Notice2025-04353
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend the Rule Governing the Listing and Trading of Shares of the Franklin Ethereum ETF To Permit Staking
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 18, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 51 (Tuesday, March 18, 2025)</title>
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[Federal Register Volume 90, Number 51 (Tuesday, March 18, 2025)]
[Notices]
[Pages 12611-12613]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-04353]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102632; File No. SR-CboeBZX-2025-036]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend the Rule Governing the
Listing and Trading of Shares of the Franklin Ethereum ETF To Permit
Staking
March 12, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on March 10, 2025, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``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
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 Franklin Ethereum ETF (the ``Fund''),
a series of the Franklin Ethereum Trust (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 Fund.
The text of the proposed rule change is also available on the
Exchange's website (<a href="http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/">http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/</a>), 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 the
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 Fund 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
Fund, which is a series of the Trust. The Trust was formed as a
Delaware statutory trust on February 8, 2024.
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\3\ See Securities Exchange Act Release Nos. 100218 (May 22,
2024) 89 FR 46499 (May 29, 2024) (SR-CboeBZX-2024-018) (Notice of
Filing of Amendment No. 1 to a Proposed Rule Change Relating To List
and Trade Shares of the Franklin Ethereum ETF, a Series of the
Franklin Ethereum Trust, Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares) (``Eth ETP Amendment No. 1''); 100224 (May 23, 2024)
89 FR 46937 (May 30, 2024) (SR-CboeBZX-2024-018) (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'').
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Based on discussions with the Sponsor, the Exchange proposes to
amend several portions of the Eth ETP Amendment No. 1 in order to allow
the staking of the ether held by the Fund. First, the Exchange proposes
to delete the following representation in the Eth ETP Amendment No. 1
that provides that the Fund will not engage in staking: \4\
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\4\ See Eth ETP Amendment No. 1 at 46505.
Neither the Trust or the Fund, nor the Sponsor, nor the
Custodian, nor any other person associated with the Trust or Fund
will, directly or indirectly, engage in action where any portion of
the Fund's ETH becomes subject to the Ethereum proof-of-stake
validation or is used to earn additional ETH or generate income or
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other earnings.
The Exchange also proposes to add the following ``Staking'' section
following the ``The Custodian'' section \5\ of the Eth ETP Amendment
No. 1:
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\5\ See Eth ETP Amendment No. 1 at 46506-46507.
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Staking
The Sponsor may, from time to time, stake a portion of the
Fund's ether on behalf of the Fund through one or more trusted
staking providers, which may include the Custodian, an affiliate of
the Custodian or an affiliate of the Sponsor (``Staking
Providers''). In consideration for any staking activity in which the
Fund may engage, the Fund would receive certain staking rewards of
ether tokens, which may be treated as income to the Fund.
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 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.
[[Page 12612]]
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 Fund
The Sponsor may, from time to time, stake a portion of the
Fund's ether on behalf of the Fund through one or more Staking
Providers. The Sponsor expects to maintain sufficient liquidity in
the Fund to satisfy redemptions. The ether staked by the Sponsor on
behalf of the Fund will consist exclusively of ether owned by the
Fund. The Sponsor's staking activities on behalf of the Fund 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 Fund on behalf of the
Fund 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'').\6\
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\6\ See SEC v. Payward Ventures, Inc. and Payward Trading, Ltd.,
(Complaint filed February 9, 2023) available at <a href="https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-25.pdf">https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-25.pdf</a>. (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 <a href="https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf">https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-101.pdf</a>. (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 <a href="https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-102.pdf">https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-102.pdf</a>. (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 Fund.
The Sponsor will not seek to pool the ether held by the Fund 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 Fund. Third, the Sponsor has stated
that it is staking the Fund's ether solely in order to maximize the
Fund's revenue generation opportunities, and to generate returns for
the Fund's shareholders. Fourth, the Sponsor will not bear or
subsidize the risk of slashing on behalf of the Fund.
Staking by the Sponsor will not result in the ether held by the
Fund moving out of the custody of the Custodian. In order to stake
the Fund'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 in 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. 1 remain unchanged and will continue to constitute
continuing listing requirements. In addition, the Fund will continue to
comply with the terms of Eth ETP Amendment No. 1 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.\7\ Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \8\ 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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\7\ 15 U.S.C. 78f(b).
\8\ 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 Fund 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 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 tokens 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 Fund. As such, not
staking the Fund's ether would amount to waiving the Fund's right to
free additional ether, an act analogous to an equity ETP refusing
dividends from the companies it holds. Allowing the Fund to stake its
ether would benefit investors and help the Fund to better track the
returns associated with holding ether. This would improve the creation
and
[[Page 12613]]
redemption process for both authorized participants and the Fund,
increase efficiency, and ultimately benefit the end investors in the
Fund.
Except for the addition of staking of the Fund's ether and the
changes discussed herein, all other representations made in Eth ETP
Amendment No. 1 remain unchanged and will continue to constitute
continuing listing requirements for the Fund.
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 Fund 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
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6b191e070e46080406060e051f182b180e08450c041d"><span class="__cf_email__" data-cfemail="1f6d6a737a327c7072727a716b6c5f6c7a7c31787069">[email protected]</span></a>. Please include
file number SR-CboeBZX-2025-036 on the subject line.
Paper Comments
<bullet> 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-2025-036.
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 (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). 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-2025-036 and
should be submitted on or before April 8, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-04353 Filed 3-17-25; 8:45 am]
BILLING CODE 8011-01-P
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