Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To List and Trade Shares of the VanEck Ethereum Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 46462-46476 [2024-11706]

Download as PDF 46462 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices submissions should refer to file number SR–NYSEARCA–2023–70 and should be submitted on or before June 20, 2024. 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 [FR Doc. 2024–11709 Filed 5–28–24; 8:45 am] 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 rule-comments@ sec.gov. Please include file number SR– NYSEARCA–2023–70 on the subject line. lotter on DSK11XQN23PROD with NOTICES1 • 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 18:05 May 28, 2024 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–100214; File No. SR– CboeBZX–2023–069] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To List and Trade Shares of the VanEck Ethereum Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares May 22, 2024. Paper Comments VerDate Sep<11>2014 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.78 J. Matthew DeLesDernier, Deputy Secretary. Jkt 262001 On September 6, 2023, Cboe BZX Exchange, Inc. (‘‘BZX’’ 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 (‘‘Shares’’) of the VanEck Ethereum Trust (f/k/a VanEck Ethereum ETF) under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The proposed rule change was published for comment in the Federal Register on September 26, 2023.3 On September 27, 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 December 18, 2023, 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 February 16, 2024, the Exchange filed Amendment No. 1, which replaced and superseded 78 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 98457 (Sept. 20, 2023), 88 FR 66076. Comments on the proposed rule change are available at: https:// www.sec.gov/comments/sr-cboebzx-2023-069/ srcboebzx2023069.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 98566, 88 FR 68236 (Oct. 3, 2023). 6 15 U.S.C. 78s(b)(2)(B). 7 See Securities Exchange Act Release No. 99195, 88 FR 88683 (Dec. 22, 2023). PO 00000 Frm 00105 Fmt 4703 Sfmt 4703 the proposed rule change in its entirety. On March 20, 2024, the Commission provided notice of Amendment No. 1 to the proposed rule change and designated a longer period for Commission action on the proposed rule change, as modified by Amendment No. 1.8 On May 21, 2024, the Exchange filed Amendment No. 2 to the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. Amendment No. 2 amended and replaced the proposed rule change, as modified by Amendment No. 1, in its entirety. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 2, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) a proposed rule change to list and trade shares of the VanEck Ethereum Trust (the ‘‘Trust’’),9 under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose This Amendment No. 2 to SR– CboeBZX–2023–069 amends and 8 See Securities Exchange Act Release No. 99782, 89 FR 21032 (Mar. 26, 2024). 9 The Trust was formed as a Delaware statutory trust on June 22, 2021 and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 replaces in its entirety the proposal as originally submitted on September 6, 2023 and as amended by Amendment No. 1 on February 16, 2024. The Exchange submits this Amendment No. 2 in order to clarify certain points and add additional details to the proposal. The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4),10 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.11 VanEck Digital Assets, LLC is the sponsor of the Trust (‘‘Sponsor’’). The Shares will be registered with the Commission by means of the Trust’s registration statement on Form S–1 (the ‘‘Registration Statement’’).12 The Commission has historically approved or disapproved exchange filings to list and trade series of Trust Issued Receipts, including spot-based Commodity-Based Trust Shares, on the basis of whether the listing exchange has in place a comprehensive surveillance sharing agreement with a regulated market of significant size related to the underlying commodity to be held.13 With this in mind, the 10 The Commission approved BZX Rule 14.11(e)(4) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 11 Any of the statements or representations regarding the index composition, the description of the portfolio or reference assets, limitations on portfolio holdings or reference assets, dissemination and availability of index, reference asset, and intraday indicative values, or the applicability of Exchange listing rules specified in this filing to list a series of Other Securities (collectively, ‘‘Continued Listing Representations’’) shall constitute continued listing requirements for the Shares listed on the Exchange. 12 See Amendment No. 1 to Registration Statement on Form S–1, dated February 16, 2024, submitted to the Commission by the Sponsor on behalf of the Trust (333–255888). The descriptions of the Trust, the Shares, and the Benchmark contained herein are based, in part, on information in the Registration Statement. The Registration Statement is not yet effective and the Shares will not trade on the Exchange until such time that the Registration Statement is effective. 13 See Securities Exchange Act Release No. 78262 (July 8, 2016), 81 FR 78262 (July 14, 2016) (the ‘‘Winklevoss Proposal’’). The Winklevoss Proposal was subsequently disapproved by the Commission. See Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the ‘‘Winklevoss Order’’). Prior orders from the Commission have pointed out that in every prior approval order for Commodity-Based Trust Shares, there has been a derivatives market that represents the regulated market of significant size, generally a Commodity Futures Trading Commission (the ‘‘CFTC’’) regulated futures market. Further to this point, the Commission’s prior orders have noted that the spot commodities and currency markets for which it has previously approved spot ETPs are generally unregulated and that the Commission relied on the underlying futures market as the regulated market of significant size that formed the basis for approving the series of Currency and Commodity-Based Trust Shares, including gold, silver, platinum, palladium, copper, and other commodities and currencies. The Commission VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 Chicago Mercantile Exchange (‘‘CME’’) ether futures (‘‘Ether Futures’’) market, which launched in February 2021, is the proper market to consider in determining whether there is a related regulated market of significant size. Recently, the Commission issued an order granting approval for proposals to list bitcoin-based commodity trust and bitcoin-based trust issued receipts (these proposed funds are nearly identical to the Trust, but proposed to hold bitcoin instead of ether) (‘‘Spot Bitcoin ETPs’’).14 By way of background, in 2022 the Commission disapproved proposals 15 to list Spot Bitcoin ETPs, including a proposal sponsored by Grayscale Investments, LLC (‘‘Grayscale’’).16 Grayscale appealed the decision with the U.S. Court of Appeals for the D.C. Circuit, which held that the Commission had failed to adequately explain its reasoning that the proposing exchange had not established that the CME bitcoin futures market was a market of significant size related to spot bitcoin, or that the ‘‘other means’’ asserted were sufficient to satisfy the statutory standard. As a result, the court vacated the Grayscale Order and remanded the matter to the Commission.17 In considering the specifically noted in the Winklevoss Order that the approval order issued related to the first spot gold ETP ‘‘was based on an assumption that the currency market and the spot gold market were largely unregulated.’’ See Winklevoss Order at 37592. As such, the regulated market of significant size test does not require that the spot ether market be regulated in order for the Commission to approve this proposal, and precedent makes clear that an underlying market for a spot commodity or currency being a regulated market would actually be an exception to the norm. These largely unregulated currency and commodity markets do not provide the same protections as the markets that are subject to the Commission’s oversight, but the Commission has consistently looked to surveillance sharing agreements with the underlying futures market in order to determine whether such products were consistent with the Act. 14 See Exchange Act Release No. 99306 (January 10, 2024), 89 FR 3008 (January 17, 2024) (SelfRegulatory Organizations; NYSE Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; 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) (the ‘‘Spot Bitcoin ETP Approval Order’’). 15 See 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, Securities Exchange Act Release No. 97102 (Mar. 10, 2023), 88 FR 16055 (Mar. 15, 2023) (SR–CboeBZX–2022–035) (‘‘VanEck Order II’’) and n.11 therein for the complete list of previous proposals. 16 See Securities Exchange Act Release No. 95180 (June 29, 2022) 87 FR 40299 (July 6, 2022) (SR– NYSEArca–2021–90) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca Rule 8.201–E (CommodityBased Trust Shares) (the ‘‘Grayscale Order’’). 17 See Grayscale Investments, LLC v. SEC, 82 F.4th 1239 (D.C. Cir. 2023). PO 00000 Frm 00106 Fmt 4703 Sfmt 4703 46463 remand of the Grayscale Order and Spot Bitcoin ETPs, the Commission determined in the Spot Bitcoin ETP Approval Order that the CME bitcoin futures (‘‘Bitcoin Futures’’) market is highly correlated to spot bitcoin. Specifically, the Commission stated: [B]ased on the record before the Commission and the improved quality of the correlation analysis in the record . . . the Commission is able to conclude that fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME—a U.S. regulated market whose bitcoin futures market is consistently highly correlated to spot bitcoin, albeit not of ‘‘significant size’’ related to spot bitcoin—can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals.18 As further discussed below, both the Exchange and the Sponsor believe that this proposal and the included analysis are sufficient to establish that the CME Ether Futures market represents a regulated market of significant size and that this proposal should be approved. Background Ethereum is free software that is hosted on computers distributed throughout the globe. It employs an array of logic, called a protocol, to create a unified understanding of ownership, commercial activity, and business logic. This allows users to engage in commerce without the need to trust any of its participants or counterparties. Ethereum code creates verifiable and unambiguous rules that assign clear, strong property rights to create a platform for unrestrained business formation and free exchange. It is widely understood that no single intermediary or entity operates or controls the Ethereum network (referred to as ‘‘decentralization’’), the transaction validation and recordkeeping infrastructure of which is collectively maintained by a disparate user base. The Ethereum network allows people to exchange tokens of value, referred to as ‘‘ether’’ or ‘‘ETH’’, which are recorded on a distributed public recordkeeping system or ledger known as a blockchain (the ‘‘Ethereum Blockchain’’), and which can be used to pay for goods and services, including computational power on the Ethereum network, or converted to fiat currencies, such as the U.S. dollar, at rates determined on 18 See the Spot Bitcoin ETP Approval Order at 3011–3012. E:\FR\FM\29MYN1.SGM 29MYN1 lotter on DSK11XQN23PROD with NOTICES1 46464 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices digital asset platforms or in individual peer-to-peer transactions. Furthermore, by combining the recordkeeping system of the Ethereum Blockchain with a flexible scripting language that is programmable and can be used to implement sophisticated logic and execute a wide variety of instructions, the Ethereum network is intended to act as a foundational infrastructure layer on top of which users can build their own custom software programs, as an alternative to centralized web servers. In theory, anyone can build their own custom software programs on the Ethereum network. In this way, the Ethereum network represents a project to expand blockchain deployment beyond a limited-purpose, peer-to-peer private money system into a flexible, distributed alternative computing infrastructure that is available to all. On the Ethereum network, ETH is the unit of account that users pay for the computational resources consumed by running their programs. Heretofore, U.S. retail investors have lacked a U.S. regulated, U.S. exchangetraded vehicle to gain exposure to ETH. Instead current options include: (i) facing the counter-party risk, legal uncertainty, technical risk, and complexity associated with accessing spot ether; or (ii) over-the-counter ether funds (‘‘OTC ETH Funds’’) with high management fees and potentially volatile premiums and discounts. Meanwhile, investors in other countries, including Germany, Canada, Switzerland, and France, are able to use more traditional exchange listed and traded products (including exchangetraded funds holding physical ETH) to gain exposure to ETH. Investors across Europe and Canada have access to products which trade on regulated exchanges and provide exposure to a broad array of spot crypto assets. U.S. investors, by contrast, are left with fewer and more risky means of getting ether exposure.19 To this point, the lack of an ETP that holds spot ETH (a ‘‘Spot Ether ETP’’) exposes U.S. investor assets to significant risk because investors that would otherwise seek cryptoasset exposure through a Spot Ether ETP are forced to find alternative exposure through generally riskier means. For example, investors in OTC ETH Funds are not afforded the benefits and protections of regulated Spot Ether ETPs, resulting in retail investors suffering losses due to drastic 19 The Exchange notes that the list of countries above is not exhaustive and that securities regulators in a number of additional countries have either approved or otherwise allowed the listing and trading of Spot Ether ETPs. VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 movements in the premium/discount of OTC ETH Funds. An investor who purchased the largest OTC ETH Fund in January 2021 and held the position at the end of 2022 would have suffered a 69% loss due to the premium/discount, even if the price of ETH did not change. Many retail investors likely suffered losses due to this premium/discount in OTC ETH Fund trading; all such losses could have been avoided if a Spot Ether ETP had been available. Additionally, many U.S. investors that held their digital assets in accounts at FTX,20 Celsius Network LLC,21 BlockFi Inc.22 and Voyager Digital Holdings, Inc.23 have become unsecured creditors in the insolvencies of those entities. If a Spot Ether ETP was available, it is likely that at least a portion of the billions of dollars tied up in those proceedings would still reside in the brokerage accounts of U.S. investors, having instead been invested in a transparent, regulated, and well-understood structure—a Spot Ether ETP. To this point, approval of a Spot Ether ETP would represent a major win for the protection of U.S. investors in the cryptoasset space. The Trust, like all other series of Commodity-Based Trust Shares, is designed to protect investors against the risk of losses through fraud and insolvency that arise by holding digital assets, including ETH, on centralized platforms. Ether Futures ETFs The Exchange and Sponsor applaud the Commission for allowing the launch of ETFs registered under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’) that provide exposure to ether primarily through CME Ether Futures (‘‘Ether Futures ETFs’’). Allowing such products to list and trade is a productive first step in providing U.S. investors and traders with transparent, exchange-listed tools for expressing a view on ether. The structure of Ether Futures ETFs provides negative outcomes for buy and hold investors as compared to a Spot Ether ETP. Specifically, the cost of rolling CME Ether Futures contracts will cause the Ether Futures ETFs to lag the performance of ether itself and could cost U.S. investors significant amounts of money on an annual basis compared to Spot Ether ETPs. Such rolling costs would not be required for Spot Ether ETPs that hold ether. Further, Ether 20 See FTX Trading Ltd., et al., Case No. 22– 11068. 21 See Celsius Network LLC, et al., Case No. 22– 10964. 22 See BlockFi Inc., Case No. 22–19361. 23 See Voyager Digital Holdings, Inc., et al., Case No. 22–10943. PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 Futures ETFs could potentially hit CME position limits, which would force an Ether Futures ETF to invest in nonfutures assets for ether exposure and cause potential investor confusion and lack of certainty about what such Ether Futures ETFs are actually holding to try to get exposure to ether, not to mention completely changing the risk profile associated with such an ETF. While Ether Futures ETFs represent a useful trading tool, they are clearly a suboptimal structure for U.S. investors that are looking for long-term exposure to ether that will unnecessarily cost U.S. investors significant amounts of money every year compared to Spot Ether ETPs and the Exchange believes that any proposal to list and trade a Spot Ether ETP should be reviewed by the Commission with this important investor protection context in mind. To the extent the Commission may view differential treatment of Ether Futures ETFs and Spot Ether ETPs as warranted based on the Commission’s concerns about the custody of physical ether that a Spot Ether ETP would hold (compared to cash-settled futures contracts),24 the Sponsor believes this concern is mitigated to a significant degree by the custodial arrangements that the Trust has contracted with the Custodian (as defined below) to provide, as further outlined below. In the custody statement, the Commission stated that the fourth step that a brokerdealer could take to shield traditional securities customers and others from the risks and consequences of digital asset security fraud, theft, or loss is to establish, maintain, and enforce reasonably designed written policies, procedures, and controls for safekeeping and demonstrating the broker-dealer has exclusive possession or control over digital asset securities that are consistent with industry best practices to protect against the theft, loss, and unauthorized and accidental use of the private keys necessary to access and transfer the digital asset securities the broker-dealer holds in custody. While ether is not a security and the Custodian is not a broker-dealer, the Sponsor believes that similar considerations apply to the Custodian’s holding of the Trust’s ether. After diligent investigation, the Sponsor believes that the Custodian’s policies, procedures, and controls for safekeeping, 24 See, e.g., Division of Investment Management Staff, Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market, May 11, 2021 (‘‘The Bitcoin Futures market also has not presented the custody challenges associated with some cryptocurrencybased investing because the futures are cashsettled’’). E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 exclusively possessing, and controlling the Trust’s ether holdings are consistent with industry best practices to protect against the theft, loss, and unauthorized and accidental use of the private keys. As a trust company chartered by the New York Department of Financial Services (‘‘NYDFS’’), the Sponsor notes that the Custodian is subject to extensive regulation and has among longest track records in the industry of providing custodial services for digital asset private keys. Under the circumstances, therefore, to the extent the Commission believes that its concerns about the risks of spot ether custody justifies differential treatment of a Ether Futures ETF versus a Spot Ether ETP, the Sponsor believes that the fact that the Custodian employs the same types of policies, procedures, and safeguards in handling spot ether that the Commission has stated that brokerdealers should implement with respect to digital asset securities would appear to weaken the justification for treating a Ether Futures ETF compared to a Spot Ether ETP differently due to spot ether custody concerns. Based on the foregoing, the Exchange and Sponsor believe that any objective review of the proposals to list Spot Ether ETPs compared to the Ether Futures ETFs would lead to the conclusion that Spot Ether ETPs should be available to U.S. investors and, as VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 such, this proposal and other comparable proposals to list and trade Spot Ether ETPs should be approved by the Commission. Stated simply, U.S. investors will continue to lose significant amounts of money from holding Ether Futures ETFs as compared to Spot Ether ETPs, losses which could be prevented by the Commission approving Spot Ether ETPs. Additionally, any concerns related to preventing fraudulent and manipulative acts and practices related to Spot Ether ETPs would apply equally to the spot markets underlying the futures contracts held by an Ether Futures ETF. Both the Exchange and Sponsor believe that the CME Ether Futures market is a regulated market of significant size and that such manipulation concerns are mitigated, as described extensively below. After allowing the listing and trading of Ether Futures ETFs that hold primarily CME Ether Futures, however, the only consistent outcome would be approving Spot Ether ETPs on the basis that the CME Ether Futures market is a regulated market of significant size. Given the current landscape, approving this proposal (and others like it) and allowing Spot Ether ETPs to be listed and traded alongside Ether Futures ETFs and Spot Bitcoin ETPs would establish a consistent regulatory approach, provide U.S. investors with choice in product structures for ether PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 46465 exposure, and offer flexibility in the means of gaining exposure to ether through transparent, regulated, U.S. exchange-listed vehicles. CME Ether Futures 25 CME began offering trading in CME Ether Futures in February 2021. Each contract represents 50 ETH and is based on the CME CF Ether-Dollar Reference Rate.26 The contracts trade and settle like other cash-settled commodity futures contracts. Most measurable metrics related to CME Ether Futures have generally trended up since launch, although some metrics have slowed recently. For example, there were 76,293 CME Ether Futures contracts traded in July 2023 (approximately $7.3 billion) compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts traded in July 2021, and July 2022 respectively.27 The Sponsor’s research indicates daily correlation between the spot ETH and the CME Ether Futures is 0.998 from the period of 9/1/22 through 9/1/23. 25 Unless otherwise noted, all data and analysis presented in this section and referenced elsewhere in the filing has been provided by the Sponsor. 26 The CME CF Ether-Dollar Reference Rate is based on a publicly available calculation methodology based on pricing sourced from several crypto trading platforms, including Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. 27 Source: CME, 7/31/23. E:\FR\FM\29MYN1.SGM 29MYN1 The number of large open interest holders 28 and unique accounts trading CME Ether Futures have both increased, even in the face of heightened ether price volatility. 28 A large open interest holder in CME Ether Futures is an entity that holds at least 25 contracts, which is the equivalent of 1,250 ether. At a price of approximately $1,867 per ether on 7/31/2023, VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 PO 00000 Frm 00109 Fmt 4703 Sfmt 4725 more than 59 firms had outstanding positions of greater than $2.3 million in CME Ether Futures. E:\FR\FM\29MYN1.SGM 29MYN1 EN29MY24.017</GPH> Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices EN29MY24.016</GPH> lotter on DSK11XQN23PROD with NOTICES1 46466 46467 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices CME Ether Futures Average Daily Volume (ADV) and Open Interest (01) 10,000 500,000 9,000 450,000 8,000 400,000 1/) tJ 6,000 i 5,000 0 4,000 8 :;j: ' l 7,000 3,000 2,000 1,000 0 .,I tll J 'I' I' ,,, " "' ' -: " ',' ■ ADV .. I ' /' ... 350,000 ~ 300,000 0 250,000 ; 200,000 150,000 f;j 's>- 100,000 LU 50,000 0 111Avg 01 CME Ether Futures Average Daily Volume (ADV) and Open lnterset (01) 1,400,000,000 1,200,000,000 1,000,000,000 800,000,000 600,000,000 400,000,000 200,000,000 u.. ,!. Cl. <C .-I N .-I N ' +• I),() ~ II lotter on DSK11XQN23PROD with NOTICES1 The Commission has approved numerous series of Trust Issued Receipts,29 including Commodity-Based Trust Shares,30 to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6(b)(5) of the Act, specifically including: (i) the requirement that a national securities exchange’s rules are Exchange Rule 14.11(f). Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 30 Commodity-Based VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 u 0 .