Ethereum's ETF Proposal Under Scrutiny
Ethereum's ETF Proposal Under Scrutiny
Consensys' letter to the SEC offers a detailed perspective on Ethereum's ETF proposal, focusing on consensus mechanisms but leaving out key details about staking.
In an open letter addressed to the SEC, Consensys, a prominent entity within the Ethereum ecosystem, recently made its case regarding the regulatory considerations for an Ethereum-based Exchange-Traded Fund (ETF) under Nasdaq Rule 5711(d). This document, while detailed in its technical discourse, notably omits discussion on a key aspect of Ethereum's Proof of Stake (PoS) model: the native yield generated from staking ETH.
Let’s proceed with pulling out screenshot examples from the full document and see some highlights:
No Mention Of Staking
Here is the snippet about what the SEC is asking about:
And here is the section regarding PoS from consensys:
The primary focus of the Consensys letter is a comparison between Proof of Work (PoW) and Proof of Stake (PoS) mechanisms, arguing in favor of the latter. However, the document does not address the yield that stakers receive, including its origin or the implications of such yields being akin to dividends. This absence suggests a strategic avoidance of potentially complex regulatory discussions surrounding the nature of staking rewards.
Environmental Benefits
A significant portion of the letter is dedicated to discussing the energy efficiency of PoS over PoW. While this aligns with broader environmental concerns in the tech and financial sectors, it sidesteps a fundamental debate about PoW's role in securing blockchain networks through energy consumption. This perspective raises questions about whether the emphasis on energy efficiency may overlook the intrinsic value that PoW brings to blockchain security and trustlessness.
Funny mentions
Snippet regarding transparency:
The letter makes an effort to underline Ethereum's commitment to transparency, mentioning public developer calls on YouTube and open-source development on GitHub. While these points are meant to showcase Ethereum's open development process, they might seem tangential to the central arguments supporting an ETF based on Ethereum, possibly serving more as anecdotal evidence of Ethereum's community engagement rather than substantive arguments for regulatory approval.
PoS > PoW snippets:
In discussing block finality and the reliability of Ethereum's PoS model, the letter omits mention of the DAO hack and the controversial blockchain rollback that followed. This event is a critical piece of Ethereum's history, relevant to discussions about network security and consensus mechanisms. The absence of this context might be seen as overlooking a significant challenge to the argument for Ethereum's stability and security.
The Need for Comprehensive Discussion
The Consensys letter to the SEC represents a focused effort to address specific technical and regulatory considerations for an Ethereum ETF. However, the omission of discussions around staking yields, the environmental debate's nuances, and the historical context of the DAO hack indicates areas where further detail and transparency could benefit the broader dialogue around Ethereum's ETF ambitions. As the regulatory framework for cryptocurrency continues to evolve, a more comprehensive approach to addressing these complex issues may enhance the prospects for Ethereum and similar technologies in the financial marketplace.
Here is the full Nasdaq Rule 5711(d) that is being commented on above:
(d) Commodity-Based Trust Shares
(i) Nasdaq will consider for trading, whether by listing or pursuant to unlisted trading privileges, Commodity-Based Trust Shares that meet the criteria of this Rule.
(ii) Applicability. This Rule is applicable only to Commodity-Based Trust Shares. Except to the extent inconsistent with this Rule, or unless the context otherwise requires, the provisions of the trust issued receipts rules, Bylaws, and all other rules and procedures of the Board of Directors shall be applicable to the trading on Nasdaq of such securities. Commodity-Based Trust Shares are included within the definition of "security" or "securities" as such terms are used in the Bylaws and Rules of Nasdaq.
(iii) Nasdaq will file separate proposals under Section 19(b) of the Act before listing Commodity-Based Trust Shares. Any statements or representations included in the applicable rule proposal under Section 19(b) regarding: (a) the description of the reference assets or trust holdings; (b) limitations on the reference assets or trust holdings; (c) dissemination and availability of the reference asset or intraday indicative values; or (d) the applicability of Nasdaq listing rules specified in such proposals shall constitute continued listing standards.
(iv) Definitions. The following terms as used in the Rules shall, unless the context otherwise requires, have the meaning herein specified:
(A) Commodity-Based Trust Shares. The term "Commodity-Based Trust Shares" means a security (1) that is issued by a trust ("Trust") that holds (a) a specified commodity deposited with the Trust, or (b) a specified commodity and, in addition to such specified commodity, cash; (2) 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 (3) 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.
