Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the ARK 21Shares Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 66515-66526 [2023-20959]

Download as PDF Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices Christopher C. Mohr; Comments Due: September 28, 2023. 4. Docket No(s).: MC2023–277 and CP2023–280; Filing Title: USPS Request to Add Priority Mail & USPS Ground Advantage Contract 62 to Competitive Product List and Notice of Filing Materials Under Seal; Filing Acceptance Date: September 20, 2023; Filing Authority: 39 U.S.C. 3642, 39 CFR 3040.130 through 3040.135, and 39 CFR 3035.105; Public Representative: Christopher C. Mohr; Comments Due: September 28, 2023. This Notice will be published in the Federal Register. Erica A. Barker, Secretary. [FR Doc. 2023–20939 Filed 9–26–23; 8:45 am] BILLING CODE 7710–FW–P POSTAL SERVICE Product Change—Priority Mail and USPS Ground Advantage® Negotiated Service Agreement AGENCY: ACTION: Postal ServiceTM. Notice. The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule’s Competitive Products List. SUMMARY: Date of required notice: September 27, 2023. DATES: FOR FURTHER INFORMATION CONTACT: Sean Robinson, 202–268–8405. The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on September 21, 2023, it filed with the Postal Regulatory Commission a USPS Request to Add Priority Mail & USPS Ground Advantage® Contract 63 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2023–278, CP2023–281. ddrumheller on DSK120RN23PROD with NOTICES1 SUPPLEMENTARY INFORMATION: Sean Robinson, Attorney, Corporate and Postal Business Law. SECURITIES AND EXCHANGE COMMISSION the most significant aspects of such statements. [Release No. 34–98467; File No. SR– CboeBZX–2023–070] A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the ARK 21Shares Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares September 21, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 6, 2023, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (the ‘‘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 ARK 21Shares 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 [FR Doc. 2023–20942 Filed 9–26–23; 8:45 am] 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 The Trust was formed as a Delaware statutory trust on September 5, 2023 and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. BILLING CODE 7710–12–P 2 17 VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 66515 PO 00000 Frm 00155 Fmt 4703 Sfmt 4703 1. Purpose The Exchange proposes to list and trade the Shares of the ARK 21Shares Ethereum Trust 4 under BZX Rule 14.11(e)(4),5 which governs the listing 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. ARK 21Shares Ethereum Trust 21Shares US LLC is the sponsor of the Trust (the ‘‘Sponsor’’). The Bank of New York Mellon will be the administrator (‘‘Administrator’’) and transfer agent (‘‘Transfer Agent’’). Foreside Global Services, LLC will be the marketing agent (‘‘Marketing Agent’’) in connection with the creation and redemption of ‘‘Baskets’’ of Shares. ARK Investment Management LLC (‘‘ARK’’) will provide assistance in the marketing of the Shares and serve as a sub-adviser. Coinbase Custody Trust Company, LLC, a third-party regulated custodian (the ‘‘Custodian’’), will be responsible for custody of the Trust’s ether. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the ether held by the Trust. The Trust’s assets will consist of ether held by the Custodian on behalf of the Trust. The Trust generally does not intend to 4 On September 6, 2023 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. 7 15 U.S.C. 80a–1. E:\FR\FM\27SEN1.SGM 27SEN1 66516 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices hold cash or cash equivalents. However, there may be situations where the Trust will unexpectedly hold cash on a temporary basis. The Trust will be neither an investment company registered under the Investment Company Act of 1940, as amended,8 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. When the Trust sells or redeems its Shares, it will do so in ‘‘in-kind’’ transactions in blocks of 5,000 Shares (a ‘‘Creation Basket’’) at the Trust’s NAV. Authorized participants will deliver, or facilitate the delivery of, ether to the Trust’s account with the Custodian in exchange for Shares when they purchase Shares, and the Trust, through the Custodian, will deliver ether 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. As noted above, the Trust is designed to protect investors against the risk of losses through fraud and insolvency that arise by holding digital assets, including ether, on centralized platforms. Specifically, the Trust is designed to protect investors as follows: ddrumheller on DSK120RN23PROD with NOTICES1 (i) Assets of the Trust Protected From Insolvency The Trust’s ether will be held by its Custodian,9 which is a New York chartered trust company overseen by the NYDFS and a qualified custodian under Rule 206–4 of the Investment Adviser Act. The Custodian will custody the Trust’s ether pursuant to a custody agreement, which requires the Custodian to maintain the Trust’s ether in segregated accounts that clearly identify the Trust as owner of the accounts and assets held on those accounts; the segregation will be both from the proprietary property of the Custodian and the assets of any other customer. Such an arrangement is generally deemed to be ‘‘bankruptcy remote,’’ that is, in the event of an 8 15 U.S.C. 80a–1. to the Registration Statement, the Trust’s cash will be held at The Bank of New York Mellon pursuant to a cash custody agreement. 9 According VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 insolvency of the Custodian, assets held in such segregated accounts would not become property of the Custodian’s estate and would not be available to satisfy claims of creditors of the Custodian. In addition, according to the Registration Statement, the Custodian carries fidelity insurance, which covers assets held by the Custodian in custody from risks such as theft of funds. These arrangements provide significant protections to investors and could have mitigated the type of losses incurred by investors in the numerous cryptorelated insolvencies, including Celsius, Voyager, BlockFi and FTX. (ii) Trust’s Transfer Agent Will Instruct Disposition of Trust’s Ether According to the Registration Statement, except with respect to sale of ether from time to time to cover expenses of the Trust, the only time ether will move into or out from the Trust will be with respect to creations or redemptions of Shares of the Trust. Authorized Participants will deliver ether to the Trust’s account with the Custodian or Subcustodian, as applicable, in exchange for Shares of the Trust, and the Trust, through the Custodian, will deliver ether to Authorized Participants when those Authorized Participants redeem Shares of the Trust. The creation and redemption procedures are administered by the Transfer Agent, the Bank of New York Mellon, an independent third party. In other words, according to the Registration Statement, with very limited exceptions, the Sponsor will not give instructions with respect to the transfer or disposition of the Trust’s ether. Ether owned by the Trust will at all times be held by, and in the control of, the Custodian (or Subcustodian, as applicable), and transfer of such ether to or from the Custodian (or Subcustodian) will occur only in connection with creation and redemptions of Shares. This will provide safeguards against the movement of ether owned by the Trust by or to the Sponsor or affiliates of the Sponsor. (iii) Trust’s Assets Are Subject to Regular Audit According to the Registration Statement, audit trails exist for all movement of ether within Custodiancontrolled ether wallets and are audited annually for accuracy and completeness by an independent external audit firm. In addition, the Trust will be audited by an independent registered public accounting firm on a regular basis. PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 (iv) Trust Is Subject to the Exchange’s Obligations of Companies Listed on the Exchange and Applicable Corporate Governance Requirements The Trust will be subject to the obligations of companies listed on the Exchange set forth in BZX Rule 14.6, which require the listed companies to make public disclosure of material events and any notifications of deficiency by the Exchange, file and distribute period financial reports, engage independent public accountants registered with the Exchange, among other things. Such disclosures serve a key investor protection role. In addition, the Trust will be subject to the corporate governance requirements for companies listed on the Exchange set forth in BZX Rule 14.10. Background Ethereum is a decentralized smart contract platform that revolutionized the world of blockchain technology beyond its initial use case of peer-topeer payments. It introduced the idea of ‘‘smart contracts,’’ self-executing agreements with predefined rules, enabling developers and entrepreneurs worldwide to code and deploy decentralized applications on top of the Ethereum network. Ether (ETH), the native crypto asset of the network, is the fuel that allows Ethereum to operate in the same way that we use oil to propel vehicles, heat buildings, and produce electricity in the physical world. Users must pay a ‘‘gas fee’’ or a transaction tax in ether for every transaction they perform on the network. The term ‘‘gas’’ refers to the unit that measures the computational effort required to execute specific operations on the Ethereum blockchain. Thus, ether is analogous to a digital commodity powering the Ethereum network. For instance, an entire virtual economy has emerged with ether as the unit of account and medium of exchange. This phenomenon is similar to the spontaneous adoption of commodities like coffee and, most notably, precious metals like gold as money by various civilizations throughout history, except this time, in a digital-native realm. With more than 5,946 monthly active developers as of June 2023, Ethereum is the world’s largest developer ecosystem. Moreover, the platform is explored and experimented with by various private banks and central banks globally. Since its launch in 2015, Ethereum has driven the evolution of the blockchain space with innovations, ranging from decentralized finance (DeFi), nonfungible tokens (NFTs), digital identity solutions, and the tokenizations of off- E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 chain, or as it’s commonly referred to, ‘‘real-world’’ assets. Some of the most important innovations that have come out of DeFi include ‘stablecoins,’ decentralized exchanges (DEXs), and automated lending protocols. Stablecoins maintain price parity with a target asset, such as the U.S. dollar. Decentralized exchanges (DEXs), such as Uniswap, allow users to trade assets without the need for an intermediary against an ‘‘automated market-maker’’ (AMM), settling trillions of dollars of value since their inception. As a final example, overcollateralized lending protocols like MakerDAO, Aave, or Compound have taken traditional credit risk out of the equation, relying instead on smart contract automation and operators to liquidate loans when the collateralization ratio falls below a predetermined threshold. These and many other DeFi innovations reveal one of the core value propositions of Ethereum—the ability to act as a credibly neutral settlement layer where developers can automate away the need for centralized intermediaries. Much like bitcoin, access for U.S. retail investors to gain exposure to ether via a transparent and U.S. regulated, U.S. exchange-traded vehicle remains limited. 