[Federal Register Volume 88, Number 207 (Friday, October 27, 2023)]
[Notices]
[Pages 73892-73912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-23703]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98780; File No. SR-NYSEARCA-2023-70]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the Grayscale
Ethereum Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares)
October 23, 2023.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on October 10, 2023, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
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comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.201-E: Grayscale Ethereum Trust (ETH) (the
``Trust'').\4\ The proposed rule change is available on the Exchange's
website at www.nyse.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
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\4\ The Trust was previously named Ethereum Investment Trust,
whose name was changed pursuant to a Certificate of Amendment to the
Certificate of Trust of Ethereum Investment Trust filed with the
Delaware Secretary of State on January 11, 2019.
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II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/
or trade pursuant to unlisted trading privileges ``Commodity-Based
Trust Shares.'' \5\ The Exchange proposes to list and trade shares
(``Shares'') \6\ of the Trust pursuant to NYSE Arca Rule 8.201-E.\7\
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\5\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
Trust.
\6\ The Shares are expected to be listed under the ticker symbol
``ETH.''
\7\ On April 17, 2020, the Trust confidentially filed its draft
registration statement on Form 10 under the '34 Act) (File No. 377-
03131) (the ``Draft Registration Statement on Form 10''). On June
16, 2020, the Trust confidentially filed Amendment No. 1 to the
Draft Registration Statement on Form 10. The Jumpstart Our Business
Startups Act (the ``JOBS Act''), enacted on April 5, 2012, added
Section 6(e) to the Securities Act of 1933 (the ``Securities Act''
or ``'33 Act''). Section 6(e) of the Securities Act provides that an
``emerging growth company'' may confidentially submit to the
Commission a draft registration statement for confidential, non-
public review by the Commission staff prior to public filing,
provided that the initial confidential submission and all amendments
thereto shall be publicly filed not later than 21 days before the
date on which the issuer conducts a road show, as such term is
defined in Securities Act Rule 433(h)(4). An emerging growth company
is defined in Section 2(a)(19) of the Securities Act as an issuer
with less than $1,000,000,000 total annual gross revenues during its
most recently completed fiscal year. The Trust meets the definition
of an emerging growth company and consequently submitted its Draft
Registration Statement on Form 10 to the Commission on a
confidential basis. On August 6, 2020, the Trust filed its
registration statement on Form 10 under the Securities Act (File No.
000-56193) (the ``Registration Statement on Form 10''). On October
2, 2020, the Trust filed Amendment No. 1 to the Registration
Statement on Form 10. On, October 5, 2020, the Registration
Statement on Form 10 was automatically deemed effective. On March 5,
2021, February 25, 2022, and March 1, 2023, the Trust filed its
annual report on Form 10-K under the Securities Act (File No. 000-
56193) (the ``Annual Reports''). On November 6, 2020, May 7, 2021,
August 6, 2021, November 5, 2021, May 6, 2022, August 5, 2022,
November 4, 2022, May 5, 2023 and August 4, 2023, the Trust filed
its quarterly reports on Form 10-Q under the Securities Act (File
No. 000-56193) (the ``Quarterly Reports''). The descriptions of the
Trust, the Shares, and ETH contained herein are based, in part, on
the Annual Reports and Quarterly Reports. On January 17, 2019, the
Trust submitted to the Commission an amended Form D as a business
trust. Shares of the Trust have been quoted on OTC Market's OTCQX
Best Marketplace under the symbol ``ETHE'' since June 20, 2019. On
May 23, 2019 and March 20, 2020, the Trust published annual reports
for ETHE for the periods ended December 31, 2018 and December 31,
2019, respectively. On May 23, 2019, August 8, 2019, November 11,
2019, May 8, 2020, and August 6, 2020, the Trust published quarterly
reports for ETHE for the periods ended March 31, 2019, June 30,
2019, September 30, 2019, March 31, 2020, and June 30, 2020,
respectively. Reports published before October 5, 2020, the date on
which the Trust's Shares became registered pursuant to Section 12(g)
of the Act, can be found on OTC Market's website (https://www.otcmarkets.com/stock/ETHE/disclosure), and reports published on
or after October 5, 2020 can be found on OTC Market's website and
the Commission's website (https://www.sec.gov/edgar/browse/?CIK=1725210&owner=exclude). The Shares will be of the same class
and will have the same rights as shares of ETHE. According to the
Sponsor, freely tradeable shares of ETHE will remain freely
tradeable Shares on the date of the listing of the Shares that are
unregistered under the Securities Act. Restricted shares of ETHE
will remain subject to private placement restrictions on such date,
and the holders of such restricted shares will continue to hold
those Shares subject to those restrictions until they become freely
tradable Shares.
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The Trust is the world's largest Ethereum (``ETH'') investment fund
by assets under management as of the date of this filing. The Trust has
approximately $4.8 billion in assets under management \8\ (representing
2.5% of all ETH in circulation), its Shares trade millions of dollars
in daily volume and are held by more than a quarter of a million
American investor accounts seeking exposure to ETH without the cost and
complexity of purchasing the asset directly. However, because the Trust
is not currently listed as an exchange-traded product (``ETP''), the
value of the Shares has not been able to closely track the value of the
Trust's underlying ETH. The Sponsor thus believes that allowing Shares
of the Trust to list and trade on the Exchange as an ETP (i.e.,
converting the Trust to a spot Ethereum ETP) would unlock over $1.6
billion of value \9\ for the Trust's shareholders and provide other
investors with a safe and secure way to invest in ETH on a regulated
national securities exchange.
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\8\ As of September 28, 2023.
\9\ As of September 28, 2023.
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The sponsor of the Trust is Grayscale Investments, LLC
(``Sponsor''), a Delaware limited liability company. The Sponsor is a
wholly owned subsidiary of Digital Currency Group, Inc. (``Digital
Currency Group''). The trustee for the Trust is Delaware Trust Company
(``Trustee''). The custodian for the Trust is Coinbase Custody Trust
Company, LLC (``Custodian'').\10\ The distribution and marketing agent
for the Trust is Grayscale Securities, LLC (the ``Marketing Agent'').
The index provider for the Trust is CoinDesk Indices, Inc. (the ``Index
Provider'').
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\10\ According to the Annual Report, Digital Currency Group owns
a minority interest in Coinbase, Inc., which is the parent company
of the Custodian, representing less than 1.0% of its equity.
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The Trust is a Delaware statutory trust, formed on December 13,
2017, that operates pursuant to a trust agreement between the Sponsor
and the Trustee (``Trust Agreement''). The Trust has no fixed
termination date.
Operation of the Trust
According to the Annual Report, the Trust's assets consist solely
of ETH, Incidental Rights,\11\ IR Virtual Currency,\12\ proceeds from
the sale of ETH, Incidental Rights, and IR Virtual Currency pending use
of such cash for payment of Additional Trust Expenses \13\ or
distribution to
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shareholders, and any rights of the Trust pursuant to any agreements,
other than the Trust Agreement, to which the Trust is a party. Each
Share represents a proportional interest, based on the total number of
Shares outstanding, in each of the Trust's assets as determined by
reference to the Index Price,\14\ less the Trust's expenses and other
liabilities (which include accrued but unpaid fees and expenses). The
Sponsor expects that the market price of the Shares will fluctuate over
time in response to the market prices of ETH. In addition, because the
Shares reflect the estimated accrued but unpaid expenses of the Trust,
the number of ETH represented by a Share will gradually decrease over
time as the Trust's ETH are used to pay the Trust's expenses. The Trust
does not expect to take any Incidental Rights or IR Virtual Currency it
may hold into account for purposes of determining the Trust's ``Digital
Asset Holdings'' (as described below) or the Digital Asset Holdings per
Share.
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\11\ ``Incidental Rights'' are rights to acquire, or otherwise
establish dominion and control over, any virtual currency or other
asset or right, which rights are incident to the Trust's ownership
of ETH and arise without any action of the Trust, or of the Sponsor
or Trustee on behalf of the Trust.
\12\ ``IR Virtual Currency'' is any virtual currency tokens, or
other asset or right, acquired by the Trust through the exercise
(subject to the applicable provisions of the Trust Agreement) of any
Incidental Right.
\13\ ``Additional Trust Expenses'' are any expenses incurred by
the Trust in addition to the Sponsor's Fee that are not Sponsor-paid
Expenses, including, but not limited to, (i) taxes and governmental
charges, (ii) expenses and costs of any extraordinary services
performed by the Sponsor (or any other service provider) on behalf
of the Trust to protect the Trust or the interests of shareholders
(including in connection with any Incidental Rights, any IR Virtual
Currency, or any other staking consideration), (iii) any
indemnification of the Custodian or other agents, service providers
or counterparties of the Trust, (iv) the fees and expenses related
to the listing, quotation or trading of the Shares on any Secondary
Market (including legal, marketing and audit fees and expenses) to
the extent exceeding $600,000 in any given fiscal year and (v)
extraordinary legal fees and expenses, including any legal fees and
expenses incurred in connection with litigation, regulatory
enforcement or investigation matters.
\14\ The ``Index Price'' means the U.S. dollar value of an ETH
derived from the Digital Asset Exchanges that are reflected in the
Index, calculated at 4:00 p.m., New York time, on each business day.
For purposes of the Trust Agreement, the term ETH Index Price has
the same meaning as the Index Price as defined herein.
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The activities of the Trust are limited to (i) issuing ``Baskets''
(as defined below) in exchange for ETH transferred to the Trust as
consideration in connection with creations, (ii) transferring or
selling ETH, Incidental Rights, IR Virtual Currency, or any other
staking consideration as necessary to cover the ``Sponsor's Fee'' and/
or certain Trust expenses, (iii) transferring ETH in exchange for
Baskets surrendered for redemption (subject to obtaining regulatory
approval from the SEC and approval of the Sponsor), (iv) causing the
Sponsor to sell ETH, Incidental Rights, IR Virtual Currency, or any
other staking consideration on the termination of the Trust, (v) making
distributions of Incidental Rights, IR Virtual Currency, and/or any
other staking consideration, or cash from the sale thereof, and (vi)
engaging in all administrative and security procedures necessary to
accomplish such activities in accordance with the provisions of the
Trust Agreement, the Custodian Agreement, the Index License Agreement,
and the Participant Agreements.
In addition, the Trust may engage in any lawful activity necessary
or desirable in order to facilitate shareholders' access to Incidental
Rights or IR Virtual Currency, provided that such activities do not
conflict with the terms of the Trust Agreement. The Trust will not be
actively managed. It will not engage in any activities designed to
obtain a profit from, or to ameliorate losses caused by, changes in the
market prices of ETH.
Investment Objective
According to the Annual Report, and as further described below, the
Trust's investment objective is for the value of the Shares (based on
ETH per Share) to reflect the value of the ETH held by the Trust,
determined by reference to the Index Price, less the Trust's expenses
and other liabilities. While an investment in the Shares is not a
direct investment in ETH, the Shares are designed to provide investors
with a cost-effective and convenient way to gain investment exposure to
ETH. A substantial direct investment in ETH may require expensive and
sometimes complicated arrangements in connection with the acquisition,
security and safekeeping of the ETH and may involve the payment of
substantial fees to acquire such ETH from third-party facilitators
through cash payments of U.S. dollars. Because the value of the Shares
is correlated with the value of ETH held by the Trust, it is important
to understand the investment attributes of, and the market for, ETH.
ETH and the Ethereum Network 15
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\15\ The description of ETH and the Ethereum Network in this
section was provided by the Sponsor and is based on the Annual
Report.
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According to the Annual Report, Ethereum, or ETH, is a digital
asset that is created and transmitted through the operations of the
peer-to-peer ``Ethereum Network,'' a decentralized network of computers
that operates on cryptographic protocols. No single entity owns or
operates the Ethereum Network, the infrastructure of which is
collectively maintained by a decentralized user base. The Ethereum
Network allows people to exchange tokens of value, called Ether, which
are recorded on a public transaction ledger known as a blockchain. ETH
can be used to pay for goods and services, including computational
power on the Ethereum network, or it can be converted to fiat
currencies, such as the U.S. dollar, at rates determined on ``Digital
Asset Exchanges'' \16\ that trade ETH or in individual end-user-to-end-
user transactions under a barter system.
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\16\ A ``Digital Asset Market'' is a ``Brokered Market,''
``Dealer Market,'' ``Principal-to-Principal Market'' or ``Exchange
Market,'' as each such term is defined in the Financial Accounting
Standards Board Accounting Standards Codification Master Glossary.
The ``Digital Asset Exchange Market'' is the global exchange market
for the trading of ETH, which consists of transactions on electronic
Digital Asset Exchanges. A ``Digital Asset Exchange'' is an
electronic marketplace where exchange participants may trade, buy
and sell ETH based on bid-ask trading. The largest Digital Asset
Exchanges are online and typically trade on a 24-hour basis,
publishing transaction price and volume data.
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Furthermore, the Ethereum Network also allows users to write and
implement smart contracts--that is, general-purpose code that executes
on every computer in the network and can instruct the transmission of
information and value based on a sophisticated set of logical
conditions. Using smart contracts, users can create markets, store
registries of debts or promises, represent the ownership of property,
move funds in accordance with conditional instructions and create
digital assets other than ETH on the Ethereum Network. Smart contract
operations are executed on the Ethereum Blockchain in exchange for
payment of ETH. The Ethereum Network is one of a number of projects
intended to expand blockchain use beyond just a peer-to-peer money
system.
The Ethereum Network went live on July 30, 2015. Unlike other
digital assets, such as Bitcoin, which are solely created through a
progressive mining process, 72.0 million ETH were created in connection
with the launch of the Ethereum Network. At the time of the network
launch, a non-profit called the Ethereum Foundation was the sole
organization dedicated to protocol development.
The Ethereum Network is decentralized in that it does not require
governmental authorities or financial institution intermediaries to
create, transmit, or determine the value of ETH. Rather, following the
initial distribution of ETH, ETH is created, burned, and allocated by
the Ethereum Network protocol through a process that is currently
subject to an issuance and burn rate. The value of ETH is determined by
the supply of and demand for ETH on the Digital Asset Exchanges or in
private end-user-to-end-user transactions.
New ETH are created and rewarded to the validators of a block in
the Ethereum Blockchain for verifying transactions. The Ethereum
Blockchain is effectively a decentralized database that includes all
blocks that have been validated, and it is updated to include new
blocks as they are validated. Each ETH transaction is broadcast to the
Ethereum Network and, when included in a block,
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recorded in the Ethereum Blockchain. As each new block records
outstanding ETH transactions, and outstanding transactions are settled
and validated through such recording, the Ethereum Blockchain
represents a complete, transparent and unbroken history of all
transactions of the Ethereum Network.
