Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Invesco Galaxy Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 46543-46556 [2024-11711]
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
sessions and to deter and detect
attempted manipulation of the Shares or
other violations of Exchange rules and
applicable federal securities laws. The
Exchange or FINRA, on behalf of the
Exchange, or both, will communicate as
needed regarding trading in the Shares
and ether futures with the CME and
other markets and other entities that are
members of the ISG, and the Exchange
or FINRA, on behalf of the Exchange, or
both, may obtain trading information
regarding trading in the Shares from
such markets and other entities. In
addition, the Exchange may obtain
information regarding trading in the
Shares from markets and other entities
that are members of ISG or with which
the Exchange has in place a CSSA. The
Exchange is also able to obtain
information regarding trading in the
Shares and ether futures or the
underlying ether through ETP Holders,
in connection with such ETP Holders’
proprietary trades which they effect on
any relevant market.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA. The Trust’s website will also
include a form of the prospectus for the
Trust that may be downloaded. The
website will include the Shares’ ticker
and CUSIP information, along with
additional quantitative information
updated on a daily basis for the Trust.
The Trust’s website will include (1)
daily trading volume, the prior Business
Day’s reported NAV and closing price,
and a calculation of the premium and
discount of the closing price or midpoint of the Bid/Ask Price against the
NAV; and (ii) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
closing price or Bid/Ask Price against
the NAV, within appropriate ranges, for
at least each of the four previous
calendar quarters. The Trust’s website
will be publicly available prior to the
public offering of Shares and accessible
at no charge.
Trading in Shares of the Trust will be
halted if the circuit breaker parameters
in NYSE Arca Rule 7.12–E have been
reached or because of market conditions
or for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of a new type of exchange-traded
product based on the price of ether that
will enhance competition among market
participants, to the benefit of investors
and the marketplace. As noted above,
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the Exchange has in place surveillance
procedures that are adequate to properly
monitor trading in the Shares in all
trading sessions and to deter and detect
violations of Exchange rules and
applicable federal securities laws.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
Exchange notes that the proposed rule
change will facilitate the listing and
trading of a new type of CommodityBased Trust Share based on the price of
ether that would enhance competition
among market participants, to the
benefit of investors and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
NYSEARCA–2024–31 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–NYSEARCA–2024–31. 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
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46543
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–NYSEARCA–2024–31 and should be
submitted on or before June 20, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.37
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024–11705 Filed 5–28–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100219; File No. SR–
CboeBZX–2023–087]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 1 to a Proposed Rule
Change To List and Trade Shares of
the Invesco Galaxy Ethereum ETF
Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares
May 22, 2024.
On October 20, 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 Invesco Galaxy
Ethereum ETF (‘‘Trust’’) under BZX
Rule 14.11(e)(4), Commodity-Based
Trust Shares. The proposed rule change
was published for comment in the
Federal Register on November 8, 2023.3
37 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 98846
(Nov. 2, 2023), 88 FR 77116. Comments on the
proposed rule change are available at: https://
1 15
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
On December 13, 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 February 6,
2024, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Act 6 to determine whether to
approve or disapprove the proposed
rule change.7 On May 6, 2024, the
Commission designated a longer period
for Commission action on the proposed
rule change.8 On May 21, 2024, the
Exchange filed Amendment No. 1 to the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange.
Amendment No. 1 amended and
replaced the proposed rule change in its
entirety. The Commission is publishing
this notice to solicit comments on the
proposed rule change, as modified by
Amendment No. 1, from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
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 Invesco Galaxy Ethereum ETF (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.
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
www.sec.gov/comments/sr-cboebzx-2023-087/
srcboebzx2023087.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 99151,
88 FR 87822 (Dec. 19, 2023).
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 99479,
89 FR 9880 (Feb. 12, 2024).
8 See Securities Exchange Act Release No.
100065, 89 FR 40516 (May 10, 2024).
9 The Trust was formed as a Delaware statutory
trust on September 27, 2023, and is operated as a
grantor trust for U.S. federal tax purposes. The
Trust has no fixed termination date.
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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. 1 to SR–
CboeBZX–2023–087 amends and
replaces in its entirety the proposal as
originally submitted on October 20,
2023. The Exchange submits this
Amendment No. 1 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 Invesco
Capital Management 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 Exchange proposes to list and
trade the Shares of the Invesco Galaxy
Ethereum ETF 13 under BZX Rule
14.11(e)(4),14 which governs the listing
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 On September 29, 2023, the Trust filed with the
Commission an initial registration statement (the
‘‘Registration Statement’’) on Form S–1 under the
Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is
based, in part, on the Registration Statement. The
Registration Statement is not yet effective and the
Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
13 On September 29, 2023, the Trust filed with the
Commission an initial registration statement (the
‘‘Registration Statement’’) on Form S–1 under the
Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is
based, in part, on the Registration Statement. The
Registration Statement is not yet effective and the
Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
14 The Commission approved BZX Rule
14.11(e)(4) in Securities Exchange Act Release No.
65225 (August 30, 2011), 76 FR 55148 (September
6, 2011) (SR–BATS–2011–018).
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and trading of Commodity-Based Trust
Shares on the Exchange.15
The Commission has historically
approved or disapproved exchange
filings to list and trade series of Trust
Issued Receipts, including spot-based
Commodity-Based Trust Shares, on the
basis of whether the listing exchange
has in place a comprehensive
surveillance sharing agreement with a
regulated market of significant size
related to the underlying commodity to
be held.16 With this in mind, the
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’’).17 By way of background, in
15 All statements and representations made in this
filing regarding (a) the description of the portfolio,
(b) limitations on portfolio holdings or reference
assets, or (c) the applicability of Exchange rules and
surveillance procedures shall constitute continued
listing requirements for listing the Shares on the
Exchange.