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 Ether Funds’’) with high management fees and potentially volatile premiums and discounts.10 Meanwhile, investors in other countries are able to use more traditional exchange listed and traded products (including exchange-traded funds holding physical ETH) to gain exposure 10 The premium and discount for OTC ether 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 Ether 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 buying shares of a fund 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 ether 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 ether Fund, meaning that even investors that do not directly buy OTC ether Funds can be disadvantaged by extreme premiums (or discounts) and premium volatility. VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 to ether. Similarly, 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.11 To this point, the lack of an ETP that holds spot ETH (a ‘‘Spot Ether ETP’’) exposes U.S. investor assets to significant risk because investors that would otherwise seek cryptoasset exposure through a Spot Ether ETP are forced to find alternative exposure through fewer and more risky means. For example, investors in OTC Ether Funds are not afforded the benefits and protections of regulated Spot Ether ETPs, resulting in retail investors suffering losses due to drastic movements in the premium/discount of OTC Ether Funds. Many retail investors likely suffered losses due to this premium/discount in OTC Ether Fund trading; all such losses could have been avoided if a Spot Ether ETP had been available. Additionally, many U.S. investors that held their digital assets in accounts at FTX,12 Celsius Network LLC,13 BlockFi Inc.14 and Voyager Digital Holdings, Inc.15 have become unsecured creditors in the insolvencies of those entities. If a Spot Ether 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 Ether ETP. To this point, approval of a Spot Ether 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 ether, on centralized platforms. 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 11 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 Ether ETPs. 12 See FTX Trading Ltd., et al., Case No. 22– 11068. 13 See Celsius Network LLC, et al., Case No. 22– 10964. 14 See BlockFi Inc., Case No. 22–19361. 15 See Voyager Digital Holdings, Inc., et al., Case No. 22–10943. PO 00000 Frm 00157 Fmt 4703 Sfmt 4703 66517 has in place a comprehensive surveillance sharing agreement with a regulated market of significant size related to the underlying commodity to be held.16 With this in mind, the CME Ether 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’’),17 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 (these proposed funds are nearly identical to the Trust, but proposed to hold bitcoin instead of ETH) (‘‘Spot Bitcoin ETPs’’) on the seemingly conflicting basis that the CME Bitcoin Futures market is not a regulated market of significant size. In the recently decided Grayscale Investments, LLC v 16 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 bitcoin 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. 17 See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 21676 (April 12, 2022) and 94853 (May 5, 2022) (collectively, the ‘‘Bitcoin Futures Approvals’’). E:\FR\FM\27SEN1.SGM 27SEN1 66518 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices Securities and Exchange Commission,18 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 (the ‘‘Grayscale Bitcoin Trust Proposal’’) and vacating the disapproval order.19 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 Ether Futures market represents a regulated market of significant size as it relates both to the CME Ether Futures market and to the spot ether market and that this proposal should be approved. Investment Objective The investment objective of the Trust will be to seek to track the performance of ether, as measured by the performance of the CME CF Ether-Dollar Reference Rate—New York Variant (the ‘‘Index’’), adjusted for the Trust’s expenses and other liabilities. In seeking to achieve its investment objective, the Trust will hold ether and will value the Shares daily based on the Index. The Trust will process all creations and redemptions in-kind in transactions with authorized participants. The Trust is not actively managed. ddrumheller on DSK120RN23PROD with NOTICES1 The Index The Fund will use the Index to calculate the Trust’s NAV. The administrator of the Index is CF Benchmarks Ltd. (the ‘‘Index Provider’’). The Index currently uses substantially the same methodology as the CME CF Ether Dollar Reference Rate (‘‘ERR’’), including utilizing the same six ether exchanges, which is the underlying rate to determine settlement of CME Ether Futures contracts, except that the Index is calculated as of 4:00 p.m. ET, whereas the ERR is calculated as of 4:00 p.m. London time. The Index, which was introduced on November 14, 2016 is based on materially the same methodology (except calculation time) as the Index Provider’s ERR, which was first introduced on May 14, 2018 and is the rate on which ether futures contracts are cash-settled in U.S. dollars at the CME. The Index is designed based on the IOSCO Principals for Financial Benchmarks. The administrator of the Index is the Index Provider. The Index is calculated daily and aggregates the 18 Grayscale Investments, LLC v. Securities and Exchange Commission, et al., Case No. 22–1142 (the ‘‘Grayscale Order’’). 19 Id. VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 notional value of ether trading activity across major ether spot exchanges. The Sponsor believes that the use of the Index is reflective of a reasonable valuation of the average spot price of ether and that resistance to manipulation is a priority aim of its design methodology. The methodology: (i) takes an observation period and divides it into equal partitions of time; (ii) then calculates the volume-weighted median of all transactions within each partition; and (iii) the value is determined from the arithmetic mean of the volume-weighted medians, equally weighted. By employing the foregoing steps, the Index thereby seeks to ensure that transactions in ether conducted at outlying prices do not have an undue effect on the value of a specific partition, large trades or clusters of trades transacted over a short period of time will not have an undue influence on the index level, and the effect of large trades at prices that deviate from the prevailing price are mitigated from having an undue influence on the benchmark level. In addition, the Sponsor notes that an oversight function is implemented by the Index Provider in seeking to ensure that the Index is administered through codified policies for Index integrity. Index data and the description of the Index are based on information made publicly available by the Index Provider on its website at https:// www.cfbenchmarks.com. The Trust will determine the value its Shares daily based on the value of ether as reflected by the Index. The Index is calculated daily and aggregates the notional value of ether trading activity across major ether spot exchanges. The Index is designed based on the IOSCO Principals for Financial Benchmarks. The Trust also uses the ether price determined by the Index to calculate its ‘‘Ether Holdings,’’ which is the aggregate U.S. Dollar value of ether in the Trust, based on the ether price determined by the Index, less its liabilities and expenses. ‘‘Ether Holdings per Share’’ is calculated by dividing Ether Holdings by the number of Shares currently outstanding. Ether Holdings and Ether Holdings per Share are not measures calculated in accordance with GAAP. Ether Holdings is not intended to be a substitute for the Trust’s NAV calculated in accordance with GAAP, and Ether Holdings per Share is not intended to be a substitute for the Trust’s NAV per Share calculated in accordance with GAAP. The Index was created to facilitate financial products based on ether. It serves as a once-a-day benchmark rate of the U.S. dollar price of ether (USD/ PO 00000 Frm 00158 Fmt 4703 Sfmt 4703 ETH), calculated as of 4:00 p.m. ET. The Index, which has been calculated and published since [•], aggregates the trade flow of several ether exchanges, during an observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one ether at 4:00 p.m. ET. Specifically, the Index is calculated based on the ‘‘Relevant Transactions’’ (as defined below) of all of its constituent ether exchanges, which are currently Coinbase, Bitstamp, Kraken, itBit, LMAX Digital and Gemini (the ‘‘Constituent Platforms’’), as follows: • All Relevant Transactions are added to a joint list, recording the time of execution, trade price and size for each transaction. • The list is partitioned by timestamp into 12 equally-sized time intervals of five minute length. • For each partition separately, the volume-weighted median trade price is calculated from the trade prices and sizes of all Relevant Transactions, i.e., across all Constituent Platforms. A volume-weighted median differs from a standard median in that a weighting factor, in this case trade size, is factored into the calculation. • The Index is then determined by the equally-weighted average of the volume medians of all partitions. The Index does not include any futures prices in its methodology. A ‘‘Relevant Transaction’’ is any cryptocurrency versus U.S. dollar spot trade that occurs during the observation window between 3:00 p.m. and 4:00 p.m. Eastern time on a Constituent Platform in the ETH/USD pair that is reported and disseminated by a Constituent Platform through its