Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust, 24534-24554 [2024-07333]

Download as PDF 24534 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices SR–CboeBZX–2023–095 and should be submitted on or before April 29, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.61 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2024–07334 Filed 4–5–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99887; File No. SR– NYSEARCA–2023–70] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust April 2, 2024. On October 10, 2023, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares of the Grayscale Ethereum Trust under NYSE Arca Rule 8.201–E (Commodity-Based Trust Shares). The proposed rule change was published for comment in the Federal Register on October 27, 2023.3 On December 5, 2023, pursuant to section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On January 25, 2024, the Commission instituted proceedings under section 19(b)(2)(B) of the Act 6 to determine whether to approve or disapprove the proposed rule change.7 On March 15, 2024, the Exchange filed Amendment No. 1, which replaced and superseded the proposed rule change in its entirety. Amendment No. 1 to the proposed rule change is described in Items I and II below, which Items have been prepared 61 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 98780 (Oct. 23, 2023), 88 FR 73892. Comments on the proposed rule change are available at: https:// www.sec.gov/comments/sr-nysearca-2023-70/ srnysearca202370.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 99082, 88 FR 85962 (Dec. 11, 2023). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 99428, 89 FR 6155 (Jan. 31, 2024). lotter on DSK11XQN23PROD with NOTICES1 1 15 VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares of the following under NYSE Arca Rule 8.201–E: Grayscale Ethereum Trust (ETH) (the ‘‘Trust’’).8 This Amendment No. 1 to SR– NYSEARCA–2023–70 replaces SR– NYSEARCA–2023–70 as originally filed and supersedes such filing in its entirety. The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, 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 self-regulatory organization 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 those statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Under NYSE Arca Rule 8.201–E, the Exchange may propose to list and/or trade pursuant to unlisted trading privileges ‘‘Commodity-Based Trust Shares.’’ 9 The Exchange proposes to list and trade shares (‘‘Shares’’) 10 of the Trust pursuant to NYSE Arca Rule 8.201–E.11 8 The Trust was previously named Ethereum Investment Trust, whose name was changed pursuant to a Certificate of Amendment to the Certificate of Trust of Ethereum Investment Trust filed with the Delaware Secretary of State on January 11, 2019. 9 Commodity-Based Trust Shares are securities issued by a trust that represent investors’ discrete identifiable and undivided beneficial ownership interest in the commodities deposited into the Trust. 10 The Shares are expected to be listed under the ticker symbol ‘‘ETH.’’ 11 On April 17, 2020, the Trust confidentially filed its draft registration statement on Form 10 under the ’34 Act) (File No. 377–03131) (the ‘‘Draft Registration Statement on Form 10’’). On June 16, PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 The Trust is the world’s largest Ethereum (‘‘ETH’’) investment fund by assets under management as of the date of this filing. The Trust has approximately $11.8 billion in assets under management 12 (representing 2.5% of all ETH in circulation), its 2020, the Trust confidentially filed Amendment No. 1 to the Draft Registration Statement on Form 10. The Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’), enacted on April 5, 2012, added section 6(e) to the Securities Act of 1933 (the ‘‘Securities Act’’ or ‘‘’33 Act’’). section 6(e) of the Securities Act provides that an ‘‘emerging growth company’’ may confidentially submit to the Commission a draft registration statement for confidential, non-public review by the Commission staff prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in Securities Act Rule 433(h)(4). An emerging growth company is defined in section 2(a)(19) of the Securities Act as an issuer with less than $1,000,000,000 total annual gross revenues during its most recently completed fiscal year. The Trust meets the definition of an emerging growth company and consequently submitted its Draft Registration Statement on Form 10 to the Commission on a confidential basis. On August 6, 2020, the Trust filed its registration statement on Form 10 under the Securities Act (File No. 000– 56193) (the ‘‘Registration Statement on Form 10’’). On October 2, 2020, the Trust filed Amendment No. 1 to the Registration Statement on Form 10. On, October 5, 2020, the Registration Statement on Form 10 was automatically deemed effective. On March 5, 2021, February 25, 2022, March 1, 2023, and February 23, 2024, the Trust filed its annual report on Form 10–K under the Securities Act (File No. 000–56193) (the ‘‘Annual Reports’’). On November 6, 2020, May 7, 2021, August 6, 2021, November 5, 2021, May 6, 2022, August 5, 2022, November 4, 2022, May 5, 2023, August 4, 2023, and November 3, 2023, the Trust filed its quarterly reports on Form 10–Q under the Securities Act (File No. 000–56193) (the ‘‘Quarterly Reports’’). The descriptions of the Trust, the Shares, and ETH contained herein are based, in part, on the Annual Reports and Quarterly Reports. On January 17, 2019, the Trust submitted to the Commission an amended Form D as a business trust. Shares of the Trust have been quoted on OTC Market’s OTCQX Best Marketplace under the symbol ‘‘ETHE’’ since June 20, 2019. On May 23, 2019 and March 20, 2020, the Trust published annual reports for ETHE for the periods ended December 31, 2018 and December 31, 2019, respectively. On May 23, 2019, August 8, 2019, November 11, 2019, May 8, 2020, and August 6, 2020, the Trust published quarterly reports for ETHE for the periods ended March 31, 2019, June 30, 2019, September 30, 2019, March 31, 2020, and June 30, 2020, respectively. Reports published before October 5, 2020, the date on which the Trust’s Shares became registered pursuant to section 12(g) of the Act, can be found on OTC Market’s website (https:// www.otcmarkets.com/stock/ETHE/disclosure), and reports published on or after October 5, 2020 can be found on OTC Market’s website and the Commission’s website (https://www.sec.gov/edgar/ browse/?CIK=1725210&owner=exclude). The Shares will be of the same class and will have the same rights as shares of ETHE. According to the Sponsor, freely tradeable shares of ETHE will remain freely tradeable Shares on the date of the listing of the Shares that are unregistered under the Securities Act. Restricted shares of ETHE will remain subject to private placement restrictions on such date, and the holders of such restricted shares will continue to hold those Shares subject to those restrictions until they become freely tradable Shares. 12 As of March 13, 2024. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Shares trade millions of dollars in daily volume and are held by more than a quarter of a million American investor accounts seeking exposure to ETH without the cost and complexity of purchasing the asset directly.13 However, because the Trust is not currently listed as an exchange-traded product (‘‘ETP’’), the value of the Shares has not been able to closely track the value of the Trust’s underlying ETH. The Sponsor thus believes that allowing Shares of the Trust to list and trade on the Exchange as an ETP (i.e., converting the Trust to a spot Ethereum ETP) would unlock over $1.73 billion of value 14 for the Trust’s shareholders and provide other investors with a safe and secure way to invest in ETH on a regulated national securities exchange. The sponsor of the Trust is Grayscale Investments, LLC (‘‘Sponsor’’), a Delaware limited liability company. The Sponsor is a wholly owned subsidiary of Digital Currency Group, Inc. (‘‘Digital Currency Group’’). The trustee for the Trust is Delaware Trust Company (‘‘Trustee’’). The custodian for the Trust is Coinbase Custody Trust Company, LLC (‘‘Custodian’’).15 The administrator and transfer agent of the Trust is BNY Mellon Asset Servicing, a division of The Bank of New York Mellon (the ‘‘Transfer Agent’’). The distribution and marketing agent for the Trust will be Foreside Fund Services, LLC (the ‘‘Marketing Agent’’). The index provider for the Trust is CoinDesk Indices, Inc. (the ‘‘Index Provider’’). The Trust is a Delaware statutory trust, formed on December 13, 2017, that operates pursuant to a trust agreement between the Sponsor and the Trustee (‘‘Trust Agreement’’). The Trust has no fixed termination date. lotter on DSK11XQN23PROD with NOTICES1 Operation of the Trust According to the Annual Report, the Trust’s assets consist solely of ETH.16 13 As of the date of the initial filing of this proposed rule change. See Securities Exchange Act Release No. 98780 (October 23, 2023), 88 FR 73892 (October 27, 2023) (Notice of Filing of Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust Under NYSE Arca Rule 8.201–E (Commodity-Based Trust Shares)). 14 As of March 13, 2024. 15 According to the Annual Report, Digital Currency Group owns a minority interest in Coinbase, Inc., which is the parent company of the Custodian, representing less than 1.0% of its equity. 16 The Trust may from time to time come into possession of Incidental Rights and/or IR Virtual Currency by virtue of its ownership of Ethereum, generally through a fork in the Ethereum Blockchain, an airdrop offered to holders of Ethereum or other similar event. ‘‘Incidental Rights’’ are rights to acquire, or otherwise establish dominion and control over, any virtual currency or other asset or right, which rights are incident to the Trust’s ownership of Ethereum and arise without any action of the Trust, or of the Sponsor or Trustee VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 Each Share represents a proportional interest, based on the total number of Shares outstanding, in each of the Trust’s assets as determined by reference to the Index Price,17 less the Trust’s expenses and other liabilities (which include accrued but unpaid fees and expenses). The Sponsor expects that the market price of the Shares will fluctuate over time in response to the market prices of ETH. In addition, because the Shares reflect the estimated accrued but unpaid expenses of the Trust, the number of ETH represented by a Share will gradually decrease over time as the Trust’s ETH are used to pay the Trust’s expenses. The activities of the Trust are limited to (i) issuing ‘‘Baskets’’ (as defined below) in exchange for ETH transferred to the Trust as consideration in connection with creations, (ii) transferring or selling ETH or any other staking consideration as necessary to cover the ‘‘Sponsor’s Fee’’ 18 and/or certain Trust expenses, (iii) transferring ETH in exchange for Baskets surrendered for redemption (subject to obtaining regulatory approval from the SEC and approval of the Sponsor), (iv) causing the Sponsor to sell ETH or any other staking consideration on the termination of the Trust, and (v) engaging in all administrative and security procedures necessary to accomplish such activities in accordance with the provisions of the Trust Agreement, the Custodian on behalf of the Trust. ‘‘IR Virtual Currency’’ is any virtual currency tokens, or other asset or right, acquired by the Trust through the exercise (subject to the applicable provisions of the Trust Agreement) of any Incidental Right. Although the Trust is permitted to take certain actions with respect to Incidental Rights and IR Virtual Currency in accordance with its Trust Agreement, at this time the Trust will prospectively irrevocably abandon any Incidental Rights and IR Virtual Currency. In the event the Trust seeks to change this position, the Exchange would file a subsequent proposed rule change with the Commission. 17 The ‘‘Index Price’’ means the U.S. dollar value of an ETH derived from the Digital Asset Trading Platforms that are reflected in the CoinDesk Ether Price Index (ETX), calculated at 4:00 p.m., New York time, on each business day. For purposes of the Trust Agreement, the term ETH Index Price has the same meaning as the Index Price as defined herein. 18 The Sponsor’s Fee means a fee, payable in ETH, which accrues daily in U.S. dollars at an annual rate of currently 2.5%, but which will be lowered in connection with the Trust becoming an ETP, of the NAV Fee Basis Amount of the Trust as of 4:00 p.m., New York time, on each day, provided that for a day that is not a business day, the calculation of the Sponsor’s Fee will be based on the NAV Fee Basis Amount from the most recent business day, reduced by the accrued and unpaid Sponsor’s Fee for such most recent business day and for each day after such most recent business day and prior to the relevant calculation date. The ‘‘NAV Fee Basis Amount’’ is calculated in the manner set forth under ‘‘Valuation of ETH and Determination of NAV’’ below. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 24535 Agreement, the Index License Agreement, and the Participant Agreements (each as defined below). The Trust will not be actively managed. It will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the market prices of ETH. Investment Objective According to the Annual Report, and as further described below, the Trust’s investment objective is for the value of the Shares (based on ETH per Share) to reflect the value of the ETH held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities. While an investment in the Shares is not a direct investment in ETH, the Shares are designed to provide investors with a cost-effective and convenient way to gain investment exposure to ETH. Generally speaking, a substantial direct investment in ETH may require expensive and sometimes complicated arrangements in connection with the acquisition, security and safekeeping of the ETH and may involve the payment of substantial fees to acquire such ETH from third-party facilitators through cash payments of U.S. dollars. Because the value of the Shares is correlated with the value of ETH held by the Trust, it is important to understand the investment attributes of, and the market for, ETH. The Trust uses the Index Price to calculate its ‘‘NAV,’’ which is the aggregate value, expressed in U.S. dollars, of the Trust’s assets (other than U.S. dollars or other fiat currency), less the U.S. dollar value of the Trust’s expenses and other liabilities calculated in the manner set forth under ‘‘Valuation of ETH and Determination of NAV.’’ ‘‘NAV per Share’’ is calculated by dividing NAV by the number of Shares then outstanding. Valuation of ETH and Determination of NAV The following is a description of the material terms of the Trust Agreement as they relate to valuation of the Trust’s ETH and the NAV calculations.19 On each business day at 4:00 p.m., New York time, or as soon thereafter as practicable (the ‘‘Evaluation Time’’), the Sponsor will evaluate the ETH held by the Trust and calculate and publish the NAV of the Trust. To calculate the NAV, the Sponsor will: 1. Determine the Index Price as of such business day. 19 While the Sponsor uses the terminology ‘‘NAV’’ in this filing, the term used in the Trust Agreement is ‘‘Digital Asset Holdings.’’ E:\FR\FM\08APN1.SGM 08APN1 24536 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 2. Multiply the Index Price by the Trust’s aggregate number of ETH owned by the Trust as of 4:00 p.m., New York time, on the immediately preceding day, less the aggregate number of ETH payable as the accrued and unpaid Sponsor’s Fee as of 4:00 p.m., New York time, on the immediately preceding day. 3. Add the U.S. dollar value of ETH, calculated using the Index Price, receivable under pending creation orders, if any, determined by multiplying the number of the Baskets represented by such creation orders by the Basket Amount and then multiplying such product by the Index Price.20 4. Subtract the U.S. dollar amount of accrued and unpaid Additional Trust Expenses, if any.21 5. Subtract the U.S. dollar value of the ETH, calculated using the Index Price, to be distributed under pending redemption orders, if any, determined by multiplying the number of Baskets to be redeemed represented by such redemption orders by the Basket Amount and then multiplying such product by the Index Price (the amount derived from steps 1 through 5 above, the ‘‘NAV Fee Basis Amount’’). 6. Subtract the U.S. dollar amount of the Sponsor’s Fee that accrues for such business day, as calculated based on the NAV Fee Basis Amount for such business day. In the event that the Sponsor determines that the primary methodology used to determine the Index Price is not an appropriate basis for valuation of the Trust’s ETH, the Sponsor will utilize the cascading set of rules as described in ‘‘Trust Valuation of ETH’’ below. 20 ‘‘Baskets’’ and ‘‘Basket Amount’’ have the meanings set forth in ‘‘Creation and Redemption of Shares’’ below. 21 ‘‘Additional Trust Expenses’’ are any expenses incurred by the Trust in addition to the Sponsor’s Fee that are not Sponsor-paid expenses, including, but not limited to, (i) taxes and governmental charges, (ii) expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Trust to protect the Trust or the interests of shareholders, (iii) any indemnification of the Custodian or other agents, service providers or counterparties of the Trust, (iv) the fees and expenses related to the listing, quotation or trading of the Shares on any marketplace or other alternative trading system, as determined by the Sponsor, on which the Shares may then be listed, quoted or traded, including but not limited to, NYSE Arca, Inc. (including legal, marketing and audit fees and expenses) to the extent exceeding $600,000 in any given fiscal year and (v) extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 ETH and the Ethereum Network 22 According to the Annual Report, Ethereum, or ETH, is a digital asset that is created and transmitted through the operations of the peer-to-peer ‘‘Ethereum Network,’’ a decentralized network of computers that operates on cryptographic protocols. No single entity owns or operates the Ethereum Network, the infrastructure of which is collectively maintained by a decentralized user base. The Ethereum Network allows people to exchange tokens of value, called Ether, which are recorded on a public transaction ledger known as a blockchain. ETH can be used to pay for goods and services, including computational power on the Ethereum network, or it can be converted to fiat currencies, such as the U.S. dollar, at rates determined on ‘‘Digital Asset Markets’’ 23 or in individual end-user-to-end-user transactions under a barter system. Furthermore, the Ethereum Network also allows users to write and implement smart contracts—that is, general-purpose code that executes on every computer in the network and can instruct the transmission of information and value based on a sophisticated set of logical conditions. Using smart contracts, users can create markets, store registries of debts or promises, represent the ownership of property, move funds in accordance with conditional instructions and create digital assets other than ETH on the Ethereum Network. Smart contract operations are executed on the Ethereum Blockchain in exchange for payment of ETH. The Ethereum Network is one of a number of projects intended to expand blockchain use beyond just a peer-topeer money system. The Ethereum Network went live on July 30, 2015. Unlike other digital assets, such as Bitcoin, which are solely created through a progressive mining process, 72.0 million ETH were created in connection with the launch of the Ethereum Network. At the time of the network launch, a non-profit called the Ethereum Foundation was the sole organization dedicated to protocol development. The Ethereum Network is decentralized in that it does not require governmental authorities or financial institution intermediaries to create, transmit, or determine the value of ETH. Rather, following the initial distribution of ETH, ETH is created, burned, and allocated by the Ethereum Network protocol through a process that is currently subject to an issuance and burn rate. The value of ETH is determined by the supply of and demand for ETH on the Digital Asset Trading Platforms or in private enduser-to-end-user transactions. New ETH are created and rewarded to the validators of a block in the Ethereum Blockchain for verifying transactions. The Ethereum Blockchain is effectively a decentralized database that includes all blocks that have been validated, and it is updated to include new blocks as they are validated. Each ETH transaction is broadcast to the Ethereum Network and, when included in a block, recorded in the Ethereum Blockchain. As each new block records outstanding ETH transactions, and outstanding transactions are settled and validated through such recording, the Ethereum Blockchain represents a complete, transparent and unbroken history of all transactions of the Ethereum Network. Among other things, ETH is used to pay for transaction fees and computational services (i.e., smart contracts) on the Ethereum Network; users of the Ethereum Network pay for the computational power of the machines executing the requested operations with ETH. Requiring payment in ETH on the Ethereum Network incentivizes developers to write quality applications and increases the efficiency of the Ethereum Network because wasteful code costs more, while also ensuring that the Ethereum Network remains economically viable by compensating for contributed computational resources. 22 The description of ETH and the Ethereum Network in this section was provided by the Sponsor and is based on the Annual Report. 23 A ‘‘Digital Asset Market’’ is a ‘‘Brokered Market,’’ ‘‘Dealer Market,’’ ‘‘Principal-to-Principal Market’’ or ‘‘Exchange Market,’’ as each such term is defined in the Financial Accounting Standards Board Accounting Standards Codification Master Glossary. The ‘‘Digital Asset Trading Platform Market’’ is the global trading platform market for the trading of ETH, which consists of transactions on electronic Digital Asset Trading Platforms. A ‘‘Digital Asset Trading Platform’’ is an electronic marketplace where trading participants may trade, buy and sell ETH based on bid-ask trading. The largest Digital Asset Trading Platforms are online and typically trade on a 24-hour basis, publishing transaction price and volume data. Smart Contracts and Development on the Ethereum Network PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Smart contracts are programs that run on a blockchain that can execute automatically when certain conditions are met. Smart contracts facilitate the exchange of anything representative of value, such as money, information, property, or voting rights. Using smart contracts, users can send or receive digital assets, create markets, store registries of debts or promises, represent ownership of property or a company, move funds in accordance with E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices conditional instructions and create new digital assets. Development on the Ethereum Network involves building more complex tools on top of smart contracts, such as decentralized apps (‘‘DApps’’); organizations that are autonomous, known as decentralized autonomous organizations (‘‘DAOs’’); and entirely new decentralized networks. For example, a company that distributes charitable donations on behalf of users could hold donated funds in smart contracts that are paid to charities only if the charity satisfies certain predefined conditions. Moreover, the Ethereum Network has also been used as a platform for creating new digital assets and conducting their associated initial coin offerings. As of December 31, 2023, a majority of digital assets were built on the Ethereum Network, with such assets representing a significant amount of the total market value of all digital assets. More recently, the Ethereum Network has been used for decentralized finance (‘‘DeFi’’) or open finance platforms, which seek to democratize access to financial services, such as borrowing, lending, custody, trading, derivatives and insurance, by removing third-party intermediaries. DeFi can allow users to lend and earn interest on their digital assets, exchange one digital asset for another and create derivative digital assets such as stablecoins, which are digital assets pegged to a reserve asset such as fiat currency. Over the course of 2023, between $20 billion and $30 billion worth of digital assets were locked up as collateral on DeFi platforms on the Ethereum Network.24 In addition, the Ethereum Network and other smart contract platforms have been used for creating non-fungible tokens, or ‘‘NFTs.’’ Unlike digital assets native to smart contract platforms which are fungible and enable the payment of fees for smart contract execution. Instead, NFTs allow for digital ownership of assets that convey certain rights to other digital or real-world assets. This new paradigm allows users to own rights to other assets through NFTs, which enable users to trade them with others on the Ethereum Network. For example, an NFT may convey rights to a digital asset that exists in an online game or a DApp, and users can trade their NFT in the DApp or game, and carry them to other digital experiences, creating an entirely new free-market, internet-native economy that can be monetized in the physical world. 24 DeFiLlama, ‘‘Ethereum Total Value Locked,’’ https://defillama.com/chain/Ethereum. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 Overview of the Ethereum Network’s Operations In order to own, transfer, or use ETH directly on the Ethereum Network (as opposed to through an intermediary, such as a custodian), a person generally must have internet access to connect to the Ethereum Network. ETH transactions may be made directly between end-users without the need for a third-party intermediary. To prevent the possibility of double-spending ETH, a user must notify the Ethereum Network of the transaction by broadcasting the transaction data to its network peers. The Ethereum Network provides confirmation against doublespending by memorializing every transaction in the Ethereum Blockchain, which is publicly accessible and transparent. This memorialization and verification against double-spending is accomplished through the Ethereum Network validation process, which adds ‘‘blocks’’ of data, including recent transaction information, to the Ethereum Blockchain. Summary of an ETH Transaction Prior to engaging in ETH transactions directly on the Ethereum Network, a user generally must first install on its computer or mobile device an Ethereum Network software program that will allow the user to generate a private and public key pair associated with an ETH address, commonly referred to as a ‘‘wallet.’’ The Ethereum Network software program and the ETH address also enable the user to connect to the Ethereum Network and transfer ETH to, and receive ETH from, other users. Each Ethereum Network address, or wallet, is associated with a unique ‘‘public key’’ and ‘‘private key’’ pair. To receive ETH, the ETH recipient must provide its public key to the party initiating the transfer. This activity is analogous to a recipient for a transaction in U.S. dollars providing a routing address in wire instructions to the payor so that cash may be wired to the recipient’s account. The payor approves the transfer to the address provided by the recipient by ‘‘signing’’ a transaction that consists of the recipient’s public key with the private key of the address from where the payor is transferring the ETH. The recipient, however, does not make public or provide to the sender its related private key. Neither the recipient nor the sender reveal their private keys in a transaction, because the private key authorizes transfer of the funds in that address to other users. Therefore, if a user loses his or her private key, the user may permanently lose access to the PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 24537 ETH contained in the associated address. Likewise, ETH is irretrievably lost if the private key associated with them is deleted and no backup has been made. When sending ETH, a user’s Ethereum Network software program must validate the transaction with the associated private key. In addition, since every computation on the Ethereum Network requires processing power, there is a transaction fee involved with the transfer that is paid by the payor. The resulting digitally validated transaction is sent by the user’s Ethereum Network software program to the Ethereum Network validators to allow transaction confirmation. Ethereum Network validators record and confirm transactions when they validate and add blocks of information to the Ethereum Blockchain. In proof-ofstake, validators compete to be randomly selected to validate transactions. When a validator is selected to validate a block, it creates that block, which includes data relating to (i) the verification of newly submitted and accepted transactions and (ii) a reference to the prior block in the Ethereum Blockchain to which the new block is being added. The validator becomes aware of outstanding, unrecorded transactions through the data packet transmission and distribution discussed above. Upon the addition of a block included in the Ethereum Blockchain, the Ethereum Network software program of both the spending party and the receiving party will show confirmation of the transaction on the Ethereum Blockchain and reflect an adjustment to the ETH balance in each party’s Ethereum Network public key, completing the ETH transaction. Once a transaction is confirmed on the Ethereum Blockchain, it is irreversible. Some ETH transactions are conducted ‘‘off-blockchain’’ and are therefore not recorded in the Ethereum Blockchain. These ‘‘off-blockchain transactions’’ involve the transfer of control over, or ownership of, a specific digital wallet holding ETH or the reallocation of ownership of certain ETH in a pooledownership digital wallet, such as a digital wallet owned by a Digital Asset Trading Platform. In contrast to onblockchain transactions, which are publicly recorded on the Ethereum Blockchain, information and data regarding off-blockchain transactions are generally not publicly available. Therefore, off-blockchain transactions are not truly ETH transactions in that they do not involve the transfer of transaction data on the Ethereum Network and do not reflect a movement E:\FR\FM\08APN1.SGM 08APN1 24538 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices of ETH between addresses recorded in the Ethereum Blockchain. For these reasons, off-blockchain transactions are subject to risks, as any such transfer of ETH ownership is not protected by the protocol behind the Ethereum Network or recorded in, and validated through, the blockchain mechanism. Creation of New ETH Initial Creation of ETH Unlike other digital assets such as Bitcoin, which are solely created through a progressive mining process, 72.0 million ETH were created in connection with the launch of the Ethereum Network. The initial 72.0 million ETH were distributed as follows: Initial Distribution: 60.0 million ETH, or 83.33% of the supply, was sold to the public in a crowd sale conducted between July and August 2014 that raised approximately $18 million. Ethereum Foundation: 6.0 million ETH, or 8.33% of the supply, was distributed to the Ethereum Foundation for operational costs. Ethereum Developers: 3.0 million ETH, or 4.17% of the supply, was distributed to developers who contributed to the Ethereum Network. Developer Purchase Program: 3.0 million ETH, or 4.17% of the supply, was distributed to members of the Ethereum Foundation to purchase at the initial crowd sale price. Following the launch of the Ethereum Network, ETH supply initially increased through a progressive mining process. Following the introduction of EIP–1559, described below, ETH supply and issuance rate varies based on factors such as recent use of the network. lotter on DSK11XQN23PROD with NOTICES1 Proof-of-Work Mining Process Prior to September 2022, Ethereum operated using a proof-of-work consensus mechanism. Under proof-ofwork, in order to incentivize those who incurred the computational costs of securing the network by validating transactions, there was a reward given to the computer that was able to create the latest block on the chain. Every 14 seconds, on average, a new block was added to the Ethereum Blockchain with the latest transactions processed by the network, and the computer that generated this block was awarded a variable amount of ETH, depending on use of the network at the time. In certain mining scenarios, ETH was sometimes sent to another miner if they were also able to find a solution, but their block was not included. This scenario is referred to as an uncle/aunt reward. Due to the nature of the algorithm for block VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 generation, this process (generating a ‘‘proof-of-work’’) was guaranteed to be random. The process by which a digital asset was ‘‘mined’’ resulted in new blocks being added to such digital asset’s blockchain and new digital assets being issued to the miners. Prior to the Merge upgrade, described below, computers on the Ethereum Network engaged in a set of prescribed complex mathematical calculations in order to add a block to the Ethereum Blockchain and thereby confirm ETH transactions included in that block’s data. ETH are removed from supply at a rate that varies with network usage. On occasion, the ETH supply has been deflationary over a 24-hour period as a result of the burn mechanism. The attributes of the new consensus algorithm are subject to change, but in sum, the new consensus algorithm and related modifications reduced total new ETH issuances and could turn the ETH supply deflationary over the long term. As of December 31, 2023, approximately 120 million ETH were outstanding.25 Proof-of-Stake Process In the second half of 2020, the Ethereum Network began the first of several stages of an upgrade that was initially known as ‘‘Ethereum 2.0’’ and eventually became known as the ‘‘Merge’’ to transition the Ethereum Network from a proof-of-work consensus mechanism to a proof-ofstake consensus mechanism. The Merge was completed on September 15, 2022, and the Ethereum Network has operated on a proof-of-stake model since such time. Unlike proof-of-work, in which miners expend computational resources to compete to validate transactions and are rewarded coins in proportion to the amount of computational resources expended, in proof-of-stake, miners (sometimes called validators) risk or ‘‘stake’’ coins to compete to be randomly selected to validate transactions and are rewarded coins in proportion to the amount of coins staked. Any malicious activity, such as validating multiple blocks, disagreeing with the eventual consensus, or otherwise violating protocol rules, results in the forfeiture or ‘‘slashing’’ of a portion of the staked coins. Proof-ofstake is viewed as more energy efficient and scalable than proof-of-work and is sometimes referred to as ‘‘virtual mining.’’ As of December 31, 2023, every 12 seconds, approximately, a new block is added to the Ethereum Blockchain with the latest transactions processed by the network, and the validator that generated this block is awarded ETH. Modifications to the ETH Protocol The Ethereum Network is an open source project with no official developer or group of developers that controls it. However, the Ethereum Network’s development has historically been overseen by the Ethereum Foundation and other core developers. The Ethereum Foundation and core developers are able to access and alter the Ethereum Network source code and, as a result, they are responsible for quasi-official releases of updates and other changes to the Ethereum Network’s source code. For example, in 2019, the Ethereum Network completed a network upgrade called Metropolis that was designed to enhance the usability of the Ethereum Network and was introduced in two stages. The first stage, called Byzantium, was implemented in October 2017. The purpose of Byzantium was to increase the network’s privacy, security, and scalability and reduce the block reward from 5.0 ETH to 3.0 ETH. The second stage, called Constantinople, was implemented in February 2019, along with another upgrade, called St. Petersburg. Another network upgrade, called Istanbul, was implemented in December 2019. The purpose of Istanbul was to make the network more resistant to denial of service attacks, enable greater ETH and Zcash interoperability as well as other Equihash-based proofof-work digital assets, and to increase the scalability and performance for solutions on zero-knowledge privacy technology like SNARKs and STARKs. The purpose of these upgrades was to prepare the Ethereum Network for the introduction of a proof-of-stake algorithm and reduce the block reward from 3.0 ETH to 2.0 ETH. In the second half of 2020, the Ethereum Network began the first of several stages of an upgrade culminating in the Merge. The Merge amended the Ethereum Network’s consensus mechanism to include proof-of-stake. In April 2023, Limits on ETH Supply The rate at which new ETH are issued and put into circulation is expected to vary. As of December 31, 2023, following the Merge, approximately 2,400 ETH are issued per day, though the issuance rate varies based on the number of validators on the network. In addition, the issuance of new ETH could be partially or completely offset by the burn mechanism introduced by the EIP–1559 modification, under which PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 25 CoinMarketCap, ‘‘Ethereum,’’ https:// coinmarketcap.com/currencies/ethereum/. E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices the Ethereum Network completed a network upgrade called Shapella, which enabled users to unstake their previously-staked ETH and remove it from the relevant smart contract. Forthcoming planned upgrades include Dencun, which will enable ‘‘protodanksharding.’’ The purpose of protodanksharding is to increase scalability of the Ethereum Network by allowing easy synchronization with Layer 2 networks capable of processing many more transactions than the Ethereum Blockchain alone. The intended effect would be to increase the rate of transactions that can be processed by the Ethereum Network. In 2021, the Ethereum Network implemented the EIP–1559 upgrade. EIP–1559 changed the methodology used to calculate the fees paid to miners (now validators). This new methodology splits fees into two components: a base cost and priority fee. The base cost is now removed from circulation, or ‘‘burnt’’, and the priority fee is paid to validators. EIP–1559 has reduced the total net issuance of ETH fees to validators. The release of updates to the Ethereum Network’s source code does not guarantee that the updates will be automatically adopted. Users and validators must accept any changes made to the Ethereum source code by downloading the proposed modification of the Ethereum Network’s source code. A modification of the Ethereum Network’s source code is effective only with respect to the Ethereum users and validators that download it. If a modification is accepted by only a percentage of users and validators, a division in the Ethereum Network will occur such that one network will run the pre-modification source code and the other network will run the modified source code. Such a division is known as a ‘‘fork.’’ Consequently, as a practical matter, a modification to the source code becomes part of the Ethereum Network only if accepted by participants collectively having most of the validation power on the Ethereum Network. Core development of the Ethereum source code has increasingly focused on modifications of the Ethereum protocol to increase speed and scalability and also allow for financial and nonfinancial next generation uses. The Trust’s activities will not directly relate to such projects, though such projects may utilize ETH as tokens for the facilitation of their non-financial uses, thereby potentially increasing demand for ETH and the utility of the Ethereum Network as a whole. Conversely, projects that operate and are built within the Ethereum Blockchain may VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 increase the data flow on the Ethereum Network and could either ‘‘bloat’’ the size of the Ethereum Blockchain or slow confirmation times. Custody of the Trust’s ETH Digital assets and digital asset transactions are recorded and validated on blockchains, the public transaction ledgers of a digital asset network. Each digital asset blockchain serves as a record of ownership for all of the units of such digital asset, even in the case of certain privacy-preserving digital assets, where the transactions themselves are not publicly viewable. All digital assets recorded on a blockchain are associated with a public blockchain address, also referred to as a digital wallet. Digital assets held at a particular public blockchain address may be accessed and transferred using a corresponding private key. Key Generation Public addresses and their corresponding private keys are generated by the Custodian in secret key generation ceremonies at secure locations inside faraday cages, which are enclosures used to block electromagnetic fields and thus mitigate against attacks. The Custodian uses quantum random number generators to generate the public and private key pairs. Once generated, private keys are encrypted, separated into ‘‘shards,’’ and then further encrypted. After the key generation ceremony, all materials used to generate private keys, including computers, are destroyed. All key generation ceremonies are performed offline. No party other than the Custodian has access to the private key shards of the Trust, including the Trust itself. Key Storage Private key shards are distributed geographically in secure vaults around the world, including in the United States. The locations of the secure vaults may change regularly and are kept confidential by the Custodian for security purposes. The ‘‘Digital Asset Account’’ is a segregated custody account controlled and secured by the Custodian to store private keys, which allows for the transfer of ownership or control of the Trust’s ETH on the Trust’s behalf. The Digital Asset Account uses offline storage, or ‘‘cold,’’ mechanisms to secure the Trust’s private keys. The term cold storage refers to a safeguarding method by which the private keys corresponding to digital assets are disconnected and/or deleted entirely PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 24539 from the internet. Cold storage of private keys may involve keeping such keys on a non-networked (or ‘‘air-gapped’’) computer or electronic device or storing the private keys on a storage device (for example, a USB thumb drive) or printed medium (for example, papyrus, paper, or a metallic object). A digital wallet may receive deposits of digital assets but may not send digital assets without use of the digital assets’ corresponding private keys. In order to send digital assets from a digital wallet in which the private keys are kept in cold storage, either the private keys must be retrieved from cold storage and entered into an online, or ‘‘hot,’’ digital asset software program to sign the transaction, or the unsigned transaction must be transferred to the cold server in which the private keys are held for signature by the private keys and then transferred back to the online digital asset software program. At that point, the user of the digital wallet can transfer its digital assets. Security Procedures The Custodian is the custodian of the Trust’s private keys (which, as noted above, facilitate the transfer of ownership or control of the Trust’s ETH) in accordance with the terms and provisions of the custodian agreement by and between the Custodian, the Sponsor and the Trust (the ‘‘Custodian Agreement’’). Transfers from the Digital Asset Account require certain security procedures, including, but not limited to, multiple encrypted private key shards, usernames, passwords and 2step verification. Multiple private key shards held by the Custodian must be combined to reconstitute the private key to sign any transaction in order to transfer the Trust’s assets. Private key shards are distributed geographically in secure vaults around the world, including in the United States. As a result, if any one secure vault is ever compromised, this event will have no impact on the ability of the Trust to access its assets, other than a possible delay in operations, while one or more of the other secure vaults is used instead. These security procedures are intended to remove single points of failure in the protection of the Trust’s assets. Transfers of ETH to the Digital Asset Account will be available to the Trust once processed on the Blockchain. Subject to obtaining regulatory approval to operate a redemption program and authorization of the Sponsor, the process of accessing and withdrawing ETH from the Trust to redeem a Basket by an Authorized E:\FR\FM\08APN1.SGM 08APN1 24540 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Participant 26 will follow the same general procedure as transferring ETH to the Trust to create a Basket by an Authorized Participant, only in reverse. The Sponsor will maintain ownership and control of the Trust’s ETH in a manner consistent with good delivery requirements for spot commodity transactions. ETH Value Digital Asset Trading Platform Valuation According to the Annual Report, the value of ETH is determined by the value that various market participants place on ETH through their transactions. The most common means of determining the value of an ETH is by surveying one or more Digital Asset Trading Platforms where ETH is traded publicly and transparently (e.g., Coinbase, Kraken, LMAX Digital, and Crypto.com). Additionally, there are over-the-counter dealers or market makers that transact in ETH. Digital Asset Trading Platform Public Market Data On each online Digital Asset Trading Platform, ETH is traded with publicly disclosed valuations for each executed trade, measured by one or more fiat currencies such as the U.S. dollar or euro, or by the widely used cryptocurrency Bitcoin. Over-thecounter dealers or market makers do not typically disclose their trade data. As of December 31, 2023, the Digital Asset Trading Platforms included in the Index were Coinbase, Kraken, LMAX Digital, and Crypto.com. As further described below, the Sponsor and the Trust reasonably believe each of these Digital Asset Trading Platforms are in material compliance with applicable U.S. federal and state licensing requirements and maintain practices and policies designed to comply with know-your-customer (‘‘KYC’’) and antimoney-laundering (‘‘AML’’) regulations. Coinbase: A U.S.-based trading platform registered as a money services business (‘‘MSB’’) with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (‘‘FinCEN’’) and licensed as a virtual currency business under the New York State Department of Financial Services (‘‘NYDFS’’) BitLicense, as well as a money transmitter in various U.S. states. Crypto.com: A Singapore-based trading platform registered as an MSB with FinCEN and licensed as a money transmitter in various U.S. states. Crypto.com does not hold a BitLicense. Kraken: A U.S.-based trading platform registered as an MSB with FinCEN and licensed as a money transmitter in various U.S. states. Kraken does not hold a BitLicense. LMAX Digital: A U.K.-based trading platform registered as a broker with the Financial Conduct Authority. LMAX Digital does not hold a BitLicense. Currently, there are several Digital Asset Trading Platforms operating worldwide, and online Digital Asset Trading Platforms represent a substantial percentage of ETH buying and selling activity and provide the most data with respect to prevailing valuations of ETH. These trading platforms include established trading platforms such as those included in the Index, which provide a number of options for buying and selling ETH. The below table reflects the trading volume in ETH and market share 27 of the ETH– U.S. dollar trading pairs of each of the Digital Asset Trading Platforms included in the Index as of December 31, 2023 (collectively, ‘‘Constituent Trading Platforms’’),28 using data reported by the Index Provider from December 14, 2017 to December 31, 2023: Volume (ETH) lotter on DSK11XQN23PROD with NOTICES1 Digital Asset Trading Platforms included in the Index as of December 31, 2023 Market share (%) Coinbase ...................................................................................................................................................... Kraken .......................................................................................................................................................... LMAX Digital ................................................................................................................................................ Crypto.com ................................................................................................................................................... 416,006,668 135,358,403 69,287,707 14,750,030 34.75 11.31 5.79 1.23 Total ETH–U.S. Dollar trading pair ...................................................................................................... 635,402,808 53.08 The domicile, regulation, and legal compliance of the Digital Asset Trading Platforms included in the Index varies. Information regarding each Digital Asset Trading Platform may be found, where available, on the websites for such Digital Asset Trading Platforms, among other places. 26 ‘‘Authorized Participant’’ has the meaning set forth in ‘‘Creation and Redemption of Shares’’ below. 27 Market share is calculated using trading volume (in ETH) for certain Digital Asset Trading Platforms, including Coinbase, Kraken, LMAX Digital and Crypto.com, as well as certain other large U.S.-dollar denominated Digital Asset Trading Platforms that were not included in the Index as of December 31, 2023, including Bitstamp, Binance.US (data included from April 1, 2020), Bittrex (data included from July 31, 2018), Bitfinex, Bitflyer (data included from November 13, 2022), Cboe Digital (data included from October 1, 2020), Gemini, HitBTC (data included from June 13, 2019 through March 31, 2020), itBit (data included from December 27, 2018), OKCoin (data included from December 25, 2018) and FTX.US (data included from July 1, 2021 through November 12, 2022). 