Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the VanEck Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 66076-66088 [2023-20813]
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66076
Federal Register / Vol. 88, No. 185 / Tuesday, September 26, 2023 / Notices
values of key market quality indicators
(specifically, the bid-ask spread 45 and
effective spread 46) in p.m.-settled SPX
weekly (‘‘SPXW’’) options both before
and after the introduction of Tuesday
expirations and Thursday expirations
for SPXW options on April 18 and May
11, 2022, respectively.47 The Exchange
concludes from this analysis that the
introduction of SPX options with
Tuesday and Thursday options had no
significant impact on the market quality
of SPXW options with Monday,
Wednesday, and Friday expirations.48
For a majority of the series analyzed, the
Exchange observed no statistically
significant difference in bid-ask spread
or effective spread.49 The Exchange
states that analyzing whether the
introduction of new SPXW p.m.-settled
expirations (i.e., SPXW options with
Tuesday and Thursday expirations)
impacted the market quality of thenexisting SPXW p.m.-settled expirations
(i.e., SPXW options with Monday,
Wednesday, and Friday expirations)
provides a reasonable substitute to
evaluate whether the introduction of
p.m.-settled index options impacted
market quality when the Program
began.50 Therefore, the Exchange
believes the results of its analysis permit
the Exchange to extrapolate that it is
unlikely the introduction of p.m.-settled
XSP or p.m.-settled MRUT options
significantly impacted the market
quality of a.m.-settled options, such as
a.m.-settled SPX or Russell 2000
options, respectively, when the Program
began.51
The Commission believes that the
evidence contained in the Exchange’s
filing, the Exchange’s pilot data and
reports, and the Pilot Memo analysis
demonstrate that the Program has
benefitted investors and other market
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45 The
Exchange calculated for each of SPXW
options (with Monday, Wednesday, and Friday
expirations) and SPY Weekly options (with
Monday, Wednesday, and Friday expirations) the
daily time-weighted bid-ask spread on the Exchange
during its regular trading hours session, adjusted for
the difference in size between SPXW options and
SPY options (SPXW options are approximately ten
times the value of SPY options).
46 The Exchange calculated the volume-weighted
average daily effective spread for simple trades for
each of SPXW options (with Monday, Wednesday,
and Friday expirations) and SPY Weekly options
(with Monday, Wednesday, and Friday expirations)
as twice the amount of the absolute value of the
difference between an order execution price and the
midpoint of the national best bid and offer at the
time of execution, adjusted for the difference in size
between SPXW options and SPY options.
47 For purposes of comparison, the Exchange
paired SPXW options and SPY options with the
same moneyness and same days to expiration.
48 See Notice, 88 FR at 26364.
49 See id.
50 See Notice, 88 FR at 26364.
51 See id. at 26365.
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participants by providing more flexible
trading and hedging opportunities while
also having no disruptive impact on the
market. The market for p.m.-settled
options has grown in size over the
course of the Program, and analysis of
the pilot data did not identify any
significant economic impact on the
underlying component securities
surrounding the close as a result of
expiring p.m.-settled options nor did it
indicate a deterioration in market
quality (as measured by bid-ask and
effective spreads) for an existing
product when a new p.m.-settled
expiration was introduced. Further,
significant changes in closing
procedures in the decades since index
options moved to a.m. settlement may
also serve to mitigate the potential
impact of p.m.-settled index options on
the underlying cash markets.
Accordingly, the Commission finds
that the proposed rule change is
consistent with section 6(b)(5) of the
Act 52 and the rules and regulations
thereunder applicable to a national
securities exchange.
V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,53 that the
proposed rule change (SR–CBOE–2023–
019) be, and hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.54
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–20811 Filed 9–25–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98457; File No. SR–
CboeBZX–2023–069]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change To List and
Trade Shares of the VanEck Ethereum
ETF Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares
September 20, 2023.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on
September 6, 2023, Cboe BZX Exchange,
Inc. (‘‘Exchange’’ or ‘‘BZX’’) filed with
the Securities and Exchange
52 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
54 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
53 15
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Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (‘‘BZX’’ or
the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) a proposed
rule change to list and trade shares of
the VanEck Ethereum ETF (the
‘‘Trust’’),3 under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to list and
trade the Shares of the VanEck
Ethereum Trust 4 under BZX Rule
14.11(e)(4),5 which governs the listing
3 The Trust was formed as a Delaware statutory
trust on June 22, 2021 and is operated as a grantor
trust for U.S. federal tax purposes. The Trust has
no fixed termination date.
4 On May 7, 2021 the Trust filed with the
Commission an initial registration statement (the
‘‘Registration Statement’’) on Form S–1 under the
Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is
based, in part, on the Registration Statement. The
Registration Statement is not yet effective and the
Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
5 The Commission approved BZX Rule 14.11(e)(4)
in Securities Exchange Act Release No. 65225
(August 30, 2011), 76 FR 55148 (September 6, 2011)
(SR–BATS–2011–018).
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and trading of Commodity-Based Trust
Shares on the Exchange.6
According to the Registration
Statement, the Trust is neither an
investment company registered under
the Investment Company Act of 1940, as
amended,7 nor a commodity pool for
purposes of the Commodity Exchange
Act (‘‘CEA’’), and neither the Trust nor
the Sponsor is subject to regulation as
a commodity pool operator or a
commodity trading adviser in
connection with the Shares.
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VanEck Ethereum Trust
VanEck Digital Assets, LLC is the
sponsor of the Trust (the ‘‘Sponsor’’). A
third-party regulated custodian (the
‘‘Custodian’’) will be responsible for
custody of the Trust’s Ether (‘‘ETH’’).
Delaware Trust Company is the trustee
(‘‘Trustee’’). The State Street Bank and
Trust Company will be the
administrator (‘‘Administrator’’) and
transfer agent (‘‘Transfer Agent’’). Van
Eck Securities Corporation will be the
marketing agent (‘‘Marketing Agent’’) in
connection with the creation and
redemption of ‘‘Baskets’’ of Shares. The
Custodian will be responsible for
custody of the Trust’s ETH.
According to the Registration
Statement, each Share will represent a
fractional undivided beneficial interest
in the Trust’s net assets. The Trust’s
assets will consist of ETH held by the
Custodian on behalf of the Trust. The
Trust generally does not intend to hold
cash or cash equivalents. However,
there may be situations where the Trust
will unexpectedly hold cash on a
temporary basis.
When the Trust sells or redeems its
Shares, it will do so in blocks of 50,000
Shares (a ‘‘Creation Basket’’) at the
Trust’s NAV. Authorized participants
will deliver, or facilitate the delivery of,
ETH to the Trust’s account with the
Custodian in exchange for Shares when
they purchase Shares, and the Trust,
through the Custodian, will deliver ETH
to such authorized participants when
they redeem Shares with the Trust.
Authorized participants may then offer
Shares to the public at prices that
depend on various factors, including the
supply and demand for Shares, the
value of the Trust’s assets, and market
conditions at the time of a transaction.
Shareholders who buy or sell Shares
during the day from their broker may do
6 All statements and representations made in this
filing regarding (a) the description of the portfolio,
(b) limitations on portfolio holdings or reference
assets, or (c) the applicability of Exchange rules and
surveillance procedures shall constitute continued
listing requirements for listing the Shares on the
Exchange.
7 15 U.S.C. 80a–1.
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so at a premium or discount relative to
the NAV of the Shares of the Trust.
Background
Ethereum is free software that is
hosted on computers distributed
throughout the globe. It employs an
array of logic, called a protocol, to create
a unified understanding of ownership,
commercial activity, and business logic.
This allows users to engage in
commerce without the need to trust any
of its participants or counterparties.
Ethereum code creates verifiable and
unambiguous rules that assign clear,
strong property rights to create a
platform for unrestrained business
formation and free exchange. It is
widely understood that no single
intermediary or entity operates or
controls the Ethereum network (referred
to as ‘‘decentralization’’), the transaction
validation and recordkeeping
infrastructure of which is collectively
maintained by a disparate user base.
The Ethereum network allows people to
exchange tokens of value, or ETH,
which are recorded on a distributed
public recordkeeping system or ledger
known as a blockchain (the ‘‘Ethereum
Blockchain’’), and which can be used to
pay for goods and services, including
computational power on the Ethereum
network, or converted to fiat currencies,
such as the U.S. dollar, at rates
determined on digital asset exchanges or
in individual peer-to-peer transactions.
Furthermore, by combining the
recordkeeping system of the Ethereum
Blockchain with a flexible scripting
language that is programmable and can
be used to implement sophisticated
logic and execute a wide variety of
instructions, the Ethereum network is
intended to act as a foundational
infrastructure layer on top of which
users can build their own custom
software programs, as an alternative to
centralized web servers. In theory,
anyone can build their own custom
software programs on the Ethereum
network. In this way, the Ethereum
network represents a project to expand
blockchain deployment beyond a
limited-purpose, peer-to-peer private
money system into a flexible,
distributed alternative computing
infrastructure that is available to all. On
the Ethereum network, ETH is the unit
of account that users pay for the
computational resources consumed by
running their programs.
Heretofore, U.S. retail investors have
lacked a U.S. regulated, U.S. exchangetraded vehicle to gain exposure to ETH.
Instead current options include: (i)
facing the counter-party risk, legal
uncertainty, technical risk, and
complexity associated with accessing
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66077
spot ether or (ii) over-the-counter ether
funds (‘‘OTC ETH Funds’’) with high
management fees and potentially
volatile premiums and discounts; 8
Meanwhile, investors in other countries,
including Germany, Switzerland and
France, are able to use more traditional
exchange listed and traded products
(including exchange-traded funds
holding physical ETH) to gain exposure
to ETH. Investors across Europe have
access to products which trade on
regulated exchanges and provide
exposure to a broad array of spot crypto
assets. U.S. investors, by contrast, are
left with fewer and more risky means of
getting ether exposure.9
To this point, the lack of an ETP that
holds spot ETH (a ‘‘Spot ETH ETP’’)
exposes U.S. investor assets to
significant risk because investors that
would otherwise seek cryptoasset
exposure through a Spot ETH ETP are
forced to find alternative exposure
through generally riskier means. For
example, investors in OTC ETH Funds
are not afforded the benefits and
protections of regulated Spot ETH ETPs,
resulting in retail investors suffering
losses due to drastic movements in the
premium/discount of OTC ETH Funds.
An investor who purchased the largest
OTC ETH Fund in January 2021 and
held the position at the end of 2022
would have suffered a 69% loss due to
the premium/discount, even if the price
of ETH did not change. Many retail
investors likely suffered losses due to
this premium/discount in OTC ETH
Fund trading; all such losses could have
8 The premium and discount for OTC ETH Funds
is known to move rapidly. For example, over the
period of 12/21/20 to 1/21/21, the premium for the
largest OTC ETH Fund went from 238.63% to 5.1%.
While the price of ether appreciated significantly
during this period and NAV per share increased by
101.40%, the price per share decreased by 37.49%.
This means that investors are holding shares of a
fund with roughly $4.8 billion in assets under
management that experiences significant volatility
in its premium and discount outside of the
fluctuations in price of the underlying asset. Even
operating within the normal premium and discount
range, it’s possible for an investor to buy shares of
an OTC ETH Fund only to have those shares
quickly lose 10% or more in dollar value excluding
any movement of the price of ether. That is to say—
the price of ether could have stayed exactly the
same from market close on one day to market open
the next, yet the value of the shares held by the
investor decreased only because of the fluctuation
of the premium. As more investment vehicles,
including mutual funds and ETFs, seek to gain
exposure to ether, the easiest option for a buy and
hold strategy for such vehicles is often an OTC ETH
Fund, meaning that even investors that do not
directly buy OTC ETH Funds can be disadvantaged
by extreme premiums (or discounts) and premium
volatility.
9 The Exchange notes that the list of countries
above is not exhaustive and that securities
regulators in a number of additional countries have
either approved or otherwise allowed the listing
and trading of Spot ETH ETPs.
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been avoided if a Spot ETH ETP had
been available. Additionally, many U.S.
investors that held their digital assets in
accounts at FTX,10 Celsius Network
LLC,11 BlockFi Inc.12 and Voyager
Digital Holdings, Inc.13 have become
unsecured creditors in the insolvencies
of those entities. If a Spot ETH ETP was
available, it is likely that at least a
portion of the billions of dollars tied up
in those proceedings would still reside
in the brokerage accounts of U.S.
investors, having instead been invested
in a transparent, regulated, and wellunderstood structure—a Spot ETH ETP.
To this point, approval of a Spot ETH
ETP would represent a major win for the
protection of U.S. investors in the
cryptoasset space. The Trust, like all
other series of Commodity-Based Trust
Shares, is designed to protect investors
against the risk of losses through fraud
and insolvency that arise by holding
digital assets, including ETH, on
centralized platforms.
Applicable Standard
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The Commission has historically
approved or disapproved exchange
filings to list and trade series of Trust
Issued Receipts, including spot-based
Commodity-Based Trust Shares, on the
basis of whether the listing exchange
has in place a comprehensive
surveillance sharing agreement with a
regulated market of significant size
related to the underlying commodity to
be held.14 With this in mind, the CME
10 See FTX Trading Ltd., et al., Case No. 22–
11068.
11 See Celsius Network LLC, et al., Case No. 22–
10964.
12 See BlockFi Inc., Case No. 22–19361.
13 See Voyager Digital Holdings, Inc., et al., Case
No. 22–10943.