publicly available API and observed by the Index Provider. An oversight function is implemented by the Index Provider in seeking to ensure that the Index is administered through the Index Provider’s codified policies for Index integrity. The Sponsor believes that the use of the Index is reflective of a reasonable valuation of the average spot price of ether and that resistance to manipulation is a priority aim of its design methodology. The methodology: (i) takes an observation period and divides it into equal partitions of time; (ii) then calculates the volume-weighted median of all transactions within each partition; and (iii) the value is determined from the arithmetic mean of the volume-weighted medians, equally weighted. By employing the foregoing steps, the Index thereby seeks to ensure that transactions in ether conducted at outlying prices do not have an undue effect on the value of a specific partition, large trades or clusters of E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices trades transacted over a short period of time will not have an undue influence on the index level, and the effect of large trades at prices that deviate from the prevailing price are mitigated from having an undue influence on the benchmark level. ddrumheller on DSK120RN23PROD with NOTICES1 Availability of Information In addition to the price transparency of the Index, the Trust will provide information regarding the Trust’s ether 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 ether 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 ether 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 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. VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 calculated, will be publicly available at https://www.cfbenchmarks.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 ether 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 ether is available from major market data vendors and from the exchanges on which ether are traded. Depth of book information is also available from ether exchanges. The normal trading hours for ether exchanges are 24 hours per day, 365 days per year. The Ether Custodian The Custodian carefully considers the design of the physical, operational and cryptographic systems for secure storage of the Trust’s private keys in an effort to lower the risk of loss or theft. The Custodian utilizes a variety of security measures to ensure that private keys necessary to transfer digital assets remain uncompromised and that the Trust maintains exclusive ownership of its assets. The operational procedures of the Custodian are reviewed by thirdparty advisors with specific expertise in physical security. The devices that store the keys will never be connected to the internet or any other public or private distributed network—this is colloquially known as ‘‘cold storage.’’ Only specific individuals are authorized to participate in the custody process, and no individual acting alone will be able to access or use any of the private keys. In addition, no combination of the executive officers of the Sponsor or the investment professionals managing the Trust, acting alone or together, will be able to access or use any of the private keys that hold the Trust’s ether. Net Asset Value NAV means the total assets of the Trust including, but not limited to, all ether 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 PO 00000 Frm 00159 Fmt 4703 Sfmt 4703 66519 its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the Trust’s NAV, the Administrator values the ether held by the Trust based on the price set by the Index 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 ether required is an amount of ether 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 ether 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 ether held by the Trust as of the opening of business on that business day, adjusted for the amount of ether 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 5,000. 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 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, E:\FR\FM\27SEN1.SGM Continued 27SEN1 66520 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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 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 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. VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 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 extent to which trading is not occurring in the ether 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. PO 00000 Frm 00160 Fmt 4703 Sfmt 4703 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 ether 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 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. In addition, the Information Circular will advise members, prior to the 22 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 23 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern Time. E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices 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 Ether Futures 24 CME began offering trading in ether futures (‘‘CME Ether Futures’’) in February 2021. Each contract represents 50 ether 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 Ether 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 In addition, according to Sponsor’s research, trading volume for CME Ether Futures amounts to a total volume of $6,123,830,768.67 for August 2023. This trading volume represents 3,646.26 in open interest for CME Ether Futures, with an average value of $319,051,613.52. For August 2023, there were a total of 72,223 contracts for CME Ether Futures (equivalent to 3,611,150 ETH). Sponsor’s analyses further demonstrate that the correlation in pricing between CME Ether Futures and Spot ETH is significantly correlated. Notably, the Sponsor performed a pairwise correlation of Ether daily returns across top centralized spot cryptocurrency exchanges and the CME from March 19, 2021 to September 5, 2023. The Sponsor’s research indicates that daily correlation between the Spot ETH and the CME ETH Futures during this time period was over 99.88%. Section 6(b)(5) and the Applicable Standards ddrumheller on DSK120RN23PROD with NOTICES1 The Commission has approved numerous series of Trust Issued 24 Unless otherwise noted, all data and analysis presented in this section and referenced elsewhere in the filing has been provided by the Sponsor. 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 VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 Receipts,27 including Commodity-Based Trust Shares,28 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; 29 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 Ether 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 27 See Exchange Rule 14.11(f). Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 29 Much like bitcoin, the Exchange believes that ether 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 ether trading render it difficult and prohibitively costly to manipulate the price of ETH. The fragmentation across ether platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of ether prices through continuous trading activity challenging. To the extent that there are ether exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of ether 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 ether markets and the presence of arbitrageurs in those markets means that the manipulation of the price of ether price on any single venue would require manipulation of the global ether 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 ether 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. 28 Commodity-Based PO 00000 Frm 00161 Fmt 4703 Sfmt 4703 66521 Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 30 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 ether 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.31 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.32 33 30 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 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 Wilshire Phoenix Disapproval. 31 See Wilshire Phoenix Disapproval. 32 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. E:\FR\FM\27SEN1.SGM Continued 27SEN1 66522 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices (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 Ether Futures and spot bitcoin/CME Bitcoin Futures, applying the same rationale that the Commission applied to a Bitcoin Futures ETF in the Bitcoin Futures Approvals 34 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 ddrumheller on DSK120RN23PROD with NOTICES1 The assumptions from this statement are also true for CME Ether Futures. CME Ether Futures pricing is based on pricing from spot ether 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 33 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 ether primarily through CME Ether 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. 34 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’’). 35 See Teurcrium Approval at 21679. VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 markets on the pricing of CME BTC Futures. This same logic would extend to CME Ether 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 Ether 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 Ether Futures. This view is also consistent with the Advisor’s research. Further, the Trust only allows for inkind creation and redemption, which, as further described below, reduces the potential for manipulation of the Shares through manipulation of the Index or any of its individual constituents, again emphasizing that a potential manipulator of the Shares would have to manipulate the entirety of the ether spot market, which is led by the ether Futures market. 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 Ether Futures The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices in the CME Ether Futures market for a number of reasons. First, because the Trust would not hold CME Ether Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME Ether Futures contracts use for pricing.36 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 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.’’ PO 00000 Frm 00162 Fmt 4703 Sfmt 4703 1, 2023.37 The Sponsor expects that the Trust would represent a very small percentage of this daily trading volume in the spot ether 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 Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether 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 ether and CME Ether 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 ether that represents a substantial portion of US-based and USD denominated ether trading,38 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 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 37 Source: TokenTerminal. 