28 On January 19, 2020, the Index Provider removed itBit due to a lack of trading volume and added LMAX Digital to the Index based on the trading platform meeting the liquidity thresholds as part of its scheduled quarterly review. On July 23, 2022, the Index Provider removed Bitstamp from the Index due to the trading platform’s failure to meet the minimum liquidity requirement, and added FTX.US as a Constituent Trading Platform based on its satisfaction of the minimum liquidity requirement as part of its scheduled quarterly review. On November 10, 2022, the Index Provider removed FTX.US from the Index due to the trading platform’s announcement that trading on the trading platform would be halted, which would impact FTX.US’s ability to reliably publish trade prices and volume on a real-time basis through APIs, and did not add any Constituent Trading Platforms as part of its review. On January 28, 2023, VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 The Index and the Index Price The Index is a U.S. dollardenominated composite reference rate for the price of ETH. The Index is PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 designed to (i) mitigate the effects of fraud, manipulation and other anomalous trading activity from impacting the ETH reference rate, (ii) provide a real-time, volume-weighted fair value of ETH and (iii) appropriately the Index Provider added Binance.US to the Index due to the trading platform meeting the minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its quarterly review. On June 17, 2023, the Index Provider removed Binance.US from the Index due to Binance.US’s announcement that the trading platform was suspending U.S. dollar (‘‘USD’’) deposits and withdrawals and planned to delist its USD trading pairs, and did not add any Constituent Trading Platforms as part of its review. On October 28, 2023, the Index Provider added Crypto.com to the Index due to the trading platform meeting the minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its scheduled quarterly review. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices handle and adjust for non-market related events. The Index Price is determined by the Index Provider through a process in which trade data is cleansed and compiled in such a manner as to algorithmically reduce the impact of anomalistic or manipulative trading. This is accomplished by adjusting the weight of each data input based on price deviation relative to the observable set, as well as recent and long-term trading volume at each venue relative to the observable set. The value of the Index is calculated and disseminated on a 24-hour basis and will be available on a continuous basis at https://www.coindesk.com/ indices. Constituent Trading Platform Selection lotter on DSK11XQN23PROD with NOTICES1 According to the Annual Report, the Digital Asset Trading Platforms that are included in the Index are selected by the Index Provider utilizing a methodology that is guided by the International Organization of Securities Commissions (‘‘IOSCO’’) principles for financial benchmarks. For a trading platform to become a Constituent Trading Platform, it must satisfy the criteria listed below (the ‘‘Inclusion Criteria’’): • Sufficient USD liquidity relative to the size of the listed assets; • No evidence in the past 12 months of trading restrictions on individuals or entities that would otherwise meet the trading platform’s eligibility requirements to trade; • No evidence in the past 12 months of undisclosed restrictions on deposits or withdrawals from user accounts; • Real-time price discovery; • Limited or no capital controls; 29 • Transparent ownership including a publicly-owned ownership entity; • Publicly available language and policies addressing legal and regulatory compliance in the U.S., including KYC (Know Your Customer), AML (AntiMoney Laundering) and other policies designed to comply with relevant regulations that might apply to it; • Be a U.S.-domiciled trading platform or a non-U.S. domiciled trading platform that is able to service U.S. investors; and • Offer programmatic spot trading of the trading pair 30 and reliably publish 29 ‘‘Capital controls’’ in this context means governmental sanctions that would limit the movement of capital into, or out of, the jurisdiction in which such Digital Asset Trading Platforms operate. 30 Trading platforms with programmatic trading offer traders an application programming interface that permits trading by sending programmed commands to the trading platform. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 trade prices and volumes on a real-time basis through Rest and Websocket APIs. A Digital Asset Trading Platform is removed as a Constituent Trading Platform when it no longer satisfies the Inclusion Criteria. The Index Provider does not currently include data from over-the-counter markets or derivatives platforms among the Constituent Trading Platforms. According to the Annual Report, over-the-counter data is not currently included because of the potential for trades to include a significant premium or discount paid for larger liquidity, which creates an uneven comparison relative to more active markets. There is also a higher potential for over-the-counter transactions to not be arms-length, and thus not be representative of a true market price. ETH derivative markets data, including ETH futures markets and perpetuals markets data, are also not currently included. While the Index Provider has no plans to include data from over-the-counter markets or derivative platforms at this time, the Index Provider will consider IOSCO principles for financial benchmarks, the management of trading venues of ETH derivatives and the aforementioned Inclusion Criteria when considering whether to include over-the-counter or derivative platform data in the future. The Index Provider and the Sponsor have entered into the index license agreement, dated as of February 1, 2022 (as amended, the ‘‘Index License Agreement’’), governing the Sponsor’s use of the Index Price.31 Pursuant to the terms of the Index License Agreement, the Index Provider may adjust the calculation methodology for the Index Price without notice to, or consent of, the Trust or its shareholders. The Index Provider may decide to change the calculation methodology to maintain the integrity of the Index Price calculation should it identify or become aware of previously unknown variables or issues with the existing methodology that it believes could materially impact its performance and/or reliability. The Index Provider has sole discretion over the determination of Index Price and may change the methodologies for determining the Index Price from time to time. Shareholders will be notified of any material changes to the calculation methodology or the Index Price in the Trust’s current reports and will be notified of all other changes that the Sponsor considers significant in the Trust’s periodic or current reports. The 31 Upon entering into the Index License Agreement, the Sponsor and the Index Provider terminated the license agreement between the parties dated as of February 28, 2019. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 24541 Sponsor will determine the materiality of any changes to the Index Price on a case-by-case basis, in consultation with external counsel. The Index Provider may change the trading venues that are used to calculate the Index or otherwise change the way in which the Index is calculated at any time. For example, the Index Provider has scheduled quarterly reviews in which it may add or remove Constituent Trading Platforms that satisfy or fail the Inclusion Criteria. The Index Provider does not have any obligation to consider the interests of the Sponsor, the Trust, the shareholders, or anyone else in connection with such changes. While the Index Provider is not required to publicize or explain the changes or to alert the Sponsor to such changes, it has historically notified the Trust (and other subscribers to the Index) of any material changes to the Constituent Trading Platforms, including any additions or removals, contemporaneous with its issuance of press releases in connection with the same. The Sponsor will notify investors of any such material event by filing a current report on Form 8–K. Although the Index methodology is designed to operate without any manual intervention, rare events would justify manual intervention. Intervention of this kind would be in response to nonmarket-related events, such as the halting of deposits or withdrawals of funds on a Digital Asset Trading Platform, the unannounced closure of operations on a Digital Asset Trading Platform, insolvency or the compromise of user funds. In the event that such an intervention is necessary, the Index Provider would issue a public announcement through its website, API and other established communication channels with its clients. Determination of the Index Price The Index applies an algorithm to the price of ETH on the Constituent Trading Platforms calculated on a per second basis over a 24-hour period. The Index’s algorithm is expected to reflect a fourpronged methodology to calculate the Index Price from the Constituent Trading Platforms: Volume Weighting: Constituent Trading Platforms with greater liquidity receive a higher weighting in the Index, increasing the ability to execute against (i.e., replicate) the Index in the underlying spot markets. Price-Variance Weighting: The Index Price reflects data points that are discretely weighted in proportion to their variance from the rest of the Constituent Trading Platforms. As the price at a particular trading platform diverges from the prices at the rest of E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 24542 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices the Constituent Trading Platforms, its weight in the Index Price consequently decreases. Inactivity Adjustment: The Index Price algorithm penalizes stale activity from any given Constituent Trading Platform. When a Constituent Trading Platform does not have recent trading data, its weighting in the Index Price is gradually reduced until it is deweighted entirely. Similarly, once trading activity at a Constituent Trading Platform resumes, the corresponding weighting for that Constituent Trading Platform is gradually increased until it reaches the appropriate level. Manipulation Resistance: In order to mitigate the effects of wash trading and order book spoofing, the Index only includes executed trades in its calculation. Additionally, the Index only includes Constituent Trading Platforms that charge trading fees to its users in order to attach a real, quantifiable cost to any manipulation attempts. The Index Provider re-evaluates the weighting algorithm on a periodic basis, but maintains discretion to change the way in which an Index Price is calculated based on its periodic review or in extreme circumstances and does not make the exact methodology to calculate the Index Price publicly available. Nonetheless, the Sponsor believes that the Index is designed to limit exposure to trading or price distortion of any individual Digital Asset Trading Platform that experiences periods of unusual activity or limited liquidity by discounting, in real-time, anomalous price movements at individual Digital Asset Trading Platforms. The Sponsor believes the Index Provider’s selection process for Constituent Trading Platforms as well as the methodology of the Index Price’s algorithm provides a more accurate picture of ETH price movements than a simple average of Digital Asset Trading Platform spot prices, and that the weighting of ETH prices on the Constituent Trading Platforms limits the inclusion of data that is influenced by temporary price dislocations that may result from technical problems, limited liquidity or fraudulent activity elsewhere in the ETH spot market. By referencing multiple trading venues and weighting them based on trade activity, the Sponsor believes that the impact of any potential fraud, manipulation or anomalous trading activity occurring on any single venue is reduced. If the Index Price becomes unavailable, or if the Sponsor determines in good faith that such Index Price does not reflect an accurate price VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 for ETH, then the Sponsor will, on a best efforts basis, contact the Index Provider to obtain the Index Price directly from the Index Provider. If after such contact such Index Price remains unavailable or the Sponsor continues to believe in good faith that such Index Price does not reflect an accurate price for ETH, then the Sponsor will employ a cascading set of rules to determine the Index Price, as described below in ‘‘Determination of the Index Price When Index Price is Unavailable.’’ The Trust values its ETH for operational purposes by reference to the Index Price. The Index Price is the value of an ETH as represented by the Index, calculated at 4:00 p.m., New York time, on each business day. Illustrative Example For the purposes of illustration, outlined below are examples of how the attributes that impact weighting and adjustments in the aforementioned methodology may be utilized to generate the Index Price for a digital asset. For example, Constituent Trading Platforms used to calculate the Index Price of the digital asset may include trading platforms such as Coinbase, Kraken, LMAX Digital, and Crypto.com. The Index Price algorithm, as described above, accounts for manipulation at the outset by only including data from executed trades on Constituent Trading Platforms that charge trading fees. Then, the belowlisted elements may impact the weighting of the Constituent Trading Platforms on the Index Price as follows: • Volume Weighting: Each Constituent Trading Platform will be weighted to appropriately reflect the trading volume share of the Constituent Trading Platform relative to all the Constituent Trading Platforms during this same period. For example, an average hourly weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase, Kraken, LMAX Digital, and Crypto.com, respectively, would represent each Constituent Trading Platform’s share of trading volume during the same period. • Inactivity Adjustment: Assume that a Constituent Trading Platform represented a 14% weighting on the Index Price of the digital asset, which is based on the per-second calculations of its trading volume and price-variance relative to the cohort of Constituent Trading Platforms included in such Index, and then went offline for approximately two hours. The index algorithm would automatically recognize inactivity and start deweighting the Constituent Trading Platform at the 3-minute mark and PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 continue to do so over a 7-minute period until its influence was effectively zero, 10 minutes after becoming inactive. As soon as trading activity resumed at the Constituent Trading Platform, the index algorithm would reweight it to the appropriate weighting based on trading volume and pricevariance relative to the cohort of Constituent Trading Platforms included in the Index. Due to the period of inactivity, it would re-weight the Constituent Trading Platform activity to a weight lower than its original weighting—for example, to 12%. • Price-Variance Weighting: The price-variance weighting adjustment is a relative measure of each Constituent Trading Platform versus the cohort of Constituent Trading Platforms. The further the price at a Constituent Trading Platform is from the mean price of the cohort, the less influence that trading platform’s price will have on the algorithm that produces the Index Price, as the trading platform data is discretely weighted in proportion to their variance from the rest of the trading platforms on a per-second basis and there is no minimum threshold the variance must meet for this adjustment to take place. For example, assume that for a one-hour period, the digital asset’s execution prices on one Constituent Trading Platform were trading more than 7% higher than the average execution prices on another Constituent Trading Platform. The algorithm will automatically detect the anomaly (price variance) and reduce that specific Constituent Trading Platform’s weighting during that one-hour period, ensuring a reliable spot reference price that is unaffected by the localized event and that is reflective of broader market activity. Determination of the Index Price When Index Price Is Unavailable The Sponsor uses the following cascading set of rules to calculate the Index Price when the Index Price is unavailable.32 For the avoidance of doubt, the Sponsor will employ the below rules sequentially and in the order as presented below, should one or more specific rule(s) fail: 1. Index Price = The price set by the Index as of 4:00 p.m., New York time, on the valuation date.33 If the Index becomes unavailable, or if the Sponsor determines in good faith that the Index does not reflect an accurate price, then the Sponsor will, on a best efforts basis, 32 The Sponsor updated these rules on January 11, 2022. 33 The valuation date is any day for which the value of the ETH in the Trust may be calculated utilizing the Index Price. E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices contact the Index Provider to obtain the Index Price directly from the Index Provider. If after such contact the Index remains unavailable or the Sponsor continues to believe in good faith that the Index does not reflect an accurate price, then the Sponsor will employ the next rule to determine the Index Price. There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion. 2. Index Price = The price set by Coin Metrics Real-Time Rate (the ‘‘Secondary Index’’) as of 4:00 p.m., New York time, on the valuation date (the ‘‘Secondary Index Price’’). The Secondary Index Price is a real-time reference rate price, calculated using trade data from constituent markets selected by Coin Metrics, Inc. (the ‘‘Secondary Index Provider’’). The Secondary Index Price is calculated by applying weightedmedian techniques to such trade data where half the weight is derived from the trading volume on each constituent market and half is derived from inverse price variance, where a constituent market with high price variance as a result of outliers or market anomalies compared to other constituent markets is assigned a smaller weight. If the Secondary Index becomes unavailable, or if the Sponsor determines in good faith that the Secondary Index does not reflect an accurate price, then the Sponsor will, on a best efforts basis, contact the Secondary Index Provider to obtain the Secondary Index Price directly from the Secondary Index Provider. If after such contact the Secondary Index remains unavailable or the Sponsor continues to believe in good faith that the Secondary Index does not reflect an accurate price, then the Sponsor will employ the next rule to determine the Index Price. There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion. 3. Index Price = The price set by the Trust’s principal market (as defined in the Annual Report) (the ‘‘Tertiary Pricing Option’’) as of 4:00 p.m., New York time, on the valuation date. The Tertiary Pricing Option is a spot price derived from the principal market’s public data feed that is believed to be consistently publishing pricing information as of 4:00 p.m., New York time, and is provided to the Sponsor via an application programming interface. If the Tertiary Pricing Option becomes unavailable, or if the Sponsor determines in good faith that the Tertiary Pricing Option does not reflect an accurate price, then the Sponsor will, on a best efforts basis, contact the Tertiary Pricing Provider to obtain the VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 Tertiary Pricing Option directly from the Tertiary Pricing Provider. If after such contact the Tertiary Pricing Option remains unavailable after such contact or the Sponsor continues to believe in good faith that the Tertiary Pricing Option does not reflect an accurate price, then the Sponsor will employ the next rule to determine the Index Price. There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion. 4. Index Price = The Sponsor will use its best judgment to determine a good faith estimate of the Index Price. There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion. In the event of a fork, the Index Provider may calculate the Index Price based on a digital asset that the Sponsor does not believe to be an appropriate asset of the Trust (i.e., a digital asset other than ETH).34 In this event, the 34 According to the Annual Report, when a modification is introduced and a substantial majority of users and validators consent to the modification, the change is implemented and the network remains uninterrupted. However, if less than a substantial majority of users and validators consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a ‘‘hard fork’’ of the Ethereum Network, with one group running the pre-modified software and the other running the modified software. The effect of such a fork would be the existence of two versions of ETH running in parallel, yet lacking interchangeability. For example, in July 2016, Ethereum ‘‘forked’’ into Ethereum and a new digital asset, Ethereum Classic, as a result of the Ethereum Network community’s response to a significant security breach in which an anonymous hacker exploited a smart contract running on the Ethereum Network to syphon approximately $60 million of ETH held by the DAO, a distributed autonomous organization, into a segregated account. In response to the hack, most participants in the Ethereum community elected to adopt a ‘‘fork’’ that effectively reversed the hack. However, a minority of users continued to develop the original blockchain, with the digital asset on that blockchain now referred to as Ethereum Classic, or ETC. ETC now trades on several Digital Asset Trading Platforms. In the event of a hard fork of the Ethereum Network, the Sponsor will, if permitted by the terms of the Trust Agreement, use its discretion to determine, in good faith, which peer-to-peer network, among a group of incompatible forks of the Ethereum Network, is generally accepted as the Ethereum Network and should therefore be considered the appropriate network for the Trust’s purposes. The Sponsor will base its determination on a variety of then relevant factors, including, but not limited to, the Sponsor’s beliefs regarding expectations of the core developers of ETH, users, services, businesses, miners, and other constituencies, as well as the actual continued acceptance of, validating power on, and community engagement with, the Ethereum Network. There is no guarantee that the Sponsor will choose the digital asset that is ultimately the most valuable fork, and the Sponsor’s decision may adversely affect the value of the Shares as a result. The Sponsor may also disagree with shareholders, security vendors, and the Index Provider on what PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 24543 Sponsor has full discretion to use a different index provider or calculate the Index Price itself using its best judgment. In such an event, the Exchange will submit a proposed rule filing to contemplate the assets that would subsequently be held by the Trust. The Sponsor may, in its sole discretion, select a different index provider, select a different index price provided by the Index Provider, calculate the Index Price by using the cascading set of rules set forth above, or change the cascading set of rules set forth above at any time.35 The Impact of the Approval of ETH Futures ETFs on Spot ETH ETPs Like the Trust On October 2, 2023, the first ETHbased exchange-traded funds (‘‘ETFs’’) were approved by the Commission for trading.36 The ETFs hold ETH futures contracts that trade on the CME and settle using the CME CF Ethereum Reference Rate (‘‘ERR’’), which is priced based on the spot ETH markets Coinbase, Kraken, LMAX Digital, Bitstamp, Gemini, and itBit, essentially the same spot markets that are included in the Index that the Trust uses to value its ETH holdings. Given that the Commission has approved ETFs that offer exposure to ETH futures, which themselves are priced based on the underlying spot ETH market, the Sponsor believes that the Commission must also approve ETPs that offer exposure to spot ETH, like the Trust. In the context of other digital assetbased ETF and ETP proposals for Bitcoin, the Commission has sought to justify treating futures-based ETFs differently from spot-based ETFs because of (i) distinctions between the regulations under which the two products would be registered (the Investment Company Act of 1940 (the ‘‘ ’40 Act’’) for digital-asset futures ETFs and ’33 Act for spot digital-asset ETPs) and (ii) the existence of regulation and surveillance-sharing over the CME digital-asset futures market through the Intermarket Surveillance Group (‘‘ISG’’), is generally accepted as ETH and should therefore be considered ‘‘ETH’’ for the Trust’s purposes, which may also adversely affect the value of the Shares as a result. 35 The Sponsor will provide notice of any such changes in the Trust’s periodic or current reports and, where applicable, will file a proposed rule change with the Commission. 36 These ETFs included the Bitwise Ethereum Strategy ETF, Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin & Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum Strategy ETF, and Volatility Shares Ethereum Strategy ETF. E:\FR\FM\08APN1.SGM 08APN1 24544 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices as compared to the spot market for those digital assets.37 The Sponsor believes that this reasoning is unsupported for the following reasons. lotter on DSK11XQN23PROD with NOTICES1 The ’40 Act Offers No More Investor Protections Than the ’33 Act in the Context of ETH-Based ETF and ETP Proposals While the ’40 Act has certain added investor protections that the ’33 Act does not require, these protections do not seek to allay harms arising from underlying assets or markets of assets that ETFs hold, such as the potential for fraud or manipulation in such markets. In other words, the Sponsor does not believe that the application of the ’40 Act supports the purported justifications the Commission has made in denying other spot digital asset ETPs. Instead, the ’40 Act seeks to remedy certain abusive practices in the management of investment companies such as ETFs, and thus places certain restrictions on ETFs and ETF sponsors. The ’40 Act explicitly lists out the types of abuses it seeks to prevent, and places certain restrictions related to accounting, borrowing, custody, fees, 37 See, e.g., Chair Gary Gensler Public Statement, ‘‘Remarks Before the Aspen Security Forum,’’ (August 3, 2021), stating that the Chair looked forward to the Commission’s review of Bitcoinbased ETF proposals registered under the ’40 Act, ‘‘particularly if those are limited to [the] CMEtraded Bitcoin futures,’’ noting the ‘‘significant investor protection’’ offered by the ’40 Act, https:// www.sec.gov/news/public-statement/gensler-aspensecurity-forum-2021-08-03; Securities Exchange Act Release No. 93559 (November 12, 2021), 86 FR 64539 (November 18, 2021) (SR–CboeBZX–2021– 019) (Order Disapproving a Proposed Rule Change to List and Trade Shares of the VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), CommodityBased Trust Shares) (‘‘VanEck Order’’) (denying the first spot bitcoin ETP registered under the ’33 Act following the first approval of a bitcoin futures ETF registered under the ’40 Act, noting the differences in the standard of review that applies to such products); Securities Exchange Act Release No. 94620 (April 6, 2022), 87 FR 21676 (April 12, 2022) (SR–NYSEArca–2021–53) (Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin Futures Fund under NYSE ARCA Rule 8.200–E, Commentary .02 (Trust Issued Receipts)) (‘‘Teucrium Order’’) (approving the first bitcoin futures ETP registered under the ’33 Act, stating that ‘‘With respect to the proposed ETP, the underlying bitcoin assets are CME bitcoin futures contracts. The relevant analysis, therefore, is whether Arca has a comprehensive surveillance sharing agreement with a regulated market of significant size related to CME bitcoin futures contracts. As discussed below, taking into consideration the direct relationship between the regulated market with which Arca has a surveillance-sharing agreement and the assets held by the proposed ETP, as well as developments with respect to the CME bitcoin futures market— including the launch of exchange-traded funds registered under the Investment Company Act of 1940 (‘‘1940 Act’’) that hold CME bitcoin futures (‘‘Bitcoin Futures ETFs’’)—the Commission concludes that the Exchange has the requisite surveillance-sharing agreement.’’). VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 and independent boards, among others. Notably, none of these restrictions address an ETF’s underlying assets, whether ETH futures or spot ETH, or the markets from which such assets’ pricing is derived, whether the CME ETH futures market or spot ETH markets. As a result, the Sponsor believes that the distinction between registration of ETH futures ETFs under the ’40 Act and the registration of spot ETH ETPs under the ’33 Act is one without a difference in the context of ETH-based ETP proposals. Surveillance-Sharing With the CME ETH Futures Market Is Sufficient To Protect Against Fraud and Manipulation in the Underlying Spot ETH Market The Sponsor believes that, because the CME ETH futures market is priced based on the underlying spot ETH market, any fraud or manipulation in the spot market would necessarily affect the price of ETH futures, thereby affecting the net asset value of an ETP holding spot ETH or an ETF holding ETH futures, as well as the price investors pay for such product’s shares.38 The Sponsor also believes that a correlation analysis conducted by Coinbase, Inc. further corroborates this conclusion. Coinbase, Inc.’s analysis found that the CME ETH futures market has been consistently and highly correlated with the spot ETH market throughout the past (nearly) three years, with an even greater correlation than that cited by the Commission with respect to the CME Bitcoin futures and spot Bitcoin market in approving proposed rule changes to list and trade spot Bitcoin-based ETPs.39 Given the similarity between an ETP holding spot ETH and an ETF holding 38 See Grayscale Investments, LLC v. Securities and Exchange Commission (‘‘Grayscale v. SEC’’), No. 22–1142, Brief of Petitioner Grayscale Investments, LLC (October 11, 2022) (advancing the same argument regarding CME Bitcoin futures and the underlying spot Bitcoin market). 39 See Comment Letter from Paul Grewal, Chief Legal Officer, Coinbase, Inc. (February 21, 2024), available at: https://www.sec.gov/comments/srnysearca-2023-70/srnysearca202370-4327991074283.pdf (noting that ‘‘the correlation between the CME ETH futures market and the spot ETH market for the full sample period is 99.3% using data at an hourly interval, 96.2% using data at a five-minute interval, and 84.7% using data at a oneminute interval’’); Securities Exchange Act Release No. 34–99306 (January 10, 2024), 89 FR 3008 at 3010–11 (January 17, 2024) (SR–NYSEARCA–2021– 90; SR–NYSEARCA–2023–44; SRNYSEARCA– 2023–58; SR–NASDAQ–2023–016; SR–NASDAQ– 2023–019; SR–CboeBZX–2023028; SR–CboeBZX– 2023–038; SR–CboeBZX–2023–040; SR–CboeBZX– 2023–042; SRCboeBZX–2023–044; SR–CboeBZX– 2023–072) (Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade BitcoinBased Commodity-Based Trust Shares and Trust Units). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 ETH futures, the Sponsor believes that it must be the case that CME surveillance can either detect spotmarket fraud that affects both futures ETFs and spot ETPs, or that such surveillance cannot do so for either type of product. Having approved ETH futures ETFs in part on the basis of such surveillance, the Commission has clearly determined that CME surveillance can detect spot-market fraud that would affect spot ETPs, and the Sponsor thus believes that it must also approve spot ETH ETPs on that basis. * * * * * In summary, the Sponsor believes that the distinctions between the ’40 Act and the ’33 Act, and the surveillance-sharing available for the CME ETH futures market versus the spot ETH market, are not meaningful in the context of ETHbased ETF and ETP proposals, and that such reasoning cannot be a basis for the Commission treating ETH futures ETFs differently from spot ETH ETPs like the Trust. The Sponsor believes that the Commission’s approval of ETH futures ETFs means it must also approve spot ETH ETPs like the Trust. The Structure and Operation of the Trust Protects Investors and Satisfies Commission Requirements for ETHBased Exchange Traded Products Even if the Commission had not approved ETH futures ETFs, the Sponsor still believes the Commission should approve the listing and trading of Shares of the Trust. In the context of prior spot digital asset ETP proposal disapproval orders for Bitcoin, the Commission expressed concerns about the underlying Digital Asset Market due to the potential for fraud and manipulation and has outlined the reasons why such ETP proposals have been unable to satisfy these concerns.40 40 See Securities Exchange Act Release Nos. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (SR–BatsBZX–2016–30) (Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust) (the ‘‘Winklevoss Order’’); 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019) (SR–NYSEArca–2019–01) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201–E) (the ‘‘Bitwise Order’’); 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR–NYSEArca–2019–39) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to Amend NYSE Arca Rule 8.201–E (Commodity-Based Trust Shares) and to List and Trade Shares of the United States Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201–E) (the ‘‘Wilshire Phoenix Order’’); 83904 (August 22, 2018), 83 FR 43934 (August 28, 2018) (SR–NYSEArca–2017–139) (Order Disapproving a Proposed Rule Change to List and E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices For purposes of the Trust’s ETH-based ETP proposal, the Sponsor anticipates that the Commission may have the same concerns and addresses each of these in turn below. In the Prior Spot Digital Asset ETP Disapproval Orders, the Commission outlined that a proposal relating to a digital asset-based ETP could satisfy its concerns regarding potential for fraud and manipulation by demonstrating: (1) Inherent Resistance to Fraud and Manipulation: that the underlying commodity market is inherently resistant to fraud and manipulation; (2) Other Means to Prevent Fraud and Manipulation: that there are other means to prevent fraudulent and manipulative acts and practices that are sufficient; or (3) Surveillance Sharing: that the listing exchange has entered into a surveillance sharing agreement with a regulated market of significant size relating to the underlying or reference assets. As described below, the Sponsor believes the structure and operation of the Trust are designed to prevent fraudulent and manipulative acts and practices, to protect investors and the public interest, and to respond to the specific concerns that the Commission may have with respect to potential fraud and manipulation in the context of an ETH-based ETP. How the Trust Meets Standards in the Prior Spot Digital Asset ETP Disapproval Orders lotter on DSK11XQN23PROD with NOTICES1 1. Resistance to or Prevention of Fraud and Manipulation In the Prior Spot Digital Asset ETP Disapproval Orders, the Commission disagreed with the proposition that a digital asset’s fungibility, transportability and exchange tradability combine to provide unique protections against, and allow such digital asset to be uniquely resistant to, attempts at price manipulation. The Commission reached its conclusion based on concessions by one issuer that Trade the Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF) (the ‘‘ProShares Order’’); 83912 (August 22, 2018), 83 FR 43912 (August 28, 2018) (SR–NYSEArca–2018–02) (Order Disapproving a Proposed Rule Change Relating to Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200–E) (the ‘‘Direxion Order’’); 83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) (SR–CboeBZX–2018–01) (Order Disapproving a Proposed Rule Change to List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF) (the ‘‘GraniteShares Order’’) (together, the ‘‘Prior Spot Digital Asset ETP Disapproval Orders’’). VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 95% of the reported trading in the digital asset, Bitcoin, is ‘‘fake’’ or noneconomic, effectively admitting that the properties of Bitcoin do not make it inherently resistant to manipulation. Such issuer’s concessions were further compounded by evidence of potential and actual fraud and manipulation in the historical trading of Bitcoin on certain marketplaces such as (1) ‘‘wash’’ trading, (2) trading based on material, non-public information, including the dissemination of false and misleading information, (3) manipulative activity involving Tether, and (4) fraud and manipulation.41 The Sponsor acknowledges the possibility that fraud and manipulation may exist in commodity markets and that digital asset trading, such as ETH, on any given exchange may be no more uniquely resistant to fraud and manipulation than other commodity markets.42 However, the Sponsor believes that the fundamental features of digital assets, including fungibility, transportability and exchange tradability offer novel protections beyond those that exist in traditional commodity markets or equity markets when combined with other means, as discussed further below. 2. Other Means To Prevent Fraud and Manipulation The Commission has recognized 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.43 In evaluating the effectiveness of this type of resistance, the Commission does not apply a ‘‘cannot be manipulated’’ standard. Instead, the Commission requires that such resistance to fraud and manipulation be novel and beyond those protections that exist in traditional commodity markets or equity markets for which the Commission has 41 See Bitwise Order, 84 FR at 55383 (discussing analysis of the Bitcoin spot market that asserts that 95% of the spot market is dominated by fake and non-economic activity, such as wash trades), 55391 (discussing possible sources of fraud and manipulation in the bitcoin spot market). See also Winklevoss Order, 83 FR at 37585–86 (discussing pending litigation against a Bitcoin trading platform for fraudulent conduct relating to Tether); Bitwise Order, 84 FR at 55391 n.140, 55402 & n.331 (same); Winklevoss Order, 83 FR at 37584–86 (discussing potential types of manipulation in the Bitcoin spot market). The Commission has also noted that fraud and manipulation in the Bitcoin spot market could persist for a significant duration. See, e.g., Bitwise Order, 84 FR at 55405 & n.379. 42 See generally Bitwise Order. 43 See Winklevoss Order, 84 FR at 37580, 37582– 91; Bitwise Order, 84 FR at 55383, 55385–406; Wilshire Phoenix Order, 85 FR at 12597. PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 24545 long required surveillance-sharing agreements in the context of listing derivative securities products.44 The Sponsor believes the Index represents a novel means to prevent fraud and manipulation from impacting a reference price for ETH and that it offers protections beyond those that exist in traditional commodity markets or equity markets. The Index operates materially similarly to CoinDesk Bitcoin Price Index (XBX). Specifically, digital assets, such as ETH, are novel and exist outside traditional commodity markets. It therefore stands to reason that the methods by which they trade will be novel and that the market for digital assets like ETH will have different attributes than traditional commodity markets. Digital assets like ETH were only introduced within the past decade, twenty years after the first U.S. ETFs were offered 45 and 150 years after the first futures were offered.46 In contrast to older commodities such as gold, silver, platinum, palladium or copper, which the Commission has noted all had at least one significant, regulated market for trading futures on the underlying commodity at the time commodity trust ETPs were approved for listing and trading, the first trading in digital assets like ETH took place entirely in an open, transparent and online setting where other commodities cannot trade. The Trust has priced its Shares consistently for more than six years based on the Index. The Sponsor believes the Trust’s use of the Index specifically addresses the Commission’s concerns in that the Index serves as an alternative means to prevent fraud and manipulation. Specifically, the Index can (i) mitigate the effects of fraud, manipulation and other anomalous trading activity on the ETH reference rate, (ii) provide a real-time, volumeweighted fair value of ETH and (iii) appropriately handle and adjust for nonmarket related events. As described in more detail below, the Sponsor believes that the Index accomplishes those objectives in the following ways: 1. The Index tracks the Digital Asset Trading Platform Market price through 44 See Winklevoss Order, 84 FR at 37582; Wilshire Phoenix Order, 85 FR at 12597. 45 SEC, ‘‘Investor Bulletin: Exchange-Traded Funds (ETFs),’’ August 2012, https://www.sec.gov/ investor/alerts/etfs.pdf. 46 Commodity Futures Trading Commission (‘‘CFTC’’), ‘‘History of the CFTC,’’ https:// www.cftc.gov/About/HistoryoftheCFTC/history_ precftc.html. E:\FR\FM\08APN1.SGM 08APN1 24546 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 trading activity at ‘‘U.S.-Compliant Trading Platform’’; 47 2. The Index mitigates the impact of instances of fraud, manipulation and other anomalous trading activity in realtime through systematic adjustments; 3. The Index is constructed and maintained by an expert third-party index provider, allowing for prudent handling of non-market-related events; and 4. The Index mitigates the impact of instances of fraud, manipulation and other anomalous trading activity concentrated on any one specific trading platform through a cross-trading platform composite index rate. 1. The Index tracks the Digital Asset Trading Platform Market price through trading activity at ‘‘U.S.-Compliant Trading Platforms.’’ To reduce the risk of fraud, manipulation, and other anomalous trading activity from impacting the Index, only U.S.-Compliant Trading Platforms are eligible to be included in the Index. 47 ‘‘U.S.-Compliant Trading Platforms’’ are trading platforms in the Digital Asset Trading Platform Market that are compliant with applicable U.S. federal and state licensing requirements and practices regarding AML and KYC regulations. All Constituent Trading Platforms are U.S.-Compliant Trading Platforms. ‘‘Non-U.S.-Compliant Trading Platforms’’ are all other trading platforms in the Digital Asset Trading Platform Market. As of December 31, 2023, the U.S.-Compliant Trading Platforms that the Index Provider considered for inclusion in the Index were Coinbase, Kraken, LMAX Digital and Crypto.com. From these U.S.Compliant Trading Platforms, the Index Provider then applies additional Inclusion Criteria to determine the Constituent Trading Platform. On January 19, 2020, the Index Provider removed itBit due to a lack of trading volume and added LMAX Digital to the Index based on the trading platform meeting the liquidity thresholds as part of its scheduled quarterly review. On July 23, 2022, the Index Provider removed Bitstamp from the Index due to the trading platform’s failure to meet the minimum liquidity requirement, and added FTX.US as a Constituent Trading Platform based on its satisfaction of the minimum liquidity requirement as part of its scheduled quarterly review. On November 10, 2022, the Index Provider removed FTX.US from the Index due to the trading platform’s announcement that trading on the trading platform would be halted, which would impact FTX.US’s ability to reliably publish trade prices and volume on a real-time basis through APIs, and did not add any Constituent Trading Platforms as part of its review. On January 28, 2023, the Index Provider added Binance.US to the Index due to the trading platform meeting the minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its quarterly review. On June 17, 2023, the Index Provider removed Binance.US from the Index due to Binance.US’s announcement that the trading platform was suspending USD deposits and withdrawals and planned to delist its USD trading pairs, and did not add any Constituent Trading Platforms as part of its review. On October 28, 2023, the Index Provider added Crypto.com to the Index due to the trading platform meeting the minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its scheduled quarterly review. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 The Index maintains a minimum number of three trading platforms and a maximum number of five trading platforms to track the Digital Asset Trading Platform Market while offering replicability for traders and market makers.48 U.S.-Compliant Trading Platforms possess safeguards that protect against fraud and manipulation. For example, U.S.-Compliant Trading Platforms regulated by the NYDFS under the BitLicense program have regulatory requirements to implement measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, market manipulation, and similar wrongdoing, and to monitor, control, investigate and report back to the NYDFS regarding any wrongdoing.49 These trading platforms also have the following obligations: 50 • Submission of audited financial statements including income statements, statements of assets/ liabilities, insurance, and banking; • Compliance with capitalization requirements set at NYDFS’s discretion; • Prohibitions against the sale or encumbrance to protect full reserves of custodian assets; • Fingerprints and photographs of employees with access to customer funds; • Retention of a qualified Chief Information Security Officer and annual penetration testing/audits; • Documented business continuity and disaster recovery plan, independently tested annually; and • Participation in an independent exam by NYDFS. Other U.S.-Compliant Trading Platforms have voluntarily implemented measures to protect against common forms of market manipulation.51 Furthermore, all U.S.-Compliant Trading Platforms are considered MSBs 48 According to the Sponsor, the more trading platforms included in the Index, the more ability there is for traders and market makers to trade against the Index by arbitraging price differences. For example, in the event of variances between ETH prices on Constituent Trading Platforms and nonConstituent Trading Platforms, arbitrage trading opportunities would exist. These discrepancies generally consolidate over time, as price differences across trading platforms are realized and capitalized upon by traders and market makers. 49 See, e.g., ‘‘DFS Takes Action to Deter Fraud and Manipulation in Virtual Currency Markets,’’ available at: https://www.dfs.ny.gov/about/press/ pr1802071.htm. 50 See ‘‘New York’s Final ‘‘BitLicense’’ Rule: Overview and Changes from July 2014 Proposal,’’ June 5, 2015, Davis Polk, available at: https:// www.davispolk.com/files/new_yorks_final_ bitlicense_rule_overview_changes_july_2014_ proposal.pdf. 51 As of the date of this filing, one of the four Constituent Trading Platforms, Coinbase, is regulated by NYDFS. PO 00000 Frm 00124 Fmt 4703 Sfmt 4703 that are subject to FinCEN’s federal and state reporting requirements that provide additional safeguards. For example, unscrupulous traders may be less likely to engage in fraudulent or manipulative acts and practices on trading platforms that (1) report suspicious activity to FinCEN as money services businesses, (2) report to state regulators as money transmitters, and/or (3) require customer identification through KYC procedures. U.S.Compliant Trading Platforms are required to: 52 • Identify people with ownership stakes or controlling roles in the MSB; • Establish a formal Anti-Money Laundering (AML) policy in place with documentation, training, independent review, and a named compliance officer; • Implement strict customer identification and verification policies and procedures; • File Suspicious Activity Reports (SARs) for suspicious customer transactions; • File Currency Transaction Reports (CTRs) for cash-in or cash-out transactions greater than $10,000; and • Maintain a five-year record of currency exchanges greater than $1,000 and money transfers greater than $3,000. Lastly, because of ETH’s classification as a commodity, the CFTC has authority to police fraud and manipulation on U.S.-Compliant Trading Platforms.53 The Sponsor acknowledges that there are substantial differences between FinCEN and New York state regulations and the Commission’s regulation of the national securities exchanges.54 The Sponsor does not believe the inclusion of U.S.-Compliant Trading Platforms is in and of itself sufficient to prove that the Index is an alternative means to prevent fraud and manipulation such that surveillance sharing agreements are not required, but does believe that the inclusion of only U.S.-Compliant Trading Platforms in the Index is one significant way in which the Index is protected from the potential impacts of fraud and manipulation. 2. The Index mitigates the impact of instances of fraud, manipulation, and other anomalous trading activity in realtime through systematic adjustments. 52 See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsarequirementsmsbs. 53 ‘‘U.S. CFTC Chief Behnam Reinforces View of Ether as Commodity,’’ CoinDesk (Mar. 28, 2023), https://www.coindesk.com/policy/2023/03/28/uscftc-chief-behnam-reinforces-view-of-ether-ascommodity/; CME Group, https:// www.cmegroup.com/markets/cryptocurrencies/ ether/ether.html?gad=1&gclid=EAIaIQobChMI44KB mu7ygAMVavvjBx2P4g5yEAAYASAAEgJSZfD_ BwE&gclsrc=aw.ds. 54 See Bitwise Order, 84 FR at 55392; Wilshire Phoenix Order, 85 FR at 12603. E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices The Index is calculated once every second according to a systematic methodology that relies on observed trading activity on the Constituent Trading Platforms. While the precise methodology underlying the Index is currently proprietary, the key elements of the Index are outlined below: • Volume Weighting: Constituent Trading Platforms with greater liquidity receive a higher weighting in the Index, increasing the ability to execute against (i.e., replicate) the Index in the underlying spot markets. • Price-Variance Weighting: The Index reflects data points that are discretely weighted in proportion to their variance from the rest of the Constituent Trading Platforms. As the price at a Constituent Trading Platform diverges from the prices at the rest of the Constituent Trading Platforms, its weight in the Index consequently decreases. • Inactivity Adjustment: The Index algorithm penalizes stale activity from any given Constituent Trading Platform. When a Constituent Trading Platform does not have recent trading data, its weighting in the Index is gradually reduced, until it is de-weighted entirely. Similarly, once trading activity at the Constituent Trading Platform resumes, the corresponding weighting for that Constituent Trading Platform is gradually increased until it reaches the appropriate level. • Manipulation Resistance: In order to mitigate the effects of wash trading and order book spoofing, the Index only includes executed trades in its calculation. Additionally, the Index only includes Constituent Trading Platforms that charge trading fees to its users in order to attach a real, quantifiable cost to any manipulation attempts. 