90 FR 36 pgs. 10645-10647 - Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend the 21Shares Core Ethereum ETF, Shares of Which Have Been Approved by the Commission To List and Trade on the Exchange Pursuant to BZX Rule 14.11(e)(4)
Type: NOTICEVolume: 90Number: 36Pages: 10645 - 10647
Pages: 10645, 10646, 10647Docket number: [Release No. 34-102450; File No. SR-CboeBZX-2025-025]
FR document: [FR Doc. 2025-03030 Filed 2-24-25; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
[top]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102450; File No. SR-CboeBZX-2025-025]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend the 21Shares Core Ethereum ETF, Shares of Which Have Been Approved by the Commission To List and Trade on the Exchange Pursuant to BZX Rule 14.11(e)(4)
February 19, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act"), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on February 12, 2025, Cboe BZX Exchange, Inc. ("Exchange" or "BZX") filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Footnotes:
1 ?15 U.S.C. 78s(b)(1).
2 ?17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
Cboe BZX Exchange, Inc. ("BZX" or the "Exchange") is filing with the Securities and Exchange Commission ("Commission" or "SEC") a proposed rule change to amend the 21Shares Core Ethereum ETF (the "Trust"), shares (the "Shares") of which have been approved by the Commission to list and trade on the Exchange pursuant to BZX Rule 14.11(e)(4), to permit staking of the Ether held by the Trust.
The text of the proposed rule change is also available on the Exchange's website ( http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/ ), at the Exchange's Office of the Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The Commission approved the Exchange's proposal to list and trade shares (the "Shares") of the Trust on the Exchange pursuant to Exchange Rule 14.11(e)(4), Commodity-Based Trust Shares, on May 23, 2024. 3 Exchange Rule 14.11(e)(4) governs the listing and trading of Commodity-Based Trust Shares, which means a security (a) that is issued by a trust that holds (1) a specified commodity deposited with the trust, or (2) a specified commodity and, in addition to such specified commodity, cash; (b) that is issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity and/or cash; and (c) that, when aggregated in the same specified minimum number, may be redeemed at a holder's request by such trust which will deliver to the redeeming holder the quantity of the underlying commodity and/or cash. The Shares are issued by the Trust, which was formed as a Delaware statutory trust on September 5, 2023.
Footnotes:
3 ? See Securities Exchange Act Release Nos. 100216 (May 22, 2024) 89 FR 46514 (May 29, 2024) (SR-CboeBZX-2023-070) (Notice of Filing of Amendment No. 2 to a Proposed Rule Change to List and Trade Shares of the ARK 21Shares Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares) ("Eth ETP Amendment No. 2"); 100224 (May 23, 2024) 89 FR 46937 (May 30, 2024) (SR-CboeBZX-2023-070) (Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Shares of Ether-Based Exchange-Traded Products) (the "Approval Order"). The Trust was originally named the ARK 21Shares Ethereum ETF, as reflected in the Approval Order. However, the Exchange later submitted an amendment, in part, to rename the Trust to the 21Shares Core Ethereum ETF. See Securities Exchange Act Release No. 100306 (June 10, 2024) 89 FR 50656 (June 14, 2024) (SR-CboeBZX-2024-050) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the ARK 21Shares Ethereum ETF To Amend the Trust Name and Reflect That the Trust Will No Longer Have a Sub-Adviser) (the "Trust Name and Sub-Adviser Amendment"). On September 12, 2024, the Exchange again amended the Eth ETP Amendment No. 2 to add two new custodians to the Eth Trust. See Securities Exchange Act Release No. 101080 (September 18, 2024) 89 FR 77910 (September 24, 2024) (Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the ARK 21Shares Bitcoin ETF and the 21Shares Core Ethereum ETF To Add Two New Custodians to Each Trust) (the "Custodian Amendment").
Based on discussions with the Sponsor, the Exchanges proposes to amend several portions of the Eth ETP Amendment No. 2, as amended, in order to allow the staking of the Ethereum held by the Trust. Specifically, the Exchange is proposing to add the following "Staking" section following the "The Ether Custodian" section? 4 of the Eth ETP Amendment No. 2:
Footnotes:
4 ? See Eth ETP Amendment No. 2 at 46522.