16 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.
17 See Exchange Act Release No. 99306 (January
10, 2024), 89 FR 3008 (January 17, 2024) (Self-
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2022 the Commission disapproved
proposals 18 to list Spot Bitcoin ETPs,
including a proposal sponsored by
Grayscale Investments, LLC
(‘‘Grayscale’’).19 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.20 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:
[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.21
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As further discussed below, both the
Exchange and the Sponsor believe that
this proposal and the included analysis
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 BitcoinBased Commodity-Based Trust Shares and Trust
Units) (the ‘‘Spot Bitcoin ETP Approval Order’’).
18 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.
19 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’’).
20 See Grayscale Investments, LLC v. SEC, 82
F.4th 1239 (D.C. Cir. 2023).
21 See the Spot Bitcoin ETP Approval Order at
3011–3012.
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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
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
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46545
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, Switzerland and
France, are able to use more traditional
exchange listed and traded products
(including exchange-traded funds
holding physical ETH) to gain exposure
to ETH. Investors across Europe have
access to products which trade on
regulated exchanges and provide
exposure to a broad array of spot crypto
assets. U.S. investors, by contrast, are
left with fewer and more risky means of
getting ether exposure.22
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,23
Celsius Network LLC,24 BlockFi Inc.25
and Voyager Digital Holdings, Inc.26
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
22 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.
23 See FTX Trading Ltd., et al., Case No. 22–
11068.
24 See Celsius Network LLC, et al., Case No. 22–
10964.
25 See BlockFi Inc., Case No. 22–19361.
26 See Voyager Digital Holdings, Inc., et al., Case
No. 22–10943.
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Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
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.
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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, at over
a billion dollars in assets under
management, would 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
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18:05 May 28, 2024
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contracts),27 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,
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
27 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’’).
PO 00000
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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
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 28
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.29 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,
28 Unless otherwise noted, all data and analysis
presented in this section and referenced elsewhere
in the filing has been provided by the Sponsor.
29 The CME CF Ether-Dollar Reference Rate is
based on a publicly available calculation
methodology based on pricing sourced from several
crypto exchanges and trading platforms, including
Bitstamp, Coinbase, Gemini, itBit, Kraken, and
LMAX Digital.
E:\FR\FM\29MYN1.SGM
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30 Source:
CME, 7/31/23.
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18:05 May 28, 2024
Jkt 262001
contracts traded in July 2021, and July
2022 respectively.30 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.
The number of large open interest
holders 31 and unique accounts trading
CME Ether Futures have both increased,
even in the face of heightened Ether
price volatility.
31 A large open interest holder in CME Ether
Futures is an entity that holds at least 25 contracts,
which is the equivalent of 1250 ether. At a price
of approximately $1,867 per Ether on 7/31/2023,
more than 59 firms had outstanding positions of
greater than $2.3 million in CME Ether Futures.
PO 00000
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E:\FR\FM\29MYN1.SGM
29MYN1
EN29MY24.034</GPH>
lotter on DSK11XQN23PROD with NOTICES1
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)
46547
EN29MY24.033</GPH>
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
46548
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
CME Ether Futures Average Daily Volume (ADV) and Open Interest (01)
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lotter on DSK11XQN23PROD with NOTICES1
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Section 6(b)(5) and the Applicable
Standards
The Commission has approved
numerous series of Trust Issued
Receipts,32 including Commodity-Based
Trust Shares,33 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
32 See
Exchange Rule 14.11(f).
Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
33 Commodity-Based
VerDate Sep<11>2014
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34 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
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designed to prevent fraudulent and
manipulative acts and practices; 34 and
PO 00000
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(ii) the requirement that an exchange
proposal be designed, in general, to
protect investors and the public interest.
The Exchange believes that this
proposal is consistent with the
requirements of Section 6(b)(5) of the
Act and that this filing sufficiently
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
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EN29MY24.036</GPH>
11
200,000,000
EN29MY24.035</GPH>
400,000,000
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 35 with a regulated
market of significant size. Both the
Exchange and CME are members of the
Intermarket Surveillance Group
(‘‘ISG’’).36 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
35 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’’).
36 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
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18:05 May 28, 2024
Jkt 262001
predominant influence on prices in that
market.37
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.38
(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.39
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.
39 See the Spot Bitcoin ETP Approval Order at
3011–3012.
46549
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 Ether Futures
The Exchange and Sponsor also
believe that trading in the Shares would
not be the predominant force on prices
in the CME Ether Futures market for a
number of reasons. First, because the
Trust would not hold CME Ether
Futures contracts, the only way that it
could be the predominant force on
prices in that market is through the spot
markets that CME Ether Futures
contracts use for pricing.40 The Sponsor
notes that ether total 24-hour spot
trading volume has averaged $9.4
billion over the year ending September
1, 2023.41 The Sponsor expects that the
Trust would represent a very small
percentage of this daily trading volume
in the spot ether market even in its most
aggressive projections for the Trust’s
assets and, thus, the Trust would not
have an impact on the spot market and
therefore could not be the predominant
force on prices in the CME Ether
Futures market. Second, much like the
CME Bitcoin Futures market, the CME
Ether Futures market has progressed
and matured significantly. As the 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
37 See
38 See
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40 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.’’
41 Source: TokenTerminal.
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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 into the tens of billions of dollars
and more than a billion dollars of
exposure through Ether Futures ETFs.
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.
