10-K: Franklin Ethereum ETF Reports Significant Losses Amidst Ether Price Decline and Regulatory Uncertainty

Franklin Ethereum Trust's annual report reveals a substantial net loss of over $17 million and a nearly 47% drop in Net Asset Value per share for its Franklin Ethereum ETF, primarily driven by a sharp decline in ether's market price since its July 2024 launch.

Summary

• The Franklin Ethereum Trust, through its Franklin Ethereum ETF (EZET), reported a net decrease in net assets resulting from operations of approximately $17,242,876 for the period from July 23, 2024 (commencement of operations) to March 31, 2025.
• The Fund experienced a net realized and unrealized loss on investment in ether of approximately $17,233,952, comprising a net realized loss of $995,550 and a net change in unrealized depreciation of $16,238,402.
• The Fund's Net Asset Value (NAV) per Share decreased by 46.81%, from $26.21 at commencement of operations on July 23, 2024, to $13.94 as of March 31, 2025.
• This NAV decrease is primarily attributed to a 46.80% decline in the price of ether, from $3,448.77 per ether on July 23, 2024, to $1,834.80 per ether on March 31, 2025.
• As of March 31, 2025, the Fund held 11,780.2062 ether with a fair value of $21,614,322 (cost: $37,851,948).
• The Sponsor's fee is 0.19% annually of the daily net asset value, with a waiver applied from July 23, 2024, to January 31, 2025, for the first $10.0 billion of assets, resulting in a net Sponsor Fee payable of $8,924 for the period.
• The Fund issued 1,750,000 Shares and redeemed 300,000 Shares during the period, resulting in 1,550,000 shares outstanding as of March 31, 2025.
• The Fund operates as a passive investment vehicle, not actively managing ether holdings or utilizing leverage or derivatives.
• Creation Units consist of 50,000 Shares and are created and redeemed for cash only by Authorized Participants, who bear associated transaction costs and network fees.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant financial losses, substantial depreciation in the underlying asset (ether), and a comprehensive list of inherent risks associated with digital assets, market volatility, regulatory uncertainty, and operational dependencies. While the Sponsor has absorbed some costs and established key partnerships, the overall financial performance and the extensive risk disclosures indicate a challenging environment for the Fund.

Positives

• The Sponsor assumed all organizational and initial offering costs, and a significant portion of ordinary administrative and marketing expenses, including up to $500,000 per annum in ordinary legal fees.
• The Sponsor waived the entire Sponsor's Fee on the first $10.0 billion of the Fund's assets from July 23, 2024, to January 31, 2025, reducing initial operational costs for the Fund.
• The Fund has established relationships with major financial institutions as Authorized Participants, including Jane Street Capital, J.P. Morgan Securities, Virtu Americas, Citadel Securities, and Goldman Sachs & Co. LLC.
• The Fund utilizes Coinbase Custody Trust Company, LLC for cold storage of ether, enhancing security against hacking, and Coinbase Global maintains a commercial crime insurance policy for client assets.
• The Trust maintains disclosure controls and procedures, evaluated as effective at reasonable levels of assurance as of March 31, 2025.

Negatives

• The Fund experienced a significant net decrease in net assets of $17,242,876 and a 46.81% decline in NAV per Share due to a substantial drop in ether's price.
• The Fund incurred a net realized and unrealized loss on investment in ether of $17,233,952.
• The Fund's passive investment strategy means it cannot actively manage ether to mitigate price volatility or generate returns beyond tracking ether's price, making it vulnerable to market downturns.
• The Fund's reliance on cash creations and redemptions, rather than in-kind, may lead to operational inefficiencies and could cause the Shares to trade at premiums or discounts to NAV.
• The lack of full insurance coverage and limited legal recourse against service providers (Ether Custodian, Prime Broker) expose the Fund and Shareholders to potential losses not covered by insurance or liability limits.
• The Prime Broker (Coinbase Inc.) and its parent (Coinbase Global) are subject to ongoing SEC enforcement actions and litigation, which could impact their ability to provide services to the Fund or affect their financial condition.
• The Fund does not participate in staking programs, causing an investment in Shares to forgo potential staking rewards that direct ether holders might receive.

