over 90 crypto ETF applications.

The new custody framework

The SEC released a proposal on October 1, 2026, regarding the custody of crypto assets for registered investment advisers and regulated funds. This proposal, labeled Releases IA-7023 and IC-36353, offers two paths: conditional self-custody and the use of state trust companies. An adviser can only use self-custody if they determine that no authorized custodian exists. The adviser must verify this determination before taking the asset and every quarter thereafter. To use this path, the adviser must demonstrate expertise and protect private keys through joint authorization by at least two people for every transaction. They must also obtain an independent auditor report on internal controls within six months. For funds, the board of directors must review the lack of a qualified custodian initially and every quarter. State trust companies act as custodians if an adviser verifies their state banking authority authorization annually and reviews their audited accounts. Client assets must stay separate from the company’s own funds. The proposal targets registered investment advisers and regulated funds, such as registered investment companies and business development companies. The 2023 proposal, which the agency withdrew in June 2025, intended to extend the custody rule to all assets. Under the current 2026 proposal, the amendments apply only to crypto assets that are funds or securities. The requirement that an adviser must verify the unavailability of an authorized custodian every single quarter adds a significant administrative burden that may discourage many firms from using this specific fallback option for their clients.

Market efficiency and in-kind redemptions

The regulatory environment for crypto custody changed after the repeal of Staff Accounting Bulletin 121, which removed the barriers that previously stopped banks from offering cryptocurrency custody services. Nasdaq proposed in-kind redemptions for BlackRock’s iShares Bitcoin Trust (IBIT) to improve efficiency. This would allow authorized participants to exchange ETF shares directly for bitcoin instead of cash. This change aims to lower fees for retail investors. Coinbase Custody must process withdrawals of Bitcoin to a public blockchain address within 12 hours of receiving instructions from IBIT or its authorized representatives. This requirement aims to enhance liquidity and provide quicker access to the actual Bitcoin assets. The SEC’s crypto custody rewrite entered White House review on August 25, 2026. The agency targets October 2026 for a formal proposal. The proposal for in-kind redemptions provides several advantages. It reduces the complexity and the number of steps in the redemption process. This model streamlines ETF operations, saving both time and costs. Avoiding the sale of bitcoin minimizes capital gains distributions, making ETFs more tax-efficient for institutional investors. Reduced sell pressure on bitcoin during redemptions helps stabilize the asset’s price. I would skip the hype surrounding these filings and focus on the technical requirements for liquidity and custody. The fund’s ability to distribute rewards depends on the exit queue in the Ethereum protocol. Will the SEC provide a more definitive rule for staking before the 2026 target?