-I N u' (I) Cl AvgAgg 01 N N I .0 ~ N N ...0.' <C N N I c:: :, -, N N I I),() :, <C 31 The Exchange believes that ETH is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of ETH trading render it difficult and prohibitively costly to manipulate the price of ETH. The fragmentation across ETH platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of ETH prices through continuous trading activity challenging. To the extent that there are ETH platforms engaged in or allowing wash trading or other activity intended to manipulate the price of ETH on other platforms, such pricing does not normally impact prices on other platforms because participants will generally ignore markets with quotes that they deem non-executable. Moreover, the linkage between the ETH markets and the PO 00000 Frm 00110 N N .,.u I 0 N N m m u' (I) N I .0 N Cl u.. <C (I) ...0. I m N I C: :, -, m N I bl) ::, <C • Avg Agg Volume designed to prevent fraudulent and manipulative acts and practices; 31 and Section 6(b)(5) and the Applicable Standards 29 See I Fmt 4703 Sfmt 4703 (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act and that this filing sufficiently presence of arbitrageurs in those markets means that the manipulation of the price of ETH on any single venue would require manipulation of the global ETH price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular ETH platform or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. E:\FR\FM\29MYN1.SGM 29MYN1 EN29MY24.019</GPH> (I) .-I N C: ' :, -, ..-1 N EN29MY24.018</GPH> ..-1 N .0 ' 46468 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices demonstrates that the CME Ether Futures market represents a regulated market of significant size and that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal. (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices lotter on DSK11XQN23PROD with NOTICES1 In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 32 with a regulated market of significant size. Both the Exchange and CME are members of the Intermarket Surveillance Group (‘‘ISG’’).33 The only remaining issue to be addressed is whether the CME Ether Futures market constitutes a market of significant size, which both the Exchange and the Sponsor believe that it does. The terms ‘‘significant market’’ and ‘‘market of significant size’’ include a market (or group of markets) as to which: (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct; and (b) it is unlikely that trading in the ETP would be the 32 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance- sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in the ISG constitutes such a surveillance sharing agreement. See Securities Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix Disapproval’’). 33 For a list of the current members and affiliate members of ISG, see www.isgportal.com. VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 predominant influence on prices in that market.34 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying Section 6(b)(5) of the act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement.35 (a) Manipulation of the ETP The significant market test requires that there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct. In light of the similarly high correlation between spot ETH/CME Ether Futures and spot bitcoin/CME Bitcoin Futures, applying the same rationale that the Commission applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order also indicates that this test is satisfied for this proposal. As noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that: . . . fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME . . . can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals.36 The assumptions from this statement are also true for CME Ether Futures. CME Ether Futures pricing is based on pricing from spot ether markets. The statement from the Spot Bitcoin ETP Approval Order that the surveillancesharing agreement with the CME ‘‘can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals’’ makes clear that the Commission Wilshire Phoenix Disapproval. Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘cannot be manipulated’ standard; instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.’’ Id. at 37582. 36 See the Spot Bitcoin ETP Approval Order at 3011–3012. believes that CME’s surveillance can capture the effects of trading on the relevant spot markets on the pricing of CME Bitcoin Futures. This same logic would extend to CME Ether Futures markets where CME’s surveillance would be able to capture the effects of trading on the relevant spot markets on the pricing of CME Ether Futures. (b) Predominant Influence on Prices in Spot and ETH Futures The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices in the CME Ether Futures market for a number of reasons. First, because the Trust would not hold CME Ether Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME Ether Futures contracts use for pricing.37 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 1, 2023.38 The Sponsor expects that the Trust would represent a very small percentage of this daily trading volume in the spot ether market even in its most aggressive projections for the Trust’s assets and therefore could not be the predominant force on prices in the CME Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether Futures market has progressed and matured significantly. As the U.S. Court of Appeals for the D.C. Circuit found in its review of the Grayscale Order, ‘‘Because the spot market is deeper and more liquid than the futures market, manipulation should be more difficult, not less.’’ The Exchange and Sponsor agree with this sentiment and believe it applies equally to the spot ether and CME Ether Futures markets. (c) Other Means To Prevent Fraudulent and Manipulative Acts and Practices As noted above, the Commission also permits a listing exchange to demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The 34 See 35 See PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 37 This logic is reflected by the U.S. Court of Appeals for the D.C. Circuit on its review of the Grayscale Order at 17–18. See Grayscale Investments, LLC v. SEC, 82 F. 4th 1239 (D.C. Cir. 2023). Specifically, the court found that ‘‘Because Grayscale owns no futures contracts, trading in Grayscale can affect the futures market only through the spot market . . . But Grayscale holds just 3.4 percent of outstanding bitcoin, and the Commission did not suggest Grayscale can dominate the price of bitcoin.’’ 38 Source: TokenTerminal. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 Exchange and Sponsor believe that such conditions are present. The Exchange believes that the proposal is designed to protect investors and the public interest. Over the past several years, U.S. investor exposure to ether through OTC ETH Funds has grown. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Ether Futures ETFs and premium/discount volatility and management fees for OTC ETH Funds. The Exchange believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to ether in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks and costs associated with investing in Ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. VanEck Ethereum ETF Delaware Trust Company is the trustee (‘‘Trustee’’). The State Street Bank and Trust Company will be the administrator (‘‘Administrator’’) and transfer agent (‘‘Transfer Agent’’) and will be responsible for the custody of the Trust’s cash and cash equivalents 39 (the ‘‘Cash Custodian’’). Van Eck Securities Corporation will be the marketing agent (‘‘Marketing Agent’’) in connection with the creation and redemption of ‘‘Creation Baskets’’, as defined below, of Shares. Gemini Trust Company, LLC, a third-party custodian (the ‘‘Custodian’’), will be responsible for custody of the Trust’s ether. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the Trust’s net assets. The Trust’s assets will only consist of ether, cash and cash equivalents. According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as 39 Cash equivalents are short-term instruments with maturities of less than 3 months. VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 amended,40 nor a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’), and neither the Trust nor the Sponsor is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. Neither the Trust, nor the Sponsor, nor the Custodian, nor any other person associated with the Trust will, directly or indirectly, engage in action where any portion of the Trust’s ETH becomes subject to the Ethereum proof-of-stake validation or is used to earn additional ETH or generate income or other earnings. The Trust will not acquire and will disclaim any incidental right (‘‘IR’’) or IR asset received, for example as a result of forks or airdrops, and such assets will not be taken into account for purposes of determining NAV. When the Trust sells or redeems its Shares, it will do so in cash transactions in blocks of 25,000 Shares (a ‘‘Creation Basket’’) at the Trust’s net asset value (‘‘NAV’’). For creations, authorized participants will deliver cash to the Trust’s account with the Cash Custodian in exchange for Shares. Upon receipt of an approved creation order, the Sponsor, on behalf of the Trust, will submit an order to buy the amount of ether represented by a Creation Basket. Based off ether executions, the Cash Custodian will request the required cash from the authorized participant; the Transfer Agent will only issue Shares when the authorized participant has made delivery of the cash. Following receipt by the Cash Custodian of the cash from an authorized participant, the Sponsor, on behalf of the Trust, will approve an order with one or more previously onboarded trading partners to purchase the amount of ether represented by the Creation Basket. This purchase of ether will normally be cleared through an affiliate of the Custodian (although the purchase may also occur directly with the trading partner) and the ether will settle directly into the Trust’s account at the Custodian.41 Authorized participants may then offer Shares to the public at prices that depend on various factors, including the supply and demand for Shares, the value of the Trust’s assets, and market conditions at the time of a transaction. Shareholders who buy or sell Shares during the day from their 40 15 U.S.C. 80a–1. redemptions, the process will occur in the reverse order. Upon receipt of an approved redemption order, the Sponsor, on behalf of the Trust, will submit an order to sell the amount of ether represented by a Creation Basket and the cash proceeds will be remitted to the authorized participant when the 25,000 Shares are received by the Transfer Agent. 41 For PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 46469 broker may do so at a premium or discount relative to the NAV of the Shares of the Trust. Investment Objective According to the Registration Statement and as further described below, the investment objective of the Trust is for the Shares to reflect the performance of ether less the expenses of the Trust’s operations. In seeking to achieve its investment objective, the Trust will hold ether and will value its Shares daily based on the reported Benchmark (as discussed below) and process all creations and redemptions in cash transactions with authorized participants. The Trust is not actively managed. The Benchmark As described in the Registration Statement, the Trust will use the MarketVectorTM Ethereum Benchmark Rate (the ‘‘Benchmark’’) to calculate the Trust’s NAV. The Benchmark is designed to be a robust price for ETH in USD and there is no component other than ETH in the Benchmark. The underlying ether platforms (the ‘‘constituent platforms’’) are sourced from the industry leading CryptoCompare Exchange Benchmark review report. The CryptoCompare Exchange Benchmark review report was established in 2019 as a tool designed to bring clarity to the digital trading platform sector by providing a framework for assessing risk and in turn bringing transparency and accountability to a complex and rapidly evolving market.42 The current constituent platforms of the Benchmark is Bitstamp, Coinbase, Gemini, itBit, and Kraken. CryptoCompare Data Limited is the index sponsor and index administrator for the Benchmark. CryptoCompare Data Limited is the 42 The CryptoCompare Exchange Benchmark review report methodology utilizes a combination of qualitative and quantitative metrics to analyze a comprehensive data set across eight categories of evaluation legal/regulation, KYC/transaction risk, data provision, security, team/exchange, asset quality/diversity, market quality and negative events. The CryptoCompare Exchange Benchmark review report assigns a grade to each platform which helps identify what it believes to be the lowest risk platforms in the industry. Based on the CryptoCompare Exchange Benchmark review report, MarketVector Indexes initially selects the top five platforms by rank for inclusion in the MarketVectorTM Ethereum Benchmark Rate. If an eligible platform is downgraded by two or more notches in a semi-annual review and is no longer in the top five by rank, it is replaced by the highest ranked non-component platform. Adjustments to platform coverage are announced four business days prior to the first business day of each of June and December 23:00 CET. The MarketVectorTM Ethereum Benchmark Rate is rebalanced at 16:00:00 GMT/BST on the last business day of each of May and November. E:\FR\FM\29MYN1.SGM 29MYN1 46470 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices lotter on DSK11XQN23PROD with NOTICES1 calculation agent for the Benchmark. The Benchmark is calculated daily between 00:00 and 24:00 (CET) and the Benchmark values are disseminated to data vendors every fifteen seconds. The Benchmark is disseminated in USD and the closing value is calculated at 16:00:00 ET with fixed 16:00 ether platform rates. In calculating the closing value of the Benchmark, the methodology captures trade prices and sizes from ether platforms and examines twenty threeminute periods leading up to 4:00 p.m. ET. It then calculates an equal-weighted average of the volume-weighted median price of these twenty three-minute periods, removing the highest and lowest contributed prices. Using twenty consecutive three-minute segments over a sixty-minute period means malicious actors would need to sustain efforts to manipulate the market over an extended period of time, or would need to replicate efforts multiple times across ether platforms, potentially triggering review. This extended period also supports authorized participant activity by capturing volume over a longer time period, rather than forcing authorized participants to mark an individual close or auction. The use of a median price reduces the ability of outlier prices to impact the NAV, as it systematically excludes those prices from the NAV calculation. The use of a volumeweighted median (as opposed to a traditional median) serves as an additional protection against attempts to manipulate the NAV by executing a large number of low-dollar trades, because any manipulation attempt would have to involve a majority of global spot ETH volume in a threeminute window to have any influence on the NAV. As discussed in the Registration Statement, removing the highest and lowest prices further protects against attempts to manipulate the NAV, requiring bad actors to act on multiple ether platforms at once to have any ability to influence the price. Net Asset Value NAV means the total assets of the Trust (which includes all ether, cash, and cash equivalents) less total liabilities of the Trust. The Administrator determines the NAV of the Trust on each day that the Exchange is open for regular trading, as promptly as practical after 4:00 p.m. ET based on the closing value of the Benchmark. The NAV of the Trust is the aggregate value of the Trust’s assets less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the NAV, the Administrator values the ether held by the Trust based VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 on the closing value of the Benchmark as of 4:00 p.m. ET. The Administrator also determines the NAV per Share. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. The Sponsor will monitor for significant events related to crypto assets that may impact the value of ether and will determine, in good faith, and in accordance with its valuation policies and procedures, whether to fair value the Trust’s ether on a given day based on whether certain pre-determined criteria have been met. For example, if the closing value of the Benchmark deviates by more than a pre-determined amount from an alternate benchmark available to the Sponsor, the Sponsor may determine to utilize an alternate benchmark, such as the MarketVectorTM Ethereum Index or the S&P Ethereum Index. The Sponsor may also fair value the Trust’s ether using observed market transactions from various trading platforms, including some or all of the trading platforms included in the Benchmark.43 Availability of Information In addition to the price transparency of the Benchmark, the Trust will provide information regarding the Trust’s ETH holdings as well as additional data regarding the Trust. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) the current NAV per Share daily and the prior business day’s NAV per Share and the reported BZX Official Closing Price; 44 (b) the BZX Official Closing Price in relation to the NAV per Share as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV per Share; (c) data in chart form displaying the frequency distribution of discounts and premiums of the BZX Official Closing Price against the NAV per Share, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The aforementioned information will be published as of the close of business available on the Sponsor’s website at www.vaneck.com, 43 Any alternative method to determining NAV will only be employed on an ad hoc basis. Any permanent change to the calculation of the NAV would require a proposed rule change under Rule 19b–4. 44 As defined in Rule 11.23(a)(3), the term ‘‘BZX Official Closing Price’’ shall mean the price disseminated to the consolidated tape as the market center closing trade. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 or any successor thereto. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). The Trust will also disseminate its holdings on a daily basis on its website. The Intraday Indicative Value (‘‘IIV’’) will be updated during Regular Trading Hours to reflect changes in the value of the Trust’s ether holdings during the trading day. The IIV may differ from the NAV because NAV is calculated, using the closing value of the Benchmark, once a day at 4:00 p.m. Eastern time whereas the IIV draws prices from the last trade on each constituent platform 45 to produce a relevant, realtime price. The IIV disseminated during Regular Trading Hours should not be viewed as an actual real-time update of the NAV, which will be calculated only once at the end of each trading day. The Trust will provide an IIV per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be widely disseminated on a per Share basis every 15 seconds during the Exchange’s Regular Trading Hours through the facilities of the CTA and Consolidated Quotation System (CQS) high speed lines. In addition, the IIV will be available through on-line information services such as Bloomberg and Reuters. The price of ether will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. As noted above, the Benchmark is calculated every 15 seconds and information about the Benchmark and Benchmark value, including index data and key elements of how the Benchmark is calculated, will be publicly available at https://www.marketvector.com/. Quotation and last sale information for ether is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in ether is available from major market data vendors and from the trading platforms on which ether are traded. Depth of book information is also available from ether trading platforms. The normal trading hours for 45 The constituent platforms for purposes of calculating IIV are Gemini, Bitstamp, and Bitfinex. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices ether trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s BZX Official Closing Price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. lotter on DSK11XQN23PROD with NOTICES1 The Custodian The Custodian’s services (i) allow ETH to be deposited from a public blockchain address to the Trust’s ETH account and (ii) allow ETH to be withdrawn from the ETH account to a public blockchain address as instructed by the Trust. The custody agreement requires the Custodian to hold the Trust’s ETH in cold storage, unless required to facilitate withdrawals as a temporary measure. The Custodian will use segregated cold storage ETH addresses for the Trust which are separate from the ETH addresses that the Custodian uses for its other customers and which are directly verifiable via the ETH blockchain. The Custodian will safeguard the private keys to the ETH associated with the Trust’s ETH account. The Custodian will at all times record and identify in its books and records that such ETH constitutes the property of the Trust. The Custodian will not withdraw the Trust’s ETH from the Trust’s account with the Custodian, or loan, hypothecate, pledge or otherwise encumber the Trust’s ETH, without the Trust’s instruction. If the custody agreement terminates, the Sponsor may appoint another custodian and the Trust may enter into a custodian agreement with such custodian. Creation and Redemption of Shares When the Trust sells or redeems its Shares, it will do so in cash transactions in blocks of 25,000 Shares that are based on the amount of ether held by the Trust on a per unit (i.e., 25,000 Share) basis. According to the Registration Statement, on any business day, an authorized participant may place an order to create one or more Creation Baskets. Purchase orders must be placed by 4:00 p.m. ET, or the close of regular trading on the Exchange, whichever is earlier. The day on which an order is received is considered the purchase order date. The total deposit of cash required is based on the combined NAV of the number of VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 Shares included in the Creation Baskets being created determined as of 4:00 p.m. ET on the date the order to purchase is properly received. The Administrator determines the quantity of ether associated with a Creation Basket for a given day by dividing the number of ether held by the Trust as of the opening of business on that business day, adjusted for the amount of ether constituting estimated accrued but unpaid fees and expenses of the Trust as of the opening of business on that business day, by the quotient of the number of Shares outstanding at the opening of business divided by the number of Shares in a Creation Basket. 