Invesco Galaxy Ethereum ETF
Delaware Trust Company is the
trustee (‘‘Trustee’’). The Bank of New
York Mellon will be the administrator
(‘‘Administrator’’) and transfer agent
(‘‘Transfer Agent’’). As noted above,
Coinbase Custody Trust Company, LLC,
is the Custodian and will be responsible
for custody of the Trust’s ETH. The
Bank of New York Mellon (the ‘‘Cash
Custodian’’) will act as custodian of the
Trust’s cash and cash equivalents.42
According to the Registration
Statement, each Share will represent a
fractional undivided beneficial interest
and ownership in the Trust. The Trust’s
assets will consist only of ETH, 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,43 nor a commodity pool for
42 Cash equivalents are short-term instruments
with maturities of less than 3 months.
43 15 U.S.C. 80a–1.
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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 5,000 Shares (a ‘‘Creation
Basket’’) at the Trust’s net asset value
(‘‘NAV’’). Authorized participants will
deliver, or facilitate the delivery of, cash
to the Trust’s account with the Cash
Custodian in exchange for Shares when
they purchase Shares, and the Trust,
through the Cash Custodian, will deliver
cash to such authorized participants
when they redeem Shares with the
Trust. Authorized participants may then
offer Shares to the public at prices that
depend on various factors, including the
supply and demand for Shares, the
value of the Trust’s assets, and market
conditions at the time of a transaction.
Shareholders who buy or sell Shares
during the day from their broker may do
so at a premium or discount relative to
the NAV of the Shares of the Trust.
Investment Objective
According to the Registration
Statement, the investment objective of
the Trust is for the Shares to reflect the
spot price of Ether as measured by using
the Lukka Prime Reference Rate (the
‘‘Index’’) less the Trust’s expenses and
other liabilities. In seeking to achieve its
investment objective, the Trust will
hold only ETH, cash, and cash
equivalents. The Trust will value its
Shares daily based on the value of the
Index as of 4:00 p.m. ET, which is
calculated based on the fair market
value price for ETH, reflecting the
execution price of ETH on its principal
market as determined by Lukka Inc., an
independent third-party digital asset
company (the ‘‘Index Provider’’). The
Trust will process all creations and
redemptions in cash transactions with
authorized participants. The Trust is not
actively managed.
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The Index
As described in the Registration
Statement, the Trust will use the Index
to calculate the Trust’s NAV. The Index
is designed to be a robust price for ETH
in USD and there is no component other
than ETH in the index. The underlying
trading platforms are sourced from the
Index Provider. As of December 2023,
the following platforms are considered
to be eligible by the Index Provider:
Binance, Bitfinex, Bitflyer, Bittrex,
Bitstamp, Coinbase, Crypto.com,
Gemini, HitBTC, Huobi, Kraken,
KuCoin, OKEx, Poloniex (collectively,
‘‘Index Pricing Sources’’). The Index
Provider reviews eligible trading
platforms quarterly. In determining
which trading platforms to include, the
Index Provider evaluates each trading
platform using proprietary ratings
criteria. The Index Provider constantly
reassesses the trading platforms to be
eligible for inclusion in the Index, and
makes adjustments as needed.
In determining the value of ETH, the
Index Provider applies a five-step
weighting process for identifying the
principal trading platform for Ether and
the last price on that trading platform.
A ‘‘base exchange score’’ (‘‘BES’’) that
takes into account this criteria is
assigned to each Index Pricing Source in
order to select the most appropriate
primary trading platform and then an
executed trading platform price is
determined at 4:00 p.m. ET., although
the Index Provider performs this
calculation every second each day.
Step 1: Assign each platform for Ether
and U.S. Dollars a BES reflecting static
platform characteristics such as
oversight, microstructure and
technology.
Step 2: Adjust the BES based on the
relative monthly volume each platform
services. This new score is the Volume
Adjusted Score (‘‘VAS’’).
Step 3: Decay the adjusted score based
on the time passed since last trade on
platform, assessing the level of activity
in the market by considering the
frequency (volume) of trades. The decay
factor reflects the time since the last
trade on the platform. This is the final
Decayed Volume Adjusted Score
(DVAS), which reflects freshness of data
by tracking most recent trades.
Step 4: Rank the platforms by the
DVAS score and designate the highestranking platform as the Principal Market
for that point in time—the principal
market is the exchange with highest
DVAS.
Step 5: An executed platform price is
used to represent fair market value at
4:00 p.m. Eastern time.
Index data and the description of the
Index are based on information made
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publicly available by the Index Provider
on its website at https://lukka.tech.
Net Asset Value
The Trust’s NAV per Share is
calculated by (1) taking the current
market value of its ETH (calculated by
the Index Provider) and any other
assets; (2) subtracting any liabilities
(including accrued by unpaid expenses);
and (3) dividing that total by the total
number of outstanding Shares. The
Administrator calculates the NAV of the
Trust on each day that the Exchange is
open for regular trading, using the
execution price of ETH on the principal
market selected by the Index Provider as
of 4:00 p.m. ET. However, NAVs are not
officially struck until later in the day
(often by 5:30 p.m. ET and almost
always by 8:00 p.m. ET).
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.
In the event that the Index is
unavailable or if the Sponsor or
Administrator determines that the price
provided by the Index does not reflect
an accurate ETH price, the Sponsor’s
pricing team will evaluate the prices of
other similar benchmarks in an effort to
ensure that the Trust’s NAV is
determined based on consistent,
accurate pricing that the Sponsor
believes is reflective of the value of the
Trust’s ETH, and also a transparent
index methodology and process. The
pricing team will recommend the price
to be used to the Sponsor’s valuation
committee who will then review the
recommendation and approve it for use
by the Trust if found appropriate.44
lotter on DSK11XQN23PROD with NOTICES1
Availability of Information
In addition to the price transparency
of the Index, the Trust will provide
information regarding the Trust’s ETH
holdings as well as additional data
regarding the Trust. The 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; 45 (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
44 Such alternative method 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.
45 As defined in Rule 11.23(a)(3), the term ‘‘BZX
Official Closing Price’’ shall mean the price
disseminated to the consolidated tape as the market
center closing trade.