Among other things, ETH is used to pay for transaction fees and
computational services (i.e., smart contracts) on the Ethereum Network;
users of the Ethereum Network pay for the computational power of the
machines executing the requested operations with ETH. Requiring payment
in ETH on the Ethereum Network incentivizes developers to write quality
applications and increases the efficiency of the Ethereum Network
because wasteful code costs more, while also ensuring that the Ethereum
Network remains economically viable by compensating for contributed
computational resources.
Smart Contracts and Development on the Ethereum Network
Smart contracts are programs that run on a blockchain that can
execute automatically when certain conditions are met. Smart contracts
facilitate the exchange of anything representative of value, such as
money, information, property, or voting rights. Using smart contracts,
users can send or receive digital assets, create markets, store
registries of debts or promises, represent ownership of property or a
company, move funds in accordance with conditional instructions and
create new digital assets.
Development on the Ethereum Network involves building more complex
tools on top of smart contracts, such as decentralized apps
(``DApps''); organizations that are autonomous, known as decentralized
autonomous organizations (``DAOs''); and entirely new decentralized
networks. For example, a company that distributes charitable donations
on behalf of users could hold donated funds in smart contracts that are
paid to charities only if the charity satisfies certain pre-defined
conditions.
Moreover, the Ethereum Network has also been used as a platform for
creating new digital assets and conducting their associated initial
coin offerings. As of June 30, 2023, a majority of digital assets were
built on the Ethereum Network, with such assets representing a
significant amount of the total market value of all digital assets.
More recently, the Ethereum Network has been used for decentralized
finance (``DeFi'') or open finance platforms, which seek to democratize
access to financial services, such as borrowing, lending, custody,
trading, derivatives and insurance, by removing third-party
intermediaries. DeFi can allow users to lend and earn interest on their
digital assets, exchange one digital asset for another and create
derivative digital assets such as stablecoins, which are digital assets
pegged to a reserve asset such as fiat currency. Over the course of
2022, between $20 billion and $98 billion worth of digital assets were
locked up as collateral on DeFi platforms on the Ethereum Network.\17\
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\17\ DeFiLlama, ``Ethereum Total Value Locked,'' https://defillama.com/chain/Ethereum.
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In addition, the Ethereum Network and other smart contract
platforms have been used for creating non-fungible tokens, or ``NFTs.''
Unlike digital assets native to smart contract platforms that are
fungible and enable the payment of fees for smart contract execution,
NFTs allow for digital ownership of assets that convey certain rights
to other digital or real-world assets. This new paradigm allows users
to own rights to other assets through NFTs, which enable users to trade
them with others on the Ethereum Network. For example, an NFT may
convey rights to a digital asset that exists in an online game or a
Dapp, and users can trade their NFT in the Dapp or game, and carry them
to other digital experiences, creating an entirely new free-market,
internet-native economy that can be monetized in the physical world.
Overview of the Ethereum Network's Operations
In order to own, transfer, or use ETH directly on the Ethereum
Network (as opposed to through an intermediary, such as a custodian), a
person generally must have internet access to connect to the Ethereum
Network. ETH transactions may be made directly between end-users
without the need for a third-party intermediary. To prevent the
possibility of double-spending ETH, a user must notify the Ethereum
Network of the transaction by broadcasting the transaction data to its
network peers. The Ethereum Network provides confirmation against
double-spending by memorializing every transaction in the Ethereum
Blockchain, which is publicly accessible and transparent. This
memorialization and verification against double-spending is
accomplished through the Ethereum Network validation process, which
adds ``blocks'' of data, including recent transaction information, to
the Ethereum Blockchain.
Summary of an ETH Transaction
Prior to engaging in ETH transactions directly on the Ethereum
Network, a user generally must first install on its computer or mobile
device an Ethereum Network software program that will allow the user to
generate a private and public key pair associated with an ETH address,
commonly referred to as a ``wallet.'' The Ethereum Network software
program and the ETH address also enable the user to connect to the
Ethereum Network and transfer ETH to, and receive ETH from, other
users.
Each Ethereum Network address, or wallet, is associated with a
unique ``public key'' and ``private key'' pair. To receive ETH, the ETH
recipient must provide its public key to the party initiating the
transfer. This activity is analogous to a recipient for a transaction
in U.S. dollars providing a routing address in wire instructions to the
payor so that cash may be wired to the recipient's account. The payor
approves the transfer to the address provided by the recipient by
``signing'' a transaction that consists of the recipient's public key
with the private key of the address from where the payor is
transferring the ETH. The recipient, however, does not make public or
provide to the sender its related private key.
Neither the recipient nor the sender reveals their private keys in
a transaction, because the private key authorizes transfer of the funds
in that address to other users. Therefore, if a user loses his private
key, the user may permanently lose access to the ETH contained in the
associated address. Likewise, ETH is irretrievably lost if the private
key associated with them is deleted and no backup has been made. When
sending ETH, a user's Ethereum Network software program must validate
the transaction with the associated private key. In addition, since
every computation on the Ethereum Network requires processing power,
there is a transaction fee involved with the transfer that is paid by
the payor. The resulting digitally validated transaction is sent by the
user's Ethereum Network software program to the Ethereum Network
validators to allow transaction confirmation.
Ethereum Network validators record and confirm transactions when
they validate and add blocks of information to the Ethereum Blockchain.
In proof-of-stake, validators compete to be randomly selected to
validate transactions. When a validator is selected to validate a
block, it creates that block, which includes data relating to (i) the
verification of newly submitted
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and accepted transactions and (ii) a reference to the prior block in
the Ethereum Blockchain to which the new block is being added. The
validator becomes aware of outstanding, unrecorded transactions through
the data packet transmission and distribution discussed above.
Upon the addition of a block included in the Ethereum Blockchain,
the Ethereum Network software program of both the spending party and
the receiving party will show confirmation of the transaction on the
Ethereum Blockchain and reflect an adjustment to the ETH balance in
each party's Ethereum Network public key, completing the ETH
transaction. Once a transaction is confirmed on the Ethereum
Blockchain, it is irreversible.
Some ETH transactions are conducted ``off-blockchain'' and are
therefore not recorded in the Ethereum Blockchain. Some ``off-
blockchain transactions'' involve the transfer of control over, or
ownership of, a specific digital wallet holding ETH or the reallocation
of ownership of certain ETH in a pooled-ownership digital wallet, such
as a digital wallet owned by a Digital Asset Exchange. In contrast to
on-blockchain transactions, which are publicly recorded on the Ethereum
Blockchain, information and data regarding off-blockchain transactions
are generally not publicly available. Therefore, off-blockchain
transactions are not truly ETH transactions in that they do not involve
the transfer of transaction data on the Ethereum Network and do not
reflect a movement of ETH between addresses recorded in the Ethereum
Blockchain. For these reasons, off-blockchain transactions are subject
to risks, as any such transfer of ETH ownership is not protected by the
protocol behind the Ethereum Network or recorded in, and validated
through, the blockchain mechanism.
Creation of New ETH
Initial Creation of ETH
Unlike other digital assets such as Bitcoin, which are solely
created through a progressive mining process, 72.0 million ETH were
created in connection with the launch of the Ethereum Network. The
initial 72.0 million ETH were distributed as follows:
Initial Distribution: 60.0 million ETH, or 83.33% of the supply,
were sold to the public in a crowd sale conducted between July and
August 2014 that raised approximately $18 million.
Ethereum Foundation: 6.0 million ETH, or 8.33% of the supply, were
distributed to the Ethereum Foundation for operational costs.
Ethereum Developers: 3.0 million ETH, or 4.17% of the supply, were
distributed to developers who contributed to the Ethereum Network.
Developer Purchase Program: 3.0 million ETH, or 4.17% of the
supply, were distributed to members of the Ethereum Foundation to
purchase at the initial crowd sale price.
Following the launch of the Ethereum Network, ETH supply initially
increased through a progressive mining process. Following the
introduction of EIP-1559, described below, ETH supply and issuance rate
varies based on factors such as recent use of the network.
Proof-of-Work Mining Process
Prior to September 2022, Ethereum operated using a proof-of-work
consensus mechanism. Under proof-of-work, in order to incentivize those
who incurred the computational costs of securing the network by
validating transactions, there was a reward given to the computer that
was able to create the latest block on the chain. Every 12 seconds, on
average, a new block was added to the Ethereum Blockchain with the
latest transactions processed by the network, and the computer that
generated this block was awarded a variable amount of ETH, depending on
use of the network at the time. In certain mining scenarios, referred
to as an uncle/aunt reward, ETH was sometimes sent to another miner if
they were also able to find a solution, but their block was not
included. Due to the nature of the algorithm for block generation, this
process (generating a ``proof-of-work'') was guaranteed to be random.
The process by which a digital asset was ``mined'' resulted in new
blocks being added to such digital asset's blockchain and new digital
assets being issued to the miners. Prior to the Merge upgrade,
described below, computers on the Ethereum Network engaged in a set of
prescribed complex mathematical calculations in order to add a block to
the Ethereum Blockchain and thereby confirm ETH transactions included
in that block's data.
Proof-of-Stake Process
In the second half of 2020, the Ethereum Network began the first of
several stages of an upgrade that was initially known as ``Ethereum
2.0'' and eventually became known as the ``Merge'' to transition the
Ethereum Network from a proof-of-work consensus mechanism to a proof-
of-stake consensus mechanism. The Merge was completed on September 15,
2022, and the Ethereum Network has operated on a proof-of-stake model
since such time.
Unlike proof-of-work, in which miners expend computational
resources to compete to validate transactions and are rewarded coins in
proportion to the amount of computational resources expended, in proof-
of-stake, miners (sometimes called validators) risk or ``stake'' coins
to compete to be randomly selected to validate transactions and are
rewarded coins in proportion to the amount of coins staked. Any
malicious activity, such as validating multiple blocks, disagreeing
with the eventual consensus, or otherwise violating protocol rules,
results in the forfeiture or ``slashing'' of a portion of the staked
coins. Proof-of-stake is viewed as more energy efficient and scalable
than proof-of-work and is sometimes referred to as ``virtual mining.''
Every 12 seconds, approximately, a new block is added to the Ethereum
Blockchain with the latest transactions processed by the network, and
the validator that generated this block is awarded ETH.
Limits on ETH Supply
The rate at which new ETH are issued and put into circulation is
expected to vary. Following the Merge, approximately 1,700 ETH are
issued per day, though the issuance rate varies based on the number of
validators on the network. In addition, the issuance of new ETH could
be partially or completely offset by the burn mechanism introduced by
the EIP-1559 modification, under which ETH are removed from supply at a
rate that varies with network usage. On occasion, the ETH supply has
been deflationary over a 24-hour period as a result of the burn
mechanism. The attributes of the new consensus algorithm are subject to
change, but in sum, the new consensus algorithm and related
modifications reduced total new ETH issuances and could turn the ETH
supply deflationary over the long term.
As of June 30, 2023, approximately 120 million ETH were
outstanding.\18\
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\18\ CoinMarketCap, ``Ethereum,'' https://coinmarketcap.com/currencies/ethereum/.
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Modifications to the ETH Protocol
The Ethereum Network is an open source project with no official
developer or group of developers that controls it. However,
historically the Ethereum Network's development has been overseen by
the Ethereum Foundation and other core developers. The Ethereum
Foundation and core developers are able to access and alter the
Ethereum Network source code and,
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as a result, they are responsible for quasi-official releases of
updates and other changes to the Ethereum Network's source code.
For example, in 2019, the Ethereum Network completed a network
upgrade called Metropolis that was designed to enhance the usability of
the Ethereum Network and was introduced in two stages. The first stage,
called Byzantium, was implemented in October 2017. The purpose of
Byzantium was to increase the network's privacy, security, and
scalability and reduce the block reward from 5.0 ETH to 3.0 ETH. The
second stage, called Constantinople, was implemented in February 2019,
along with another upgrade, called St. Petersburg. Another network
upgrade, called Istanbul, was implemented in December 2019. The purpose
of Istanbul was to make the network more resistant to denial of service
attacks, enable greater ETH and Zcash interoperability as well as other
Equihash-based proof-of-work digital assets, and to increase the
scalability and performance for solutions on zero-knowledge privacy
technology like SNARKs and STARKs. The purpose of these upgrades was to
prepare the Ethereum Network for the introduction of a proof-of-stake
algorithm and reduce the block reward from 3.0 ETH to 2.0 ETH. In the
second half of 2020, the Ethereum Network began the first of several
stages of an upgrade culminating in the Merge. The Merge amended the
Ethereum Network's consensus mechanism to include proof-of-stake.
Forthcoming upgrades will include sharding. The purpose of sharding is
to increase scalability of a database, such as a blockchain, by
splitting the data processing responsibility among many nodes, allowing
for parallel processing and validation of transactions. This contrasts
with the existing Ethereum Blockchain, which requires each node to
process and validate every transaction.
In 2021, the Ethereum network implemented the EIP-1559 upgrade.
EIP-1559 changed the methodology used to calculate the fees paid to
miners (now validators). This new methodology splits fees into two
components: a base cost and priority fee. The base cost is now removed
from circulation, or ``burnt'', and the priority fee is paid to
validators. EIP-1559 has reduced the total net issuance of ETH fees to
validators. The release of updates to the Ethereum Network's source
code does not guarantee that the updates will be automatically adopted.
Users and validators must accept any changes made to the Ethereum
source code by downloading the proposed modification of the Ethereum
Network's source code. A modification of the Ethereum Network's source
code is only effective with respect to the Ethereum users and
validators that download it. If a modification is accepted only by a
percentage of users and validators, a division in the Ethereum Network
will occur such that one network will run the pre-modification source
code and the other network will run the modified source code. Such a
division is known as a ``fork.'' Consequently, as a practical matter, a
modification to the source code becomes part of the Ethereum Network
only if accepted by participants collectively having a majority of the
validation power on the Ethereum Network.
Core development of the Ethereum source code has increasingly
focused on modifications of the Ethereum protocol to increase speed and
scalability and also allow for financial and non-financial next
generation uses. The Trust's activities will not directly relate to
such projects, though such projects may utilize ETH as tokens for the
facilitation of their non-financial uses, thereby potentially
increasing demand for ETH and the utility of the Ethereum Network as a
whole. Conversely, projects that operate and are built within the
Ethereum Blockchain may increase the data flow on the Ethereum Network
and could either ``bloat'' the size of the Ethereum Blockchain or slow
confirmation times.