Risks

• Extreme volatility in ether prices could lead to a material adverse effect on the value of the Shares, potentially resulting in total or substantial loss of value.
• Digital assets are bearer instruments, and loss, theft, destruction, or compromise of associated private keys could result in permanent loss of the asset.
• Smart contracts, including those for DeFi applications, are new technology and may have vulnerabilities, leading to problems that reduce demand for ether or cause a loss of confidence in the Ethereum network.
• Temporary or permanent forks in the Ethereum network could adversely affect the value of the Shares, and the Sponsor's choice of which fork to support may not be the most valuable one.
• Competition from alternative digital assets (e.g., Bitcoin, Solana, Avalanche, Cardano) and smart contract platforms could negatively impact ether's demand and price.
• The Index used to calculate the Fund's NAV has a limited performance history and could experience calculation errors, failing to track the global ether price accurately.
• Operational difficulties in the creation and redemption process, or withdrawal of Authorized Participants or Ether Trading Counterparties, could impair arbitrage and cause the Share price to diverge from NAV.
• Security threats to the Fund's accounts at the Ether Custodian or Prime Broker could disrupt operations, lead to loss of assets, or damage reputation.
• Ether transactions are irrevocable; incorrectly transferred or stolen ether may be irretrievable.
• Loss of a critical banking relationship or failure of a bank used by the Prime Broker could adversely impact the Fund's ability to create or redeem Creation Units or cause losses.
• Regulatory uncertainty in U.S. digital asset markets, including potential bans, restrictions, or onerous conditions on ether use, validation, or custody, could significantly harm ether's value or the Shares.
• If the Fund or Sponsor are subjected to regulation as a money services business (MSB) or money transmitter, it could result in extraordinary expenses and decreased liquidity for Shares.
• Regulatory changes or interpretations could obligate the Fund or Sponsor to register and comply with new regulations, leading to extraordinary, nonrecurring expenses or even termination of the Fund.
• The U.S. federal income tax treatment of digital currency is uncertain, and future guidance could adversely affect the value of Shares or result in unexpected tax liabilities for Shareholders.
• Potential conflicts of interest may arise between the Sponsor/affiliates and the Fund, as the Sponsor has no fiduciary duties to the Fund or Shareholders and may favor its own interests.
• The Sponsor's limited history in operating cryptoasset investment vehicles may be inadequate to manage the Fund effectively, increasing operational risks.
• The lack of an active trading market for Shares may result in losses at disposition.
• The Fund may be terminated and liquidated at a time disadvantageous to Shareholders.
• Shareholders have limited voting rights and restricted ability to bring derivative actions, giving almost all control to the Sponsor and Trustee.
• The non-exclusive jurisdiction and waiver of jury trial clauses in the Declaration of Trust may limit Shareholders' legal rights and forum choices.
• The Sponsor's sole responsibility for NAV determination, and potential errors or changes in valuation methods, could adversely affect Share value.
• Extraordinary expenses not assumed by the Sponsor, such as legal claims or indemnification, could force the Fund to sell ether at depressed prices, reducing Share value.
• Shareholders could incur tax liability without an associated distribution from the Fund due to ether sales for expenses or hard forks.
• Intellectual property rights claims against the Fund could result in extraordinary expenses or force termination.
• Competition from other exchange-traded ether products and Coinbase's role as custodian/prime broker for multiple competitors could adversely affect the Fund's operations.
• Lack of independent advisers representing investors in the Fund may lead to undesirable investment decisions.
• Shareholders and Authorized Participants lack direct claims against the Ether Custodian, limiting recourse.

Future Outlook

The Fund's future success is subject to significant risks and uncertainties, including changes in ether prices and market conditions, regulatory changes, and global economic and political developments. The Sponsor does not intend to update forward-looking statements unless required by federal securities laws. The Fund is an emerging growth company and may continue to take advantage of reduced disclosure requirements.

Management Comments

• David Mann, President and Chief Executive Officer of Franklin Holdings, LLC, certified that the annual report fairly presents the financial condition, results of operations, and cash flows, and that disclosure controls and procedures operated effectively.
• Matthew Hinkle, Chief Financial Officer of Franklin Holdings, LLC, provided a similar certification regarding the financial statements and disclosure controls.
• The Sponsor believes that the security procedures in place for the Fund, including offline storage and multiple encrypted private key shards, are reasonably designed to safeguard the Fund's ether.

Industry Context

The digital asset industry, including ether, is characterized by extreme price volatility and regulatory uncertainty. Recent bankruptcies of major digital asset platforms (e.g., Celsius Network, Voyager Digital, Three Arrows Capital, FTX, BlockFi, Genesis) have increased regulatory scrutiny and negatively impacted market confidence and liquidity. The industry is also grappling with scaling challenges on blockchain networks like Ethereum, leading to discussions around Layer 2 solutions and sharding. The regulatory landscape is evolving, with U.S. federal and state agencies examining digital asset operations and potential new legislation, which could impose significant compliance burdens. The SEC's actions against Coinbase and other digital asset issuers highlight the ongoing debate about whether certain digital assets are securities, which could have a material adverse impact on the market. Competition from central bank digital currencies (CBDCs) and other financial institutions' blockchain initiatives also poses a threat to ether's value and adoption.