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18:05 May 28, 2024
Jkt 262001
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 Trust will also
disseminate its holdings on a daily basis
on its website. The aforementioned
information will be published as of the
close of business available on the
Sponsor’s website at www.invesco.com/
etfs, or any successor thereto.
The Intraday Indicative Value (‘‘IIV’’)
will be calculated by using the prior
day’s closing NAV per Share as a base
and updating that value during Regular
Trading Hours to reflect changes in the
most recently reported price of ETH as
reported by the Index Provider or
another reporting service. The IIV
disseminated during Regular Trading
Hours should not be viewed as an actual
real-time update of the NAV, which will
be calculated only once at the end of
each trading day. The IIV may differ
from the NAV due to the differences in
the time window of trades used to
calculate each price. The IIV will be
widely disseminated on a per Share
basis every 15 seconds during the
Exchange’s Regular Trading Hours by
one or more major market data vendors.
In addition, the IIV will be available
through the facilities of the consolidated
tape association (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 ETH 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 Index is designed
to provide an estimated fair market
value for ETH. Information about the
Index and Index value, including key
elements of how the Index is calculated,
will be publicly available at https://
lukka.tech.
Quotation and last sale information
for ETH 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 ETH is available from
major market data vendors and from the
trading platforms on which ETH are
traded. Depth of book information is
also available from ETH trading
platforms. The normal trading hours for
ETH trading platforms are 24 hours per
day, 365 days per year.
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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 ETH Custodian
The Custodian carefully considers the
design of the physical, operational and
cryptographic systems for secure storage
of the Trust’s private keys in an effort
to lower the risk of loss or theft. The
Custodian utilizes a variety of security
measures to ensure that private keys
necessary to transfer digital assets
remain uncompromised and that the
Trust maintains exclusive ownership of
its assets. The operational procedures of
the Custodian are reviewed by thirdparty advisors with specific expertise in
physical security. The devices that store
the keys will never be connected to the
internet or any other public or private
distributed network—this is colloquially
known as ‘‘cold storage.’’ Only specific
individuals are authorized to participate
in the custody process, and no
individual acting alone will be able to
access or use any of the private keys. In
addition, no combination of the
executive officers of the Sponsor or the
investment professionals managing the
Trust, acting alone or together, will be
able to access or use any of the private
keys that hold the Trust’s ETH.
Creation and Redemption of Shares
When the Trust sells or redeems its
Shares, it will do so in cash transactions
in blocks of 5,000 Shares (e.g., a
Creation Basket) that are based on the
quantity of ETH attributable to each
Share of the Trust at the Trust’s NAV.
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.
Eastern Time, or the close of regular
trading on the Exchange, whichever is
earlier. The day on which an order is
received is considered the purchase
order date. The total deposit of 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 ET on the date the
order to purchase is properly received.
The Administrator determines the
quantity of ether associated with a
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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 procedures by which an
authorized participant can redeem one
or more Creation Baskets mirror the
procedures for the creation of Creation
Baskets.
The authorized participants will
deliver only cash to create Shares and
will receive only cash when redeeming
Shares. Further, authorized participants
will not directly or indirectly purchase,
hold, deliver, or receive ETH as part of
the creation or redemption process or
otherwise direct the Trust or a third
party with respect to purchasing,
holding, delivering, or receiving ETH as
part of the creation or redemption
process.
The Trust will create Shares by
receiving ETH from a third party that is
not the authorized participant and the
Trust (through an execution agent that
is acting in an agency capacity)—not the
authorized participant—is responsible
for selecting the third party to deliver
the ETH. Further, the third party will
not be acting as an agent of the
authorized participant with respect to
the delivery of the ETH to the Trust or
acting at the direction of the authorized
participant with respect to the delivery
of the ETH to the Trust. The Trust will
redeem Shares by delivering ETH to a
third party that is not the authorized
participant and the Trust—not the
authorized participant—is responsible
for selecting the third party to receive
the ETH. Further, the third party will
not be acting as an agent of the
authorized participant with respect to
the receipt of the ETH from the Trust or
acting at the direction of the authorized
participant with respect to the receipt of
the ETH from the Trust.
The Sponsor will maintain ownership
and control of ETH 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
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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 Trust’s NAV will
be calculated daily and 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
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
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.
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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 ETH, CME
Ether Futures, options on CME Ether
Futures, or any other ETH 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
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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 Index 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 Index occurs. If the interruption to
the dissemination of the IIV or the value
of the Index persists past the trading day
in which it occurred, the Exchange will
halt trading no later than the beginning
of the trading day following the
interruption.
In addition, if the Exchange becomes
aware that the NAV 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.
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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
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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, or any other 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, or any other derivative
from such markets and other entities.47
The Exchange may obtain information
regarding trading in the Shares, CME
Ether Futures, or any other 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
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
47 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
48 Regular Trading Hours is the time between 9:30
a.m. and 4:00 p.m. Eastern Time.
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46553
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.
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
fraudulent and manipulative acts and
practices; 53 and (ii) the requirement that
49 15
U.S.C. 78f.
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.
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
50 15
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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.
lotter on DSK11XQN23PROD with NOTICES1
(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
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 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
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
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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
. . . 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
(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:
(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, thus, the Trust would not
have an impact on the spot market and
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.
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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.
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.
