Fidelity plans to launch an Ethereum pledge for its $898 million FETH fund

Fidelity Investments has added Ethereum pledge and quarterly cash dividend features to its $898 million Fidelity Ethereum Fund. Under normal conditions, the trust fund can use up to all Ethereum assets for pledge.

Summary

Fidelity plans to introduce Ethereum pledges and quarterly cash dividends in its $898 million Fidelity Ethereum fund. Under normal conditions, FETH can pledge up to 100% of Ethereum while retaining enough Ethereum to meet liquidity needs. The fund will retain 85% of the total pledge proceeds, with the remaining 15% allocated to sponsors, custodians and node operators. The net pledge income will first be used to pay fund expenses and then distributed to shareholders in the form of quarterly cash dividends.

Regulatory documents show new pledge function

A document filed with the U.S. Securities and Exchange Commission on August 11 shows that Fidelity has revised the fund's registration statement to include pledges, allowing FETH to earn income through Ethereum already held by the trust. Fidelity plans to start pledging as soon as possible after the prospectus takes effect. Under the proposed structure, Fidelity does not need to use the minimum amount of Ethereum in the fund for pledge. Under normal conditions, up to 100% of Ethereum can be entrusted to verification nodes, but part of Ethereum will be reserved for redemption, fund fees, dividends and liquidity management. The document defines "normal conditions" as: the Ethereum network is operating normally without major interruptions, redemption activity remains within expected ranges, and no special events require Fidelity to hold additional Ethereum in addition to the pledge.

Fidelity's Ethereum Fund can pledge up to 100% of Ethereum

Once Fidelity determines the amount of Ethereum that can be pledged, the fund custodian will work with the selected node operator to invest the assets in the Ethereum verification node. The custodian will retain control of the private key, while the node operator will be responsible for maintaining the verification node infrastructure needed to participate in the Ethereum Proof-of-Interest network. Fidelity's designated node operators include Blockdaemon, Figment and Galaxy Digital Trading Cayman. The allocation ratio will depend on factors such as security practices, operational experience, technology and the concentration of the fund Ethereum at a single operator. According to the document, pledge proceeds will be charged a fixed fee of 15%, which will be shared by the initiator, custodian and node operator, with FETH retaining the remaining 85%. After deducting these expenses, the proceeds will be used first to pay promoter fees or other trust expenses and liabilities, and then to use quarterly shareholder dividends, redemption requirements, and additional pledges.

This arrangement is different from the pledge model proposed by Morgan Stanley in June. Morgan Stanley revised its proposed Ethereum and Solana ETF options so that 95% of pledge proceeds remain in the trust, while pledge providers and custodians receive the remaining 5%.

Pledge proceeds will be used for quarterly cash dividends

For FETH shareholders, pledge income will eventually be converted from Ethereum to U.S. dollars. Fidelity said earnings will be accumulated in the form of Ethereum until the registration date is set, after which counterparties will sell Ethereum that can be used for dividends before the payment date. Under normal conditions, the fund expects to pay quarterly cash dividends. The specific amount depends on Ethereum pledge yield, verification node performance, network rules, fees, expenses, forfeiture events and other operating conditions. Fidelity also said that dividends are not guaranteed. When the fund's liabilities exceed the pledged income received, Fidelity may suspend dividends and retain the income to repay trust debts. The promoter will also set a registration date and a payment date in accordance with exchange rules.

Gray has previously adopted a similar cash dividend structure. After receiving pledge income from October 6 to December 31, 2025, the Gray Ethereum Pledge ETF distributed US$0.083178 per share, with a total payment amount of approximately US$9.4 million. Gray will sell the pledged proceeds and distribute them in cash, rather than Ethereum. Its Ethereum products have been pledged since October 2025, making ETHE the first spot cryptocurrency ETP in the United States to distribute pledge proceeds to shareholders.

BlackRock later chose to launch a stand-alone product rather than add collateral to its existing Ethereum spot fund. Its iShares Staked Ethereum Trust ETF (ETHB), which began trading in March, is designed to keep approximately 70% to 95% of Ethereum in pledge status through verification nodes operated through Figment, Galaxy and Attestant. ETHB was launched with assets ranging from approximately US$100 million to US$107 million, with first-day trading volume of approximately US$15.5 million.

IRS regulations clear tax barriers for ETF pledges

Fidelity's proposed pledge structure relies in part on U.S. tax guidance issued in November 2025. The U.S. Department of the Treasury and the Internal Revenue Service have issued the Revenue Procedure 2025-31, creating a safe harbor rule that allows qualified investment trusts holding digital assets to participate in pledges without affecting their federal income tax benefits as investment trusts and grantors trusts. The November 2025 guidance solves tax issues that previously plagued fund issuers, allowing them to add pledge functions to fund products holding assets such as ETH and SOL. Under the framework, qualified trusts can earn pledge income and maintain their tax classification provided they comply with specified conditions. Fidelity said FETH plans to conduct pledge and liquidity operations in accordance with IRS Safe Harbor rules. The fund's investment targets will also be adjusted accordingly, so that its performance tracks Ethereum through the Fidelity Ethereum reference rate (adjusted for fees and liabilities) plus an amount linked to pledge income.

Pledging Ethereum increases additional redemption risk

Investing a large amount of FETH's Ethereum into the verification node will make some assets temporarily unable to be transferred. Fidelity said exiting the verification node and completing the Ethereum withdrawal can take about a day under certain conditions, but can extend to weeks or months when the verification node queue or network demand is high. To manage this risk, the trust will retain assets that are readily available for expected redemptions, fees and dividends. Fidelity has also developed a liquidity risk management plan that includes daily monitoring of available assets and annual review by its Fair Value and Liquidity Risk Management Committee. Possible sources of liquidity listed in the document include: credit arrangements, transfer of verification node positions to third parties, deferred settlement agreements, and the use of liquidity pledge tokens or other smart contract-based methods to obtain pledged Ethereum under regulatory restrictions. Fidelity said that as of the prospectus date, FETH had not yet signed any credit lines.

When there is insufficient unpledged Ethereum to complete redemption on time, Fidelity can extend the settlement period and wait for Ethereum to exit the verification node. If physical redemption cannot be completed within a reasonable extension period, the promoter may pay part or all of the redemption amount in cash based on the fund's Ethereum Index price on the corresponding order date. The document also lists the risk of forfeiture as a potential risk for the fund-pledged assets. Fidelity said verification node failures, protocol errors, network security vulnerabilities involving custodians or node operators, and operational failures during the revenue transfer process could reduce the amount of Ethereum retained by the fund.