[Federal Register Volume 88, Number 215 (Wednesday, November 8, 2023)]
[Notices]
[Pages 77116-77127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-24623]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98846; File No. SR-CboeBZX-2023-087]


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

November 2, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 20, 2023, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (``Commission'' or ``SEC'') 
a proposed rule change to list and trade shares of the Invesco Galaxy 
Ethereum ETF (the ``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-
Based Trust Shares.
---------------------------------------------------------------------------

    \3\ The Trust was formed as a Delaware statutory trust on 
September 27, 2023, and is operated as a grantor trust for U.S. 
federal tax purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------

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

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

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares of the Invesco 
Galaxy Ethereum ETF \4\ under BZX Rule 14.11(e)(4),\5\ which governs 
the listing and trading of Commodity-Based Trust Shares on the 
Exchange.\6\
---------------------------------------------------------------------------

    \4\ On September 29, 2023, the Trust filed with the Commission 
an initial registration statement (the ``Registration Statement'') 
on Form S-1 under the Securities Act of 1933 (15 U.S.C. 77a). The 
description of the operation of the Trust herein is based, in part, 
on the Registration Statement. The Registration Statement is not yet 
effective and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective.
    \5\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \6\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\7\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

Invesco Galaxy Ethereum ETF
    Invesco Capital Management is the sponsor of the Trust (the 
``Sponsor''). A well-established global fund administrator and transfer 
agent, Bank of New York Mellon (``BNYM'') will be the administrator 
(``Administrator'') and transfer agent (``Transfer Agent''). Coinbase 
Custody Trust Company, LLC (``ETH Custodian''), a third-party regulated 
custodian, will be responsible for custody of the Trust's Ether 
(``ETH''), and Bank of New York Mellon (the ``Cash Custodian'') will be 
responsible for custody of any Trust cash holdings. Delaware Trust 
Company is the trustee (``Trustee'').
    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the Trust. The Trust's 
assets will consist of ETH held by the Custodian on behalf of the 
Trust. The Trust generally does not intend to hold cash or cash

[[Page 77117]]

equivalents. However, there may be situations where the Trust will 
unexpectedly hold cash on a temporary basis.
    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in large blocks of Shares (a ``Creation Basket'') 
at the Trust's NAV. Authorized participants will deliver, or facilitate 
the delivery of, ETH to the Trust's account with the Custodian in 
exchange for Shares when they purchase Shares, and the Trust, through 
the Custodian, will deliver ETH to such authorized participants when 
they redeem Shares with the Trust. Authorized participants may then 
offer Shares to the public at prices that depend on various factors, 
including the supply and demand for Shares, the value of the Trust's 
assets, and market conditions at the time of a transaction. 
Shareholders who buy or sell Shares during the day from their broker 
may do so at a premium or discount relative to the NAV of the Shares of 
the Trust.
Background
    Ethereum is free software that is hosted on computers distributed 
throughout the globe. It employs an array of logic, called a protocol, 
to create a unified understanding of ownership, commercial activity, 
and business logic. This allows users to engage in commerce without the 
need to trust any of its participants or counterparties. Ethereum code 
creates verifiable and unambiguous rules that assign clear, strong 
property rights to create a platform for unrestrained business 
formation and free exchange. It is widely understood that no single 
intermediary or entity operates or controls the Ethereum network 
(referred to as ``decentralization''), the transaction validation and 
recordkeeping infrastructure of which is collectively maintained by a 
disparate user base. The Ethereum network allows people to exchange 
tokens of value, or ETH, which are recorded on a distributed public 
recordkeeping system or ledger known as a blockchain (the ``Ethereum 
Blockchain''), and which can be used to pay for goods and services, 
including computational power on the Ethereum network, or converted to 
fiat currencies, such as the U.S. dollar, at rates determined on 
digital asset exchanges or in individual peer-to-peer transactions. 
Furthermore, by combining the recordkeeping system of the Ethereum 
Blockchain with a flexible scripting language that is programmable and 
can be used to implement sophisticated logic and execute a wide variety 
of instructions, the Ethereum network is intended to act as a 
foundational infrastructure layer on top of which users can build their 
own custom software programs, as an alternative to centralized web 
servers. In theory, anyone can build their own custom software programs 
on the Ethereum network. In this way, the Ethereum network represents a 
project to expand blockchain deployment beyond a limited-purpose, peer-
to-peer private money system into a flexible, distributed alternative 
computing infrastructure that is available to all. On the Ethereum 
network, ETH is the unit of account that users pay for the 
computational resources consumed by running their programs.
    Heretofore, U.S. retail investors have lacked a U.S. regulated, 
U.S. exchange-traded vehicle to gain exposure to ETH. Instead current 
options include: (i) facing the counter-party risk, legal uncertainty, 
technical risk, and complexity associated with accessing spot Ether or 
(ii) over-the-counter Ether funds (``OTC ETH Funds'') with high 
management fees and potentially volatile premiums and discounts; \8\ 
Meanwhile, investors in other countries, including Germany, Switzerland 
and France, are able to use more traditional exchange listed and traded 
products (including exchange-traded funds holding physical ETH) to gain 
exposure to ETH. Investors across Europe have access to products which 
trade on regulated exchanges and provide exposure to a broad array of 
spot crypto assets. U.S. investors, by contrast, are left with fewer 
and more risky means of getting Ether exposure.\9\
---------------------------------------------------------------------------