Custody of the Trust's ETH
Digital assets and digital asset transactions are recorded and
validated on blockchains, the public transaction ledgers of a digital
asset network. Each digital asset blockchain serves as a record of
ownership for all of the units of such digital asset, even in the case
of certain privacy-focused digital assets, where the transactions
themselves are not publicly viewable. All digital assets recorded on a
blockchain are associated with a public blockchain address, also
referred to as a digital wallet. Digital assets held at a particular
public blockchain address may be accessed and transferred using a
corresponding private key.
Key Generation
Public addresses and their corresponding private keys are generated
by the Custodian in secret key generation ceremonies at secure
locations inside faraday cages, which are enclosures used to block
electromagnetic fields and mitigate attacks. The Custodian uses quantum
random number generators to generate the public and private key pairs.
Once generated, private keys are encrypted, separated into
``shards,'' and then further encrypted. After the key generation
ceremony, all materials used to generate private keys, including
computers, are destroyed. All key generation ceremonies are performed
offline. No party other than the Custodian has access to the private
key shards of the Trust.
Key Storage
Private key shards are distributed geographically in secure vaults
around the world, including in the United States. The locations of the
secure vaults may change regularly and are kept confidential by the
Custodian for security purposes.
The Digital Asset Account \19\ uses offline storage, or ``cold
storage,'' mechanisms to secure the Trust's private keys. The term cold
storage refers to a safeguarding method by which the private keys
corresponding to digital assets are disconnected and/or deleted
entirely from the internet. Cold storage of private keys may involve
keeping such keys on a non-networked (or ``airgapped'') computer or
electronic device or storing the private keys on a storage device (for
example, a USB thumb drive) or printed medium (for example, papyrus,
paper, or a metallic object). A digital wallet may receive deposits of
digital assets but may not send digital assets without use of the
digital assets' corresponding private keys. In order to send digital
assets from a digital wallet in which the private keys are kept in cold
storage, either the private keys must be retrieved from cold storage
and entered into an online, or ``hot,'' digital asset software program
to sign the transaction, or the unsigned transaction must be
transferred to the cold server in which the private keys are held for
signature by the private keys and then transferred back to the online
digital asset software program. At that point, the user of the digital
wallet can transfer its digital assets.
---------------------------------------------------------------------------
\19\ The Digital Asset Account is a segregated custody account
controlled and secured by the Custodian to store private keys, which
allows for the transfer of ownership or control of the Trust's ETH
on the Trust's behalf.
---------------------------------------------------------------------------
Security Procedures
The Custodian is the custodian of the Trust's private keys in
accordance with the terms and provisions of the Custodian Agreement.
Transfers from the Digital Asset Account require certain security
procedures, including, but not limited to, multiple encrypted private
key shards, usernames, passwords and 2-step verification. Multiple
private key shards held by the
[[Page 73898]]
Custodian must be combined to reconstitute the private key to sign any
transaction in order to transfer the Trust's assets. Private key shards
are distributed geographically in secure vaults around the world,
including in the United States.
As a result, if any one secure vault is ever compromised, this
event will have no impact on the ability of the Trust to access its
assets, other than a possible delay in operations, while one or more of
the other secure vaults is used instead. These security procedures are
intended to remove single points of failure in the protection of the
Trust's assets.
Transfers of ETH to the Digital Asset Account will be available to
the Trust once processed on the Blockchain.
Subject to obtaining regulatory approval to operate a redemption
program and authorization of the Sponsor, the process of accessing and
withdrawing ETH from the Trust to redeem a Unit by an Authorized
Participant will follow the same general procedure as transferring ETH
to the Trust to create a Unit by an Authorized Participant, only in
reverse.
Digital Asset Holdings
According to the Annual Report, the Trust's assets consist solely
of ETH, Incidental Rights, IR Virtual Currency, proceeds from the sale
of ETH, Incidental Rights, and IR Virtual Currency pending use of such
cash for payment of Additional Trust Expenses or distribution to the
shareholders, and any rights of the Trust pursuant to any agreements,
other than the Trust Agreement, to which the Trust is a party. Each
Share represents a proportional interest, based on the total number of
Shares outstanding, in each of the Trust's assets as determined in the
case of ETH by reference to the Index Price, less the Trust's expenses
and other liabilities (which include accrued but unpaid fees and
expenses). The Sponsor expects that the market price of the Shares will
fluctuate over time in response to the market prices of ETH. In
addition, because the Shares reflect the estimated accrued but unpaid
expenses of the Trust, the number of ETH represented by a Share will
gradually decrease over time as the Trust's ETH is used to pay the
Trust's expenses. The Trust does not expect to take any Incidental
Rights or IR Virtual Currency it may hold into account for purposes of
determining the Trust's Digital Asset Holdings or the Digital Asset
Holdings per Share.
The Sponsor will evaluate the ETH held by the Trust and determine
the Digital Asset Holdings of the Trust in accordance with the relevant
provisions of the Trust Documents. The following is a description of
the material terms of the Trust Documents as they relate to valuation
of the Trust's ETH and the Digital Asset Holdings calculations.
On each business day at 4:00 p.m., New York time, or as soon
thereafter as practicable (the ``Evaluation Time''), the Sponsor will
evaluate the ETH held by the Trust and calculate and publish the
Digital Asset Holdings of the Trust. To calculate the Digital Asset
Holdings, the Sponsor will:
1. Determine the Index Price as of such business day.
2. Multiply the Index Price by the Trust's aggregate number of ETH
owned by the Trust as of 4:00 p.m., New York time, on the immediately
preceding day, less the aggregate number of ETH payable as the accrued
and unpaid Sponsor's Fee as of 4:00 p.m., New York time, on the
immediately preceding day.
3. Add the U.S. dollar value of ETH, calculated using the Index
Price, receivable under pending creation orders, if any, determined by
multiplying the number of the Baskets represented by such creation
orders by the Basket Amount and then multiplying such product by the
Index Price.
4. Subtract the U.S. dollar amount of accrued and unpaid Additional
Trust Expenses, if any.
5. Subtract the U.S. dollar value of the ETH, calculated using the
Index Price, to be distributed under pending redemption orders, if any,
determined by multiplying the number of Baskets to be redeemed
represented by such redemption orders by the Basket Amount and then
multiplying such product by the Index Price (the amount derived from
steps 1 through 5 above, the ``Digital Asset Holdings Fee Basis
Amount'').
6. Subtract the U.S. dollar amount of the Sponsor's Fee that
accrues for such business day, as calculated based on the Digital Asset
Holdings Fee Basis Amount for such business day.
In the event that the Sponsor determines that the primary
methodology used to determine the Index Price is not an appropriate
basis for valuation of the Trust's ETH, the Sponsor will utilize the
cascading set of rules as described in ``Trust Valuation of ETH''
below. In addition, in the event that the Trust holds any Incidental
Rights and/or IR Virtual Currency, the Sponsor may, at its discretion,
include the value of such Incidental Rights and/or IR Virtual Currency
in the determination of the Digital Asset Holdings, provided that the
Sponsor has determined in good faith a method for assigning an
objective value to such Incidental Rights and/or IR Virtual Currency.
At this time, the Trust does not expect to take any Incidental Rights
or IR Virtual Currency it may hold into account for the purposes of
determining the Digital Asset Holdings or the Digital Asset Holdings
per Share.
ETH Value
Digital Asset Exchange Valuation
According to the Annual Report, the value of ETH is determined by
the value that various market participants place on ETH through their
transactions. The most common means of determining the value of an ETH
is by surveying one or more Digital Asset Exchanges where ETH is traded
publicly (e.g., Coinbase Pro, Kraken, and LMAX Digital). Additionally,
there are over-the-counter dealers or market makers that transact in
ETH.
Digital Asset Exchange Public Market Data
On each online Digital Asset Exchange, ETH is traded with publicly
disclosed valuations for each executed trade, measured by one or more
fiat currencies such as the U.S. dollar or euro. Over-the-counter
dealers or market makers do not typically disclose their trade data.
As of June 30, 2023, the Digital Asset Exchanges included in the
Index are Coinbase Pro, Kraken, and LMAX Digital. As further described
below, the Sponsor and the Trust reasonably believe each of these
Digital Asset Exchanges are in material compliance with applicable U.S.
federal and state licensing requirements and maintain practices and
policies designed to comply with know-your-customer (``KYC''), anti-
money-laundering (``AML'') regulations.
Coinbase Pro: A U.S.-based exchange registered as a money services
business (``MSB'') with the U.S. Department of the Treasury's Financial
Crimes Enforcement Network (``FinCEN'') and licensed as a virtual
currency business under the New York State Department of Financial
Services (``NYDFS'') BitLicense program, as well as money transmitter
in various U.S. states.
Kraken: A U.S.-based exchange registered as an MSB with FinCEN and
licensed as money transmitter in various U.S. states. Kraken does not
hold a BitLicense.
LMAX Digital: A U.K.-based exchange registered as a broker with the
Financial Conduct Authority. LMAX Digital does not hold a BitLicense.
Currently, there are several Digital Asset Exchanges operating
worldwide,
[[Page 73899]]
and online Digital Asset Exchanges represent a substantial percentage
of ETH buying and selling activity and provide the most data with
respect to prevailing valuations of ETH. These exchanges include
established exchanges such as exchanges included in the Index, which
provide a number of options for buying and selling ETH. The below table
reflects the trading volume in ETH and market share \20\ of the ETH-
U.S. dollar trading pair of each of the Digital Asset Exchanges
included in the Index as of June 30, 2023,\21\ using data reported by
the Index Provider from December 14, 2017 to June 30, 2023:
---------------------------------------------------------------------------
\20\ Market share is calculated using trading volume data (in
ETH) provided by the Index Provider for certain Digital Asset
Exchanges, including Coinbase Pro, Kraken, and LMAX Digital, as well
as certain other large U.S.-dollar denominated Digital Asset
Exchanges that are not included in the Index as of June 30, 2023,
including Bitstamp, Binance.US (data included from April 1, 2020),
Bitfinex, Bittrex (data included from July 31, 2018), Cboe Digital
(data included from October 1, 2020), FTX.US (data included from
July 1, 2021 through November 10, 2022), Gemini, HitBTC (data
included from June 13, 2019 through March 31, 2020), OKCoin (data
included from December 25, 2018 through December 31, 2022), and
itBit (data included from December 27, 2018).
\21\ On January 19, 2020, the Index Provider removed itBit due
to a lack of trading volume and added LMAX Digital to the Index
based on the exchange meeting the liquidity thresholds as part of
its scheduled quarterly review. Effective July 23, 2022, the Index
Provider removed Bitstamp from the Index due to the exchange's
failure to meet the minimum liquidity requirement, and added FTX.US
as a Constituent Exchange based on its satisfaction of the minimum
liquidity requirement as part of its scheduled quarterly review.
Effective November 10, 2022, the Index Provider removed FTX.US from
the Index due to FTX.US's announcement that trading on the exchange
may be halted, which would impact FTX.US's ability to reliably
publish trade prices and volumes on a real-time basis through APIs,
and did not add any Constituent Exchanges as part of its review.
Effective January 28, 2023, the Index Provider added Binance.US to
the Index based on the exchange meeting the minimum liquidity
requirement, and did not remove any Constituent Exchanges as part of
its quarterly review. On June 17, 2023, the Index Provider removed
Binance.US from the Index, due to Binance.US's announcement that the
exchange was suspending U.S. dollar deposits and withdrawals and
planned to delist its U.S. dollar trading pairs, and did not add any
Constituent Exchanges as part of its review.
------------------------------------------------------------------------
Digital asset exchanges included in the Market share
index as of June 30, 2023 Volume (ETH) (%)
------------------------------------------------------------------------
Coinbase Pro............................ 399,687,249 34.61
Kraken.................................. 132,211,166 11.45
LMAX Digital............................ 65,848,432 5.70
-------------------------------
Total ETH-U.S. dollar trading pair.. 597,746,846 51.76
------------------------------------------------------------------------
The domicile, regulation, and legal compliance of the Digital Asset
Exchanges included in the Index varies. Information regarding each
Digital Asset Exchange may be found, where available, on the websites
for such Digital Asset Exchanges, among other places.
The Index and the Index Price
The Index is a U.S. dollar-denominated composite reference rate for
the price of ETH. The Index is designed to (i) mitigate the effects of
fraud, manipulation and other anomalous trading activity from impacting
the ETH reference rate, (ii) provide a real-time, volume-weighted fair
value of ETH and (iii) appropriately handle and adjust for non-market
related events.
The Index Price is determined by the Index Provider through a
process in which trade data is cleansed and compiled in such a manner
as to algorithmically reduce the impact of anomalistic or manipulative
trading. This is accomplished by adjusting the weight of each data
input based on price deviation relative to the observable set, as well
as recent and long-term trading volume at each venue relative to the
observable set.
Constituent Exchange Selection
According to the Annual Report, the Digital Asset Exchanges that
are included in the Index are selected by the Index Provider utilizing
a methodology that is guided by the International Organization of
Securities Commissions (``IOSCO'') principles for financial benchmarks.
For an exchange to become a Digital Asset Exchange included in the
Index (a ``Constituent Exchange''), it must satisfy the criteria listed
below (the ``Inclusion Criteria''):
Sufficient USD liquidity relative to the size of the
listed assets;
No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the exchange's
eligibility requirements to trade;
No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
Real-time price discovery;
Limited or no capital controls;
Transparent ownership including a publicly-owned ownership
entity;
Publicly available language and policies addressing legal
and regulatory compliance in the US, including KYC (Know Your
Customer), AML (Anti-Money Laundering) and other policies designed to
comply with relevant regulations that might apply to it;
Be a U.S.-domiciled exchange or a non-U.S. domiciled
exchange that is able to service U.S. investors;
Offer programmatic spot trading of the trading \22\ pair;
and
---------------------------------------------------------------------------
\22\ Exchanges with programmatic trading offer traders an
application programming interface that permits trading by sending
programmed commands to the exchange.
---------------------------------------------------------------------------
Reliably publish trade prices and volumes on a real-time
basis through Rest and Websocket APIs.