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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.
lotter on DSK11XQN23PROD with NOTICES1
(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 into the tens of billions of dollars
and more than a billion dollars of
exposure through Ether Futures ETFs.
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.
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
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
The Exchange also believes that the
proposal promotes market transparency
in that a large amount of information is
currently available about ETH and will
be available regarding the Trust and the
Shares. In addition to the price
transparency of the Index, the Trust will
provide information regarding the
Trust’s ETH holdings as well as
additional data regarding the Trust. The
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
PO 00000
Frm 00198
Fmt 4703
Sfmt 4703
46555
each of the four previous calendar
quarters (or for the life of the Trust, if
shorter); (d) the prospectus; and (e)
other applicable quantitative
information. The Trust will also
disseminate its holdings on a daily basis
on its website. The aforementioned
information will be published as of the
close of business available on the
Sponsor’s website at www.invesco.com/
etfs, or any successor thereto.
The IIV will be calculated by using
the prior day’s closing NAV per Share
as a base and updating that value during
Regular Trading Hours to reflect
changes in the most recently reported
price of ETH as reported by the Index
Provider or another reporting service.
The IIV disseminated during Regular
Trading Hours should not be viewed as
an actual real-time update of the NAV,
which will be calculated only once at
the end of each trading day. The IIV
may differ from the NAV due to the
differences in the time window of trades
used to calculate each price. The IIV
will be widely disseminated on a per
Share basis every 15 seconds during the
Exchange’s Regular Trading Hours by
one or more major market data vendors.
In addition, the IIV will be available
through 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 ETH 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 Index is designed
to provide an estimated fair market
value for ETH. Information about the
Index and Index value, including key
elements of how the Index is calculated,
will be publicly available at https://
lukka.tech.
Quotation and last sale information
for ETH 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 ETH is available from
major market data vendors and from the
trading platforms on which ETH are
traded. Depth of book information is
also available from ETH trading
platforms. The normal trading hours for
ETH 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
E:\FR\FM\29MYN1.SGM
29MYN1
46556
Federal Register / Vol. 89, No. 104 / Wednesday, May 29, 2024 / Notices
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. 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
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.61
J. Matthew DeLesDernier,
Deputy Secretary.
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
[FR Doc. 2024–11711 Filed 5–28–24; 8:45 am]
III. Solicitation of Comments
BILLING CODE 8011–01–P
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:
lotter on DSK11XQN23PROD with NOTICES1
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–2023–087 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.
VerDate Sep<11>2014
18:05 May 28, 2024
Jkt 262001
All submissions should refer to file
number SR–CboeBZX–2023–087. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–087 and should be
submitted on or before June 20, 2024.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–100212; File No. SR–
NASDAQ–2023–045]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment No. 2 to
Proposed Rule Change to List and
Trade Shares of the iShares Ethereum
Trust Under Nasdaq Rule 5711(d)
(Commodity-Based Trust Shares)
May 22, 2024.
On November 21, 2023, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or
‘‘Exchange’’) filed with the Securities
61 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00199
Fmt 4703
Sfmt 4703
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
list and trade shares of the iShares
Ethereum Trust under Nasdaq Rule
5711(d), Commodity-Based Trust
Shares. The proposed rule change was
published for comment in the Federal
Register on December 11, 2023.3 On
January 24, 2024, 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 March 4, 2024, the
Commission instituted proceedings
under Section 19(b)(2)(B) of the Act 6 to
determine whether to approve or
disapprove the proposed rule change.7
On April 19, 2024, the Exchange filed
Amendment No. 1 to the proposed rule
change, which replaced and superseded
the proposed rule change in its entirety.
On April 23, 2024, the Commission
published notice of Amendment No. 1
to the proposed rule change.8 On May
22, 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 superseded 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
The Exchange proposes to list and
trade shares of the iShares Ethereum
Trust (the ‘‘Trust’’) under Nasdaq Rule
5711(d) (‘‘Commodity-Based Trust
Shares’’). The shares of the Trust are
referred to herein as the ‘‘Shares.’’ This
Amendment No. 2 supersedes the
Amendment No 1 in its entirety.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 99081
(Dec. 5, 2023), 88 FR 85945. Comments on the
proposed rule change are available at: https://
www.sec.gov/comments/sr-nasdaq-2023-045/
srnasdaq2023045.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 99419,
89 FR 5970 (Jan. 30, 2024).
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 99665,
89 FR 16811 (Mar. 8, 2024).
8 See Securities Exchange Act Release No.
100016, 89 FR 33414 (Apr. 29, 2024).
2 17
E:\FR\FM\29MYN1.SGM
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]]>Agencies
[Federal Register Volume 89, Number 104 (Wednesday, May 29, 2024)]
[Notices]
[Pages 46543-46556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11711]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100219; File No. SR-CboeBZX-2023-087]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade
Shares of the Invesco Galaxy Ethereum ETF Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares
May 22, 2024.
On October 20, 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
Invesco Galaxy Ethereum ETF (``Trust'') under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares. The proposed rule change was published
for comment in the Federal Register on November 8, 2023.\3\
[[Page 46544]]
On December 13, 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 February 6, 2024, the Commission instituted proceedings
under Section 19(b)(2)(B) of the Act \6\ to determine whether to
approve or disapprove the proposed rule change.\7\ On May 6, 2024, the
Commission designated a longer period for Commission action on the
proposed rule change.\8\ On May 21, 2024, the Exchange filed Amendment
No. 1 to the proposed rule change as described in Items I and II below,
which Items have been prepared by the Exchange. Amendment No. 1 amended
and replaced the proposed rule change in its entirety. The Commission
is publishing this notice to solicit comments on the proposed rule
change, as modified by Amendment No. 1, from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98846 (Nov. 2,
2023), 88 FR 77116. Comments on the proposed rule change are
available at: https://www.sec.gov/comments/sr-cboebzx-2023-087/srcboebzx2023087.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 99151, 88 FR 87822
(Dec. 19, 2023).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 99479, 89 FR 9880
(Feb. 12, 2024).
