SecProbe.io

CORRESP
1
filename1.htm

CORRESP

 June 21, 2024

VIA EDGAR

 Securities and Exchange Commission

Division of Corporate Finance

 Office of Crypto Assets

100 F Street, NE

 Washington, D.C. 20549

Re:
 Invesco Galaxy Ethereum ETF Pre-Effective

 
 Amendment No. 2 to Registration Statement on Form S-1

 
 Filed May 31, 2024

 
 File No. 333-274767

Dear Messrs. Brunhofer, Irving, Brown, and Dobbie:

 On behalf
of Invesco Galaxy Ethereum ETF (the “Trust”) and Invesco Capital Management LLC (the “Sponsor” or “Invesco”), we are writing to respond to comments of the staff (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) that you provided by e-mail on June 14, 2024 in connection with Pre-Effective Amendment No. 2 to the Trust’s
Registration Statement on Form S-1 (the “Registration Statement”), which was filed with the Commission on May 31, 2024.

The below responses are reflected, to the extent applicable, in Pre-Effective Amendment No. 3 to the Trust’s
Registration Statement, filed contemporaneously with this letter on June 21, 2024. The following sets forth the Staff’s comments and the Trust’s responses thereto. Defined terms used and not otherwise defined herein have the meaning
assigned to them in the Registration Statement.

 Amendment No. 2 to Registration Statement on Form S-1

 General

1.
 Staff Comment: To the extent that you intend to use a fact sheet, please provide us with a copy for our
review.

 Response: The Sponsor does not currently intend to distribute fact sheets until after the Trust has had
at least one quarter of operating history.

 Cover Page

2.
 Staff Comment: Please revise the cover page to state that the Trust will not participate in the proof-of-stake validation mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether) to earn additional ether or seek other means of generating
income from its ether holdings.

 1

 Response: The Trust has made the requested change.
Pre-Effective Amendment No. 3 includes the following as a new paragraph on the cover page:

The Trust will not participate in the proof-of-stake
validation mechanism of the Ethereum network (i.e., the Trust will not “stake” its ether) to earn additional ether or seek other means of generating income from its ether holdings.

Prospectus Summary, page 2

3.
 Staff Comment: Please revise the Prospectus Summary to state that shareholders will not receive the
benefits of any hard fork or airdrop because if a hard fork, airdrop or similar event occurs in the Ethereum blockchain, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to the assets so created.

 Response: The Trust has made the requested change. Pre-Effective
Amendment No. 3 includes the following disclosure as a new paragraph in the section titled “Prospectus Summary—Ether and the Ethereum Network.”

In the event of a hard fork of the Ethereum network, the Sponsor will instruct the Trust to immediately and irrevocably disclaim all rights to
the ether, cash or other assets or rights received as a result of a hard fork or airdrop in respect of ether (“IR Assets”) so created. As a result, shareholders will not receive the benefit of any hard fork or airdrop. Ether is the only
digital asset that will be held by the Trust. In the event the Trust seeks to change its treatment of Incidental Rights or IR Assets, an application would need to be filed with the SEC by the Exchange seeking approval to amend its listing rules.

 Risk Factors, page 11

4.
 Staff Comment: Please include risk factor disclosure regarding the uncertain treatment of custodied
crypto assets in the event of the insolvency or bankruptcy of the Prime Broker or the Ethereum Custodian, and the risk that the Trust’s custodied assets could become the property of a bankruptcy estate and made available to satisfy the claims
of general unsecured creditors.

 Response: The Trust has made the requested change with respect to both the
Ethereum Custodian and the Prime Broker. The Trust and the Sponsor, however, expect that the Trust’s ether transactions will be conducted over the counter with counterparties selected by the Execution Agent. As a result, neither the
Sponsor nor the Execution Agent expects to utilize the Prime Broker to acquire and dispose of either on behalf of the Trust or in connection with paying the Trust’s expenses. Pre-Effective Amendment
No. 3 includes the following as a new risk factor in the section titled “Risk Factors—Risks Related to the Trust and the Shares:”

The Trust’s Prime Broker or Ethereum Custodian could become insolvent or become subject to a receivership or bankruptcy proceeding,
which may result in a loss of or delay in access to Trust assets.