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 ether 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 ether as part of the creation or redemption process. The Trust will create Shares by receiving ether from a third party that is not the authorized participant and the Trust—not the authorized participant— is responsible for selecting the third party to facilitate the delivery of the ether. Further, the third party will not be acting as an agent of the authorized participant with respect to the delivery of the ether to the Trust or acting at the direction of the authorized participant with respect to the delivery of the ether to the Trust. When fulfilling a redemption request, the Trust will deliver ether to a third party that is not the authorized participant and the Trust—not the authorized participant- is responsible for selecting such third party to receive the ether. Further, the third party will not be acting as an agent of the authorized participant with respect to the receipt of the ether from the Trust or acting at the direction of the authorized participant with respect to the receipt of the ether from the Trust. The procedures by which an authorized participant can redeem one or more Creation Baskets mirror the procedures for the creation of Creation Baskets. The Sponsor will maintain ownership and control of ether in a manner consistent with good delivery requirements for spot commodity transactions. Rule 14.11(e)(4)—Commodity-Based Trust Shares The Shares will be subject to BZX Rule 14.11(e)(4), which sets forth the PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 46471 initial and continued listing criteria applicable to Commodity-Based Trust Shares. The Exchange represents that, for initial and continued listing, the Trust must be in compliance with Rule 10A–3 under the Act. A minimum of 100,000 Shares will be outstanding at the commencement of listing on the Exchange. The Exchange will obtain a representation that the NAV will be calculated daily and that the NAV and information about the assets of the Trust will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a trust that holds (1) a specified commodity 46 deposited with the trust, or (2) a specified commodity and, in addition to such specified commodity, cash; (b) issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity and/or cash; and (c) when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such trust which will deliver to the redeeming holder the quantity of the underlying commodity and/or cash. Upon termination of the Trust, the Shares will be removed from listing. The Trustee, Delaware Trust Company, is a trust company having substantial capital and surplus and the experience and facilities for handling corporate trust business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee without prior notice to and approval of the Exchange. The Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange shall have any liability for damages, claims, losses or expenses caused by any errors, omissions or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to the Trust in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent of the Exchange, or any act, condition or cause beyond the reasonable control of the Exchange, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity. Finally, as 46 For purposes of Rule 14.11(e)(4), the term commodity takes on the definition of the term as provided in the Commodity Exchange Act. E:\FR\FM\29MYN1.SGM 29MYN1 lotter on DSK11XQN23PROD with NOTICES1 46472 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices required in Rule 14.11(e)(4)(G), the Exchange notes that any registered market maker (‘‘Market Maker’’) in the Shares must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a registered Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records (see, e.g., Rule 4.2), the registered Market Maker in CommodityBased Trust Shares shall make available to the Exchange such books, records or other information pertaining to transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, as may be requested by the Exchange. The Exchange is able to obtain information regarding trading in the Shares and the underlying ether, CME Ether Futures, options on CME Ether Futures, or any other ether derivative through members acting as registered Market Makers, in connection with their proprietary or customer trades. As a general matter, the Exchange has regulatory jurisdiction over its Members and their associated persons, which include any person or entity controlling a Member. To the extent the Exchange may be found to lack jurisdiction over a subsidiary or affiliate of a Member that does business only in commodities or futures contracts, the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares. The Exchange will halt trading in the VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 Shares under the conditions specified in BZX Rule 11.18. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) the extent to which trading is not occurring in the ether underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. If the IIV or the value of the Benchmark is not being disseminated as required, the Exchange may halt trading during the day in which the interruption to the dissemination of the IIV or the value of the Benchmark occurs. If the interruption to the dissemination of the IIV or the value of the Benchmark 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 with respect to the Shares 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. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. BZX will allow trading in the Shares during all trading sessions on the Exchange. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in BZX Rule 11.11(a) the minimum price variation for quoting and entry of orders in securities traded on the Exchange is $0.01 where the price is greater than $1.00 per share or $0.0001 where the price is less than $1.00 per share. The Shares of the Trust will conform to the initial and continued listing criteria set forth in BZX Rule 14.11(e)(4). Surveillance The Exchange represents that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 derivative products, including Commodity-Based Trust Shares. FINRA conducts certain 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 Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares, CME Ether Futures, and any other ether derivative 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, CME Ether Futures, and any other ether derivative from such markets and other entities.47 The Exchange may obtain information regarding trading in the Shares, CME Ether Futures, and any other ether derivative via ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. The Sponsor has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (i) the procedures for the creation and redemption of Creation Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the IIV and the Trust’s NAV are disseminated; (iv) the 47 For a list of the current members and affiliate members of ISG, see www.isgportal.com. E:\FR\FM\29MYN1.SGM 29MYN1 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices risks involved in trading the Shares outside of Regular Trading Hours 48 when an updated IIV will not be calculated or publicly disseminated; (v) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. The Information Circular will also reference the fact that there is no regulated source of last sale information regarding ether, that the Commission has no jurisdiction over the trading of ether as a commodity, and that the CFTC has regulatory jurisdiction over the trading of CME Ether Futures and options on CME Ether Futures. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Shares. Members purchasing the Shares for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, noaction and interpretive relief granted by the Commission from any rules under the Act. lotter on DSK11XQN23PROD with NOTICES1 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act 49 in general and Section 6(b)(5) of the Act 50 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Commission has approved numerous series of Trust Issued Receipts,51 including Commodity-Based Trust Shares,52 to be listed on U.S. national securities. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6(b)(5) of the Act, specifically including: (i) the requirement that a national securities exchange’s rules are designed to prevent 48 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern Time. 49 15 U.S.C. 78f. 50 15 U.S.C. 78f(b)(5). 51 See Exchange Rule 14.11(f). 52 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 fraudulent and manipulative acts and practices; 53 and (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act and that this filing sufficiently demonstrates that the CME Ether Futures market represents a regulated market of significant size and that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal. (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 54 with a regulated 53 The Exchange believes that ETH is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of ETH trading render it difficult and prohibitively costly to manipulate the price of ETH. The fragmentation across ETH platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of ETH prices through continuous trading activity challenging. To the extent that there are ETH platforms engaged in or allowing wash trading or other activity intended to manipulate the price of ETH on other markets, such pricing does not normally impact prices on other platforms because participants will generally ignore markets with quotes that they deem non-executable. Moreover, the linkage between the ETH markets and the presence of arbitrageurs in those markets means that the manipulation of the price of ETH price on any single venue would require manipulation of the global ETH price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular ETH platform or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. 54 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 46473 market of significant size. Both the Exchange and CME are members of ISG.55 The only remaining issue to be addressed is whether the CME Ether Futures market constitutes a market of significant size, which both the Exchange and the Sponsor believe that it does. The terms ‘‘significant market’’ and ‘‘market of significant size’’ include a market (or group of markets) as to which: (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct; and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.56 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying Section 6(b)(5) of the act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement.57 (a) Manipulation of the ETP The significant market test requires that there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange in detecting and deterring misconduct. In light of the similarly high correlation between spot ETH/CME Ether Futures and spot bitcoin/CME Bitcoin Futures, applying the same rationale that the Commission applied to a Spot Bitcoin ETP in the laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in ISG constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval. 55 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 56 See Wilshire Phoenix Disapproval. 57 See Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘cannot be manipulated’ standard; instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.’’ Id. at 37582. E:\FR\FM\29MYN1.SGM 29MYN1 46474 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices Spot Bitcoin ETP Approval Order also indicates that this test is satisfied for this proposal. As noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that: . . . fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME’s surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges’ comprehensive surveillance-sharing agreement with the CME . . . can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals.58 The assumptions from this statement are also true for CME Ether Futures. CME Ether Futures pricing is based on pricing from spot ether markets. The statement from the Spot Bitcoin ETP Approval Order that the surveillancesharing agreement with the CME ‘‘can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the [p]roposals’’ makes clear that the Commission believes that CME’s surveillance can capture the effects of trading on the relevant spot markets on the pricing of CME Bitcoin Futures. This same logic would extend to CME Ether Futures markets where CME’s surveillance would be able to capture the effects of trading on the relevant spot markets on the pricing of CME Ether Futures. lotter on DSK11XQN23PROD with NOTICES1 (b) Predominant Influence on Prices in Spot and ETH Futures The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices in the CME Ether Futures market for a number of reasons. First, because the Trust would not hold CME Ether Futures contracts, the only way that it could be the predominant force on prices in that market is through the spot markets that CME Ether Futures contracts use for pricing.59 The Sponsor notes that ether total 24-hour spot trading volume has averaged $9.4 billion over the year ending September 1, 2023.60 The Sponsor expects that the Trust would represent a very small 58 See the Spot Bitcoin ETP Approval Order at 3011–3012. 59 This logic is reflected by the U.S. Court of Appeals for the D.C. Circuit on its review of the Grayscale Order at 17–18. See Grayscale Investments, LLC v. SEC, 82 F. 4tha 1239 (D.C. Cir. 2023). Specifically, the court found that ‘‘Because Grayscale owns no futures contracts, trading in Grayscale can affect the futures market only through the spot market . . . But Grayscale holds just 3.4 percent of outstanding bitcoin, and the Commission did not suggest Grayscale can dominate the price of bitcoin.’’ 60 Source: TokenTerminal. VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 percentage of this daily trading volume in the spot ether market even in its most aggressive projections for the Trust’s assets and therefore could not be the predominant force on prices in the CME Ether Futures market. Second, much like the CME Bitcoin Futures market, the CME Ether Futures market has progressed and matured significantly. As the U.S. Court of Appeals for the D.C. Circuit found in its review of the Grayscale Order, ‘‘Because the spot market is deeper and more liquid than the futures market, manipulation should be more difficult, not less.’’ The Exchange and Sponsor agree with this sentiment and believe it applies equally to the spot ether and CME Ether Futures markets. (c) Other Means To Prevent Fraudulent and Manipulative Acts and Practices As noted above, the Commission also permits a listing exchange to demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The Exchange and Sponsor believe that such conditions are present. The Exchange believes that the proposal is designed to protect investors and the public interest. Over the past several years, U.S. investor exposure to ether through OTC ETH Funds has grown. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Ether Futures ETFs and premium/discount volatility and management fees for OTC ETH Funds. The Exchange believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to ether in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks and costs associated with investing in Ether Futures ETFs and operating companies that are imperfect proxies for ether exposure; and (iv) providing an alternative to custodying spot ether. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 Commodity-Based Trust Shares The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed on the Exchange pursuant to the initial and continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and listed ether derivatives via the ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement. Availability of Information In addition to the price transparency of the Benchmark, the Trust will provide information regarding the Trust’s ETH holdings as well as additional data regarding the Trust. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) the current NAV per Share daily and the prior business day’s NAV per Share and the reported BZX Official Closing Price; (b) the BZX Official Closing Price in relation to the NAV per Share as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV per Share; (c) data in chart form displaying the frequency distribution of discounts and premiums of the BZX Official Closing Price against the NAV per Share, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The aforementioned E:\FR\FM\29MYN1.SGM 29MYN1 lotter on DSK11XQN23PROD with NOTICES1 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices information will be published as of the close of business available on the Sponsor’s website at www.vaneck.com, or any successor thereto. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. The Trust will also disseminate its holdings on a daily basis on its website. The IIV will be updated during Regular Trading Hours to reflect changes in the value of the Trust’s ether holdings during the trading day. The IIV may differ from the NAV because NAV is calculated, using the closing value of the Benchmark, once a day at 4:00 p.m. Eastern time whereas the IIV draws prices from the last trade on each constituent platform to produce a relevant, real-time price. The IIV disseminated during Regular Trading Hours should not be viewed as an actual real-time update of the NAV, which will be calculated only once at the end of each trading day. The Trust will provide an IIV per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be widely disseminated on a per Share basis every 15 seconds during the Exchange’s Regular Trading Hours through the facilities of the CTA and CQS high speed lines. In addition, the IIV will be available through on-line information services such as Bloomberg and Reuters. The price of ether will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. As noted above, the Benchmark is calculated every 15 seconds and information about the Benchmark and Benchmark value, including index data and key elements of how the Benchmark is calculated, will be publicly available at https://www.marketvector.com/. Quotation and last sale information for ether is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in ether is available from major market data vendors and from the trading platforms on which ether are traded. Depth of book information is also available from ether trading platforms. The normal trading hours for ether trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s BZX Official Closing Price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. In sum, the Exchange believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act, that this filing sufficiently demonstrates that the CME Ether Futures market represents a regulated market of significant size, and that on the whole the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by investor protection issues that would be resolved by approving this proposal. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. Premium and discount volatility, high fees, rolling costs, insufficient disclosures, and technical hurdles are putting U.S. investor money at risk on a daily basis that could potentially be eliminated through access to a Spot Ether ETP. As such, the Exchange believes that this proposal acts to limit the risk to U.S. investors that are increasingly seeking exposure to ether by providing direct, 1-for-1 exposure to ether in a regulated, transparent, exchange-traded vehicle, specifically by: (i) reducing premium volatility; (ii) reducing management fees through meaningful competition; (iii) providing an alternative to Ether Futures ETFs which will eliminate roll cost; (iv) reducing risks associated with investing in operating companies that are imperfect proxies for ether exposure; and (v) providing an alternative to custodying spot ether. The investor protection issues for U.S. investors has grown significantly over the last several years, through roll costs for Ether Futures ETFs and premium/discount volatility and management fees for OTC ETH Funds. As discussed throughout, this growth investor protection concerns need to be reevaluated and rebalanced with the prevention of fraudulent and manipulative acts and practices concerns that previous disapproval orders have relied upon. Finally, the Exchange notes that in addition to all of the arguments herein which it believes sufficiently establishes the CME Ether Futures market as a regulated market of significant size, it is logically inconsistent to find that the CME Ether PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 46475 Futures market is a significant market as it relates to the CME Ether Futures market, but not a significant market as it relates to the ether spot market for the numerous reasons laid out above. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change, rather will facilitate the listing and trading of an additional exchange-traded product that will enhance competition among both market participants and listing venues, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. 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 rule-comments@ sec.gov. Please include file number SR– CboeBZX–2023–069 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–CboeBZX–2023–069. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the E:\FR\FM\29MYN1.SGM 29MYN1 46476 Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–CboeBZX–2023–069 and should be submitted on or before June 20, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.61 J. Matthew DeLesDernier, Deputy Secretary. [FR Doc. 2024–11706 Filed 5–28–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–100210; File No. SR– GEMX–2024–11] Self-Regulatory Organizations; Nasdaq GEMX, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Cabinet Proximity Option Fee To Establish a Reservation Fee for Cabinets With Power Densities Greater Than 10 kW lotter on DSK11XQN23PROD with NOTICES1 May 22, 2024. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 9, 2024, Nasdaq GEMX, LLC (‘‘GEMX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 61 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 18:05 May 28, 2024 Jkt 262001 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend the Exchange’s Cabinet Proximity Option Fee at General 8, Section 1, as described further below. The text of the proposed rule change is available on the Exchange’s website at https://listingcenter.nasdaq.com/ rulebook/gemx/rules, 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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change 3 is to amend the Exchange’s Cabinet Proximity Option Fee at General 8, Section 1(d) by establishing a reservation fee for cabinets with power densities greater than 10 kilowatts (‘‘kW’’).4 The Exchange currently offers a Cabinet Proximity Option program where, for a monthly fee, customers can obtain an option for future use on available, unused cabinet space in proximity to their existing equipment. Cabinets reserved under the Cabinet Proximity Option program are unused cabinets that customers reserve for future use and can be converted to a powered cabinet at the customer’s request. Under the program, customers can reserve up to maximum of 20 cabinets that the Exchange endeavors to 3 The Exchange initially filed the proposed pricing change on March 1, 2024 (SR–GEMX–2024– 06). On March 13, 2024, the Exchange withdrew that filing and submitted SR–GEMX–2024–08. On May 9, 2024, the Exchange withdrew that filing and submitted this filing. 4 On February 26, 2024, the Exchange filed a proposal to offer the Exchange’s Cabinet Proximity Option program for cabinets with power densities greater than 10 kW. See Securities Exchange Act Release No. 34–99646 (February 29, 2024), 89 FR 16064 (March 6, 2024) (SR–GEMX–2024–04). PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 provide as close as reasonably possible to the customer’s existing cabinet space, taking into consideration power availability within segments of the data center and the overall efficiency of use of data center resources as determined by the Exchange. Should reserved data center space be needed for use, the reserving customer will have three business days to formally contract with the Exchange for full payment for the reserved cabinet space or it will be reassigned. In making determinations to require exercise or relinquishment of reserved space as among numerous customers, the Exchange will take into consideration several factors, including: proximity between available reserved cabinet space and the existing space of a customer seeking additional space for actual cabinet usage; a customer’s ratio of cabinets in use to those reserved; the length of time that a particular reservation(s) has been in place; and any other factor that the Exchange deems relevant to ensure overall efficiency in use of the data center space.5 The applicable monthly fees for the Cabinet Proximity Option program are in General 8, Section 1(d). The Cabinet Proximity Option fee is $1,055/month per medium or low density cabinets and $1,583/month per medium/high or high density cabinets.6 The Exchange proposes to establish a Cabinet Proximity Option fee of $3,000 for cabinets with power densities greater than 10 kW. As such, the Exchange proposes to amend its fee schedule at General 8, Section 1(d) to reflect the addition to the existing Cabinet Proximity Option fees. Currently, the Exchange offers Super High Density Cabinets with power densities greater than 10 kW and less than or equal to 17.3 kW.7 In addition, the Exchange intends to expand its data center and offer cabinets with increased power densities in the future, including power densities greater than 17.3 kW.8 5 See Securities Exchange Act Release No. 34– 62397 (June 28, 2010), 75 FR 38860 (July 6, 2010) (SR–NASDAQ–2010–019). In 2017, the Exchange synchronized its options for connecting to the Exchange with that of its sister exchanges and adopted uniform colocation services, including the Cabinet Proximity Option program. See Securities Exchange Act Release No. 34–81902 (October 19, 2017), 82 FR 49453 (October 25, 2017) (SR–GEMX– 2017–48). 6 Low density cabinets are cabinets with power densities less than or equal to 2.88 kW. Medium density cabinets are cabinets with power densities greater than 2.88 kW and less than or equal to 5 kW. Medium/High density cabinets are cabinets with power densities greater than 5 kW and less than or equal to 7 kW. High density cabinets are cabinets with power densities greater than 7 kW and less than 10 kW. See General 8, Section 1(a). 7 See General 8, Section 1(a). 8 The Exchange will submit proposed rule change(s) to the Commission regarding any E:\FR\FM\29MYN1.SGM 29MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 104 (Wednesday, May 29, 2024)]
[Notices]
[Pages 46462-46476]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11706]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100214; File No. SR-CboeBZX-2023-069]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 2 to a Proposed Rule Change To List and Trade 
Shares of the VanEck Ethereum Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares

May 22, 2024.
    On September 6, 2023, Cboe BZX Exchange, Inc. (``BZX'' 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 (``Shares'') of the 
VanEck Ethereum Trust (f/k/a VanEck Ethereum ETF) under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares. The proposed rule change was 
published for comment in the Federal Register on September 26, 2023.\3\ 
On September 27, 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 December 18, 2023, 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 February 16, 
2024, the Exchange filed Amendment No. 1, which replaced and superseded 
the proposed rule change in its entirety. On March 20, 2024, the 
Commission provided notice of Amendment No. 1 to the proposed rule 
change and designated a longer period for Commission action on the 
proposed rule change, as modified by Amendment No. 1.\8\ On May 21, 
2024, the Exchange filed Amendment No. 2 to the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
the Exchange. Amendment No. 2 amended and replaced the proposed rule 
change, as modified by Amendment No. 1, in its entirety. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change, as modified by Amendment No. 2, from interested persons.
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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. 98457 (Sept. 20, 
2023), 88 FR 66076. Comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-cboebzx-2023-069/srcboebzx2023069.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 98566, 88 FR 68236 
(Oct. 3, 2023).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 99195, 88 FR 88683 
(Dec. 22, 2023).
    \8\ See Securities Exchange Act Release No. 99782, 89 FR 21032 
(Mar. 26, 2024).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (``Commission'' or ``SEC'') 
a proposed rule change to list and trade shares of the VanEck Ethereum 
Trust (the ``Trust''),\9\ under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares.
---------------------------------------------------------------------------

