Grayscale Investments, the leading digital asset manager, recently filed documents with the US Securities and Exchange Commission (SEC) to introduce an innovative ETF focused on Ethereum (ETH) futures.
Specifically, the Grayscale Ethereum Futures ETF Trust will be engaged in the purchase and management of Ethereum-related futures contracts within its portfolio. Let’s see all the details below.
Summary
Grayscale’s financial innovation: Ethereum Futures ETF could revolutionize the market
As anticipated, Grayscale has filed an application with the SEC via a new Form 19b-4 to obtain permission to list an Exchange-Traded Fund (ETF) based on Ethereum futures contracts on the New York Stock Exchange (NYSE) Arca.
Hence, the digital asset manager aims to incorporate Ethereum futures contracts within the ETF.
On the CME trading platform, two variants of Ethereum-related futures contracts are available: one represents 50 ETH, known as “ETH contracts,” while the other represents 0.10 ether, called “MET contracts.”
These contracts allow investors to bet on the future price movements of Ethereum without the need to directly own the cryptocurrency.
They function similarly to traditional futures contracts, allowing investors to protect their investments or speculate on Ethereum price fluctuations. Grayscale’s proposed ETF aims to reflect the daily price changes of the two types of ETH contracts in the nearest expiration.
Grayscale: favorable ruling from the court of appeals and submissions to the SEC
The Form 19b-4 filing also includes the following:
“The trust will deposit an initial margin amount to initiate an open position in futures contracts. A margin deposit is like a cash fulfillment bond. It helps ensure the trader’s execution of the futures contracts he or she buys or sells.”
Grayscale also recently obtained a favorable ruling from the D.C. Circuit Court, which criticized the securities regulator for rejecting Grayscale’s application to list a Bitcoin-based Exchange-Traded Fund (ETF).
Following this ruling, Grayscale’s attorneys pressed the Securities and Exchange Commission (SEC) for a speedy approval of Grayscale’s Bitcoin ETF.
In the most recent filing with the SEC, Grayscale highlights that the Chicago Mercantile Exchange (CME) operates as a regulated futures market, emphasizing its commitment to oversight, controls and regulatory compliance.
In the filing, it stresses that such measures are critical to ensuring a fair and transparent trading environment for its offerings, including ETH and MET contracts.
Some background: the approval of Grayscale’s Bitcoin ETP and still problems with the SEC
On August 29, 2023, the U.S. Court of Appeals, District of Columbia Circuit (Court), issued a unanimous decision granting Grayscale’s request for Securities Exchange Commission (SEC) review regarding its Bitcoin Exchange Traded Product (Grayscale ETP).
Hence, the Court reversed the rejection order previously issued by the SEC. Specifically, the Court criticized the SEC for its “arbitrary and capricious” treatment of Grayscale’s ETP and for its inconsistency in dealing with essentially identical cases by simultaneously approving Teucrium and Valkyrie Bitcoin futures ETPs.
Indeed, the court pointed out that Teucrium and Valkyrie’s ETP futures had virtually identical spot market price exposure to that proposed by Grayscale.
In addition, the price exchanges for these ETPs had identical oversight sharing agreements with the CME, where bitcoin futures are traded. Therefore, the Court concluded that Grayscale had demonstrated that its proposed bitcoin ETP was materially similar, based on relevant regulatory factors, to approved bitcoin futures ETPs.
In addition, the Court found that the evidence presented by Grayscale directly addressed the SEC’s concerns, including the concern about Grayscale’s possible influence on the CME futures market.
The Court pointed out that the SEC had failed to adequately explain its decision in light of the evidence presented.
The Court concluded by recalling the legal principle that administrative judgment must be consistent and predictable, implying that similar cases should be treated similarly.
Because the SEC had failed to provide a sufficient explanation for the difference in treatment between different FTEs, the Court accepted Grayscale’s request for review and reversed the SEC’s earlier order.