A Digital Asset Exchange is removed as a Constituent Exchanges when
it no longer satisfies the Inclusion Criteria. The Index Provider does
not currently include data from over-the-counter markets or derivatives
platforms among the Constituent Exchanges. According to the Annual
Report, over-the-counter data is not currently included because of the
potential for trades to include a significant premium or discount paid
for larger liquidity, which creates an uneven comparison relative to
more active markets. There is also a higher potential for over-the-
counter transactions to not be arms-length, and thus not be
representative of a true market price. ETH derivative markets are also
not currently included as the markets remain relatively thin. The Index
Provider will consider IOSCO principles for financial benchmarks and
the management of trading venues of ETH derivatives and the
aforementioned Inclusion Criteria when considering inclusion of over-
the-counter or derivative platform data in the future.
The Index Provider and the Sponsor have entered into an index
license agreement, dated as of February 1, 2022 (as amended, the
``Index License Agreement''), governing the Sponsor's
[[Page 73900]]
use of the Index Price.\23\ Pursuant to the terms of the Index License
Agreement, the Index Provider may adjust the calculation methodology
for the Index Price without notice to, or consent of, the Trust or its
shareholders. The Index Provider may decide to change the calculation
methodology to maintain the integrity of the Index Price calculation
should it identify or become aware of previously unknown variables or
issues with the existing methodology that it believes could materially
impact its performance and/or reliability. The Index Provider has sole
discretion over the determination of Index Price and may change the
methodologies for determining the Index Price from time to time.
Shareholders will be notified of any material changes to the
calculation methodology or the Index Price in the Trust's current
reports and will be notified of all other changes that the Sponsor
considers significant in the Trust's periodic or current reports. The
Trust will determine the materiality of any changes to the Index Price
on a case-by-case basis, in consultation with external counsel.
---------------------------------------------------------------------------
\23\ Upon entering into the Index License Agreement, the Sponsor
and the Index Provider terminated the license agreement between the
parties dated as of February 28, 2019.
---------------------------------------------------------------------------
The Index Provider may change the trading venues that are used to
calculate the Index or otherwise change the way in which the Index is
calculated at any time. For example, the Index Provider has scheduled
quarterly reviews in which it may add or remove Constituent Exchanges
that satisfy or fail the Inclusion Criteria. The Index Provider does
not have any obligation to consider the interests of the Sponsor, the
Trust, the shareholders, or anyone else in connection with such
changes. While the Index Provider is not required to publicize or
explain the changes or to alert the Sponsor to such changes, it has
historically notified the Trust of any material changes to the
Constituent Exchanges, including any additions or removals of the
Constituent Exchanges, in addition to issuing press releases in
connection with the same. The Sponsor will notify investors of any such
material event by filing a current report on Form 8-K. Although the
Index methodology is designed to operate without any manual
intervention, rare events would justify manual intervention.
Intervention of this kind would be in response to non-market-related
events, such as the halting of deposits or withdrawals of funds on a
Digital Asset Exchange, the unannounced closure of operations on a
Digital Asset Exchange, insolvency or the compromise of user funds. In
the event that such an intervention is necessary, the Index Provider
would issue a public announcement through its website, API and other
established communication channels with its clients.
Determination of the Index Price
The Index applies an algorithm to the price of ETH on the
Constituent Exchanges calculated on a per second basis over a 24-hour
period. The Index's algorithm is expected to reflect a four-pronged
methodology to calculate the Index Price from the Constituent
Exchanges:
Volume Weighting: Constituent Exchanges with greater
liquidity receive a higher weighting in the Index, increasing the
ability to execute against (i.e., replicate) the Index in the
underlying spot markets.
Price-Variance Weighting: The Index Price reflects data
points that are discretely weighted in proportion to their variance
from the rest of the Constituent Exchanges. As the price at a
particular exchange diverges from the prices at the rest of the
Constituent Exchanges, its weight in the Index Price consequently
decreases.
Inactivity Adjustment: The Index Price algorithm penalizes
stale activity from any given Constituent Exchange. When a Constituent
Exchange does not have recent trading data, its weighting in the Index
Price is gradually reduced until it is de-weighted entirely. Similarly,
once trading activity at a Constituent Exchange resumes, the
corresponding weighting for that Constituent Exchange is gradually
increased until it reaches the appropriate level.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Index only includes
executed trades in its calculation. Additionally, the Index only
includes Constituent Exchanges that charge trading fees to its users in
order to attach a real, quantifiable cost to any manipulation attempts.
The Index Provider re-evaluates the weighting algorithm on a
periodic basis, but maintains discretion to change the way in which an
Index Price is calculated based on its periodic review or in extreme
circumstances. The exact methodology to calculate the Index Price is
not publicly available. Still, the Index is designed to limit exposure
to trading or price distortion of any individual Digital Asset Exchange
that experiences periods of unusual activity or limited liquidity by
discounting, in real-time, anomalous price movements at individual
Digital Asset Exchanges.
The Sponsor believes the Index Provider's selection process for
Constituent Exchanges as well as the methodology of the Index Price's
algorithm provides a more accurate picture of ETH price movements than
a simple average of Digital Asset Exchange spot prices, and that the
weighting of ETH prices on the Constituent Exchanges limits the
inclusion of data that is influenced by temporary price dislocations
that may result from technical problems, limited liquidity or
fraudulent activity elsewhere in the ETH spot market. By referencing
multiple trading venues and weighting them based on trade activity, the
Sponsor believes that the impact of any potential fraud, manipulation
or anomalous trading activity occurring on any single venue is reduced.
If the Index Price becomes unavailable, or if the Sponsor
determines in good faith that such Index Price does not reflect an
accurate price for ETH, then the Sponsor will, on a best efforts basis,
contact the Index Provider to obtain the Index Price directly from the
Index Provider. If after such contact such Index Price remains
unavailable or the Sponsor continues to believe in good faith that such
Index Price does not reflect an accurate price for the relevant digital
asset, then the Sponsor will employ a cascading set of rules to
determine the Index Price, as described below in ``Determination of the
Index Price When Index Prices are Unavailable.''
The Trust values its ETH for operational purposes by reference to
the Index Price. The Index Price is the value of an ETH as represented
by the Index, calculated at 4:00 p.m., New York time, on each business
day.
Illustrative Example
For the purposes of illustration, outlined below are examples of
how the attributes that impact weighting and adjustments in the
aforementioned methodology may be utilized to generate the Index Price
for a digital asset. In this example, the Constituent Exchanges for the
Index Price for a digital asset are Coinbase Pro, Kraken, LMAX Digital,
and Bitstamp.
The Index Price algorithm, as described above, accounts for
manipulation at the outset by only including data from executed trades
on Constituent Exchanges that charge trading fees. Then, the below-
listed elements may impact the weighting of the Constituent Exchanges
on the Index price as follows:
Volume Weighting: Each Constituent Exchange will be
weighted to appropriately reflect the trading
[[Page 73901]]
volume share of the Constituent Exchange relative to all the
Constituent Exchanges during this same period. For example, an average
hourly weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase Pro,
LMAX Digital, Kraken, and Bitstamp, respectively, would represent each
Constituent Exchange's share of trading volume during the same period.
Inactivity Adjustment: Assume that a Constituent Exchange
represented a 14% weighting on the Index Price of a digital asset,
which is based on the per-second calculations of its trading volume and
price-variance relative to the cohort of Constituent Exchanges included
in such Index, and then went offline for approximately two hours. The
index algorithm would automatically recognize inactivity and start de-
weighting the Constituent Exchange at the 3-minute mark and continue to
do so over a 7-minute period until its influence was effectively zero,
10-minutes after becoming inactive. As soon as trading activity resumed
at the Constituent Exchange, the index algorithm would re-weight it to
the appropriate weighting based on trading volume and price-variance
relative to the cohort of Constituent Exchanges included in the Index.
Due to the period of inactivity, it would re-weight the Constituent
Exchange activity to a weight lower than its original weighting--for
example, to 12%.
Price-Variance Weighting: Assume that for a one-hour
period, the digital asset's execution prices on one Constituent
Exchange were trading more than 7% higher than the average execution
prices on another Constituent Exchange. The algorithm will
automatically detect the anomaly and reduce that specific Constituent
Exchange's weighting to 0% for that one-hour period, ensuring a
reliable spot reference unaffected by the localized event.
Determination of the Index Price When Index Prices Are Unavailable
The Sponsor uses the following cascading set of rules to calculate
the Index Price.\24\ For the avoidance of doubt, the Sponsor will
employ the below rules sequentially and in the order as presented
below, should one or more specific rule(s) fail.
---------------------------------------------------------------------------
\24\ The Sponsor updated these rules on January 11, 2022.
---------------------------------------------------------------------------
1. Index Price = The price set by the Index as of 4:00 p.m., New
York time, on the valuation date. If the Index becomes unavailable, or
if the Sponsor determines in good faith that the Index does not reflect
an accurate price, then the Sponsor will, on a best efforts basis,
contact the Index Provider to obtain the Index Price directly from the
Index Provider. If after such contact the Index remains unavailable or
the Sponsor continues to believe in good faith that the Index does not
reflect an accurate price, then the Sponsor will employ the next rule
to determine the Index Price. There are no predefined criteria to make
a good faith assessment and it will be made by the Sponsor in its sole
discretion.
2. Index Price = The price set by Coin Metrics Real-Time Rate (the
``Secondary Index'') as of 4:00 p.m., New York time, on the valuation
date (the ``Secondary Index Price''). The Secondary Index Price is a
real-time reference rate price, calculated using trade data from
constituent markets selected by Coin Metrics (the ``Secondary Index
Provider''). The Secondary Index Price is calculated by applying
weighted-median techniques to such trade data where half the weight is
derived from the trading volume on each constituent market and half is
derived from inverse price variance, where a constituent market with
high price variance as a result of outliers or market anomalies
compared to other constituent markets is assigned a smaller weight. If
the Secondary Index becomes unavailable, or if the Sponsor determines
in good faith that the Secondary Index does not reflect an accurate
price, then the Sponsor will, on a best efforts basis, contact the
Secondary Index Provider to obtain the Secondary Index Price directly
from the Secondary Index Provider. If after such contact the Secondary
Index remains unavailable or the Sponsor continues to believe in good
faith that the Secondary Index does not reflect an accurate price, then
the Sponsor will employ the next rule to determine the Index Price.
There are no predefined criteria to make a good faith assessment and it
will be made by the Sponsor in its sole discretion.
3. Index Price = The price set by the Trust's principal market (the
``Tertiary Pricing Option'') as of 4:00 p.m., New York time, on the
valuation date. The Tertiary Pricing Option is a spot price derived
from the principal market's public data feed that is believed to be
consistently publishing pricing information as of 4:00 p.m., New York
time, and is provided to the Sponsor via an application programming
interface. If the Tertiary Pricing Option becomes unavailable, or if
the Sponsor determines in good faith that the Tertiary Pricing Option
does not reflect an accurate price, then the Sponsor will, on a best
efforts basis, contact the Tertiary Pricing Provider to obtain the
Tertiary Pricing Option directly from the Tertiary Pricing Provider. If
after such contact the Tertiary Pricing Option remains unavailable
after such contact or the Sponsor continues to believe in good faith
that the Tertiary Pricing Option does not reflect an accurate price,
then the Sponsor will employ the next rule to determine the Index
Price. There are no predefined criteria to make a good faith assessment
and it will be made by the Sponsor in its sole discretion.
4. Index Price = The Sponsor will use its best judgment to
determine a good faith estimate of the Index Price. There are no
predefined criteria to make a good faith assessment and it will be made
by the Sponsor in its sole discretion.
In the event of a fork, the Index Provider may calculate the Index
Price based on a digital asset that the Sponsor does not believe to be
the appropriate asset that is held by the Trust.\25\ In this
[[Page 73902]]
event, the Sponsor has full discretion to use a different index
provider or calculate the Index Price itself using its best judgment.
---------------------------------------------------------------------------
\25\ According to the Annual Report, when a modification is
introduced and a substantial majority of users and miners consent to
the modification, the change is implemented and the network remains
uninterrupted. However, if less than a substantial majority of users
and miners consent to the proposed modification, and the
modification is not compatible with the software prior to its
modification, the consequence would be what is known as a ``hard
fork'' of the Ethereum Network, with one group running the pre-
modified software and the other running the modified software. The
effect of such a fork would be the existence of two versions of ETH
running in parallel, yet lacking interchangeability. For example, in
July 2016, Ethereum ``forked'' into Ethereum and a new digital
asset, Ethereum Classic, as a result of the Ethereum network
community's response to a significant security breach in which an
anonymous hacker exploited a smart contract running on the Ethereum
network to syphon approximately $60 million of ETH held by the DAO,
a distributed autonomous organization, into a segregated account. In
response to the hack, most participants in the Ethereum community
elected to adopt a ``fork'' that effectively reversed the hack.
However, a minority of users continued to develop the original
blockchain, with the digital asset on that blockchain now referred
to as Ethereum Classic, or ETC. ETC now trades on several Digital
Asset Exchanges. In the event of a hard fork of the Ethereum
Network, the Sponsor will, if permitted by the terms of the Trust
Agreement, use its discretion to determine, in good faith, which
peer-to-peer network, among a group of incompatible forks of the
Ethereum Network, is generally accepted as the Ethereum Network and
should therefore be considered the appropriate network for the
Trust's purposes. The Sponsor will base its determination on a
variety of then relevant factors, including, but not limited to, the
Sponsor's beliefs regarding expectations of the core developers of
ETH, users, services, businesses, miners, and other constituencies,
as well as the actual continued acceptance of, mining power on, and
community engagement with, the Ethereum Network. There is no
guarantee that the Sponsor will choose the digital asset that is
ultimately the most valuable fork, and the Sponsor's decision may
adversely affect the value of the Shares as a result. The Sponsor
may also disagree with shareholders, security vendors, and the Index
Provider on what is generally accepted as ETH and should therefore
be considered ``ETH'' for the Trust's purposes, which may also
adversely affect the value of the Shares as a result.
---------------------------------------------------------------------------
The Sponsor may, in its sole discretion, select a different index
provider, select a different index price provided by the Index
Provider, calculate the Index Price by using the cascading set of rules
set forth above, or change the cascading set of rules set forth above
at any time.\26\
---------------------------------------------------------------------------
\26\ The Sponsor will provide notice of any such changes in the
Trust's periodic or current reports and, where applicable, will file
a proposed rule change with the Commission.