    \8\ The premium and discount for OTC ETH Funds is known to move 
rapidly. For example, over the period of 12/21/20 to 1/21/21, the 
premium for the largest OTC ETH Fund went from 238.63% to 5.1%. 
While the price of Ether appreciated significantly during this 
period and NAV per share increased by 101.40%, the price per share 
decreased by 37.49%. This means that investors are holding shares of 
a fund with roughly $4.8 billion in assets under management that 
experiences significant volatility in its premium and discount 
outside of the fluctuations in price of the underlying asset. Even 
operating within the normal premium and discount range, it's 
possible for an investor to buy shares of an OTC ETH Fund only to 
have those shares quickly lose 10% or more in dollar value excluding 
any movement of the price of ether. That is to say--the price of 
Ether could have stayed exactly the same from market close on one 
day to market open the next, yet the value of the shares held by the 
investor decreased only because of the fluctuation of the premium. 
As more investment vehicles, including mutual funds and ETFs, seek 
to gain exposure to ether, the easiest option for a buy and hold 
strategy for such vehicles is often an OTC ETH Fund, meaning that 
even investors that do not directly buy OTC ETH Funds can be 
disadvantaged by extreme premiums (or discounts) and premium 
volatility.
    \9\ The Exchange notes that the list of countries above is not 
exhaustive and that securities regulators in a number of additional 
countries have either approved or otherwise allowed the listing and 
trading of Spot ETH ETPs.
---------------------------------------------------------------------------

    To this point, the lack of an ETP that holds spot ETH (a ``Spot ETH 
ETP'') exposes U.S. investor assets to significant risk because 
investors that would otherwise seek cryptoasset exposure through a Spot 
ETH ETP are forced to find alternative exposure through generally 
riskier means. For example, investors in OTC ETH Funds are not afforded 
the benefits and protections of regulated Spot ETH ETPs, resulting in 
retail investors suffering losses due to drastic movements in the 
premium/discount of OTC ETH Funds. An investor who purchased the 
largest OTC ETH Fund in January 2021 and held the position at the end 
of 2022 would have suffered a 69% loss due to the premium/discount, 
even if the price of ETH did not change. Many retail investors likely 
suffered losses due to this premium/discount in OTC ETH Fund trading; 
all such losses could have been avoided if a Spot ETH ETP had been 
available. Additionally, many U.S. investors that held their digital 
assets in accounts at FTX,\10\ Celsius Network LLC,\11\ BlockFi 
Inc.\12\ and Voyager Digital Holdings, Inc.\13\ have become unsecured 
creditors in the insolvencies of those entities. If a Spot ETH ETP was 
available, it is likely that at least a portion of the billions of 
dollars tied up in those proceedings would still reside in the 
brokerage accounts of U.S. investors, having instead been invested in a 
transparent, regulated, and well-understood structure--a Spot ETH ETP. 
To this point, approval of a Spot ETH ETP would represent a major win 
for the protection of U.S. investors in the cryptoasset space. The 
Trust, like all other series of Commodity-Based Trust Shares, is 
designed to protect investors against the risk of losses through fraud 
and insolvency that arise by holding digital assets, including ETH, on 
centralized platforms.
---------------------------------------------------------------------------

