SEC Acknowledges Grayscale's Revised Staking Proposal for its Ethereum ETF

The Securities and Exchange Commission has acknowledged and published a filing from NYSE Arca on Tuesday, with the document carrying details of a proposal that seeks to allow Grayscale's Ethereum exchange-traded funds to earn staking rewards.

The rule change, submitted on February 14 and published by the SEC on February 25, would allow the Grayscale Ethereum Trust ETF and Grayscale Ethereum Mini Trust ETF to participate in Ethereum's proof-of-stake validation system while maintaining existing custody protections.

"The Sponsor may, from time to time, stake a portion of the Trust's Ethereum on behalf of the Trust through one or more trusted staking providers," the filing reads, noting how these providers could include the current custodian or its affiliates but would not include any Grayscale affiliates.

For Ethereum products, staking involves a process where users lock up their Ethereum (ETH) to become co-validators, thereby helping to secure the network and earn some ETH as a reward.

The filing distinguishes Grayscale's approach from "delegated staking" services that have faced regulatory challenges in the past.

The digital asset management firm has been on a filing spree, submitting multiple crypto ETF applications this year, including proposals for XRP, Cardano, and Polkadot, as it seeks to expand its portfolio beyond Bitcoin and Ethereum.

Shifting aspirations for a new regime under President Donald Trump are paving the way for issuers to submit fresh applications, betting on a more favorable regulatory environment under a potentially revamped SEC leadership.

With Grayscale's most recent proposal, the ETFs would stake the Ethereum tokens through trusted providers and earn rewards in the form of added ETH. These additional funds would be considered as income for the fund.

However, the staking process itself will be done exclusively by Grayscale, without pooling ETH with other entities such as validators.

As the fund’s sponsor, Grayscale would not "pool the Ethereum held by the Trust with Ethereum held by other entities," the filing reads. 

Grayscale would also not be allowed to market its staking services.

The proposal also specifies that any staked Ethereum they manage would remain under custodial control, addressing security concerns that have previously complicated regulatory approval for such activities.

"Staking by the sponsor will not result in the Ethereum held by the Trust moving out of the custody of the Custodian," the filing explains. "This process does not involve the staked Ethereum leaving the wallet at which it is held."

If approved, the change would help the Grayscale ETFs track returns associated with holding Ethereum more effectively, as staking has become an integral feature of Ethereum since its transition to proof-of-stake in 2022 with The Merge.

The SEC will have 45 days to approve, disapprove, or extend its proposal review unless it designates a longer period for consideration when the filing hits the register.

Edited by Sebastian Sinclair