---------------------------------------------------------------------------
The Impact of the Approval of ETH Futures ETFs on Spot ETH ETPs Like
the Trust
On October 2, 2023, the date of this filing, the first ETH-based
exchange-traded funds (``ETFs'') were approved by the Commission for
trading.\27\ The ETFs hold ETH futures contracts that trade on the CME
and settle using the CME CF Ethereum Reference Rate (``ERR''), which is
priced based on the spot ETH markets Coinbase, Kraken, LMAX, Bitstamp,
Gemini, and itBit, essentially the same spot markets that are included
in the Index that the Trust uses to value its ETH holdings. Given that
the Commission has approved ETFs that offer exposure to ETH futures,
which themselves are priced based on the underlying spot ETH market,
the Sponsor believes that the Commission must also approve ETPs that
offer exposure to spot ETH, like the Trust.
---------------------------------------------------------------------------
\27\ These ETFs included the Bitwise Ethereum Strategy ETF,
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin &
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum
Strategy ETF, and Volatility Shares Ethereum Strategy ETF.
---------------------------------------------------------------------------
In the context of other digital asset-based ETF and ETP proposals
for Bitcoin, the Commission has sought to justify treating futures-
based ETFs differently from spot-based ETFs because of (i) distinctions
between the regulations under which the two products would be
registered (the Investment Company Act of 1940 (the `` '40 Act'') for
digital-asset futures ETFs and '33 Act for spot digital-asset ETPs) and
(ii) the existence of regulation and surveillance-sharing over the CME
digital-asset futures market through the Intermarket Surveillance Group
(``ISG''), as compared to the spot market for those digital assets.\28\
The Sponsor believes that this reasoning is unsupported for the
following reasons.
---------------------------------------------------------------------------
\28\ See, e.g., Chair Gary Gensler Public Statement, ``Remarks
Before the Aspen Security Forum,'' (August 3, 2021), stating that
the Chair looked forward to the Commission's review of Bitcoin-based
ETF proposals registered under the '40 Act, ``particularly if those
are limited to [the] CME-traded Bitcoin futures,'' noting the
``significant investor protection'' offered by the '40 Act, https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03; Securities Exchange Act Release No. 93559 (November 12,
2021), 86 FR 64539 (November 18, 2021) (SR-CboeBZX-2021-019) (Order
Disapproving a Proposed Rule Change to List and Trade Shares of the
VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares) (``VanEck Order'') (denying the first spot bitcoin ETP
registered under the '33 Act following the first approval of a
bitcoin futures ETF registered under the `40 Act, noting the
differences in the standard of review that applies to such
products); Securities Exchange Act Release No. 94620 (April 6,
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order
Granting Approval of a Proposed Rule Change, as Modified by
Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin
Futures Fund under NYSE ARCA Rule 8.200-E, Commentary .02 (Trust
Issued Receipts)) (``Teucrium Order'') (approving the first bitcoin
futures ETP registered under the '33 Act, stating that ``With
respect to the proposed ETP, the underlying bitcoin assets are CME
bitcoin futures contracts. The relevant analysis, therefore, is
whether Arca has a comprehensive surveillance sharing agreement with
a regulated market of significant size related to CME bitcoin
futures contracts. As discussed below, taking into consideration the
direct relationship between the regulated market with which Arca has
a surveillance-sharing agreement and the assets held by the proposed
ETP, as well as developments with respect to the CME bitcoin futures
market--including the launch of exchange-traded funds registered
under the Investment Company Act of 1940 (``1940 Act'') that hold
CME bitcoin futures (``Bitcoin Futures ETFs'')--the Commission
concludes that the Exchange has the requisite surveillance-sharing
agreement.'').
---------------------------------------------------------------------------
The '40 Act Offers No More Investor Protections Than the '33 Act in the
Context of ETH-Based ETF and ETP Proposals
While the '40 Act has certain added investor protections that the
'33 Act does not require, these protections do not seek to allay harms
arising from underlying assets or markets of assets that ETFs hold,
such as the potential for fraud or manipulation in such markets. In
other words, the Sponsor does not believe that the application of the
'40 Act supports the purported justifications the Commission has made
in denying other spot digital asset ETPs. Instead, the '40 Act seeks to
remedy certain abusive practices in the management of investment
companies such as ETFs, and thus places certain restrictions on ETFs
and ETF sponsors. The '40 Act explicitly lists out the types of abuses
it seeks to prevent, and places certain restrictions related to
accounting, borrowing, custody, fees, and independent boards, among
others. Notably, none of these restrictions address an ETF's underlying
assets, whether ETH futures or spot ETH, or the markets from which such
assets' pricing is derived, whether the CME ETH futures market or spot
ETH markets. As a result, the Sponsor believes that the distinction
between registration of ETH futures ETFs under the '40 Act and the
registration of spot ETH ETPs under the '33 Act is one without a
difference in the context of ETH-based ETP proposals.
Surveillance-Sharing With the CME ETH Futures Market Is Sufficient To
Protect Against Fraud and Manipulation in the Underlying Spot ETH
Market
The Sponsor believes that, because the CME ETH futures market is
priced based on the underlying spot ETH market, any fraud or
manipulation in the spot market would necessarily affect the price of
ETH futures, thereby affecting the net asset value of an ETP holding
spot ETH or an ETF holding ETH futures, as well as the price investors
pay for such product's shares. Accordingly, either CME surveillance can
detect spot-market fraud that affects both futures ETFs and spot ETPs,
or that surveillance cannot do so for either type of product. Having
approved ETH futures ETFs in part on the basis of such surveillance,
the Commission has clearly determined that CME surveillance can detect
spot-market fraud that would affect spot ETPs, and the Sponsor thus
believes that it must also approve spot ETH ETPs on that basis.
* * * * *
In summary, the Sponsor believes that the distinctions between the
'40 Act and the '33 Act, and the surveillance-sharing available for the
CME ETH futures market versus the spot ETH market, are not meaningful
in the context of ETH-based ETF and ETP proposals, and that such
reasoning cannot be a basis for the Commission treating ETH futures
ETFs differently from spot ETH ETPs like the Trust. The Sponsor
believes that the Commission's approval of ETH futures ETFs means it
must also approve spot ETH ETPs like the Trust.
The Structure and Operation of the Trust Protects Investors and
Satisfies Commission Requirements for ETH-Based Exchange Traded
Products
Even if the Commission had not approved ETH futures ETFs, the
Sponsor still believes the Commission should approve the listing and
trading of Shares of the Trust. In the context of prior spot digital
asset ETP proposal disapproval orders for Bitcoin, the Commission
expressed concerns about
[[Page 73903]]
the underlying Digital Asset Market due to the potential for fraud and
manipulation and has outlined the reasons why such ETP proposals have
been unable to satisfy these concerns.\29\ For purposes of the Trust's
ETH-based ETP proposal, the Sponsor anticipates that the Commission may
have the same concerns and addresses each of these in turn below.
---------------------------------------------------------------------------
\29\ See Securities Exchange Act Release Nos. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order
Setting Aside Action by Delegated Authority and Disapproving a
Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List
and Trade Shares of the Winklevoss Bitcoin Trust) (the ``Winklevoss
Order''); 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019)
(SR-NYSEArca-2019-01) (Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, Relating to the Listing and Trading of
Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-
E) (the ``Bitwise Order''); 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (Order Disapproving a Proposed
Rule Change, as Modified by Amendment No. 1, to Amend NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares) and to List and Trade Shares
of the United States Bitcoin and Treasury Investment Trust Under
NYSE Arca Rule 8.201-E) (the ``Wilshire Phoenix Order''); 83904
(August 22, 2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017-
139) (Order Disapproving a Proposed Rule Change to List and Trade
the Shares of the ProShares Bitcoin ETF and the ProShares Short
Bitcoin ETF) (the ``ProShares Order''); 83912 (August 22, 2018), 83
FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02) (Order Disapproving
a Proposed Rule Change Relating to Listing and Trading of the
Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X
Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares
Under NYSE Arca Rule 8.200-E) (the ``Direxion Order''); 83913
(August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-2018-
01) (Order Disapproving a Proposed Rule Change to List and Trade the
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short
Bitcoin ETF) (the ``GraniteShares Order'') (together, the ``Prior
Spot Digital Asset ETP Disapproval Orders'').
---------------------------------------------------------------------------
In the Prior Spot Digital Asset ETP Disapproval Orders, the
Commission outlined that a proposal relating to a digital asset-based
ETP could satisfy its concerns regarding potential for fraud and
manipulation by demonstrating:
(1) Inherent Resistance to Fraud and Manipulation: that the
underlying commodity market is inherently resistant to fraud and
manipulation;
(2) Other Means to Prevent Fraud and Manipulation: that there are
other means to prevent fraudulent and manipulative acts and practices
that are sufficient; or
(3) Surveillance Sharing: that the listing exchange has entered
into a surveillance sharing agreement with a regulated market of
significant size relating to the underlying or reference assets.
As described below, the Sponsor believes the structure and
operation of the Trust are designed to prevent fraudulent and
manipulative acts and practices, to protect investors and the public
interest, and to respond to the specific concerns that the Commission
may have with respect to potential fraud and manipulation in the
context of an ETH-based ETP.
How the Trust Meets Standards in the Prior Spot Digital Asset ETP
Disapproval Orders
1. Resistance to or Prevention of Fraud and Manipulation
In the Prior Spot Digital Asset ETP Disapproval Orders, the
Commission disagreed with the proposition that a digital asset's
fungibility, transportability and exchange tradability combine to
provide unique protections against, and allow such digital asset to be
uniquely resistant to, attempts at price manipulation. The Commission
reached its conclusion based on concessions by one issuer that 95% of
the reported trading in the digital asset, Bitcoin, is ``fake'' or non-
economic, effectively admitting that the properties of Bitcoin do not
make it inherently resistant to manipulation. Such issuer's concessions
were further compounded by evidence of potential and actual fraud and
manipulation in the historical trading of Bitcoin on certain
marketplaces such as (1) ``wash'' trading, (2) trading based on
material, non-public information, including the dissemination of false
and misleading information, (3) manipulative activity involving Tether,
and (4) fraud and manipulation.\30\
---------------------------------------------------------------------------
\30\ See Bitwise Order, 84 FR at 55383 (discussing analysis of
the Bitcoin spot market that asserts that 95% of the spot market is
dominated by fake and non-economic activity, such as wash trades),
55391 (discussing possible sources of fraud and manipulation in the
bitcoin spot market). See also Winklevoss Order, 83 FR at 37585-86
(discussing pending litigation against a Bitcoin trading platform
for fraudulent conduct relating to Tether); Bitwise Order, 84 FR at
55391 n.140, 55402 & n.331 (same); Winklevoss Order, 83 FR at 37584-
86 (discussing potential types of manipulation in the Bitcoin spot
market). The Commission has also noted that fraud and manipulation
in the Bitcoin spot market could persist for a significant duration.
See, e.g., Bitwise Order, 84 FR at 55405 & n.379.
---------------------------------------------------------------------------
The Sponsor acknowledges the possibility that fraud and
manipulation may exist in commodity markets and that digital asset
trading, such as ETH, on any given exchange may be no more uniquely
resistant to fraud and manipulation than other commodity markets.\31\
However, the Sponsor believes that the fundamental features of digital
assets, including fungibility, transportability and exchange
tradability offer novel protections beyond those that exist in
traditional commodity markets or equity markets when combined with
other means, as discussed further below.
---------------------------------------------------------------------------
\31\ See generally Bitwise Order.
---------------------------------------------------------------------------
2. Other Means To Prevent Fraud and Manipulation
The Commission has recognized that a listing exchange could
demonstrate that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
requisite surveillance-sharing agreement.\32\ In evaluating the
effectiveness of this type of resistance, the Commission does not apply
a ``cannot be manipulated'' standard. Instead, the Commission requires
that such resistance to fraud and manipulation be novel and beyond
those protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing derivative securities
products.\33\
---------------------------------------------------------------------------
\32\ See Winklevoss Order, 84 FR at 37580, 37582-91; Bitwise
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at
12597.
\33\ See Winklevoss Order, 84 FR at 37582; Wilshire Phoenix
Order, 85 FR at 12597.
---------------------------------------------------------------------------
The Sponsor believes the Index represents a novel means to prevent
fraud and manipulation from impacting a reference price for ETH and
that it offers protections beyond those that exist in traditional
commodity markets or equity markets. The Index operates materially
similarly to CoinDesk Bitcoin Price Index (XBX). Specifically, digital
assets, such as ETH, are novel and exist outside traditional commodity
markets. It therefore stands to reason that the methods by which they
trade will be novel and that the market for digital assets like ETH
will have different attributes than traditional commodity markets.
Digital assets like ETH were only introduced within the past decade,
twenty years after the first U.S. ETFs were offered \34\ and 150 years
after the first futures were offered.\35\ In contrast to older
commodities such as gold, silver, platinum, palladium or copper, which
the Commission has noted all had at least one significant, regulated
market for trading futures on the underlying commodity at the time
commodity trust ETPs were approved for listing and trading, the first
trading in digital assets like ETH took place entirely in an open,
transparent and online setting where other commodities cannot trade.
---------------------------------------------------------------------------
\34\ SEC, ``Investor Bulletin: Exchange-Traded Funds (ETFs),''
August 2012, https://www.sec.gov/investor/alerts/etfs.pdf.
\35\ Commodity Futures Trading Commission (``CFTC''), ``History
of the CFTC,'' https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html.
---------------------------------------------------------------------------
[[Page 73904]]
The Trust has priced its Shares consistently for more than six
years based on the Index. The Sponsor believes the Trust's use of the
Index specifically addresses the Commission's concerns in that the
Index serves as an alternative means to prevent fraud and manipulation.
Specifically, the Index can (i) mitigate the effects of fraud,
manipulation and other anomalous trading activity on the ETH reference
rate, (ii) provide a real-time, volume-weighted fair value of ETH and
(iii) appropriately handle and adjust for non-market related events.