Comparison to Industry Standards

• The Fund's use of cash creations and redemptions, in contrast to other spot commodity exchange-traded products (like gold and silver ETFs) that typically employ in-kind creations and redemptions, is a relatively novel approach for digital asset ETFs. This may lead to operational inefficiencies and potentially wider premiums or discounts to NAV compared to in-kind models.
• The Fund's expense ratio of 0.19% (before waivers) is competitive within the newly approved spot ether ETF market, as the document notes that competitors with lower expense ratios could impair the Fund's ability to attract assets.
• The Ethereum network's transition to a proof-of-stake consensus model (the Merge) and subsequent upgrades (e.g., Dencun) are significant developments compared to older proof-of-work blockchains like Bitcoin, which have been tested over a longer period. This newer technology may have undetected vulnerabilities or suboptimal incentive structures.
• The document highlights that Coinbase, serving as the Ether Custodian and prime execution agent for several competing exchange-traded ether products, holds a critical role in the U.S. spot ether ETF ecosystem. This concentration of service provision could lead to risks if Coinbase fails to adequately resource its operations or favors certain products.

Management Changes

Corporate Governance

Legal Proceedings

• As of June 27, 2025, the Trust and the Fund are not subject to any material legal proceedings, nor are any material legal proceedings threatened against them.
• Coinbase Inc. (Prime Broker) and its parent, Coinbase Global, received a Wells Notice from the SEC staff on March 22, 2023, regarding a preliminary determination to recommend enforcement action for alleged violations of federal securities laws related to Coinbase Prime service, spot market, staking service, and Coinbase Wallet.
• On June 6, 2023, the SEC filed a complaint against Coinbase Inc. and Coinbase Global Inc. alleging failure to register as a national securities exchange, broker-dealer, and clearing agency, and failure to register its staking program.
• On February 27, 2025, the SEC announced a joint stipulation with Coinbase Inc. and Coinbase Global Inc. to dismiss the ongoing civil enforcement action against them. The SEC's complaint did not allege that ether is a security or that Coinbase Inc.'s activities involving ether caused the alleged registration violations.

Related Party Transactions

• Franklin Resources Inc. (FRI), an affiliate of the Sponsor, acted as the Seed Capital Investor, purchasing 4,000 Initial Seed Shares for $100,000 on May 21, 2024.
• On June 27, 2024, the Initial Seed Shares were redeemed, and the Seed Capital Investor purchased two creation units (100,000 Shares) for cash, which the Fund used to purchase 760 ether for $2,619,241.20. The Seed Capital Investor paid all transaction and other costs related to this conversion.
• The Sponsor (Franklin Holdings, LLC) and the Marketing Agent (Franklin Distributors, LLC) are affiliates, with FRI as their ultimate parent company. The Sponsor pays the Marketing Agent's fees through its Sponsor's fee.
• Investment vehicles advised or managed by affiliates of the Sponsor may hold interests in Coinbase Global, the parent of the Prime Broker (Coinbase Inc.) and Ether Custodian (Coinbase Custody Trust Company, LLC). This could present conflicts of interest where the Sponsor might favor Coinbase's interests over the Fund's.

Stakeholder Impact

• **Shareholders**: Experienced a significant decline in investment value due to ether price depreciation. They bear the risk of total loss, have limited voting rights, and restricted ability to bring derivative actions. They also incur tax liability from ether sales for expenses without direct distributions.
• **Employees**: The Trust and Fund do not have direct employees. The Sponsor's employees perform functions for the Trust, and their compensation recovery policy is in place for executive officers of the Sponsor.
• **Customers (Authorized Participants)**: Are responsible for transaction fees and network fees during creation and redemption. They face risks if the arbitrage mechanism is ineffective or if service providers fail. Their ability to participate in in-kind creations/redemptions is currently limited, which may impact their efficiency.
• **Suppliers/Service Providers (e.g., Coinbase, BNY Mellon)**: Continue to provide essential services (custody, prime brokerage, administration) to the Fund. Their operational stability and regulatory compliance are critical to the Fund's functioning. Coinbase's ongoing legal proceedings highlight potential risks to service continuity.
• **Creditors**: The Fund has a security interest, lien, and right of set-off against its Trading and Vault Balances in favor of the Trade Credit Lender to secure repayment of Trade Credits. If the Fund fails to repay, assets may be liquidated.

Next Steps

• The Sponsor will notify Shareholders in a prospectus supplement, periodic reports, and/or on the Fund's website if it decides to waive all or a portion of the Sponsor's Fee in the future.
• The Cboe BZX Exchange is seeking In-Kind Regulatory Approval to amend its listing rules to permit the Fund to create and redeem Shares through in-kind transactions, which would be a future development.
• The Fund will continue to operate as an emerging growth company, potentially taking advantage of reduced public company reporting requirements.
• The Sponsor will continue to monitor and review its cybersecurity program annually, coordinating with Franklin Resources, Inc.'s relevant risk management committees.
• The Sponsor will continue to evaluate each fork, airdrop, or similar occurrence on a case-by-case basis in consultation with legal and tax advisors, and service providers.

Key Dates

Recommendation

Keywords

Ethereum ETF, Ether, Cryptocurrency, Digital Assets, SEC Filing, 10-K, Financial Report, Investment Fund, EZET, Franklin Ethereum Trust, Coinbase Custody, Proof-of-Stake, Blockchain, Market Volatility, Regulatory Risk, Net Asset Value, Financial Performance, Investment Loss