14 See Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579 (August 1, 2018). This
proposal was subsequently disapproved by the
Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1,
2018) (the ‘‘Winklevoss Order’’). Prior orders from
the Commission have pointed out that in every
prior approval order for Commodity-Based Trust
Shares, there has been a derivatives market that
represents the regulated market of significant size,
generally a Commodity Futures Trading
Commission (the ‘‘CFTC’’) regulated futures market.
Further to this point, the Commission’s prior orders
have noted that the spot commodities and currency
markets for which it has previously approved spot
ETPs are generally unregulated and that the
Commission relied on the underlying futures
market as the regulated market of significant size
that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares,
including gold, silver, platinum, palladium, copper,
and other commodities and currencies. The
Commission specifically noted in the Winklevoss
Order that the approval order issued related to the
first spot gold ETP ‘‘was based on an assumption
that the currency market and the spot gold market
were largely unregulated.’’ See Winklevoss Order at
37592. As such, the regulated market of significant
size test does not require that the spot ether market
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Ether Futures (‘‘CME ETH Futures’’)
market, which launched in February
2021, is the proper market to consider
in determining whether there is a
related regulated market of significant
size.
The Commission has approved
proposals related to the listing and
trading of funds that would primarily
hold CME Bitcoin Futures that are
registered under the Securities Act of
1933 (‘‘Bitcoin Futures ETPs’’),15
finding that the CME Bitcoin Futures
market represents a regulated market of
significant size. Meanwhile, the
Commission has continued to
disapprove proposals to list and trade
funds that would hold spot bitcoin on
the seemingly conflicting basis that the
CME Bitcoin Futures market is not a
regulated market of significant size.16 In
the recently decided Grayscale
Investments, LLC v Securities and
Exchange Commission,17 however, the
court resolved this conflict by finding
that the SEC had failed to provide a
coherent explanation as to why it had
approved the Bitcoin Futures ETPs
while disapproving the proposal to list
and trade shares of the Grayscale
Bitcoin Trust and vacating the
disapproval order.18
As further discussed below, both the
Exchange and the Sponsor believe that
this proposal and the included analysis
are sufficient to establish that the CME
ETH Futures market represents a
regulated market of significant size as it
relates both to the CME ETH Futures
market and to the spot ETH market and
that this proposal should be approved.
expenses of the Trust’s operations. In
seeking to achieve its investment
objective, the Trust will hold Ether
(‘‘ETH’’) and will value its Shares daily
based on the reported MarketVectorTM
Ethereum Benchmark Rate (the
‘‘Benchmark’’), which is calculated
based on prices contributed by
exchanges that the Sponsor’s affiliate,
MarketVector IndexesTM
(‘‘MarketVector’’), believes represent the
top five Ethereum exchanges based on
the industry leading CryptoCompare
Exchange Benchmark review report. The
Trust is not actively managed.
Investment Objective
According to the Registration
Statement, the investment objective of
the Trust is for the Shares to reflect the
performance of the MarketVectorTM
Ethereum Benchmark Rate less the
The Benchmark
As described in the Registration
Statement, the Fund will use the
Benchmark to calculate the Trust’s
NAV. The Benchmark is designed to be
a robust price for ETH in USD and there
is no component other than ETH in the
index. The underlying exchanges are
sourced from the industry leading
CryptoCompare Exchange Benchmark
review report. CryptoCompare Exchange
Benchmark was established in 2019 as
a tool designed to bring clarity to the
digital asset exchange sector by
providing a framework for assessing risk
and in turn bringing transparency and
accountability to a complex and rapidly
evolving market.19 The current
exchange composition of the Benchmark
is Bitstamp, Coinbase, Gemini, itBit, and
Kraken.
In calculating the MarketVectorTM
Ethereum Benchmark Rate, the
methodology captures trade prices and
sizes from exchanges and examines
twenty consecutive three-minute
periods leading up to 4:00 p.m. EST. It
then calculates an equal-weighted
average of the volume-weighted median
price of these twenty three-minute
periods, removing the highest and
lowest contributed prices. Using twenty
be regulated in order for the Commission to approve
this proposal, and precedent makes clear that an
underlying market for a spot commodity or
currency being a regulated market would actually
be an exception to the norm. These largely
unregulated currency and commodity markets do
not provide the same protections as the markets that
are subject to the Commission’s oversight, but the
Commission has consistently looked to surveillance
sharing agreements with the underlying futures
market in order to determine whether such
products were consistent with the Act.
15 See Exchange Act Release No. 94620 (April 6,
2022), 87 FR 21676 (April 12, 2022) (the ‘‘Teucrium
Approval’’) and 94853 (May 5, 2022) (collectively,
with the Teucrium Approval, the ‘‘Bitcoin Futures
Approvals’’).
16 The proposed spot bitcoin funds are nearly
identical to the Trust but proposed to hold bitcoin
instead of ETH (‘‘Spot Bitcoin ETPs’’).
17 Grayscale Investments, LLC v. Securities and
Exchange Commission, et al., Case No. 22–1142 (the
‘‘Grayscale Order’’).
18 Id.
19 The CryptoCompare Exchange Benchmark
methodology utilizes a combination of qualitative
and quantitative metrics to analyze a
comprehensive data set across eight categories of
evaluation legal/regulation, KYC/transaction risk,
data provision, security, team/exchange, asset
quality/diversity, market quality and negative
events. The CryptoCompare Exchange Benchmark
review report assigns a grade to each exchange
which helps identify what it believes to be the
lowest risk exchanges in the industry. Based on the
CryptoCompare Exchange Benchmark,
MarketVector Indexes initially selects the top five
exchanges by rank for inclusion in the
MarketVectorTM Ethereum Benchmark Rate. If an
eligible exchange is downgraded by two or more
notches in a semi-annual review and is no longer
in the top five by rank, it is replaced by the highest
ranked non-component exchange. Adjustments to
exchange coverage are announced four business
days prior to the first business day of each of June
and December 23:00 CET. The MarketVectorTM
Ethereum Benchmark Rate is rebalanced at 16:00:00
GMT/BST on the last business day of each of May
and November.
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consecutive three-minute segments over
a sixty-minute period means malicious
actors would need to sustain efforts to
manipulate the market over an extended
period of time, or would need to
replicate efforts multiple times across
exchanges, potentially triggering review.
This extended period also supports
authorized participant activity by
capturing volume over a longer time
period, rather than forcing authorized
participants to mark an individual close
or auction. The use of a median price
reduces the ability of outlier prices to
impact the NAV, as it systematically
excludes those prices from the NAV
calculation. The use of a volumeweighted median (as opposed to a
traditional median) serves as an
additional protection against attempts to
manipulate the NAV by executing a
large number of low-dollar trades,
because any manipulation attempt
would have to involve a majority of
global spot ETH volume in a threeminute window to have any influence
on the NAV. As discussed in the
Registration Statement, removing the
highest and lowest prices further
protects against attempts to manipulate
the NAV, requiring bad actors to act on
multiple exchanges at once to have any
ability to influence the price.
Availability of Information
In addition to the price transparency
of the Benchmark, the Trust will
provide information regarding the
Trust’s ETH holdings as well as
additional data regarding the Trust. The
Trust will provide an Intraday
Indicative Value (‘‘IIV’’) per Share
updated every 15 seconds, as calculated
by the Exchange or a third-party
financial data provider during the
Exchange’s Regular Trading Hours (9:30
a.m. to 4:00 p.m. E.T.). The IIV will be
calculated by using the prior day’s
closing NAV per Share as a base and
updating that value during Regular
Trading Hours to reflect changes in the
value of the Trust’s ETH holdings
during the trading day.
The IIV disseminated during Regular
Trading Hours should not be viewed as
an actual real-time update of the NAV,
which will be calculated only once at
the end of each trading day. The IIV will
be widely disseminated on a per Share
basis every 15 seconds during the
Exchange’s Regular Trading Hours by
one or more major market data vendors.
In addition, the IIV will be available
through on-line information services.
The website for the Trust, which will
be publicly accessible at no charge, will
contain the following information: (a)
the current NAV per Share daily and the
prior business day’s NAV and the
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reported closing price; (b) the BZX
Official Closing Price 20 in relation to
the NAV as of the time the NAV is
calculated and a calculation of the
premium or discount of such price
against such NAV; (c) data in chart form
displaying the frequency distribution of
discounts and premiums of the Official
Closing Price against the NAV, within
appropriate ranges for each of the four
previous calendar quarters (or for the
life of the Trust, if shorter); (d) the
prospectus; and (e) other applicable
quantitative information. The Trust will
also disseminate the Trust’s holdings on
a daily basis on the Trust’s website. The
price of ETH will be made available by
one or more major market data vendors,
updated at least every 15 seconds
during Regular Trading Hours.
Information about the Benchmark,
including key elements of how the
Benchmark is calculated, will be
publicly available at https://
www.marketvector.com/.
The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’).
Quotation and last sale information
for ETH is widely disseminated through
a variety of major market data vendors,
including Bloomberg and Reuters, as
well as the Benchmark. Information
relating to trading, including price and
volume information, in ETH is available
from major market data vendors and
from the exchanges on which ETH are
traded. Depth of book information is
also available from ETH exchanges. The
normal trading hours for ETH exchanges
are 24 hours per day, 365 days per year.
The ETH Custodian
The Custodian’s services (i) allow
ETH to be deposited from a public
blockchain address to the Trust’s ETH
account and (ii) allow ETH to be
withdrawn from the ETH account to a
public blockchain address as instructed
by the Trust. The Custody Agreement
requires the Custodian to hold the
Trust’s ETH in cold storage, unless
required to facilitate withdrawals as a
temporary measure. The Custodian will
use segregated cold storage ETH
addresses for the Trust which are
separate from the ETH addresses that
the Custodian uses for its other
20 As defined in Rule 11.23(a)(3), the term ‘‘BZX
Official Closing Price’’ shall mean the price
disseminated to the consolidated tape as the market
center closing trade.
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customers and which are directly
verifiable via the ETH blockchain. The
Custodian will safeguard the private
keys to the ETH associated with the
Trust’s ETH account. The Custodian
will at all times record and identify in
its books and records that such ETH
constitutes the property of the Trust.
The Custodian will not withdraw the
Trust’s ETH from the Trust’s account
with the Custodian, or loan,
hypothecate, pledge or otherwise
encumber the Trust’s ETH, without the
Trust’s instruction. If the custody
agreement terminates, the Sponsor may
appoint another custodian and the Trust
may enter into a custodian agreement
with such custodian.
Net Asset Value
NAV means the total assets of the
Trust including, but not limited to, all
ETH and cash, if any, less total
liabilities of the Trust, each determined
on the basis of generally accepted
accounting principles. The
Administrator will determine the NAV
of the Trust on each day that the
Exchange is open for regular trading, as
promptly as practical after 4:00 p.m.
EST. The NAV of the Trust is the
aggregate value of the Trust’s assets less
its estimated accrued but unpaid
liabilities (which include accrued
expenses). In determining the Trust’s
NAV, the Administrator values the ETH
held by the Trust based on the price set
by the MarketVectorTM Ethereum
Benchmark Rate as of 4:00 p.m. EST.
The Administrator also determines the
NAV per Share.
Creation and Redemption of Shares
According to the Registration
Statement, on any business day, an
authorized participant may place an
order to create one or more baskets.
Purchase orders must be placed by 4:00
p.m. Eastern Time, or the close of
regular trading on the Exchange,
whichever is earlier. The day on which
an order is received is considered the
purchase order date. The total deposit of
ETH required is an amount of ETH that
is in the same proportion to the total
assets of the Trust, net of accrued
expenses and other liabilities, on the
date the order to purchase is properly
received, as the number of Shares to be
created under the purchase order is in
proportion to the total number of Shares
outstanding on the date the order is
received. Each night, the Sponsor will
publish the amount of ETH that will be
required in exchange for each creation
order. The Administrator determines the
required deposit for a given day by
dividing the number of ETH held by the
Trust as of the opening of business on
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that business day, adjusted for the
amount of ETH constituting estimated
accrued but unpaid fees and expenses of
the Trust as of the opening of business
on that business day, by the quotient of
the number of Shares outstanding at the
opening of business divided by 50,000.
The procedures by which an authorized
participant can redeem one or more
Creation Baskets mirror the procedures
for the creation of Creation Baskets.
Commodity-Based Trust Shares—Rule
14.11(e)(4)
The Shares will be subject to BZX
Rule 14.11(e)(4), which sets forth the
initial and continued listing criteria
applicable to Commodity-Based Trust
Shares. The Exchange will obtain a
representation that the Trust’s NAV will
be calculated daily and that these values
and information about the assets of the
Trust will be made available to all
market participants at the same time.
The Exchange notes that, as defined in
Rule 14.11(e)(4)(C)(i), the Shares will be:
(a) issued by a trust that holds a
specified commodity 21 deposited with
the trust; (b) issued by such trust in a
specified aggregate minimum number in
return for a deposit of a quantity of the
underlying commodity; and (c) when
aggregated in the same specified
minimum number, may be redeemed at
a holder’s request by such trust which
will deliver to the redeeming holder the
quantity of the underlying commodity.
Upon termination of the Trust, the
Shares will be removed from listing.
The Trustee, Delaware Trust Company,
is a trust company having substantial
capital and surplus and the experience
and facilities for handling corporate
trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change
will be made to the trustee without prior
notice to and approval of the Exchange.