(B) Commodity. The term "commodity" is defined in Section 1a(9) of the Commodity Exchange Act.
(v) Designation of an Underlying Commodity. Nasdaq may trade, either by listing or pursuant to unlisted trading privileges, Commodity-Based Trust Shares based on an underlying commodity. Each issue of a Commodity-Based Trust Share shall be designated as a separate series and shall be identified by a unique symbol.
(vi) Initial and Continued Listing. Commodity-Based Trust Shares will be listed and traded on Nasdaq subject to application of the following criteria:
(A) Initial Listing—Nasdaq will establish a minimum number of Commodity-Based Trust Shares required to be outstanding at the time of commencement of trading on Nasdaq.
(B) Continued Listing—Nasdaq will consider the suspension of trading in, and will initiate delisting proceedings under the Rule 5800 Series of, such series under any of the following circumstances:
(1) if following the initial 12 month period following commencement of trading on Nasdaq:
a. the Trust has more than 60 days remaining until termination and there are fewer than 50 record and/or beneficial holders of Commodity-Based Trust Shares;
b. if the Trust has fewer than 50,000 receipts issued and outstanding; or
c. if the market value of all receipts issued and outstanding is less than $1,000,000;
(2) if an interruption to the dissemination of the value of the underlying commodity persists past the trading day in which it occurred or is no longer calculated or available on at least a 15-second delayed basis by Nasdaq or one or more major market data vendors during the Regular Market Session (as defined in Nasdaq Rule 4120).
(3) if an interruption to the dissemination of the Intraday Indicative Value persists past the trading day in which it occurred or is no longer made available on at least a 15-second delayed basis; or
(4) if a series of Commodity-Based Trust Shares is not in compliance with any statements or representations included in the applicable rule proposal under Section 19(b) regarding: (a) the description of the reference assets or trust holdings; (b) limitations on the reference assets or trust holdings; (c) dissemination and availability of the reference asset or intraday indicative values; or (d) the applicability of Nasdaq listing rules specified in such proposals;
(5) if any of the requirements set forth in this rule are not continuously maintained; or
(6) if such other event shall occur or condition exists which, in the opinion of Nasdaq, makes further dealings on Nasdaq inadvisable.
Upon termination of a Trust, Nasdaq requires that Commodity-Based Trust Shares issued in connection with such entity Trust be removed from Nasdaq listing. A Trust may terminate in accordance with the provisions of the Trust prospectus, which may provide for termination if the value of the Trust falls below a specified amount.
(C) Term - The stated term of the Trust shall be as stated in the Trust prospectus. However, a Trust may be terminated under such earlier circumstances as may be specified in the Trust prospectus.
(D) Trustee - The following requirements apply on an initial and continued listing basis:
(1) The trustee of a Trust must be a trust company or banking institution having substantial capital and surplus and the experience and facilities for handling corporate trust business. In cases where, for any reason, an individual has been appointed as trustee, a qualified trust company or banking institution must be appointed co-trustee.
(2) No change is to be made in the trustee of a listed issue without prior notice to and approval of Nasdaq.
(E) Voting—Voting rights shall be as set forth in the applicable Trust prospectus.
(vii) Limitation of Nasdaq Liability. Neither Nasdaq nor any agent of Nasdaq shall have any liability for damages, claims, losses or expenses caused by any errors, omissions, or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to the Trust in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by Nasdaq, or any agent of Nasdaq, or any act, condition or cause beyond the reasonable control of Nasdaq, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity.
(viii) Market Maker Accounts. A registered Market Maker in Commodity-Based Trust Shares must file with Nasdaq in a manner prescribed by Nasdaq and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a registered Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to Nasdaq as required by this Rule.
In addition to the existing obligations under Nasdaq rules regarding the production of books and records (see, e.g., Rule 4625), the registered Market Maker in Commodity-Based Trust Shares shall make available to Nasdaq such books, records or other information pertaining to transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, as may be requested by Nasdaq.
Commentary:
.01 A Commodity-Based Trust Share is a Trust Issued Receipt that holds a specified commodity deposited with the Trust.
.02 Nasdaq requires that Members provide all purchasers of newly issued Commodity-Based Trust Shares a prospectus for the series of Commodity-Based Trust Shares.
.03 Transactions in Commodity-Based Trust Shares will occur during the trading hours specified in Rule 4120.