3. The Index is constructed and maintained by an expert third-party index provider, allowing for prudent handling of non-market-related events. The Index Provider reviews and periodically updates which trading platforms are included in the Index by utilizing a methodology that is guided by the IOSCO principles for financial benchmarks. According to the Index methodology, for a trading platform to become a Constituent Trading Platform, it must satisfy the following Inclusion Criteria: • Sufficient USD liquidity relative to the size of the listed assets; • No evidence in the past 12 months of trading restrictions on individuals or entities that would otherwise meet the trading platform’s eligibility requirements to trade; VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 • No evidence in the past 12 months of undisclosed restrictions on deposits or withdrawals from user accounts; • Real-time price discovery; • Limited or no capital controls; • Transparent ownership including a publicly-owned ownership entity; • Publicly available language and policies addressing legal and regulatory compliance in the US, including KYC (Know Your Customer), AML (AntiMoney Laundering) and other policies designed to comply with relevant regulations that might apply to it; • Be a U.S.-domiciled trading platform or a non-U.S. domiciled trading platform that is able to service U.S. investors; • Offer programmatic spot trading of the trading pair and reliably publish trade prices and volumes on a real-time basis through Rest and Websocket APIs. Although the Index methodology is designed to operate without any human interference, rare events would justify manual intervention. Manual intervention would only be in response to ‘‘non-market-related events’’ (e.g., halting of deposits or withdrawals of funds, unannounced closure of trading platform operations, insolvency, compromise of user funds, etc.). In the event that such an intervention is necessary, the Index Provider would issue a public announcement through its website, API and other established communication channels with its clients.55 4. The Index mitigates the impact of instances of fraud, manipulation and other anomalous trading activity concentrated on any one specific trading platform through a cross-trading platform composite index rate. The Index is based on the price and volume data of multiple U.S.-Compliant Trading Platforms that satisfy the Index Provider’s Inclusion Criteria. By referencing multiple trading venues and weighting them based on trade activity, the impact of any potential fraud, manipulation, or anomalous trading activity occurring on any single venue is reduced. Specifically, the effects of fraud, manipulation, or anomalous trading activity occurring on any single venue are de-weighted and consequently diluted by non-anomalous trading activity from other Constituent Trading Platforms. Although the Index is designed to accurately capture the market price of ETH, third parties may be able to purchase and sell ETH on public or private markets included or not 55 To the extent any such intervention has a material impact on the Trust, the Sponsor will also issue a public announcement. PO 00000 Frm 00125 Fmt 4703 Sfmt 4703 24547 included among the Constituent Trading Platforms, and such transactions may take place at prices materially higher or lower than the Index Price. For example, based on data provided by the Index Provider, on any given day during the twelve months ended December 31, 2023, the maximum differential between the 4:00 p.m., New York time spot price of any single Digital Asset Trading Platform included in the Index and the Index Price was 2.76% and the average of the maximum differentials of the 4:00 p.m., New York time spot price of each Digital Asset Trading Platform included in the Index and the Index Price was 0.75%. During this same period, the average differential between the 4:00 p.m., New York time spot prices of all the Digital Asset Trading Platforms included in the Index and the Index Price was 0.012%.56 Since inception of the Trust, the Trust has consistently priced its Shares at 4:00 p.m., New York time based on the Index Price. While that pricing would be known to the market, the Sponsor believes that, even if efforts to manipulate the price of ETH at 4:00 p.m., E.T. were successful on any trading platform, such activity would have had a negligible effect on the pricing of the Trust, due to the controls embedded in the structure of the Index. Accordingly, the Sponsor believes that the Index has proven its ability to (i) mitigate the effects of fraud, manipulation and other anomalous trading activity on the ETH reference rate, (ii) provide a real-time, volumeweighted fair value of ETH and (iii) appropriately handle and adjust for nonmarket related events. For these reasons, the Sponsor believes that the Index represents an effective alternative means to prevent fraud and manipulation and the Trust’s reliance on the Index addresses the Commission’s concerns with respect to potential fraud and manipulation. 3. A Significant, Regulated and Surveilled Market Exists and Is Closely Connected With Spot Market for ETH In the Prior Spot Digital Asset ETP Disapproval Orders, the Commission described both the need for and the definition of a surveilled market of significant size for commodity-trust ETPs like the Trust to date.57 Specifically, the Commission explained that: 56 All Digital Asset Trading Platforms that were included in the Index throughout the period were considered in this analysis. 57 See Winklevoss Order, 83 FR at 37593–94; Bitwise Order, 84 FR at 55383, 55410; Wilshire Phoenix Order, 85 FR at 12609. E:\FR\FM\08APN1.SGM 08APN1 24548 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices for the commodity-trust ETPs approved to date for listing and trading, there has been in every case at least one significant, regulated market for trading futures on the underlying commodity— whether gold, silver, platinum, palladium, or copper—and the ETP listing exchange has entered into surveillance-sharing agreements with, or held Intermarket Surveillance Group membership in common with, that market.58 Further, the Commission stated that its interpretation of the term ‘‘market of significant size’’ depends on the interrelationship between the market with which the listing exchange has a surveillance-sharing agreement and the proposed ETP.59 Accordingly, the terms ‘‘significant market’’ and ‘‘market of significant size’’ could mean: 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 successfully manipulate the ETP, so that a surveillance-sharing agreement would assist 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.60 In the context of the Prior Spot Digital Asset ETP Disapproval Orders specifically, the Commission has stated that establishing a lead-lag relationship between the futures market and the spot market is central to understanding whether it is reasonably likely that a would-be manipulator of the ETP would need to trade on the futures market to successfully manipulate prices on those spot platforms that feed into the proposed ETP’s pricing mechanism such that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct.61 In particular, if the spot market leads the futures market, this would indicate that it would not be necessary to trade on the futures market to manipulate the proposed ETP, even if arbitrage worked efficiently, because the 58 See Winklevoss Order, 83 FR at 37594. Winklevoss Order, 83 FR at 37594; Bitwise Order, 84 FR at 55410; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 FR at 43925; Direxion Order, 83 FR at 43914; Wilshire Phoenix Order, 85 FR at 12609. 60 See Winklevoss Order, 83 FR at 37594. This definition is illustrative and not exclusive. There could be other types of ‘‘significant markets’’ and ‘‘markets of significant size,’’ but this definition is an example that will provide guidance to market participants. 61 See Bitwise Order, 84 FR at 55411; Wilshire Phoenix Order, 85 FR at 12612. lotter on DSK11XQN23PROD with NOTICES1 59 See VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 futures price would move to meet the spot price. While studies have found that the CME futures market does lead the spot market in the context of Bitcoin,62 as explained in the Sponsor’s briefs and argument in its prevailing case before the D.C. Circuit Court of Appeals regarding its Bitcoin-based ETP proposal, the lead/lag question is irrelevant. If a would-be manipulator were to attempt to manipulate either a spot ETP or futures ETP by trading futures on the CME, then a surveillancesharing agreement with the CME would provide access to information concerning that activity.63 If, on the other hand, a would-be manipulator were to attempt to manipulate either a spot ETP or a futures ETP by trading on the spot market, then a surveillancesharing agreement with the CME would also be able to provide access to information concerning that activity. If that were not true, the Commission could not have approved the Bitcoin futures ETPs. Given that the Commission has approved Bitcoin futures ETPs, the Commission must have concluded that the CME is capable of detecting manipulation attempts in the spot Bitcoin market. And given that the Commission has now approved ETH futures ETFs, it must have concluded that the CME is capable of detecting manipulation attempts in the spot ETH market as well. Accordingly, the Sponsor believes that disapproval of the instant proposal on such grounds would be arbitrary given that Shares of the Trust would be just as protected from fraud as shares of previously approved ETH futures ETPs. Regardless of the irrelevance of the lead/lag relationship and the mixed findings regarding the lead/lag relationship between the CME futures and spot markets in the context of ETH, the Sponsor believes that the CME futures market represents a large, surveilled and regulated market and 62 See Memorandum to File from Neel Maitra, Senior Special Counsel (Fintech & Crypto Specialist), Division of Trading and Markets, U.S. Securities and Exchange Commission re: Meeting with Representatives from Fidelity Digital Assets, et al. and attachment (SR–CboeBZX–2021–039) (September 8, 2021), available at: https:// www.sec.gov/comments/sr-cboebzx-2021-039/ srcboebzx2021039-250110.pdf; Letter from Bitwise Asset Management, Inc. re: File Number SR– NYSEArca–2021–89 (February 25, 2022), available at: https://www.sec.gov/comments/sr-nysearca2021-89/srnysearca202189-20117902-270822.pdf; Letter from Wilson Sonsini Goodrich and Rosati, P.C. and Chapman and Cutler LLP, on behalf of Bitwise Asset Management, Inc. re: File No. SR– NYSEArca–2021–89 (March 7, 2022), available at: https://www.sec.gov/comments/sr-nysearca-202189/srnysearca202189-20118794-271630.pdf. 63 Grayscale v. SEC, Commission Reply Br. 27. PO 00000 Frm 00126 Fmt 4703 Sfmt 4703 meets the Commission’s definition of a ‘‘significant market.’’ For example, from November 1, 2019 to December 31, 2023, the CME futures market trading volume was over $461 billion, compared to $732 billion in trading volume across the Constituent Trading Platforms included in the Index. With over 60% of the Index trading volume, the CME futures market represents significant coverage of U.S.-Compliant Trading Platforms in the Ether market. In addition, the CME futures market trading volume from November 1, 2019 to December 31, 2023 was approximately 50% of the trading volume of the U.S. dollar-denominated spot markets referenced in the Bitwise Order.64 Given the size of the CME futures markets, the Sponsor believes such markets meet the Commission’s definition of ‘‘significant market’’ because there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, since arbitrage between the derivative and spot markets would tend to counter an attempt to manipulate the spot market alone. As a result, the Exchange’s ability to obtain information regarding trading in the Shares and futures from markets and other entities that are members of the Intermarket Trading Group (‘‘ISG’’), including the CME, would assist the Exchange in detecting and deterring misconduct. The Sponsor also believes it is unlikely that the ETP would become the predominant influence on prices in the market. While future inflows to the proposed Trust cannot be predicted, to provide comparable data, the Sponsor examined the change in market capitalization of ETH with net inflows into the Trust, which currently trades on OTC Markets and is largest and most liquid ETH investment product in the world.65 From November 1, 2019 to December 31, 2023, the market capitalization of ETH grew from $20 billion to $273 billion, a $250 billion increase. Over the same period, the Trust experienced $1.2 billion of inflows. The cumulative inflow into the Trust over the stated time period was only 0.5% of the aggregate growth of ETH’s market capitalization. Additionally, the Trust experienced approximately $71 billion of trading 64 These spot markets include Binance.US, Coinbase, Bitfinex, Kraken, Bitstamp, BitFlyer, Poloniex, Bittrex, and itBit. 65 To further illustrate the size and liquidity of the Trust, as of March 8, 2024, compared with global commodity ETPs, the Trust would rank 8th in assets under management and 10th in notional trading volume for the preceding 30 days. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 volume from November 1, 2019 to December 31, 2023, only 15% of the CME futures market and 10% of the Index over the same period. * * * * * In summary, the Sponsor believes that the foregoing addresses concerns the Commission may have with respect to ETH-based ETPs, based on the Commission’s articulated concerns with respect to potential fraud and manipulation in Bitcoin-based ETPs. Specifically, the Sponsor believes that, although ETH is not itself inherently resistant to fraud and manipulation, the Index represents an effective means to prevent fraudulent and manipulative acts and practices. As discussed above, the Trust has used the Index to price the Shares for more than six years, and the Index has proven its ability to (i) mitigate the effects of fraud, manipulation and other anomalous trading activity on the ETH reference rate, (ii) provide a real-time, volumeweighted fair value of ETH and (iii) appropriately handle and adjust for nonmarket related events. The Sponsor also believes that the CME futures market is a significant, surveilled and regulated market that is closely connected with the spot market for ETH and fulfills the requirements for surveillance sharing given the Exchange’s ability to obtain information from markets and other entities that are members of the ISG to assist in detecting and deterring misconduct. Creation and Redemption of Shares Authorized Participants may submit orders to create or redeem Shares under procedures for ‘‘Cash Orders.’’ The Authorized Participants will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, Authorized Participants will not directly or indirectly purchase, hold, deliver, or receive ETH as part of the creation or redemption process or otherwise direct the Trust or a third party with respect to purchasing, holding, delivering, or receiving ETH as part of the creation or redemption process. The Trust will create Shares by receiving ETH from a third party that is not the Authorized Participant and the Trust, or an affiliate of the Trust (and in any event not the Authorized Participant), is responsible for selecting the third party to deliver the ETH. Further, the third party will not be acting as an agent of the Authorized Participant with respect to the delivery of the ETH to the Trust or acting at the direction of the Authorized Participant with respect to the delivery of the ETH to the Trust. The Trust will redeem VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 Shares by delivering ETH to a third party that is not the Authorized Participant and the Trust, or an affiliate of the Trust (and in any event not the Authorized Participant), is responsible for selecting the third party to receive the ETH. Further, the third party will not be acting as an agent of the Authorized Participant with respect to the receipt of the ETH from the Trust or acting at the direction of the Authorized Participant with respect to the receipt of the ETH from the Trust. Cash Orders are made through the participation of a Liquidity Provider 66 who obtains or receives ETH in exchange for cash, and are facilitated by the Transfer Agent and Grayscale Investments, LLC, acting in its capacity as the Liquidity Engager. Liquidity Providers are not party to the Participant Agreements and are engaged separately by the Liquidity Engager. According to the Registration Statement, the Trust creates Baskets (as described below) of Shares only upon receipt of ETH and redeems Shares only by distributing ETH. ‘‘Authorized Participants’’ are the only persons that may place orders to create and redeem Baskets. Each Authorized Participant must (i) be a registered broker-dealer and (ii) enter into an agreement with the Sponsor and Transfer Agent that provides the procedures for the creation and redemption of Baskets and for the delivery of ETH required for the creation and redemption of Baskets via a Liquidity Provider (each, a ‘‘Participant Agreement’’). An Authorized Participant may act for its own account or as agent for brokerdealers, custodians and other securities market participants that wish to create or redeem Baskets. Shareholders who are not Authorized Participants will only be able to create or redeem their 66 A ‘‘Liquidity Provider’’ means one or more eligible companies that facilitate the purchase and sale of ETH in connection with creations or redemptions pursuant to Cash Orders. The Liquidity Providers with which Grayscale Investments, LLC, acting other than in its capacity as the Sponsor (in such other capacity, the ‘‘Liquidity Engager’’) will engage in ETH transactions are third parties that are not affiliated with the Sponsor or the Trust and are not acting as agents of the Trust, the Sponsor, or any Authorized Participant, and all transactions will be done on an arms-length basis. Except for the contractual relationships between each Liquidity Provider and Grayscale Investments, LLC in its capacity as the Liquidity Engager, there is no contractual relationship between each Liquidity Provider and the Trust, the Sponsor, or any Authorized Participant. When seeking to buy ETH in connection with creations or sell ETH in connection with redemptions, the Liquidity Engager will seek to obtain commercially reasonable prices and terms from the approved Liquidity Providers. Once agreed upon, the transaction will generally occur on an ‘‘over-the-counter’’ basis. PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 24549 Shares through an Authorized Participant. The Trust issues Shares to and redeems Shares from Authorized Participants on an ongoing basis, but only in one or more ‘‘Baskets’’ (with a Basket being a block of 10,000 Shares). The Trust will not issue fractions of a Basket. The creation and redemption of Baskets will be made only in exchange for the delivery to the Trust, or the distribution by the Trust, of the number of whole and fractional ETH represented by each Basket being created or redeemed, which is determined by dividing (x) the number of ETH owned by the Trust at 4:00 p.m., New York time, on the trade date of a creation or redemption order, after deducting the number of ETH representing the U.S. dollar value of accrued but unpaid fees and expenses of the Trust (converted using the Index Price at such time, and carried to the eighth decimal place), by (y) the number of Shares outstanding at such time (with the quotient so obtained calculated to one one-hundredmillionth of one ETH (i.e., carried to the eighth decimal place)), and multiplying such quotient by 10,000 (the ‘‘Basket Amount’’). The U.S. dollar value of a Basket is calculated by multiplying the Basket Amount by the Index Price as of the trade date (the ‘‘Basket NAV’’). The Basket NAV multiplied by the number of Baskets being created or redeemed is referred to as the ‘‘Total Basket NAV.’’ All questions as to the calculation of the Basket Amount will be conclusively determined by the Sponsor and will be final and binding on all persons interested in the Trust. The number of ETH represented by a Share will gradually decrease over time as the Trust’s ETH are used to pay the Trust’s expenses. As of December 31, 2023, each Share represented approximately 0.0096 of one ETH. The creation of Baskets requires the delivery to the Trust of the Total Basket Amount and the redemption of Baskets requires the distribution by the Trust of the Total Basket Amount. Although the Trust creates Baskets only upon the receipt of ETH, and redeems Baskets only by distributing ETH, an Authorized Participant will submit Cash Orders, pursuant to which the Authorized Participant will deposit cash with, or accept cash from, the Transfer Agent in connection with the creation and redemption of Baskets. Cash Orders will be facilitated by the Transfer Agent and Liquidity Engager, acting other than in its capacity as Sponsor. On an order-by-order basis, the Liquidity Engager will engage one or more Liquidity Providers to obtain or E:\FR\FM\08APN1.SGM 08APN1 24550 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices receive ETH in exchange for cash in connection with such order, as described in more detail below. Unless the Sponsor requires that a Cash Order be effected at actual execution prices (an ‘‘Actual Execution Cash Order’’),67 each Authorized Participant that submits a Cash Order to create or redeem Baskets (a ‘‘Variable Fee Cash Order’’) 68 will pay a fee (the ‘‘Variable Fee’’) based on the Total Basket NAV, and any price differential of ETH between the trade date and the settlement date will be borne solely by the Liquidity Provider until such ETH have been received or liquidated by the Trust. The Variable Fee is intended to cover all of a Liquidity Provider’s expenses in connection with the creation or redemption order, including any ETH trading platform fees that the Liquidity Provider incurs in connection with buying or selling ETH. The amount may be changed by the Sponsor in its sole discretion at any time, and Liquidity Providers will communicate to the Sponsor in advance the Variable Fee they would be willing to accept in connection with a Variable Fee Cash Order, based on market conditions and other factors existing at the time of such Variable Fee Cash Order. Alternatively, the Sponsor may require that a Cash Order be effected as an Actual Execution Cash Order, in its sole discretion based on market conditions and other factors existing at the time of such Cash Order, and under such circumstances, any price differential of ETH between the trade date and the settlement date will be borne solely by the Authorized Participant until such ETH have been received or liquidated by the Trust. In the case of creations, to transfer the Total Basket Amount to the Trust’s Digital Asset Account, the Liquidity Provider will transfer ETH to one of the public key addresses associated with the Digital Asset Account and as provided by the Sponsor. In the case of redemptions, the same procedure is conducted, but in reverse, using the public key addresses associated with the wallet of the Liquidity Provider and as provided by such party. All such transactions will be conducted on the Blockchain and parties acknowledge and agree that such transfers may be irreversible if done incorrectly. Authorized Participants do not pay a transaction fee to the Trust in connection with the creation or redemption of Baskets, but there may be transaction fees associated with the validation of the transfer of ETH by the Ethereum Network, which will be paid by the Custodian in the case of redemptions and the Authorized Participant or the Liquidity Provider in the case of creations. Service providers may charge Authorized Participants administrative fees for order placement and other services related to creation of Baskets. As discussed above, Authorized Participants will also pay the Variable Fee in connection with Variable Fee Cash Orders. Under certain circumstances Authorized Participants may also be required to deposit additional cash in the Cash Account, or be entitled to receive excess cash from the Cash Account, in connection with creations and redemptions pursuant to Actual Execution Cash Orders. Authorized Participants will receive no fees, commissions or other form of compensation or inducement of any Trade date (T) lotter on DSK11XQN23PROD with NOTICES1 67 With respect to a creation or redemption pursuant to an Actual Execution Cash Order, as between the Trust and an Authorized Participant, the Authorized Participant is responsible for the dollar cost of the difference between the ETH price utilized in calculating Total Basket NAV on the trade date and the price at which the Trust acquires or disposes of the ETH on the settlement date. If the price realized in acquiring or disposing of the corresponding Total Basket Amount is higher than the Total Basket NAV, the Authorized Participant will bear the dollar cost of such difference, in the 16:37 Apr 05, 2024 Jkt 262001 Creation Procedures On any business day, an Authorized Participant may place an order with the Transfer Agent to create one or more Baskets. Cash Orders for creation must be placed with the Transfer Agent no later than 1:59:59 p.m., New York time. The Sponsor may in its sole discretion limit the number of Shares created pursuant to Cash Orders on any specified day without notice to the Authorized Participants and may direct the Marketing Agent to reject any Cash Orders in excess of such capped amount. In exercising its discretion to limit the number of Shares created pursuant to Cash Orders, the Sponsor expects to take into consideration a number of factors, including the availability of Liquidity Providers to facilitate Cash Orders and the cost of processing Cash Orders. Creations under Cash Orders will take place as follows, where ‘‘T’’ is the trade date and each day in the sequence must be a business day. Before a creation order is placed, the Sponsor determines if such creation order will be a Variable Fee Cash Order or an Actual Execution Cash Order, which determination is communicated to the Authorized Participant. Settlement date (T+1, or T+2, as established at the time of order placement) • The Authorized Participant places a creation order with the Transfer Agent. • The Marketing Agent accepts (or rejects) the creation order, which is communicated to the Authorized Participant by the Transfer Agent. • The Sponsor notifies the Liquidity Provider of the creation order. • The Sponsor determines the Total Basket NAV and any Variable Fee and Additional Creation Cash as soon as practicable after 4:00 p.m., New York time. VerDate Sep<11>2014 kind from either the Sponsor or the Trust and no such person has any obligation or responsibility to the Sponsor or the Trust to effect any sale or resale of Shares. The following is a summary of the procedures for the creation and redemption of Baskets. • The Authorized Participant delivers to the Cash Account: 1 (x) in the case of a Variable Fee Cash Order, the Total Basket NAV, plus any Variable Fee; or (y) in the case of an Actual Execution Cash Order, the Total Basket NAV, plus any Additional Creation Cash, less any Excess Creation Cash, if applicable (such amount, as applicable, the ‘‘Required Creation Cash’’). • The Liquidity Provider transfers the Total Basket Amount to the Trust’s Vault Balance. case of a creation, by delivering cash in the amount of such shortfall (the ‘‘Additional Creation Cash’’) to the Cash Account or, in the case of a redemption, with the amount of cash to be delivered to the Authorized Participant being reduced by the amount of such difference (the ‘‘Redemption Cash Shortfall’’). If the price realized in acquiring the corresponding Total Basket Amount is lower than the Total Basket NAV, the Authorized Participant will benefit from such difference, with the Trust promptly returning cash in the amount of such PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 excess (the ‘‘Excess Creation Cash’’) to the Authorized Participant. 68 Unless the Sponsor determines otherwise in its sole discretion based on market conditions and other factors existing at the time of such Cash Order, all creations and redemptions pursuant to Cash Orders are expected to be executed as Variable Fee Cash Orders, and any price differential of ETH between the trade date and the settlement date will be borne solely by the Liquidity Provider until such ETH have been received by the Trust. E:\FR\FM\08APN1.SGM 08APN1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Trade date (T) 24551 Settlement date (T+1, or T+2, as established at the time of order placement) • Once the Trust is in simultaneous possession of (x) the Total Basket Amount and (y) the Required Creation Cash, the Trust issues the aggregate number of Shares corresponding to the Baskets ordered by the Authorized Participant, which the Transfer Agent holds for the benefit of the Authorized Participant. • Cash equal to the Required Creation Cash is delivered to the Liquidity Provider from the Cash Account. • The Transfer Agent delivers Shares to the Authorized Participant by crediting the number of Baskets created to the Authorized Participant’s DTC account. 1 The ‘‘Cash Account’’ means the account maintained by the Transfer Agent for purposes of receiving cash from, and distributing cash to, Authorized Participants in connection with creations and redemptions pursuant to Cash Orders. For the avoidance of doubt, the Trust shall have no interest (beneficial, equitable or otherwise) in the Cash Account or any cash held therein. Redemption Procedures The procedures by which an Authorized Participant can redeem one or more Baskets mirror the procedures for the creation of Baskets. On any business day, an Authorized Participant may place a redemption order specifying the number of Baskets to be redeemed. The redemption of Shares pursuant to Cash Orders will only take place if approved by the Sponsor in writing, in its sole discretion and on a case-by-case basis. In exercising its discretion to approve the redemption of Shares pursuant to Cash Orders, the Sponsor expects to take into consideration a number of factors, including the availability of Liquidity Providers to facilitate Cash Orders and the cost of processing Cash Orders Cash Orders for redemption must be placed no later than 1:59:59 p.m., New York time on each business day. The Authorized Participants may only Trade Date (T) Settlement date (T+1 (or T+2 on case-by-case basis, as approved by Sponsor)) • The Authorized Participant places a redemption order with the Transfer Agent. • The Marketing Agent accepts (or rejects) the redemption order, which is communicated to the Authorized Participant by the Transfer Agent. • The Authorized Participant delivers Baskets to be redeemed from its DTC account to the Transfer Agent. • The Liquidity Provider delivers to the Cash Account: (x) in the case of a Variable Fee Cash Order, the Total Basket NAV less any Variable Fee; or (y) in the case of an Actual Execution Cash Order, the actual proceeds to the Trust from the liquidation of the Total Basket Amount (such amount, as applicable, the ‘‘Required Redemption Cash’’). • Once the Trust is in simultaneous possession of (x) the Total Basket Amount and (y) the Required Redemption Cash, the Transfer Agent cancels the Shares comprising the number of Baskets redeemed by the Authorized Participant. • The Custodian sends the Liquidity Provider the Total Basket Amount, and cash equal to the Required Redemption Cash is delivered to the Authorized Participant from the Cash Account. • The Sponsor notifies the Liquidity Provider of the redemption order. • The Sponsor determines the Total Basket NAV and, in the case of a Variable Fee Cash Order, any Variable Fee, as soon as practicable after 4:00 p.m., New York time. lotter on DSK11XQN23PROD with NOTICES1 redeem Baskets and cannot redeem any Shares in an amount less than a Basket. Redemptions under Cash Orders will take place as follows, where ‘‘T’’ is the trade date and each day in the sequence must be a business day. Before a redemption order is placed, the Sponsor determines if such redemption order will be a Variable Fee Cash Order or an Actual Execution Cash Order, which determination is communicated to the Authorized Participant. Suspension or Rejection of Orders and Total Basket Amount The creation or redemption of Shares may be suspended generally, or refused with respect to particular requested creations or redemptions, during any period when the transfer books of the Transfer Agent are closed or if circumstances outside the control of the Sponsor or its delegates make it for all practicable purposes not feasible to process creation orders or redemption orders or for any other reason at any time or from time to time.69 The 69 Extenuating circumstances outside of the control of the Sponsor and its delegates or that could cause the transfer books of the Transfer Agent to be closed are outlined in the Participant Agreement and include, for example, public service VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 Transfer Agent may reject an order or, after accepting an order, may cancel such order if: (i) such order is not presented in proper form as described in the Participant Agreement, (ii) the transfer of the Total Basket Amount comes from an account other than a ETH wallet address that is known to the Custodian as belonging to a Liquidity Provider or (iii) the fulfillment of the or utility problems, power outages resulting in telephone, telecopy and computer failures, acts of God such as fires, floods or extreme weather conditions, market conditions or activities causing trading halts, systems failures involving computer or other information systems, including any failures or outages of the Ethereum Network, affecting the Authorized Participant, the Sponsor, the Trust, the Transfer Agent, the Marketing Agent and the Custodian and similar extraordinary events. PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 order, in the opinion of counsel, might be unlawful, among other reasons. None of the Sponsor or its delegates will be liable for the suspension, rejection or acceptance of any creation order or redemption order. Availability of Information The Trust’s website (https:// grayscale.com/crypto-products/ grayscale-ethereum-trust/) will include quantitative information on a per Share basis updated on a daily basis, including, (i) the current NAV per Share daily and the prior business day’s NAV per Share and the reported closing price of the Shares; (ii) the mid-point of the E:\FR\FM\08APN1.SGM 08APN1 24552 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 bid-ask price 70 as of the time the NAV per Share is calculated (‘‘Bid-Ask Price’’) and a calculation of the premium or discount of such price against such NAV per Share; and (iii) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid-Ask Price against the NAV per Share, within appropriate ranges, for each of the four previous calendar quarters (or for as long as the Trust has been trading as an ETP if shorter). In addition, on each business day the Trust’s website will provide pricing information for the Shares. One or more major market data vendors, will provide an intra-day 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 Core Trading Session (9:30 a.m. to 4:00 p.m., E.T.).71 The IIV will be calculated using the same methodology as the NAV per Share of the Trust (as described above), specifically by using the prior day’s closing NAV per Share as a base and updating that value during the NYSE Arca Core Trading Session to reflect changes in the value of the Trust’s NAV during the trading day. The IIV disseminated during the NYSE Arca Core Trading Session should not be viewed as an actual real-time update of the NAV per Share, 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 NYSE Arca Core Trading Session by one or more major market data vendors. In addition, the IIV will be available through on-line information services. The NAV for the Trust will be calculated by the Sponsor once a day and will be disseminated daily to all market participants at the same time. To the extent that the Sponsor has utilized the cascading set of rules described in ‘‘Index Price’’ above, the Trust’s website will note the valuation methodology used and the price per ETH resulting from such calculation. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). Quotation and last sale information for ETH will be widely disseminated 70 The bid-ask price of the Trust is determined using the highest bid and lowest offer on the Consolidated Tape as of the time of calculation of the closing day NAV. 71 The IIV on a per Share basis disseminated during the Core Trading Session should not be viewed as a real-time update of the NAV, which is calculated once a day. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 through a variety of major market data vendors, including Bloomberg and Reuters. In addition, real-time price (and volume) data for ETH is available by subscription from Reuters and Bloomberg. The spot price of ETH is available on a 24-hour basis from major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in ETH will be available from major market data vendors and from the trading platforms on which ETH are traded. The normal trading hours for Digital Asset Trading Platforms are 24-hours per day, 365days per year. On each business day, the Sponsor will publish the Index Price, the Trust’s NAV, and the NAV per Share on the Trust’s website as soon as practicable after its determination. If the NAV and NAV per Share have been calculated using a price per ETH other than the Index Price for such Evaluation Time, the publication on the Trust’s website will note the valuation methodology used and the price per ETH resulting from such calculation. The Trust will provide website disclosure of its NAV daily. The website disclosure of the Trust’s NAV will occur at the same time as the disclosure by the Sponsor of the NAV to Authorized Participants so that all market participants are provided such portfolio information at the same time. Therefore, the same portfolio information will be provided on the public website as well as in electronic files provided to Authorized Participants. Accordingly, each investor will have access to the current NAV of the Trust through the Trust’s website, as well as from one or more major market data vendors. The value of the Index, as well as additional information regarding the Index, will be available on a continuous basis at https://www.coindesk.com/ indices. 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. Shares will trade on the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in accordance with NYSE Arca Rule 7.34–E (Early, Core, and Late Trading Sessions). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Rule 7.6–E, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities PO 00000 Frm 00130 Fmt 4703 Sfmt 4703 that are priced less than $1.00, for which the MPV for order entry is $0.0001. The Shares will conform to the initial and continued listing criteria under NYSE Arca Rule 8.201–E. The trading of the Shares will be subject to NYSE Arca Rule 8.201–E(g), which sets forth certain restrictions on Equity Trading Permit Holders (‘‘ETP Holders’’) acting as registered Market Makers in Commodity-Based Trust Shares to facilitate surveillance. The Exchange represents that, for initial and continued listing, the Trust will be in compliance with Rule 10A–3 72 under the Act, as provided by NYSE Arca Rule 5.3–E. A minimum of 100,000 Shares of the Trust will be outstanding at the commencement of trading on 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 of the Trust.73 Trading in Shares of the Trust will be halted if the circuit breaker parameters in NYSE Arca Rule 7.12–E have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. The Exchange may halt trading during the day in which an interruption to the dissemination of the IIV or the value of the Index occurs. If the interruption to the dissemination of the IIV or the value of the Index persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. In addition, if the Exchange becomes aware that the NAV per Share is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV per Share is available to all market participants. Surveillance The Exchange represents that trading in the Shares of the Trust will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.74 The 72 17 CFR 240.10A–3. NYSE Arca Rule 7.12–E. 74 FINRA conducts cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. 73 See E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive surveillance sharing agreement (‘‘CSSA’’).75 The Exchange is also able to obtain information regarding trading in the Shares in connection with such ETP Holders’ proprietary or customer trades which they effect through ETP Holders on any relevant market. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. All statements and representations made in this filing regarding (a) the description of the portfolios of the Trust, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in this rule filing shall constitute continued listing requirements for listing the Shares on the Exchange. The Sponsor has represented to the Exchange that it will advise the Exchange of any failure by the Trust to comply with the continued listing requirements, and, pursuant to its obligations under section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Trust is not in compliance with the applicable listing 75 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Trust may trade on markets that are members of ISG or with which the Exchange has in place a CSSA. VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 requirements, the Exchange will commence delisting procedures under NYSE Arca Rule 5.5–E(m). Information Bulletin Prior to the commencement of trading, the Exchange will inform its ETP Holders in an ‘‘Information Bulletin’’ of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) the procedures for creations of Shares in Baskets; (2) NYSE Arca Rule 9.2–E(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (3) information regarding how the value of the Index and the IIV are disseminated; (4) the possibility that trading spreads and the resulting premium or discount on the Shares may widen during the Opening and Late Trading Sessions, when an updated IIV will not be calculated or publicly disseminated; and (5) trading information. The Exchange notes that investors purchasing Shares directly from the Trust will receive a prospectus. In addition, the Information Bulletin will reference that the Trust is subject to various fees and expenses as described in the Annual Report. The Information Bulletin will disclose that information about the Shares of the Trust is publicly available on the Trust’s website. The Information Bulletin will also discuss any relief, if granted, by the Commission or the staff from any rules under the Act. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under section 6(b)(5) 76 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. 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 and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Rule 8.201–E. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities 76 15 PO 00000 U.S.C. 78f(b)(5). Frm 00131 Fmt 4703 Sfmt 4703 24553 laws. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares with other markets that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets. In addition, the Exchange may obtain information regarding trading in the Shares from markets that are members of ISG or with which the Exchange has in place a CSSA. Also, pursuant to NYSE Arca Rule 8.201–E(g), the Exchange is able to obtain information regarding trading in the Shares and the underlying ETH or any ETH derivative through ETP Holders acting as registered Market Makers, in connection with such ETP Holders’ proprietary or customer trades through ETP Holders which they effect on any relevant market. The proposed rule change is also designed to prevent fraudulent and manipulative acts and practices because, although the Digital Asset Trading Platform Market is not inherently resistant to fraud and manipulation, the Index serves as a means sufficient to mitigate the impact of instances of fraud and manipulation on a reference price for ETH. Specifically, the Index provides a better benchmark for the price of ETH than the Digital Asset Trading Platform Market price because it (1) tracks the Digital Asset Trading Platform Market price through trading activity at U.S.Compliant Trading Platforms; (2) mitigates the impact of instances of fraud, manipulation and other anomalous trading activity in real-time through systematic adjustments; (3) is constructed and maintained by an expert third-party index provider, allowing for prudent handling of nonmarket-related events; and (4) mitigates the impact of instances of fraud, manipulation and other anomalous trading activity concentrated on any one specific trading platform through a cross-trading platform composite index rate. The Trust has used the Index to price the Shares for more than four years, and the Index has proven its ability to (i) mitigate the effects of fraud, manipulation and other anomalous trading activity from impacting the ETH reference rate, (ii) provide a real-time, volume-weighted fair value of ETH and (iii) appropriately handle and adjust for non-market related events, such that efforts to manipulate the price of ETH would have had a negligible effect on the pricing of the Trust, due to the controls embedded in the structure of the Index. In addition, certain of the E:\FR\FM\08APN1.SGM 08APN1 lotter on DSK11XQN23PROD with NOTICES1 24554 Federal Register / Vol. 89, No. 68 / Monday, April 8, 2024 / Notices Index’s Constituent Trading Platforms also have or have begun to implement market surveillance infrastructure to further detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing, including market manipulation. The proposed rule change is also designed to prevent fraudulent and manipulative acts and practices based on the existence of the CME futures market as a large, surveilled and regulated market that is closely connected with the spot market for ETH and through which the Exchange could obtain information to assist in detecting and deterring potential fraud or manipulation. The proposed rule change is designed to promote just and equitable principles of trade and to protect investors and the public interest in that there is a considerable amount of ETH price and market information available on public websites and through professional and subscription services. Investors may obtain, on a 24-hour basis, ETH pricing information based on the spot price for ETH from various financial information service providers. The closing price and settlement prices of ETH are readily available from the Digital Asset Trading Platforms and other publicly available websites. In addition, such prices are published in public sources, or on-line information services such as Bloomberg and Reuters. The NAV per Share will be calculated daily and made available to all market participants at the same time. The Trust will provide website disclosure of its NAV daily. One or more major market data vendors will disseminate for the Trust on a daily basis information with respect to the most recent NAV per Share and Shares outstanding. In addition, if the Exchange becomes aware that the NAV per Share is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. Quotation and lastsale information regarding the Shares will be disseminated through the facilities of the CTA. The IIV will be widely disseminated on a per Share basis every 15 seconds during the NYSE Arca Core Trading Session (normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major market data vendors. The Exchange represents that the Exchange may halt trading during the day in which an interruption to the dissemination of the IIV or the value of the Index occurs. If the interruption to the dissemination of the IIV or the value of the Index persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning VerDate Sep<11>2014 16:37 Apr 05, 2024 Jkt 262001 of the trading day following the interruption. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of an additional type of exchange-traded product that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures relating to trading in the Shares and may obtain information via ISG from other exchanges that are members of ISG or with which the Exchange has entered into a CSSA. In addition, as noted above, investors will have ready access to information regarding the Trust’s NAV, IIV, and quotation and last sale information for the Shares. 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 purposes of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of an additional type of exchange-traded product, and the first such product based on ETH, which will enhance competition among market participants, 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 No written comments were solicited or received with respect to the proposed rule change. III. 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 Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Frm 00132 Fmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.77 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2024–07333 Filed 4–5–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meetings 2:00 p.m. on Thursday, April 11, 2024. PLACE: The meeting will be held via remote means and/or at the Commission’s headquarters, 100 F Street NE, Washington, DC 20549. STATUS: This meeting will be closed to the public. MATTERS TO BE CONSIDERED: Commissioners, Counsel to the TIME AND DATE: • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– NYSEARCA–2023–70 on the subject line. PO 00000 Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–NYSEARCA–2023–70. 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–NYSEARCA–2023–70 and should be submitted on or before April 29, 2024. Sfmt 4703 77 17 E:\FR\FM\08APN1.SGM CFR 200.30–3(a)(12). 08APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 68 (Monday, April 8, 2024)]
[Notices]
[Pages 24534-24554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-07333]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99887; File No. SR-NYSEARCA-2023-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares 
of the Grayscale Ethereum Trust