The Exchange also notes that, pursuant
to Rule 14.11(e)(4)(F), neither the
Exchange nor any agent of the Exchange
shall have any liability for damages,
claims, losses or expenses caused by
any errors, omissions or delays in
calculating or disseminating any
underlying commodity value, the
current value of the underlying
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21 For
purposes of Rule 14.11(e)(4), the term
commodity takes on the definition of the term as
provided in the Commodity Exchange Act. The
CFTC has stated that: ‘‘Certain digital assets,
including BTC, ETH, LTC, and at least two fiatbacked stablecoins, tether (‘‘USDT’’) and the
Binance USD (‘‘BUSD’’), as well as other virtual
currencies as alleged herein, are ‘‘commodities,’’ as
defined under section 1a(9) of the [Commodities
Exchange] Act, 7 U.S.C. 1a(9).’’ See Commodity
Futures Trading Commission v. Changpeng Zhao,
Binance Holdings Limited, Binance Holdings (IE)
Limited, Binance (Services) Holdings Limited, and
Samuel Lim, March 27, 2023 at 9.
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commodity required to be deposited to
the Trust in connection with issuance of
Commodity-Based Trust Shares;
resulting from any negligent act or
omission by the Exchange, or any agent
of the Exchange, or any act, condition or
cause beyond the reasonable control of
the Exchange, its agent, including, but
not limited to, an act of God; fire; flood;
extraordinary weather conditions; war;
insurrection; riot; strike; accident;
action of government; communications
or power failure; equipment or software
malfunction; or any error, omission or
delay in the reports of transactions in an
underlying commodity. Finally, as
required in Rule 14.11(e)(4)(G), the
Exchange notes that any registered
market maker (‘‘Market Maker’’) in the
Shares must file with the Exchange in
a manner prescribed by the Exchange
and keep current a list identifying all
accounts for trading in an underlying
commodity, related commodity futures
or options on commodity futures, or any
other related commodity derivatives,
which the registered Market Maker may
have or over which it may exercise
investment discretion. No registered
Market Maker shall trade in an
underlying commodity, related
commodity futures or options on
commodity futures, or any other related
commodity derivatives, in an account in
which a registered Market Maker,
directly or indirectly, controls trading
activities, or has a direct interest in the
profits or losses thereof, which has not
been reported to the Exchange as
required by this Rule. In addition to the
existing obligations under Exchange
rules regarding the production of books
and records (see, e.g., Rule 4.2), the
registered Market Maker in CommodityBased Trust Shares shall make available
to the Exchange such books, records or
other information pertaining to
transactions by such entity or registered
or non-registered employee affiliated
with such entity for its or their own
accounts for trading the underlying
physical commodity, related commodity
futures or options on commodity
futures, or any other related commodity
derivatives, as may be requested by the
Exchange.
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares.
The Exchange will halt trading in the
Shares under the conditions specified in
BZX Rule 11.18. Trading may be halted
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. These may include: (1) the
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extent to which trading is not occurring
in the ETH underlying the Shares; or (2)
whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. Trading in the
Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth
circumstances under which trading in
the Shares may be halted.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. BZX will allow trading
in the Shares during all trading sessions
on the Exchange. The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in BZX
Rule 11.11(a) the minimum price
variation for quoting and entry of orders
in securities traded on the Exchange is
$0.01 where the price is greater than
$1.00 per share or $0.0001 where the
price is less than $1.00 per share.
Surveillance
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including
Commodity-Based Trust Shares. The
issuer has represented to the Exchange
that it will advise the Exchange of any
failure by the Trust or the Shares to
comply with the continued listing
requirements, and, pursuant to its
obligations under section 19(g)(1) of the
Exchange Act, the Exchange will surveil
for compliance with the continued
listing requirements. If the Trust or the
Shares are not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under Exchange Rule 14.12.
The Exchange may obtain information
regarding trading in the Shares and ETH
Futures via the Intermarket Surveillance
Group (‘‘ISG’’), from other exchanges
who are members or affiliates of the ISG,
or with which the Exchange has entered
into a comprehensive surveillance
sharing agreement.22
22 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
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Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (i) the
procedures for the creation and
redemption of Baskets (and that the
Shares are not individually redeemable);
(ii) BZX Rule 3.7, which imposes
suitability obligations on Exchange
members with respect to recommending
transactions in the Shares to customers;
(iii) how information regarding the IIV
and the Trust’s NAV are disseminated;
(iv) the risks involved in trading the
Shares outside of Regular Trading
Hours 23 when an updated IIV will not
be calculated or publicly disseminated;
(v) the requirement that members
23 Regular Trading Hours is the time between 9:30
a.m. and 4:00 p.m. Eastern Time.
24 Unless otherwise noted, all data and analysis
presented in this section and referenced elsewhere
in the filing has been provided by the Sponsor.
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deliver a prospectus to investors
purchasing newly issued Shares prior to
or concurrently with the confirmation of
a transaction; and (vi) trading
information.
In addition, the Information Circular
will advise members, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Shares. Members
purchasing the Shares for resale to
investors will deliver a prospectus to
such investors. The Information Circular
will also discuss any exemptive, noaction and interpretive relief granted by
the Commission from any rules under
the Act.
CME ETH Futures 24
CME began offering trading in Ether
Futures in February 2021. Each contract
represents 50 ETH and is based on the
CME CF Ether-Dollar Reference Rate.25
25 The CME CF Ether-Dollar Reference Rate is
based on a publicly available calculation
methodology based on pricing sourced from several
crypto exchanges and trading platforms, including
Bitstamp, Coinbase, Gemini, itBit, Kraken, and
LMAX Digital.
26 Source: CME, 7/31/23.
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The contracts trade and settle like other
cash-settled commodity futures
contracts. Most measurable metrics
related to CME ETH Futures have
generally trended up since launch,
although some metrics have slowed
recently. For example, there were
76,293 CME ETH Futures contracts
traded in July 2023 (approximately $7.3
billion) compared to 70,305 ($11.1
billion) and 158,409 ($7.5 billion)
contracts traded in July 2021, and July
2022 respectively.26 The Sponsor’s
research indicates daily correlation
between the spot ETH and the CME ETH
Futures is 0.998 from the period of 9/
1/22 through 9/1/23.
The number of large open interest
holders 27 and unique accounts trading
CME ETH Futures have both increased,
even in the face of heightened Ether
price volatility.
BILLING CODE 8011–01–P
27 A large open interest holder in CME ETH
Futures is an entity that holds at least 25 contracts,
which is the equivalent of 1250 ether. At a price
of approximately $1,867 per ether on 7/31/2023,
more than 59 firms had outstanding positions of
greater than $2.3 million in CME ETH Futures.
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Section 6(b)(5) and the Applicable
Standards
The Commission has approved
numerous series of Trust Issued
Receipts,28 including Commodity-Based
Trust Shares,29 to be listed on U.S.
national securities exchanges. In order
for any proposed rule change from an
exchange to be approved, the
Commission must determine that,
among other things, the proposal is
consistent with the requirements of
section 6(b)(5) of the Act, specifically
including: (i) the requirement that a
national securities exchange’s rules are
designed to prevent fraudulent and
manipulative acts and practices; 30 and
28 See
Exchange Rule 14.11(f).
Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
30 The Exchange believes that ETH is resistant to
price manipulation and that ‘‘other means to
prevent fraudulent and manipulative acts and
practices’’ exist to justify dispensing with the
requisite surveillance sharing agreement. The
geographically diverse and continuous nature of
ETH trading render it difficult and prohibitively
costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively
slow speed of transactions, and the capital
necessary to maintain a significant presence on
each trading platform make manipulation of ETH
prices through continuous trading activity
challenging. To the extent that there are ETH
exchanges engaged in or allowing wash trading or
other activity intended to manipulate the price of
ETH on other markets, such pricing does not
normally impact prices on other exchange because
participants will generally ignore markets with
quotes that they deem non-executable. Moreover,
the linkage between the ETH markets and the
presence of arbitrageurs in those markets means
that the manipulation of the price of ETH price on
any single venue would require manipulation of the
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29 Commodity-Based
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(ii) the requirement that an exchange
proposal be designed, in general, to
protect investors and the public interest.
The Exchange believes that this
proposal is consistent with the
requirements of section 6(b)(5) of the
Act and that this filing sufficiently
demonstrates that the CME ETH Futures
market represents a regulated market of
significant size and that, on the whole,
the manipulation concerns previously
articulated by the Commission are
sufficiently mitigated to the point that
they are outweighed by quantifiable
investor protection issues that would be
resolved by approving this proposal.
(i) Designed To Prevent Fraudulent and
Manipulative Acts and Practices
In order to meet this standard in a
proposal to list and trade a series of
Commodity-Based Trust Shares, the
Commission requires that an exchange
demonstrate that there is a
comprehensive surveillance-sharing
agreement in place 31 with a regulated
global ETH price in order to be effective.
Arbitrageurs must have funds distributed across
multiple trading platforms in order to take
advantage of temporary price dislocations, thereby
making it unlikely that there will be strong
concentration of funds on any particular ETH
exchange or OTC platform. As a result, the potential
for manipulation on a trading platform would
require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any
cross-market pricing differences.
31 As previously articulated by the Commission,
‘‘The standard requires such surveillance-sharing
agreements since ‘‘they provide a necessary
deterrent to manipulation because they facilitate the
availability of information needed to fully
investigate a manipulation if it were to occur.’’ The
Commission has emphasized that it is essential for
an exchange listing a derivative securities product
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market of significant size. Both the
Exchange and CME are members of ISG.
The only remaining issue to be
addressed is whether the ETH Futures
market constitutes a market of
significant size, which both the
Exchange and the Sponsor believe that
it does. The terms ‘‘significant market’’
and ‘‘market of significant size’’ include
a market (or group of markets) as to
which: (a) there is a reasonable
likelihood that a person attempting to
manipulate the ETP would also have to
trade on that market to manipulate the
ETP, so that a surveillance-sharing
agreement would assist the listing
exchange in detecting and deterring
misconduct; and (b) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.32
The Commission has also recognized
that the ‘‘regulated market of significant
to enter into a surveillance- sharing agreement with
markets trading underlying securities for the listing
exchange to have the ability to obtain information
necessary to detect, investigate, and deter fraud and
market manipulation, as well as violations of
exchange rules and applicable federal securities
laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides
for the sharing of information about market trading
activity, clearing activity, and customer identity;
that the parties to the agreement have reasonable
ability to obtain access to and produce requested
information; and that no existing rules, laws, or
practices would impede one party to the agreement
from obtaining this information from, or producing
it to, the other party.’’ The Commission has
historically held that joint membership in the ISG
constitutes such a surveillance sharing agreement.
See Securities Exchange Act Release No. 88284
(February 26, 2020), 85 FR 12595 (March 3, 2020)
(SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix
Disapproval’’).
32 See Wilshire Phoenix Disapproval.
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size’’ standard is not the only means for
satisfying section 6(b)(5) of the act,
specifically providing that a listing
exchange could demonstrate that ‘‘other
means to prevent fraudulent and
manipulative acts and practices’’ are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement.33 34
(a) Manipulation of the ETP
The significant market test requires
that there is a reasonable likelihood that
a person attempting to manipulate the
ETP would also have to trade on that
market to manipulate the ETP, so that a
surveillance-sharing agreement would
assist the listing exchange in detecting
and deterring misconduct.
In light of the similarly high
correlation between spot ETH/CME ETH
Futures and spot bitcoin/CME Bitcoin
Futures (.998 vs. .999, respectively),
applying the same rationale that the
Commission applied to a Bitcoin
Futures ETF in the Bitcoin Futures
Approvals also indicates that this test is
satisfied for this proposal. In the
Teucrium Approval, the SEC stated:
The CME ‘‘comprehensively surveils
futures market conditions and price
movements on a real-time and ongoing basis
in order to detect and prevent price
distortions, including price distortions
caused by manipulative efforts.’’ Thus, the
CME’s surveillance can reasonably be relied
upon to capture the effects on the CME
futures market caused by a person attempting
to manipulate the proposed futures ETP by
manipulating the price of CME futures
contracts, whether that attempt is made by
directly trading on the CME futures market
or indirectly by trading outside of the CME
futures market. As such, when the CME
shares its surveillance information with Arca,
the information would assist in detecting and
deterring fraudulent or manipulative
misconduct related to the non-cash assets
held by the proposed ETP.35
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The assumptions from this statement
are also true for CME ETH Futures. CME
33 See Winklevoss Order at 37580. The
Commission has also specifically noted that it ‘‘is
not applying a ‘cannot be manipulated’ standard;
instead, the Commission is examining whether the
proposal meets the requirements of the Exchange
Act and, pursuant to its Rules of Practice, places the
burden on the listing exchange to demonstrate the
validity of its contentions and to establish that the
requirements of the Exchange Act have been met.’’
Id. at 37582.