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 According E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices surveillance-sharing agreement between two members of the ISG, which would give the Exchange supplemental access to data regarding spot ether trades on Coinbase where the Exchange determines it is necessary as part of its surveillance program for the Commodity-Based Trust Shares.39 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 ether 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.40 ddrumheller on DSK120RN23PROD 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 ether through OTC Ether 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 Ether 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 ether 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 ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. 39 For additional information regarding ISG and the hallmarks of surveillance-sharing between ISG members, see https://isgportal.org/overview. 40 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. VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act 41 in general and Section 6(b)(5) of the Act 42 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,43 including Commodity-Based Trust Shares,44 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; 45 and (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. 41 15 U.S.C. 78f. U.S.C. 78f(b)(5). 43 See Exchange Rule 14.11(f). 44 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 45 Much like bitcoin, the Exchange believes that ether 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 ether trading render it difficult and prohibitively costly to manipulate the price of ETH. The fragmentation across ether platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of ether prices through continuous trading activity challenging. To the extent that there are ether exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of ether 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 ether markets and the presence of arbitrageurs in those markets means that the manipulation of the price of ether price on any single venue would require manipulation of the global ether 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 ether 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. 42 15 PO 00000 Frm 00163 Fmt 4703 Sfmt 4703 66523 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 Ether 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 46 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 ether 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.47 46 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 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 Wilshire Phoenix Disapproval. 47 See Wilshire Phoenix Disapproval. E:\FR\FM\27SEN1.SGM 27SEN1 66524 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices 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.48 49 (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 Ether Futures and spot bitcoin/CME Bitcoin Futures, applying the same rationale that the Commission applied to a Bitcoin Futures ETF in the Bitcoin Futures Approvals 50 also indicates that this test is satisfied for this proposal. In the Teucrium Approval, the SEC stated: ddrumheller on DSK120RN23PROD with NOTICES1 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 48 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. 49 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 ether primarily through CME Ether 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. 50 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’’). VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 deterring fraudulent or manipulative misconduct related to the non-cash assets held by the proposed ETP.51 The assumptions from this statement are also true for CME Ether Futures. CME Ether Futures pricing is based on pricing from spot ether 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 Ether 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 Ether 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 Ether Futures. This view is also consistent with the Advisor’s research. Further, the Trust only allows for inkind creation and redemption, which, as further described below, reduces the potential for manipulation of the Shares through manipulation of the Index or any of its individual constituents, again emphasizing that a potential manipulator of the Shares would have to manipulate the entirety of the ether spot market, which is led by the ether Futures market. 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 Ether Futures The Exchange and Sponsor also believe that trading in the Shares would 51 See PO 00000 Teucrium Approval at 21679. Frm 00164 Fmt 4703 Sfmt 4703 not be the predominant force on prices in the CME Ether Futures market for a number of reasons. First, because the Trust would not hold CME Ether Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME Ether Futures contracts use for pricing.52 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 1, 2023.53 The Sponsor expects that the Trust would represent a very small percentage of this daily trading volume in the spot ether 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 Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether 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 ether and CME Ether 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, an operator of a United States-based spot trading platform for ether that represents a substantial portion of USbased and USD denominated ether trading, to enter into a Spot Crypto SSA and executed an associated term sheet. 52 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.’’ 53 Source: TokenTerminal. E:\FR\FM\27SEN1.SGM 27SEN1 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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 CommodityBased 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 ether 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 ether 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. (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 ether through OTC Ether 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 Ether 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 ether 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 VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 risks and costs associated with investing in ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. 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 ether 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 ether 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 ether 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 PO 00000 Frm 00165 Fmt 4703 Sfmt 4703 66525 value of the Trust’s ether 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 ether 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 ether 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 ether is available from major market data vendors and from the exchanges on which ether are traded. Depth of book information is also available from ether exchanges. The normal trading hours for ether 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 Ether Futures market represents a regulated E:\FR\FM\27SEN1.SGM 27SEN1 66526 Federal Register / Vol. 88, No. 186 / Wednesday, September 27, 2023 / Notices 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. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. The investor protection issues for U.S. investors has grown significantly over the last several years, through roll costs for ether Futures ETFs and premium/ discount volatility and management fees for OTC Ether Funds. As discussed throughout, this growth investor protection concerns need to be reevaluated and rebalanced with the prevention of fraudulent and manipulative acts and practices concerns that previous disapproval orders have relied upon. Finally, the Exchange notes that in addition to all of the arguments herein which it believes sufficiently establish the CME Ether Futures market as a regulated market of significant size, it is logically inconsistent to find that the CME Ether Futures market is a significant market as it relates to the CME Ether Futures market, but not a significant market as it relates to the ether spot market for the numerous reasons laid out above. 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. ddrumheller on DSK120RN23PROD with NOTICES1 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. 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 VerDate Sep<11>2014 18:44 Sep 26, 2023 Jkt 259001 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. subject to copyright protection. All submissions should refer to file number SR-CboeBZX–2023–070 and should be submitted on or before October 18, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54 Sherry R. Haywood, Assistant Secretary. 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: [FR Doc. 2023–20959 Filed 9–26–23; 8:45 am] Electronic Comments • 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–2023–070 on the subject line. Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend Rules 5.87 and 8.21 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–2023–070. 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 PO 00000 Frm 00166 Fmt 4703 Sfmt 4703 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98474; File No. SR–CBOE– 2023–048] September 21, 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 14, 2023, Cboe Exchange, Inc. (‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II 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 Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) proposes to amend Rules 5.87 and 8.21. The text of the proposed rule change is provided in Exhibit 5. The text of the proposed rule change is also available on the Exchange’s website (https://www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), 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 54 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\27SEN1.SGM 27SEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 186 (Wednesday, September 27, 2023)]
[Notices]
[Pages 66515-66526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-20959]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98467; File No. SR-CboeBZX-2023-070]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Proposed Rule Change To List and Trade Shares of the ARK
21Shares Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares

