Grayscale Ethereum Trust Faces ‘Comparative Disadvantage’ Without Staking: SEC Filing

The world's largest digital asset manager, Greyscale, is currently grappling with the limitations of Ethereum Trust (ETHE) in the era of Ethereum staking.

Grayscale recently updated ETHE's statements: “The current Trust's inability to use Ether for staking and receiving rewards may place the shares at a comparative disadvantage in investing in Ether that is not directly or through a vehicle.” Such prohibition may adversely affect the stock price.

This addition comes on the heels of Ethereum's successful Shanghai upgrade in April, which allowed stakeholders to withdraw their locked-up ETH and rewards—making it a more attractive proposition for many investors. With annual stock yields of 4-6%, ETHE investors are missing out on potential returns.

The firm said that if the Greyscale Ethereum fund were to allow stock pooling, it would first need to amend its trust agreement with the SEC. And NYSE Arca—the exchange where ETHE shares are traded—needs to apply for an SEC rule change. He wrote that the company “may seek permission” to do so in the future, but he made it clear that the fund's shares cannot support any Ethereum right now.

Greyscale's frustration is understandable, especially considering its efforts to convert ETHE into an ETF.

In a March SEC filing, the firm touted the potential benefits of “shares of Ethereum held by the trust” as part of its push for an ETH spot ETF. However, the SEC has repeatedly rejected Greyscale's ETF applications, leading to a legal battle between the firm and the regulator.

Grayscale is not alone in navigating these regulatory challenges. Other prominent ETF issuers, such as Fidelity and Ark Invest/21 Shares, have recently removed key language from their filings in what appears to be a temporary concession to SEC concerns.

Under Chairman Gary Gensler, the SEC has taken a cautious approach to Ethereum staking, noting that the services could be securities offerings. The regulator emphasized the need for clear disclosures on how cryptocurrencies held by companies are handled, including whether funds are pooled.

While the SEC appears open to approving spot Ethereum ETFs, the underlying issue is still a point of contention. Some experts have warned of “serious security risks” associated with Ethereum ETFs, saying that large and centralized holdings make the network more vulnerable to attacks or fraud.

For Greyscale, the stake limit is one of the many challenges facing Ethereum's trust.

ETHE has consistently traded at a discount to the underlying ETH price, a gap that has widened by nearly 50% in recent months. Converting to an ETF structure can help close this gap by enabling share creation and redemption.

Edited by Stacy Elliott.