34 According to reports, the Commission is poised
to allow the launch of ETFs registered under the
Investment Company Act of 1940, as amended (the
‘‘1940 Act’’), that provide exposure to ETH
primarily through CME ETH Futures (‘‘ETH Futures
ETFs’’) as early as October 2023. Allowing such
products to list and trade is a productive first step
in providing U.S. investors and traders with
transparent, exchange-listed tools for expressing a
view on ETH. https://www.bloomberg.com/news/
articles/2023-08-17/sec-said-to-be-poised-to-allowus-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
35 See Teucrium Approval at 21679.
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ETH Futures pricing is based on pricing
from spot ETH markets. The statement
from the Teucrium Approval that
‘‘CME’s surveillance can reasonably be
relied upon to capture the effects on the
CME BTC futures market caused by a
person attempting to manipulate the
proposed futures ETP by manipulating
the price of CME BTC futures
contracts. . .indirectly by trading
outside of the CME BTC futures
market,’’ makes clear that the
Commission believes that CME’s
surveillance can capture the effects of
trading on the relevant spot markets on
the pricing of CME BTC Futures. This
same logic would extend to CME ETH
Futures markets where CME’s
surveillance would be able to capture
the effects of trading on the relevant
spot markets on the pricing of CME ETH
Futures. This was further acknowledged
in the Grayscale lawsuit when Judge
Rao stated ‘‘. . .the Commission in the
Teucrium order recognizes that the
futures prices are influenced by the spot
prices, and the Commission concludes
in approving futures ETPs that any
fraud on the spot market can be
adequately addressed by the fact that
the futures market is a regulated
one. . .’’ The Exchange agrees with the
Commission on this point and notes that
the pricing mechanism applicable to the
Shares is similar to that of the CME ETH
Futures. This view is also consistent
with the Sponsor’s research.
As such, the part (a) of the significant
market test outlined above is satisfied
and that common membership in ISG
between the Exchange and CME would
assist the listing exchange in detecting
and deterring misconduct in the Shares
in the same way that it would be for
both Bitcoin Futures ETPs and Spot
Bitcoin ETPs.
(b) Predominant Influence on Prices in
Spot and ETH Futures
The Exchange and Sponsor also
believe that trading in the Shares would
not be the predominant force on prices
in the CME ETH Futures market for a
number of reasons. First, because the
Trust would not hold CME ETH Futures
contracts, the only way that it could be
the predominant force on prices in that
market is through the spot markets that
CME ETH Futures contracts use for
pricing.36 The Sponsor notes that ETH
total 24-hour spot trading volume has
36 This logic is reflected by the court in the
Grayscale Order at 17–18. Specifically, the court
found that ‘‘Because Grayscale owns no futures
contracts, trading in Grayscale can affect the futures
market only through the spot market. . .But
Grayscale holds just 3.4 percent of outstanding
bitcoin, and the Commission did not suggest
Grayscale can dominate the price of bitcoin.’’
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averaged $9.4B over the year ending
September 1, 2023,37 with
approximately $950M occurring on
venues whose trades are included in the
sponsor’s benchmark.38 The Sponsor
expects that the Trust would represent
a very small percentage of this daily
trading volume in the spot ETH market
even in its most aggressive projections
for the Trust’s assets and, thus, the Trust
would not have an impact on the spot
market and therefore could not be the
predominant force on prices in the CME
ETH Futures market. Second, much like
the CME Bitcoin Futures market, the
CME ETH Futures market has
progressed and matured significantly.
As the court found in the Grayscale
Order ‘‘Because the spot market is
deeper and more liquid than the futures
market, manipulation should be more
difficult, not less.’’ The Exchange and
sponsor agree with this sentiment and
believe it applies equally to the spot
ETH and CME ETH Futures markets.
(c) Other Means To Prevent Fraudulent
and Manipulative Acts and Practices
As noted above, the Commission also
permits a listing exchange to
demonstrate that ‘‘other means to
prevent fraudulent and manipulative
acts and practices’’ are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement. The
Exchange and Sponsor believe that such
conditions are present.
The Exchange is proposing to take
additional steps to those described
above to supplement its ability to obtain
information that would be helpful in
detecting, investigating, and deterring
fraud and market manipulation in the
Commodity-Based Trust Shares. On
June 21, 2023, the Exchange reached an
agreement on terms with Coinbase, Inc.
(‘‘Coinbase’’), an operator of a United
States-based spot trading platform for
ETH that represents a substantial
portion of US-based and USD
denominated ETH trading,39 to enter
into a surveillance-sharing agreement
(‘‘Spot Crypto SSA’’) and executed an
associated term sheet. Based on this
agreement on terms, the Exchange and
Coinbase will finalize and execute a
definitive agreement that the parties
expect to be executed prior to allowing
trading of the Commodity-Based Trust
Shares.
The Spot Crypto SSA is expected to
be a bilateral surveillance-sharing
37 Source:
TokenTerminal.
VanEck research, CryptoCompare.
39 According to a report from The Block, Coinbase
represented 45%% of USD denominated exchange
trading volume in August 2023. https://
www.theblock.co/data/crypto-markets/spot/usdsupport-exchange-volume-market-share.
38 Source:
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agreement between the Exchange and
Coinbase that is intended to supplement
the Exchange’s market surveillance
program. The Spot Crypto SSA is
expected to have the hallmarks of a
surveillance-sharing agreement between
two members of the ISG, which would
give the Exchange supplemental access
to data regarding spot ETH trades on
Coinbase where the Exchange
determines it is necessary as part of its
surveillance program for the
Commodity-Based Trust Shares.40 This
means that the Exchange expects to
receive market data for orders and
trades from Coinbase, which it will
utilize in surveillance of the trading of
Commodity-Based Trust Shares. In
addition, the Exchange can request
further information from Coinbase
related to spot ETH trading activity on
the Coinbase exchange platform, if the
Exchange determines that such
information would be necessary to
detect and investigate potential
manipulation in the trading of the
Commodity-Based Trust Shares.41
(ii) Designed To Protect Investors and
the Public Interest
The Exchange believes that the
proposal is designed to protect investors
and the public interest. Over the past
several years, U.S. investor exposure to
ETH through OTC ETH Funds is greater
than $5 billion. With that growth, so too
has grown the quantifiable investor
protection issues to U.S. investors
through premium/discount volatility
and management fees for OTC ETH
Funds. The Exchange believes that, as
described above, the concerns related to
the prevention of fraudulent and
manipulative acts and practices have
been sufficiently addressed to be
consistent with the Act and, to the
extent that the Commission disagrees
with that assertion, such concerns are
now at the very least outweighed by
investor protection concerns. As such,
the Exchange believes that approving
this proposal (and comparable
proposals) provides the Commission
with the opportunity to allow U.S.
investors with access to ETH in a
regulated and transparent exchangetraded vehicle that would act to limit
risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii)
reducing management fees through
meaningful competition; (iii) reducing
risks and costs associated with investing
40 For additional information regarding ISG and
the hallmarks of surveillance-sharing between ISG
members, see https://isgportal.org/overview.
41 The Exchange also notes that it already has in
place ISG-like surveillance sharing agreement with
Cboe Digital Exchange, LLC and Cboe Clear Digital,
LLC.
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in ETH Futures ETFs and operating
companies that are imperfect proxies for
ETH exposure; and (iv) providing an
alternative to custodying spot ETH.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with section 6(b)
of the Act 42 in general and section
6(b)(5) of the Act 43 in particular in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The Commission has approved
numerous series of Trust Issued
Receipts, including Commodity-Based
Trust Shares, to be listed on U.S.
national securities exchanges. In order
for any proposed rule change from an
exchange to be approved, the
Commission must determine that,
among other things, the proposal is
consistent with the requirements of
section 6(b)(5) of the Act, specifically
including: (i) the requirement that a
national securities exchange’s rules are
designed to prevent fraudulent and
manipulative acts and practices; 44 and
(ii) the requirement that an exchange
proposal be designed, in general, to
42 15
U.S.C. 78f.
U.S.C. 78f(b)(5).
44 The Exchange believes that ETH is resistant to
price manipulation and that ‘‘other means to
prevent fraudulent and manipulative acts and
practices’’ exist to justify dispensing with the
requisite surveillance sharing agreement. The
geographically diverse and continuous nature of
ETH trading render it difficult and prohibitively
costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively
slow speed of transactions, and the capital
necessary to maintain a significant presence on
each trading platform make manipulation of ETH
prices through continuous trading activity
challenging. To the extent that there are ETH
exchanges engaged in or allowing wash trading or
other activity intended to manipulate the price of
ETH on other markets, such pricing does not
normally impact prices on other exchange because
participants will generally ignore markets with
quotes that they deem non-executable. Moreover,
the linkage between the ETH markets and the
presence of arbitrageurs in those markets means
that the manipulation of the price of ETH price on
any single venue would require manipulation of the
global ETH price in order to be effective.
Arbitrageurs must have funds distributed across
multiple trading platforms in order to take
advantage of temporary price dislocations, thereby
making it unlikely that there will be strong
concentration of funds on any particular ETH
exchange or OTC platform. As a result, the potential
for manipulation on a trading platform would
require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any
cross-market pricing differences.
43 15
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66085
protect investors and the public interest.
The Exchange believes that this
proposal is consistent with the
requirements of section 6(b)(5) of the
Act and that this filing sufficiently
demonstrates that the CME ETH Futures
market represents a regulated market of
significant size and that, on the whole,
the manipulation concerns previously
articulated by the Commission are
sufficiently mitigated to the point that
they are outweighed by quantifiable
investor protection issues that would be
resolved by approving this proposal.
(i) Designed To Prevent Fraudulent and
Manipulative Acts and Practices
In order to meet this standard in a
proposal to list and trade a series of
Commodity-Based Trust Shares, the
Commission requires that an exchange
demonstrate that there is a
comprehensive surveillance-sharing
agreement in place with a regulated
market of significant size. Both the
Exchange and CME are members of ISG.
The only remaining issue to be
addressed is whether the ETH Futures
market constitutes a market of
significant size, which both the
Exchange and the Sponsor believe that
it does. The terms ‘‘significant market’’
and ‘‘market of significant size’’ include
a market (or group of markets) as to
which: (a) there is a reasonable
likelihood that a person attempting to
manipulate the ETP would also have to
trade on that market to manipulate the
ETP, so that a surveillance-sharing
agreement would assist the listing
exchange in detecting and deterring
misconduct; and (b) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.45
The Commission has also recognized
that the ‘‘regulated market of significant
size’’ standard is not the only means for
satisfying section 6(b)(5) of the act,
specifically providing that a listing
exchange could demonstrate that ‘‘other
means to prevent fraudulent and
manipulative acts and practices’’ are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement.46 47
45 See
Wilshire Phoenix Disapproval.
Winklevoss Order at 37580. The
Commission has also specifically noted that it ‘‘is
not applying a ‘cannot be manipulated’ standard;
instead, the Commission is examining whether the
proposal meets the requirements of the Exchange
Act and, pursuant to its Rules of Practice, places the
burden on the listing exchange to demonstrate the
validity of its contentions and to establish that the
requirements of the Exchange Act have been met.’’
Id. at 37582.
47 According to reports, the Commission is poised
to allow the launch of ETFs registered under the
46 See
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(a) Manipulation of the ETP
The significant market test requires
that there is a reasonable likelihood that
a person attempting to manipulate the
ETP would also have to trade on that
market to manipulate the ETP, so that a
surveillance-sharing agreement would
assist the listing exchange in detecting
and deterring misconduct.
In light of the similarly high
correlation between spot ETH/CME ETH
Futures and spot bitcoin/CME Bitcoin
Futures (.998 vs. .999, respectively),
applying the same rationale that the
Commission applied to a Bitcoin
Futures ETF in the Bitcoin Futures
Approvals also indicates that this test is
satisfied for this proposal. In the
Teucrium Approval, the SEC stated:
The CME ‘‘comprehensively surveils
futures market conditions and price
movements on a real-time and ongoing basis
in order to detect and prevent price
distortions, including price distortions
caused by manipulative efforts.’’ Thus, the
CME’s surveillance can reasonably be relied
upon to capture the effects on the CME
futures market caused by a person attempting
to manipulate the proposed futures ETP by
manipulating the price of CME futures
contracts, whether that attempt is made by
directly trading on the CME futures market
or indirectly by trading outside of the CME
futures market. As such, when the CME
shares its surveillance information with Arca,
the information would assist in detecting and
deterring fraudulent or manipulative
misconduct related to the non-cash assets
held by the proposed ETP.48
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The assumptions from this statement
are also true for CME ETH Futures. CME
ETH Futures pricing is based on pricing
from spot ETH markets. The statement
from the Teucrium Approval that
‘‘CME’s surveillance can reasonably be
relied upon to capture the effects on the
CME BTC futures market caused by a
person attempting to manipulate the
proposed futures ETP by manipulating
the price of CME BTC futures
contracts. . .indirectly by trading
outside of the CME BTC futures
market,’’ makes clear that the
Commission believes that CME’s
surveillance can capture the effects of
trading on the relevant spot markets on
the pricing of CME BTC Futures. This
same logic would extend to CME ETH
Futures markets where CME’s
Investment Company Act of 1940, as amended (the
‘‘1940 Act’’), that provide exposure to ETH
primarily through CME ETH Futures (‘‘ETH Futures
ETFs’’) as early as October 2023. Allowing such
products to list and trade is a productive first step
in providing U.S. investors and traders with
transparent, exchange-listed tools for expressing a
view on ETH. https://www.bloomberg.com/news/
articles/2023-08-17/sec-said-to-be-poised-to-allowus-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
48 See Teucrium Approval at 21679.
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18:18 Sep 25, 2023
Jkt 259001
surveillance would be able to capture
the effects of trading on the relevant
spot markets on the pricing of CME ETH
Futures. This was further acknowledged
in the Grayscale lawsuit when Judge
Rao stated ‘‘. . .the Commission in the
Teucrium order recognizes that the
futures prices are influenced by the spot
prices, and the Commission concludes
in approving futures ETPs that any
fraud on the spot market can be
adequately addressed by the fact that
the futures market is a regulated
one. . .’’ The Exchange agrees with the
Commission on this point and notes that
the pricing mechanism applicable to the
Shares is similar to that of the CME ETH
Futures. This view is also consistent
with the Sponsor’s research.