September 21, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 6, 2023, Cboe BZX Exchange, Inc. (the ``Exchange'' or
``BZX'') filed with the Securities and Exchange Commission (the
``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 ARK 21Shares
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
September 5, 2023 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 ARK
21Shares Ethereum Trust \4\ under BZX Rule 14.11(e)(4),\5\ which
governs the listing and trading of Commodity-Based Trust Shares on the
Exchange.\6\
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\4\ On September 6, 2023 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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ARK 21Shares Ethereum Trust
21Shares US LLC is the sponsor of the Trust (the ``Sponsor''). The
Bank of New York Mellon will be the administrator (``Administrator'')
and transfer agent (``Transfer Agent''). Foreside Global Services, LLC
will be the marketing agent (``Marketing Agent'') in connection with
the creation and redemption of ``Baskets'' of Shares. ARK Investment
Management LLC (``ARK'') will provide assistance in the marketing of
the Shares and serve as a sub-adviser. Coinbase Custody Trust Company,
LLC, a third-party regulated custodian (the ``Custodian''), will be
responsible for custody of the Trust's ether.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the ether held by the
Trust. The Trust's assets will consist of ether held by the Custodian
on behalf of the Trust. The Trust generally does not intend to

[[Page 66516]]

hold cash or cash equivalents. However, there may be situations where
the Trust will unexpectedly hold cash on a temporary basis.
The Trust will be neither an investment company registered under
the Investment Company Act of 1940, as amended,\8\ 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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\8\ 15 U.S.C. 80a-1.
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When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares (a ``Creation Basket'')
at the Trust's NAV. Authorized participants will deliver, or facilitate
the delivery of, ether to the Trust's account with the Custodian in
exchange for Shares when they purchase Shares, and the Trust, through
the Custodian, will deliver ether 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.
As noted above, the Trust is designed to protect investors against
the risk of losses through fraud and insolvency that arise by holding
digital assets, including ether, on centralized platforms.
Specifically, the Trust is designed to protect investors as follows:
(i) Assets of the Trust Protected From Insolvency
The Trust's ether will be held by its Custodian,\9\ which is a New
York chartered trust company overseen by the NYDFS and a qualified
custodian under Rule 206-4 of the Investment Adviser Act. The Custodian
will custody the Trust's ether pursuant to a custody agreement, which
requires the Custodian to maintain the Trust's ether in segregated
accounts that clearly identify the Trust as owner of the accounts and
assets held on those accounts; the segregation will be both from the
proprietary property of the Custodian and the assets of any other
customer. Such an arrangement is generally deemed to be ``bankruptcy
remote,'' that is, in the event of an insolvency of the Custodian,
assets held in such segregated accounts would not become property of
the Custodian's estate and would not be available to satisfy claims of
creditors of the Custodian. In addition, according to the Registration
Statement, the Custodian carries fidelity insurance, which covers
assets held by the Custodian in custody from risks such as theft of
funds. These arrangements provide significant protections to investors
and could have mitigated the type of losses incurred by investors in
the numerous crypto-related insolvencies, including Celsius, Voyager,
BlockFi and FTX.
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\9\ According to the Registration Statement, the Trust's cash
will be held at The Bank of New York Mellon pursuant to a cash
custody agreement.
---------------------------------------------------------------------------

(ii) Trust's Transfer Agent Will Instruct Disposition of Trust's Ether
According to the Registration Statement, except with respect to
sale of ether from time to time to cover expenses of the Trust, the
only time ether will move into or out from the Trust will be with
respect to creations or redemptions of Shares of the Trust. Authorized
Participants will deliver ether to the Trust's account with the
Custodian or Subcustodian, as applicable, in exchange for Shares of the
Trust, and the Trust, through the Custodian, will deliver ether to
Authorized Participants when those Authorized Participants redeem
Shares of the Trust. The creation and redemption procedures are
administered by the Transfer Agent, the Bank of New York Mellon, an
independent third party. In other words, according to the Registration
Statement, with very limited exceptions, the Sponsor will not give
instructions with respect to the transfer or disposition of the Trust's
ether. Ether owned by the Trust will at all times be held by, and in
the control of, the Custodian (or Subcustodian, as applicable), and
transfer of such ether to or from the Custodian (or Subcustodian) will
occur only in connection with creation and redemptions of Shares. This
will provide safeguards against the movement of ether owned by the
Trust by or to the Sponsor or affiliates of the Sponsor.
(iii) Trust's Assets Are Subject to Regular Audit
According to the Registration Statement, audit trails exist for all
movement of ether within Custodian-controlled ether wallets and are
audited annually for accuracy and completeness by an independent
external audit firm. In addition, the Trust will be audited by an
independent registered public accounting firm on a regular basis.
(iv) Trust Is Subject to the Exchange's Obligations of Companies Listed
on the Exchange and Applicable Corporate Governance Requirements
The Trust will be subject to the obligations of companies listed on
the Exchange set forth in BZX Rule 14.6, which require the listed
companies to make public disclosure of material events and any
notifications of deficiency by the Exchange, file and distribute period
financial reports, engage independent public accountants registered
with the Exchange, among other things. Such disclosures serve a key
investor protection role. In addition, the Trust will be subject to the
corporate governance requirements for companies listed on the Exchange
set forth in BZX Rule 14.10.
Background
Ethereum is a decentralized smart contract platform that
revolutionized the world of blockchain technology beyond its initial
use case of peer-to-peer payments. It introduced the idea of ``smart
contracts,'' self-executing agreements with predefined rules, enabling
developers and entrepreneurs worldwide to code and deploy decentralized
applications on top of the Ethereum network. Ether (ETH), the native
crypto asset of the network, is the fuel that allows Ethereum to
operate in the same way that we use oil to propel vehicles, heat
buildings, and produce electricity in the physical world. Users must
pay a ``gas fee'' or a transaction tax in ether for every transaction
they perform on the network. The term ``gas'' refers to the unit that
measures the computational effort required to execute specific
operations on the Ethereum blockchain. Thus, ether is analogous to a
digital commodity powering the Ethereum network. For instance, an
entire virtual economy has emerged with ether as the unit of account
and medium of exchange. This phenomenon is similar to the spontaneous
adoption of commodities like coffee and, most notably, precious metals
like gold as money by various civilizations throughout history, except
this time, in a digital-native realm.
With more than 5,946 monthly active developers as of June 2023,
Ethereum is the world's largest developer ecosystem. Moreover, the
platform is explored and experimented with by various private banks and
central banks globally. Since its launch in 2015, Ethereum has driven
the evolution of the blockchain space with innovations, ranging from
decentralized finance (DeFi), non-fungible tokens (NFTs), digital
identity solutions, and the tokenizations of off-