April 2, 2024.
    On October 10, 2023, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of the Grayscale Ethereum 
Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares). The 
proposed rule change was published for comment in the Federal Register 
on October 27, 2023.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98780 (Oct. 23, 
2023), 88 FR 73892. Comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370.htm.
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    On December 5, 2023, pursuant to section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On January 25, 2024, the Commission instituted proceedings 
under section 19(b)(2)(B) of the Act \6\ to determine whether to 
approve or disapprove the proposed rule change.\7\ On March 15, 2024, 
the Exchange filed Amendment No. 1, which replaced and superseded the 
proposed rule change in its entirety. Amendment No. 1 to the proposed 
rule change is 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, as modified by Amendment 
No. 1, from interested persons.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99082, 88 FR 85962 
(Dec. 11, 2023).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 99428, 89 FR 6155 
(Jan. 31, 2024).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Rule 8.201-E: Grayscale Ethereum Trust (ETH) (the 
``Trust'').\8\ This Amendment No. 1 to SR-NYSEARCA-2023-70 replaces SR-
NYSEARCA-2023-70 as originally filed and supersedes such filing in its 
entirety. The proposed rule change is available on the Exchange's 
website at www.nyse.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.
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    \8\ The Trust was previously named Ethereum Investment Trust, 
whose name was changed pursuant to a Certificate of Amendment to the 
Certificate of Trust of Ethereum Investment Trust filed with the 
Delaware Secretary of State on January 11, 2019.
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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 self-regulatory organization 
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 those statements may be examined at 
the places specified in Item III below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/
or trade pursuant to unlisted trading privileges ``Commodity-Based 
Trust Shares.'' \9\ The Exchange proposes to list and trade shares 
(``Shares'') \10\ of the Trust pursuant to NYSE Arca Rule 8.201-E.\11\
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    \9\ Commodity-Based Trust Shares are securities issued by a 
trust that represent investors' discrete identifiable and undivided 
beneficial ownership interest in the commodities deposited into the 
Trust.
    \10\ The Shares are expected to be listed under the ticker 
symbol ``ETH.''
    \11\ On April 17, 2020, the Trust confidentially filed its draft 
registration statement on Form 10 under the '34 Act) (File No. 377-
03131) (the ``Draft Registration Statement on Form 10''). On June 
16, 2020, the Trust confidentially filed Amendment No. 1 to the 
Draft Registration Statement on Form 10. The Jumpstart Our Business 
Startups Act (the ``JOBS Act''), enacted on April 5, 2012, added 
section 6(e) to the Securities Act of 1933 (the ``Securities Act'' 
or ``'33 Act''). section 6(e) of the Securities Act provides that an 
``emerging growth company'' may confidentially submit to the 
Commission a draft registration statement for confidential, non-
public review by the Commission staff prior to public filing, 
provided that the initial confidential submission and all amendments 
thereto shall be publicly filed not later than 21 days before the 
date on which the issuer conducts a road show, as such term is 
defined in Securities Act Rule 433(h)(4). An emerging growth company 
is defined in section 2(a)(19) of the Securities Act as an issuer 
with less than $1,000,000,000 total annual gross revenues during its 
most recently completed fiscal year. The Trust meets the definition 
of an emerging growth company and consequently submitted its Draft 
Registration Statement on Form 10 to the Commission on a 
confidential basis. On August 6, 2020, the Trust filed its 
registration statement on Form 10 under the Securities Act (File No. 
000-56193) (the ``Registration Statement on Form 10''). On October 
2, 2020, the Trust filed Amendment No. 1 to the Registration 
Statement on Form 10. On, October 5, 2020, the Registration 
Statement on Form 10 was automatically deemed effective. On March 5, 
2021, February 25, 2022, March 1, 2023, and February 23, 2024, the 
Trust filed its annual report on Form 10-K under the Securities Act 
(File No. 000-56193) (the ``Annual Reports''). On November 6, 2020, 
May 7, 2021, August 6, 2021, November 5, 2021, May 6, 2022, August 
5, 2022, November 4, 2022, May 5, 2023, August 4, 2023, and November 
3, 2023, the Trust filed its quarterly reports on Form 10-Q under 
the Securities Act (File No. 000-56193) (the ``Quarterly Reports''). 
The descriptions of the Trust, the Shares, and ETH contained herein 
are based, in part, on the Annual Reports and Quarterly Reports. On 
January 17, 2019, the Trust submitted to the Commission an amended 
Form D as a business trust. Shares of the Trust have been quoted on 
OTC Market's OTCQX Best Marketplace under the symbol ``ETHE'' since 
June 20, 2019. On May 23, 2019 and March 20, 2020, the Trust 
published annual reports for ETHE for the periods ended December 31, 
2018 and December 31, 2019, respectively. On May 23, 2019, August 8, 
2019, November 11, 2019, May 8, 2020, and August 6, 2020, the Trust 
published quarterly reports for ETHE for the periods ended March 31, 
2019, June 30, 2019, September 30, 2019, March 31, 2020, and June 
30, 2020, respectively. Reports published before October 5, 2020, 
the date on which the Trust's Shares became registered pursuant to 
section 12(g) of the Act, can be found on OTC Market's website 
(https://www.otcmarkets.com/stock/ETHE/disclosure), and reports 
published on or after October 5, 2020 can be found on OTC Market's 
website and the Commission's website (https://www.sec.gov/edgar/browse/?CIK=1725210&owner=exclude). The Shares will be of the same 
class and will have the same rights as shares of ETHE. According to 
the Sponsor, freely tradeable shares of ETHE will remain freely 
tradeable Shares on the date of the listing of the Shares that are 
unregistered under the Securities Act. Restricted shares of ETHE 
will remain subject to private placement restrictions on such date, 
and the holders of such restricted shares will continue to hold 
those Shares subject to those restrictions until they become freely 
tradable Shares.
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    The Trust is the world's largest Ethereum (``ETH'') investment fund 
by assets under management as of the date of this filing. The Trust has 
approximately $11.8 billion in assets under management \12\ 
(representing 2.5% of all ETH in circulation), its