As such, the part (a) of the significant
market test outlined above is satisfied
and that common membership in ISG
between the Exchange and CME would
assist the listing exchange in detecting
and deterring misconduct in the Shares
in the same way that it would be for
both Bitcoin Futures ETPs and Spot
Bitcoin ETPs.
(b) Predominant Influence on Prices in
Spot and ETH Futures
The Exchange and Sponsor also
believe that trading in the Shares would
not be the predominant force on prices
in the CME ETH Futures market for a
number of reasons. First, because the
Trust would not hold CME ETH Futures
contracts, the only way that it could be
the predominant force on prices in that
market is through the spot markets that
CME ETH Futures contracts use for
pricing.49 The Sponsor notes that ETH
total 24-hour spot trading volume has
averaged $9.4B over the year ending
September 1, 2023,50 with
approximately $950M occurring on
venues whose trades are included in the
sponsor’s benchmark.51 The Sponsor
expects that the Trust would represent
a very small percentage of this daily
trading volume in the spot ETH market
even in its most aggressive projections
for the Trust’s assets and, thus, the Trust
would not have an impact on the spot
market and therefore could not be the
predominant force on prices in the CME
ETH Futures market. Second, much like
the CME Bitcoin Futures market, the
CME ETH Futures market has
49 This logic is reflected by the court in the
Grayscale Order at 17–18. Specifically, the court
found that ‘‘Because Grayscale owns no futures
contracts, trading in Grayscale can affect the futures
market only through the spot market. . .But
Grayscale holds just 3.4 percent of outstanding
bitcoin, and the Commission did not suggest
Grayscale can dominate the price of bitcoin.’’
50 Source: TokenTerminal.
51 Source: VanEck research, CryptoCompare.
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Fmt 4703
Sfmt 4703
progressed and matured significantly.
As the court found in the Grayscale
Order, ‘‘Because the spot market is
deeper and more liquid than the futures
market, manipulation should be more
difficult, not less.’’ The Exchange and
Sponsor agree with this sentiment and
believe it applies equally to the spot
ETH and CME ETH Futures markets.
(c) Other Means To Prevent Fraudulent
and Manipulative Acts and Practices
As noted above, the Commission also
permits a listing exchange to
demonstrate that ‘‘other means to
prevent fraudulent and manipulative
acts and practices’’ are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement. The
Exchange and Sponsor believe that such
conditions are present.
The Exchange is proposing to take
additional steps to those described
above to supplement its ability to obtain
information that would be helpful in
detecting, investigating, and deterring
fraud and market manipulation in the
Commodity-Based Trust Shares. On
June 21, 2023, the Exchange reached an
agreement on terms with Coinbase, Inc.
(‘‘Coinbase’’), an operator of a United
States-based spot trading platform for
ETH that represents a substantial
portion of US-based and USD
denominated ETH trading, to enter into
a Spot Crypto SSA and executed an
associated term sheet. Based on this
agreement on terms, the Exchange and
Coinbase will finalize and execute a
definitive agreement that the parties
expect to be executed prior to allowing
trading of the Commodity-Based Trust
Shares.
The Spot Crypto SSA is expected to
be a bilateral surveillance-sharing
agreement between the Exchange and
Coinbase that is intended to supplement
the Exchange’s market surveillance
program. The Spot Crypto SSA is
expected to have the hallmarks of a
surveillance-sharing agreement between
two members of the ISG, which would
give the Exchange supplemental access
to data regarding spot ETH trades on
Coinbase where the Exchange
determines it is necessary as part of its
surveillance program for the
Commodity-Based Trust Shares. This
means that the Exchange expects to
receive market data for orders and
trades from Coinbase, which it will
utilize in surveillance of the trading of
Commodity-Based Trust Shares. In
addition, the Exchange can request
further information from Coinbase
related to spot ETH trading activity on
the Coinbase exchange platform, if the
Exchange determines that such
information would be necessary to
E:\FR\FM\26SEN1.SGM
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detect and investigate potential
manipulation in the trading of the
Commodity-Based Trust Shares.
lotter on DSK11XQN23PROD with NOTICES1
(ii) Designed To Protect Investors and
the Public Interest
The Exchange believes that the
proposal is designed to protect investors
and the public interest. Over the past
several years, U.S. investor exposure to
ETH through OTC ETH Funds is greater
than $5 billion. With that growth, so too
has grown the quantifiable investor
protection issues to U.S. investors
through premium/discount volatility
and management fees for OTC ETH
Funds. The Exchange believes that, as
described above, the concerns related to
the prevention of fraudulent and
manipulative acts and practices have
been sufficiently addressed to be
consistent with the Act and, to the
extent that the Commission disagrees
with that assertion, such concerns are
now at the very least outweighed by
investor protection concerns. As such,
the Exchange believes that approving
this proposal (and comparable
proposals) provides the Commission
with the opportunity to allow U.S.
investors with access to ETH in a
regulated and transparent exchangetraded vehicle that would act to limit
risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii)
reducing management fees through
meaningful competition; (iii) reducing
risks and costs associated with investing
in ETH Futures ETFs and operating
companies that are imperfect proxies for
ETH exposure; and (iv) providing an
alternative to custodying spot ETH.
Commodity-Based Trust Shares—Rule
14.11(e)(4)
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed on the Exchange pursuant to
the initial and continued listing criteria
in Exchange Rule 14.11(e)(4). The
Exchange believes that its surveillance
procedures are adequate to properly
monitor the trading of the Shares on the
Exchange during all trading sessions
and to deter and detect violations of
Exchange rules and the applicable
federal securities laws. Trading of the
Shares through the Exchange will be
subject to the Exchange’s surveillance
procedures for derivative products,
including Commodity-Based Trust
Shares. The issuer has represented to
the Exchange that it will advise the
Exchange of any failure by the Trust or
the Shares to comply with the
continued listing requirements, and,
pursuant to its obligations under section
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18:18 Sep 25, 2023
Jkt 259001
19(g)(1) of the Exchange Act, the
Exchange will surveil for compliance
with the continued listing requirements.
If the Trust or the Shares are not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
Exchange Rule 14.12. The Exchange
may obtain information regarding
trading in the Shares and listed ETH
derivatives via the ISG, from other
exchanges who are members or affiliates
of the ISG, or with which the Exchange
has entered into a comprehensive
surveillance sharing agreement.
Availability of Information
The Exchange also believes that the
proposal promotes market transparency
in that a large amount of information is
currently available about ETH and will
be available regarding the Trust and the
Shares. In addition to the price
transparency of the Index, the Trust will
provide information regarding the
Trust’s ETH holdings as well as
additional data regarding the Trust. The
Trust will provide an IIV per Share
updated every 15 seconds, as calculated
by the Exchange or a third-party
financial data provider during the
Exchange’s Regular Trading Hours (9:30
a.m. to 4:00 p.m. E.T.). The IIV will be
calculated by using the prior day’s
closing NAV per Share as a base and
updating that value during Regular
Trading Hours to reflect changes in the
value of the Trust’s ETH holdings
during the trading day.
The IIV disseminated during Regular
Trading Hours should not be viewed as
an actual real-time update of the NAV,
which will be calculated only once at
the end of each trading day. The IIV will
be widely disseminated on a per Share
basis every 15 seconds during the
Exchange’s Regular Trading Hours by
one or more major market data vendors.
In addition, the IIV will be available
through on-line information services.
The website for the Trust, which will
be publicly accessible at no charge, will
contain the following information: (a)
the current NAV per Share daily and the
prior business day’s NAV and the
reported closing price; (b) the BZX
Official Closing Price in relation to the
NAV as of the time the NAV is
calculated and a calculation of the
premium or discount of such price
against such NAV; (c) data in chart form
displaying the frequency distribution of
discounts and premiums of the Official
Closing Price against the NAV, within
appropriate ranges for each of the four
previous calendar quarters (or for the
life of the Trust, if shorter); (d) the
prospectus; and (e) other applicable
quantitative information. The Trust will
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Fmt 4703
Sfmt 4703
66087
also disseminate the Trust’s holdings on
a daily basis on the Trust’s website. The
price of ETH will be made available by
one or more major market data vendors,
updated at least every 15 seconds
during Regular Trading Hours.
Information about the Index, including
key elements of how the Index is
calculated, will be publicly available at
The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA.
Quotation and last sale information
for ETH is widely disseminated through
a variety of major market data vendors,
including Bloomberg and Reuters, as
well as the Index. Information relating
to trading, including price and volume
information, in ETH is available from
major market data vendors and from the
exchanges on which ETH are traded.
Depth of book information is also
available from ETH exchanges. The
normal trading hours for ETH exchanges
are 24 hours per day, 365 days per year.
In sum, the Exchange believes that
this proposal is consistent with the
requirements of section 6(b)(5) of the
Act, that this filing sufficiently
demonstrates that the CME ETH Futures
market represents a regulated market of
significant size, and that on the whole
the manipulation concerns previously
articulated by the Commission are
sufficiently mitigated to the point that
they are outweighed by investor
protection issues that would be resolved
by approving this proposal. For the
above reasons, the Exchange believes
that the proposed rule change is
consistent with the requirements of
section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change,
rather will facilitate the listing and
trading of an additional exchange-traded
product that will enhance competition
among both market participants and
listing venues, to the benefit of investors
and the marketplace.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
lotter on DSK11XQN23PROD with NOTICES1
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CboeBZX–2023–069. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
18:18 Sep 25, 2023
The subject matter of the closed
meeting will consist of the following
topics:
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings;
Resolution of litigation claims; and
Other matters relating to examinations
and enforcement proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting agenda items that
may consist of adjudicatory,
examination, litigation, or regulatory
matters.
CONTACT PERSON FOR MORE INFORMATION:
For further information; please contact
Vanessa A. Countryman from the Office
of the Secretary at (202) 551–5400.
Authority: 5 U.S.C. 552b.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.52
Sherry R. Haywood,
Assistant Secretary.
Dated: September 21, 2023.
Vanessa A. Countryman,
Secretary.
Jkt 259001
[FR Doc. 2023–20974 Filed 9–22–23; 8:45 am]
BILLING CODE 8011–01–P
[FR Doc. 2023–20813 Filed 9–25–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98451; File No. SR–Phlx–
2023–07]
Sunshine Act Meetings
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Order Granting Approval of
a Proposed Rule Change, as Modified
by Amendment No. 1, To Make
Permanent Certain P.M.-Settled Pilots
1:00 p.m. on Thursday,
September 28, 2023.
PLACE: The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
STATUS: This meeting will be closed to
the public.
MATTERS TO BE CONSIDERED:
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters also may be present.
In the event that the time, date, or
location of this meeting changes, an
announcement of the change, along with
the new time, date, and/or place of the
meeting will be posted on the
Commission’s website at https://
www.sec.gov.
The General Counsel of the
Commission, or her designee, has
certified that, in her opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B)
and (10) and 17 CFR 200.402(a)(3),
(a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and
(a)(10), permit consideration of the
scheduled matters at the closed meeting.
TIME AND DATE:
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CboeBZX–2023–069 on the subject line.
VerDate Sep<11>2014
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–069 and should be
submitted on or before October 17,
2023.
52 17
PO 00000
CFR 200.30–3(a)(12).
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Fmt 4703
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September 20, 2023.
I. Introduction
On February 23, 2023, Nasdaq PHLX
LLC (‘‘Phlx’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to make permanent the pilot
program to permit the listing and
trading of options based on 1/100 the
value of the Nasdaq–100 Index
(‘‘Nasdaq–100’’) and the Exchange’s
nonstandard expirations pilot program
(collectively, the ‘‘Programs’’). The
proposed rule change was published for
comment in the Federal Register on
March 2, 2023.3 On April 7, 2023,
pursuant to section 19(b)(2) of the Act,4
the Commission designated a longer
period within which to approve the
proposed rule change, disapprove the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 96980
(February 24, 2023), 88 FR 13161 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
2 17
E:\FR\FM\26SEN1.SGM
26SEN1
]]>Agencies
[Federal Register Volume 88, Number 185 (Tuesday, September 26, 2023)]
[Notices]
[Pages 66076-66088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-20813]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98457; File No. SR-CboeBZX-2023-069]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To List and Trade Shares of the VanEck
Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares
September 20, 2023.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 6, 2023, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the VanEck Ethereum
ETF (the ``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares.
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\3\ The Trust was formed as a Delaware statutory trust on June
22, 2021 and is operated as a grantor trust for U.S. federal tax
purposes. The Trust has no fixed termination date.
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The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade the Shares of the VanEck
Ethereum Trust \4\ under BZX Rule 14.11(e)(4),\5\ which governs the
listing
[[Page 66077]]
and trading of Commodity-Based Trust Shares on the Exchange.\6\
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\4\ On May 7, 2021 the Trust filed with the Commission an
initial registration statement (the ``Registration Statement'') on
Form S-1 under the Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is based, in part,
on the Registration Statement. The Registration Statement is not yet
effective and the Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
\5\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\6\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
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According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\7\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is
subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
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\7\ 15 U.S.C. 80a-1.