Staking
The Sponsor may, from time to time, stake a portion of the Trust's ether on behalf of the Trust through one or more trusted staking providers, which may include the Custodian or an affiliate of the Custodian ("Staking Providers"). However, the Sponsor will not utilize any staking providers that are affiliates of the Sponsor. In consideration for any staking activity in which the Trust may engage, the Trust would receive certain staking rewards of ether tokens, which may be treated as income to the Trust.
The Staking Process
[top] In the second half of 2020, the Ethereum network began the first of several stages of an upgrade culminating in a transition referred to as the "Merge." The Merge amended the Ethereum network's consensus mechanism to a process known as proof-of-stake. Proof-of-stake was intended to address the perceived shortcomings of the proof-of-work consensus mechanism in terms of labor intensity and duplicative computational effort expended by validators (known under proof-of-work as "miners"). In a proof-of-work consensus mechanism, miners effectively compete to be the first in time to solve the cryptographic puzzle that would allow them to be the only validator permitted to validate the block and thus be the only ones to receive the resulting block reward. Miners who are not first in time (and thus are not permitted to be validators) will have effectively expended significant labor and computing power for no gain. In a proof-of-stake mechanism, by contrast, a single validator is randomly selected to solve the cryptographic puzzle needed to validate a block, which it proposes to a committee of other validators, who
Unlike proof-of-work, in which miners expend computational resources to compete to validate transactions and are rewarded coins in proportion to the amount of computational resources expended, in proof-of-stake, validators risk or "stake" coins to compete to be randomly selected to validate transactions and are rewarded coins in proportion to the amount of coins staked. Any malicious activity, such as mining multiple blocks, disagreeing with the eventual consensus or otherwise violating protocol rules, results in the forfeiture or "slashing" of a portion of the staked coins. Proof-of-stake is viewed as more energy efficient and scalable than proof-of-work.
New ether is created as a result of the staking of ether by validators. Validators are required to stake ether in order to be selected to perform validation activities and then once selected, as a reward, they earn newly created ether. Validation activities include verifying transactions, storing data, and adding to the Ethereum blockchain.
To operate a node on the Ethereum blockchain, a validator must acquire and lock 32 ether by sending a special transaction to the staking contract. This transaction associates the staked ether with a withdrawal address (to unlock the ether and receive any staking rewards) and a validator address (to designate the validator node performing transaction verification).
Staking by the Sponsor on Behalf of the Trust
The Sponsor may, from time to time, stake a portion of the Trust's ether on behalf of the Trust through one or more Staking Providers. The Sponsor expects to maintain sufficient liquidity in the Trust to satisfy redemptions. The ether staked by the Sponsor on behalf of the Trust will consist exclusively of ether owned by the Trust. The Sponsor's staking activities on behalf of the Trust will not constitute "delegated staking" and will not form part of a "staking as a service" offering.
As further discussed below, the Sponsor believes its activities in relation to staking the ether held by the Trust on behalf of the Trust are materially different from the delegated staking and "staking as a service" activities that the SEC has alleged to involve securities offerings in violation of Section 5 of the Securities Act of 1933 (the "Securities Act"). 5
Footnotes:
5 ? See SEC v. Payward Ventures, Inc. and Payward Trading, Ltd., (Complaint filed February 9, 2023) available at https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-25.pdf. (In February 2023, the SEC charged and entered into a settlement order with Payward Ventures, Inc. and Payward Trading Ltd., both commonly known as Kraken, regarding Kraken's alleged failure to register the offer and sale of their crypto asset staking-as-a-service program, whereby investors transfer crypto assets to Kraken for staking in exchange for advertised annual investment returns of as much as 21 percent. According to the SEC's complaint, since 2019, Kraken has offered and sold its crypto asset "staking services" to the general public, whereby Kraken pools certain crypto assets transferred by investors and stakes them on behalf of those investors. According to the SEC, investors would lock up-or "stake"-their crypto tokens with Kraken with the goal of being rewarded with new tokens when their staked crypto tokens become part of the process for validating data for the blockchain. The complaint alleged that Kraken touted that its staking investment program offered an easy-to-use platform and benefits that derived from Kraken's efforts on behalf of investors, including Kraken's strategies to obtain regular investment returns and payouts.) See also SEC v. Binance Holdings Limited, et al., (Complaint filed June 5, 2023) available at https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf. (On June 5, 2023, the SEC filed a complaint charging Binance Holdings Ltd. and certain of its affiliates with a variety of securities law violations, including operating a "staking-as-a-service" program. The SEC's complaint alleges, among other things, that BAM Trading violated Sections 5(a) and 5(c) of the Securities Act by offering and selling its staking program without a registration statement, and that BAM Trading's Staking Program was promoted "as a superior and much easier way to obtain staking rewards by, among other things, pooling the crypto assets of a large number of investors.") See also SEC v. Coinbase, Inc. and Coinbase Global (Complaint filed June 6, 2023) available at https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-102.pdf. (On June 6, 2023, the SEC filed a complaint against Coinbase, Inc. and Coinbase Global in federal district court in the Southern District of New York, alleging, inter alia that Coinbase Inc. violated the Securities Act by failing to register with the SEC the offer and sale of its staking program. The SEC's complaint alleges that through the Coinbase staking program, investors' crypto assets are transferred to and pooled by Coinbase (segregated by asset), and subsequently "staked" (or committed) by Coinbase in exchange for rewards, which Coinbase distributes pro rata to investors after paying itself a 25-35% commission. The SEC also alleges that investors understand that Coinbase will expend efforts and leverage its experience and expertise to generate returns.)