    \9\ The Trust was formed as a Delaware statutory trust on June 
22, 2021 and is operated as a grantor trust for U.S. federal tax 
purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------

    The text of the proposed rule change is also available on the 
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    This Amendment No. 2 to SR-CboeBZX-2023-069 amends and

[[Page 46463]]

replaces in its entirety the proposal as originally submitted on 
September 6, 2023 and as amended by Amendment No. 1 on February 16, 
2024. The Exchange submits this Amendment No. 2 in order to clarify 
certain points and add additional details to the proposal.
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\10\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\11\ VanEck Digital Assets, LLC is 
the sponsor of the Trust (``Sponsor''). The Shares will be registered 
with the Commission by means of the Trust's registration statement on 
Form S-1 (the ``Registration Statement'').\12\
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    \10\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \11\ Any of the statements or representations regarding the 
index composition, the description of the portfolio or reference 
assets, limitations on portfolio holdings or reference assets, 
dissemination and availability of index, reference asset, and 
intraday indicative values, or the applicability of Exchange listing 
rules specified in this filing to list a series of Other Securities 
(collectively, ``Continued Listing Representations'') shall 
constitute continued listing requirements for the Shares listed on 
the Exchange.
    \12\ See Amendment No. 1 to Registration Statement on Form S-1, 
dated February 16, 2024, submitted to the Commission by the Sponsor 
on behalf of the Trust (333-255888). The descriptions of the Trust, 
the Shares, and the Benchmark contained herein are based, in part, 
on information in the Registration Statement. The Registration 
Statement is not yet effective and the Shares will not trade on the 
Exchange until such time that the Registration Statement is 
effective.
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    The Commission has historically approved or disapproved exchange 
filings to list and trade series of Trust Issued Receipts, including 
spot-based Commodity-Based Trust Shares, on the basis of whether the 
listing exchange has in place a comprehensive surveillance sharing 
agreement with a regulated market of significant size related to the 
underlying commodity to be held.\13\ With this in mind, the Chicago 
Mercantile Exchange (``CME'') ether futures (``Ether Futures'') market, 
which launched in February 2021, is the proper market to consider in 
determining whether there is a related regulated market of significant 
size.
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    \13\ See Securities Exchange Act Release No. 78262 (July 8, 
2016), 81 FR 78262 (July 14, 2016) (the ``Winklevoss Proposal''). 
The Winklevoss Proposal was subsequently disapproved by the 
Commission. See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018) (the ``Winklevoss Order''). 
Prior orders from the Commission have pointed out that in every 
prior approval order for Commodity-Based Trust Shares, there has 
been a derivatives market that represents the regulated market of 
significant size, generally a Commodity Futures Trading Commission 
(the ``CFTC'') regulated futures market. Further to this point, the 
Commission's prior orders have noted that the spot commodities and 
currency markets for which it has previously approved spot ETPs are 
generally unregulated and that the Commission relied on the 
underlying futures market as the regulated market of significant 
size that formed the basis for approving the series of Currency and 
Commodity-Based Trust Shares, including gold, silver, platinum, 
palladium, copper, and other commodities and currencies. The 
Commission specifically noted in the Winklevoss Order that the 
approval order issued related to the first spot gold ETP ``was based 
on an assumption that the currency market and the spot gold market 
were largely unregulated.'' See Winklevoss Order at 37592. As such, 
the regulated market of significant size test does not require that 
the spot ether market be regulated in order for the Commission to 
approve this proposal, and precedent makes clear that an underlying 
market for a spot commodity or currency being a regulated market 
would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to 
surveillance sharing agreements with the underlying futures market 
in order to determine whether such products were consistent with the 
Act.
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    Recently, the Commission issued an order granting approval for 
proposals to list bitcoin-based commodity trust and bitcoin-based trust 
issued receipts (these proposed funds are nearly identical to the 
Trust, but proposed to hold bitcoin instead of ether) (``Spot Bitcoin 
ETPs'').\14\ By way of background, in 2022 the Commission disapproved 
proposals \15\ to list Spot Bitcoin ETPs, including a proposal 
sponsored by Grayscale Investments, LLC (``Grayscale'').\16\ Grayscale 
appealed the decision with the U.S. Court of Appeals for the D.C. 
Circuit, which held that the Commission had failed to adequately 
explain its reasoning that the proposing exchange had not established 
that the CME bitcoin futures market was a market of significant size 
related to spot bitcoin, or that the ``other means'' asserted were 
sufficient to satisfy the statutory standard. As a result, the court 
vacated the Grayscale Order and remanded the matter to the 
Commission.\17\ In considering the remand of the Grayscale Order and 
Spot Bitcoin ETPs, the Commission determined in the Spot Bitcoin ETP 
Approval Order that the CME bitcoin futures (``Bitcoin Futures'') 
market is highly correlated to spot bitcoin. Specifically, the 
Commission stated:
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    \14\ See Exchange Act Release No. 99306 (January 10, 2024), 89 
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE 
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; 
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) (the ``Spot Bitcoin 
ETP Approval Order'').
    \15\ See 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, Securities Exchange Act Release No. 
97102 (Mar. 10, 2023), 88 FR 16055 (Mar. 15, 2023) (SR-CboeBZX-2022-
035) (``VanEck Order II'') and n.11 therein for the complete list of 
previous proposals.
    \16\ See Securities Exchange Act Release No. 95180 (June 29, 
2022) 87 FR 40299 (July 6, 2022) (SR-NYSEArca-2021-90) (Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
to List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares) (the ``Grayscale 
Order'').
    \17\ See Grayscale Investments, LLC v. SEC, 82 F.4th 1239 (D.C. 
Cir. 2023).

    [B]ased on the record before the Commission and the improved 
quality of the correlation analysis in the record . . . the 
Commission is able to conclude that fraud or manipulation that 
impacts prices in spot bitcoin markets would likely similarly impact 
CME bitcoin futures prices. And because the CME's surveillance can 
assist in detecting those impacts on CME bitcoin futures prices, the 
Exchanges' comprehensive surveillance-sharing agreement with the 
CME--a U.S. regulated market whose bitcoin futures market is 
consistently highly correlated to spot bitcoin, albeit not of 
``significant size'' related to spot bitcoin--can be reasonably 
expected to assist in surveilling for fraudulent and manipulative 
acts and practices in the specific context of the [p]roposals.\18\
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    \18\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

    As further discussed below, both the Exchange and the Sponsor 
believe that this proposal and the included analysis are sufficient to 
establish that the CME Ether Futures market represents a regulated 
market of significant size and that this proposal should be approved.
Background
    Ethereum is free software that is hosted on computers distributed 
throughout the globe. It employs an array of logic, called a protocol, 
to create a unified understanding of ownership, commercial activity, 
and business logic. This allows users to engage in commerce without the 
need to trust any of its participants or counterparties. Ethereum code 
creates verifiable and unambiguous rules that assign clear, strong 
property rights to create a platform for unrestrained business 
formation and free exchange. It is widely understood that no single 
intermediary or entity operates or controls the Ethereum network 
(referred to as ``decentralization''), the transaction validation and 
recordkeeping infrastructure of which is collectively maintained by a 
disparate user base. The Ethereum network allows people to exchange 
tokens of value, referred to as ``ether'' or ``ETH'', which are 
recorded on a distributed public recordkeeping system or ledger known 
as a blockchain (the ``Ethereum Blockchain''), and which can be used to 
pay for goods and services, including computational power on the 
Ethereum network, or converted to fiat currencies, such as the U.S. 
dollar, at rates determined on

[[Page 46464]]

digital asset platforms or in individual peer-to-peer transactions. 
Furthermore, by combining the recordkeeping system of the Ethereum 
Blockchain with a flexible scripting language that is programmable and 
can be used to implement sophisticated logic and execute a wide variety 
of instructions, the Ethereum network is intended to act as a 
foundational infrastructure layer on top of which users can build their 
own custom software programs, as an alternative to centralized web 
servers. In theory, anyone can build their own custom software programs 
on the Ethereum network. In this way, the Ethereum network represents a 
project to expand blockchain deployment beyond a limited-purpose, peer-
to-peer private money system into a flexible, distributed alternative 
computing infrastructure that is available to all. On the Ethereum 
network, ETH is the unit of account that users pay for the 
computational resources consumed by running their programs.
    Heretofore, U.S. retail investors have lacked a U.S. regulated, 
U.S. exchange-traded vehicle to gain exposure to ETH. Instead current 
options include: (i) facing the counter-party risk, legal uncertainty, 
technical risk, and complexity associated with accessing spot ether; or 
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high 
management fees and potentially volatile premiums and discounts. 
Meanwhile, investors in other countries, including Germany, Canada, 
Switzerland, and France, are able to use more traditional exchange 
listed and traded products (including exchange-traded funds holding 
physical ETH) to gain exposure to ETH. Investors across Europe and 
Canada have access to products which trade on regulated exchanges and 
provide exposure to a broad array of spot crypto assets. U.S. 
investors, by contrast, are left with fewer and more risky means of 
getting ether exposure.\19\
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    \19\ The Exchange notes that the list of countries above is not 
exhaustive and that securities regulators in a number of additional 
countries have either approved or otherwise allowed the listing and 
trading of Spot Ether ETPs.
---------------------------------------------------------------------------

    To this point, the lack of an ETP that holds spot ETH (a ``Spot 
Ether ETP'') exposes U.S. investor assets to significant risk because 
investors that would otherwise seek cryptoasset exposure through a Spot 
Ether ETP are forced to find alternative exposure through generally 
riskier means. For example, investors in OTC ETH Funds are not afforded 
the benefits and protections of regulated Spot Ether ETPs, resulting in 
retail investors suffering losses due to drastic movements in the 
premium/discount of OTC ETH Funds. An investor who purchased the 
largest OTC ETH Fund in January 2021 and held the position at the end 
of 2022 would have suffered a 69% loss due to the premium/discount, 
even if the price of ETH did not change. Many retail investors likely 
suffered losses due to this premium/discount in OTC ETH Fund trading; 
all such losses could have been avoided if a Spot Ether ETP had been 
available. Additionally, many U.S. investors that held their digital 
assets in accounts at FTX,\20\ Celsius Network LLC,\21\ BlockFi 
Inc.\22\ and Voyager Digital Holdings, Inc.\23\ have become unsecured 
creditors in the insolvencies of those entities. If a Spot Ether ETP 
was available, it is likely that at least a portion of the billions of 
dollars tied up in those proceedings would still reside in the 
brokerage accounts of U.S. investors, having instead been invested in a 
transparent, regulated, and well-understood structure--a Spot Ether 
ETP. To this point, approval of a Spot Ether ETP would represent a 
major win for the protection of U.S. investors in the cryptoasset 
space. The Trust, like all other series of Commodity-Based Trust 
Shares, is designed to protect investors against the risk of losses 
through fraud and insolvency that arise by holding digital assets, 
including ETH, on centralized platforms.
---------------------------------------------------------------------------

    \20\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \21\ See Celsius Network LLC, et al., Case No. 22-10964.
    \22\ See BlockFi Inc., Case No. 22-19361.
    \23\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

Ether Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the 
launch of ETFs registered under the Investment Company Act of 1940, as 
amended (the ``1940 Act'') that provide exposure to ether primarily 
through CME Ether Futures (``Ether Futures ETFs''). Allowing such 
products to list and trade is a productive first step in providing U.S. 
investors and traders with transparent, exchange-listed tools for 
expressing a view on ether.
    The structure of Ether Futures ETFs provides negative outcomes for 
buy and hold investors as compared to a Spot Ether ETP. Specifically, 
the cost of rolling CME Ether Futures contracts will cause the Ether 
Futures ETFs to lag the performance of ether itself and could cost U.S. 
investors significant amounts of money on an annual basis compared to 
Spot Ether ETPs. Such rolling costs would not be required for Spot 
Ether ETPs that hold ether. Further, Ether Futures ETFs could 
potentially hit CME position limits, which would force an Ether Futures 
ETF to invest in non-futures assets for ether exposure and cause 
potential investor confusion and lack of certainty about what such 
Ether Futures ETFs are actually holding to try to get exposure to 
ether, not to mention completely changing the risk profile associated 
with such an ETF. While Ether Futures ETFs represent a useful trading 
tool, they are clearly a sub-optimal structure for U.S. investors that 
are looking for long-term exposure to ether that will unnecessarily 
cost U.S. investors significant amounts of money every year compared to 
Spot Ether ETPs and the Exchange believes that any proposal to list and 
trade a Spot Ether ETP should be reviewed by the Commission with this 
important investor protection context in mind.
    To the extent the Commission may view differential treatment of 
Ether Futures ETFs and Spot Ether ETPs as warranted based on the 
Commission's concerns about the custody of physical ether that a Spot 
Ether ETP would hold (compared to cash-settled futures contracts),\24\ 
the Sponsor believes this concern is mitigated to a significant degree 
by the custodial arrangements that the Trust has contracted with the 
Custodian (as defined below) to provide, as further outlined below. In 
the custody statement, the Commission stated that the fourth step that 
a broker-dealer could take to shield traditional securities customers 
and others from the risks and consequences of digital asset security 
fraud, theft, or loss is to establish, maintain, and enforce reasonably 
designed written policies, procedures, and controls for safekeeping and 
demonstrating the broker-dealer has exclusive possession or control 
over digital asset securities that are consistent with industry best 
practices to protect against the theft, loss, and unauthorized and 
accidental use of the private keys necessary to access and transfer the 
digital asset securities the broker-dealer holds in custody. While 
ether is not a security and the Custodian is not a broker-dealer, the 
Sponsor believes that similar considerations apply to the Custodian's 
holding of the Trust's ether. After diligent investigation, the Sponsor 
believes that the Custodian's policies, procedures, and controls for 
safekeeping,