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VanEck Ethereum Trust
VanEck Digital Assets, LLC is the sponsor of the Trust (the
``Sponsor''). A third-party regulated custodian (the ``Custodian'')
will be responsible for custody of the Trust's Ether (``ETH'').
Delaware Trust Company is the trustee (``Trustee''). The State Street
Bank and Trust Company will be the administrator (``Administrator'')
and transfer agent (``Transfer Agent''). Van Eck Securities Corporation
will be the marketing agent (``Marketing Agent'') in connection with
the creation and redemption of ``Baskets'' of Shares. The Custodian
will be responsible for custody of the Trust's ETH.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust's net assets.
The Trust's assets will consist of ETH held by the Custodian on behalf
of the Trust. The Trust generally does not intend to hold cash or cash
equivalents. However, there may be situations where the Trust will
unexpectedly hold cash on a temporary basis.
When the Trust sells or redeems its Shares, it will do so in blocks
of 50,000 Shares (a ``Creation Basket'') at the Trust's NAV. Authorized
participants will deliver, or facilitate the delivery of, ETH to the
Trust's account with the Custodian in exchange for Shares when they
purchase Shares, and the Trust, through the Custodian, will deliver ETH
to such authorized participants when they redeem Shares with the Trust.
Authorized participants may then offer Shares to the public at prices
that depend on various factors, including the supply and demand for
Shares, the value of the Trust's assets, and market conditions at the
time of a transaction. Shareholders who buy or sell Shares during the
day from their broker may do so at a premium or discount relative to
the NAV of the Shares of the Trust.
Background
Ethereum is free software that is hosted on computers distributed
throughout the globe. It employs an array of logic, called a protocol,
to create a unified understanding of ownership, commercial activity,
and business logic. This allows users to engage in commerce without the
need to trust any of its participants or counterparties. Ethereum code
creates verifiable and unambiguous rules that assign clear, strong
property rights to create a platform for unrestrained business
formation and free exchange. It is widely understood that no single
intermediary or entity operates or controls the Ethereum network
(referred to as ``decentralization''), the transaction validation and
recordkeeping infrastructure of which is collectively maintained by a
disparate user base. The Ethereum network allows people to exchange
tokens of value, or ETH, which are recorded on a distributed public
recordkeeping system or ledger known as a blockchain (the ``Ethereum
Blockchain''), and which can be used to pay for goods and services,
including computational power on the Ethereum network, or converted to
fiat currencies, such as the U.S. dollar, at rates determined on
digital asset exchanges or in individual peer-to-peer transactions.
Furthermore, by combining the recordkeeping system of the Ethereum
Blockchain with a flexible scripting language that is programmable and
can be used to implement sophisticated logic and execute a wide variety
of instructions, the Ethereum network is intended to act as a
foundational infrastructure layer on top of which users can build their
own custom software programs, as an alternative to centralized web
servers. In theory, anyone can build their own custom software programs
on the Ethereum network. In this way, the Ethereum network represents a
project to expand blockchain deployment beyond a limited-purpose, peer-
to-peer private money system into a flexible, distributed alternative
computing infrastructure that is available to all. On the Ethereum
network, ETH is the unit of account that users pay for the
computational resources consumed by running their programs.
Heretofore, U.S. retail investors have lacked a U.S. regulated,
U.S. exchange-traded vehicle to gain exposure to ETH. Instead current
options include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot ether or
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high
management fees and potentially volatile premiums and discounts; \8\
Meanwhile, investors in other countries, including Germany, Switzerland
and France, are able to use more traditional exchange listed and traded
products (including exchange-traded funds holding physical ETH) to gain
exposure to ETH. Investors across Europe have access to products which
trade on regulated exchanges and provide exposure to a broad array of
spot crypto assets. U.S. investors, by contrast, are left with fewer
and more risky means of getting ether exposure.\9\
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\8\ The premium and discount for OTC ETH Funds is known to move
rapidly. For example, over the period of 12/21/20 to 1/21/21, the
premium for the largest OTC ETH Fund went from 238.63% to 5.1%.
While the price of ether appreciated significantly during this
period and NAV per share increased by 101.40%, the price per share
decreased by 37.49%. This means that investors are holding shares of
a fund with roughly $4.8 billion in assets under management that
experiences significant volatility in its premium and discount
outside of the fluctuations in price of the underlying asset. Even
operating within the normal premium and discount range, it's
possible for an investor to buy shares of an OTC ETH Fund only to
have those shares quickly lose 10% or more in dollar value excluding
any movement of the price of ether. That is to say--the price of
ether could have stayed exactly the same from market close on one
day to market open the next, yet the value of the shares held by the
investor decreased only because of the fluctuation of the premium.
As more investment vehicles, including mutual funds and ETFs, seek
to gain exposure to ether, the easiest option for a buy and hold
strategy for such vehicles is often an OTC ETH Fund, meaning that
even investors that do not directly buy OTC ETH Funds can be
disadvantaged by extreme premiums (or discounts) and premium
volatility.
\9\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot ETH ETPs.
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To this point, the lack of an ETP that holds spot ETH (a ``Spot ETH
ETP'') exposes U.S. investor assets to significant risk because
investors that would otherwise seek cryptoasset exposure through a Spot
ETH ETP are forced to find alternative exposure through generally
riskier means. For example, investors in OTC ETH Funds are not afforded
the benefits and protections of regulated Spot ETH ETPs, resulting in
retail investors suffering losses due to drastic movements in the
premium/discount of OTC ETH Funds. An investor who purchased the
largest OTC ETH Fund in January 2021 and held the position at the end
of 2022 would have suffered a 69% loss due to the premium/discount,
even if the price of ETH did not change. Many retail investors likely
suffered losses due to this premium/discount in OTC ETH Fund trading;
all such losses could have
[[Page 66078]]
been avoided if a Spot ETH ETP had been available. Additionally, many
U.S. investors that held their digital assets in accounts at FTX,\10\
Celsius Network LLC,\11\ BlockFi Inc.\12\ and Voyager Digital Holdings,
Inc.\13\ have become unsecured creditors in the insolvencies of those
entities. If a Spot ETH ETP was available, it is likely that at least a
portion of the billions of dollars tied up in those proceedings would
still reside in the brokerage accounts of U.S. investors, having
instead been invested in a transparent, regulated, and well-understood
structure--a Spot ETH ETP. To this point, approval of a Spot ETH ETP
would represent a major win for the protection of U.S. investors in the
cryptoasset space. The Trust, like all other series of Commodity-Based
Trust Shares, is designed to protect investors against the risk of
losses through fraud and insolvency that arise by holding digital
assets, including ETH, on centralized platforms.
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\10\ See FTX Trading Ltd., et al., Case No. 22-11068.
\11\ See Celsius Network LLC, et al., Case No. 22-10964.
\12\ See BlockFi Inc., Case No. 22-19361.
\13\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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Applicable Standard
The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot-based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\14\ With this in mind, the CME Ether
Futures (``CME ETH Futures'') market, which launched in February 2021,
is the proper market to consider in determining whether there is a
related regulated market of significant size.
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\14\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently
disapproved by the Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the
``Winklevoss Order''). Prior orders from the Commission have pointed
out that in every prior approval order for Commodity-Based Trust
Shares, there has been a derivatives market that represents the
regulated market of significant size, generally a Commodity Futures
Trading Commission (the ``CFTC'') regulated futures market. Further
to this point, the Commission's prior orders have noted that the
spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other commodities and currencies.
The Commission specifically noted in the Winklevoss Order that the
approval order issued related to the first spot gold ETP ``was based
on an assumption that the currency market and the spot gold market
were largely unregulated.'' See Winklevoss Order at 37592. As such,
the regulated market of significant size test does not require that
the spot ether market be regulated in order for the Commission to
approve this proposal, and precedent makes clear that an underlying
market for a spot commodity or currency being a regulated market
would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to
surveillance sharing agreements with the underlying futures market
in order to determine whether such products were consistent with the
Act.
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The Commission has approved proposals related to the listing and
trading of funds that would primarily hold CME Bitcoin Futures that are
registered under the Securities Act of 1933 (``Bitcoin Futures
ETPs''),\15\ finding that the CME Bitcoin Futures market represents a
regulated market of significant size. Meanwhile, the Commission has
continued to disapprove proposals to list and trade funds that would
hold spot bitcoin on the seemingly conflicting basis that the CME
Bitcoin Futures market is not a regulated market of significant
size.\16\ In the recently decided Grayscale Investments, LLC v
Securities and Exchange Commission,\17\ however, the court resolved
this conflict by finding that the SEC had failed to provide a coherent
explanation as to why it had approved the Bitcoin Futures ETPs while
disapproving the proposal to list and trade shares of the Grayscale
Bitcoin Trust and vacating the disapproval order.\18\
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\15\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5,
2022) (collectively, with the Teucrium Approval, the ``Bitcoin
Futures Approvals'').
\16\ The proposed spot bitcoin funds are nearly identical to the
Trust but proposed to hold bitcoin instead of ETH (``Spot Bitcoin
ETPs'').
\17\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142 (the ``Grayscale Order'').
\18\ Id.
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As further discussed below, both the Exchange and the Sponsor
believe that this proposal and the included analysis are sufficient to
establish that the CME ETH Futures market represents a regulated market
of significant size as it relates both to the CME ETH Futures market
and to the spot ETH market and that this proposal should be approved.
Investment Objective
According to the Registration Statement, the investment objective
of the Trust is for the Shares to reflect the performance of the
MarketVectorTM Ethereum Benchmark Rate less the expenses of
the Trust's operations. In seeking to achieve its investment objective,
the Trust will hold Ether (``ETH'') and will value its Shares daily
based on the reported MarketVectorTM Ethereum Benchmark Rate
(the ``Benchmark''), which is calculated based on prices contributed by
exchanges that the Sponsor's affiliate, MarketVector
IndexesTM (``MarketVector''), believes represent the top
five Ethereum exchanges based on the industry leading CryptoCompare
Exchange Benchmark review report. The Trust is not actively managed.
The Benchmark
As described in the Registration Statement, the Fund will use the
Benchmark to calculate the Trust's NAV. The Benchmark is designed to be
a robust price for ETH in USD and there is no component other than ETH
in the index. The underlying exchanges are sourced from the industry
leading CryptoCompare Exchange Benchmark review report. CryptoCompare
Exchange Benchmark was established in 2019 as a tool designed to bring
clarity to the digital asset exchange sector by providing a framework
for assessing risk and in turn bringing transparency and accountability
to a complex and rapidly evolving market.\19\ The current exchange
composition of the Benchmark is Bitstamp, Coinbase, Gemini, itBit, and
Kraken.
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\19\ The CryptoCompare Exchange Benchmark methodology utilizes a
combination of qualitative and quantitative metrics to analyze a
comprehensive data set across eight categories of evaluation legal/
regulation, KYC/transaction risk, data provision, security, team/
exchange, asset quality/diversity, market quality and negative
events. The CryptoCompare Exchange Benchmark review report assigns a
grade to each exchange which helps identify what it believes to be
the lowest risk exchanges in the industry. Based on the
CryptoCompare Exchange Benchmark, MarketVector Indexes initially
selects the top five exchanges by rank for inclusion in the
MarketVectorTM Ethereum Benchmark Rate. If an eligible
exchange is downgraded by two or more notches in a semi-annual
review and is no longer in the top five by rank, it is replaced by
the highest ranked non-component exchange. Adjustments to exchange
coverage are announced four business days prior to the first
business day of each of June and December 23:00 CET. The
MarketVectorTM Ethereum Benchmark Rate is rebalanced at
16:00:00 GMT/BST on the last business day of each of May and
November.
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In calculating the MarketVectorTM Ethereum Benchmark
Rate, the methodology captures trade prices and sizes from exchanges
and examines twenty consecutive three-minute periods leading up to 4:00
p.m. EST. It then calculates an equal-weighted average of the volume-
weighted median price of these twenty three-minute periods, removing
the highest and lowest contributed prices. Using twenty
[[Page 66079]]
consecutive three-minute segments over a sixty-minute period means
malicious actors would need to sustain efforts to manipulate the market
over an extended period of time, or would need to replicate efforts
multiple times across exchanges, potentially triggering review. This
extended period also supports authorized participant activity by
capturing volume over a longer time period, rather than forcing
authorized participants to mark an individual close or auction. The use
of a median price reduces the ability of outlier prices to impact the
NAV, as it systematically excludes those prices from the NAV
calculation. The use of a volume-weighted median (as opposed to a
traditional median) serves as an additional protection against attempts
to manipulate the NAV by executing a large number of low-dollar trades,
because any manipulation attempt would have to involve a majority of
global spot ETH volume in a three-minute window to have any influence
on the NAV. As discussed in the Registration Statement, removing the
highest and lowest prices further protects against attempts to
manipulate the NAV, requiring bad actors to act on multiple exchanges
at once to have any ability to influence the price.
Availability of Information
In addition to the price transparency of the Benchmark, the Trust
will provide information regarding the Trust's ETH holdings as well as
additional data regarding the Trust. The Trust will provide an Intraday
Indicative Value (``IIV'') per Share updated every 15 seconds, as
calculated by the Exchange or a third-party financial data provider
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m.
E.T.). The IIV will be calculated by using the prior day's closing NAV
per Share as a base and updating that value during Regular Trading
Hours to reflect changes in the value of the Trust's ETH holdings
during the trading day.