[[Page 66517]]

chain, or as it's commonly referred to, ``real-world'' assets. Some of
the most important innovations that have come out of DeFi include
`stablecoins,' decentralized exchanges (DEXs), and automated lending
protocols. Stablecoins maintain price parity with a target asset, such
as the U.S. dollar. Decentralized exchanges (DEXs), such as Uniswap,
allow users to trade assets without the need for an intermediary
against an ``automated market-maker'' (AMM), settling trillions of
dollars of value since their inception. As a final example,
overcollateralized lending protocols like MakerDAO, Aave, or Compound
have taken traditional credit risk out of the equation, relying instead
on smart contract automation and operators to liquidate loans when the
collateralization ratio falls below a predetermined threshold. These
and many other DeFi innovations reveal one of the core value
propositions of Ethereum--the ability to act as a credibly neutral
settlement layer where developers can automate away the need for
centralized intermediaries.
Much like bitcoin, access for U.S. retail investors to gain
exposure to ether via a transparent and U.S. regulated, U.S. exchange-
traded vehicle remains limited. 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 Ether Funds'') with high management fees and
potentially volatile premiums and discounts.\10\ Meanwhile, investors
in other countries are able to use more traditional exchange listed and
traded products (including exchange-traded funds holding physical ETH)
to gain exposure to ether. Similarly, 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.\11\
---------------------------------------------------------------------------

\10\ The premium and discount for OTC ether 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 Ether 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 buying shares of
a fund 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 ether 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 ether Fund,
meaning that even investors that do not directly buy OTC ether Funds
can be disadvantaged by extreme premiums (or discounts) and premium
volatility.
\11\ 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 Ether ETPs.
---------------------------------------------------------------------------

To this point, the lack of an ETP that holds spot ETH (a ``Spot
Ether ETP'') exposes U.S. investor assets to significant risk because
investors that would otherwise seek cryptoasset exposure through a Spot
Ether ETP are forced to find alternative exposure through fewer and
more risky means. For example, investors in OTC Ether Funds are not
afforded the benefits and protections of regulated Spot Ether ETPs,
resulting in retail investors suffering losses due to drastic movements
in the premium/discount of OTC Ether Funds. Many retail investors
likely suffered losses due to this premium/discount in OTC Ether Fund
trading; all such losses could have been avoided if a Spot Ether ETP
had been available. Additionally, many U.S. investors that held their
digital assets in accounts at FTX,\12\ Celsius Network LLC,\13\ BlockFi
Inc.\14\ and Voyager Digital Holdings, Inc.\15\ have become unsecured
creditors in the insolvencies of those entities. If a Spot Ether 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 Ether
ETP. To this point, approval of a Spot Ether 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 ether, on centralized platforms.
---------------------------------------------------------------------------

\12\ See FTX Trading Ltd., et al., Case No. 22-11068.
\13\ See Celsius Network LLC, et al., Case No. 22-10964.
\14\ See BlockFi Inc., Case No. 22-19361.
\15\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

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.\16\ With this in mind, the CME Ether
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.
---------------------------------------------------------------------------

\16\ 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 bitcoin 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.
---------------------------------------------------------------------------

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''),\17\ 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 (these proposed funds are nearly identical to the
Trust, but proposed to hold bitcoin instead of ETH) (``Spot Bitcoin
ETPs'') on the seemingly conflicting basis that the CME Bitcoin Futures
market is not a regulated market of significant size. In the recently
decided Grayscale Investments, LLC v

[[Page 66518]]

Securities and Exchange Commission,\18\ 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 (the ``Grayscale Bitcoin Trust Proposal'') and vacating
the disapproval order.\19\
---------------------------------------------------------------------------

\17\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) and 94853 (May 5, 2022) (collectively, the
``Bitcoin Futures Approvals'').
\18\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142 (the ``Grayscale Order'').
\19\ Id.
---------------------------------------------------------------------------