 In the event of an insolvency or bankruptcy of the Prime Broker (in
the case of the Trading Balance) or the Ethereum Custodian (in the case of the Vault Balance) in the future, given that the contractual protections and legal rights of customers with respect to digital assets held on their behalf by third parties
are relatively untested in a bankruptcy of an entity such as the Ethereum Custodian or Prime Broker in the virtual currency industry, there is a risk that customers’ assets—including the

 2

Trust’s assets—may be considered the property of the bankruptcy estate of the Prime Broker (in the case of the Trading Balance) or the Ethereum Custodian (in the case of the Vault
Balance), and customers—including the Trust—may be at risk of being treated as general unsecured creditors of such entities and subject to the risk of total loss or markdowns on value of such assets.

The Ether Custody Agreement contains an agreement by the parties to treat the ether credited to the Trust’s Vault Balance as financial
assets under Article 8 of the New York Uniform Commercial Code (“Article 8”), in addition to stating that the Ethereum Custodian will serve as fiduciary and custodian on the Trust’s behalf. The Ethereum Custodian’s parent,
Coinbase Global, has stated in its most recent public securities filings that in light of the inclusion in its custody agreements of provisions relating to Article 8 it believes that a court would not treat custodied digital assets as part of its
general estate in the event the Ethereum Custodian were to experience insolvency. However, due to the novelty of digital asset custodial arrangements courts have not yet considered this type of treatment for custodied digital assets and it is not
possible to predict with certainty how they would rule in such a scenario. If the Ethereum Custodian became subject to insolvency proceedings and a court were to rule that the custodied ether were part of the Ethereum Custodian’s general estate
and not the property of the Trust, then the Trust would be treated as a general unsecured creditor in the Ethereum Custodian’s insolvency proceedings and the Trust could be subject to the loss of all or a significant portion of its assets.
Moreover, in the event of the bankruptcy of the Ethereum Custodian, an automatic stay could go into effect and protracted litigation could be required in order to recover the assets held with the Ethereum Custodian, all of which could significantly
and negatively impact the Trust’s operations and the value of the Shares.

 There is a risk that the Trading Balance, in which the
Trust’s ether and cash is held in omnibus accounts by the Prime Broker (in the latter case, as described below in “Cybersecurity Risk Related to Ethereum—Loss of a critical banking relationship for, or the failure of a bank used by,
the Execution Agent could adversely impact the Trust’s ability to create or redeem Creation Baskets, or could cause losses to the Trust.”), could be considered part of the Prime Broker’s bankruptcy estate in the event of the Prime
Broker’s bankruptcy. The Ether Custody Agreement contains an Article 8 opt-in clause with respect to the Trust’s assets held in the Trading Balance. The Prime Broker is not required to hold any of
the ether or cash in the Trust’s Trading Balance in segregation. Within the Trading Balance, the Ether Custody Agreement provides that the Trust does not have an identifiable claim to any particular ether (and cash). Instead, the Trust’s
Trading Balance represents an entitlement to a pro rata share of the ether (and cash) the Prime Broker has allocated to the omnibus wallets the Prime Broker holds, as well as the accounts in the Prime Broker’s name that the Prime Broker
maintains at Connected Trading Venues (which are typically held on an omnibus, rather than segregated, basis). If the Prime Broker suffers an insolvency event, there is a risk that the Trust’s assets held in the Trading Balance could be
considered part of the Prime Broker’s bankruptcy estate and the Trust could be treated as a general

 3

unsecured creditor of the Prime Broker, which could result in losses for the Trust and Shareholders. Moreover, in the event of the bankruptcy of the Prime Broker, an automatic stay could go into
effect and protracted litigation could be required in order to recover the assets held with the Prime Broker, all of which could significantly and negatively impact the Trust’s operations and the value of the Shares. There are no policies that
would limit the amount of ether that can be held temporarily in the Trading Balance maintained by the Prime Broker.

5.
 Staff Comment: Please add risk factor disclosure regarding the potential risk of transactions with a
sanctioned entity and the impact if such transactions occur.

 Response: The Trust has made the requested change. Pre-Effective Amendment No. 3 includes the following as a new risk factor in the section titled “Risk Factors—Risks Related to the Markets and Service Ecosystem for Ether:”

Anonymity and illicit financing risk.