[[Page 46465]]

exclusively possessing, and controlling the Trust's ether holdings are 
consistent with industry best practices to protect against the theft, 
loss, and unauthorized and accidental use of the private keys. As a 
trust company chartered by the New York Department of Financial 
Services (``NYDFS''), the Sponsor notes that the Custodian is subject 
to extensive regulation and has among longest track records in the 
industry of providing custodial services for digital asset private 
keys. Under the circumstances, therefore, to the extent the Commission 
believes that its concerns about the risks of spot ether custody 
justifies differential treatment of a Ether Futures ETF versus a Spot 
Ether ETP, the Sponsor believes that the fact that the Custodian 
employs the same types of policies, procedures, and safeguards in 
handling spot ether that the Commission has stated that broker-dealers 
should implement with respect to digital asset securities would appear 
to weaken the justification for treating a Ether Futures ETF compared 
to a Spot Ether ETP differently due to spot ether custody concerns.
---------------------------------------------------------------------------

    \24\ See, e.g., Division of Investment Management Staff, Staff 
Statement on Funds Registered Under the Investment Company Act 
Investing in the Bitcoin Futures Market, May 11, 2021 (``The Bitcoin 
Futures market also has not presented the custody challenges 
associated with some cryptocurrency-based investing because the 
futures are cash-settled'').
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list Spot Ether ETPs compared to 
the Ether Futures ETFs would lead to the conclusion that Spot Ether 
ETPs should be available to U.S. investors and, as such, this proposal 
and other comparable proposals to list and trade Spot Ether ETPs should 
be approved by the Commission. Stated simply, U.S. investors will 
continue to lose significant amounts of money from holding Ether 
Futures ETFs as compared to Spot Ether ETPs, losses which could be 
prevented by the Commission approving Spot Ether ETPs. Additionally, 
any concerns related to preventing fraudulent and manipulative acts and 
practices related to Spot Ether ETPs would apply equally to the spot 
markets underlying the futures contracts held by an Ether Futures ETF. 
Both the Exchange and Sponsor believe that the CME Ether Futures market 
is a regulated market of significant size and that such manipulation 
concerns are mitigated, as described extensively below. After allowing 
the listing and trading of Ether Futures ETFs that hold primarily CME 
Ether Futures, however, the only consistent outcome would be approving 
Spot Ether ETPs on the basis that the CME Ether Futures market is a 
regulated market of significant size.
    Given the current landscape, approving this proposal (and others 
like it) and allowing Spot Ether ETPs to be listed and traded alongside 
Ether Futures ETFs and Spot Bitcoin ETPs would establish a consistent 
regulatory approach, provide U.S. investors with choice in product 
structures for ether exposure, and offer flexibility in the means of 
gaining exposure to ether through transparent, regulated, U.S. 
exchange-listed vehicles.
CME Ether Futures \25\
---------------------------------------------------------------------------

    \25\ Unless otherwise noted, all data and analysis presented in 
this section and referenced elsewhere in the filing has been 
provided by the Sponsor.
---------------------------------------------------------------------------

    CME began offering trading in CME Ether Futures in February 2021. 
Each contract represents 50 ETH and is based on the CME CF Ether-Dollar 
Reference Rate.\26\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to 
CME Ether Futures have generally trended up since launch, although some 
metrics have slowed recently. For example, there were 76,293 CME Ether 
Futures contracts traded in July 2023 (approximately $7.3 billion) 
compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts 
traded in July 2021, and July 2022 respectively.\27\ The Sponsor's 
research indicates daily correlation between the spot ETH and the CME 
Ether Futures is 0.998 from the period of 9/1/22 through 9/1/23.
---------------------------------------------------------------------------

    \26\ The CME CF Ether-Dollar Reference Rate is based on a 
publicly available calculation methodology based on pricing sourced 
from several crypto trading platforms, including Bitstamp, Coinbase, 
Gemini, itBit, Kraken, and LMAX Digital.
    \27\ Source: CME, 7/31/23.

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[[Page 46466]]

    The number of large open interest holders \28\ and unique accounts 
trading CME Ether Futures have both increased, even in the face of 
heightened ether price volatility.
---------------------------------------------------------------------------

    \28\ A large open interest holder in CME Ether Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
1,250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than 
$2.3 million in CME Ether Futures.
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[[Page 46467]]


[GRAPHIC] [TIFF OMITTED] TN29MY24.018

[GRAPHIC] [TIFF OMITTED] TN29MY24.019

Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\29\ including Commodity-Based Trust Shares,\30\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\31\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the Act and that this filing sufficiently

[[Page 46468]]

demonstrates that the CME Ether Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the Commission are sufficiently 
mitigated to the point that they are outweighed by quantifiable 
investor protection issues that would be resolved by approving this 
proposal.
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    \29\ See Exchange Rule 14.11(f).
    \30\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \31\ The Exchange believes that ETH is resistant to price 
manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of ETH trading render it difficult and 
prohibitively costly to manipulate the price of ETH. The 
fragmentation across ETH platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of ETH prices 
through continuous trading activity challenging. To the extent that 
there are ETH platforms engaged in or allowing wash trading or other 
activity intended to manipulate the price of ETH on other platforms, 
such pricing does not normally impact prices on other platforms 
because participants will generally ignore markets with quotes that 
they deem non-executable. Moreover, the linkage between the ETH 
markets and the presence of arbitrageurs in those markets means that 
the manipulation of the price of ETH on any single venue would 
require manipulation of the global ETH price in order to be 
effective. Arbitrageurs must have funds distributed across multiple 
trading platforms in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular ETH platform or OTC 
platform. As a result, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \32\ with a regulated market of significant size. 
Both the Exchange and CME are members of the Intermarket Surveillance 
Group (``ISG'').\33\ The only remaining issue to be addressed is 
whether the CME Ether Futures market constitutes a market of 
significant size, which both the Exchange and the Sponsor believe that 
it does. The terms ``significant market'' and ``market of significant 
size'' include a market (or group of markets) as to which: (a) there is 
a reasonable likelihood that a person attempting to manipulate the ETP 
would also have to trade on that market to manipulate the ETP, so that 
a surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct; and (b) it is unlikely that trading 
in the ETP would be the predominant influence on prices in that 
market.\34\
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    \32\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance- sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in the ISG 
constitutes such a surveillance sharing agreement. See Securities 
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix 
Disapproval'').
    \33\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \34\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\35\
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    \35\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
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(a) Manipulation of the ETP
    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct. In light of the similarly high 
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME 
Bitcoin Futures, applying the same rationale that the Commission 
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order 
also indicates that this test is satisfied for this proposal. As noted 
above, in the Spot Bitcoin ETP Approval Order, the SEC concluded that:

. . . fraud or manipulation that impacts prices in spot bitcoin 
markets would likely similarly impact CME bitcoin futures prices. 
And because the CME's surveillance can assist in detecting those 
impacts on CME bitcoin futures prices, the Exchanges' comprehensive 
surveillance-sharing agreement with the CME . . . can be reasonably 
expected to assist in surveilling for fraudulent and manipulative 
acts and practices in the specific context of the [p]roposals.\36\
---------------------------------------------------------------------------

    \36\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

    The assumptions from this statement are also true for CME Ether 
Futures. CME Ether Futures pricing is based on pricing from spot ether 
markets. The statement from the Spot Bitcoin ETP Approval Order that 
the surveillance-sharing agreement with the CME ``can be reasonably 
expected to assist in surveilling for fraudulent and manipulative acts 
and practices in the specific context of the [p]roposals'' makes clear 
that the Commission believes that CME's surveillance can capture the 
effects of trading on the relevant spot markets on the pricing of CME 
Bitcoin Futures. This same logic would extend to CME Ether Futures 
markets where CME's surveillance would be able to capture the effects 
of trading on the relevant spot markets on the pricing of CME Ether 
Futures.
(b) Predominant Influence on Prices in Spot and ETH Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME Ether Futures 
market for a number of reasons. First, because the Trust would not hold 
CME Ether Futures contracts, the only way that it could be the 
predominant force on prices in that market is through the spot markets 
that CME Ether Futures contracts use for pricing.\37\ The Sponsor notes 
that ether total 24-hour spot trading volume has averaged $9.4 billion 
over the year ending September 1, 2023.\38\ The Sponsor expects that 
the Trust would represent a very small percentage of this daily trading 
volume in the spot ether market even in its most aggressive projections 
for the Trust's assets and therefore could not be the predominant force 
on prices in the CME Ether Futures market. Second, much like the CME 
Bitcoin Futures market, the CME Ether Futures market has progressed and 
matured significantly. As the U.S. Court of Appeals for the D.C. 
Circuit found in its review of the Grayscale Order, ``Because the spot 
market is deeper and more liquid than the futures market, manipulation 
should be more difficult, not less.'' The Exchange and Sponsor agree 
with this sentiment and believe it applies equally to the spot ether 
and CME Ether Futures markets.
---------------------------------------------------------------------------

    \37\ This logic is reflected by the U.S. Court of Appeals for 
the D.C. Circuit on its review of the Grayscale Order at 17-18. See 
Grayscale Investments, LLC v. SEC, 82 F. 4th 1239 (D.C. Cir. 2023). 
Specifically, the court found that ``Because Grayscale owns no 
futures contracts, trading in Grayscale can affect the futures 
market only through the spot market . . . But Grayscale holds just 
3.4 percent of outstanding bitcoin, and the Commission did not 
suggest Grayscale can dominate the price of bitcoin.''
    \38\ Source: TokenTerminal.
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(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The

[[Page 46469]]

Exchange and Sponsor believe that such conditions are present.
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to ether through OTC ETH Funds has grown. With that 
growth, so too has grown the quantifiable investor protection issues to 
U.S. investors through roll costs for Ether Futures ETFs and premium/
discount volatility and management fees for OTC ETH Funds. The Exchange 
believes that the concerns related to the prevention of fraudulent and 
manipulative acts and practices have been sufficiently addressed to be 
consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, also believes that such concerns are now 
outweighed by these investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to ether in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in Ether Futures ETFs and operating companies that are 
imperfect proxies for ether exposure; and (iv) providing an alternative 
to custodying spot ether.
VanEck Ethereum ETF
    Delaware Trust Company is the trustee (``Trustee''). The State 
Street Bank and Trust Company will be the administrator 
(``Administrator'') and transfer agent (``Transfer Agent'') and will be 
responsible for the custody of the Trust's cash and cash equivalents 
\39\ (the ``Cash Custodian''). Van Eck Securities Corporation will be 
the marketing agent (``Marketing Agent'') in connection with the 
creation and redemption of ``Creation Baskets'', as defined below, of 
Shares. Gemini Trust Company, LLC, a third-party custodian (the 
``Custodian''), will be responsible for custody of the Trust's ether.
---------------------------------------------------------------------------

    \39\ Cash equivalents are short-term instruments with maturities 
of less than 3 months.
---------------------------------------------------------------------------

    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the Trust's net assets. 
The Trust's assets will only consist of ether, cash and cash 
equivalents.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\40\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

    Neither the Trust, nor the Sponsor, nor the Custodian, nor any 
other person associated with the Trust will, directly or indirectly, 
engage in action where any portion of the Trust's ETH becomes subject 
to the Ethereum proof-of-stake validation or is used to earn additional 
ETH or generate income or other earnings. The Trust will not acquire 
and will disclaim any incidental right (``IR'') or IR asset received, 
for example as a result of forks or airdrops, and such assets will not 
be taken into account for purposes of determining NAV.
    When the Trust sells or redeems its Shares, it will do so in cash 
transactions in blocks of 25,000 Shares (a ``Creation Basket'') at the 
Trust's net asset value (``NAV''). For creations, authorized 
participants will deliver cash to the Trust's account with the Cash 
Custodian in exchange for Shares. Upon receipt of an approved creation 
order, the Sponsor, on behalf of the Trust, will submit an order to buy 
the amount of ether represented by a Creation Basket. Based off ether 
executions, the Cash Custodian will request the required cash from the 
authorized participant; the Transfer Agent will only issue Shares when 
the authorized participant has made delivery of the cash. Following 
receipt by the Cash Custodian of the cash from an authorized 
participant, the Sponsor, on behalf of the Trust, will approve an order 
with one or more previously onboarded trading partners to purchase the 
amount of ether represented by the Creation Basket. This purchase of 
ether will normally be cleared through an affiliate of the Custodian 
(although the purchase may also occur directly with the trading 
partner) and the ether will settle directly into the Trust's account at 
the Custodian.\41\ Authorized participants may then offer Shares to the 
public at prices that depend on various factors, including the supply 
and demand for Shares, the value of the Trust's assets, and market 
conditions at the time of a transaction. Shareholders who buy or sell 
Shares during the day from their broker may do so at a premium or 
discount relative to the NAV of the Shares of the Trust.
---------------------------------------------------------------------------