\8\ See Securities Exchange Act Release No. 100065, 89 FR 40516
(May 10, 2024).
---------------------------------------------------------------------------
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 Invesco Galaxy
Ethereum ETF (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
September 27, 2023, 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. 1 to SR-CboeBZX-2023-087 amends and replaces in
its entirety the proposal as originally submitted on October 20, 2023.
The Exchange submits this Amendment No. 1 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\ Invesco Capital Management 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\
---------------------------------------------------------------------------
\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\ On September 29, 2023, the Trust filed with the Commission
an initial registration statement (the ``Registration Statement'')
on Form S-1 under the Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is based, in part,
on the Registration Statement. The Registration Statement is not yet
effective and the Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
---------------------------------------------------------------------------
The Exchange proposes to list and trade the Shares of the Invesco
Galaxy Ethereum ETF \13\ under BZX Rule 14.11(e)(4),\14\ which governs
the listing and trading of Commodity-Based Trust Shares on the
Exchange.\15\
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\13\ On September 29, 2023, the Trust filed with the Commission
an initial registration statement (the ``Registration Statement'')
on Form S-1 under the Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is based, in part,
on the Registration Statement. The Registration Statement is not yet
effective and the Shares will not trade on the Exchange until such
time that the Registration Statement is effective.
\14\ 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).
\15\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
---------------------------------------------------------------------------
The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot-based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\16\ With this in mind, the 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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\16\ 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.
---------------------------------------------------------------------------
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'').\17\ By way of background, in
[[Page 46545]]
2022 the Commission disapproved proposals \18\ to list Spot Bitcoin
ETPs, including a proposal sponsored by Grayscale Investments, LLC
(``Grayscale'').\19\ 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.\20\ 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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\17\ 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'').
\18\ 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.
\19\ 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'').
\20\ 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.\21\
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\21\ 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 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, Switzerland
and France, are able to use more traditional exchange listed and traded
products (including exchange-traded funds holding physical ETH) to gain
exposure to ETH. Investors across Europe have access to products which
trade on regulated exchanges and provide exposure to a broad array of
spot crypto assets. U.S. investors, by contrast, are left with fewer
and more risky means of getting ether exposure.\22\
---------------------------------------------------------------------------
\22\ 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,\23\ Celsius Network LLC,\24\ BlockFi
Inc.\25\ and Voyager Digital Holdings, Inc.\26\ 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
[[Page 46546]]
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.
---------------------------------------------------------------------------
\23\ See FTX Trading Ltd., et al., Case No. 22-11068.
\24\ See Celsius Network LLC, et al., Case No. 22-10964.
\25\ See BlockFi Inc., Case No. 22-19361.
\26\ 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, at over a
billion dollars in assets under management, would 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),\27\
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, 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.
---------------------------------------------------------------------------
\27\ 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 \28\
---------------------------------------------------------------------------
\28\ 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.\29\ 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,
[[Page 46547]]
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.\30\
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.
---------------------------------------------------------------------------
\29\ The CME CF Ether-Dollar Reference Rate is based on a
publicly available calculation methodology based on pricing sourced
from several crypto exchanges and trading platforms, including
Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
\30\ Source: CME, 7/31/23.
---------------------------------------------------------------------------
The number of large open interest holders \31\ and unique accounts
trading CME Ether Futures have both increased, even in the face of
heightened Ether price volatility.
---------------------------------------------------------------------------
\31\ A large open interest holder in CME Ether Futures is an
entity that holds at least 25 contracts, which is the equivalent of
1250 ether. At a price of approximately $1,867 per Ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than
$2.3 million in CME Ether Futures.
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[[Page 46548]]
[GRAPHIC] [TIFF OMITTED] TN29MY24.035
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Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\32\ including Commodity-Based Trust Shares,\33\ 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;
\34\ 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 46549]]
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.
---------------------------------------------------------------------------
\32\ See Exchange Rule 14.11(f).
\33\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\34\ 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 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 \35\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\36\ 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.\37\
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\35\ 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'').
\36\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\37\ 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.\38\
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\38\ 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.
---------------------------------------------------------------------------
(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.\39\
---------------------------------------------------------------------------
\39\ 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 Ether Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the CME Ether Futures
market for a number of reasons. First, because the Trust would not hold
CME Ether Futures contracts, the only way that it could be the
predominant force on prices in that market is through the spot markets
that CME Ether Futures contracts use for pricing.\40\ The Sponsor notes
that ether total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\41\ The Sponsor expects that
the Trust would represent a very small percentage of this daily trading
volume in the spot ether market even in its most aggressive projections
for the Trust's assets and, thus, the Trust would not have an impact on
the spot market and therefore could not be the predominant force on
prices in the CME Ether Futures market. Second, much like the CME
Bitcoin Futures market, the CME Ether Futures market has progressed and
matured significantly. As the 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.
---------------------------------------------------------------------------
\40\ 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.''
\41\ 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
[[Page 46550]]
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 into the
tens of billions of dollars and more than a billion dollars of exposure
through Ether Futures ETFs. 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.
Invesco Galaxy Ethereum ETF
Delaware Trust Company is the trustee (``Trustee''). The Bank of
New York Mellon will be the administrator (``Administrator'') and
transfer agent (``Transfer Agent''). As noted above, Coinbase Custody
Trust Company, LLC, is the Custodian and will be responsible for
custody of the Trust's ETH. The Bank of New York Mellon (the ``Cash
Custodian'') will act as custodian of the Trust's cash and cash
equivalents.\42\
---------------------------------------------------------------------------
\42\ 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 and ownership in the Trust.