As described in more detail below, the Sponsor believes that the
Index accomplishes those objectives in the following ways:
1. The Index tracks the Digital Asset Exchange Market price through
trading activity at ``U.S.-Compliant Exchanges''; \36\
---------------------------------------------------------------------------
\36\ ``U.S.-Compliant Exchanges'' are exchanges in the Digital
Asset Exchange Market that are compliant with applicable U.S.
federal and state licensing requirements and practices regarding AML
and KYC regulations. All Constituent Exchanges are U.S.-Compliant
Exchanges. ``Non-U.S.-Compliant Exchanges'' are all other exchanges
in the Digital Asset Exchange Market. As of June 30, 2023, the U.S.-
Compliant Exchanges that the Index Provider considered for inclusion
in the Index were Coinbase Pro, Kraken and LMAX Digital. From these
U.S.-Compliant Exchanges, the Index Provider then applies additional
Inclusion Criteria to determine the Constituent Exchange. Effective
July 23, 2022, the Index Provider removed Bitstamp from the Index
due to the exchange's failure to meet the minimum liquidity
requirement and added FTX.US as a Constituent Exchange based on its
satisfaction of the minimum liquidity requirement as part of its
scheduled quarterly review. Effective November 10, 2022, the Index
Provider removed FTX.US from the Index due to FTX.US's announcement
that trading on the exchange may be halted, which would impact
FTX.US's ability to reliably publish trade prices and volumes on a
real-time basis through APIs, and did not add any Constituent
Exchanges as part of its review. Effective January 28, 2023, the
Index Provider added Binance.US to the Index based on the exchange
meeting the minimum liquidity requirement, and did not remove any
Constituent Exchanges as part of its quarterly review. On June 17,
2023, the Index Provider removed Binance.US from the Index, due to
Binance.US's announcement that the exchange was suspending U.S.
dollar deposits and withdrawals and planned to delist its U.S.
dollar trading pairs, and did not add any Constituent Exchanges as
part of its review.
---------------------------------------------------------------------------
2. The Index mitigates the impact of instances of fraud,
manipulation and other anomalous trading activity in real-time through
systematic adjustments;
3. The Index is constructed and maintained by an expert third-party
index provider, allowing for prudent handling of non-market-related
events; and
4. The Index mitigates the impact of instances of fraud,
manipulation and other anomalous trading activity concentrated on any
one specific exchange through a cross-exchange composite index rate.
1. The Index tracks the Digital Asset Exchange Market price through
trading activity at ``U.S.-Compliant Exchanges.''
To reduce the risk of fraud, manipulation, and other anomalous
trading activity from impacting the Index, only U.S.-Compliant
Exchanges are eligible to be included in the Index.
The Index maintains a minimum number of three exchanges and a
maximum number of five exchanges to track the Digital Asset Exchange
Market while offering replicability for traders and market makers.\37\
---------------------------------------------------------------------------
\37\ According to the Sponsor, the more exchanges included in
the Index, the more ability there is for traders and market makers
to trade against the Index by arbitraging price differences. For
example, in the event of variances between ETH prices on Constituent
Exchanges and non-Constituent Exchanges, arbitrage trading
opportunities would exist. These discrepancies generally consolidate
over time, as price differences across exchanges are realized and
capitalized upon by traders and market makers.
---------------------------------------------------------------------------
U.S.-Compliant Exchanges possess safeguards that protect against
fraud and manipulation. For example, U.S.-Compliant Exchanges regulated
by the NYDFS under the BitLicense program have regulatory requirements
to implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, market manipulation, and similar
wrongdoing, and to monitor, control, investigate and report back to the
NYDFS regarding any wrongdoing.\38\ These exchanges also have the
following obligations: \39\
---------------------------------------------------------------------------
\38\ See, e.g., ``DFS Takes Action to Deter Fraud and
Manipulation in Virtual Currency Markets,'' available at: https://www.dfs.ny.gov/about/press/pr1802071.htm.
\39\ See ``New York's Final ``BitLicense'' Rule: Overview and
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk,
available at: https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf.
---------------------------------------------------------------------------
Submission of audited financial statements including
income statements, statements of assets/liabilities, insurance, and
banking;
Compliance with capitalization requirements set at NYDFS's
discretion;
Prohibitions against the sale or encumbrance to protect
full reserves of custodian assets;
Fingerprints and photographs of employees with access to
customer funds;
Retention of a qualified Chief Information Security
Officer and annual penetration testing/audits;
Documented business continuity and disaster recovery plan,
independently tested annually; and
Participation in an independent exam by NYDFS.
Other U.S.-Compliant Exchanges have voluntarily implemented
measures to protect against common forms of market manipulation.\40\
---------------------------------------------------------------------------
\40\ As of the date of filing, one of the three Constituent
Exchanges, Coinbase Pro, is regulated by NYDFS.
---------------------------------------------------------------------------
Furthermore, all U.S.-Compliant Exchanges are considered MSBs that
are subject to FinCEN's federal and state reporting requirements that
provide additional safeguards. For example, unscrupulous traders may be
less likely to engage in fraudulent or manipulative acts and practices
on exchanges that (1) report suspicious activity to FinCEN as money
services businesses, (2) report to state regulators as money
transmitters, and/or (3) require customer identification through KYC
procedures. U.S.-Compliant Exchanges are required to: \41\
---------------------------------------------------------------------------
\41\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsarequirements-msbs.
---------------------------------------------------------------------------
Identify people with ownership stakes or controlling roles
in the MSB;
Establish a formal Anti-Money Laundering (AML) policy in
place with documentation, training, independent review, and a named
compliance officer;
Implement strict customer identification and verification
policies and procedures;
File Suspicious Activity Reports (SARs) for suspicious
customer transactions;
File Currency Transaction Reports (CTRs) for cash-in or
cash-out transactions greater than $10,000; and
Maintain a five-year record of currency exchanges greater
than $1,000 and money transfers greater than $3,000.
Lastly, because of ETH's classification as a commodity, the CFTC
has authority to police fraud and manipulation on U.S.-Compliant
Exchanges.\42\
---------------------------------------------------------------------------
\42\ ``U.S. CFTC Chief Behnam Reinforces View of Ether as
Commodity,'' Coindesk (Mar. 28, 2023), https://www.coindesk.com/policy/2023/03/28/us-cftc-chief-behnam-reinforces-view-of-ether-as-commodity/; CME Group, https://www.cmegroup.com/markets/cryptocurrencies/ether/ether.html?gad=1&gclid=EAIaIQobChMI44KBmu7ygAMVavvjBx2P4g5yEAAYASAAEgJSZfD_BwE&gclsrc=aw.ds.
---------------------------------------------------------------------------
The Sponsor acknowledges that there are substantial differences
between FinCEN and New York state regulations and the Commission's
regulation of the national securities exchanges.\43\ The Sponsor does
not believe the inclusion of U.S.-Compliant Exchanges is in and of
itself sufficient to prove that the Index is an alternative means to
prevent fraud and manipulation such that surveillance sharing
agreements are not required, but does believe that the inclusion of
only U.S.-Compliant Exchanges in the Index is one significant way in
which the Index is
[[Page 73905]]
protected from the potential impacts of fraud and manipulation.
---------------------------------------------------------------------------
\43\ See Bitwise Order, 84 FR at 55392; Wilshire Phoenix Order,
85 FR at 12603.
---------------------------------------------------------------------------
2. The Index mitigates the impact of instances of fraud,
manipulation, and other anomalous trading activity in real-time through
systematic adjustments.
The Index is calculated once every second according to a systematic
methodology that relies on observed trading activity on the Constituent
Exchanges. While the precise methodology underlying the Index is
currently proprietary, the key elements of the Index are outlined
below:
Volume Weighting: Constituent Exchanges with greater
liquidity receive a higher weighting in the Index, increasing the
ability to execute against (i.e., replicate) the Index in the
underlying spot markets.
Price-Variance Weighting: The Index reflects data points
that are discretely weighted in proportion to their variance from the
rest of the Constituent Exchanges. As the price at a Constituent
Exchange diverges from the prices at the rest of the Constituent
Exchanges, its weight in the Index consequently decreases.
Inactivity Adjustment: The Index algorithm penalizes stale
activity from any given Constituent Exchange. When a Constituent
Exchange does not have recent trading data, its weighting in the Index
is gradually reduced, until it is de-weighted entirely. Similarly, once
trading activity at the Constituent Exchange resumes, the corresponding
weighting for that Constituent Exchange is gradually increased until it
reaches the appropriate level.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Index only includes
executed trades in its calculation. Additionally, the Index only
includes Constituent Exchanges that charge trading fees to its users in
order to attach a real, quantifiable cost to any manipulation attempts.
3. The Index is constructed and maintained by an expert third-party
index provider, allowing for prudent handling of non-market-related
events.
The Index Provider reviews and periodically updates which exchanges
are included in the Index by utilizing a methodology that is guided by
the IOSCO principles for financial benchmarks.
According to the Index methodology, for an exchange to become a
Constituent Exchange, it must satisfy the following Inclusion Criteria:
Sufficient USD liquidity relative to the size of the
listed assets;
No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the exchange's
eligibility requirements to trade;
No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
Real-time price discovery;
Limited or no capital controls;
Transparent ownership including a publicly-owned ownership
entity;
Publicly available language and policies addressing legal
and regulatory compliance in the US, including KYC (Know Your
Customer), AML (Anti-Money Laundering) and other policies designed to
comply with relevant regulations that might apply to it;
Be a U.S.-domiciled exchange or a non-U.S. domiciled
exchange that is able to service U.S. investors;
Offer programmatic spot trading of the trading pair; and
Reliably publish trade prices and volumes on a real-time
basis through Rest and Websocket APIs.
Although the Index methodology is designed to operate without any
human interference, rare events would justify manual intervention.
Manual intervention would only be in response to ``non-market-related
events'' (e.g., halting of deposits or withdrawals of funds,
unannounced closure of exchange operations, insolvency, compromise of
user funds, etc.). In the event that such an intervention is necessary,
the Index Provider would issue a public announcement through its
website, API and other established communication channels with its
clients.\44\
---------------------------------------------------------------------------
\44\ To the extent any such intervention has a material impact
on the Trust, the Sponsor will also issue a public announcement.
---------------------------------------------------------------------------
4. The Index mitigates the impact of instances of fraud,
manipulation and other anomalous trading activity concentrated on any
one specific exchange through a cross-exchange composite index rate.
The Index is based on the price and volume data of multiple U.S.-
Compliant Exchanges that satisfy the Index Provider's Inclusion
Criteria. By referencing multiple trading venues and weighting them
based on trade activity, the impact of any potential fraud,
manipulation, or anomalous trading activity occurring on any single
venue is reduced. Specifically, the effects of fraud, manipulation, or
anomalous trading activity occurring on any single venue are de-
weighted and consequently diluted by non-anomalous trading activity
from other Constituent Exchanges.
Although the Index is designed to accurately capture the market
price of ETH, third parties may be able to purchase and sell ETH on
public or private markets included or not included among the
Constituent Exchanges, and such transactions may take place at prices
materially higher or lower than the Index Price. For example, based on
data provided by the Index Provider, on any given day during the twelve
months ended June 30, 2023, the maximum differential between the 4:00
p.m., New York time spot price of any single Digital Asset Exchange
included in the Index and the Index Price was 2.76% and the average of
the maximum differentials of the 4:00 p.m., New York time spot price of
each Digital Asset Exchange included in the Index and the Index Price
was 0.82%. During this same period, the average differential between
the 4:00 p.m., New York time spot prices of all the Digital Asset
Exchanges included in the Index and the Index Price was 0.01%.\45\
---------------------------------------------------------------------------
\45\ All Digital Asset Exchanges that were included in the Index
throughout the period were considered in this analysis.
---------------------------------------------------------------------------
Since inception of the Trust, the Trust has consistently priced its
Shares at 4:00 p.m., New York time based on the Index Price.\46\ While
that pricing would be known to the market, the Sponsor believes that,
even if efforts to manipulate the price of ETH at 4:00 p.m., E.T. were
successful on any exchange, such activity would have had a negligible
effect on the pricing of the Trust, due to the controls embedded in the
structure of the Index.
---------------------------------------------------------------------------
\46\ Prior to February 1, 2022, the Trust valued its ETH for
operational purposes by reference to the volume-weighted average
Index Price (the ``Old Index Price''). The Old Index Price was
calculated by applying a weighting algorithm to the price and
trading volume data for the immediately preceding 24-hour period as
of 4:00 p.m., New York time, derived from the Constituent Exchanges
reflected in the Index on such trade date, and overlaying an
averaging mechanism to the price produced. Thus, whereas the Old
Index Price reflected the price of an ETH at 4:00 p.m., New York
time, calculated by taking the average of each price of an ETH
produced by the Index over the preceding 24-hour period, the Index
Price now is the price of an ETH at 4:00 p.m., New York time,
calculated based on the price and trading volume data of the Digital
Asset Exchanges included in the Index over the preceding 24-hour
period. The Index Price differs from the Old Index Price only in
that it does not use an additional averaging mechanism; the Index
Price otherwise uses the same methodology as the Old Index Price,
and there has been no change to the Index used to determine the
Index Price or the criteria used to select the Constituent
Exchanges.
---------------------------------------------------------------------------
Accordingly, the Sponsor believes that the Index has proven its
ability to (i) mitigate the effects of fraud, manipulation and other
anomalous trading activity on the ETH reference rate, (ii) provide a
real-time, volume-weighted fair value of ETH and (iii) appropriately
handle and adjust for non-market related events. For these reasons, the
Sponsor believes that the Index
[[Page 73906]]
represents an effective alternative means to prevent fraud and
manipulation and the Trust's reliance on the Index addresses the
Commission's concerns with respect to potential fraud and manipulation.
3. A Significant, Regulated and Surveilled Market Exists and Is Closely
Connected With Spot Market for ETH
In the Prior Spot Digital Asset ETP Disapproval Orders, the
Commission described both the need for and the definition of a
surveilled market of significant size for commodity-trust ETPs like the
Trust to date.\47\ Specifically, the Commission explained that:
---------------------------------------------------------------------------
\47\ See Winklevoss Order, 83 FR at 37593-94; Bitwise Order, 84
FR at 55383, 55410; Wilshire Phoenix Order, 85 FR at 12609.
for the commodity-trust ETPs approved to date for listing and
trading, there has been in every case at least one significant,
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP
listing exchange has entered into surveillance-sharing agreements
with, or held Intermarket Surveillance Group membership in common
with, that market.\48\
---------------------------------------------------------------------------
\48\ See Winklevoss Order, 83 FR at 37594.
Further, the Commission stated that its interpretation of the term
``market of significant size'' depends on the interrelationship between
the market with which the listing exchange has a surveillance-sharing
agreement and the proposed ETP.\49\ Accordingly, the terms
``significant market'' and ``market of significant size'' could mean:
---------------------------------------------------------------------------
\49\ See Winklevoss Order, 83 FR at 37594; Bitwise Order, 84 FR
at 55410; ProShares Order, 83 FR at 43936; GraniteShares Order, 83
FR at 43925; Direxion Order, 83 FR at 43914; Wilshire Phoenix Order,
85 FR at 12609.
a market (or group of markets) as to which (a) there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to successfully manipulate the ETP, so
that a surveillance-sharing agreement would assist in detecting and
deterring misconduct, and (b) it is unlikely that trading in the ETP
would be the predominant influence on prices in that market.\50\
---------------------------------------------------------------------------
\50\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants.
