[Federal Register Volume 90, Number 36 (Tuesday, February 25, 2025)]
[Notices]
[Pages 10645-10647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-03030]
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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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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.
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\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'').
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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:
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\4\ See Eth ETP Amendment No. 2 at 46522.
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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
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
[[Page 10646]]
vote for whether to include the block (or not). This proof-of-stake
system reduces the computational work performed--and energy expended--
to validate each block compared to proof-of-work.
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\
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\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.)
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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.
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\6\ 15 U.S.C. 78f(b).
\7\ 15 U.S.C. 78f(b)(5).
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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
[[Page 10647]]
to receive rewards in the form of more ether tokens. The net
beneficiaries are not only validators, or those on behalf of whom they
stake ether, but also the Ethereum blockchain itself which grows and is
progressively made more secure through the validation of transactions.
Staking permits validators to contribute to the network by staking
their token to secure the blockchain, facilitating the creation of
blocks, and helping process transactions. Validators are compensated
for fulfilling this important role through transaction fees and
consensus rewards paid by the blockchain itself.
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 [email protected]. 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\
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\8\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-03030 Filed 2-24-25; 8:45 am]
BILLING CODE 8011-01-P