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 Ether Futures market represents a regulated
market of significant size as it relates both to the CME Ether Futures
market and to the spot ether market and that this proposal should be
approved.
Investment Objective
The investment objective of the Trust will be to seek to track the
performance of ether, as measured by the performance of the CME CF
Ether-Dollar Reference Rate--New York Variant (the ``Index''), adjusted
for the Trust's expenses and other liabilities. In seeking to achieve
its investment objective, the Trust will hold ether and will value the
Shares daily based on the Index. The Trust will process all creations
and redemptions in-kind in transactions with authorized participants.
The Trust is not actively managed.
The Index
The Fund will use the Index to calculate the Trust's NAV. The
administrator of the Index is CF Benchmarks Ltd. (the ``Index
Provider''). The Index currently uses substantially the same
methodology as the CME CF Ether Dollar Reference Rate (``ERR''),
including utilizing the same six ether exchanges, which is the
underlying rate to determine settlement of CME Ether Futures contracts,
except that the Index is calculated as of 4:00 p.m. ET, whereas the ERR
is calculated as of 4:00 p.m. London time.
The Index, which was introduced on November 14, 2016 is based on
materially the same methodology (except calculation time) as the Index
Provider's ERR, which was first introduced on May 14, 2018 and is the
rate on which ether futures contracts are cash-settled in U.S. dollars
at the CME. The Index is designed based on the IOSCO Principals for
Financial Benchmarks. The administrator of the Index is the Index
Provider. The Index is calculated daily and aggregates the notional
value of ether trading activity across major ether spot exchanges.
The Sponsor believes that the use of the Index is reflective of a
reasonable valuation of the average spot price of ether and that
resistance to manipulation is a priority aim of its design methodology.
The methodology: (i) takes an observation period and divides it into
equal partitions of time; (ii) then calculates the volume-weighted
median of all transactions within each partition; and (iii) the value
is determined from the arithmetic mean of the volume-weighted medians,
equally weighted. By employing the foregoing steps, the Index thereby
seeks to ensure that transactions in ether conducted at outlying prices
do not have an undue effect on the value of a specific partition, large
trades or clusters of trades transacted over a short period of time
will not have an undue influence on the index level, and the effect of
large trades at prices that deviate from the prevailing price are
mitigated from having an undue influence on the benchmark level.
In addition, the Sponsor notes that an oversight function is
implemented by the Index Provider in seeking to ensure that the Index
is administered through codified policies for Index integrity. Index
data and the description of the Index are based on information made
publicly available by the Index Provider on its website at https://www.cfbenchmarks.com. The Trust will determine the value its Shares
daily based on the value of ether as reflected by the Index. The Index
is calculated daily and aggregates the notional value of ether trading
activity across major ether spot exchanges. The Index is designed based
on the IOSCO Principals for Financial Benchmarks. The Trust also uses
the ether price determined by the Index to calculate its ``Ether
Holdings,'' which is the aggregate U.S. Dollar value of ether in the
Trust, based on the ether price determined by the Index, less its
liabilities and expenses. ``Ether Holdings per Share'' is calculated by
dividing Ether Holdings by the number of Shares currently outstanding.
Ether Holdings and Ether Holdings per Share are not measures calculated
in accordance with GAAP. Ether Holdings is not intended to be a
substitute for the Trust's NAV calculated in accordance with GAAP, and
Ether Holdings per Share is not intended to be a substitute for the
Trust's NAV per Share calculated in accordance with GAAP.
The Index was created to facilitate financial products based on
ether. It serves as a once-a-day benchmark rate of the U.S. dollar
price of ether (USD/ETH), calculated as of 4:00 p.m. ET. The Index,
which has been calculated and published since [], aggregates
the trade flow of several ether exchanges, during an observation window
between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one
ether at 4:00 p.m. ET. Specifically, the Index is calculated based on
the ``Relevant Transactions'' (as defined below) of all of its
constituent ether exchanges, which are currently Coinbase, Bitstamp,
Kraken, itBit, LMAX Digital and Gemini (the ``Constituent Platforms''),
as follows:
All Relevant Transactions are added to a joint list,
recording the time of execution, trade price and size for each
transaction.
The list is partitioned by timestamp into 12 equally-sized
time intervals of five minute length.
For each partition separately, the volume-weighted median
trade price is calculated from the trade prices and sizes of all
Relevant Transactions, i.e., across all Constituent Platforms. A
volume-weighted median differs from a standard median in that a
weighting factor, in this case trade size, is factored into the
calculation.
The Index is then determined by the equally-weighted
average of the volume medians of all partitions.
The Index does not include any futures prices in its methodology. A
``Relevant Transaction'' is any cryptocurrency versus U.S. dollar spot
trade that occurs during the observation window between 3:00 p.m. and
4:00 p.m. Eastern time on a Constituent Platform in the ETH/USD pair
that is reported and disseminated by a Constituent Platform through its
publicly available API and observed by the Index Provider. An oversight
function is implemented by the Index Provider in seeking to ensure that
the Index is administered through the Index Provider's codified
policies for Index integrity.
The Sponsor believes that the use of the Index is reflective of a
reasonable valuation of the average spot price of ether and that
resistance to manipulation is a priority aim of its design methodology.
The methodology: (i) takes an observation period and divides it into
equal partitions of time; (ii) then calculates the volume-weighted
median of all transactions within each partition; and (iii) the value
is determined from the arithmetic mean of the volume-weighted medians,
equally weighted. By employing the foregoing steps, the Index thereby
seeks to ensure that transactions in ether conducted at outlying prices
do not have an undue effect on the value of a specific partition, large
trades or clusters of

[[Page 66519]]

trades transacted over a short period of time will not have an undue
influence on the index level, and the effect of large trades at prices
that deviate from the prevailing price are mitigated from having an
undue influence on the benchmark level.
Availability of Information
In addition to the price transparency of the Index, the Trust will
provide information regarding the Trust's ether 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 ether 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 ether
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 https://www.cfbenchmarks.com/.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 ether 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 ether is available
from major market data vendors and from the exchanges on which ether
are traded. Depth of book information is also available from ether
exchanges. The normal trading hours for ether exchanges are 24 hours
per day, 365 days per year.
The Ether Custodian
The Custodian carefully considers the design of the physical,
operational and cryptographic systems for secure storage of the Trust's
private keys in an effort to lower the risk of loss or theft. The
Custodian utilizes a variety of security measures to ensure that
private keys necessary to transfer digital assets remain uncompromised
and that the Trust maintains exclusive ownership of its assets. The
operational procedures of the Custodian are reviewed by third-party
advisors with specific expertise in physical security. The devices that
store the keys will never be connected to the internet or any other
public or private distributed network--this is colloquially known as
``cold storage.'' Only specific individuals are authorized to
participate in the custody process, and no individual acting alone will
be able to access or use any of the private keys. In addition, no
combination of the executive officers of the Sponsor or the investment
professionals managing the Trust, acting alone or together, will be
able to access or use any of the private keys that hold the Trust's
ether.
Net Asset Value
NAV means the total assets of the Trust including, but not limited
to, all ether 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 ether held by the Trust based
on the price set by the Index 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 ether required is an amount of ether 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 ether 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 ether held by the Trust as of
the opening of business on that business day, adjusted for the amount
of ether 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 5,000. 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

[[Page 66520]]

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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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 ether
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 ether 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.
---------------------------------------------------------------------------

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

[[Page 66521]]

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 Ether 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 (``CME Ether Futures'')
in February 2021. Each contract represents 50 ether 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 Ether 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\
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\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
---------------------------------------------------------------------------

In addition, according to Sponsor's research, trading volume for
CME Ether Futures amounts to a total volume of $6,123,830,768.67 for
August 2023. This trading volume represents 3,646.26 in open interest
for CME Ether Futures, with an average value of $319,051,613.52. For
August 2023, there were a total of 72,223 contracts for CME Ether
Futures (equivalent to 3,611,150 ETH).
Sponsor's analyses further demonstrate that the correlation in
pricing between CME Ether Futures and Spot ETH is significantly
correlated. Notably, the Sponsor performed a pairwise correlation of
Ether daily returns across top centralized spot cryptocurrency
exchanges and the CME from March 19, 2021 to September 5, 2023. The
Sponsor's research indicates that daily correlation between the Spot
ETH and the CME ETH Futures during this time period was over 99.88%.
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\27\ including Commodity-Based Trust Shares,\28\ 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;
\29\ 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 Ether 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.
---------------------------------------------------------------------------

\27\ See Exchange Rule 14.11(f).
\28\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\29\ Much like bitcoin, the Exchange believes that ether 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 ether trading render
it difficult and prohibitively costly to manipulate the price of
ETH. The fragmentation across ether platforms, the relatively slow
speed of transactions, and the capital necessary to maintain a
significant presence on each trading platform make manipulation of
ether prices through continuous trading activity challenging. To the
extent that there are ether exchanges engaged in or allowing wash
trading or other activity intended to manipulate the price of ether
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 ether markets and the presence of arbitrageurs in those
markets means that the manipulation of the price of ether price on
any single venue would require manipulation of the global ether
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 ether 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 \30\ 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 ether 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.\31\
---------------------------------------------------------------------------

\30\ 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 Wilshire
Phoenix Disapproval.
\31\ 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.^{32 33}
---------------------------------------------------------------------------

\32\ 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.
\33\ 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 ether
primarily through CME Ether 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 66522]]

(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 Ether Futures and spot bitcoin/CME
Bitcoin Futures, applying the same rationale that the Commission
applied to a Bitcoin Futures ETF in the Bitcoin Futures Approvals \34\
also indicates that this test is satisfied for this proposal. In the
Teucrium Approval, the SEC stated:
---------------------------------------------------------------------------

\34\ 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'').