In the context of the Prior Spot Digital Asset ETP Disapproval
Orders specifically, the Commission has stated that establishing a
lead-lag relationship between the futures market and the spot market is
central to understanding whether it is reasonably likely that a would-
be manipulator of the ETP would need to trade on the futures market to
successfully manipulate prices on those spot platforms that feed into
the proposed ETP's pricing mechanism such that a surveillance-sharing
agreement would assist the ETP listing market in detecting and
deterring misconduct.\51\ In particular, if the spot market leads the
futures market, this would indicate that it would not be necessary to
trade on the futures market to manipulate the proposed ETP, even if
arbitrage worked efficiently, because the futures price would move to
meet the spot price.
---------------------------------------------------------------------------
\51\ See Bitwise Order, 84 FR at 55411; Wilshire Phoenix Order,
85 FR at 12612.
---------------------------------------------------------------------------
While studies have found that the CME futures market does lead the
spot market in the context of Bitcoin,\52\ as explained in the
Sponsor's briefs and argument in its prevailing case before the D.C.
Circuit Court of Appeals regarding its Bitcoin-based ETP proposal, the
lead/lag question is irrelevant. If a would-be manipulator were to
attempt to manipulate either a spot ETP or futures ETP by trading
futures on the CME, then a surveillance-sharing agreement with the CME
would provide access to information concerning that activity.\53\ If,
on the other hand, a would-be manipulator were to attempt to manipulate
either a spot ETP or a futures ETP by trading on the spot market, then
a surveillance-sharing agreement with the CME would also be able to
provide access to information concerning that activity. If that were
not true, the Commission could not have approved the Bitcoin futures
ETPs. Given that the Commission has approved Bitcoin futures ETPs, the
Commission must have concluded that the CME is capable of detecting
manipulation attempts in the spot bitcoin market. And given that the
Commission has now approved ETH futures ETFs, it must have concluded
that the CME is capable of detecting manipulation attempts in the spot
ETH market as well. Accordingly, the Sponsor believes that disapproval
of the instant proposal on such grounds would be arbitrary given that
Shares of the Trust would be just as protected from fraud as shares of
previously approved ETH futures ETPs.
---------------------------------------------------------------------------
\52\ See Memorandum to File from Neel Maitra, Senior Special
Counsel (Fintech & Crypto Specialist), Division of Trading and
Markets, U.S. Securities and Exchange Commission re: Meeting with
Representatives from Fidelity Digital Assets, et al. and attachment
(SR-CboeBZX-2021-039) (September 8, 2021), available at: https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf; Letter from Bitwise Asset Management, Inc. re: File
Number SR-NYSEArca-2021-89 (February 25, 2022), available at:
https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20117902-270822.pdf; Letter from Wilson Sonsini Goodrich and Rosati,
P.C. and Chapman and Cutler LLP, on behalf of Bitwise Asset
Management, Inc. re: File No. SR-NYSEArca-2021-89 (March 7, 2022),
available at: https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20118794-271630.pdf.
\53\ Grayscale Investments, LLC v. Securities and Exchange
Commission, No. 22-1142, Commission Reply Br. 27.
---------------------------------------------------------------------------
Regardless of the irrelevance of the lead/lag relationship and the
mixed findings regarding the lead/lag relationship between the CME
futures and spot markets in the context of Bitcoin, the Sponsor
believes that the CME futures market represents a large, surveilled and
regulated market and meets the Commission's definition of a
``significant market.'' For example, from November 1, 2019 to August
31, 2023, the CME futures market trading volume was over $373 billion,
compared to $701 billion in trading volume across the Constituent
Exchanges included in the Index. With over 50% of the Index trading
volume, the CME futures market represents significant coverage of U.S.-
Compliant Exchanges in the Ether market. In addition, the CME futures
market trading volume from November 1, 2019 to August 31, 2023 was
approximately 43% of the trading volume of the U.S. dollar-denominated
spot markets referenced in the Bitwise Order.\54\
---------------------------------------------------------------------------
\54\ These spot markets include Binance.US, Coinbase Pro,
Bitfinex, Kraken, Bitstamp, BitFlyer, Poloniex, Bittrex, and itBit.
---------------------------------------------------------------------------
Given the size of the CME futures markets, the Sponsor believes
such markets meet the Commission's definition of ``significant market''
because there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
successfully manipulate the ETP, since arbitrage between the derivative
and spot markets would tend to counter an attempt to manipulate the
spot market alone. As a result, the Exchange's ability to obtain
information regarding trading in the Shares and futures from markets
and other entities that are members of the Intermarket Trading Group
(``ISG''), including the CME, would assist the Exchange in detecting
and deterring misconduct.
The Sponsor also believes it is unlikely that the ETP would become
the predominant influence on prices in the market. While future inflows
to the proposed Trust cannot be predicted, to provide comparable data,
the Sponsor examined the change in market capitalization of ETH with
net inflows into the Trust, which currently trades on OTC Markets and
is largest and most liquid ETH investment product in the
[[Page 73907]]
world.\55\ From November 1, 2019 to August 31, 2023, the market
capitalization of ETH grew from $20 billion to $198 billion, a $178
billion increase. Over the same period, the Trust experienced $1.2
billion of inflows. The cumulative inflow into the Trust over the
stated time period was only 0.6% of the aggregate growth of ETH's
market capitalization.
---------------------------------------------------------------------------
\55\ To further illustrate the size and liquidity of the Trust,
as of September 6, 2023, compared with global commodity ETPs, the
Trust would rank 24th in assets under management and 83rd in
notional trading volume for the preceding 30 days.
---------------------------------------------------------------------------
Additionally, the Trust experienced approximately $70.2 billion of
trading volume from November 1, 2019 to August 31, 2023, only 19% of
the CME futures market and 10% of the Index over the same period.
* * * * *
In summary, the Sponsor believes that the foregoing addresses
concerns the Commission may have with respect to ETH-based ETPs, based
on the Commission's articulated concerns with respect to potential
fraud and manipulation in Bitcoin-based ETPs. Specifically, the Sponsor
believes that, although ETH is not itself inherently resistant to fraud
and manipulation, the Index represents an effective means to prevent
fraudulent and manipulative acts and practices. As discussed above, the
Trust has used the Index to price the Shares for more than six years,
and the Index has proven its ability to (i) mitigate the effects of
fraud, manipulation and other anomalous trading activity on the ETH
reference rate, (ii) provide a real-time, volume-weighted fair value of
ETH and (iii) appropriately handle and adjust for non-market related
events. The Sponsor also believes that the CME futures market is a
significant, surveilled and regulated market that is closely connected
with the spot market for ETH and fulfills the requirements for
surveillance sharing given the Exchange's ability to obtain information
from markets and other entities that are members of the ISG to assist
in detecting and deterring misconduct.
Creation of Shares
According to the Annual Report, the Trust will issue Shares to
Authorized Participants from time to time, but only in one or more
Baskets (with a Basket being a block of 100 Shares). The Trust will not
issue fractions of a Basket. The creation of Baskets will be made only
in exchange for the delivery to the Trust, or the distribution by the
Trust, of the number of whole and fractional ETH represented by each
Basket being created, which is determined by dividing (x) the number of
ETH owned by the Trust at 4:00 p.m., E.T., on the trade date of a
creation order, after deducting the number of ETH representing the U.S.
dollar value of accrued but unpaid fees and expenses of the Trust
(converted using the Index Price at such time, and carried to the
eighth decimal place), by (y) the number of Shares outstanding at such
time (with the quotient so obtained calculated to one one-hundred-
millionth of one ETH (i.e., carried to the eighth decimal place)), and
multiplying such quotient by 100 (the ``Basket Amount''). All questions
as to the calculation of the Basket Amount will be conclusively
determined by the Sponsor and will be final and binding on all persons
interested in the Trust. The Basket Amount multiplied by the number of
Baskets being created is the ``Total Basket Amount.'' The number of ETH
represented by a Share will gradually decrease over time as the Trust's
ETH are used to pay the Trust's expenses. As of June 30, 2023, each
Share represented approximately 0.0097 of one ETH.
Authorized Participants are the only persons that may place orders
to create Baskets. Each Authorized Participant must (i) be a registered
broker-dealer, (ii) enter into an agreement with the Sponsor and the
Liquidity Provider (as defined below), if applicable, that provides the
procedures for the creation and redemption of Baskets and for the
delivery of ETH required for Creation Baskets and Redemption Baskets
(each, a ``Participant Agreement'') and (iii) in the case of creation
or redemption in-kind, own an ETH wallet address that is known to the
Custodian as belonging to the Authorized Participant. An Authorized
Participant may act for its own account or as agent for broker-dealers,
custodians and other securities market participants that wish to create
or redeem Baskets. Shareholders who are not Authorized Participants
will only be able to redeem their Shares through an Authorized
Participant.
Although the creation of Baskets requires the delivery to the Trust
of the Total Basket Amount, an Authorized Participant may deposit cash,
which will facilitate the purchase or sale of ETH on behalf of the
Authorized Participant through one or more eligible companies (each, a
``Liquidity Provider'') that have entered into a Participant Agreement
with the Sponsor, the Administrator, the Marketing Agent, and the
relevant Authorized Participant.
The Participant Agreement provides the procedures for the creation
of Baskets and for the delivery of the whole and fractional ETH
required for such creations. The Participant Agreement and the related
procedures attached thereto may be amended by the Sponsor and the
relevant Authorized Participant. Under the Participant Agreement, the
Sponsor has agreed to indemnify each Authorized Participant against
certain liabilities, including liabilities under the Securities Act.
Authorized Participants do not pay a transaction fee to the Trust
in connection with the creation of Baskets, but there may be
transaction fees associated with the validation of the transfer of ETH
by the Ethereum Network. Authorized Participants who deposit ETH with
the Trust in exchange for Baskets will receive no fees, commissions or
other form of compensation or inducement of any kind from either the
Sponsor or the Trust, and no such person has any obligation or
responsibility to the Sponsor or the Trust to effect any sale or resale
of Shares.
Creation Procedures
On any business day, an Authorized Participant may place an order
with the Administrator to create one or more Baskets. Orders for
creations may be placed either ``in-kind'' or ``in-cash.'' Orders for
creation in-kind must be placed with the Administrator no later than
3:59:59 p.m., New York time, and no later than 4:59:59 p.m., New York
time, for creations in-cash (in each case, the ``Order Cutoff Time'').
In-kind creations will take place as follows, where ``T'' is the
trade date and each day in the sequence must be a business day:
[[Page 73908]]
------------------------------------------------------------------------
T T+1
------------------------------------------------------------------------
The Authorized Participant The Authorized
places a creation order with the Participant transfers the
Administrator. Total Basket Amount to the
The Marketing Agent accepts Custodian no later than 4:00
(or rejects) the creation order, which p.m., New York time.
is communicated to the Authorized Once the Total Basket
Participant by the Administrator. Amount is received by the
The Total Basket Amount is Custodian, the Administrator
determined as soon as practicable directs the Transfer Agent to
after 4:00 p.m., New York time. credit the number of Baskets
created to the Authorized
Participant's DTC account.
------------------------------------------------------------------------
In-cash creations will take place as follows, where ``T'' is the
trade date and each day in the sequence must be a business day:
------------------------------------------------------------------------
T-1 T T+1
------------------------------------------------------------------------
The Authorized The The
Participant places a creation Sponsor notifies Liquidity
order with the Administrator. the Liquidity Provider delivers
The Marketing Agent Provider of the the Total Basket
accepts (or rejects) the creation order Amount to the
creation order, which is and the Liquidity Custodian no
communicated to the Authorized Provider may later than 4:00
Participant by the begin purchasing p.m., New York
Administrator. ETH to deliver time.
The Authorized the Total Basket Once the
Participant sends 110% of the Amount. Total Basket
U.S. dollar value of the number The Total Amount is
of baskets ordered pursuant to Basket Amount is received by the
such creation order, as determined as Custodian, the
calculated using the Index soon as Administrator
Price as of the order date (the practicable after directs the
``Cash Collateral Amount'') to 4:00 p.m., New Transfer Agent to
the Administrator. York time. credit the number
of Baskets
created to the
Authorized
Participant's DTC
account.
The
Administrator
sends the
Liquidity
Provider cash
equal to the U.S.
dollar value of
the Total Basket
Amount, as
determined on the
trade date, plus
the Variable Fee,
and returns the
remaining amount
of the Cash
Collateral Amount
(if any) to the
Authorized
Participant.
------------------------------------------------------------------------
Redemption of Shares
The Trust may redeem Shares from time to time but only in Baskets.
A Basket equals a block of 100 Shares. The number of outstanding Shares
is expected to decrease from time to time as a result of the redemption
of Baskets. The redemption of Baskets requires the distribution by the
Trust of the number of ETH represented by the Baskets being redeemed.
The redemption of a Basket will be made only in exchange for the
distribution by the Trust of the number of whole and fractional ETH
represented by each Basket being redeemed, the number of which is
determined by dividing (x) the number of ETH owned by the Trust at 4:00
p.m., New York time, on the relevant trade date of a redemption order,
after deducting the number of ETH representing the U.S. dollar value of
accrued but unpaid fees and expenses of the Trust (converted using the
Index Price at such time, and carried to the eighth decimal place) by
(y) the number of Shares outstanding at such time (with the quotient so
obtained calculated to one one-hundred-millionth of one ETH (i.e.,
carried to the eighth decimal place)), and multiplying such quotient by
100.
Authorized Participants are the only persons that may place orders
to redeem Baskets. Shareholders who are not Authorized Participants
will be able to redeem their Shares only through an Authorized
Participant.
Each Participant Agreement provides the procedures for the
redemption of Baskets and for the delivery of the whole and fractional
ETH required for such redemption. The Participant Agreement and the
related procedures attached thereto may be amended by the Sponsor and
the relevant Authorized Participant.
Authorized Participants do not pay a transaction fee to the Trust
in connection with the redemption of Baskets, but there may be
transaction fees associated with the validation of the transfer of ETH
by the Ethereum Network.
Redemption Procedures
The Trust will also redeem Shares on a continuous basis but only in
Baskets of 100 Shares. The procedures by which an Authorized
Participant can redeem one or more Baskets mirror the procedures for
the creation of Baskets. On any business day, an Authorized Participant
may place an order with the Administrator to redeem one or more
Baskets. Redemption orders must be placed with the Administrator no
later than the Order Cutoff Time.