    \10\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \11\ See Celsius Network LLC, et al., Case No. 22-10964.
    \12\ See BlockFi Inc., Case No. 22-19361.
    \13\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

Applicable Standard
    The Commission has historically approved or disapproved exchange 
filings to list and trade series of Trust Issued Receipts, including 
spot-based Commodity-Based Trust Shares, on the basis of whether the 
listing exchange has in place a comprehensive surveillance sharing 
agreement with a regulated market of significant size related to the 
underlying commodity to

[[Page 77118]]

be held.\14\ With this in mind, the CME Ether Futures (``CME ETH 
Futures'') market, which launched in February 2021, is the proper 
market to consider in determining whether there is a related regulated 
market of significant size.
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order''). Prior orders from the Commission have pointed 
out that in every prior approval order for Commodity-Based Trust 
Shares, there has been a derivatives market that represents the 
regulated market of significant size, generally a Commodity Futures 
Trading Commission (the ``CFTC'') regulated futures market. Further 
to this point, the Commission's prior orders have noted that the 
spot commodities and currency markets for which it has previously 
approved spot ETPs are generally unregulated and that the Commission 
relied on the underlying futures market as the regulated market of 
significant size that formed the basis for approving the series of 
Currency and Commodity-Based Trust Shares, including gold, silver, 
platinum, palladium, copper, and other commodities and currencies. 
The Commission specifically noted in the Winklevoss Order that the 
approval order issued related to the first spot gold ETP ``was based 
on an assumption that the currency market and the spot gold market 
were largely unregulated.'' See Winklevoss Order at 37592. As such, 
the regulated market of significant size test does not require that 
the spot Ether market be regulated in order for the Commission to 
approve this proposal, and precedent makes clear that an underlying 
market for a spot commodity or currency being a regulated market 
would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to 
surveillance sharing agreements with the underlying futures market 
in order to determine whether such products were consistent with the 
Act.
---------------------------------------------------------------------------

    The Commission has approved proposals related to the listing and 
trading of funds that would primarily hold CME Bitcoin Futures that are 
registered under the Securities Act of 1933 (``Bitcoin Futures 
ETPs''),\15\ finding that the CME Bitcoin Futures market represents a 
regulated market of significant size. Meanwhile, the Commission has 
continued to disapprove proposals to list and trade funds that would 
hold spot bitcoin on the seemingly conflicting basis that the CME 
Bitcoin Futures market is not a regulated market of significant 
size.\16\ In the recently decided Grayscale Investments, LLC v. 
Securities and Exchange Commission,\17\ however, the court resolved 
this conflict by finding that the SEC had failed to provide a coherent 
explanation as to why it had approved the Bitcoin Futures ETPs while 
disapproving the proposal to list and trade shares of the Grayscale 
Bitcoin Trust and vacating the disapproval order.\18\
---------------------------------------------------------------------------

    \15\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5, 
2022) (collectively, with the Teucrium Approval, the ``Bitcoin 
Futures Approvals'').
    \16\ The proposed spot bitcoin funds are nearly identical to the 
Trust but proposed to hold bitcoin instead of ETH (``Spot Bitcoin 
ETPs'').
    \17\ Grayscale Investments, LLC v. Securities and Exchange 
Commission, et al., Case No. 22-1142 (the ``Grayscale Order'').
    \18\ Id.
---------------------------------------------------------------------------