[[Page 24535]]

Shares trade millions of dollars in daily volume and are held by more 
than a quarter of a million American investor accounts seeking exposure 
to ETH without the cost and complexity of purchasing the asset 
directly.\13\ However, because the Trust is not currently listed as an 
exchange-traded product (``ETP''), the value of the Shares has not been 
able to closely track the value of the Trust's underlying ETH. The 
Sponsor thus believes that allowing Shares of the Trust to list and 
trade on the Exchange as an ETP (i.e., converting the Trust to a spot 
Ethereum ETP) would unlock over $1.73 billion of value \14\ for the 
Trust's shareholders and provide other investors with a safe and secure 
way to invest in ETH on a regulated national securities exchange.
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    \12\ As of March 13, 2024.
    \13\ As of the date of the initial filing of this proposed rule 
change. See Securities Exchange Act Release No. 98780 (October 23, 
2023), 88 FR 73892 (October 27, 2023) (Notice of Filing of Proposed 
Rule Change To List and Trade Shares of the Grayscale Ethereum Trust 
Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)).
    \14\ As of March 13, 2024.
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    The sponsor of the Trust is Grayscale Investments, LLC 
(``Sponsor''), a Delaware limited liability company. The Sponsor is a 
wholly owned subsidiary of Digital Currency Group, Inc. (``Digital 
Currency Group''). The trustee for the Trust is Delaware Trust Company 
(``Trustee''). The custodian for the Trust is Coinbase Custody Trust 
Company, LLC (``Custodian'').\15\ The administrator and transfer agent 
of the Trust is BNY Mellon Asset Servicing, a division of The Bank of 
New York Mellon (the ``Transfer Agent''). The distribution and 
marketing agent for the Trust will be Foreside Fund Services, LLC (the 
``Marketing Agent''). The index provider for the Trust is CoinDesk 
Indices, Inc. (the ``Index Provider'').
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    \15\ According to the Annual Report, Digital Currency Group owns 
a minority interest in Coinbase, Inc., which is the parent company 
of the Custodian, representing less than 1.0% of its equity.
---------------------------------------------------------------------------

    The Trust is a Delaware statutory trust, formed on December 13, 
2017, that operates pursuant to a trust agreement between the Sponsor 
and the Trustee (``Trust Agreement''). The Trust has no fixed 
termination date.
Operation of the Trust
    According to the Annual Report, the Trust's assets consist solely 
of ETH.\16\
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    \16\ The Trust may from time to time come into possession of 
Incidental Rights and/or IR Virtual Currency by virtue of its 
ownership of Ethereum, generally through a fork in the Ethereum 
Blockchain, an airdrop offered to holders of Ethereum or other 
similar event. ``Incidental Rights'' are rights to acquire, or 
otherwise establish dominion and control over, any virtual currency 
or other asset or right, which rights are incident to the Trust's 
ownership of Ethereum and arise without any action of the Trust, or 
of the Sponsor or Trustee on behalf of the Trust. ``IR Virtual 
Currency'' is any virtual currency tokens, or other asset or right, 
acquired by the Trust through the exercise (subject to the 
applicable provisions of the Trust Agreement) of any Incidental 
Right. Although the Trust is permitted to take certain actions with 
respect to Incidental Rights and IR Virtual Currency in accordance 
with its Trust Agreement, at this time the Trust will prospectively 
irrevocably abandon any Incidental Rights and IR Virtual Currency. 
In the event the Trust seeks to change this position, the Exchange 
would file a subsequent proposed rule change with the Commission.
---------------------------------------------------------------------------

    Each Share represents a proportional interest, based on the total 
number of Shares outstanding, in each of the Trust's assets as 
determined by reference to the Index Price,\17\ less the Trust's 
expenses and other liabilities (which include accrued but unpaid fees 
and expenses). The Sponsor expects that the market price of the Shares 
will fluctuate over time in response to the market prices of ETH. In 
addition, because the Shares reflect the estimated accrued but unpaid 
expenses of the Trust, the number of ETH represented by a Share will 
gradually decrease over time as the Trust's ETH are used to pay the 
Trust's expenses.
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    \17\ The ``Index Price'' means the U.S. dollar value of an ETH 
derived from the Digital Asset Trading Platforms that are reflected 
in the CoinDesk Ether Price Index (ETX), calculated at 4:00 p.m., 
New York time, on each business day. For purposes of the Trust 
Agreement, the term ETH Index Price has the same meaning as the 
Index Price as defined herein.
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    The activities of the Trust are limited to (i) issuing ``Baskets'' 
(as defined below) in exchange for ETH transferred to the Trust as 
consideration in connection with creations, (ii) transferring or 
selling ETH or any other staking consideration as necessary to cover 
the ``Sponsor's Fee'' \18\ and/or certain Trust expenses, (iii) 
transferring ETH in exchange for Baskets surrendered for redemption 
(subject to obtaining regulatory approval from the SEC and approval of 
the Sponsor), (iv) causing the Sponsor to sell ETH or any other staking 
consideration on the termination of the Trust, and (v) engaging in all 
administrative and security procedures necessary to accomplish such 
activities in accordance with the provisions of the Trust Agreement, 
the Custodian Agreement, the Index License Agreement, and the 
Participant Agreements (each as defined below).
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    \18\ The Sponsor's Fee means a fee, payable in ETH, which 
accrues daily in U.S. dollars at an annual rate of currently 2.5%, 
but which will be lowered in connection with the Trust becoming an 
ETP, of the NAV Fee Basis Amount of the Trust as of 4:00 p.m., New 
York time, on each day, provided that for a day that is not a 
business day, the calculation of the Sponsor's Fee will be based on 
the NAV Fee Basis Amount from the most recent business day, reduced 
by the accrued and unpaid Sponsor's Fee for such most recent 
business day and for each day after such most recent business day 
and prior to the relevant calculation date. The ``NAV Fee Basis 
Amount'' is calculated in the manner set forth under ``Valuation of 
ETH and Determination of NAV'' below.
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    The Trust will not be actively managed. It will not engage in any 
activities designed to obtain a profit from, or to ameliorate losses 
caused by, changes in the market prices of ETH.
Investment Objective
    According to the Annual Report, and as further described below, the 
Trust's investment objective is for the value of the Shares (based on 
ETH per Share) to reflect the value of the ETH held by the Trust, 
determined by reference to the Index Price, less the Trust's expenses 
and other liabilities. While an investment in the Shares is not a 
direct investment in ETH, the Shares are designed to provide investors 
with a cost-effective and convenient way to gain investment exposure to 
ETH. Generally speaking, a substantial direct investment in ETH may 
require expensive and sometimes complicated arrangements in connection 
with the acquisition, security and safekeeping of the ETH and may 
involve the payment of substantial fees to acquire such ETH from third-
party facilitators through cash payments of U.S. dollars. Because the 
value of the Shares is correlated with the value of ETH held by the 
Trust, it is important to understand the investment attributes of, and 
the market for, ETH.
    The Trust uses the Index Price to calculate its ``NAV,'' which is 
the aggregate value, expressed in U.S. dollars, of the Trust's assets 
(other than U.S. dollars or other fiat currency), less the U.S. dollar 
value of the Trust's expenses and other liabilities calculated in the 
manner set forth under ``Valuation of ETH and Determination of NAV.'' 
``NAV per Share'' is calculated by dividing NAV by the number of Shares 
then outstanding.
Valuation of ETH and Determination of NAV
    The following is a description of the material terms of the Trust 
Agreement as they relate to valuation of the Trust's ETH and the NAV 
calculations.\19\
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    \19\ While the Sponsor uses the terminology ``NAV'' in this 
filing, the term used in the Trust Agreement is ``Digital Asset 
Holdings.''
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    On each business day at 4:00 p.m., New York time, or as soon 
thereafter as practicable (the ``Evaluation Time''), the Sponsor will 
evaluate the ETH held by the Trust and calculate and publish the NAV of 
the Trust. To calculate the NAV, the Sponsor will:
    1. Determine the Index Price as of such business day.

[[Page 24536]]

    2. Multiply the Index Price by the Trust's aggregate number of ETH 
owned by the Trust as of 4:00 p.m., New York time, on the immediately 
preceding day, less the aggregate number of ETH payable as the accrued 
and unpaid Sponsor's Fee as of 4:00 p.m., New York time, on the 
immediately preceding day.
    3. Add the U.S. dollar value of ETH, calculated using the Index 
Price, receivable under pending creation orders, if any, determined by 
multiplying the number of the Baskets represented by such creation 
orders by the Basket Amount and then multiplying such product by the 
Index Price.\20\
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    \20\ ``Baskets'' and ``Basket Amount'' have the meanings set 
forth in ``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------

    4. Subtract the U.S. dollar amount of accrued and unpaid Additional 
Trust Expenses, if any.\21\
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    \21\ ``Additional Trust Expenses'' are any expenses incurred by 
the Trust in addition to the Sponsor's Fee that are not Sponsor-paid 
expenses, including, but not limited to, (i) taxes and governmental 
charges, (ii) expenses and costs of any extraordinary services 
performed by the Sponsor (or any other service provider) on behalf 
of the Trust to protect the Trust or the interests of shareholders, 
(iii) any indemnification of the Custodian or other agents, service 
providers or counterparties of the Trust, (iv) the fees and expenses 
related to the listing, quotation or trading of the Shares on any 
marketplace or other alternative trading system, as determined by 
the Sponsor, on which the Shares may then be listed, quoted or 
traded, including but not limited to, NYSE Arca, Inc. (including 
legal, marketing and audit fees and expenses) to the extent 
exceeding $600,000 in any given fiscal year and (v) extraordinary 
legal fees and expenses, including any legal fees and expenses 
incurred in connection with litigation, regulatory enforcement or 
investigation matters.
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    5. Subtract the U.S. dollar value of the ETH, calculated using the 
Index Price, to be distributed under pending redemption orders, if any, 
determined by multiplying the number of Baskets to be redeemed 
represented by such redemption orders by the Basket Amount and then 
multiplying such product by the Index Price (the amount derived from 
steps 1 through 5 above, the ``NAV Fee Basis Amount'').
    6. Subtract the U.S. dollar amount of the Sponsor's Fee that 
accrues for such business day, as calculated based on the NAV Fee Basis 
Amount for such business day.
    In the event that the Sponsor determines that the primary 
methodology used to determine the Index Price is not an appropriate 
basis for valuation of the Trust's ETH, the Sponsor will utilize the 
cascading set of rules as described in ``Trust Valuation of ETH'' 
below.
ETH and the Ethereum Network \22\
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    \22\ The description of ETH and the Ethereum Network in this 
section was provided by the Sponsor and is based on the Annual 
Report.
---------------------------------------------------------------------------

    According to the Annual Report, Ethereum, or ETH, is a digital 
asset that is created and transmitted through the operations of the 
peer-to-peer ``Ethereum Network,'' a decentralized network of computers 
that operates on cryptographic protocols. No single entity owns or 
operates the Ethereum Network, the infrastructure of which is 
collectively maintained by a decentralized user base. The Ethereum 
Network allows people to exchange tokens of value, called Ether, which 
are recorded on a public transaction ledger known as a blockchain. ETH 
can be used to pay for goods and services, including computational 
power on the Ethereum network, or it can be converted to fiat 
currencies, such as the U.S. dollar, at rates determined on ``Digital 
Asset Markets'' \23\ or in individual end-user-to-end-user transactions 
under a barter system.
---------------------------------------------------------------------------

    \23\ A ``Digital Asset Market'' is a ``Brokered Market,'' 
``Dealer Market,'' ``Principal-to-Principal Market'' or ``Exchange 
Market,'' as each such term is defined in the Financial Accounting 
Standards Board Accounting Standards Codification Master Glossary. 
The ``Digital Asset Trading Platform Market'' is the global trading 
platform market for the trading of ETH, which consists of 
transactions on electronic Digital Asset Trading Platforms. A 
``Digital Asset Trading Platform'' is an electronic marketplace 
where trading participants may trade, buy and sell ETH based on bid-
ask trading. The largest Digital Asset Trading Platforms are online 
and typically trade on a 24-hour basis, publishing transaction price 
and volume data.
---------------------------------------------------------------------------

    Furthermore, the Ethereum Network also allows users to write and 
implement smart contracts--that is, general-purpose code that executes 
on every computer in the network and can instruct the transmission of 
information and value based on a sophisticated set of logical 
conditions. Using smart contracts, users can create markets, store 
registries of debts or promises, represent the ownership of property, 
move funds in accordance with conditional instructions and create 
digital assets other than ETH on the Ethereum Network. Smart contract 
operations are executed on the Ethereum Blockchain in exchange for 
payment of ETH. The Ethereum Network is one of a number of projects 
intended to expand blockchain use beyond just a peer-to-peer money 
system.
    The Ethereum Network went live on July 30, 2015. Unlike other 
digital assets, such as Bitcoin, which are solely created through a 
progressive mining process, 72.0 million ETH were created in connection 
with the launch of the Ethereum Network. At the time of the network 
launch, a non-profit called the Ethereum Foundation was the sole 
organization dedicated to protocol development.
    The Ethereum Network is decentralized in that it does not require 
governmental authorities or financial institution intermediaries to 
create, transmit, or determine the value of ETH. Rather, following the 
initial distribution of ETH, ETH is created, burned, and allocated by 
the Ethereum Network protocol through a process that is currently 
subject to an issuance and burn rate. The value of ETH is determined by 
the supply of and demand for ETH on the Digital Asset Trading Platforms 
or in private end-user-to-end-user transactions.
    New ETH are created and rewarded to the validators of a block in 
the Ethereum Blockchain for verifying transactions. The Ethereum 
Blockchain is effectively a decentralized database that includes all 
blocks that have been validated, and it is updated to include new 
blocks as they are validated. Each ETH transaction is broadcast to the 
Ethereum Network and, when included in a block, recorded in the 
Ethereum Blockchain. As each new block records outstanding ETH 
transactions, and outstanding transactions are settled and validated 
through such recording, the Ethereum Blockchain represents a complete, 
transparent and unbroken history of all transactions of the Ethereum 
Network.
    Among other things, ETH is used to pay for transaction fees and 
computational services (i.e., smart contracts) on the Ethereum Network; 
users of the Ethereum Network pay for the computational power of the 
machines executing the requested operations with ETH. Requiring payment 
in ETH on the Ethereum Network incentivizes developers to write quality 
applications and increases the efficiency of the Ethereum Network 
because wasteful code costs more, while also ensuring that the Ethereum 
Network remains economically viable by compensating for contributed 
computational resources.
Smart Contracts and Development on the Ethereum Network
    Smart contracts are programs that run on a blockchain that can 
execute automatically when certain conditions are met. Smart contracts 
facilitate the exchange of anything representative of value, such as 
money, information, property, or voting rights. Using smart contracts, 
users can send or receive digital assets, create markets, store 
registries of debts or promises, represent ownership of property or a 
company, move funds in accordance with

[[Page 24537]]

conditional instructions and create new digital assets.
    Development on the Ethereum Network involves building more complex 
tools on top of smart contracts, such as decentralized apps 
(``DApps''); organizations that are autonomous, known as decentralized 
autonomous organizations (``DAOs''); and entirely new decentralized 
networks. For example, a company that distributes charitable donations 
on behalf of users could hold donated funds in smart contracts that are 
paid to charities only if the charity satisfies certain pre-defined 
conditions.
    Moreover, the Ethereum Network has also been used as a platform for 
creating new digital assets and conducting their associated initial 
coin offerings. As of December 31, 2023, a majority of digital assets 
were built on the Ethereum Network, with such assets representing a 
significant amount of the total market value of all digital assets.
    More recently, the Ethereum Network has been used for decentralized 
finance (``DeFi'') or open finance platforms, which seek to democratize 
access to financial services, such as borrowing, lending, custody, 
trading, derivatives and insurance, by removing third-party 
intermediaries. DeFi can allow users to lend and earn interest on their 
digital assets, exchange one digital asset for another and create 
derivative digital assets such as stablecoins, which are digital assets 
pegged to a reserve asset such as fiat currency. Over the course of 
2023, between $20 billion and $30 billion worth of digital assets were 
locked up as collateral on DeFi platforms on the Ethereum Network.\24\
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    \24\ DeFiLlama, ``Ethereum Total Value Locked,'' https://defillama.com/chain/Ethereum.
---------------------------------------------------------------------------

    In addition, the Ethereum Network and other smart contract 
platforms have been used for creating non-fungible tokens, or ``NFTs.'' 
Unlike digital assets native to smart contract platforms which are 
fungible and enable the payment of fees for smart contract execution. 
Instead, NFTs allow for digital ownership of assets that convey certain 
rights to other digital or real-world assets. This new paradigm allows 
users to own rights to other assets through NFTs, which enable users to 
trade them with others on the Ethereum Network. For example, an NFT may 
convey rights to a digital asset that exists in an online game or a 
DApp, and users can trade their NFT in the DApp or game, and carry them 
to other digital experiences, creating an entirely new free-market, 
internet-native economy that can be monetized in the physical world.
Overview of the Ethereum Network's Operations
    In order to own, transfer, or use ETH directly on the Ethereum 
Network (as opposed to through an intermediary, such as a custodian), a 
person generally must have internet access to connect to the Ethereum 
Network. ETH transactions may be made directly between end-users 
without the need for a third-party intermediary. To prevent the 
possibility of double-spending ETH, a user must notify the Ethereum 
Network of the transaction by broadcasting the transaction data to its 
network peers. The Ethereum Network provides confirmation against 
double-spending by memorializing every transaction in the Ethereum 
Blockchain, which is publicly accessible and transparent. This 
memorialization and verification against double-spending is 
accomplished through the Ethereum Network validation process, which 
adds ``blocks'' of data, including recent transaction information, to 
the Ethereum Blockchain.
Summary of an ETH Transaction
    Prior to engaging in ETH transactions directly on the Ethereum 
Network, a user generally must first install on its computer or mobile 
device an Ethereum Network software program that will allow the user to 
generate a private and public key pair associated with an ETH address, 
commonly referred to as a ``wallet.'' The Ethereum Network software 
program and the ETH address also enable the user to connect to the 
Ethereum Network and transfer ETH to, and receive ETH from, other 
users.
    Each Ethereum Network address, or wallet, is associated with a 
unique ``public key'' and ``private key'' pair. To receive ETH, the ETH 
recipient must provide its public key to the party initiating the 
transfer. This activity is analogous to a recipient for a transaction 
in U.S. dollars providing a routing address in wire instructions to the 
payor so that cash may be wired to the recipient's account. The payor 
approves the transfer to the address provided by the recipient by 
``signing'' a transaction that consists of the recipient's public key 
with the private key of the address from where the payor is 
transferring the ETH. The recipient, however, does not make public or 
provide to the sender its related private key.
    Neither the recipient nor the sender reveal their private keys in a 
transaction, because the private key authorizes transfer of the funds 
in that address to other users. Therefore, if a user loses his or her 
private key, the user may permanently lose access to the ETH contained 
in the associated address. Likewise, ETH is irretrievably lost if the 
private key associated with them is deleted and no backup has been 
made. When sending ETH, a user's Ethereum Network software program must 
validate the transaction with the associated private key. In addition, 
since every computation on the Ethereum Network requires processing 
power, there is a transaction fee involved with the transfer that is 
paid by the payor. The resulting digitally validated transaction is 
sent by the user's Ethereum Network software program to the Ethereum 
Network validators to allow transaction confirmation.
    Ethereum Network validators record and confirm transactions when 
they validate and add blocks of information to the Ethereum Blockchain. 
In proof-of-stake, validators compete to be randomly selected to 
validate transactions. When a validator is selected to validate a 
block, it creates that block, which includes data relating to (i) the 
verification of newly submitted and accepted transactions and (ii) a 
reference to the prior block in the Ethereum Blockchain to which the 
new block is being added. The validator becomes aware of outstanding, 
unrecorded transactions through the data packet transmission and 
distribution discussed above.
    Upon the addition of a block included in the Ethereum Blockchain, 
the Ethereum Network software program of both the spending party and 
the receiving party will show confirmation of the transaction on the 
Ethereum Blockchain and reflect an adjustment to the ETH balance in 
each party's Ethereum Network public key, completing the ETH 
transaction. Once a transaction is confirmed on the Ethereum 
Blockchain, it is irreversible.
    Some ETH transactions are conducted ``off-blockchain'' and are 
therefore not recorded in the Ethereum Blockchain. These ``off-
blockchain transactions'' involve the transfer of control over, or 
ownership of, a specific digital wallet holding ETH or the reallocation 
of ownership of certain ETH in a pooled-ownership digital wallet, such 
as a digital wallet owned by a Digital Asset Trading Platform. In 
contrast to on-blockchain transactions, which are publicly recorded on 
the Ethereum Blockchain, information and data regarding off-blockchain 
transactions are generally not publicly available. Therefore, off-
blockchain transactions are not truly ETH transactions in that they do 
not involve the transfer of transaction data on the Ethereum Network 
and do not reflect a movement

[[Page 24538]]

of ETH between addresses recorded in the Ethereum Blockchain. For these 
reasons, off-blockchain transactions are subject to risks, as any such 
transfer of ETH ownership is not protected by the protocol behind the 
Ethereum Network or recorded in, and validated through, the blockchain 
mechanism.
Creation of New ETH
Initial Creation of ETH
    Unlike other digital assets such as Bitcoin, which are solely 
created through a progressive mining process, 72.0 million ETH were 
created in connection with the launch of the Ethereum Network. The 
initial 72.0 million ETH were distributed as follows:
    Initial Distribution: 60.0 million ETH, or 83.33% of the supply, 
was sold to the public in a crowd sale conducted between July and 
August 2014 that raised approximately $18 million.
    Ethereum Foundation: 6.0 million ETH, or 8.33% of the supply, was 
distributed to the Ethereum Foundation for operational costs.
    Ethereum Developers: 3.0 million ETH, or 4.17% of the supply, was 
distributed to developers who contributed to the Ethereum Network.
    Developer Purchase Program: 3.0 million ETH, or 4.17% of the 
supply, was distributed to members of the Ethereum Foundation to 
purchase at the initial crowd sale price.
    Following the launch of the Ethereum Network, ETH supply initially 
increased through a progressive mining process. Following the 
introduction of EIP-1559, described below, ETH supply and issuance rate 
varies based on factors such as recent use of the network.
Proof-of-Work Mining Process
    Prior to September 2022, Ethereum operated using a proof-of-work 
consensus mechanism. Under proof-of-work, in order to incentivize those 
who incurred the computational costs of securing the network by 
validating transactions, there was a reward given to the computer that 
was able to create the latest block on the chain. Every 14 seconds, on 
average, a new block was added to the Ethereum Blockchain with the 
latest transactions processed by the network, and the computer that 
generated this block was awarded a variable amount of ETH, depending on 
use of the network at the time. In certain mining scenarios, ETH was 
sometimes sent to another miner if they were also able to find a 
solution, but their block was not included. This scenario is referred 
to as an uncle/aunt reward. Due to the nature of the algorithm for 
block generation, this process (generating a ``proof-of-work'') was 
guaranteed to be random. The process by which a digital asset was 
``mined'' resulted in new blocks being added to such digital asset's 
blockchain and new digital assets being issued to the miners. Prior to 
the Merge upgrade, described below, computers on the Ethereum Network 
engaged in a set of prescribed complex mathematical calculations in 
order to add a block to the Ethereum Blockchain and thereby confirm ETH 
transactions included in that block's data.
Proof-of-Stake Process
    In the second half of 2020, the Ethereum Network began the first of 
several stages of an upgrade that was initially known as ``Ethereum 
2.0'' and eventually became known as the ``Merge'' to transition the 
Ethereum Network from a proof-of-work consensus mechanism to a proof-
of-stake consensus mechanism. The Merge was completed on September 15, 
2022, and the Ethereum Network has operated on a proof-of-stake model 
since such time.
    Unlike proof-of-work, in which miners expend computational 
resources to compete to validate transactions and are rewarded coins in 
proportion to the amount of computational resources expended, in proof-
of-stake, miners (sometimes called validators) risk or ``stake'' coins 
to compete to be randomly selected to validate transactions and are 
rewarded coins in proportion to the amount of coins staked. Any 
malicious activity, such as validating multiple blocks, disagreeing 
with the eventual consensus, or otherwise violating protocol rules, 
results in the forfeiture or ``slashing'' of a portion of the staked 
coins. Proof-of-stake is viewed as more energy efficient and scalable 
than proof-of-work and is sometimes referred to as ``virtual mining.'' 
As of December 31, 2023, every 12 seconds, approximately, a new block 
is added to the Ethereum Blockchain with the latest transactions 
processed by the network, and the validator that generated this block 
is awarded ETH.
Limits on ETH Supply
    The rate at which new ETH are issued and put into circulation is 
expected to vary. As of December 31, 2023, following the Merge, 
approximately 2,400 ETH are issued per day, though the issuance rate 
varies based on the number of validators on the network. In addition, 
the issuance of new ETH could be partially or completely offset by the 
burn mechanism introduced by the EIP-1559 modification, under which ETH 
are removed from supply at a rate that varies with network usage. On 
occasion, the ETH supply has been deflationary over a 24-hour period as 
a result of the burn mechanism. The attributes of the new consensus 
algorithm are subject to change, but in sum, the new consensus 
algorithm and related modifications reduced total new ETH issuances and 
could turn the ETH supply deflationary over the long term.
    As of December 31, 2023, approximately 120 million ETH were 
outstanding.\25\
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    \25\ CoinMarketCap, ``Ethereum,'' https://coinmarketcap.com/currencies/ethereum/.
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Modifications to the ETH Protocol
    The Ethereum Network is an open source project with no official 
developer or group of developers that controls it. However, the 
Ethereum Network's development has historically been overseen by the 
Ethereum Foundation and other core developers. The Ethereum Foundation 
and core developers are able to access and alter the Ethereum Network 
source code and, as a result, they are responsible for quasi-official 
releases of updates and other changes to the Ethereum Network's source 
code.
    For example, in 2019, the Ethereum Network completed a network 
upgrade called Metropolis that was designed to enhance the usability of 
the Ethereum Network and was introduced in two stages. The first stage, 
called Byzantium, was implemented in October 2017. The purpose of 
Byzantium was to increase the network's privacy, security, and 
scalability and reduce the block reward from 5.0 ETH to 3.0 ETH. The 
second stage, called Constantinople, was implemented in February 2019, 
along with another upgrade, called St. Petersburg. Another network 
upgrade, called Istanbul, was implemented in December 2019. The purpose 
of Istanbul was to make the network more resistant to denial of service 
attacks, enable greater ETH and Zcash interoperability as well as other 
Equihash-based proof-of-work digital assets, and to increase the 
scalability and performance for solutions on zero-knowledge privacy 
technology like SNARKs and STARKs. The purpose of these upgrades was to 
prepare the Ethereum Network for the introduction of a proof-of-stake 
algorithm and reduce the block reward from 3.0 ETH to 2.0 ETH. In the 
second half of 2020, the Ethereum Network began the first of several 
stages of an upgrade culminating in the Merge. The Merge amended the 
Ethereum Network's consensus mechanism to include proof-of-stake. In 
April 2023,

[[Page 24539]]

the Ethereum Network completed a network upgrade called Shapella, which 
enabled users to unstake their previously-staked ETH and remove it from 
the relevant smart contract. Forthcoming planned upgrades include 
Dencun, which will enable ``proto-danksharding.'' The purpose of proto-
danksharding is to increase scalability of the Ethereum Network by 
allowing easy synchronization with Layer 2 networks capable of 
processing many more transactions than the Ethereum Blockchain alone. 
The intended effect would be to increase the rate of transactions that 
can be processed by the Ethereum Network.
    In 2021, the Ethereum Network implemented the EIP-1559 upgrade. 
EIP-1559 changed the methodology used to calculate the fees paid to 
miners (now validators). This new methodology splits fees into two 
components: a base cost and priority fee. The base cost is now removed 
from circulation, or ``burnt'', and the priority fee is paid to 
validators. EIP-1559 has reduced the total net issuance of ETH fees to 
validators. The release of updates to the Ethereum Network's source 
code does not guarantee that the updates will be automatically adopted. 
Users and validators must accept any changes made to the Ethereum 
source code by downloading the proposed modification of the Ethereum 
Network's source code. A modification of the Ethereum Network's source 
code is effective only with respect to the Ethereum users and 
validators that download it. If a modification is accepted by only a 
percentage of users and validators, a division in the Ethereum Network 
will occur such that one network will run the pre-modification source 
code and the other network will run the modified source code. Such a 
division is known as a ``fork.'' Consequently, as a practical matter, a 
modification to the source code becomes part of the Ethereum Network 
only if accepted by participants collectively having most of the 
validation power on the Ethereum Network.
    Core development of the Ethereum source code has increasingly 
focused on modifications of the Ethereum protocol to increase speed and 
scalability and also allow for financial and non-financial next 
generation uses. The Trust's activities will not directly relate to 
such projects, though such projects may utilize ETH as tokens for the 
facilitation of their non-financial uses, thereby potentially 
increasing demand for ETH and the utility of the Ethereum Network as a 
whole. Conversely, projects that operate and are built within the 
Ethereum Blockchain may increase the data flow on the Ethereum Network 
and could either ``bloat'' the size of the Ethereum Blockchain or slow 
confirmation times.
Custody of the Trust's ETH
    Digital assets and digital asset transactions are recorded and 
validated on blockchains, the public transaction ledgers of a digital 
asset network. Each digital asset blockchain serves as a record of 
ownership for all of the units of such digital asset, even in the case 
of certain privacy-preserving digital assets, where the transactions 
themselves are not publicly viewable. All digital assets recorded on a 
blockchain are associated with a public blockchain address, also 
referred to as a digital wallet. Digital assets held at a particular 
public blockchain address may be accessed and transferred using a 
corresponding private key.
Key Generation
    Public addresses and their corresponding private keys are generated 
by the Custodian in secret key generation ceremonies at secure 
locations inside faraday cages, which are enclosures used to block 
electromagnetic fields and thus mitigate against attacks. The Custodian 
uses quantum random number generators to generate the public and 
private key pairs.
    Once generated, private keys are encrypted, separated into 
``shards,'' and then further encrypted. After the key generation 
ceremony, all materials used to generate private keys, including 
computers, are destroyed. All key generation ceremonies are performed 
offline. No party other than the Custodian has access to the private 
key shards of the Trust, including the Trust itself.
Key Storage
    Private key shards are distributed geographically in secure vaults 
around the world, including in the United States. The locations of the 
secure vaults may change regularly and are kept confidential by the 
Custodian for security purposes.
    The ``Digital Asset Account'' is a segregated custody account 
controlled and secured by the Custodian to store private keys, which 
allows for the transfer of ownership or control of the Trust's ETH on 
the Trust's behalf. The Digital Asset Account uses offline storage, or 
``cold,'' mechanisms to secure the Trust's private keys. The term cold 
storage refers to a safeguarding method by which the private keys 
corresponding to digital assets are disconnected and/or deleted 
entirely from the internet. Cold storage of private keys may involve 
keeping such keys on a non-networked (or ``air-gapped'') computer or 
electronic device or storing the private keys on a storage device (for 
example, a USB thumb drive) or printed medium (for example, papyrus, 
paper, or a metallic object). A digital wallet may receive deposits of 
digital assets but may not send digital assets without use of the 
digital assets' corresponding private keys. In order to send digital 
assets from a digital wallet in which the private keys are kept in cold 
storage, either the private keys must be retrieved from cold storage 
and entered into an online, or ``hot,'' digital asset software program 
to sign the transaction, or the unsigned transaction must be 
transferred to the cold server in which the private keys are held for 
signature by the private keys and then transferred back to the online 
digital asset software program. At that point, the user of the digital 
wallet can transfer its digital assets.
Security Procedures
    The Custodian is the custodian of the Trust's private keys (which, 
as noted above, facilitate the transfer of ownership or control of the 
Trust's ETH) in accordance with the terms and provisions of the 
custodian agreement by and between the Custodian, the Sponsor and the 
Trust (the ``Custodian Agreement''). Transfers from the Digital Asset 
Account require certain security procedures, including, but not limited 
to, multiple encrypted private key shards, usernames, passwords and 2-
step verification. Multiple private key shards held by the Custodian 
must be combined to reconstitute the private key to sign any 
transaction in order to transfer the Trust's assets. Private key shards 
are distributed geographically in secure vaults around the world, 
including in the United States.
    As a result, if any one secure vault is ever compromised, this 
event will have no impact on the ability of the Trust to access its 
assets, other than a possible delay in operations, while one or more of 
the other secure vaults is used instead. These security procedures are 
intended to remove single points of failure in the protection of the 
Trust's assets.
    Transfers of ETH to the Digital Asset Account will be available to 
the Trust once processed on the Blockchain.
    Subject to obtaining regulatory approval to operate a redemption 
program and authorization of the Sponsor, the process of accessing and 
withdrawing ETH from the Trust to redeem a Basket by an Authorized

