Grayscale Ethereum Trust becomes an SEC reporting company. What does it mean?

At 9:30 p.m. Beijing time last night, cryptocurrency asset management company Grayscale Investments officially announced that its Ethereum trust registration application previously submitted to the U.S. Securities and Exchange Commission (SEC) has been officially approved.

At this point, Grayscale Ethereum Trust has become an SEC reporting company and its second digital currency investment tool to obtain a registration license.

In January this year, Grayscale Bitcoin Trust’s registration application with the SEC was approved, becoming the first digital asset tool that meets the standards of the U.S. Securities and Exchange Commission; in April, Grayscale Bitcoin Trust officially came into effect; on August 6 this year, Grayscale submitted an Ethereum Trust registration application to the SEC.

What is the significance of becoming an SEC reporting company, and what impact will Grayscale Trust have on the crypto market?

01
Ethereum Trust Demand Surges

Grayscale Trust was initially issued through a private placement, and is only available to qualified institutional investors to invest in Ethereum in the form of securities , without the need to directly purchase spot and avoid storage troubles.

In addition, Ethereum Trust shares are eligible to be sold on the open market only after the statutory one-year holding period. In June 2019, Ethereum Trust shares began to be publicly traded on Otcmarkets under the symbol ETHE, further improving the usability of the product.

Since you already have a public sales channel, why do you need to apply to the SEC to become a reporting company?

On the one hand, Grayscale users' demand for Ethereum Trust has surged. According to Grayscale's official announcement, in the second quarter of 2020, the average weekly inflow of funds to Ethereum Trust reached US$10.4 million, eventually setting a quarterly record of US$135.2 million.

“With the Grayscale Ethereum Trust now the world’s largest Ethereum investment vehicle, strong demand for Ethereum is more evident than ever. In fact, in our largest quarter ever, demand for Ethereum accounted for almost 15% of total inflows.”

On the other hand, some large compliance institutions in the United States have many restrictions and will not invest in investment products that are not registered with the SEC.

Based on the above two considerations, in order to expand the user range of Grayscale Trust, Grayscale chose to apply for Bitcoin and Ethereum trust registration successively this year.

To make a comparison, Apple and any other listed company or public fund are SEC reporting companies and are required to submit various reports and data to the SEC on a regular basis.

02
Impact: Increased liquidity and crypto market buying

So, what does it mean to be an SEC reporting company and what are the implications?

First, it will increase investor attention, and more institutional investors may begin to consider investing in the Grayscale Ethereum Trust.

Second, Grayscale needs to report regularly. Previously, Grayscale Ethereum Trust only needed to publish quarterly and annual reports and audited financial statements in accordance with the OTC Alternative Reporting Standards (ARS); now, it will submit its quarterly and annual reports and audited financial statements in the form of 10-Qs. In addition to complying with all other obligations under the Exchange Act, it is also necessary to submit annual reports (10-K), quarterly reports (10-Q), and current status reports (8-K) to the SEC.

Grayscale also mentioned in the Ethereum Trust-related documents submitted to the SEC that the potential risks of the transition from ETH 1.0 to ETH 2.0 may have a significant adverse impact on the price of Ethereum and Grayscale shares. The document stated that if Ethereum fails to properly implement the transition changes, it may result in temporary or permanent forks, which may have a negative impact.

Grayscale's move is part of normal reporting procedure. Companies that report to the SEC must discuss risk factors that could adversely affect their company's performance in all quarterly and annual reports.

The third is to increase liquidity. Qualified investors who have previously purchased private placement shares of Ethereum Trust will have more liquidity opportunities, and the statutory holding period will be shortened from 12 months to 6 months, and they can cash out after holding for 6 months.

Pursuant to Section 144 of the U.S. Securities Act, after becoming a reporting company for at least 90 days and meeting other requirements, the “holding period reduction” will take effect. That is, starting January 4, 2021, for the Grayscale Ethereum Trust, the holding period will be shortened to 6 months.

Fourth, for the crypto market, more institutional investors entering into Ethereum trusts are expected to increase Ethereum buying.

After Bitcoin Trust became an SEC reporting company and the "holding period reduction" took effect in April, Grayscale accelerated its purchase of Bitcoin. In 100 days, its Bitcoin Trust Fund (GBTC) increased its holdings by 78,354 Bitcoins, worth $690 million, and purchased Bitcoin at an average rate of 800 Bitcoins per day, which is equivalent to 85% of the daily mining supply of new Bitcoins.

Moreover, this news is also good news for the market, which means that more regulators and mainstream investments are beginning to pay attention to the crypto market, which is conducive to boosting confidence.

Many crypto investors are also worried that the intervention of mainstream regulation will have adverse effects. This worry is unnecessary. In 2017, compliant exchanges such as CME and CBOE successively launched Bitcoin futures, which in turn pushed the market towards a bull market.

03
Future: More crypto products are expected to enter the mainstream market

In 2013, Digital Currency Group established Grayscale Investments; in September of the same year, Grayscale launched the Bitcoin Investment Trust and obtained approval from the Financial Industry Regulatory Authority (FINRA), allowing Grayscale to issue shares publicly.

Over the past seven years, Grayscale has further expanded its product line, including Bitcoin and Ethereum Trust, BCH, horizen, XRP, zcash, ETC, LTC and Stellar. According to official data on October 9, Grayscale currently manages $6 billion in assets.

Bitcoin and Ethereum trusts have been approved by the SEC one after another. Other crypto assets may also replicate this model and become SEC reporting companies one after another , building a bridge of communication between the crypto market and the traditional market.

In fact, for Ethereum, in addition to the Grayscale Ethereum Trust becoming a "regular army", there will be another good news this year - the CFTC is about to approve Ethereum futures.

In February this year, Heath Tarbert, chairman of the U.S. Commodity Futures Trading Commission (CFTC), said in an interview with Bloomberg that Ethereum (ETH) futures are in the works. "We have seen cash-settled and physically delivered Bitcoin futures. My guess is that we will also see Ethereum futures."

In fact, this is not the first time Tarbert has publicly expressed his optimism about Ethereum futures. As early as October last year, Tarbert said that Ethereum is a commodity, Ethereum futures may begin trading in 2020, and the CFTC is willing to give the green light to new products. "I think you are likely to see an Ethereum futures contract in the next six months to a year."

In addition, with ETH2.0 about to be launched next year, Ethereum may become the focus of a new round of bull market and is worthy of attention.

Risk warning : The content of this article is only the author’s personal opinion, does not represent the views or position of Zhikuang University, and does not constitute any investment opinion or recommendation.