    As further discussed below, both the Exchange and the Sponsor 
believe that this proposal and the included analysis are sufficient to 
establish that the CME ETH Futures market represents a regulated market 
of significant size as it relates both to the CME ETH Futures market 
and to the spot ETH market and that this proposal should be approved.
Investment Objective
    According to the Registration Statement, the investment objective 
of the Trust is for the Shares to reflect the spot price of Ether as 
measured by using the Lukka Prime Reference Rate less the Trust's 
expenses and other liabilities. In seeking to achieve its investment 
objective, the Trust will hold Ether (``ETH'') and will value its 
Shares daily based on the reported Lukka Prime Reference Rate (the 
``Benchmark''), which is calculated based on prices contributed by 
exchanges that are determined by Lukka, Inc., (the ``Benchmark 
Provider'') an independent third-party digital asset company. The Trust 
is not actively managed.
The Benchmark
    As described in the Registration Statement, the Fund will use the 
Benchmark to calculate the Trust's NAV. The Benchmark is designed to be 
a robust price for ETH in USD and there is no component other than ETH 
in the index. The underlying exchanges are sourced from the Benchmark 
Provider. As of December 2022, the following exchanges are considered 
to be eligible exchanges the Benchmark Provider: Binance, Bitfinex, 
Bitflyer, Bittrex, Bitstamp, Coinbase, Crypto.com, Gemini, HitBTC, 
Huobi, Kraken, KuCoin, OKEx, Poloniex (collectively, ``Benchmark 
Pricing Sources''). The Benchmark Provider reviews eligible exchanges 
quarterly. In determining which exchanges to include, the Benchmark 
Provider evaluates each exchange using proprietary ratings criteria. 
The Benchmark Provider constantly reassesses the exchanges to be 
eligible for inclusion in the Benchmark, and makes adjustments as 
needed.
    In determining the value of ETH, the Benchmark Provider applies a 
five-step weighting process for identifying the principal exchange for 
Ether and the last price on that exchange. A Base Exchange Score 
(``BES'') that takes into account certain criteria is assigned to each 
eligible exchange in order to select the most appropriate primary 
exchange and then an executed exchange price is determined at 4:00 p.m. 
Eastern time.
    Step 1: Assign each exchange for Ether and U.S. Dollars a BES 
reflecting static exchange characteristics such as oversight, 
microstructure and technology.
    Step 2: Adjust the BES based on the relative monthly volume each 
exchange services. This new score is the Volume Adjusted Score 
(``VAS'').
    Step 3: Decay the adjusted score based on the time passed since 
last trade on exchange, assessing the level of activity in the market 
by considering the frequency (volume) of trades. The decay factor 
reflects the time since the last trade on the exchange. This is the 
final Decayed Volume Adjusted Score (DVAS), which reflects freshness of 
data by tracking most recent trades.
    Step 4: Rank the exchanges by the DVAS score and designate the 
highest-ranking exchange as the Principal Market for that point in 
time--the principal market is the exchange with highest DVAS.
    Step 5: An executed exchange price is used to represent fair market 
value at 4:00 p.m. Eastern time.
Availability of Information
    In addition to the price transparency of the Benchmark, the Trust 
will provide information regarding the Trust's ETH holdings as well as 
additional data regarding the Trust. The Trust will provide an Intraday 
Indicative Value (``IIV'') per Share updated every 15 seconds, as 
calculated by the Exchange or a third-party financial data provider 
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m. 
E.T.). The IIV will be calculated by using the prior day's closing NAV 
per Share as a base and updating that value during Regular Trading 
Hours to reflect changes in the value of the Trust's ETH holdings 
during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a)

[[Page 77119]]

the current NAV per Share daily and the prior business day's NAV and 
the reported closing price; (b) the BZX Official Closing Price \19\ in 
relation to the NAV as of the time the NAV is calculated and a 
calculation of the premium or discount of such price against such NAV; 
(c) data in chart form displaying the frequency distribution of 
discounts and premiums of the Official Closing Price against the NAV, 
within appropriate ranges for each of the four previous calendar 
quarters (or for the life of the Trust, if shorter); (d) the 
prospectus; and (e) other applicable quantitative information. The 
Trust will also disseminate the Trust's holdings on a daily basis on 
the Trust's website. The price of ETH will be made available by one or 
more major market data vendors, updated at least every 15 seconds 
during Regular Trading Hours. Information about the Benchmark, 
including key elements of how the Benchmark is calculated, will be 
publicly available at https://www.lukka.tech/.
---------------------------------------------------------------------------