[[Page 24540]]

Participant \26\ will follow the same general procedure as transferring 
ETH to the Trust to create a Basket by an Authorized Participant, only 
in reverse.
---------------------------------------------------------------------------

    \26\ ``Authorized Participant'' has the meaning set forth in 
``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------

    The Sponsor will maintain ownership and control of the Trust's ETH 
in a manner consistent with good delivery requirements for spot 
commodity transactions.
ETH Value
Digital Asset Trading Platform Valuation
    According to the Annual Report, the value of ETH is determined by 
the value that various market participants place on ETH through their 
transactions. The most common means of determining the value of an ETH 
is by surveying one or more Digital Asset Trading Platforms where ETH 
is traded publicly and transparently (e.g., Coinbase, Kraken, LMAX 
Digital, and Crypto.com). Additionally, there are over-the-counter 
dealers or market makers that transact in ETH.
Digital Asset Trading Platform Public Market Data
    On each online Digital Asset Trading Platform, ETH is traded with 
publicly disclosed valuations for each executed trade, measured by one 
or more fiat currencies such as the U.S. dollar or euro, or by the 
widely used cryptocurrency Bitcoin. Over-the-counter dealers or market 
makers do not typically disclose their trade data.
    As of December 31, 2023, the Digital Asset Trading Platforms 
included in the Index were Coinbase, Kraken, LMAX Digital, and 
Crypto.com. As further described below, the Sponsor and the Trust 
reasonably believe each of these Digital Asset Trading Platforms are in 
material compliance with applicable U.S. federal and state licensing 
requirements and maintain practices and policies designed to comply 
with know-your-customer (``KYC'') and anti-money-laundering (``AML'') 
regulations.
    Coinbase: A U.S.-based trading platform registered as a money 
services business (``MSB'') with the U.S. Department of the Treasury's 
Financial Crimes Enforcement Network (``FinCEN'') and licensed as a 
virtual currency business under the New York State Department of 
Financial Services (``NYDFS'') BitLicense, as well as a money 
transmitter in various U.S. states.
    Crypto.com: A Singapore-based trading platform registered as an MSB 
with FinCEN and licensed as a money transmitter in various U.S. states. 
Crypto.com does not hold a BitLicense.
    Kraken: A U.S.-based trading platform registered as an MSB with 
FinCEN and licensed as a money transmitter in various U.S. states. 
Kraken does not hold a BitLicense.
    LMAX Digital: A U.K.-based trading platform registered as a broker 
with the Financial Conduct Authority. LMAX Digital does not hold a 
BitLicense.
    Currently, there are several Digital Asset Trading Platforms 
operating worldwide, and online Digital Asset Trading Platforms 
represent a substantial percentage of ETH buying and selling activity 
and provide the most data with respect to prevailing valuations of ETH. 
These trading platforms include established trading platforms such as 
those included in the Index, which provide a number of options for 
buying and selling ETH. The below table reflects the trading volume in 
ETH and market share \27\ of the ETH-U.S. dollar trading pairs of each 
of the Digital Asset Trading Platforms included in the Index as of 
December 31, 2023 (collectively, ``Constituent Trading 
Platforms''),\28\ using data reported by the Index Provider from 
December 14, 2017 to December 31, 2023:
---------------------------------------------------------------------------

    \27\ Market share is calculated using trading volume (in ETH) 
for certain Digital Asset Trading Platforms, including Coinbase, 
Kraken, LMAX Digital and Crypto.com, as well as certain other large 
U.S.-dollar denominated Digital Asset Trading Platforms that were 
not included in the Index as of December 31, 2023, including 
Bitstamp, Binance.US (data included from April 1, 2020), Bittrex 
(data included from July 31, 2018), Bitfinex, Bitflyer (data 
included from November 13, 2022), Cboe Digital (data included from 
October 1, 2020), Gemini, HitBTC (data included from June 13, 2019 
through March 31, 2020), itBit (data included from December 27, 
2018), OKCoin (data included from December 25, 2018) and FTX.US 
(data included from July 1, 2021 through November 12, 2022).
    \28\ On January 19, 2020, the Index Provider removed itBit due 
to a lack of trading volume and added LMAX Digital to the Index 
based on the trading platform meeting the liquidity thresholds as 
part of its scheduled quarterly review. On July 23, 2022, the Index 
Provider removed Bitstamp from the Index due to the trading 
platform's failure to meet the minimum liquidity requirement, and 
added FTX.US as a Constituent Trading Platform based on its 
satisfaction of the minimum liquidity requirement as part of its 
scheduled quarterly review. On November 10, 2022, the Index Provider 
removed FTX.US from the Index due to the trading platform's 
announcement that trading on the trading platform would be halted, 
which would impact FTX.US's ability to reliably publish trade prices 
and volume on a real-time basis through APIs, and did not add any 
Constituent Trading Platforms as part of its review. On January 28, 
2023, the Index Provider added Binance.US to the Index due to the 
trading platform meeting the minimum liquidity requirement, and did 
not remove any Constituent Trading Platforms as part of its 
quarterly review. On June 17, 2023, the Index Provider removed 
Binance.US from the Index due to Binance.US's announcement that the 
trading platform was suspending U.S. dollar (``USD'') deposits and 
withdrawals and planned to delist its USD trading pairs, and did not 
add any Constituent Trading Platforms as part of its review. On 
October 28, 2023, the Index Provider added Crypto.com to the Index 
due to the trading platform meeting the minimum liquidity 
requirement, and did not remove any Constituent Trading Platforms as 
part of its scheduled quarterly review.

------------------------------------------------------------------------
  Digital Asset Trading Platforms
    included in the Index as of        Volume (ETH)     Market share (%)
         December 31, 2023
------------------------------------------------------------------------
Coinbase..........................        416,006,668              34.75
Kraken............................        135,358,403              11.31
LMAX Digital......................         69,287,707               5.79
Crypto.com........................         14,750,030               1.23
                                   -------------------------------------
    Total ETH-U.S. Dollar trading         635,402,808              53.08
     pair.........................
------------------------------------------------------------------------

    The domicile, regulation, and legal compliance of the Digital Asset 
Trading Platforms included in the Index varies. Information regarding 
each Digital Asset Trading Platform may be found, where available, on 
the websites for such Digital Asset Trading Platforms, among other 
places.
The Index and the Index Price
    The Index is a U.S. dollar-denominated composite reference rate for 
the price of ETH. The Index is designed to (i) mitigate the effects of 
fraud, manipulation and other anomalous trading activity from impacting 
the ETH reference rate, (ii) provide a real-time, volume-weighted fair 
value of ETH and (iii) appropriately

[[Page 24541]]

handle and adjust for non-market related events.
    The Index Price is determined by the Index Provider through a 
process in which trade data is cleansed and compiled in such a manner 
as to algorithmically reduce the impact of anomalistic or manipulative 
trading. This is accomplished by adjusting the weight of each data 
input based on price deviation relative to the observable set, as well 
as recent and long-term trading volume at each venue relative to the 
observable set.
    The value of the Index is calculated and disseminated on a 24-hour 
basis and will be available on a continuous basis at https://www.coindesk.com/indices.
Constituent Trading Platform Selection
    According to the Annual Report, the Digital Asset Trading Platforms 
that are included in the Index are selected by the Index Provider 
utilizing a methodology that is guided by the International 
Organization of Securities Commissions (``IOSCO'') principles for 
financial benchmarks. For a trading platform to become a Constituent 
Trading Platform, it must satisfy the criteria listed below (the 
``Inclusion Criteria''):
     Sufficient USD liquidity relative to the size of the 
listed assets;
     No evidence in the past 12 months of trading restrictions 
on individuals or entities that would otherwise meet the trading 
platform's eligibility requirements to trade;
     No evidence in the past 12 months of undisclosed 
restrictions on deposits or withdrawals from user accounts;
     Real-time price discovery;
     Limited or no capital controls; \29\
---------------------------------------------------------------------------

    \29\ ``Capital controls'' in this context means governmental 
sanctions that would limit the movement of capital into, or out of, 
the jurisdiction in which such Digital Asset Trading Platforms 
operate.
---------------------------------------------------------------------------

     Transparent ownership including a publicly-owned ownership 
entity;
     Publicly available language and policies addressing legal 
and regulatory compliance in the U.S., including KYC (Know Your 
Customer), AML (Anti-Money Laundering) and other policies designed to 
comply with relevant regulations that might apply to it;
     Be a U.S.-domiciled trading platform or a non-U.S. 
domiciled trading platform that is able to service U.S. investors; and
     Offer programmatic spot trading of the trading pair \30\ 
and reliably publish trade prices and volumes on a real-time basis 
through Rest and Websocket APIs.
---------------------------------------------------------------------------

    \30\ Trading platforms with programmatic trading offer traders 
an application programming interface that permits trading by sending 
programmed commands to the trading platform.
---------------------------------------------------------------------------

    A Digital Asset Trading Platform is removed as a Constituent 
Trading Platform when it no longer satisfies the Inclusion Criteria. 
The Index Provider does not currently include data from over-the-
counter markets or derivatives platforms among the Constituent Trading 
Platforms. According to the Annual Report, over-the-counter data is not 
currently included because of the potential for trades to include a 
significant premium or discount paid for larger liquidity, which 
creates an uneven comparison relative to more active markets. There is 
also a higher potential for over-the-counter transactions to not be 
arms-length, and thus not be representative of a true market price. ETH 
derivative markets data, including ETH futures markets and perpetuals 
markets data, are also not currently included. While the Index Provider 
has no plans to include data from over-the-counter markets or 
derivative platforms at this time, the Index Provider will consider 
IOSCO principles for financial benchmarks, the management of trading 
venues of ETH derivatives and the aforementioned Inclusion Criteria 
when considering whether to include over-the-counter or derivative 
platform data in the future.
    The Index Provider and the Sponsor have entered into the index 
license agreement, dated as of February 1, 2022 (as amended, the 
``Index License Agreement''), governing the Sponsor's use of the Index 
Price.\31\ Pursuant to the terms of the Index License Agreement, the 
Index Provider may adjust the calculation methodology for the Index 
Price without notice to, or consent of, the Trust or its shareholders. 
The Index Provider may decide to change the calculation methodology to 
maintain the integrity of the Index Price calculation should it 
identify or become aware of previously unknown variables or issues with 
the existing methodology that it believes could materially impact its 
performance and/or reliability. The Index Provider has sole discretion 
over the determination of Index Price and may change the methodologies 
for determining the Index Price from time to time. Shareholders will be 
notified of any material changes to the calculation methodology or the 
Index Price in the Trust's current reports and will be notified of all 
other changes that the Sponsor considers significant in the Trust's 
periodic or current reports. The Sponsor will determine the materiality 
of any changes to the Index Price on a case-by-case basis, in 
consultation with external counsel.
---------------------------------------------------------------------------

    \31\ Upon entering into the Index License Agreement, the Sponsor 
and the Index Provider terminated the license agreement between the 
parties dated as of February 28, 2019.
---------------------------------------------------------------------------

    The Index Provider may change the trading venues that are used to 
calculate the Index or otherwise change the way in which the Index is 
calculated at any time. For example, the Index Provider has scheduled 
quarterly reviews in which it may add or remove Constituent Trading 
Platforms that satisfy or fail the Inclusion Criteria. The Index 
Provider does not have any obligation to consider the interests of the 
Sponsor, the Trust, the shareholders, or anyone else in connection with 
such changes. While the Index Provider is not required to publicize or 
explain the changes or to alert the Sponsor to such changes, it has 
historically notified the Trust (and other subscribers to the Index) of 
any material changes to the Constituent Trading Platforms, including 
any additions or removals, contemporaneous with its issuance of press 
releases in connection with the same. The Sponsor will notify investors 
of any such material event by filing a current report on Form 8-K. 
Although the Index methodology is designed to operate without any 
manual intervention, rare events would justify manual intervention. 
Intervention of this kind would be in response to non-market-related 
events, such as the halting of deposits or withdrawals of funds on a 
Digital Asset Trading Platform, the unannounced closure of operations 
on a Digital Asset Trading Platform, insolvency or the compromise of 
user funds. In the event that such an intervention is necessary, the 
Index Provider would issue a public announcement through its website, 
API and other established communication channels with its clients.
Determination of the Index Price
    The Index applies an algorithm to the price of ETH on the 
Constituent Trading Platforms calculated on a per second basis over a 
24-hour period. The Index's algorithm is expected to reflect a four-
pronged methodology to calculate the Index Price from the Constituent 
Trading Platforms:
    Volume Weighting: Constituent Trading Platforms with greater 
liquidity receive a higher weighting in the Index, increasing the 
ability to execute against (i.e., replicate) the Index in the 
underlying spot markets.
    Price-Variance Weighting: The Index Price reflects data points that 
are discretely weighted in proportion to their variance from the rest 
of the Constituent Trading Platforms. As the price at a particular 
trading platform diverges from the prices at the rest of

[[Page 24542]]

the Constituent Trading Platforms, its weight in the Index Price 
consequently decreases.
    Inactivity Adjustment: The Index Price algorithm penalizes stale 
activity from any given Constituent Trading Platform. When a 
Constituent Trading Platform does not have recent trading data, its 
weighting in the Index Price is gradually reduced until it is de-
weighted entirely. Similarly, once trading activity at a Constituent 
Trading Platform resumes, the corresponding weighting for that 
Constituent Trading Platform is gradually increased until it reaches 
the appropriate level.
    Manipulation Resistance: In order to mitigate the effects of wash 
trading and order book spoofing, the Index only includes executed 
trades in its calculation. Additionally, the Index only includes 
Constituent Trading Platforms that charge trading fees to its users in 
order to attach a real, quantifiable cost to any manipulation attempts.
    The Index Provider re-evaluates the weighting algorithm on a 
periodic basis, but maintains discretion to change the way in which an 
Index Price is calculated based on its periodic review or in extreme 
circumstances and does not make the exact methodology to calculate the 
Index Price publicly available. Nonetheless, the Sponsor believes that 
the Index is designed to limit exposure to trading or price distortion 
of any individual Digital Asset Trading Platform that experiences 
periods of unusual activity or limited liquidity by discounting, in 
real-time, anomalous price movements at individual Digital Asset 
Trading Platforms.
    The Sponsor believes the Index Provider's selection process for 
Constituent Trading Platforms as well as the methodology of the Index 
Price's algorithm provides a more accurate picture of ETH price 
movements than a simple average of Digital Asset Trading Platform spot 
prices, and that the weighting of ETH prices on the Constituent Trading 
Platforms limits the inclusion of data that is influenced by temporary 
price dislocations that may result from technical problems, limited 
liquidity or fraudulent activity elsewhere in the ETH spot market. By 
referencing multiple trading venues and weighting them based on trade 
activity, the Sponsor believes that the impact of any potential fraud, 
manipulation or anomalous trading activity occurring on any single 
venue is reduced.
    If the Index Price becomes unavailable, or if the Sponsor 
determines in good faith that such Index Price does not reflect an 
accurate price for ETH, then the Sponsor will, on a best efforts basis, 
contact the Index Provider to obtain the Index Price directly from the 
Index Provider. If after such contact such Index Price remains 
unavailable or the Sponsor continues to believe in good faith that such 
Index Price does not reflect an accurate price for ETH, then the 
Sponsor will employ a cascading set of rules to determine the Index 
Price, as described below in ``Determination of the Index Price When 
Index Price is Unavailable.''
    The Trust values its ETH for operational purposes by reference to 
the Index Price. The Index Price is the value of an ETH as represented 
by the Index, calculated at 4:00 p.m., New York time, on each business 
day.
Illustrative Example
    For the purposes of illustration, outlined below are examples of 
how the attributes that impact weighting and adjustments in the 
aforementioned methodology may be utilized to generate the Index Price 
for a digital asset. For example, Constituent Trading Platforms used to 
calculate the Index Price of the digital asset may include trading 
platforms such as Coinbase, Kraken, LMAX Digital, and Crypto.com.
    The Index Price algorithm, as described above, accounts for 
manipulation at the outset by only including data from executed trades 
on Constituent Trading Platforms that charge trading fees. Then, the 
below-listed elements may impact the weighting of the Constituent 
Trading Platforms on the Index Price as follows:
     Volume Weighting: Each Constituent Trading Platform will 
be weighted to appropriately reflect the trading volume share of the 
Constituent Trading Platform relative to all the Constituent Trading 
Platforms during this same period. For example, an average hourly 
weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase, Kraken, 
LMAX Digital, and Crypto.com, respectively, would represent each 
Constituent Trading Platform's share of trading volume during the same 
period.
     Inactivity Adjustment: Assume that a Constituent Trading 
Platform represented a 14% weighting on the Index Price of the digital 
asset, which is based on the per-second calculations of its trading 
volume and price-variance relative to the cohort of Constituent Trading 
Platforms included in such Index, and then went offline for 
approximately two hours. The index algorithm would automatically 
recognize inactivity and start de-weighting the Constituent Trading 
Platform at the 3-minute mark and continue to do so over a 7-minute 
period until its influence was effectively zero, 10 minutes after 
becoming inactive. As soon as trading activity resumed at the 
Constituent Trading Platform, the index algorithm would re-weight it to 
the appropriate weighting based on trading volume and price-variance 
relative to the cohort of Constituent Trading Platforms included in the 
Index. Due to the period of inactivity, it would re-weight the 
Constituent Trading Platform activity to a weight lower than its 
original weighting--for example, to 12%.
     Price-Variance Weighting: The price-variance weighting 
adjustment is a relative measure of each Constituent Trading Platform 
versus the cohort of Constituent Trading Platforms. The further the 
price at a Constituent Trading Platform is from the mean price of the 
cohort, the less influence that trading platform's price will have on 
the algorithm that produces the Index Price, as the trading platform 
data is discretely weighted in proportion to their variance from the 
rest of the trading platforms on a per-second basis and there is no 
minimum threshold the variance must meet for this adjustment to take 
place. For example, assume that for a one-hour period, the digital 
asset's execution prices on one Constituent Trading Platform were 
trading more than 7% higher than the average execution prices on 
another Constituent Trading Platform. The algorithm will automatically 
detect the anomaly (price variance) and reduce that specific 
Constituent Trading Platform's weighting during that one-hour period, 
ensuring a reliable spot reference price that is unaffected by the 
localized event and that is reflective of broader market activity.
Determination of the Index Price When Index Price Is Unavailable
    The Sponsor uses the following cascading set of rules to calculate 
the Index Price when the Index Price is unavailable.\32\ For the 
avoidance of doubt, the Sponsor will employ the below rules 
sequentially and in the order as presented below, should one or more 
specific rule(s) fail:
---------------------------------------------------------------------------

    \32\ The Sponsor updated these rules on January 11, 2022.
---------------------------------------------------------------------------

    1. Index Price = The price set by the Index as of 4:00 p.m., New 
York time, on the valuation date.\33\ If the Index becomes unavailable, 
or if the Sponsor determines in good faith that the Index does not 
reflect an accurate price, then the Sponsor will, on a best efforts 
basis,

[[Page 24543]]

contact the Index Provider to obtain the Index Price directly from the 
Index Provider. If after such contact the Index remains unavailable or 
the Sponsor continues to believe in good faith that the Index does not 
reflect an accurate price, then the Sponsor will employ the next rule 
to determine the Index Price. There are no predefined criteria to make 
a good faith assessment and it will be made by the Sponsor in its sole 
discretion.
---------------------------------------------------------------------------

    \33\ The valuation date is any day for which the value of the 
ETH in the Trust may be calculated utilizing the Index Price.
---------------------------------------------------------------------------

    2. Index Price = The price set by Coin Metrics Real-Time Rate (the 
``Secondary Index'') as of 4:00 p.m., New York time, on the valuation 
date (the ``Secondary Index Price''). The Secondary Index Price is a 
real-time reference rate price, calculated using trade data from 
constituent markets selected by Coin Metrics, Inc. (the ``Secondary 
Index Provider''). The Secondary Index Price is calculated by applying 
weighted-median techniques to such trade data where half the weight is 
derived from the trading volume on each constituent market and half is 
derived from inverse price variance, where a constituent market with 
high price variance as a result of outliers or market anomalies 
compared to other constituent markets is assigned a smaller weight. If 
the Secondary Index becomes unavailable, or if the Sponsor determines 
in good faith that the Secondary Index does not reflect an accurate 
price, then the Sponsor will, on a best efforts basis, contact the 
Secondary Index Provider to obtain the Secondary Index Price directly 
from the Secondary Index Provider. If after such contact the Secondary 
Index remains unavailable or the Sponsor continues to believe in good 
faith that the Secondary Index does not reflect an accurate price, then 
the Sponsor will employ the next rule to determine the Index Price. 
There are no predefined criteria to make a good faith assessment and it 
will be made by the Sponsor in its sole discretion.
    3. Index Price = The price set by the Trust's principal market (as 
defined in the Annual Report) (the ``Tertiary Pricing Option'') as of 
4:00 p.m., New York time, on the valuation date. The Tertiary Pricing 
Option is a spot price derived from the principal market's public data 
feed that is believed to be consistently publishing pricing information 
as of 4:00 p.m., New York time, and is provided to the Sponsor via an 
application programming interface. If the Tertiary Pricing Option 
becomes unavailable, or if the Sponsor determines in good faith that 
the Tertiary Pricing Option does not reflect an accurate price, then 
the Sponsor will, on a best efforts basis, contact the Tertiary Pricing 
Provider to obtain the Tertiary Pricing Option directly from the 
Tertiary Pricing Provider. If after such contact the Tertiary Pricing 
Option remains unavailable after such contact or the Sponsor continues 
to believe in good faith that the Tertiary Pricing Option does not 
reflect an accurate price, then the Sponsor will employ the next rule 
to determine the Index Price. There are no predefined criteria to make 
a good faith assessment and it will be made by the Sponsor in its sole 
discretion.
    4. Index Price = The Sponsor will use its best judgment to 
determine a good faith estimate of the Index Price. There are no 
predefined criteria to make a good faith assessment and it will be made 
by the Sponsor in its sole discretion.
    In the event of a fork, the Index Provider may calculate the Index 
Price based on a digital asset that the Sponsor does not believe to be 
an appropriate asset of the Trust (i.e., a digital asset other than 
ETH).\34\ In this event, the Sponsor has full discretion to use a 
different index provider or calculate the Index Price itself using its 
best judgment. In such an event, the Exchange will submit a proposed 
rule filing to contemplate the assets that would subsequently be held 
by the Trust.
---------------------------------------------------------------------------

    \34\ According to the Annual Report, when a modification is 
introduced and a substantial majority of users and validators 
consent to the modification, the change is implemented and the 
network remains uninterrupted. However, if less than a substantial 
majority of users and validators consent to the proposed 
modification, and the modification is not compatible with the 
software prior to its modification, the consequence would be what is 
known as a ``hard fork'' of the Ethereum Network, with one group 
running the pre-modified software and the other running the modified 
software. The effect of such a fork would be the existence of two 
versions of ETH running in parallel, yet lacking interchangeability. 
For example, in July 2016, Ethereum ``forked'' into Ethereum and a 
new digital asset, Ethereum Classic, as a result of the Ethereum 
Network community's response to a significant security breach in 
which an anonymous hacker exploited a smart contract running on the 
Ethereum Network to syphon approximately $60 million of ETH held by 
the DAO, a distributed autonomous organization, into a segregated 
account. In response to the hack, most participants in the Ethereum 
community elected to adopt a ``fork'' that effectively reversed the 
hack. However, a minority of users continued to develop the original 
blockchain, with the digital asset on that blockchain now referred 
to as Ethereum Classic, or ETC. ETC now trades on several Digital 
Asset Trading Platforms. In the event of a hard fork of the Ethereum 
Network, the Sponsor will, if permitted by the terms of the Trust 
Agreement, use its discretion to determine, in good faith, which 
peer-to-peer network, among a group of incompatible forks of the 
Ethereum Network, is generally accepted as the Ethereum Network and 
should therefore be considered the appropriate network for the 
Trust's purposes. The Sponsor will base its determination on a 
variety of then relevant factors, including, but not limited to, the 
Sponsor's beliefs regarding expectations of the core developers of 
ETH, users, services, businesses, miners, and other constituencies, 
as well as the actual continued acceptance of, validating power on, 
and community engagement with, the Ethereum Network. There is no 
guarantee that the Sponsor will choose the digital asset that is 
ultimately the most valuable fork, and the Sponsor's decision may 
adversely affect the value of the Shares as a result. The Sponsor 
may also disagree with shareholders, security vendors, and the Index 
Provider on what is generally accepted as ETH and should therefore 
be considered ``ETH'' for the Trust's purposes, which may also 
adversely affect the value of the Shares as a result.
---------------------------------------------------------------------------

    The Sponsor may, in its sole discretion, select a different index 
provider, select a different index price provided by the Index 
Provider, calculate the Index Price by using the cascading set of rules 
set forth above, or change the cascading set of rules set forth above 
at any time.\35\
---------------------------------------------------------------------------

    \35\ The Sponsor will provide notice of any such changes in the 
Trust's periodic or current reports and, where applicable, will file 
a proposed rule change with the Commission.
---------------------------------------------------------------------------

The Impact of the Approval of ETH Futures ETFs on Spot ETH ETPs Like 
the Trust
    On October 2, 2023, the first ETH-based exchange-traded funds 
(``ETFs'') were approved by the Commission for trading.\36\ The ETFs 
hold ETH futures contracts that trade on the CME and settle using the 
CME CF Ethereum Reference Rate (``ERR''), which is priced based on the 
spot ETH markets Coinbase, Kraken, LMAX Digital, Bitstamp, Gemini, and 
itBit, essentially the same spot markets that are included in the Index 
that the Trust uses to value its ETH holdings. Given that the 
Commission has approved ETFs that offer exposure to ETH futures, which 
themselves are priced based on the underlying spot ETH market, the 
Sponsor believes that the Commission must also approve ETPs that offer 
exposure to spot ETH, like the Trust.
---------------------------------------------------------------------------

    \36\ These ETFs included the Bitwise Ethereum Strategy ETF, 
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether 
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin & 
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy 
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum 
Strategy ETF, and Volatility Shares Ethereum Strategy ETF.
---------------------------------------------------------------------------

    In the context of other digital asset-based ETF and ETP proposals 
for Bitcoin, the Commission has sought to justify treating futures-
based ETFs differently from spot-based ETFs because of (i) distinctions 
between the regulations under which the two products would be 
registered (the Investment Company Act of 1940 (the `` '40 Act'') for 
digital-asset futures ETFs and '33 Act for spot digital-asset ETPs) and 
(ii) the existence of regulation and surveillance-sharing over the CME 
digital-asset futures market through the Intermarket Surveillance Group 
(``ISG''),

[[Page 24544]]

as compared to the spot market for those digital assets.\37\ The 
Sponsor believes that this reasoning is unsupported for the following 
reasons.
---------------------------------------------------------------------------

    \37\ See, e.g., Chair Gary Gensler Public Statement, ``Remarks 
Before the Aspen Security Forum,'' (August 3, 2021), stating that 
the Chair looked forward to the Commission's review of Bitcoin-based 
ETF proposals registered under the '40 Act, ``particularly if those 
are limited to [the] CME-traded Bitcoin futures,'' noting the 
``significant investor protection'' offered by the '40 Act, https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03; Securities Exchange Act Release No. 93559 (November 12, 
2021), 86 FR 64539 (November 18, 2021) (SR-CboeBZX-2021-019) (Order 
Disapproving a Proposed Rule Change to List and Trade Shares of the 
VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares) (``VanEck Order'') (denying the first spot bitcoin ETP 
registered under the '33 Act following the first approval of a 
bitcoin futures ETF registered under the '40 Act, noting the 
differences in the standard of review that applies to such 
products); Securities Exchange Act Release No. 94620 (April 6, 
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin 
Futures Fund under NYSE ARCA Rule 8.200-E, Commentary .02 (Trust 
Issued Receipts)) (``Teucrium Order'') (approving the first bitcoin 
futures ETP registered under the '33 Act, stating that ``With 
respect to the proposed ETP, the underlying bitcoin assets are CME 
bitcoin futures contracts. The relevant analysis, therefore, is 
whether Arca has a comprehensive surveillance sharing agreement with 
a regulated market of significant size related to CME bitcoin 
futures contracts. As discussed below, taking into consideration the 
direct relationship between the regulated market with which Arca has 
a surveillance-sharing agreement and the assets held by the proposed 
ETP, as well as developments with respect to the CME bitcoin futures 
market--including the launch of exchange-traded funds registered 
under the Investment Company Act of 1940 (``1940 Act'') that hold 
CME bitcoin futures (``Bitcoin Futures ETFs'')--the Commission 
concludes that the Exchange has the requisite surveillance-sharing 
agreement.'').
---------------------------------------------------------------------------