First, the Sponsor will only stake the ether held by the Trust. The Sponsor will not seek to pool the ether held by the Trust with ether held by other entities (although such pooling may occur at the level of a Staking Provider). Second, the Sponsor will not advertise itself as providing any staking services generally, or promise any specific level of return from staking, or solicit delegated stakes from entities other than the Trust. Third, the Sponsor has stated that it claims no particular expertise, experience, or technical know-how in relation to staking, and is staking the Trust's ether solely in order to maximize the Trust's revenue generation opportunities, and to generate returns for the Trust's shareholders. Fourth, the Sponsor will not bear or subsidize the risk of slashing on behalf of the Trust.
Staking by the Sponsor will not result in the ether held by the Trust moving out of the custody of the Custodian. In order to stake the Trust's ether, Sponsor will engage in what is known as "point-and-click staking." Point-and-click staking involves an interface through which an entity can simply initiate staking by pointing and clicking on the ether assets to be staked. This process does not involve the staked ether leaving the wallet at which it is held, and accordingly reduces the risk of loss of ether through theft at the node while the asset is staked (although this process will not reduce the risk of loss of the ether through slashing).
Except for the above changes, all other representations in Eth ETP Amendment No. 2, as amended, remain unchanged and will continue to constitute continuing listing requirements. In addition, the Trust will continue to comply with the terms of Amendment No. 2, as amended, and the requirements of Rule 14.11(e)(4).
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act. 6 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5)? 7 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.
Footnotes:
6 ?15 U.S.C. 78f(b).
7 ?15 U.S.C. 78f(b)(5).
[top] The Exchange believes the proposed rule change is designed to remove impediments to and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest because it would allow the Trust to stake its ether on behalf of its investors. The Ethereum network allows for staking of its native asset, ether tokens, and permits validators who successfully stake ether
Staking through mechanisms such as "point-and-click" staking can also permit the earning of rewards without certain additional risks to the tokens held by the Custodian on behalf of the Trust. As such, not staking the Trust's ether would amount to waiving the Trust's right to free additional ether, an act analogous to an equity ETP refusing dividends from the companies it holds. Allowing the Trust to stake its ether would benefit investors and help the Trust to better track the returns associated with holding ether. This would improve the creation and redemption process for both authorized participants and the Trust, increase efficiency, and ultimately benefit the end investors in the Trusts.
Except for the addition of staking of the Trust's ether, all other representations made in Eth ETP Amendment No. 2, as amended, remain unchanged and will continue to constitute continuing listing requirements for the Trust.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. As noted above, the proposed amendment is intended to benefit investors and allow the Trust to better track the returns associated with holding ether. The Exchange believes these changes will not impose any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
• Use the Commission's internet comment form ( https://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include file number SR-CboeBZX-2025-025 on the subject line.
Paper Comments
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CboeBZX-2025-025. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( https://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR-CboeBZX-2025-025 and should be submitted on or before March 18, 2025.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 8
Footnotes:
8 ?17 CFR 200.30-3(a)(12).
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-03030 Filed 2-24-25; 8:45 am]
BILLING CODE 8011-01-P