    \19\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the Consolidated Tape 
Association (``CTA'').
    Quotation and last sale information for ETH is widely disseminated 
through a variety of major market data vendors, including Bloomberg and 
Reuters, as well as the Benchmark. Information relating to trading, 
including price and volume information, in ETH is available from major 
market data vendors and from the exchanges on which ETH are traded. 
Depth of book information is also available from ETH exchanges. The 
normal trading hours for ETH exchanges are 24 hours per day, 365 days 
per year.
The ETH Custodian
    The Custodian's services (i) allow ETH to be deposited from a 
public blockchain address to the Trust's ETH account and (ii) allow ETH 
to be withdrawn from the ETH account to a public blockchain address as 
instructed by the Trust. The Custody Agreement requires the Custodian 
to hold the Trust's ETH in cold storage, unless required to facilitate 
withdrawals as a temporary measure. The Custodian will use segregated 
cold storage ETH addresses for the Trust which are separate from the 
ETH addresses that the Custodian uses for its other customers and which 
are directly verifiable via the ETH blockchain. The Custodian will 
safeguard the private keys to the ETH associated with the Trust's ETH 
account. The Custodian will at all times record and identify in its 
books and records that such ETH constitutes the property of the Trust. 
The Custodian will not withdraw the Trust's ETH from the Trust's 
account with the Custodian, or loan, hypothecate, pledge or otherwise 
encumber the Trust's ETH, without the Trust's instruction. If the 
custody agreement terminates, the Sponsor may appoint another custodian 
and the Trust may enter into a custodian agreement with such custodian.
Net Asset Value
    NAV means the total assets of the Trust including, but not limited 
to, all ETH and cash, if any, less total liabilities of the Trust, each 
determined on the basis of generally accepted accounting principles. 
The Administrator will determine the NAV of the Trust on each day that 
the Exchange is open for regular trading, as promptly as practical 
after 4:00 p.m. EST. The NAV of the Trust is the aggregate value of the 
Trust's assets less its estimated accrued but unpaid liabilities (which 
include accrued expenses). In determining the Trust's NAV, the 
Administrator values the ETH held by the Trust based on the price set 
by the Benchmark as of 4:00 p.m. EST. The Administrator also determines 
the NAV per Share.
Creation and Redemption of Shares
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or 
the close of regular trading on the Exchange, whichever is earlier. The 
day on which an order is received is considered the purchase order 
date. The total deposit of ETH required is an amount of ETH that is in 
the same proportion to the total assets of the Trust, net of accrued 
expenses and other liabilities, on the date the order to purchase is 
properly received, as the number of Shares to be created under the 
purchase order is in proportion to the total number of Shares 
outstanding on the date the order is received. Each night, the Sponsor 
will publish the amount of ETH that will be required in exchange for 
each creation order. The Administrator determines the required deposit 
for a given day by dividing the number of ETH held by the Trust as of 
the opening of business on that business day, adjusted for the amount 
of ETH constituting estimated accrued but unpaid fees and expenses of 
the Trust as of the opening of business on that business day, by the 
quotient of the number of Shares outstanding at the opening of business 
divided by 5,000. The procedures by which an authorized participant can 
redeem one or more Creation Baskets mirror the procedures for the 
creation of Creation Baskets.
Commodity-Based Trust Shares--Rule 14.11(e)(4)
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a 
trust that holds a specified commodity \20\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity.
---------------------------------------------------------------------------

    \20\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. The CFTC has stated that: ``Certain digital assets, including 
BTC, ETH, LTC, and at least two fiat-backed stablecoins, tether 
(``USDT'') and the Binance USD (``BUSD''), as well as other virtual 
currencies as alleged herein, are ``commodities,'' as defined under 
Section 1a(9) of the [Commodities Exchange] Act, 7 U.S.C. 1a(9).'' 
See Commodity Futures Trading Commission v. Changpeng Zhao, Binance 
Holdings Limited, Binance Holdings (IE) Limited, Binance (Services) 
Holdings Limited, and Samuel Lim, March 27, 2023 at 9.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the

[[Page 77120]]

current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g., Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) the extent to which trading is not occurring in the ETH underlying 
the Shares; or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information regarding 
trading in the Shares and ETH Futures via the Intermarket Surveillance 
Group (``ISG''), from other exchanges who are members or affiliates of 
the ISG, or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement.\21\
---------------------------------------------------------------------------

    \21\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) the procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares outside of Regular Trading Hours \22\ 
when an updated IIV will not be calculated or publicly disseminated; 
(v) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (vi) trading information.
---------------------------------------------------------------------------

    \22\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
CME ETH Futures \23\
---------------------------------------------------------------------------