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 Teurcrium Approval at 21679.

The assumptions from this statement are also true for CME Ether
Futures. CME Ether Futures pricing is based on pricing from spot ether
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 Ether 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 Ether 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 Ether
Futures. This view is also consistent with the Advisor's research.
Further, the Trust only allows for in-kind creation and redemption,
which, as further described below, reduces the potential for
manipulation of the Shares through manipulation of the Index or any of
its individual constituents, again emphasizing that a potential
manipulator of the Shares would have to manipulate the entirety of the
ether spot market, which is led by the ether Futures market. 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 Ether Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME Ether Futures
market for a number of reasons. First, because the Trust would not hold
CME Ether Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME Ether Futures contracts use for pricing.\36\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\37\ The Sponsor expects that
the Trust would represent a very small percentage of this daily trading
volume in the spot ether 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 Ether Futures market. Second, much like the CME
Bitcoin Futures market, the CME Ether 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 ether and CME Ether 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.
---------------------------------------------------------------------------

(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 ether that represents a substantial portion of US-based
and USD denominated ether trading,\38\ 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.
---------------------------------------------------------------------------

\38\ 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 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

[[Page 66523]]

surveillance-sharing agreement between two members of the ISG, which
would give the Exchange supplemental access to data regarding spot
ether trades on Coinbase where the Exchange determines it is necessary
as part of its surveillance program for the Commodity-Based Trust
Shares.\39\ 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 ether 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.\40\
---------------------------------------------------------------------------

\39\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\40\ 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 ether through OTC Ether 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 Ether 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 ether 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 ether Futures ETFs and operating companies that are
imperfect proxies for ether exposure; and (iv) providing an alternative
to custodying spot ether.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \41\ in general and Section 6(b)(5) of the Act \42\ 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.
---------------------------------------------------------------------------

\41\ 15 U.S.C. 78f.
\42\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Commission has approved numerous series of Trust Issued
Receipts,\43\ including Commodity-Based Trust Shares,\44\ 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;
\45\ 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 Ether 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.
---------------------------------------------------------------------------

\43\ See Exchange Rule 14.11(f).
\44\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\45\ Much like bitcoin, the Exchange believes that ether 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 ether trading render
it difficult and prohibitively costly to manipulate the price of
ETH. The fragmentation across ether platforms, the relatively slow
speed of transactions, and the capital necessary to maintain a
significant presence on each trading platform make manipulation of
ether prices through continuous trading activity challenging. To the
extent that there are ether exchanges engaged in or allowing wash
trading or other activity intended to manipulate the price of ether
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 ether markets and the presence of arbitrageurs in those
markets means that the manipulation of the price of ether price on
any single venue would require manipulation of the global ether
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 ether 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 \46\ 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 ether 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.\47\
---------------------------------------------------------------------------

\46\ 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 Wilshire
Phoenix Disapproval.
\47\ See Wilshire Phoenix Disapproval.

---------------------------------------------------------------------------

[[Page 66524]]

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.\48\ \49\
---------------------------------------------------------------------------

\48\ 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.
\49\ 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 ether
primarily through CME Ether 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 Ether Futures and spot bitcoin/CME
Bitcoin Futures, applying the same rationale that the Commission
applied to a Bitcoin Futures ETF in the Bitcoin Futures Approvals \50\
also indicates that this test is satisfied for this proposal. In the
Teucrium Approval, the SEC stated:
---------------------------------------------------------------------------

\50\ 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'').

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.\51\
---------------------------------------------------------------------------

\51\ See Teucrium Approval at 21679.

The assumptions from this statement are also true for CME Ether
Futures. CME Ether Futures pricing is based on pricing from spot ether
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 Ether 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 Ether 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 Ether
Futures. This view is also consistent with the Advisor's research.
Further, the Trust only allows for in-kind creation and redemption,
which, as further described below, reduces the potential for
manipulation of the Shares through manipulation of the Index or any of
its individual constituents, again emphasizing that a potential
manipulator of the Shares would have to manipulate the entirety of the
ether spot market, which is led by the ether Futures market. 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 Ether Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME Ether Futures
market for a number of reasons. First, because the Trust would not hold
CME Ether Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME Ether Futures contracts use for pricing.\52\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\53\ The Sponsor expects that
the Trust would represent a very small percentage of this daily trading
volume in the spot ether 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 Ether Futures market. Second, much like the CME
Bitcoin Futures market, the CME Ether 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 ether and CME Ether Futures markets.
---------------------------------------------------------------------------

\52\ 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.''
\53\ Source: TokenTerminal.
---------------------------------------------------------------------------

(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, an
operator of a United States-based spot trading platform for ether that
represents a substantial portion of US-based and USD denominated ether
trading, to enter into a Spot Crypto SSA and executed an associated
term sheet.

[[Page 66525]]

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 ether 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 ether 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.
(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 ether through OTC Ether 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 Ether 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 ether 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 ether Futures ETFs and operating companies that are
imperfect proxies for ether exposure; and (iv) providing an alternative
to custodying spot ether.
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 ether
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 ether 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 ether 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 ether 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 ether
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 ether 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 ether is available
from major market data vendors and from the exchanges on which ether
are traded. Depth of book information is also available from ether
exchanges. The normal trading hours for ether 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 Ether Futures market represents
a regulated

[[Page 66526]]

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.
The Exchange believes that the proposal is, in particular, designed
to protect investors and the public interest. The investor protection
issues for U.S. investors has grown significantly over the last several
years, through roll costs for ether Futures ETFs and premium/discount
volatility and management fees for OTC Ether Funds. As discussed
throughout, this growth investor protection concerns need to be re-
evaluated and rebalanced with the prevention of fraudulent and
manipulative acts and practices concerns that previous disapproval
orders have relied upon. Finally, the Exchange notes that in addition
to all of the arguments herein which it believes sufficiently establish
the CME Ether Futures market as a regulated market of significant size,
it is logically inconsistent to find that the CME Ether Futures market
is a significant market as it relates to the CME Ether Futures market,
but not a significant market as it relates to the ether spot market for
the numerous reasons laid out above.
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.

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-2023-070 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-2023-070. 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-2023-070 and should
be submitted on or before October 18, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
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\54\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-20959 Filed 9-26-23; 8:45 am]
BILLING CODE 8011-01-P

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