The '40 Act Offers No More Investor Protections Than the '33 Act in the 
Context of ETH-Based ETF and ETP Proposals
    While the '40 Act has certain added investor protections that the 
'33 Act does not require, these protections do not seek to allay harms 
arising from underlying assets or markets of assets that ETFs hold, 
such as the potential for fraud or manipulation in such markets. In 
other words, the Sponsor does not believe that the application of the 
'40 Act supports the purported justifications the Commission has made 
in denying other spot digital asset ETPs. Instead, the '40 Act seeks to 
remedy certain abusive practices in the management of investment 
companies such as ETFs, and thus places certain restrictions on ETFs 
and ETF sponsors. The '40 Act explicitly lists out the types of abuses 
it seeks to prevent, and places certain restrictions related to 
accounting, borrowing, custody, fees, and independent boards, among 
others. Notably, none of these restrictions address an ETF's underlying 
assets, whether ETH futures or spot ETH, or the markets from which such 
assets' pricing is derived, whether the CME ETH futures market or spot 
ETH markets. As a result, the Sponsor believes that the distinction 
between registration of ETH futures ETFs under the '40 Act and the 
registration of spot ETH ETPs under the '33 Act is one without a 
difference in the context of ETH-based ETP proposals.
Surveillance-Sharing With the CME ETH Futures Market Is Sufficient To 
Protect Against Fraud and Manipulation in the Underlying Spot ETH 
Market
    The Sponsor believes that, because the CME ETH futures market is 
priced based on the underlying spot ETH market, any fraud or 
manipulation in the spot market would necessarily affect the price of 
ETH futures, thereby affecting the net asset value of an ETP holding 
spot ETH or an ETF holding ETH futures, as well as the price investors 
pay for such product's shares.\38\ The Sponsor also believes that a 
correlation analysis conducted by Coinbase, Inc. further corroborates 
this conclusion. Coinbase, Inc.'s analysis found that the CME ETH 
futures market has been consistently and highly correlated with the 
spot ETH market throughout the past (nearly) three years, with an even 
greater correlation than that cited by the Commission with respect to 
the CME Bitcoin futures and spot Bitcoin market in approving proposed 
rule changes to list and trade spot Bitcoin-based ETPs.\39\
---------------------------------------------------------------------------

    \38\ See Grayscale Investments, LLC v. Securities and Exchange 
Commission (``Grayscale v. SEC''), No. 22-1142, Brief of Petitioner 
Grayscale Investments, LLC (October 11, 2022) (advancing the same 
argument regarding CME Bitcoin futures and the underlying spot 
Bitcoin market).
    \39\ See Comment Letter from Paul Grewal, Chief Legal Officer, 
Coinbase, Inc. (February 21, 2024), available at: https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-432799-1074283.pdf (noting that ``the correlation between the CME ETH 
futures market and the spot ETH market for the full sample period is 
99.3% using data at an hourly interval, 96.2% using data at a five-
minute interval, and 84.7% using data at a one-minute interval''); 
Securities Exchange Act Release No. 34-99306 (January 10, 2024), 89 
FR 3008 at 3010-11 (January 17, 2024) (SR-NYSEARCA-2021-90; SR-
NYSEARCA-2023-44; SRNYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ-
2023-019; SR-CboeBZX-2023028; SR-CboeBZX-2023-038; SR-CboeBZX-2023-
040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; SR-CboeBZX-2023-072) 
(Order Granting Accelerated Approval of Proposed Rule Changes, as 
Modified by Amendments Thereto, to List and Trade Bitcoin-Based 
Commodity-Based Trust Shares and Trust Units).
---------------------------------------------------------------------------

    Given the similarity between an ETP holding spot ETH and an ETF 
holding ETH futures, the Sponsor believes that it must be the case that 
CME surveillance can either detect spot-market fraud that affects both 
futures ETFs and spot ETPs, or that such surveillance cannot do so for 
either type of product. Having approved ETH futures ETFs in part on the 
basis of such surveillance, the Commission has clearly determined that 
CME surveillance can detect spot-market fraud that would affect spot 
ETPs, and the Sponsor thus believes that it must also approve spot ETH 
ETPs on that basis.
* * * * *
    In summary, the Sponsor believes that the distinctions between the 
'40 Act and the '33 Act, and the surveillance-sharing available for the 
CME ETH futures market versus the spot ETH market, are not meaningful 
in the context of ETH-based ETF and ETP proposals, and that such 
reasoning cannot be a basis for the Commission treating ETH futures 
ETFs differently from spot ETH ETPs like the Trust. The Sponsor 
believes that the Commission's approval of ETH futures ETFs means it 
must also approve spot ETH ETPs like the Trust.
The Structure and Operation of the Trust Protects Investors and 
Satisfies Commission Requirements for ETH-Based Exchange Traded 
Products
    Even if the Commission had not approved ETH futures ETFs, the 
Sponsor still believes the Commission should approve the listing and 
trading of Shares of the Trust. In the context of prior spot digital 
asset ETP proposal disapproval orders for Bitcoin, the Commission 
expressed concerns about the underlying Digital Asset Market due to the 
potential for fraud and manipulation and has outlined the reasons why 
such ETP proposals have been unable to satisfy these concerns.\40\

[[Page 24545]]

For purposes of the Trust's ETH-based ETP proposal, the Sponsor 
anticipates that the Commission may have the same concerns and 
addresses each of these in turn below.
---------------------------------------------------------------------------

    \40\ See Securities Exchange Act Release Nos. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order 
Setting Aside Action by Delegated Authority and Disapproving a 
Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List 
and Trade Shares of the Winklevoss Bitcoin Trust) (the ``Winklevoss 
Order''); 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019) 
(SR-NYSEArca-2019-01) (Order Disapproving a Proposed Rule Change, as 
Modified by Amendment No. 1, Relating to the Listing and Trading of 
Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-
E) (the ``Bitwise Order''); 88284 (February 26, 2020), 85 FR 12595 
(March 3, 2020) (SR-NYSEArca-2019-39) (Order Disapproving a Proposed 
Rule Change, as Modified by Amendment No. 1, to Amend NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares) and to List and Trade Shares 
of the United States Bitcoin and Treasury Investment Trust Under 
NYSE Arca Rule 8.201-E) (the ``Wilshire Phoenix Order''); 83904 
(August 22, 2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017-
139) (Order Disapproving a Proposed Rule Change to List and Trade 
the Shares of the ProShares Bitcoin ETF and the ProShares Short 
Bitcoin ETF) (the ``ProShares Order''); 83912 (August 22, 2018), 83 
FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02) (Order Disapproving 
a Proposed Rule Change Relating to Listing and Trading of the 
Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X 
Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily 
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares 
Under NYSE Arca Rule 8.200-E) (the ``Direxion Order''); 83913 
(August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-2018-
01) (Order Disapproving a Proposed Rule Change to List and Trade the 
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short 
Bitcoin ETF) (the ``GraniteShares Order'') (together, the ``Prior 
Spot Digital Asset ETP Disapproval Orders'').
---------------------------------------------------------------------------

    In the Prior Spot Digital Asset ETP Disapproval Orders, the 
Commission outlined that a proposal relating to a digital asset-based 
ETP could satisfy its concerns regarding potential for fraud and 
manipulation by demonstrating:
    (1) Inherent Resistance to Fraud and Manipulation: that the 
underlying commodity market is inherently resistant to fraud and 
manipulation;
    (2) Other Means to Prevent Fraud and Manipulation: that there are 
other means to prevent fraudulent and manipulative acts and practices 
that are sufficient; or
    (3) Surveillance Sharing: that the listing exchange has entered 
into a surveillance sharing agreement with a regulated market of 
significant size relating to the underlying or reference assets.
    As described below, the Sponsor believes the structure and 
operation of the Trust are designed to prevent fraudulent and 
manipulative acts and practices, to protect investors and the public 
interest, and to respond to the specific concerns that the Commission 
may have with respect to potential fraud and manipulation in the 
context of an ETH-based ETP.
How the Trust Meets Standards in the Prior Spot Digital Asset ETP 
Disapproval Orders
1. Resistance to or Prevention of Fraud and Manipulation
    In the Prior Spot Digital Asset ETP Disapproval Orders, the 
Commission disagreed with the proposition that a digital asset's 
fungibility, transportability and exchange tradability combine to 
provide unique protections against, and allow such digital asset to be 
uniquely resistant to, attempts at price manipulation. The Commission 
reached its conclusion based on concessions by one issuer that 95% of 
the reported trading in the digital asset, Bitcoin, is ``fake'' or non-
economic, effectively admitting that the properties of Bitcoin do not 
make it inherently resistant to manipulation. Such issuer's concessions 
were further compounded by evidence of potential and actual fraud and 
manipulation in the historical trading of Bitcoin on certain 
marketplaces such as (1) ``wash'' trading, (2) trading based on 
material, non-public information, including the dissemination of false 
and misleading information, (3) manipulative activity involving Tether, 
and (4) fraud and manipulation.\41\
---------------------------------------------------------------------------

    \41\ See Bitwise Order, 84 FR at 55383 (discussing analysis of 
the Bitcoin spot market that asserts that 95% of the spot market is 
dominated by fake and non-economic activity, such as wash trades), 
55391 (discussing possible sources of fraud and manipulation in the 
bitcoin spot market). See also Winklevoss Order, 83 FR at 37585-86 
(discussing pending litigation against a Bitcoin trading platform 
for fraudulent conduct relating to Tether); Bitwise Order, 84 FR at 
55391 n.140, 55402 & n.331 (same); Winklevoss Order, 83 FR at 37584-
86 (discussing potential types of manipulation in the Bitcoin spot 
market). The Commission has also noted that fraud and manipulation 
in the Bitcoin spot market could persist for a significant duration. 
See, e.g., Bitwise Order, 84 FR at 55405 & n.379.
---------------------------------------------------------------------------

    The Sponsor acknowledges the possibility that fraud and 
manipulation may exist in commodity markets and that digital asset 
trading, such as ETH, on any given exchange may be no more uniquely 
resistant to fraud and manipulation than other commodity markets.\42\ 
However, the Sponsor believes that the fundamental features of digital 
assets, including fungibility, transportability and exchange 
tradability offer novel protections beyond those that exist in 
traditional commodity markets or equity markets when combined with 
other means, as discussed further below.
---------------------------------------------------------------------------

    \42\ See generally Bitwise Order.
---------------------------------------------------------------------------

2. Other Means To Prevent Fraud and Manipulation
    The Commission has recognized 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.\43\ In evaluating the 
effectiveness of this type of resistance, the Commission does not apply 
a ``cannot be manipulated'' standard. Instead, the Commission requires 
that such resistance to fraud and manipulation be novel and beyond 
those protections that exist in traditional commodity markets or equity 
markets for which the Commission has long required surveillance-sharing 
agreements in the context of listing derivative securities 
products.\44\
---------------------------------------------------------------------------

    \43\ See Winklevoss Order, 84 FR at 37580, 37582-91; Bitwise 
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at 
12597.
    \44\ See Winklevoss Order, 84 FR at 37582; Wilshire Phoenix 
Order, 85 FR at 12597.
---------------------------------------------------------------------------

    The Sponsor believes the Index represents a novel means to prevent 
fraud and manipulation from impacting a reference price for ETH and 
that it offers protections beyond those that exist in traditional 
commodity markets or equity markets. The Index operates materially 
similarly to CoinDesk Bitcoin Price Index (XBX). Specifically, digital 
assets, such as ETH, are novel and exist outside traditional commodity 
markets. It therefore stands to reason that the methods by which they 
trade will be novel and that the market for digital assets like ETH 
will have different attributes than traditional commodity markets. 
Digital assets like ETH were only introduced within the past decade, 
twenty years after the first U.S. ETFs were offered \45\ and 150 years 
after the first futures were offered.\46\ In contrast to older 
commodities such as gold, silver, platinum, palladium or copper, which 
the Commission has noted all had at least one significant, regulated 
market for trading futures on the underlying commodity at the time 
commodity trust ETPs were approved for listing and trading, the first 
trading in digital assets like ETH took place entirely in an open, 
transparent and online setting where other commodities cannot trade.
---------------------------------------------------------------------------

    \45\ SEC, ``Investor Bulletin: Exchange-Traded Funds (ETFs),'' 
August 2012, https://www.sec.gov/investor/alerts/etfs.pdf.
    \46\ Commodity Futures Trading Commission (``CFTC''), ``History 
of the CFTC,'' https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html.
---------------------------------------------------------------------------

    The Trust has priced its Shares consistently for more than six 
years based on the Index. The Sponsor believes the Trust's use of the 
Index specifically addresses the Commission's concerns in that the 
Index serves as an alternative means to prevent fraud and manipulation. 
Specifically, the Index can (i) mitigate the effects of fraud, 
manipulation and other anomalous trading activity on the ETH reference 
rate, (ii) provide a real-time, volume-weighted fair value of ETH and 
(iii) appropriately handle and adjust for non-market related events.
    As described in more detail below, the Sponsor believes that the 
Index accomplishes those objectives in the following ways:
    1. The Index tracks the Digital Asset Trading Platform Market price 
through

[[Page 24546]]

trading activity at ``U.S.-Compliant Trading Platform''; \47\
---------------------------------------------------------------------------

    \47\ ``U.S.-Compliant Trading Platforms'' are trading platforms 
in the Digital Asset Trading Platform Market that are compliant with 
applicable U.S. federal and state licensing requirements and 
practices regarding AML and KYC regulations. All Constituent Trading 
Platforms are U.S.-Compliant Trading Platforms. ``Non-U.S.-Compliant 
Trading Platforms'' are all other trading platforms in the Digital 
Asset Trading Platform Market. As of December 31, 2023, the U.S.-
Compliant Trading Platforms that the Index Provider considered for 
inclusion in the Index were Coinbase, Kraken, LMAX Digital and 
Crypto.com. From these U.S.-Compliant Trading Platforms, the Index 
Provider then applies additional Inclusion Criteria to determine the 
Constituent Trading Platform. On January 19, 2020, the Index 
Provider removed itBit due to a lack of trading volume and added 
LMAX Digital to the Index based on the trading platform meeting the 
liquidity thresholds as part of its scheduled quarterly review. On 
July 23, 2022, the Index Provider removed Bitstamp from the Index 
due to the trading platform's failure to meet the minimum liquidity 
requirement, and added FTX.US as a Constituent Trading Platform 
based on its satisfaction of the minimum liquidity requirement as 
part of its scheduled quarterly review. On November 10, 2022, the 
Index Provider removed FTX.US from the Index due to the trading 
platform's announcement that trading on the trading platform would 
be halted, which would impact FTX.US's ability to reliably publish 
trade prices and volume on a real-time basis through APIs, and did 
not add any Constituent Trading Platforms as part of its review. On 
January 28, 2023, the Index Provider added Binance.US to the Index 
due to the trading platform meeting the minimum liquidity 
requirement, and did not remove any Constituent Trading Platforms as 
part of its quarterly review. On June 17, 2023, the Index Provider 
removed Binance.US from the Index due to Binance.US's announcement 
that the trading platform was suspending USD deposits and 
withdrawals and planned to delist its USD trading pairs, and did not 
add any Constituent Trading Platforms as part of its review. On 
October 28, 2023, the Index Provider added Crypto.com to the Index 
due to the trading platform meeting the minimum liquidity 
requirement, and did not remove any Constituent Trading Platforms as 
part of its scheduled quarterly review.
---------------------------------------------------------------------------

    2. The Index mitigates the impact of instances of fraud, 
manipulation and other anomalous trading activity in real-time through 
systematic adjustments;
    3. The Index is constructed and maintained by an expert third-party 
index provider, allowing for prudent handling of non-market-related 
events; and
    4. The Index mitigates the impact of instances of fraud, 
manipulation and other anomalous trading activity concentrated on any 
one specific trading platform through a cross-trading platform 
composite index rate.
    1. The Index tracks the Digital Asset Trading Platform Market price 
through trading activity at ``U.S.-Compliant Trading Platforms.''
    To reduce the risk of fraud, manipulation, and other anomalous 
trading activity from impacting the Index, only U.S.-Compliant Trading 
Platforms are eligible to be included in the Index.
    The Index maintains a minimum number of three trading platforms and 
a maximum number of five trading platforms to track the Digital Asset 
Trading Platform Market while offering replicability for traders and 
market makers.\48\
---------------------------------------------------------------------------

    \48\ According to the Sponsor, the more trading platforms 
included in the Index, the more ability there is for traders and 
market makers to trade against the Index by arbitraging price 
differences. For example, in the event of variances between ETH 
prices on Constituent Trading Platforms and non-Constituent Trading 
Platforms, arbitrage trading opportunities would exist. These 
discrepancies generally consolidate over time, as price differences 
across trading platforms are realized and capitalized upon by 
traders and market makers.
---------------------------------------------------------------------------

    U.S.-Compliant Trading Platforms possess safeguards that protect 
against fraud and manipulation. For example, U.S.-Compliant Trading 
Platforms regulated by the NYDFS under the BitLicense program have 
regulatory requirements to implement measures designed to effectively 
detect, prevent, and respond to fraud, attempted fraud, market 
manipulation, and similar wrongdoing, and to monitor, control, 
investigate and report back to the NYDFS regarding any wrongdoing.\49\ 
These trading platforms also have the following obligations: \50\
---------------------------------------------------------------------------

    \49\ See, e.g., ``DFS Takes Action to Deter Fraud and 
Manipulation in Virtual Currency Markets,'' available at: https://www.dfs.ny.gov/about/press/pr1802071.htm.
    \50\ See ``New York's Final ``BitLicense'' Rule: Overview and 
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk, 
available at: https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf.
---------------------------------------------------------------------------

     Submission of audited financial statements including 
income statements, statements of assets/liabilities, insurance, and 
banking;
     Compliance with capitalization requirements set at NYDFS's 
discretion;
     Prohibitions against the sale or encumbrance to protect 
full reserves of custodian assets;
     Fingerprints and photographs of employees with access to 
customer funds;
     Retention of a qualified Chief Information Security 
Officer and annual penetration testing/audits;
     Documented business continuity and disaster recovery plan, 
independently tested annually; and
     Participation in an independent exam by NYDFS.
    Other U.S.-Compliant Trading Platforms have voluntarily implemented 
measures to protect against common forms of market manipulation.\51\
---------------------------------------------------------------------------

    \51\ As of the date of this filing, one of the four Constituent 
Trading Platforms, Coinbase, is regulated by NYDFS.
---------------------------------------------------------------------------

    Furthermore, all U.S.-Compliant Trading Platforms are considered 
MSBs that are subject to FinCEN's federal and state reporting 
requirements that provide additional safeguards. For example, 
unscrupulous traders may be less likely to engage in fraudulent or 
manipulative acts and practices on trading platforms that (1) report 
suspicious activity to FinCEN as money services businesses, (2) report 
to state regulators as money transmitters, and/or (3) require customer 
identification through KYC procedures. U.S.-Compliant Trading Platforms 
are required to: \52\
---------------------------------------------------------------------------

    \52\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsarequirements-msbs.
---------------------------------------------------------------------------

     Identify people with ownership stakes or controlling roles 
in the MSB;
     Establish a formal Anti-Money Laundering (AML) policy in 
place with documentation, training, independent review, and a named 
compliance officer;
     Implement strict customer identification and verification 
policies and procedures;
     File Suspicious Activity Reports (SARs) for suspicious 
customer transactions;
     File Currency Transaction Reports (CTRs) for cash-in or 
cash-out transactions greater than $10,000; and
     Maintain a five-year record of currency exchanges greater 
than $1,000 and money transfers greater than $3,000.
    Lastly, because of ETH's classification as a commodity, the CFTC 
has authority to police fraud and manipulation on U.S.-Compliant 
Trading Platforms.\53\
---------------------------------------------------------------------------

    \53\ ``U.S. CFTC Chief Behnam Reinforces View of Ether as 
Commodity,'' CoinDesk (Mar. 28, 2023), https://www.coindesk.com/policy/2023/03/28/us-cftc-chief-behnam-reinforces-view-of-ether-as-commodity/; CME Group, https://www.cmegroup.com/markets/cryptocurrencies/ether/ether.html?gad=1&gclid=EAIaIQobChMI44KBmu7ygAMVavvjBx2P4g5yEAAYASAAEgJSZfD_BwE&gclsrc=aw.ds.
---------------------------------------------------------------------------

    The Sponsor acknowledges that there are substantial differences 
between FinCEN and New York state regulations and the Commission's 
regulation of the national securities exchanges.\54\ The Sponsor does 
not believe the inclusion of U.S.-Compliant Trading Platforms is in and 
of itself sufficient to prove that the Index is an alternative means to 
prevent fraud and manipulation such that surveillance sharing 
agreements are not required, but does believe that the inclusion of 
only U.S.-Compliant Trading Platforms in the Index is one significant 
way in which the Index is protected from the potential impacts of fraud 
and manipulation.
---------------------------------------------------------------------------

    \54\ See Bitwise Order, 84 FR at 55392; Wilshire Phoenix Order, 
85 FR at 12603.
---------------------------------------------------------------------------

    2. The Index mitigates the impact of instances of fraud, 
manipulation, and other anomalous trading activity in real-time through 
systematic adjustments.

[[Page 24547]]

    The Index is calculated once every second according to a systematic 
methodology that relies on observed trading activity on the Constituent 
Trading Platforms. While the precise methodology underlying the Index 
is currently proprietary, the key elements of the Index are outlined 
below:
     Volume Weighting: Constituent Trading Platforms with 
greater liquidity receive a higher weighting in the Index, increasing 
the ability to execute against (i.e., replicate) the Index in the 
underlying spot markets.
     Price-Variance Weighting: The Index reflects data points 
that are discretely weighted in proportion to their variance from the 
rest of the Constituent Trading Platforms. As the price at a 
Constituent Trading Platform diverges from the prices at the rest of 
the Constituent Trading Platforms, its weight in the Index consequently 
decreases.
     Inactivity Adjustment: The Index algorithm penalizes stale 
activity from any given Constituent Trading Platform. When a 
Constituent Trading Platform does not have recent trading data, its 
weighting in the Index is gradually reduced, until it is de-weighted 
entirely. Similarly, once trading activity at the Constituent Trading 
Platform resumes, the corresponding weighting for that Constituent 
Trading Platform is gradually increased until it reaches the 
appropriate level.
     Manipulation Resistance: In order to mitigate the effects 
of wash trading and order book spoofing, the Index only includes 
executed trades in its calculation. Additionally, the Index only 
includes Constituent Trading Platforms that charge trading fees to its 
users in order to attach a real, quantifiable cost to any manipulation 
attempts.
    3. The Index is constructed and maintained by an expert third-party 
index provider, allowing for prudent handling of non-market-related 
events.
    The Index Provider reviews and periodically updates which trading 
platforms are included in the Index by utilizing a methodology that is 
guided by the IOSCO principles for financial benchmarks.
    According to the Index methodology, for a trading platform to 
become a Constituent Trading Platform, it must satisfy the following 
Inclusion Criteria:
     Sufficient USD liquidity relative to the size of the 
listed assets;
     No evidence in the past 12 months of trading restrictions 
on individuals or entities that would otherwise meet the trading 
platform's eligibility requirements to trade;
     No evidence in the past 12 months of undisclosed 
restrictions on deposits or withdrawals from user accounts;
     Real-time price discovery;
     Limited or no capital controls;
     Transparent ownership including a publicly-owned ownership 
entity;
     Publicly available language and policies addressing legal 
and regulatory compliance in the US, including KYC (Know Your 
Customer), AML (Anti-Money Laundering) and other policies designed to 
comply with relevant regulations that might apply to it;
     Be a U.S.-domiciled trading platform or a non-U.S. 
domiciled trading platform that is able to service U.S. investors;
     Offer programmatic spot trading of the trading pair and 
reliably publish trade prices and volumes on a real-time basis through 
Rest and Websocket APIs.
    Although the Index methodology is designed to operate without any 
human interference, rare events would justify manual intervention. 
Manual intervention would only be in response to ``non-market-related 
events'' (e.g., halting of deposits or withdrawals of funds, 
unannounced closure of trading platform operations, insolvency, 
compromise of user funds, etc.). In the event that such an intervention 
is necessary, the Index Provider would issue a public announcement 
through its website, API and other established communication channels 
with its clients.\55\
---------------------------------------------------------------------------

    \55\ To the extent any such intervention has a material impact 
on the Trust, the Sponsor will also issue a public announcement.
---------------------------------------------------------------------------

    4. The Index mitigates the impact of instances of fraud, 
manipulation and other anomalous trading activity concentrated on any 
one specific trading platform through a cross-trading platform 
composite index rate.
    The Index is based on the price and volume data of multiple U.S.-
Compliant Trading Platforms that satisfy the Index Provider's Inclusion 
Criteria. By referencing multiple trading venues and weighting them 
based on trade activity, the impact of any potential fraud, 
manipulation, or anomalous trading activity occurring on any single 
venue is reduced. Specifically, the effects of fraud, manipulation, or 
anomalous trading activity occurring on any single venue are de-
weighted and consequently diluted by non-anomalous trading activity 
from other Constituent Trading Platforms.
    Although the Index is designed to accurately capture the market 
price of ETH, third parties may be able to purchase and sell ETH on 
public or private markets included or not included among the 
Constituent Trading Platforms, and such transactions may take place at 
prices materially higher or lower than the Index Price. For example, 
based on data provided by the Index Provider, on any given day during 
the twelve months ended December 31, 2023, the maximum differential 
between the 4:00 p.m., New York time spot price of any single Digital 
Asset Trading Platform included in the Index and the Index Price was 
2.76% and the average of the maximum differentials of the 4:00 p.m., 
New York time spot price of each Digital Asset Trading Platform 
included in the Index and the Index Price was 0.75%. During this same 
period, the average differential between the 4:00 p.m., New York time 
spot prices of all the Digital Asset Trading Platforms included in the 
Index and the Index Price was 0.012%.\56\
---------------------------------------------------------------------------

    \56\ All Digital Asset Trading Platforms that were included in 
the Index throughout the period were considered in this analysis.
---------------------------------------------------------------------------

    Since inception of the Trust, the Trust has consistently priced its 
Shares at 4:00 p.m., New York time based on the Index Price. While that 
pricing would be known to the market, the Sponsor believes that, even 
if efforts to manipulate the price of ETH at 4:00 p.m., E.T. were 
successful on any trading platform, such activity would have had a 
negligible effect on the pricing of the Trust, due to the controls 
embedded in the structure of the Index.
    Accordingly, the Sponsor believes that the Index has proven its 
ability to (i) mitigate the effects of fraud, manipulation and other 
anomalous trading activity on the ETH reference rate, (ii) provide a 
real-time, volume-weighted fair value of ETH and (iii) appropriately 
handle and adjust for non-market related events. For these reasons, the 
Sponsor believes that the Index represents an effective alternative 
means to prevent fraud and manipulation and the Trust's reliance on the 
Index addresses the Commission's concerns with respect to potential 
fraud and manipulation.
3. A Significant, Regulated and Surveilled Market Exists and Is Closely 
Connected With Spot Market for ETH
    In the Prior Spot Digital Asset ETP Disapproval Orders, the 
Commission described both the need for and the definition of a 
surveilled market of significant size for commodity-trust ETPs like the 
Trust to date.\57\ Specifically, the Commission explained that:
---------------------------------------------------------------------------

    \57\ See Winklevoss Order, 83 FR at 37593-94; Bitwise Order, 84 
FR at 55383, 55410; Wilshire Phoenix Order, 85 FR at 12609.


[[Page 24548]]


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

for the commodity-trust ETPs approved to date for listing and trading, 
there has been in every case at least one significant, regulated market 
for trading futures on the underlying commodity--whether gold, silver, 
platinum, palladium, or copper--and the ETP listing exchange has 
entered into surveillance-sharing agreements with, or held Intermarket 
Surveillance Group membership in common with, that market.\58\
---------------------------------------------------------------------------

    \58\ See Winklevoss Order, 83 FR at 37594.

    Further, the Commission stated that its interpretation of the term 
``market of significant size'' depends on the interrelationship between 
the market with which the listing exchange has a surveillance-sharing 
agreement and the proposed ETP.\59\ Accordingly, the terms 
``significant market'' and ``market of significant size'' could mean:
---------------------------------------------------------------------------

    \59\ See Winklevoss Order, 83 FR at 37594; Bitwise Order, 84 FR 
at 55410; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43925; Direxion Order, 83 FR at 43914; Wilshire Phoenix Order, 
85 FR at 12609.

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 successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist 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.\60\
---------------------------------------------------------------------------

    \60\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that will provide guidance to market 
participants.