In-kind redemptions will take place as follows, where ``T'' is the
trade date and each day in the sequence must be a business day:
------------------------------------------------------------------------
T T+2
------------------------------------------------------------------------
The Authorized Participant The Authorized
places a redemption order with the Participant delivers Baskets
Administrator. from its DTC account to the
The Marketing Agent accepts Transfer Agent no later than
(or rejects) the redemption order, 4:00 p.m., New York time.
which is communicated to the Once the Baskets are
Authorized Participant by the received by the Transfer
Administrator. Agent, the Custodian transfers
The Total Basket Amount is the Total Basket Amount to the
determined as soon as practicable Authorized Participant and the
after 4:00 p.m., New York time. Transfer Agent cancels the
Shares.
------------------------------------------------------------------------
[[Page 73909]]
In-cash redemptions will take place as follows, where ``T'' is the
trade date and each day in the sequence must be a business day:
------------------------------------------------------------------------
T-1 T T+2
------------------------------------------------------------------------
The Authorized The The
Participant places a redemption Sponsor notifies Authorized
order with the Administrator. the Liquidity Participant
The Marketing Agent Provider of the delivers Baskets
accepts (or rejects) the redemption order to be redeemed to
redemption order, which is and the Liquidity the Transfer
communicated to the Authorized Provider may Agent no later
Participant by the begin selling ETH than 4:00 p.m.,
Administrator. to deliver the New York time.
Total Basket The
Amount. Liquidity
The Total Provider deposits
Basket Amount is with the
determined as Administrator
soon as cash equal to the
practicable after U.S. dollar value
4:00 p.m., New of the Total
York time. Basket Amount, as
determined on the
trade date.
Once the
Baskets are
received by the
Transfer Agent
and the
Administrator
sends the above-
mentioned cash
equal to the U.S.
dollar value of
the Total Basket
Amount less the
Transaction Fee,
the Variable Fee
and all other
charges and fees
payable in
connection with
the redemption
order to the
Authorized
Participant, the
Transfer Agent
cancels the
Shares.
The
Custodian sends
the Liquidity
Provider the
number of ETH
equal to the
Total Basket
Amount and the
Administrator
sends the
Variable Fee to
the Liquidity
Provider.
------------------------------------------------------------------------
Suspension of Orders
The creation or redemption of Shares may be suspended generally, or
refused with respect to particular requested creations or redemptions,
during any period when the transfer books of the Transfer Agent are
closed or if circumstances outside the control of the Sponsor or its
delegates make it for all practical purposes not feasible to process
creation orders or redemption orders. The Administrator may reject an
order or, after accepting an order, may cancel such order by rejecting
the Total Basket Amount if: (i) such order is not presented in proper
form as described in the Participant Agreement, (ii) the transfer of
the Total Basket Amount comes from an account other than an ETH wallet
address that is known to the Custodian as belonging to the Authorized
Participant or (iii) the fulfillment of the order, in the opinion of
counsel, might be unlawful, among other reasons. None of the Sponsor or
its delegates will be liable for the suspension, rejection or
acceptance of any creation order or redemption order.
In particular, upon the Trust's receipt of any Incidental Rights
and/or IR Virtual Currency in connection with a fork, airdrop or
similar event, the Sponsor may suspend redemptions until it is able to
cause the Trust to sell or distribute such Incidental Rights and/or IR
Virtual Currency.
Availability of Information
The Trust's website (https://grayscale.com/products/grayscale-ethereum-trust/) will include quantitative information on a per Share
basis updated on a daily basis, including, (i) the current Digital
Asset Holdings per Share daily and the prior business day's Digital
Asset Holdings per Share and the reported closing price of the Shares;
(ii) the mid-point of the bid-ask price \56\ as of the time the Digital
Asset Holdings per Share is calculated (``Bid-Ask Price'') and a
calculation of the premium or discount of such price against such
Digital Asset Holdings per Share; and (iii) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily Bid-Ask Price against the Digital Asset Holdings per Share,
within appropriate ranges, for each of the four previous calendar
quarters (or for as long as the Trust has been trading as an ETP if
shorter). In addition, on each business day the Trust's website will
provide pricing information for the Shares.
---------------------------------------------------------------------------
\56\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day Digital Asset Holdings.
---------------------------------------------------------------------------
One or more major market data vendors, will provide an intra-day
indicative value (``IIV'') per Share updated every 15 seconds, as
calculated by the Exchange or a third party financial data provider
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m.,
E.T.).\57\ The IIV will be calculated using the same methodology as the
Digital Asset Holdings per Share of the Trust (as described above),
specifically by using the prior day's closing Digital Asset Holdings
per Share as a base and updating that value during the NYSE Arca Core
Trading Session to reflect changes in the value of the Trust's Digital
Asset Holdings during the trading day.
---------------------------------------------------------------------------
\57\ The IIV on a per Share basis disseminated during the Core
Trading Session should not be viewed as a real-time update of the
Digital Asset Holdings, which is calculated once a day.
---------------------------------------------------------------------------
The IIV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real-time update of the Digital Asset
Holdings per Share, which will be calculated only once at the end of
each trading day. The IIV will be widely disseminated on a per Share
basis every 15 seconds during the NYSE Arca Core Trading Session by one
or more major market data vendors. In addition, the IIV will be
available through on-line information services.
The Digital Asset Holdings for the Trust will be calculated by the
Sponsor once a day and will be disseminated daily to all market
participants at the same time. To the extent that the Sponsor has
utilized the cascading set of rules described in ``Index Price'' above,
the Trust's website will note the valuation methodology used and the
price per ETH resulting from such calculation. Quotation and last-sale
information regarding the Shares will be disseminated through the
facilities of the Consolidated Tape Association (``CTA'').
Quotation and last sale information for ETH will be widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. In addition, real-time price (and volume) data
for ETH is available by subscription from Reuters and Bloomberg. The
spot price of ETH is available on a 24-hour basis from major market
data vendors, including Bloomberg and Reuters. Information relating to
trading, including price and
[[Page 73910]]
volume information, in ETH will be available from major market data
vendors and from the exchanges on which ETH are traded. The normal
trading hours for Digital Asset Exchanges are 24-hours per day, 365-
days per year.
On each business day, the Sponsor will publish the Index Price, the
Trust's Digital Asset Holdings, and the Digital Asset Holdings per
Share on the Trust's website as soon as practicable after its
determination. If the Digital Asset Holdings and Digital Asset Holdings
per Share have been calculated using a price per ETH other than the
Index Price for such Evaluation Time, the publication on the Trust's
website will note the valuation methodology used and the price per ETH
resulting from such calculation.
The Trust will provide website disclosure of its Digital Asset
Holdings daily. The website disclosure of the Trust's Digital Asset
Holdings will occur at the same time as the disclosure by the Sponsor
of the Digital Asset Holdings to Authorized Participants so that all
market participants are provided such portfolio information at the same
time. Therefore, the same portfolio information will be provided on the
public website as well as in electronic files provided to Authorized
Participants. Accordingly, each investor will have access to the
current Digital Asset Holdings of the Trust through the Trust's
website, as well as from one or more major market data vendors.
The value of the Index, as well as additional information regarding
the Index, will be available on a continuous basis at https://www.coindesk.com/indices.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting
and entry of orders in equity securities traded on the NYSE Arca
Marketplace is $0.01, with the exception of securities that are priced
less than $1.00, for which the MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting
as registered Market Makers in Commodity-Based Trust Shares to
facilitate surveillance. The Exchange represents that, for initial and
continued listing, the Trust will be in compliance with Rule 10A-3 \58\
under the Act, as provided by NYSE Arca Rule 5.3-E. A minimum of
100,000 Shares of the Trust will be outstanding at the commencement of
trading on the Exchange.
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\58\ 17 CFR 240.10A-3.
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Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Trust.\59\ Trading in Shares of the Trust
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
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\59\ See NYSE Arca Rule 7.12-E.
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The Exchange may halt trading during the day in which an
interruption to the dissemination of the IIV or the value of the Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption. In addition, if the Exchange
becomes aware that the Digital Asset Holdings per Share is not
disseminated to all market participants at the same time, it will halt
trading in the Shares until such time as the Digital Asset Holdings per
Share is available to all market participants.
Surveillance
The Exchange represents that trading in the Shares of the Trust
will be subject to the existing trading surveillances administered by
the Exchange, as well as cross-market surveillances administered by
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\60\ The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions
and to deter and detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange.
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\60\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the ISG, and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in the Shares from such markets
and other entities. In addition, the Exchange may obtain information
regarding trading in the Shares from markets and other entities that
are members of ISG or with which the Exchange has in place a
comprehensive surveillance sharing agreement (``CSSA'').\61\ The
Exchange is also able to obtain information regarding trading in the
Shares in connection with such ETP Holders' proprietary or customer
trades which they effect through ETP Holders on any relevant market.
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\61\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Trust may trade on markets that are members of ISG or with which the
Exchange has in place a CSSA.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolios of the Trust, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange listing rules specified in this rule filing shall constitute
continued listing requirements for listing the Shares on the Exchange.
The Sponsor has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Rule 5.5-E(m).
[[Page 73911]]
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an ``Information Bulletin'' of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
the procedures for creations of Shares in Baskets; (2) NYSE Arca Rule
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to
learn the essential facts relating to every customer prior to trading
the Shares; (3) information regarding how the value of the Index and
the IIV are disseminated; (4) the possibility that trading spreads and
the resulting premium or discount on the Shares may widen during the
Opening and Late Trading Sessions, when an updated IIV will not be
calculated or publicly disseminated; and (5) trading information. The
Exchange notes that investors purchasing Shares directly from the Trust
will receive a prospectus.
In addition, the Information Bulletin will reference that the Trust
is subject to various fees and expenses as described in the Annual
Report. The Information Bulletin will disclose that information about
the Shares of the Trust is publicly available on the Trust's website.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \62\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
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\62\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Rule 8.201-E. The
Exchange has in place surveillance procedures that are adequate to
properly monitor trading in the Shares in all trading sessions and to
deter and detect violations of Exchange rules and applicable federal
securities laws. The Exchange or FINRA, on behalf of the Exchange, or
both, will communicate as needed regarding trading in the Shares with
other markets that are members of the ISG, and the Exchange or FINRA,
on behalf of the Exchange, or both, may obtain trading information
regarding trading in the Shares from such markets. In addition, the
Exchange may obtain information regarding trading in the Shares from
markets that are members of ISG or with which the Exchange has in place
a CSSA. Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is
able to obtain information regarding trading in the Shares and the
underlying ETH or any ETH derivative through ETP Holders acting as
registered Market Makers, in connection with such ETP Holders'
proprietary or customer trades through ETP Holders which they effect on
any relevant market.
The proposed rule change is also designed to prevent fraudulent and
manipulative acts and practices because, although the Digital Asset
Exchange Market is not inherently resistant to fraud and manipulation,
the Index serves as a means sufficient to mitigate the impact of
instances of fraud and manipulation on a reference price for ETH.
Specifically, the Index provides a better benchmark for the price of
ETH than the Digital Asset Exchange Market price because it (1) tracks
the Digital Asset Exchange Market price through trading activity at
U.S.-Compliant Exchanges; (2) mitigates the impact of instances of
fraud, manipulation and other anomalous trading activity in real-time
through systematic adjustments; (3) is constructed and maintained by an
expert third-party index provider, allowing for prudent handling of
non-market-related events; and (4) mitigates the impact of instances of
fraud, manipulation and other anomalous trading activity concentrated
on any one specific exchange through a cross-exchange composite index
rate. The Trust has used the Index to price the Shares for more than
four years, and the Index has proven its ability to (i) mitigate the
effects of fraud, manipulation and other anomalous trading activity
from impacting the ETH reference rate, (ii) provide a real-time,
volume-weighted fair value of ETH and (iii) appropriately handle and
adjust for non-market related events, such that efforts to manipulate
the price of ETH would have had a negligible effect on the pricing of
the Trust, due to the controls embedded in the structure of the Index.
In addition, certain of the Index's Constituent Exchanges also have or
have begun to implement market surveillance infrastructure to further
detect, prevent, and respond to fraud, attempted fraud, and similar
wrongdoing, including market manipulation. The proposed rule change is
also designed to prevent fraudulent and manipulative acts and practices
based on the existence of the CME futures market as a large, surveilled
and regulated market that is closely connected with the spot market for
ETH and through which the Exchange could obtain information to assist
in detecting and deterring potential fraud or manipulation.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that there is a considerable amount of ETH price and market information
available on public websites and through professional and subscription
services. Investors may obtain, on a 24-hour basis, ETH pricing
information based on the spot price for ETH from various financial
information service providers. The closing price and settlement prices
of ETH are readily available from the Digital Asset Exchanges and other
publicly available websites. In addition, such prices are published in
public sources, or on-line information services such as Bloomberg and
Reuters. The Digital Asset Holdings per Share will be calculated daily
and made available to all market participants at the same time. The
Trust will provide website disclosure of its Digital Asset Holdings
daily. One or more major market data vendors will disseminate for the
Trust on a daily basis information with respect to the most recent
Digital Asset Holdings per Share and Shares outstanding. In addition,
if the Exchange becomes aware that the Digital Asset Holdings per Share
is not disseminated to all market participants at the same time, it
will halt trading in the Shares until such time as the Digital Asset
Holdings is available to all market participants. Quotation and last-
sale information regarding the Shares will be disseminated through the
facilities of the CTA. The IIV will be widely disseminated on a per
Share basis every 15 seconds during the NYSE Arca Core Trading Session
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major
market data vendors. The Exchange represents that the Exchange may halt
trading during the day in which an interruption to the dissemination of
the IIV or the value of the Index occurs. If the interruption to the
dissemination of the IIV or the value of the Index persists past the
trading day in which it occurred, the Exchange will halt trading no
later than the beginning
[[Page 73912]]
of the trading day following the interruption.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA. In addition, as noted above,
investors will have ready access to information regarding the Trust's
Digital Asset Holdings, IIV, and quotation and last sale information
for the Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product, and the first such product
based on ETH, which will enhance competition among market participants,
to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NYSEARCA-2023-70 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NYSEARCA-2023-70. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NYSEARCA-2023-70 and should
be submitted on or before November 17, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\63\
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\63\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-23703 Filed 10-26-23; 8:45 am]
BILLING CODE 8011-01-P