FR 2025-03336

The Securities and Exchange Commission (SEC) has released a proposed rule change submitted by NYSE Arca, Inc., which concerns the Grayscale Ethereum Trust ETF and the Grayscale Ethereum Mini Trust ETF. The proposal aims to allow these Trusts to engage in a process known as "staking" with their ether holdings. This proposal arises from Ethereum's move from a proof-of-work to a proof-of-stake consensus mechanism—a shift that promises greater energy efficiency.

General Overview

Under this proposal, the Trusts would have the ability to stake ether through entities referred to as "Staking Providers." The intent of staking is to earn rewards by facilitating the security and transaction processing of the Ethereum network. Such rewards involve earning additional ether tokens. This notice by the SEC seeks to involve the public in assessing whether the proposed changes comply with existing securities regulations and provide benefits to investors.

Significant Issues and Concerns

There are several significant issues within the proposed rule change that warrant attention:

• Selection of Staking Providers: The document mentions that ether will be staked through trusted Staking Providers. However, there is a lack of detail regarding the criteria or process used to designate these entities as "trusted." This could raise concerns about the security and reliability of the staking process.

• Risk Management: While ether staking does bring about potential rewards, it also introduces risks such as "slashing"—a penalty that can involve the loss of staked funds for violating network rules. The document does not explain measures to mitigate such risks, possibly leaving stakeholders exposed to unforeseen losses.

• Complex Terminology: Terms like "proof-of-stake" and "validators" are integral to understanding the staking process but may be complex for individuals unfamiliar with cryptocurrency. This complexity might limit the accessibility of the document for some investors.

• Liquidity Concerns: While the proposal assures that sufficient liquidity will be maintained to satisfy redemptions, it fails to elaborate on how this will be achieved, leaving potential investors uncertain about the implications for liquidity.

• Engagement and Feedback: The document notes that there was no solicitation for written comments prior to the proposal. This raises concerns about whether adequate stakeholder engagement occurred, potentially impacting the transparency and inclusiveness of the regulatory process.

• Supporting Data: Assertions regarding the benefits of staking for both the Trusts and the Ethereum Network are not supported with detailed quantitative or qualitative data. This lack of evidence may lead to questions about the proposal's claims.

• Regulatory Compliance: While the proposal mentions compliance with the Act, it does so in broad terms without specific examples showing how it meets regulatory requirements.

Impact on the Public and Stakeholders

Broadly, the proposal could impact the public by introducing a new method of generating returns through cryptocurrency investments, potentially appealing to both individual and institutional investors who are interested in blockchain technology. However, the complexity and associated risks could deter those less familiar with these digital assets.

For specific stakeholders, the inclusion of staking activities could enhance the Trusts' value propositions by potentially increasing returns. Investors in these Trusts might benefit from the opportunity to earn staking rewards without engaging in staking independently. Conversely, the nascent nature of staking in regulated financial instruments could expose investors to novel risks, accentuating the need for transparent risk management practices.

Overall, this proposed rule change marks a step towards integrating cryptocurrencies more formally into regulated markets. The implications for investors, regulators, and the cryptocurrency industry will depend largely on the SEC's evaluation of public feedback and the final structure of the adopted ruling.