    \41\ For redemptions, the process will occur in the reverse 
order. Upon receipt of an approved redemption order, the Sponsor, on 
behalf of the Trust, will submit an order to sell the amount of 
ether represented by a Creation Basket and the cash proceeds will be 
remitted to the authorized participant when the 25,000 Shares are 
received by the Transfer Agent.
---------------------------------------------------------------------------

Investment Objective
    According to the Registration Statement and as further described 
below, the investment objective of the Trust is for the Shares to 
reflect the performance of ether less the expenses of the Trust's 
operations. In seeking to achieve its investment objective, the Trust 
will hold ether and will value its Shares daily based on the reported 
Benchmark (as discussed below) and process all creations and 
redemptions in cash transactions with authorized participants. The 
Trust is not actively managed.
The Benchmark
    As described in the Registration Statement, the Trust will use the 
MarketVector^TM Ethereum Benchmark Rate (the ``Benchmark'') 
to calculate the Trust's NAV. The Benchmark is designed to be a robust 
price for ETH in USD and there is no component other than ETH in the 
Benchmark. The underlying ether platforms (the ``constituent 
platforms'') are sourced from the industry leading CryptoCompare 
Exchange Benchmark review report. The CryptoCompare Exchange Benchmark 
review report was established in 2019 as a tool designed to bring 
clarity to the digital trading platform sector by providing a framework 
for assessing risk and in turn bringing transparency and accountability 
to a complex and rapidly evolving market.\42\ The current constituent 
platforms of the Benchmark is Bitstamp, Coinbase, Gemini, itBit, and 
Kraken. CryptoCompare Data Limited is the index sponsor and index 
administrator for the Benchmark. CryptoCompare Data Limited is the

[[Page 46470]]

calculation agent for the Benchmark. The Benchmark is calculated daily 
between 00:00 and 24:00 (CET) and the Benchmark values are disseminated 
to data vendors every fifteen seconds. The Benchmark is disseminated in 
USD and the closing value is calculated at 16:00:00 ET with fixed 16:00 
ether platform rates.
---------------------------------------------------------------------------

    \42\ The CryptoCompare Exchange Benchmark review report 
methodology utilizes a combination of qualitative and quantitative 
metrics to analyze a comprehensive data set across eight categories 
of evaluation legal/regulation, KYC/transaction risk, data 
provision, security, team/exchange, asset quality/diversity, market 
quality and negative events. The CryptoCompare Exchange Benchmark 
review report assigns a grade to each platform which helps identify 
what it believes to be the lowest risk platforms in the industry. 
Based on the CryptoCompare Exchange Benchmark review report, 
MarketVector Indexes initially selects the top five platforms by 
rank for inclusion in the MarketVector^TM Ethereum 
Benchmark Rate. If an eligible platform is downgraded by two or more 
notches in a semi-annual review and is no longer in the top five by 
rank, it is replaced by the highest ranked non-component platform. 
Adjustments to platform coverage are announced four business days 
prior to the first business day of each of June and December 23:00 
CET. The MarketVector^TM Ethereum Benchmark Rate is 
rebalanced at 16:00:00 GMT/BST on the last business day of each of 
May and November.
---------------------------------------------------------------------------

    In calculating the closing value of the Benchmark, the methodology 
captures trade prices and sizes from ether platforms and examines 
twenty three-minute periods leading up to 4:00 p.m. ET. It then 
calculates an equal-weighted average of the volume-weighted median 
price of these twenty three-minute periods, removing the highest and 
lowest contributed prices. Using twenty consecutive three-minute 
segments over a sixty-minute period means malicious actors would need 
to sustain efforts to manipulate the market over an extended period of 
time, or would need to replicate efforts multiple times across ether 
platforms, potentially triggering review. This extended period also 
supports authorized participant activity by capturing volume over a 
longer time period, rather than forcing authorized participants to mark 
an individual close or auction. The use of a median price reduces the 
ability of outlier prices to impact the NAV, as it systematically 
excludes those prices from the NAV calculation. The use of a volume-
weighted median (as opposed to a traditional median) serves as an 
additional protection against attempts to manipulate the NAV by 
executing a large number of low-dollar trades, because any manipulation 
attempt would have to involve a majority of global spot ETH volume in a 
three-minute window to have any influence on the NAV. As discussed in 
the Registration Statement, removing the highest and lowest prices 
further protects against attempts to manipulate the NAV, requiring bad 
actors to act on multiple ether platforms at once to have any ability 
to influence the price.
Net Asset Value
    NAV means the total assets of the Trust (which includes all ether, 
cash, and cash equivalents) less total liabilities of the Trust. The 
Administrator determines the NAV of the Trust on each day that the 
Exchange is open for regular trading, as promptly as practical after 
4:00 p.m. ET based on the closing value of the Benchmark. The NAV of 
the Trust is the aggregate value of the Trust's assets less its 
estimated accrued but unpaid liabilities (which include accrued 
expenses). In determining the NAV, the Administrator values the ether 
held by the Trust based on the closing value of the Benchmark as of 
4:00 p.m. ET. The Administrator also determines the NAV per Share.
    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. The Sponsor will monitor for significant events related to 
crypto assets that may impact the value of ether and will determine, in 
good faith, and in accordance with its valuation policies and 
procedures, whether to fair value the Trust's ether on a given day 
based on whether certain pre-determined criteria have been met. For 
example, if the closing value of the Benchmark deviates by more than a 
pre-determined amount from an alternate benchmark available to the 
Sponsor, the Sponsor may determine to utilize an alternate benchmark, 
such as the MarketVector\TM\ Ethereum Index or the S&P Ethereum Index. 
The Sponsor may also fair value the Trust's ether using observed market 
transactions from various trading platforms, including some or all of 
the trading platforms included in the Benchmark.\43\
---------------------------------------------------------------------------

    \43\ Any alternative method to determining NAV will only be 
employed on an ad hoc basis. Any permanent change to the calculation 
of the NAV would require a proposed rule change under Rule 19b-4.
---------------------------------------------------------------------------

Availability of Information
    In addition to the price transparency of the Benchmark, the Trust 
will provide information regarding the Trust's ETH holdings as well as 
additional data regarding the Trust. The website for the Trust, which 
will be publicly accessible at no charge, will contain the following 
information: (a) the current NAV per Share daily and the prior business 
day's NAV per Share and the reported BZX Official Closing Price; \44\ 
(b) the BZX Official Closing Price in relation to the NAV per Share as 
of the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV per Share; (c) data in chart 
form displaying the frequency distribution of discounts and premiums of 
the BZX Official Closing Price against the NAV per Share, within 
appropriate ranges for each of the four previous calendar quarters (or 
for the life of the Trust, if shorter); (d) the prospectus; and (e) 
other applicable quantitative information. The aforementioned 
information will be published as of the close of business available on 
the Sponsor's website at www.vaneck.com, or any successor thereto. The 
NAV for the Trust will be calculated by the Administrator once a day 
and will be disseminated daily to all market participants at the same 
time. Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the Consolidated Tape 
Association (``CTA''). The Trust will also disseminate its holdings on 
a daily basis on its website.
---------------------------------------------------------------------------

    \44\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

    The Intraday Indicative Value (``IIV'') will be updated during 
Regular Trading Hours to reflect changes in the value of the Trust's 
ether holdings during the trading day. The IIV may differ from the NAV 
because NAV is calculated, using the closing value of the Benchmark, 
once a day at 4:00 p.m. Eastern time whereas the IIV draws prices from 
the last trade on each constituent platform \45\ to produce a relevant, 
real-time price. The IIV disseminated during Regular Trading Hours 
should not be viewed as an actual real-time update of the NAV, which 
will be calculated only once at the end of each trading day. The Trust 
will provide an IIV per Share updated every 15 seconds, as calculated 
by the Exchange or a third-party financial data provider during the 
Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV 
will be widely disseminated on a per Share basis every 15 seconds 
during the Exchange's Regular Trading Hours through the facilities of 
the CTA and Consolidated Quotation System (CQS) high speed lines. In 
addition, the IIV will be available through on-line information 
services such as Bloomberg and Reuters.
---------------------------------------------------------------------------

    \45\ The constituent platforms for purposes of calculating IIV 
are Gemini, Bitstamp, and Bitfinex.
---------------------------------------------------------------------------

    The price of ether will be made available by one or more major 
market data vendors, updated at least every 15 seconds during Regular 
Trading Hours.
    As noted above, the Benchmark is calculated every 15 seconds and 
information about the Benchmark and Benchmark value, including index 
data and key elements of how the Benchmark is calculated, will be 
publicly available at https://www.marketvector.com/.
    Quotation and last sale information for ether is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. Information relating to trading, including price 
and volume information, in ether is available from major market data 
vendors and from the trading platforms on which ether are traded. Depth 
of book information is also available from ether trading platforms. The 
normal trading hours for

[[Page 46471]]

ether trading platforms are 24 hours per day, 365 days per year.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's BZX Official Closing Price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. Quotation and last-sale information 
regarding the Shares will be disseminated through the facilities of the 
CTA.
The Custodian
    The Custodian's services (i) allow ETH to be deposited from a 
public blockchain address to the Trust's ETH account and (ii) allow ETH 
to be withdrawn from the ETH account to a public blockchain address as 
instructed by the Trust. The custody agreement requires the Custodian 
to hold the Trust's ETH in cold storage, unless required to facilitate 
withdrawals as a temporary measure. The Custodian will use segregated 
cold storage ETH addresses for the Trust which are separate from the 
ETH addresses that the Custodian uses for its other customers and which 
are directly verifiable via the ETH blockchain. The Custodian will 
safeguard the private keys to the ETH associated with the Trust's ETH 
account. The Custodian will at all times record and identify in its 
books and records that such ETH constitutes the property of the Trust. 
The Custodian will not withdraw the Trust's ETH from the Trust's 
account with the Custodian, or loan, hypothecate, pledge or otherwise 
encumber the Trust's ETH, without the Trust's instruction. If the 
custody agreement terminates, the Sponsor may appoint another custodian 
and the Trust may enter into a custodian agreement with such custodian.
Creation and Redemption of Shares
    When the Trust sells or redeems its Shares, it will do so in cash 
transactions in blocks of 25,000 Shares that are based on the amount of 
ether held by the Trust on a per unit (i.e., 25,000 Share) basis. 
According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
Creation Baskets. Purchase orders must be placed by 4:00 p.m. ET, or 
the close of regular trading on the Exchange, whichever is earlier. The 
day on which an order is received is considered the purchase order 
date. The total deposit of cash required is based on the combined NAV 
of the number of Shares included in the Creation Baskets being created 
determined as of 4:00 p.m. ET on the date the order to purchase is 
properly received. The Administrator determines the quantity of ether 
associated with a Creation Basket for a given day by dividing the 
number of ether held by the Trust as of the opening of business on that 
business day, adjusted for the amount of ether constituting estimated 
accrued but unpaid fees and expenses of the Trust as of the opening of 
business on that business day, by the quotient of the number of Shares 
outstanding at the opening of business divided by the number of Shares 
in a Creation Basket.
    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 ether 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 ether as part of the creation or 
redemption process.
    The Trust will create Shares by receiving ether from a third party 
that is not the authorized participant and the Trust--not the 
authorized participant--is responsible for selecting the third party to 
facilitate the delivery of the ether. Further, the third party will not 
be acting as an agent of the authorized participant with respect to the 
delivery of the ether to the Trust or acting at the direction of the 
authorized participant with respect to the delivery of the ether to the 
Trust. When fulfilling a redemption request, the Trust will deliver 
ether to a third party that is not the authorized participant and the 
Trust--not the authorized participant- is responsible for selecting 
such third party to receive the ether. Further, the third party will 
not be acting as an agent of the authorized participant with respect to 
the receipt of the ether from the Trust or acting at the direction of 
the authorized participant with respect to the receipt of the ether 
from the Trust.
    The procedures by which an authorized participant can redeem one or 
more Creation Baskets mirror the procedures for the creation of 
Creation Baskets.
    The Sponsor will maintain ownership and control of ether in a 
manner consistent with good delivery requirements for spot commodity 
transactions.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange represents that, for initial 
and continued listing, the Trust must be in compliance with Rule 10A-3 
under the Act. A minimum of 100,000 Shares will be outstanding at the 
commencement of listing on the Exchange. The Exchange will obtain a 
representation that the NAV will be calculated daily and that the NAV 
and information about the assets of the Trust will be made available to 
all market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a 
trust that holds (1) a specified commodity \46\ deposited with the 
trust, or (2) a specified commodity and, in addition to such specified 
commodity, cash; (b) issued by such trust in a specified aggregate 
minimum number in return for a deposit of a quantity of the underlying 
commodity and/or cash; and (c) when aggregated in the same specified 
minimum number, may be redeemed at a holder's request by such trust 
which will deliver to the redeeming holder the quantity of the 
underlying commodity and/or cash.
---------------------------------------------------------------------------