The IIV disseminated during Regular Trading Hours should not be
viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours by one or more major market data
vendors. In addition, the IIV will be available through on-line
information services.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the BZX Official Closing Price \20\ in relation to the NAV
as of the time the NAV is calculated and a calculation of the premium
or discount of such price against such NAV; (c) data in chart form
displaying the frequency distribution of discounts and premiums of the
Official Closing Price against the NAV, within appropriate ranges for
each of the four previous calendar quarters (or for the life of the
Trust, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The Trust will also disseminate the Trust's
holdings on a daily basis on the Trust's website. The price of ETH will
be made available by one or more major market data vendors, updated at
least every 15 seconds during Regular Trading Hours. Information about
the Benchmark, including key elements of how the Benchmark is
calculated, will be publicly available at https://www.marketvector.com/.
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\20\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
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The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for ETH is widely disseminated
through a variety of major market data vendors, including Bloomberg and
Reuters, as well as the Benchmark. Information relating to trading,
including price and volume information, in ETH is available from major
market data vendors and from the exchanges on which ETH are traded.
Depth of book information is also available from ETH exchanges. The
normal trading hours for ETH exchanges are 24 hours per day, 365 days
per year.
The ETH Custodian
The Custodian's services (i) allow ETH to be deposited from a
public blockchain address to the Trust's ETH account and (ii) allow ETH
to be withdrawn from the ETH account to a public blockchain address as
instructed by the Trust. The Custody Agreement requires the Custodian
to hold the Trust's ETH in cold storage, unless required to facilitate
withdrawals as a temporary measure. The Custodian will use segregated
cold storage ETH addresses for the Trust which are separate from the
ETH addresses that the Custodian uses for its other customers and which
are directly verifiable via the ETH blockchain. The Custodian will
safeguard the private keys to the ETH associated with the Trust's ETH
account. The Custodian will at all times record and identify in its
books and records that such ETH constitutes the property of the Trust.
The Custodian will not withdraw the Trust's ETH from the Trust's
account with the Custodian, or loan, hypothecate, pledge or otherwise
encumber the Trust's ETH, without the Trust's instruction. If the
custody agreement terminates, the Sponsor may appoint another custodian
and the Trust may enter into a custodian agreement with such custodian.
Net Asset Value
NAV means the total assets of the Trust including, but not limited
to, all ETH and cash, if any, less total liabilities of the Trust, each
determined on the basis of generally accepted accounting principles.
The Administrator will determine the NAV of the Trust on each day that
the Exchange is open for regular trading, as promptly as practical
after 4:00 p.m. EST. The NAV of the Trust is the aggregate value of the
Trust's assets less its estimated accrued but unpaid liabilities (which
include accrued expenses). In determining the Trust's NAV, the
Administrator values the ETH held by the Trust based on the price set
by the MarketVectorTM Ethereum Benchmark Rate as of 4:00
p.m. EST. The Administrator also determines the NAV per Share.
Creation and Redemption of Shares
According to the Registration Statement, on any business day, an
authorized participant may place an order to create one or more
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or
the close of regular trading on the Exchange, whichever is earlier. The
day on which an order is received is considered the purchase order
date. The total deposit of ETH required is an amount of ETH that is in
the same proportion to the total assets of the Trust, net of accrued
expenses and other liabilities, on the date the order to purchase is
properly received, as the number of Shares to be created under the
purchase order is in proportion to the total number of Shares
outstanding on the date the order is received. Each night, the Sponsor
will publish the amount of ETH that will be required in exchange for
each creation order. The Administrator determines the required deposit
for a given day by dividing the number of ETH held by the Trust as of
the opening of business on
[[Page 66080]]
that business day, adjusted for the amount of ETH constituting
estimated accrued but unpaid fees and expenses of the Trust as of the
opening of business on that business day, by the quotient of the number
of Shares outstanding at the opening of business divided by 50,000. The
procedures by which an authorized participant can redeem one or more
Creation Baskets mirror the procedures for the creation of Creation
Baskets.
Commodity-Based Trust Shares--Rule 14.11(e)(4)
The Shares will be subject to BZX Rule 14.11(e)(4), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV will be calculated daily and that these values and
information about the assets of the Trust will be made available to all
market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a
trust that holds a specified commodity \21\ deposited with the trust;
(b) issued by such trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and (c)
when aggregated in the same specified minimum number, may be redeemed
at a holder's request by such trust which will deliver to the redeeming
holder the quantity of the underlying commodity.
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\21\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act. The CFTC has stated that: ``Certain digital assets, including
BTC, ETH, LTC, and at least two fiat-backed stablecoins, tether
(``USDT'') and the Binance USD (``BUSD''), as well as other virtual
currencies as alleged herein, are ``commodities,'' as defined under
section 1a(9) of the [Commodities Exchange] Act, 7 U.S.C. 1a(9).''
See Commodity Futures Trading Commission v. Changpeng Zhao, Binance
Holdings Limited, Binance Holdings (IE) Limited, Binance (Services)
Holdings Limited, and Samuel Lim, March 27, 2023 at 9.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18. Trading may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) the extent to which trading is not occurring in the ETH underlying
the Shares; or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BZX will allow
trading in the Shares during all trading sessions on the Exchange. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Commodity-Based Trust
Shares. The issuer has represented to the Exchange that it will advise
the Exchange of any failure by the Trust or the Shares to comply with
the continued listing requirements, and, pursuant to its obligations
under section 19(g)(1) of the Exchange Act, the Exchange will surveil
for compliance with the continued listing requirements. If the Trust or
the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 14.12. The Exchange may obtain information regarding
trading in the Shares and ETH Futures via the Intermarket Surveillance
Group (``ISG''), from other exchanges who are members or affiliates of
the ISG, or with which the Exchange has entered into a comprehensive
surveillance sharing agreement.\22\
---------------------------------------------------------------------------
\22\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------
[[Page 66081]]
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) the procedures for the
creation and redemption of Baskets (and that the Shares are not
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (iii) how information
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks
involved in trading the Shares outside of Regular Trading Hours \23\
when an updated IIV will not be calculated or publicly disseminated;
(v) the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (vi) trading information.
---------------------------------------------------------------------------
\23\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------
In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
CME ETH Futures \24\
---------------------------------------------------------------------------
\24\ Unless otherwise noted, all data and analysis presented in
this section and referenced elsewhere in the filing has been
provided by the Sponsor.
---------------------------------------------------------------------------
CME began offering trading in Ether Futures in February 2021. Each
contract represents 50 ETH and is based on the CME CF Ether-Dollar
Reference Rate.\25\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to
CME ETH Futures have generally trended up since launch, although some
metrics have slowed recently. For example, there were 76,293 CME ETH
Futures contracts traded in July 2023 (approximately $7.3 billion)
compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts
traded in July 2021, and July 2022 respectively.\26\ The Sponsor's
research indicates daily correlation between the spot ETH and the CME
ETH Futures is 0.998 from the period of 9/1/22 through 9/1/23.
---------------------------------------------------------------------------
\25\ The CME CF Ether-Dollar Reference Rate is based on a
publicly available calculation methodology based on pricing sourced
from several crypto exchanges and trading platforms, including
Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
\26\ Source: CME, 7/31/23.
---------------------------------------------------------------------------
The number of large open interest holders \27\ and unique accounts
trading CME ETH Futures have both increased, even in the face of
heightened Ether price volatility.
---------------------------------------------------------------------------
\27\ A large open interest holder in CME ETH Futures is an
entity that holds at least 25 contracts, which is the equivalent of
1250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than
$2.3 million in CME ETH Futures.
---------------------------------------------------------------------------
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN26SE23.009
[[Page 66082]]
[GRAPHIC] [TIFF OMITTED] TN26SE23.010
[GRAPHIC] [TIFF OMITTED] TN26SE23.011
[[Page 66083]]
[GRAPHIC] [TIFF OMITTED] TN26SE23.012
BILLING CODE 8011-01-C
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\28\ including Commodity-Based Trust Shares,\29\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\30\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that the CME ETH Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to the point that they are outweighed by quantifiable
investor protection issues that would be resolved by approving this
proposal.
---------------------------------------------------------------------------
\28\ See Exchange Rule 14.11(f).
\29\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\30\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH exchanges engaged in or allowing wash trading or other
activity intended to manipulate the price of ETH on other markets,
such pricing does not normally impact prices on other exchange
because participants will generally ignore markets with quotes that
they deem non-executable. Moreover, the linkage between the ETH
markets and the presence of arbitrageurs in those markets means that
the manipulation of the price of ETH price on any single venue would
require manipulation of the global ETH price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular ETH exchange or OTC
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \31\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG. The only remaining issue
to be addressed is whether the ETH Futures market constitutes a market
of significant size, which both the Exchange and the Sponsor believe
that it does. The terms ``significant market'' and ``market of
significant size'' include a market (or group of markets) as to which:
(a) there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
manipulate the ETP, so that a surveillance-sharing agreement would
assist the listing exchange in detecting and deterring misconduct; and
(b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\32\
---------------------------------------------------------------------------
\31\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the ISG
constitutes such a surveillance sharing agreement. See Securities
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix
Disapproval'').
\32\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
The Commission has also recognized that the ``regulated market of
significant
[[Page 66084]]
size'' standard is not the only means for satisfying section 6(b)(5) of
the act, specifically providing that a listing exchange could
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement.33 34
---------------------------------------------------------------------------
\33\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
\34\ According to reports, the Commission is poised to allow the
launch of ETFs registered under the Investment Company Act of 1940,
as amended (the ``1940 Act''), that provide exposure to ETH
primarily through CME ETH Futures (``ETH Futures ETFs'') as early as
October 2023. Allowing such products to list and trade is a
productive first step in providing U.S. investors and traders with
transparent, exchange-listed tools for expressing a view on ETH.
https://www.bloomberg.com/news/articles/2023-08-17/sec-said-to-be-poised-to-allow-us-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
---------------------------------------------------------------------------
(a) Manipulation of the ETP
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct.
In light of the similarly high correlation between spot ETH/CME ETH
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999,
respectively), applying the same rationale that the Commission applied
to a Bitcoin Futures ETF in the Bitcoin Futures Approvals also
indicates that this test is satisfied for this proposal. In the
Teucrium Approval, the SEC stated:
The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably
be relied upon to capture the effects on the CME futures market
caused by a person attempting to manipulate the proposed futures ETP
by manipulating the price of CME futures contracts, whether that
attempt is made by directly trading on the CME futures market or
indirectly by trading outside of the CME futures market. As such,
when the CME shares its surveillance information with Arca, the
information would assist in detecting and deterring fraudulent or
manipulative misconduct related to the non-cash assets held by the
proposed ETP.\35\
---------------------------------------------------------------------------
\35\ See Teucrium Approval at 21679.
The assumptions from this statement are also true for CME ETH
Futures. CME ETH Futures pricing is based on pricing from spot ETH
markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME BTC futures market caused by a person attempting to manipulate
the proposed futures ETP by manipulating the price of CME BTC futures
contracts. . .indirectly by trading outside of the CME BTC futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of CME BTC Futures. This same logic would extend
to CME ETH Futures markets where CME's surveillance would be able to
capture the effects of trading on the relevant spot markets on the
pricing of CME ETH Futures. This was further acknowledged in the
Grayscale lawsuit when Judge Rao stated ``. . .the Commission in the
Teucrium order recognizes that the futures prices are influenced by the
spot prices, and the Commission concludes in approving futures ETPs
that any fraud on the spot market can be adequately addressed by the
fact that the futures market is a regulated one. . .'' The Exchange
agrees with the Commission on this point and notes that the pricing
mechanism applicable to the Shares is similar to that of the CME ETH
Futures. This view is also consistent with the Sponsor's research.
As such, the part (a) of the significant market test outlined above
is satisfied and that common membership in ISG between the Exchange and
CME would assist the listing exchange in detecting and deterring
misconduct in the Shares in the same way that it would be for both
Bitcoin Futures ETPs and Spot Bitcoin ETPs.
(b) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME ETH Futures
market for a number of reasons. First, because the Trust would not hold
CME ETH Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME ETH Futures contracts use for pricing.\36\ The Sponsor notes
that ETH total 24-hour spot trading volume has averaged $9.4B over the
year ending September 1, 2023,\37\ with approximately $950M occurring
on venues whose trades are included in the sponsor's benchmark.\38\ The
Sponsor expects that the Trust would represent a very small percentage
of this daily trading volume in the spot ETH market even in its most
aggressive projections for the Trust's assets and, thus, the Trust
would not have an impact on the spot market and therefore could not be
the predominant force on prices in the CME ETH Futures market. Second,
much like the CME Bitcoin Futures market, the CME ETH Futures market
has progressed and matured significantly. As the court found in the
Grayscale Order ``Because the spot market is deeper and more liquid
than the futures market, manipulation should be more difficult, not
less.'' The Exchange and sponsor agree with this sentiment and believe
it applies equally to the spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------
\36\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market. . .But Grayscale holds
just 3.4 percent of outstanding bitcoin, and the Commission did not
suggest Grayscale can dominate the price of bitcoin.''
\37\ Source: TokenTerminal.
\38\ Source: VanEck research, CryptoCompare.
---------------------------------------------------------------------------
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange is proposing to take additional steps to those
described above to supplement its ability to obtain information that
would be helpful in detecting, investigating, and deterring fraud and
market manipulation in the Commodity-Based Trust Shares. On June 21,
2023, the Exchange reached an agreement on terms with Coinbase, Inc.
