Regulatory Approval Sought for Invesco Galaxy's Solana Exchange-Traded Fund by Cboe BZX
The proposed Invesco Galaxy Solana ETF, a joint venture between global asset manager Invesco and crypto-focused financial company Galaxy Digital, aims to offer investors regulated access to the native token belonging to Layer 1 blockchain Solana through traditional securities markets. However, concerns and risks associated with Solana's Proof-of-Stake (PoS) model have come to the forefront, particularly in relation to centralization and potential market manipulation for regulated investment products.
Centralization Risks in Solana's Network
Solana faces criticism for a degree of centralization in its network. Centralization risks arise when large holders or third-party entities, such as pooled staking partners or centralized exchanges, concentrate control over validator nodes. This concentration can undermine the fundamental security and censorship resistance that decentralized networks aim to provide.
For example, platforms like Robinhood offer pooled staking for Solana, which centralizes validator control with the platform or its partners, limiting user control over staking and potentially deterring users who value decentralization.
Custodial Risks and Liquidity Constraints
Staking on centralized platforms poses custodial risks. Users do not control private keys directly, and their staked assets depend on the operational integrity and security of the platform. If a platform faces hacks, outages, or regulatory intervention, users’ staked assets—and therefore their potential rewards and capital—may be at risk.
Additionally, the bonding or lock-up periods for staked SOL (approximately two days for Solana) expose users to price volatility without immediate liquidity. In volatile markets, this can lead to losses that offset staking rewards. This liquidity limitation can be a concern especially for regulated investment products or institutional participants who require rapid asset reallocation or exit.
Regulatory Oversight and Market Manipulation Risks
Regarding regulated investment products—such as ETFs tracking Solana—there is a risk that centralized control inherent in the staking infrastructure could be exploited for market manipulation or lack transparency. The recent filing of the Invesco Galaxy Solana ETF with regulators highlights growing institutional interest but also emphasizes the importance of regulatory oversight to mitigate risks from centralization and potential manipulation.
The filing states that the ETF would track the "Lukka Prime Solana Reference Rate" and allow for both cash and in-kind creation and redemption of shares. The ETF's market characteristics justify approval without requiring a surveillance-sharing agreement with a regulated futures market, according to the proposal. The trust may stake a portion of its SOL holdings through trusted staking providers, potentially generating additional returns for investors.
Challenging Regulatory Environment
The Solana ETF filing faces a challenging regulatory environment marked by recent delays and mixed signals from the SEC. The SEC has also delayed decisions on multiple other crypto products, pushing back the Truth Social Bitcoin ETF deadline to September 18 and Grayscale's Solana Trust conversion to October 10. In addition, the agency blocked two staff-approved multi-asset crypto ETFs this month alone.
Despite pro-crypto leadership at the SEC, few crypto products have been approved, making the approval of the Invesco Galaxy Solana ETF a significant milestone in the crypto ETF space. However, the risks associated with Solana's PoS model and the need for regulatory oversight to mitigate these risks cannot be overlooked.
[1] Stadelmann, Kadan. "Proof-of-stake networks like Solana present unique risks for regulated investment products." CoinDesk, 17 June 2021. https://www.coindesk.com/policy/2021/06/17/proof-of-stake-networks-like-solana-present-unique-risks-for-regulated-investment-products/
[2] "Robinhood offers staking for Solana, Cosmos, and Tezos." Decrypt, 23 June 2021. https://decrypt.co/73973/robinhood-offers-staking-for-solana-cosmos-and-tezos
[3] "Solana's staking process: How it works and why it matters." Cointelegraph, 17 June 2021. https://cointelegraph.com/news/solana-s-staking-process-how-it-works-and-why-it-matters
[4] "Solana's SOL token: A guide for investors." Investopedia, 2021. https://www.investopedia.com/terms/s/solana.asp
[5] "Invesco Galaxy Solana ETF seeks regulated access to Solana through traditional securities markets." CoinDesk, 20 July 2021. https://www.coindesk.com/markets/2021/07/20/invesco-galaxy-solana-etf-seeks-regulated-access-to-solana-through-traditional-securities-markets/
- Invesco's proposed ETF aims to provide investors with a regulated means to invest in Solana's native token, but concerns have arisen about the token's Proof-of-Stake (PoS) model, with its inherent risks of centralization and potential market manipulation.
- Solana's network faces criticism for its degree of centralization, as large holders and third-party entities like pooled staking partners can concentrate control over validator nodes, undermining the network's fundamental security and censorship resistance.
- Custodial risks are associated with staking on centralized platforms, as users do not directly control private keys and depend on the operational integrity and security of the platform.
- The bonding or lock-up periods for staked SOL expose users to price volatility without immediate liquidity, which could lead to losses that offset staking rewards, especially for institutional participants who require rapid asset reallocation.
- Regulatory oversight is crucial for mitigating risks from centralization and potential manipulation in regulated investment products like ETFs tracking Solana.
- The Invesco Galaxy Solana ETF's filing faces a challenging regulatory environment, with recent delays and mixed signals from the SEC, as the agency has delayed decisions on multiple other crypto products this year.
- Despite the significant potential of crypto technology in finance and investing, the approval of the Invesco Galaxy Solana ETF—and other similar products—depends on addressing the unique risks associated with the tokens and networks they represent, such as Solana's PoS model.