The Trust's assets will consist only of ETH, 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,\43\ 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.
---------------------------------------------------------------------------
\43\ 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 5,000 Shares (a ``Creation Basket'') at the
Trust's net asset value (``NAV''). Authorized participants will
deliver, or facilitate the delivery of, cash to the Trust's account
with the Cash Custodian in exchange for Shares when they purchase
Shares, and the Trust, through the Cash Custodian, will deliver cash to
such authorized participants when they redeem Shares with the Trust.
Authorized participants may then offer Shares to the public at prices
that depend on various factors, including the supply and demand for
Shares, the value of the Trust's assets, and market conditions at the
time of a transaction. Shareholders who buy or sell Shares during the
day from their broker may do so at a premium or discount relative to
the NAV of the Shares of the Trust.
Investment Objective
According to the Registration Statement, the investment objective
of the Trust is for the Shares to reflect the spot price of Ether as
measured by using the Lukka Prime Reference Rate (the ``Index'') less
the Trust's expenses and other liabilities. In seeking to achieve its
investment objective, the Trust will hold only ETH, cash, and cash
equivalents. The Trust will value its Shares daily based on the value
of the Index as of 4:00 p.m. ET, which is calculated based on the fair
market value price for ETH, reflecting the execution price of ETH on
its principal market as determined by Lukka Inc., an independent third-
party digital asset company (the ``Index Provider''). The Trust will
process all creations and redemptions in cash transactions with
authorized participants. The Trust is not actively managed.
The Index
As described in the Registration Statement, the Trust will use the
Index to calculate the Trust's NAV. The Index is designed to be a
robust price for ETH in USD and there is no component other than ETH in
the index. The underlying trading platforms are sourced from the Index
Provider. As of December 2023, the following platforms are considered
to be eligible by the Index Provider: Binance, Bitfinex, Bitflyer,
Bittrex, Bitstamp, Coinbase, Crypto.com, Gemini, HitBTC, Huobi, Kraken,
KuCoin, OKEx, Poloniex (collectively, ``Index Pricing Sources''). The
Index Provider reviews eligible trading platforms quarterly. In
determining which trading platforms to include, the Index Provider
evaluates each trading platform using proprietary ratings criteria. The
Index Provider constantly reassesses the trading platforms to be
eligible for inclusion in the Index, and makes adjustments as needed.
In determining the value of ETH, the Index Provider applies a five-
step weighting process for identifying the principal trading platform
for Ether and the last price on that trading platform. A ``base
exchange score'' (``BES'') that takes into account this criteria is
assigned to each Index Pricing Source in order to select the most
appropriate primary trading platform and then an executed trading
platform price is determined at 4:00 p.m. ET., although the Index
Provider performs this calculation every second each day.
Step 1: Assign each platform for Ether and U.S. Dollars a BES
reflecting static platform characteristics such as oversight,
microstructure and technology.
Step 2: Adjust the BES based on the relative monthly volume each
platform services. This new score is the Volume Adjusted Score
(``VAS'').
Step 3: Decay the adjusted score based on the time passed since
last trade on platform, assessing the level of activity in the market
by considering the frequency (volume) of trades. The decay factor
reflects the time since the last trade on the platform. This is the
final Decayed Volume Adjusted Score (DVAS), which reflects freshness of
data by tracking most recent trades.
Step 4: Rank the platforms by the DVAS score and designate the
highest-ranking platform as the Principal Market for that point in
time--the principal market is the exchange with highest DVAS.
Step 5: An executed platform price is used to represent fair market
value at 4:00 p.m. Eastern time.
Index data and the description of the Index are based on
information made
[[Page 46551]]
publicly available by the Index Provider on its website at https://lukka.tech.
Net Asset Value
The Trust's NAV per Share is calculated by (1) taking the current
market value of its ETH (calculated by the Index Provider) and any
other assets; (2) subtracting any liabilities (including accrued by
unpaid expenses); and (3) dividing that total by the total number of
outstanding Shares. The Administrator calculates the NAV of the Trust
on each day that the Exchange is open for regular trading, using the
execution price of ETH on the principal market selected by the Index
Provider as of 4:00 p.m. ET. However, NAVs are not officially struck
until later in the day (often by 5:30 p.m. ET and almost always by 8:00
p.m. ET).
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.
In the event that the Index is unavailable or if the Sponsor or
Administrator determines that the price provided by the Index does not
reflect an accurate ETH price, the Sponsor's pricing team will evaluate
the prices of other similar benchmarks in an effort to ensure that the
Trust's NAV is determined based on consistent, accurate pricing that
the Sponsor believes is reflective of the value of the Trust's ETH, and
also a transparent index methodology and process. The pricing team will
recommend the price to be used to the Sponsor's valuation committee who
will then review the recommendation and approve it for use by the Trust
if found appropriate.\44\
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\44\ Such alternative method 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 Index, 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; \45\
(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 Trust will also
disseminate its holdings on a daily basis on its website. The
aforementioned information will be published as of the close of
business available on the Sponsor's website at www.invesco.com/etfs, or
any successor thereto.
