Grayscale, the world's biggest digital asset manager, is currently grappling with the limitations of its Ethereum Trust (ETHE) in the era of Ethereum staking.
Grayscale recently updated its ETHE disclosures, adding: "The current inability of the Trust to use its Ether in Staking and receive such rewards could place the Shares at a comparative disadvantage relative to an investment in Ether directly or through a vehicle that is not subject to such a prohibition, which could negatively affect the value of the Shares."
This addition comes on the heels of Ethereum's successful Shanghai upgrade in April, which enabled stakers to withdraw their locked ETH and rewards—thus making staking a more attractive proposition for many investors. With annual staking yields ranging from 4-6%, ETHE investors are missing out on potential returns.
If the Grayscale Ethereum fund were ever to allow staking, the firm noted, it would first need to amend its Trust agreement with the SEC. And NYSE Arca—the exchange where ETHE shares trade—would need to apply for an SEC rule change. The firm wrote that it "may seek" approval to do so in the future, but made it very clear that it can't stake any of the Ethereum backing the fund's shares now.
Grayscale's frustration is understandable, especially given its ongoing efforts to convert ETHE into an ETF.
In a March SEC filing, the firm argued for the benefits of being able to "stake the Ethereum held by the Trust" as part of its push for an ETH spot ETF. However, the SEC has repeatedly denied Grayscale'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 applicants, such as Fidelity and Ark Invest/21 Shares, have recently removed staking language from their filings in what appears to be a temporary concession to the SEC's concerns.
Under Chair Gary Gensler, the SEC has taken a cautious approach to Ethereum staking, arguing that staking services may constitute securities offerings. The regulator has emphasized the need for clear disclosures on how staked crypto is handled by companies, including whether funds are commingled.
While the SEC seems open to approving spot Ethereum ETFs, the staking issue remains a point of contention. Some experts have warned of "serious security risks" associated with Ethereum ETFs, noting that large, centralized holdings could make the network more susceptible to attacks or manipulation.
For Grayscale, the staking limitation is one of several challenges facing its Ethereum Trust.
ETHE has consistently traded at a discount compared to its underlying ETH value, a gap that has widened to nearly 50% in recent months. Converting to an ETF structure could potentially help close this discount by enabling share creation and redemption.
Edited by Stacy Elliott.