    \46\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as

[[Page 46472]]

required in Rule 14.11(e)(4)(G), the Exchange notes that any registered 
market maker (``Market Maker'') in the Shares must file with the 
Exchange in a manner prescribed by the Exchange and keep current a list 
identifying all accounts for trading in an underlying commodity, 
related commodity futures or options on commodity futures, or any other 
related commodity derivatives, which the registered Market Maker may 
have or over which it may exercise investment discretion. No registered 
Market Maker shall trade in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, in an account in which a registered Market Maker, directly 
or indirectly, controls trading activities, or has a direct interest in 
the profits or losses thereof, which has not been reported to the 
Exchange as required by this Rule. In addition to the existing 
obligations under Exchange rules regarding the production of books and 
records (see, e.g., Rule 4.2), the registered Market Maker in 
Commodity-Based Trust Shares shall make available to the Exchange such 
books, records or other information pertaining to transactions by such 
entity or registered or non-registered employee affiliated with such 
entity for its or their own accounts for trading the underlying 
physical commodity, related commodity futures or options on commodity 
futures, or any other related commodity derivatives, as may be 
requested by the Exchange.
    The Exchange is able to obtain information regarding trading in the 
Shares and the underlying ether, CME Ether Futures, options on CME 
Ether Futures, or any other ether derivative through members acting as 
registered Market Makers, in connection with their proprietary or 
customer trades.
    As a general matter, the Exchange has regulatory jurisdiction over 
its Members and their associated persons, which include any person or 
entity controlling a Member. To the extent the Exchange may be found to 
lack jurisdiction over a subsidiary or affiliate of a Member that does 
business only in commodities or futures contracts, the Exchange could 
obtain information regarding the activities of such subsidiary or 
affiliate through surveillance sharing agreements with regulatory 
organizations of which such subsidiary or affiliate is a member.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) the extent to which trading is not occurring in the ether 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
    If the IIV or the value of the Benchmark is not being disseminated 
as required, the Exchange may halt trading during the day in which the 
interruption to the dissemination of the IIV or the value of the 
Benchmark occurs. If the interruption to the dissemination of the IIV 
or the value of the Benchmark 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 with 
respect to the Shares 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.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share. The 
Shares of the Trust will conform to the initial and continued listing 
criteria set forth in BZX Rule 14.11(e)(4).
Surveillance
    The Exchange represents that its surveillance procedures are 
adequate to properly monitor the trading of the Shares on the Exchange 
during all trading sessions and to deter and detect violations of 
Exchange rules and the applicable federal securities laws. Trading of 
the Shares through the Exchange will be subject to the Exchange's 
surveillance procedures for derivative products, including Commodity-
Based Trust Shares. FINRA conducts certain 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 Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares, CME Ether 
Futures, and any other ether derivative 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, CME Ether Futures, and any other ether 
derivative from such markets and other entities.\47\ The Exchange may 
obtain information regarding trading in the Shares, CME Ether Futures, 
and any other ether derivative via ISG, from other exchanges who are 
members or affiliates of the ISG, or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

    \47\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    The Sponsor has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust or the Shares to comply with the 
continued listing requirements, and, pursuant to its obligations under 
Section 19(g)(1) of the Exchange Act, the Exchange will surveil for 
compliance with the continued listing requirements. If the Trust or the 
Shares are not in compliance with the applicable listing requirements, 
the Exchange will commence delisting procedures under Exchange Rule 
14.12.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) the procedures for the 
creation and redemption of Creation Baskets (and that the Shares are 
not individually redeemable); (ii) BZX Rule 3.7, which imposes 
suitability obligations on Exchange members with respect to 
recommending transactions in the Shares to customers; (iii) how 
information regarding the IIV and the Trust's NAV are disseminated; 
(iv) the

[[Page 46473]]

risks involved in trading the Shares outside of Regular Trading Hours 
\48\ when an updated IIV will not be calculated or publicly 
disseminated; (v) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (vi) trading information. The 
Information Circular will also reference the fact that there is no 
regulated source of last sale information regarding ether, that the 
Commission has no jurisdiction over the trading of ether as a 
commodity, and that the CFTC has regulatory jurisdiction over the 
trading of CME Ether Futures and options on CME Ether Futures.
---------------------------------------------------------------------------

    \48\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \49\ in general and Section 6(b)(5) of the Act \50\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78f.
    \50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\51\ including Commodity-Based Trust Shares,\52\ to be listed 
on U.S. national securities. In order for any proposed rule change from 
an exchange to be approved, the Commission must determine that, among 
other things, the proposal is consistent with the requirements of 
Section 6(b)(5) of the Act, specifically including: (i) the requirement 
that a national securities exchange's rules are designed to prevent 
fraudulent and manipulative acts and practices; \53\ and (ii) the 
requirement that an exchange proposal be designed, in general, to 
protect investors and the public interest. The Exchange believes that 
this proposal is consistent with the requirements of Section 6(b)(5) of 
the Act and that this filing sufficiently demonstrates that the CME 
Ether Futures market represents a regulated market of significant size 
and that, on the whole, the manipulation concerns previously 
articulated by the Commission are sufficiently mitigated to the point 
that they are outweighed by quantifiable investor protection issues 
that would be resolved by approving this proposal.
---------------------------------------------------------------------------

    \51\ See Exchange Rule 14.11(f).
    \52\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \53\ The Exchange believes that ETH is resistant to price 
manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of ETH trading render it difficult and 
prohibitively costly to manipulate the price of ETH. The 
fragmentation across ETH platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of ETH prices 
through continuous trading activity challenging. To the extent that 
there are ETH platforms engaged in or allowing wash trading or other 
activity intended to manipulate the price of ETH on other markets, 
such pricing does not normally impact prices on other platforms 
because participants will generally ignore markets with quotes that 
they deem non-executable. Moreover, the linkage between the ETH 
markets and the presence of arbitrageurs in those markets means that 
the manipulation of the price of ETH price on any single venue would 
require manipulation of the global ETH price in order to be 
effective. Arbitrageurs must have funds distributed across multiple 
trading platforms in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular ETH platform or OTC 
platform. As a result, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences.
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(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \54\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\55\ The only remaining 
issue to be addressed is whether the CME Ether Futures market 
constitutes a market of significant size, which both the Exchange and 
the Sponsor believe that it does. The terms ``significant market'' and 
``market of significant size'' include a market (or group of markets) 
as to which: (a) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to manipulate the ETP, so that a surveillance-sharing agreement 
would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\56\
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    \54\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in ISG 
constitutes such a surveillance sharing agreement. See Wilshire 
Phoenix Disapproval.
    \55\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \56\ See Wilshire Phoenix Disapproval.
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    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\57\
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    \57\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
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(a) Manipulation of the ETP
    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct. In light of the similarly high 
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME 
Bitcoin Futures, applying the same rationale that the Commission 
applied to a Spot Bitcoin ETP in the

[[Page 46474]]

Spot Bitcoin ETP Approval Order also indicates that this test is 
satisfied for this proposal. As noted above, in the Spot Bitcoin ETP 
Approval Order, the SEC concluded that:

    . . . fraud or manipulation that impacts prices in spot bitcoin 
markets would likely similarly impact CME bitcoin futures prices. 
And because the CME's surveillance can assist in detecting those 
impacts on CME bitcoin futures prices, the Exchanges' comprehensive 
surveillance-sharing agreement with the CME . . . can be reasonably 
expected to assist in surveilling for fraudulent and manipulative 
acts and practices in the specific context of the [p]roposals.\58\
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    \58\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

    The assumptions from this statement are also true for CME Ether 
Futures. CME Ether Futures pricing is based on pricing from spot ether 
markets. The statement from the Spot Bitcoin ETP Approval Order that 
the surveillance-sharing agreement with the CME ``can be reasonably 
expected to assist in surveilling for fraudulent and manipulative acts 
and practices in the specific context of the [p]roposals'' makes clear 
that the Commission believes that CME's surveillance can capture the 
effects of trading on the relevant spot markets on the pricing of CME 
Bitcoin Futures. This same logic would extend to CME Ether Futures 
markets where CME's surveillance would be able to capture the effects 
of trading on the relevant spot markets on the pricing of CME Ether 
Futures.
(b) Predominant Influence on Prices in Spot and ETH Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME Ether Futures 
market for a number of reasons. First, because the Trust would not hold 
CME Ether Futures contracts, the only way that it could be the 
predominant force on prices in that market is through the spot markets 
that CME Ether Futures contracts use for pricing.\59\ The Sponsor notes 
that ether total 24-hour spot trading volume has averaged $9.4 billion 
over the year ending September 1, 2023.\60\ The Sponsor expects that 
the Trust would represent a very small percentage of this daily trading 
volume in the spot ether market even in its most aggressive projections 
for the Trust's assets and therefore could not be the predominant force 
on prices in the CME Ether Futures market. Second, much like the CME 
Bitcoin Futures market, the CME Ether Futures market has progressed and 
matured significantly. As the U.S. Court of Appeals for the D.C. 
Circuit found in its review of the Grayscale Order, ``Because the spot 
market is deeper and more liquid than the futures market, manipulation 
should be more difficult, not less.'' The Exchange and Sponsor agree 
with this sentiment and believe it applies equally to the spot ether 
and CME Ether Futures markets.
---------------------------------------------------------------------------

    \59\ This logic is reflected by the U.S. Court of Appeals for 
the D.C. Circuit on its review of the Grayscale Order at 17-18. See 
Grayscale Investments, LLC v. SEC, 82 F. 4tha 1239 (D.C. Cir. 2023). 
Specifically, the court found that ``Because Grayscale owns no 
futures contracts, trading in Grayscale can affect the futures 
market only through the spot market . . . But Grayscale holds just 
3.4 percent of outstanding bitcoin, and the Commission did not 
suggest Grayscale can dominate the price of bitcoin.''
    \60\ Source: TokenTerminal.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to ether through OTC ETH Funds has grown. With that 
growth, so too has grown the quantifiable investor protection issues to 
U.S. investors through roll costs for Ether Futures ETFs and premium/
discount volatility and management fees for OTC ETH Funds. The Exchange 
believes that the concerns related to the prevention of fraudulent and 
manipulative acts and practices have been sufficiently addressed to be 
consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, also believes that such concerns are now 
outweighed by these investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to ether in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in Ether Futures ETFs and operating companies that are 
imperfect proxies for ether exposure; and (iv) providing an alternative 
to custodying spot ether.
Commodity-Based Trust Shares
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed ether 
derivatives via the ISG, from other exchanges who are members or 
affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    In addition to the price transparency of the Benchmark, the Trust 
will provide information regarding the Trust's ETH holdings as well as 
additional data regarding the Trust. The website for the Trust, which 
will be publicly accessible at no charge, will contain the following 
information: (a) the current NAV per Share daily and the prior business 
day's NAV per Share and the reported BZX Official Closing Price; (b) 
the BZX Official Closing Price in relation to the NAV per Share as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV per Share; (c) data in chart 
form displaying the frequency distribution of discounts and premiums of 
the BZX Official Closing Price against the NAV per Share, within 
appropriate ranges for each of the four previous calendar quarters (or 
for the life of the Trust, if shorter); (d) the prospectus; and (e) 
other applicable quantitative information. The aforementioned

[[Page 46475]]

information will be published as of the close of business available on 
the Sponsor's website at www.vaneck.com, or any successor thereto. The 
NAV for the Trust will be calculated by the Administrator once a day 
and will be disseminated daily to all market participants at the same 
time. Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. The Trust will also 
disseminate its holdings on a daily basis on its website.
    The IIV will be updated during Regular Trading Hours to reflect 
changes in the value of the Trust's ether holdings during the trading 
day. The IIV may differ from the NAV because NAV is calculated, using 
the closing value of the Benchmark, once a day at 4:00 p.m. Eastern 
time whereas the IIV draws prices from the last trade on each 
constituent platform to produce a relevant, real-time price. The IIV 
disseminated during Regular Trading Hours should not be viewed as an 
actual real-time update of the NAV, which will be calculated only once 
at the end of each trading day. The Trust will provide an IIV per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Trading 
Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be widely 
disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours through the facilities of the CTA and 
CQS high speed lines. In addition, the IIV will be available through 
on-line information services such as Bloomberg and Reuters.
    The price of ether will be made available by one or more major 
market data vendors, updated at least every 15 seconds during Regular 
Trading Hours.
    As noted above, the Benchmark is calculated every 15 seconds and 
information about the Benchmark and Benchmark value, including index 
data and key elements of how the Benchmark is calculated, will be 
publicly available at https://www.marketvector.com/.
    Quotation and last sale information for ether is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. Information relating to trading, including price 
and volume information, in ether is available from major market data 
vendors and from the trading platforms on which ether are traded. Depth 
of book information is also available from ether trading platforms. The 
normal trading hours for ether trading platforms are 24 hours per day, 
365 days per year.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's BZX Official Closing Price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers. Quotation and last-sale information 
regarding the Shares will be disseminated through the facilities of the 
CTA.
    In sum, the Exchange believes that this proposal is consistent with 
the requirements of Section 6(b)(5) of the Act, that this filing 
sufficiently demonstrates that the CME Ether Futures market represents 
a regulated market of significant size, and that on the whole the 
manipulation concerns previously articulated by the Commission are 
sufficiently mitigated to the point that they are outweighed by 
investor protection issues that would be resolved by approving this 
proposal.
    The Exchange believes that the proposal is, in particular, designed 
to protect investors and the public interest. Premium and discount 
volatility, high fees, rolling costs, insufficient disclosures, and 
technical hurdles are putting U.S. investor money at risk on a daily 
basis that could potentially be eliminated through access to a Spot 
Ether ETP. As such, the Exchange believes that this proposal acts to 
limit the risk to U.S. investors that are increasingly seeking exposure 
to ether by providing direct, 1-for-1 exposure to ether in a regulated, 
transparent, exchange-traded vehicle, specifically by: (i) reducing 
premium volatility; (ii) reducing management fees through meaningful 
competition; (iii) providing an alternative to Ether Futures ETFs which 
will eliminate roll cost; (iv) reducing risks associated with investing 
in operating companies that are imperfect proxies for ether exposure; 
and (v) providing an alternative to custodying spot ether. The investor 
protection issues for U.S. investors has grown significantly over the 
last several years, through roll costs for Ether Futures ETFs and 
premium/discount volatility and management fees for OTC ETH Funds. As 
discussed throughout, this growth investor protection concerns need to 
be reevaluated and rebalanced with the prevention of fraudulent and 
manipulative acts and practices concerns that previous disapproval 
orders have relied upon. Finally, the Exchange notes that in addition 
to all of the arguments herein which it believes sufficiently 
establishes the CME Ether Futures market as a regulated market of 
significant size, it is logically inconsistent to find that the CME 
Ether Futures market is a significant market as it relates to the CME 
Ether Futures market, but not a significant market as it relates to the 
ether spot market for the numerous reasons laid out above.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change, rather will facilitate the listing and trading of 
an additional exchange-traded product that will enhance competition 
among both market participants and listing venues, to the benefit of 
investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2023-069 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-CboeBZX-2023-069. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the

[[Page 46476]]

Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Exchange. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to file number SR-CboeBZX-2023-069 and should be submitted 
on or before June 20, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
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    \61\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-11706 Filed 5-28-24; 8:45 am]
BILLING CODE 8011-01-P

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