SEC Opens Public Review of Grayscale’s Spot Ether Trust Conversion

SEC puts the proposal on the public clock

On October 27, 2023, the Federal Register published the Securities and Exchange Commission’s notice of NYSE Arca’s proposal to list and trade shares of the Grayscale Ethereum Trust under the exchange’s rule for commodity-based trust shares. The publication formally exposed file SR-NYSEARCA-2023-70 to public comment and started the SEC’s initial decision period.

NYSE Arca had filed the proposed rule change on October 10, and the SEC notice was dated October 23. October 27 was nevertheless the consequential public-record date: publication established a November 17, 2023 comment deadline and provided that, within 45 days of publication, the Commission would approve or disapprove the proposal or institute proceedings to consider disapproval. That period could be extended to as many as 90 days under the conditions stated in the notice.

The action was procedural, not an approval. It did not authorize exchange trading, convert the trust, determine that ether was a commodity or security, or endorse Grayscale’s claims about the product. The SEC was publishing an exchange proposal and requesting evidence about whether it complied with the Securities Exchange Act.

Why the proposed conversion mattered

Grayscale Ethereum Trust shares already traded over the counter under the symbol ETHE, but the trust lacked an ongoing redemption mechanism capable of keeping its share price closely aligned with the ether it held. The proposed exchange-traded structure contemplated creations and, subject to regulatory approval and sponsor authorization, redemptions involving ether. That mechanism was intended to reduce persistent differences between the market price of the shares and the value of the trust’s assets.

The filing described the trust as holding approximately $4.8 billion in assets on September 28, 2023, equal to an asserted 2.5% of circulating ether, with shares held in more than 250,000 American investor accounts. It also said conversion could unlock more than $1.6 billion for shareholders. Those figures and the “unlock” estimate were representations supplied by the sponsor, not independent SEC findings. The filing did not establish that the estimated value would be realized.

The institutional significance extended beyond one trust. U.S. funds holding ether futures had begun trading earlier in October 2023, while spot products would hold the asset itself. The NYSE Arca filing therefore placed questions about spot-market surveillance, price formation, custody and manipulation directly before the SEC for a product tied to the second-largest crypto network by market value at the time.

The argument the SEC had not yet accepted

NYSE Arca argued that its surveillance procedures, the trust’s multi-venue reference index and the relationship between spot ether prices and regulated CME ether futures addressed manipulation concerns. It also relied on reasoning from the August 29, 2023 federal appellate ruling that vacated the SEC’s rejection of Grayscale’s proposed spot bitcoin trust conversion.

Those were the exchange and sponsor’s arguments. The October 27 notice recorded them without adopting them. Investors could not infer approval merely because the SEC had accepted the filing for review or published it for comment.

Later context

On May 23, 2024, the SEC approved rule changes for several spot ether exchange-traded products, including the Grayscale proposal. That later order clarifies the proposal’s eventual path but does not change its status on October 27, 2023: it remained an unapproved application undergoing public review.