---------------------------------------------------------------------------
\45\ 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 calculated by using
the prior day's closing NAV per Share as a base and updating that value
during Regular Trading Hours to reflect changes in the most recently
reported price of ETH as reported by the Index Provider or another
reporting service. The IIV disseminated during Regular Trading Hours
should not be viewed as an actual real-time update of the NAV, which
will be calculated only once at the end of each trading day. The IIV
may differ from the NAV due to the differences in the time window of
trades used to calculate each price. The IIV will be widely
disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours by one or more major market data
vendors. In addition, the IIV will be available through the facilities
of the consolidated tape association (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 ETH 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 Index is designed to provide an estimated fair
market value for ETH. Information about the Index and Index value,
including key elements of how the Index is calculated, will be publicly
available at https://lukka.tech.
Quotation and last sale information for ETH 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 ETH is available from major market data vendors and
from the trading platforms on which ETH are traded. Depth of book
information is also available from ETH trading platforms. The normal
trading hours for ETH 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 ETH Custodian
The Custodian carefully considers the design of the physical,
operational and cryptographic systems for secure storage of the Trust's
private keys in an effort to lower the risk of loss or theft. The
Custodian utilizes a variety of security measures to ensure that
private keys necessary to transfer digital assets remain uncompromised
and that the Trust maintains exclusive ownership of its assets. The
operational procedures of the Custodian are reviewed by third-party
advisors with specific expertise in physical security. The devices that
store the keys will never be connected to the internet or any other
public or private distributed network--this is colloquially known as
``cold storage.'' Only specific individuals are authorized to
participate in the custody process, and no individual acting alone will
be able to access or use any of the private keys. In addition, no
combination of the executive officers of the Sponsor or the investment
professionals managing the Trust, acting alone or together, will be
able to access or use any of the private keys that hold the Trust's
ETH.
Creation and Redemption of Shares
When the Trust sells or redeems its Shares, it will do so in cash
transactions in blocks of 5,000 Shares (e.g., a Creation Basket) that
are based on the quantity of ETH attributable to each Share of the
Trust at the Trust's NAV. 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. Eastern Time, or the close of regular trading on the
Exchange, whichever is earlier. The day on which an order is received
is considered the purchase order date. The total deposit of 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 ET on the
date the order to purchase is properly received. The Administrator
determines the quantity of ether associated with a
[[Page 46552]]
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 procedures by which an authorized participant can redeem one or
more Creation Baskets mirror the procedures for the creation of
Creation Baskets.
The authorized participants will deliver only cash to create Shares
and will receive only cash when redeeming Shares. Further, authorized
participants will not directly or indirectly purchase, hold, deliver,
or receive ETH as part of the creation or redemption process or
otherwise direct the Trust or a third party with respect to purchasing,
holding, delivering, or receiving ETH as part of the creation or
redemption process.
The Trust will create Shares by receiving ETH from a third party
that is not the authorized participant and the Trust (through an
execution agent that is acting in an agency capacity)--not the
authorized participant--is responsible for selecting the third party to
deliver the ETH. Further, the third party will not be acting as an
agent of the authorized participant with respect to the delivery of the
ETH to the Trust or acting at the direction of the authorized
participant with respect to the delivery of the ETH to the Trust. The
Trust will redeem Shares by delivering ETH to a third party that is not
the authorized participant and the Trust--not the authorized
participant--is responsible for selecting the third party to receive
the ETH. Further, the third party will not be acting as an agent of the
authorized participant with respect to the receipt of the ETH from the
Trust or acting at the direction of the authorized participant with
respect to the receipt of the ETH from the Trust.
The Sponsor will maintain ownership and control of ETH 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 Trust's NAV will be calculated daily and 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.
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\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.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying ETH, CME Ether Futures, options on CME Ether
Futures, or any other ETH 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
[[Page 46553]]
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 Index 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 Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
In addition, if the Exchange becomes aware that the NAV 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, or any other 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, or any other derivative from such
markets and other entities.\47\ The Exchange may obtain information
regarding trading in the Shares, CME Ether Futures, or any other
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.
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\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 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.
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\49\ 15 U.S.C. 78f.
\50\ 15 U.S.C. 78f(b)(5).
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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
[[Page 46554]]
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.
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\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 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 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, thus, the Trust would not have an impact on
the spot market and
[[Page 46555]]
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.
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(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange 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 into the
tens of billions of dollars and more than a billion dollars of exposure
through Ether Futures ETFs. 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
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about ETH and will be available regarding the Trust and the
Shares. In addition to the price transparency of the Index, the Trust
will provide information regarding the Trust's ETH holdings as well as
additional data regarding the Trust. The 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 Trust will also
disseminate its holdings on a daily basis on its website. The
aforementioned information will be published as of the close of
business available on the Sponsor's website at www.invesco.com/etfs, or
any successor thereto.
The IIV will be calculated by using the prior day's closing NAV per
Share as a base and updating that value during Regular Trading Hours to
reflect changes in the most recently reported price of ETH as reported
by the Index Provider or another reporting service. The IIV
disseminated during Regular Trading Hours should not be viewed as an
actual real-time update of the NAV, which will be calculated only once
at the end of each trading day. The IIV may differ from the NAV due to
the differences in the time window of trades used to calculate each
price. The IIV will be widely disseminated on a per Share basis every
15 seconds during the Exchange's Regular Trading Hours by one or more
major market data vendors. In addition, the IIV will be available
through 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 ETH 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 Index is designed to provide an estimated fair
market value for ETH. Information about the Index and Index value,
including key elements of how the Index is calculated, will be publicly
available at https://lukka.tech.
Quotation and last sale information for ETH 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 ETH is available from major market data vendors and
from the trading platforms on which ETH are traded. Depth of book
information is also available from ETH trading platforms. The normal
trading hours for ETH 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
[[Page 46556]]
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. 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-2023-087 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-2023-087. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeBZX-2023-087 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. 2024-11711 Filed 5-28-24; 8:45 am]
BILLING CODE 8011-01-P