    In the context of the Prior Spot Digital Asset ETP Disapproval 
Orders specifically, the Commission has stated that establishing a 
lead-lag relationship between the futures market and the spot market is 
central to understanding whether it is reasonably likely that a would-
be manipulator of the ETP would need to trade on the futures market to 
successfully manipulate prices on those spot platforms that feed into 
the proposed ETP's pricing mechanism such that a surveillance-sharing 
agreement would assist the ETP listing market in detecting and 
deterring misconduct.\61\ In particular, if the spot market leads the 
futures market, this would indicate that it would not be necessary to 
trade on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move to 
meet the spot price.
---------------------------------------------------------------------------

    \61\ See Bitwise Order, 84 FR at 55411; Wilshire Phoenix Order, 
85 FR at 12612.
---------------------------------------------------------------------------

    While studies have found that the CME futures market does lead the 
spot market in the context of Bitcoin,\62\ as explained in the 
Sponsor's briefs and argument in its prevailing case before the D.C. 
Circuit Court of Appeals regarding its Bitcoin-based ETP proposal, the 
lead/lag question is irrelevant. If a would-be manipulator were to 
attempt to manipulate either a spot ETP or futures ETP by trading 
futures on the CME, then a surveillance-sharing agreement with the CME 
would provide access to information concerning that activity.\63\ If, 
on the other hand, a would-be manipulator were to attempt to manipulate 
either a spot ETP or a futures ETP by trading on the spot market, then 
a surveillance-sharing agreement with the CME would also be able to 
provide access to information concerning that activity. If that were 
not true, the Commission could not have approved the Bitcoin futures 
ETPs. Given that the Commission has approved Bitcoin futures ETPs, the 
Commission must have concluded that the CME is capable of detecting 
manipulation attempts in the spot Bitcoin market. And given that the 
Commission has now approved ETH futures ETFs, it must have concluded 
that the CME is capable of detecting manipulation attempts in the spot 
ETH market as well. Accordingly, the Sponsor believes that disapproval 
of the instant proposal on such grounds would be arbitrary given that 
Shares of the Trust would be just as protected from fraud as shares of 
previously approved ETH futures ETPs.
---------------------------------------------------------------------------

    \62\ See Memorandum to File from Neel Maitra, Senior Special 
Counsel (Fintech & Crypto Specialist), Division of Trading and 
Markets, U.S. Securities and Exchange Commission re: Meeting with 
Representatives from Fidelity Digital Assets, et al. and attachment 
(SR-CboeBZX-2021-039) (September 8, 2021), available at: https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf; Letter from Bitwise Asset Management, Inc. re: File 
Number SR-NYSEArca-2021-89 (February 25, 2022), available at: 
https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20117902-270822.pdf; Letter from Wilson Sonsini Goodrich and Rosati, 
P.C. and Chapman and Cutler LLP, on behalf of Bitwise Asset 
Management, Inc. re: File No. SR-NYSEArca-2021-89 (March 7, 2022), 
available at: https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20118794-271630.pdf.
    \63\ Grayscale v. SEC, Commission Reply Br. 27.
---------------------------------------------------------------------------

    Regardless of the irrelevance of the lead/lag relationship and the 
mixed findings regarding the lead/lag relationship between the CME 
futures and spot markets in the context of ETH, the Sponsor believes 
that the CME futures market represents a large, surveilled and 
regulated market and meets the Commission's definition of a 
``significant market.'' For example, from November 1, 2019 to December 
31, 2023, the CME futures market trading volume was over $461 billion, 
compared to $732 billion in trading volume across the Constituent 
Trading Platforms included in the Index. With over 60% of the Index 
trading volume, the CME futures market represents significant coverage 
of U.S.-Compliant Trading Platforms in the Ether market. In addition, 
the CME futures market trading volume from November 1, 2019 to December 
31, 2023 was approximately 50% of the trading volume of the U.S. 
dollar-denominated spot markets referenced in the Bitwise Order.\64\
---------------------------------------------------------------------------

    \64\ These spot markets include Binance.US, Coinbase, Bitfinex, 
Kraken, Bitstamp, BitFlyer, Poloniex, Bittrex, and itBit.
---------------------------------------------------------------------------

    Given the size of the CME futures markets, the Sponsor believes 
such markets meet the Commission's definition of ``significant market'' 
because there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
successfully manipulate the ETP, since arbitrage between the derivative 
and spot markets would tend to counter an attempt to manipulate the 
spot market alone. As a result, the Exchange's ability to obtain 
information regarding trading in the Shares and futures from markets 
and other entities that are members of the Intermarket Trading Group 
(``ISG''), including the CME, would assist the Exchange in detecting 
and deterring misconduct.
    The Sponsor also believes it is unlikely that the ETP would become 
the predominant influence on prices in the market. While future inflows 
to the proposed Trust cannot be predicted, to provide comparable data, 
the Sponsor examined the change in market capitalization of ETH with 
net inflows into the Trust, which currently trades on OTC Markets and 
is largest and most liquid ETH investment product in the world.\65\ 
From November 1, 2019 to December 31, 2023, the market capitalization 
of ETH grew from $20 billion to $273 billion, a $250 billion increase. 
Over the same period, the Trust experienced $1.2 billion of inflows. 
The cumulative inflow into the Trust over the stated time period was 
only 0.5% of the aggregate growth of ETH's market capitalization.
---------------------------------------------------------------------------

    \65\ To further illustrate the size and liquidity of the Trust, 
as of March 8, 2024, compared with global commodity ETPs, the Trust 
would rank 8th in assets under management and 10th in notional 
trading volume for the preceding 30 days.
---------------------------------------------------------------------------

    Additionally, the Trust experienced approximately $71 billion of 
trading

[[Page 24549]]

volume from November 1, 2019 to December 31, 2023, only 15% of the CME 
futures market and 10% of the Index over the same period.
* * * * *
    In summary, the Sponsor believes that the foregoing addresses 
concerns the Commission may have with respect to ETH-based ETPs, based 
on the Commission's articulated concerns with respect to potential 
fraud and manipulation in Bitcoin-based ETPs. Specifically, the Sponsor 
believes that, although ETH is not itself inherently resistant to fraud 
and manipulation, the Index represents an effective means to prevent 
fraudulent and manipulative acts and practices. As discussed above, the 
Trust has used the Index to price the Shares for more than six years, 
and the Index has proven its ability to (i) mitigate the effects of 
fraud, manipulation and other anomalous trading activity on the ETH 
reference rate, (ii) provide a real-time, volume-weighted fair value of 
ETH and (iii) appropriately handle and adjust for non-market related 
events. The Sponsor also believes that the CME futures market is a 
significant, surveilled and regulated market that is closely connected 
with the spot market for ETH and fulfills the requirements for 
surveillance sharing given the Exchange's ability to obtain information 
from markets and other entities that are members of the ISG to assist 
in detecting and deterring misconduct.
Creation and Redemption of Shares
    Authorized Participants may submit orders to create or redeem 
Shares under procedures for ``Cash Orders.''
    The Authorized Participants will deliver only cash to create Shares 
and will receive only cash when redeeming Shares. Further, Authorized 
Participants will not directly or indirectly purchase, hold, deliver, 
or receive ETH as part of the creation or redemption process or 
otherwise direct the Trust or a third party with respect to purchasing, 
holding, delivering, or receiving ETH as part of the creation or 
redemption process.
    The Trust will create Shares by receiving ETH from a third party 
that is not the Authorized Participant and the Trust, or an affiliate 
of the Trust (and in any event not the Authorized Participant), is 
responsible for selecting the third party to deliver the ETH. Further, 
the third party will not be acting as an agent of the Authorized 
Participant with respect to the delivery of the ETH to the Trust or 
acting at the direction of the Authorized Participant with respect to 
the delivery of the ETH to the Trust. The Trust will redeem Shares by 
delivering ETH to a third party that is not the Authorized Participant 
and the Trust, or an affiliate of the Trust (and in any event not the 
Authorized Participant), is responsible for selecting the third party 
to receive the ETH. Further, the third party will not be acting as an 
agent of the Authorized Participant with respect to the receipt of the 
ETH from the Trust or acting at the direction of the Authorized 
Participant with respect to the receipt of the ETH from the Trust.
    Cash Orders are made through the participation of a Liquidity 
Provider \66\ who obtains or receives ETH in exchange for cash, and are 
facilitated by the Transfer Agent and Grayscale Investments, LLC, 
acting in its capacity as the Liquidity Engager. Liquidity Providers 
are not party to the Participant Agreements and are engaged separately 
by the Liquidity Engager.
---------------------------------------------------------------------------

    \66\ A ``Liquidity Provider'' means one or more eligible 
companies that facilitate the purchase and sale of ETH in connection 
with creations or redemptions pursuant to Cash Orders. The Liquidity 
Providers with which Grayscale Investments, LLC, acting other than 
in its capacity as the Sponsor (in such other capacity, the 
``Liquidity Engager'') will engage in ETH transactions are third 
parties that are not affiliated with the Sponsor or the Trust and 
are not acting as agents of the Trust, the Sponsor, or any 
Authorized Participant, and all transactions will be done on an 
arms-length basis. Except for the contractual relationships between 
each Liquidity Provider and Grayscale Investments, LLC in its 
capacity as the Liquidity Engager, there is no contractual 
relationship between each Liquidity Provider and the Trust, the 
Sponsor, or any Authorized Participant. When seeking to buy ETH in 
connection with creations or sell ETH in connection with 
redemptions, the Liquidity Engager will seek to obtain commercially 
reasonable prices and terms from the approved Liquidity Providers. 
Once agreed upon, the transaction will generally occur on an ``over-
the-counter'' basis.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust creates Baskets 
(as described below) of Shares only upon receipt of ETH and redeems 
Shares only by distributing ETH. ``Authorized Participants'' are the 
only persons that may place orders to create and redeem Baskets. Each 
Authorized Participant must (i) be a registered broker-dealer and (ii) 
enter into an agreement with the Sponsor and Transfer Agent that 
provides the procedures for the creation and redemption of Baskets and 
for the delivery of ETH required for the creation and redemption of 
Baskets via a Liquidity Provider (each, a ``Participant Agreement''). 
An Authorized Participant may act for its own account or as agent for 
broker-dealers, custodians and other securities market participants 
that wish to create or redeem Baskets. Shareholders who are not 
Authorized Participants will only be able to create or redeem their 
Shares through an Authorized Participant.
    The Trust issues Shares to and redeems Shares from Authorized 
Participants on an ongoing basis, but only in one or more ``Baskets'' 
(with a Basket being a block of 10,000 Shares). The Trust will not 
issue fractions of a Basket.
    The creation and redemption of Baskets will be made only in 
exchange for the delivery to the Trust, or the distribution by the 
Trust, of the number of whole and fractional ETH represented by each 
Basket being created or redeemed, which is determined by dividing (x) 
the number of ETH owned by the Trust at 4:00 p.m., New York time, on 
the trade date of a creation or redemption order, after deducting the 
number of ETH representing the U.S. dollar value of accrued but unpaid 
fees and expenses of the Trust (converted using the Index Price at such 
time, and carried to the eighth decimal place), by (y) the number of 
Shares outstanding at such time (with the quotient so obtained 
calculated to one one-hundred-millionth of one ETH (i.e., carried to 
the eighth decimal place)), and multiplying such quotient by 10,000 
(the ``Basket Amount''). The U.S. dollar value of a Basket is 
calculated by multiplying the Basket Amount by the Index Price as of 
the trade date (the ``Basket NAV''). The Basket NAV multiplied by the 
number of Baskets being created or redeemed is referred to as the 
``Total Basket NAV.'' All questions as to the calculation of the Basket 
Amount will be conclusively determined by the Sponsor and will be final 
and binding on all persons interested in the Trust. The number of ETH 
represented by a Share will gradually decrease over time as the Trust's 
ETH are used to pay the Trust's expenses. As of December 31, 2023, each 
Share represented approximately 0.0096 of one ETH.
    The creation of Baskets requires the delivery to the Trust of the 
Total Basket Amount and the redemption of Baskets requires the 
distribution by the Trust of the Total Basket Amount.
    Although the Trust creates Baskets only upon the receipt of ETH, 
and redeems Baskets only by distributing ETH, an Authorized Participant 
will submit Cash Orders, pursuant to which the Authorized Participant 
will deposit cash with, or accept cash from, the Transfer Agent in 
connection with the creation and redemption of Baskets.
    Cash Orders will be facilitated by the Transfer Agent and Liquidity 
Engager, acting other than in its capacity as Sponsor. On an order-by-
order basis, the Liquidity Engager will engage one or more Liquidity 
Providers to obtain or

[[Page 24550]]

receive ETH in exchange for cash in connection with such order, as 
described in more detail below.
    Unless the Sponsor requires that a Cash Order be effected at actual 
execution prices (an ``Actual Execution Cash Order''),\67\ each 
Authorized Participant that submits a Cash Order to create or redeem 
Baskets (a ``Variable Fee Cash Order'') \68\ will pay a fee (the 
``Variable Fee'') based on the Total Basket NAV, and any price 
differential of ETH between the trade date and the settlement date will 
be borne solely by the Liquidity Provider until such ETH have been 
received or liquidated by the Trust. The Variable Fee is intended to 
cover all of a Liquidity Provider's expenses in connection with the 
creation or redemption order, including any ETH trading platform fees 
that the Liquidity Provider incurs in connection with buying or selling 
ETH. The amount may be changed by the Sponsor in its sole discretion at 
any time, and Liquidity Providers will communicate to the Sponsor in 
advance the Variable Fee they would be willing to accept in connection 
with a Variable Fee Cash Order, based on market conditions and other 
factors existing at the time of such Variable Fee Cash Order.
---------------------------------------------------------------------------

    \67\ With respect to a creation or redemption pursuant to an 
Actual Execution Cash Order, as between the Trust and an Authorized 
Participant, the Authorized Participant is responsible for the 
dollar cost of the difference between the ETH price utilized in 
calculating Total Basket NAV on the trade date and the price at 
which the Trust acquires or disposes of the ETH on the settlement 
date. If the price realized in acquiring or disposing of the 
corresponding Total Basket Amount is higher than the Total Basket 
NAV, the Authorized Participant will bear the dollar cost of such 
difference, in the case of a creation, by delivering cash in the 
amount of such shortfall (the ``Additional Creation Cash'') to the 
Cash Account or, in the case of a redemption, with the amount of 
cash to be delivered to the Authorized Participant being reduced by 
the amount of such difference (the ``Redemption Cash Shortfall''). 
If the price realized in acquiring the corresponding Total Basket 
Amount is lower than the Total Basket NAV, the Authorized 
Participant will benefit from such difference, with the Trust 
promptly returning cash in the amount of such excess (the ``Excess 
Creation Cash'') to the Authorized Participant.
    \68\ Unless the Sponsor determines otherwise in its sole 
discretion based on market conditions and other factors existing at 
the time of such Cash Order, all creations and redemptions pursuant 
to Cash Orders are expected to be executed as Variable Fee Cash 
Orders, and any price differential of ETH between the trade date and 
the settlement date will be borne solely by the Liquidity Provider 
until such ETH have been received by the Trust.
---------------------------------------------------------------------------

    Alternatively, the Sponsor may require that a Cash Order be 
effected as an Actual Execution Cash Order, in its sole discretion 
based on market conditions and other factors existing at the time of 
such Cash Order, and under such circumstances, any price differential 
of ETH between the trade date and the settlement date will be borne 
solely by the Authorized Participant until such ETH have been received 
or liquidated by the Trust.
    In the case of creations, to transfer the Total Basket Amount to 
the Trust's Digital Asset Account, the Liquidity Provider will transfer 
ETH to one of the public key addresses associated with the Digital 
Asset Account and as provided by the Sponsor. In the case of 
redemptions, the same procedure is conducted, but in reverse, using the 
public key addresses associated with the wallet of the Liquidity 
Provider and as provided by such party. All such transactions will be 
conducted on the Blockchain and parties acknowledge and agree that such 
transfers may be irreversible if done incorrectly.
    Authorized Participants do not pay a transaction fee to the Trust 
in connection with the creation or redemption of Baskets, but there may 
be transaction fees associated with the validation of the transfer of 
ETH by the Ethereum Network, which will be paid by the Custodian in the 
case of redemptions and the Authorized Participant or the Liquidity 
Provider in the case of creations. Service providers may charge 
Authorized Participants administrative fees for order placement and 
other services related to creation of Baskets. As discussed above, 
Authorized Participants will also pay the Variable Fee in connection 
with Variable Fee Cash Orders. Under certain circumstances Authorized 
Participants may also be required to deposit additional cash in the 
Cash Account, or be entitled to receive excess cash from the Cash 
Account, in connection with creations and redemptions pursuant to 
Actual Execution Cash Orders. Authorized Participants will receive no 
fees, commissions or other form of compensation or inducement of any 
kind from either the Sponsor or the Trust and no such person has any 
obligation or responsibility to the Sponsor or the Trust to effect any 
sale or resale of Shares.
    The following is a summary of the procedures for the creation and 
redemption of Baskets.
Creation Procedures
    On any business day, an Authorized Participant may place an order 
with the Transfer Agent to create one or more Baskets.
    Cash Orders for creation must be placed with the Transfer Agent no 
later than 1:59:59 p.m., New York time.
    The Sponsor may in its sole discretion limit the number of Shares 
created pursuant to Cash Orders on any specified day without notice to 
the Authorized Participants and may direct the Marketing Agent to 
reject any Cash Orders in excess of such capped amount. In exercising 
its discretion to limit the number of Shares created pursuant to Cash 
Orders, the Sponsor expects to take into consideration a number of 
factors, including the availability of Liquidity Providers to 
facilitate Cash Orders and the cost of processing Cash Orders.
    Creations under Cash Orders will take place as follows, where ``T'' 
is the trade date and each day in the sequence must be a business day. 
Before a creation order is placed, the Sponsor determines if such 
creation order will be a Variable Fee Cash Order or an Actual Execution 
Cash Order, which determination is communicated to the Authorized 
Participant.

------------------------------------------------------------------------
                                              Settlement date (T+1, or
              Trade date (T)                 T+2, as established at the
                                              time of order placement)
------------------------------------------------------------------------
 The Authorized Participant places   The Authorized
 a creation order with the Transfer Agent.   Participant delivers to the
                                             Cash Account: \1\
 The Marketing Agent accepts (or    (x) in the case of a
 rejects) the creation order, which is       Variable Fee Cash Order,
 communicated to the Authorized              the Total Basket NAV, plus
 Participant by the Transfer Agent.          any Variable Fee; or
 The Sponsor notifies the           (y) in the case of an Actual
 Liquidity Provider of the creation order.   Execution Cash Order, the
 The Sponsor determines the Total    Total Basket NAV, plus any
 Basket NAV and any Variable Fee and         Additional Creation Cash,
 Additional Creation Cash as soon as         less any Excess Creation
 practicable after 4:00 p.m., New York       Cash, if applicable (such
 time.                                       amount, as applicable, the
                                             ``Required Creation
                                             Cash'').
                                             The Liquidity
                                             Provider transfers the
                                             Total Basket Amount to the
                                             Trust's Vault Balance.

[[Page 24551]]

 
                                             Once the Trust is
                                             in simultaneous possession
                                             of (x) the Total Basket
                                             Amount and (y) the Required
                                             Creation Cash, the Trust
                                             issues the aggregate number
                                             of Shares corresponding to
                                             the Baskets ordered by the
                                             Authorized Participant,
                                             which the Transfer Agent
                                             holds for the benefit of
                                             the Authorized Participant.
                                             Cash equal to the
                                             Required Creation Cash is
                                             delivered to the Liquidity
                                             Provider from the Cash
                                             Account.
                                             The Transfer Agent
                                             delivers Shares to the
                                             Authorized Participant by
                                             crediting the number of
                                             Baskets created to the
                                             Authorized Participant's
                                             DTC account.
------------------------------------------------------------------------
\1\ The ``Cash Account'' means the account maintained by the Transfer
  Agent for purposes of receiving cash from, and distributing cash to,
  Authorized Participants in connection with creations and redemptions
  pursuant to Cash Orders. For the avoidance of doubt, the Trust shall
  have no interest (beneficial, equitable or otherwise) in the Cash
  Account or any cash held therein.

Redemption Procedures
    The procedures by which an Authorized Participant can redeem one or 
more Baskets mirror the procedures for the creation of Baskets. On any 
business day, an Authorized Participant may place a redemption order 
specifying the number of Baskets to be redeemed.
    The redemption of Shares pursuant to Cash Orders will only take 
place if approved by the Sponsor in writing, in its sole discretion and 
on a case-by-case basis. In exercising its discretion to approve the 
redemption of Shares pursuant to Cash Orders, the Sponsor expects to 
take into consideration a number of factors, including the availability 
of Liquidity Providers to facilitate Cash Orders and the cost of 
processing Cash Orders
    Cash Orders for redemption must be placed no later than 1:59:59 
p.m., New York time on each business day. The Authorized Participants 
may only redeem Baskets and cannot redeem any Shares in an amount less 
than a Basket.
    Redemptions under Cash Orders will take place as follows, where 
``T'' is the trade date and each day in the sequence must be a business 
day. Before a redemption order is placed, the Sponsor determines if 
such redemption order will be a Variable Fee Cash Order or an Actual 
Execution Cash Order, which determination is communicated to the 
Authorized Participant.

------------------------------------------------------------------------
                                            Settlement date (T+1 (or T+2
              Trade Date (T)                  on case-by-case basis, as
                                                approved by Sponsor))
------------------------------------------------------------------------
 The Authorized Participant places   The Authorized
 a redemption order with the Transfer        Participant delivers
 Agent.                                      Baskets to be redeemed from
 The Marketing Agent accepts (or     its DTC account to the
 rejects) the redemption order, which is     Transfer Agent.
 communicated to the Authorized              The Liquidity
 Participant by the Transfer Agent.          Provider delivers to the
                                             Cash Account:
                                            (x) in the case of a
                                             Variable Fee Cash Order,
                                             the Total Basket NAV less
                                             any Variable Fee; or
                                            (y) in the case of an Actual
                                             Execution Cash Order, the
                                             actual proceeds to the
                                             Trust from the liquidation
                                             of the Total Basket Amount
                                             (such amount, as
                                             applicable, the ``Required
                                             Redemption Cash'').
 The Sponsor notifies the            Once the Trust is
 Liquidity Provider of the redemption        in simultaneous possession
 order.                                      of (x) the Total Basket
                                             Amount and (y) the Required
                                             Redemption Cash, the
                                             Transfer Agent cancels the
                                             Shares comprising the
                                             number of Baskets redeemed
                                             by the Authorized
                                             Participant.
 The Sponsor determines the Total    The Custodian sends
 Basket NAV and, in the case of a Variable   the Liquidity Provider the
 Fee Cash Order, any Variable Fee, as soon   Total Basket Amount, and
 as practicable after 4:00 p.m., New York    cash equal to the Required
 time.                                       Redemption Cash is
                                             delivered to the Authorized
                                             Participant from the Cash
                                             Account.
------------------------------------------------------------------------

Suspension or Rejection of Orders and Total Basket Amount
    The creation or redemption of Shares may be suspended generally, or 
refused with respect to particular requested creations or redemptions, 
during any period when the transfer books of the Transfer Agent are 
closed or if circumstances outside the control of the Sponsor or its 
delegates make it for all practicable purposes not feasible to process 
creation orders or redemption orders or for any other reason at any 
time or from time to time.\69\ The Transfer Agent may reject an order 
or, after accepting an order, may cancel such order if: (i) such order 
is not presented in proper form as described in the Participant 
Agreement, (ii) the transfer of the Total Basket Amount comes from an 
account other than a ETH wallet address that is known to the Custodian 
as belonging to a Liquidity Provider or (iii) the fulfillment of the 
order, in the opinion of counsel, might be unlawful, among other 
reasons. None of the Sponsor or its delegates will be liable for the 
suspension, rejection or acceptance of any creation order or redemption 
order.
---------------------------------------------------------------------------

    \69\ Extenuating circumstances outside of the control of the 
Sponsor and its delegates or that could cause the transfer books of 
the Transfer Agent to be closed are outlined in the Participant 
Agreement and include, for example, public service or utility 
problems, power outages resulting in telephone, telecopy and 
computer failures, acts of God such as fires, floods or extreme 
weather conditions, market conditions or activities causing trading 
halts, systems failures involving computer or other information 
systems, including any failures or outages of the Ethereum Network, 
affecting the Authorized Participant, the Sponsor, the Trust, the 
Transfer Agent, the Marketing Agent and the Custodian and similar 
extraordinary events.
---------------------------------------------------------------------------

Availability of Information
    The Trust's website (https://grayscale.com/crypto-products/grayscale-ethereum-trust/) will include quantitative information on a 
per Share basis updated on a daily basis, including, (i) the current 
NAV per Share daily and the prior business day's NAV per Share and the 
reported closing price of the Shares; (ii) the mid-point of the

[[Page 24552]]

bid-ask price \70\ as of the time the NAV per Share is calculated 
(``Bid-Ask Price'') and a calculation of the premium or discount of 
such price against such NAV per Share; and (iii) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily Bid-Ask Price against the NAV per Share, within appropriate 
ranges, for each of the four previous calendar quarters (or for as long 
as the Trust has been trading as an ETP if shorter). In addition, on 
each business day the Trust's website will provide pricing information 
for the Shares.
---------------------------------------------------------------------------

    \70\ The bid-ask price of the Trust is determined using the 
highest bid and lowest offer on the Consolidated Tape as of the time 
of calculation of the closing day NAV.
---------------------------------------------------------------------------

    One or more major market data vendors, will provide an intra-day 
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 Core Trading Session (9:30 a.m. to 4:00 p.m., 
E.T.).\71\ The IIV will be calculated using the same methodology as the 
NAV per Share of the Trust (as described above), specifically by using 
the prior day's closing NAV per Share as a base and updating that value 
during the NYSE Arca Core Trading Session to reflect changes in the 
value of the Trust's NAV during the trading day.
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    \71\ The IIV on a per Share basis disseminated during the Core 
Trading Session should not be viewed as a real-time update of the 
NAV, which is calculated once a day.
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    The IIV disseminated during the NYSE Arca Core Trading Session 
should not be viewed as an actual real-time update of the NAV per 
Share, 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 NYSE Arca Core Trading Session by one or more major 
market data vendors. In addition, the IIV will be available through on-
line information services.
    The NAV for the Trust will be calculated by the Sponsor once a day 
and will be disseminated daily to all market participants at the same 
time. To the extent that the Sponsor has utilized the cascading set of 
rules described in ``Index Price'' above, the Trust's website will note 
the valuation methodology used and the price per ETH resulting from 
such calculation. Quotation and last-sale information regarding the 
Shares will be disseminated through the facilities of the Consolidated 
Tape Association (``CTA'').
    Quotation and last sale information for ETH will be widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. In addition, real-time price (and volume) data 
for ETH is available by subscription from Reuters and Bloomberg. The 
spot price of ETH is available on a 24-hour basis from major market 
data vendors, including Bloomberg and Reuters. Information relating to 
trading, including price and volume information, in ETH will be 
available from major market data vendors and from the trading platforms 
on which ETH are traded. The normal trading hours for Digital Asset 
Trading Platforms are 24-hours per day, 365-days per year.
    On each business day, the Sponsor will publish the Index Price, the 
Trust's NAV, and the NAV per Share on the Trust's website as soon as 
practicable after its determination. If the NAV and NAV per Share have 
been calculated using a price per ETH other than the Index Price for 
such Evaluation Time, the publication on the Trust's website will note 
the valuation methodology used and the price per ETH resulting from 
such calculation.
    The Trust will provide website disclosure of its NAV daily. The 
website disclosure of the Trust's NAV will occur at the same time as 
the disclosure by the Sponsor of the NAV to Authorized Participants so 
that all market participants are provided such portfolio information at 
the same time. Therefore, the same portfolio information will be 
provided on the public website as well as in electronic files provided 
to Authorized Participants. Accordingly, each investor will have access 
to the current NAV of the Trust through the Trust's website, as well as 
from one or more major market data vendors.
    The value of the Index, as well as additional information regarding 
the Index, will be available on a continuous basis at https://www.coindesk.com/indices.
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. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in 
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading 
Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting 
and entry of orders in equity securities traded on the NYSE Arca 
Marketplace is $0.01, with the exception of securities that are priced 
less than $1.00, for which the MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will 
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain 
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting 
as registered Market Makers in Commodity-Based Trust Shares to 
facilitate surveillance. The Exchange represents that, for initial and 
continued listing, the Trust will be in compliance with Rule 10A-3 \72\ 
under the Act, as provided by NYSE Arca Rule 5.3-E. A minimum of 
100,000 Shares of the Trust will be outstanding at the commencement of 
trading on the Exchange.
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    \72\ 17 CFR 240.10A-3.
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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 of the Trust.\73\ Trading in Shares of the Trust 
will be halted if the circuit breaker parameters in NYSE Arca Rule 
7.12-E have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
---------------------------------------------------------------------------

    \73\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------

    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the IIV or the value of the Index 
occurs. If the interruption to the dissemination of the IIV or the 
value of the Index persists past the trading day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption. In addition, if the Exchange 
becomes aware that the NAV per Share is not disseminated to all market 
participants at the same time, it will halt trading in the Shares until 
such time as the NAV per Share is available to all market participants.
Surveillance
    The Exchange represents that trading in the Shares of the Trust 
will be subject to the existing trading surveillances administered by 
the Exchange, as well as cross-market surveillances administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\74\ The

[[Page 24553]]

Exchange represents that these procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and federal securities 
laws applicable to trading on the Exchange.
---------------------------------------------------------------------------

    \74\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares with other 
markets and other entities that are members of the ISG, and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in the Shares from such markets 
and other entities. In addition, the Exchange may obtain information 
regarding trading in the Shares from markets and other entities that 
are members of ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement (``CSSA'').\75\ The 
Exchange is also able to obtain information regarding trading in the 
Shares in connection with such ETP Holders' proprietary or customer 
trades which they effect through ETP Holders on any relevant market.
---------------------------------------------------------------------------

    \75\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Trust may trade on markets that are members of ISG or with which the 
Exchange has in place a CSSA.
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    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(a) the description of the portfolios of the Trust, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange listing rules specified in this rule filing shall constitute 
continued listing requirements for listing the Shares on the Exchange.
    The Sponsor has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust to comply with the continued 
listing requirements, and, pursuant to its obligations under section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an ``Information Bulletin'' of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (1) 
the procedures for creations of Shares in Baskets; (2) NYSE Arca Rule 
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to 
learn the essential facts relating to every customer prior to trading 
the Shares; (3) information regarding how the value of the Index and 
the IIV are disseminated; (4) the possibility that trading spreads and 
the resulting premium or discount on the Shares may widen during the 
Opening and Late Trading Sessions, when an updated IIV will not be 
calculated or publicly disseminated; and (5) trading information. The 
Exchange notes that investors purchasing Shares directly from the Trust 
will receive a prospectus.
    In addition, the Information Bulletin will reference that the Trust 
is subject to various fees and expenses as described in the Annual 
Report. The Information Bulletin will disclose that information about 
the Shares of the Trust is publicly available on the Trust's website.
    The Information Bulletin will also discuss any relief, if granted, 
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under section 6(b)(5) \76\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \76\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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 and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Rule 8.201-E. The 
Exchange has in place surveillance procedures that are adequate to 
properly monitor trading in the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws. The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares with 
other markets that are members of the ISG, and the Exchange or FINRA, 
on behalf of the Exchange, or both, may obtain trading information 
regarding trading in the Shares from such markets. In addition, the 
Exchange may obtain information regarding trading in the Shares from 
markets that are members of ISG or with which the Exchange has in place 
a CSSA. Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is 
able to obtain information regarding trading in the Shares and the 
underlying ETH or any ETH derivative through ETP Holders acting as 
registered Market Makers, in connection with such ETP Holders' 
proprietary or customer trades through ETP Holders which they effect on 
any relevant market.
    The proposed rule change is also designed to prevent fraudulent and 
manipulative acts and practices because, although the Digital Asset 
Trading Platform Market is not inherently resistant to fraud and 
manipulation, the Index serves as a means sufficient to mitigate the 
impact of instances of fraud and manipulation on a reference price for 
ETH. Specifically, the Index provides a better benchmark for the price 
of ETH than the Digital Asset Trading Platform Market price because it 
(1) tracks the Digital Asset Trading Platform Market price through 
trading activity at U.S.-Compliant Trading Platforms; (2) mitigates the 
impact of instances of fraud, manipulation and other anomalous trading 
activity in real-time through systematic adjustments; (3) is 
constructed and maintained by an expert third-party index provider, 
allowing for prudent handling of non-market-related events; and (4) 
mitigates the impact of instances of fraud, manipulation and other 
anomalous trading activity concentrated on any one specific trading 
platform through a cross-trading platform composite index rate. The 
Trust has used the Index to price the Shares for more than four years, 
and the Index has proven its ability to (i) mitigate the effects of 
fraud, manipulation and other anomalous trading activity from impacting 
the ETH reference rate, (ii) provide a real-time, volume-weighted fair 
value of ETH and (iii) appropriately handle and adjust for non-market 
related events, such that efforts to manipulate the price of ETH would 
have had a negligible effect on the pricing of the Trust, due to the 
controls embedded in the structure of the Index. In addition, certain 
of the

[[Page 24554]]

Index's Constituent Trading Platforms also have or have begun to 
implement market surveillance infrastructure to further detect, 
prevent, and respond to fraud, attempted fraud, and similar wrongdoing, 
including market manipulation. The proposed rule change is also 
designed to prevent fraudulent and manipulative acts and practices 
based on the existence of the CME futures market as a large, surveilled 
and regulated market that is closely connected with the spot market for 
ETH and through which the Exchange could obtain information to assist 
in detecting and deterring potential fraud or manipulation.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that there is a considerable amount of ETH price and market information 
available on public websites and through professional and subscription 
services. Investors may obtain, on a 24-hour basis, ETH pricing 
information based on the spot price for ETH from various financial 
information service providers. The closing price and settlement prices 
of ETH are readily available from the Digital Asset Trading Platforms 
and other publicly available websites. In addition, such prices are 
published in public sources, or on-line information services such as 
Bloomberg and Reuters. The NAV per Share will be calculated daily and 
made available to all market participants at the same time. The Trust 
will provide website disclosure of its NAV daily. One or more major 
market data vendors will disseminate for the Trust on a daily basis 
information with respect to the most recent NAV per Share and Shares 
outstanding. In addition, if the Exchange becomes aware that the NAV 
per Share is not disseminated to all market participants at the same 
time, it will halt trading in the Shares until such time as the NAV is 
available to all market participants. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the CTA. The IIV will be widely disseminated on a per 
Share basis every 15 seconds during the NYSE Arca Core Trading Session 
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major 
market data vendors. The Exchange represents that the Exchange may halt 
trading during the day in which an interruption to the dissemination of 
the IIV or the value of the Index occurs. If the interruption to the 
dissemination of the IIV or the value of the Index persists past the 
trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the interruption.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace. As noted above, the Exchange has in place surveillance 
procedures relating to trading in the Shares and may obtain information 
via ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a CSSA. In addition, as noted above, 
investors will have ready access to information regarding the Trust's 
NAV, IIV, and quotation and last sale information for the Shares.

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 purposes of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of an 
additional type of exchange-traded product, and the first such product 
based on ETH, which will enhance competition among market participants, 
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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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-NYSEARCA-2023-70 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-NYSEARCA-2023-70. 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-NYSEARCA-2023-70 and should 
be submitted on or before April 29, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\77\
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    \77\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-07333 Filed 4-5-24; 8:45 am]
BILLING CODE 8011-01-P

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