(``Coinbase''), an operator of a United States-based spot trading
platform for ETH that represents a substantial portion of US-based and
USD denominated ETH trading,\39\ to enter into a surveillance-sharing
agreement (``Spot Crypto SSA'') and executed an associated term sheet.
Based on this agreement on terms, the Exchange and Coinbase will
finalize and execute a definitive agreement that the parties expect to
be executed prior to allowing trading of the Commodity-Based Trust
Shares.
---------------------------------------------------------------------------
\39\ According to a report from The Block, Coinbase represented
45%% of USD denominated exchange trading volume in August 2023.
https://www.theblock.co/data/crypto-markets/spot/usd-support-exchange-volume-market-share.
---------------------------------------------------------------------------
The Spot Crypto SSA is expected to be a bilateral surveillance-
sharing
[[Page 66085]]
agreement between the Exchange and Coinbase that is intended to
supplement the Exchange's market surveillance program. The Spot Crypto
SSA is expected to have the hallmarks of a surveillance-sharing
agreement between two members of the ISG, which would give the Exchange
supplemental access to data regarding spot ETH trades on Coinbase where
the Exchange determines it is necessary as part of its surveillance
program for the Commodity-Based Trust Shares.\40\ This means that the
Exchange expects to receive market data for orders and trades from
Coinbase, which it will utilize in surveillance of the trading of
Commodity-Based Trust Shares. In addition, the Exchange can request
further information from Coinbase related to spot ETH trading activity
on the Coinbase exchange platform, if the Exchange determines that such
information would be necessary to detect and investigate potential
manipulation in the trading of the Commodity-Based Trust Shares.\41\
---------------------------------------------------------------------------
\40\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\41\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC
and Cboe Clear Digital, LLC.
---------------------------------------------------------------------------
(ii) Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ETH through OTC ETH Funds is greater than $5
billion. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through premium/discount volatility
and management fees for OTC ETH Funds. The Exchange believes that, as
described above, the concerns related to the prevention of fraudulent
and manipulative acts and practices have been sufficiently addressed to
be consistent with the Act and, to the extent that the Commission
disagrees with that assertion, such concerns are now at the very least
outweighed by investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to ETH in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in ETH Futures ETFs and operating companies that are
imperfect proxies for ETH exposure; and (iv) providing an alternative
to custodying spot ETH.
2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \42\ in general and section 6(b)(5) of the Act \43\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
---------------------------------------------------------------------------
\42\ 15 U.S.C. 78f.
\43\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts, including Commodity-Based Trust Shares, to be listed on U.S.
national securities exchanges. In order for any proposed rule change
from an exchange to be approved, the Commission must determine that,
among other things, the proposal is consistent with the requirements of
section 6(b)(5) of the Act, specifically including: (i) the requirement
that a national securities exchange's rules are designed to prevent
fraudulent and manipulative acts and practices; \44\ and (ii) the
requirement that an exchange proposal be designed, in general, to
protect investors and the public interest. The Exchange believes that
this proposal is consistent with the requirements of section 6(b)(5) of
the Act and that this filing sufficiently demonstrates that the CME ETH
Futures market represents a regulated market of significant size and
that, on the whole, the manipulation concerns previously articulated by
the Commission are sufficiently mitigated to the point that they are
outweighed by quantifiable investor protection issues that would be
resolved by approving this proposal.
---------------------------------------------------------------------------
\44\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH exchanges engaged in or allowing wash trading or other
activity intended to manipulate the price of ETH on other markets,
such pricing does not normally impact prices on other exchange
because participants will generally ignore markets with quotes that
they deem non-executable. Moreover, the linkage between the ETH
markets and the presence of arbitrageurs in those markets means that
the manipulation of the price of ETH price on any single venue would
require manipulation of the global ETH price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular ETH exchange or OTC
platform. As a result, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place with a regulated market of significant size. Both
the Exchange and CME are members of ISG. The only remaining issue to be
addressed is whether the ETH Futures market constitutes a market of
significant size, which both the Exchange and the Sponsor believe that
it does. The terms ``significant market'' and ``market of significant
size'' include a market (or group of markets) as to which: (a) there is
a reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to manipulate the ETP, so that
a surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct; and (b) it is unlikely that trading
in the ETP would be the predominant influence on prices in that
market.\45\
---------------------------------------------------------------------------
\45\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.46 47
---------------------------------------------------------------------------
\46\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
\47\ According to reports, the Commission is poised to allow the
launch of ETFs registered under the Investment Company Act of 1940,
as amended (the ``1940 Act''), that provide exposure to ETH
primarily through CME ETH Futures (``ETH Futures ETFs'') as early as
October 2023. Allowing such products to list and trade is a
productive first step in providing U.S. investors and traders with
transparent, exchange-listed tools for expressing a view on ETH.
https://www.bloomberg.com/news/articles/2023-08-17/sec-said-to-be-poised-to-allow-us-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
---------------------------------------------------------------------------
[[Page 66086]]
(a) Manipulation of the ETP
The significant market test requires that there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to manipulate the ETP, so that a
surveillance-sharing agreement would assist the listing exchange in
detecting and deterring misconduct.
In light of the similarly high correlation between spot ETH/CME ETH
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999,
respectively), applying the same rationale that the Commission applied
to a Bitcoin Futures ETF in the Bitcoin Futures Approvals also
indicates that this test is satisfied for this proposal. In the
Teucrium Approval, the SEC stated:
The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably
be relied upon to capture the effects on the CME futures market
caused by a person attempting to manipulate the proposed futures ETP
by manipulating the price of CME futures contracts, whether that
attempt is made by directly trading on the CME futures market or
indirectly by trading outside of the CME futures market. As such,
when the CME shares its surveillance information with Arca, the
information would assist in detecting and deterring fraudulent or
manipulative misconduct related to the non-cash assets held by the
proposed ETP.\48\
---------------------------------------------------------------------------
\48\ See Teucrium Approval at 21679.
The assumptions from this statement are also true for CME ETH
Futures. CME ETH Futures pricing is based on pricing from spot ETH
markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME BTC futures market caused by a person attempting to manipulate
the proposed futures ETP by manipulating the price of CME BTC futures
contracts. . .indirectly by trading outside of the CME BTC futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of CME BTC Futures. This same logic would extend
to CME ETH Futures markets where CME's surveillance would be able to
capture the effects of trading on the relevant spot markets on the
pricing of CME ETH Futures. This was further acknowledged in the
Grayscale lawsuit when Judge Rao stated ``. . .the Commission in the
Teucrium order recognizes that the futures prices are influenced by the
spot prices, and the Commission concludes in approving futures ETPs
that any fraud on the spot market can be adequately addressed by the
fact that the futures market is a regulated one. . .'' The Exchange
agrees with the Commission on this point and notes that the pricing
mechanism applicable to the Shares is similar to that of the CME ETH
Futures. This view is also consistent with the Sponsor's research.
As such, the part (a) of the significant market test outlined above
is satisfied and that common membership in ISG between the Exchange and
CME would assist the listing exchange in detecting and deterring
misconduct in the Shares in the same way that it would be for both
Bitcoin Futures ETPs and Spot Bitcoin ETPs.
(b) Predominant Influence on Prices in Spot and ETH Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME ETH Futures
market for a number of reasons. First, because the Trust would not hold
CME ETH Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME ETH Futures contracts use for pricing.\49\ The Sponsor notes
that ETH total 24-hour spot trading volume has averaged $9.4B over the
year ending September 1, 2023,\50\ with approximately $950M occurring
on venues whose trades are included in the sponsor's benchmark.\51\ The
Sponsor expects that the Trust would represent a very small percentage
of this daily trading volume in the spot ETH market even in its most
aggressive projections for the Trust's assets and, thus, the Trust
would not have an impact on the spot market and therefore could not be
the predominant force on prices in the CME ETH Futures market. Second,
much like the CME Bitcoin Futures market, the CME ETH Futures market
has progressed and matured significantly. As the court found in the
Grayscale Order, ``Because the spot market is deeper and more liquid
than the futures market, manipulation should be more difficult, not
less.'' The Exchange and Sponsor agree with this sentiment and believe
it applies equally to the spot ETH and CME ETH Futures markets.
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\49\ This logic is reflected by the court in the Grayscale Order
at 17-18. Specifically, the court found that ``Because Grayscale
owns no futures contracts, trading in Grayscale can affect the
futures market only through the spot market. . .But Grayscale holds
just 3.4 percent of outstanding bitcoin, and the Commission did not
suggest Grayscale can dominate the price of bitcoin.''
\50\ Source: TokenTerminal.
\51\ Source: VanEck research, CryptoCompare.
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(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange is proposing to take additional steps to those
described above to supplement its ability to obtain information that
would be helpful in detecting, investigating, and deterring fraud and
market manipulation in the Commodity-Based Trust Shares. On June 21,
2023, the Exchange reached an agreement on terms with Coinbase, Inc.
(``Coinbase''), an operator of a United States-based spot trading
platform for ETH that represents a substantial portion of US-based and
USD denominated ETH trading, to enter into a Spot Crypto SSA and
executed an associated term sheet. Based on this agreement on terms,
the Exchange and Coinbase will finalize and execute a definitive
agreement that the parties expect to be executed prior to allowing
trading of the Commodity-Based Trust Shares.
The Spot Crypto SSA is expected to be a bilateral surveillance-
sharing agreement between the Exchange and Coinbase that is intended to
supplement the Exchange's market surveillance program. The Spot Crypto
SSA is expected to have the hallmarks of a surveillance-sharing
agreement between two members of the ISG, which would give the Exchange
supplemental access to data regarding spot ETH trades on Coinbase where
the Exchange determines it is necessary as part of its surveillance
program for the Commodity-Based Trust Shares. This means that the
Exchange expects to receive market data for orders and trades from
Coinbase, which it will utilize in surveillance of the trading of
Commodity-Based Trust Shares. In addition, the Exchange can request
further information from Coinbase related to spot ETH trading activity
on the Coinbase exchange platform, if the Exchange determines that such
information would be necessary to
[[Page 66087]]
detect and investigate potential manipulation in the trading of the
Commodity-Based Trust Shares.
(ii) Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to ETH through OTC ETH Funds is greater than $5
billion. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through premium/discount volatility
and management fees for OTC ETH Funds. The Exchange believes that, as
described above, the concerns related to the prevention of fraudulent
and manipulative acts and practices have been sufficiently addressed to
be consistent with the Act and, to the extent that the Commission
disagrees with that assertion, such concerns are now at the very least
outweighed by investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to ETH in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in ETH Futures ETFs and operating companies that are
imperfect proxies for ETH exposure; and (iv) providing an alternative
to custodying spot ETH.
Commodity-Based Trust Shares--Rule 14.11(e)(4)
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange
may obtain information regarding trading in the Shares and listed ETH
derivatives via the ISG, from other exchanges who are members or
affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement.
Availability of Information
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about ETH and will be available regarding the Trust and the
Shares. In addition to the price transparency of the Index, the Trust
will provide information regarding the Trust's ETH holdings as well as
additional data regarding the Trust. The Trust will provide an IIV per
Share updated every 15 seconds, as calculated by the Exchange or a
third-party financial data provider during the Exchange's Regular
Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated
by using the prior day's closing NAV per Share as a base and updating
that value during Regular Trading Hours to reflect changes in the value
of the Trust's ETH holdings during the trading day.
The IIV disseminated during Regular Trading Hours should not be
viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours by one or more major market data
vendors. In addition, the IIV will be available through on-line
information services.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the BZX Official Closing Price in relation to the NAV as of
the time the NAV is calculated and a calculation of the premium or
discount of such price against such NAV; (c) data in chart form
displaying the frequency distribution of discounts and premiums of the
Official Closing Price against the NAV, within appropriate ranges for
each of the four previous calendar quarters (or for the life of the
Trust, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The Trust will also disseminate the Trust's
holdings on a daily basis on the Trust's website. The price of ETH will
be made available by one or more major market data vendors, updated at
least every 15 seconds during Regular Trading Hours. Information about
the Index, including key elements of how the Index is calculated, will
be publicly available at
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the CTA.
Quotation and last sale information for ETH is widely disseminated
through a variety of major market data vendors, including Bloomberg and
Reuters, as well as the Index. Information relating to trading,
including price and volume information, in ETH is available from major
market data vendors and from the exchanges on which ETH are traded.
Depth of book information is also available from ETH exchanges. The
normal trading hours for ETH exchanges are 24 hours per day, 365 days
per year.
In sum, the Exchange believes that this proposal is consistent with
the requirements of section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the CME ETH Futures market represents a
regulated market of significant size, and that on the whole the
manipulation concerns previously articulated by the Commission are
sufficiently mitigated to the point that they are outweighed by
investor protection issues that would be resolved by approving this
proposal. For the above reasons, the Exchange believes that the
proposed rule change is consistent with the requirements of section
6(b)(5) of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather will facilitate the listing and trading of
an additional exchange-traded product that will enhance competition
among both market participants and listing venues, to the benefit of
investors and the marketplace.
[[Page 66088]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBZX-2023-069 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CboeBZX-2023-069. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeBZX-2023-069 and should
be submitted on or before October 17, 2023.
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\52\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\52\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-20813 Filed 9-25-23; 8:45 am]
BILLING CODE 8011-01-P