Although transaction details of peer-to-peer transactions are
recorded on the Ethereum blockchain, a buyer or seller of digital assets on a peer-to-peer basis directly on the Ethereum network may never know to whom the public key
belongs or the true identity of the party with whom it is transacting. Public key addresses are randomized sequences of alphanumeric characters that, standing alone, do not provide sufficient information to identify users. In addition, certain
technologies may obscure the origin or chain of custody of digital assets. The opaque nature of the market poses asset verification challenges for market participants, regulators and auditors and gives rise to an increased risk of manipulation and
fraud, including the potential for Ponzi schemes, bucket shops and pump and dump schemes. Digital assets have in the past been used to facilitate illicit activities. If a digital asset was used to facilitate illicit activities, businesses that
facilitate transactions in such digital assets could be at increased risk of potential criminal or civil lawsuits, or of having banking or other services cut off, and such digital asset could be removed from digital asset trading platforms. Any of
the aforementioned occurrences could adversely affect the price of the relevant digital asset, the attractiveness of the respective blockchain network and an investment in the Shares. While the Trust’s ether transactions are expected to be
effected by the Execution Agent over-the-counter with known counterparties, if the Trust or the Sponsor were to transact with a sanctioned entity, the Trust or the
Sponsor would be at risk of potential criminal or civil lawsuits or liability.

 The Trust takes measures with the objective of reducing
illicit financing risks in connection with the Trust’s activities. However, illicit financing risks are present in the digital asset markets, including markets for ether. There can be no assurance that the measures employed by the Trust will
prove successful in reducing illicit financing risks, and the Trust is subject to the complex illicit financing risks and vulnerabilities present in the digital asset markets. If such risks eventuate, the Trust or the Sponsor or their affiliates
could face civil or criminal liability, fines, penalties, or other punishments, be subject to investigation, have their assets frozen, lose access to banking services or services provided by other service providers, or suffer disruptions to their
operations, any of which could negatively affect the Trust’s ability to operate or cause losses in value of the Shares.

 4

 Furthermore, Authorized Participants, as broker-dealers, and the Execution Agent, Prime
Broker and Ethereum Custodian, as entities licensed to conduct virtual currency business activity by the New York Department of Financial Services and a limited purpose trust company subject to New York Banking Law, respectively, are “financial
institutions” subject to the U.S. Bank Secrecy Act, as amended (“BSA”), and U.S. economic sanctions laws. The Trust will only accept ether in connection with creation and redemption requests from Ethereum Counterparties who have
represented to the Trust or the Execution Agent that they have implemented compliance programs that are designed to ensure compliance with applicable sanctions and anti-money laundering laws. In addition, with respect to all ether delivered to the
Trust by Ethereum Counterparties in connection with creation requests, the Ethereum Counterparties must represent to the Trust or the Execution Agent that it will form a reasonable belief (i) as to the identities of, and conduct necessary
diligence with respect to, any counterparties from whom the Ethereum Counterparty obtains ether being transferred and (ii) that such ether being transferred by the Ethereum Counterparty to the Trust were not derived from, or associated with,
unlawful or criminal activity.

 The Sponsor, the Execution Agent and the Trust have adopted and implemented policies and procedures that
are designed to ensure that they do not violate applicable AML and sanctions laws and regulations and to comply with any applicable KYC laws and regulations. Each of the Sponsor, the Execution Agent and the Trust will only interact with known third
party service providers with respect to whom it has engaged in a due diligence process including a thorough KYC process, such as the Authorized Participants and the Ethereum Custodian. Authorized Participants, as broker-dealers, and the Ethereum
Custodian, as a limited purpose trust company subject to New York Banking Law, are subject to the BSA and U.S. economic sanctions laws.

The Ethereum Custodian has adopted and implemented an anti-money laundering and sanctions compliance program that provides protections
intended to ensure that the Sponsor and the Trust do not transact with a sanctioned party. Notably, the Ethereum Custodian performs Know-Your-Transaction (“KYT”) screening using blockchain analytics to identify, detect, and mitigate the
risk of transacting with a sanctioned or other unlawful actor. Pursuant to the Ethereum Custodian’s KYT program, any ether that is delivered to the Trust’s custody account will undergo screening to ensure that the origins of that ether are
not illicit.

 There is no guarantee that such procedures will always be effective. If the Authorized Participants, the Execution Agent,
the Ethereum Custodian or the Prime Broker were to have inadequate policies, procedures and controls for complying with applicable anti-money laundering and applicable sanctions laws or the Trust’s diligence is ineffective, violations of such
laws could result, which could result in

 5

regulatory liability for the Trust, the Sponsor, the Trustee or their affiliates under such laws, including governmental fines, penalties, and other punishments, as well as potential liability to
or cessation of services by the Ethereum Custodian. Any of the foregoing could result in losses to the Shareholders or negatively affect the Trust’s ability to operate.

6.
 Staff Comment: Please add separately captioned risk factors discussing the regulatory and reputation