    \23\ Unless otherwise noted, all data and analysis presented in 
this section and referenced elsewhere in the filing has been 
provided by the Sponsor.
---------------------------------------------------------------------------

    CME began offering trading in Ether Futures in February 2021. Each 
contract represents 50 ETH and is based on the CME CF Ether-Dollar 
Reference Rate.\24\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to 
CME ETH Futures have generally trended up since launch, although some 
metrics have slowed recently. For example, there were 76,293 CME ETH 
Futures contracts traded in July 2023 (approximately $7.3 billion) 
compared to 70,305 ($11.1 billion) and 158,409 ($7.5 billion) contracts 
traded in July 2021, and July

[[Page 77121]]

2022 respectively.\25\ The Sponsor's research indicates daily 
correlation between the spot ETH and the CME ETH Futures is 0.998 from 
the period of 9/1/22 through 9/1/23.
---------------------------------------------------------------------------

    \24\ The CME CF Ether-Dollar Reference Rate is based on a 
publicly available calculation methodology based on pricing sourced 
from several crypto exchanges and trading platforms, including 
Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
    \25\ Source: CME, 7/31/23.
---------------------------------------------------------------------------

    The number of large open interest holders \26\ and unique accounts 
trading CME ETH Futures have both increased, even in the face of 
heightened Ether price volatility.
---------------------------------------------------------------------------

    \26\ A large open interest holder in CME ETH Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
1250 ether. At a price of approximately $1,867 per Ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than 
$2.3 million in CME ETH Futures.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN08NO23.020

[GRAPHIC] [TIFF OMITTED] TN08NO23.021


[[Page 77122]]


[GRAPHIC] [TIFF OMITTED] TN08NO23.022

BILLING CODE 8011-01-C
Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\27\ including Commodity-Based Trust Shares,\28\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\29\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the Act and that this filing sufficiently

[[Page 77123]]

demonstrates that the CME ETH Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the Commission are sufficiently 
mitigated to the point that they are outweighed by quantifiable 
investor protection issues that would be resolved by approving this 
proposal.
---------------------------------------------------------------------------

    \27\ See Exchange Rule 14.11(f).
    \28\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \29\ The Exchange believes that ETH is resistant to price 
manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of ETH trading render it difficult and 
prohibitively costly to manipulate the price of ETH. The 
fragmentation across ETH platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of ETH prices 
through continuous trading activity challenging. To the extent that 
there are ETH exchanges engaged in or allowing wash trading or other 
activity intended to manipulate the price of ETH on other markets, 
such pricing does not normally impact prices on other exchange 
because participants will generally ignore markets with quotes that 
they deem non-executable. Moreover, the linkage between the ETH 
markets and the presence of arbitrageurs in those markets means that 
the manipulation of the price of ETH price on any single venue would 
require manipulation of the global ETH price in order to be 
effective. Arbitrageurs must have funds distributed across multiple 
trading platforms in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular ETH exchange or OTC 
platform. As a result, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \30\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG. The only remaining issue 
to be addressed is whether the ETH Futures market constitutes a market 
of significant size, which both the Exchange and the Sponsor believe 
that it does. The terms ``significant market'' and ``market of 
significant size'' include a market (or group of markets) as to which: 
(a) there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
manipulate the ETP, so that a surveillance-sharing agreement would 
assist the listing exchange in detecting and deterring misconduct; and 
(b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\31\
---------------------------------------------------------------------------

    \30\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in the ISG 
constitutes such a surveillances sharing agreement. See Securities 
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix 
Disapproval'').
    \31\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.32 33
---------------------------------------------------------------------------

    \32\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
    \33\ According to reports, the Commission is poised to allow the 
launch of ETFs registered under the Investment Company Act of 1940, 
as amended (the ``1940 Act''), that provide exposure to ETH 
primarily through CME ETH Futures (``ETH Futures ETFs'') as early as 
October 2023. Allowing such products to list and trade is a 
productive first step in providing U.S. investors and traders with 
transparent, exchange-listed tools for expressing a view on ETH. 
https://www.bloomberg.com/news/articles/2023-08-17/sec-said-to-be-poised-to-allow-us-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct.
    In light of the similarly high correlation between spot ETH/CME ETH 
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999, 
respectively), applying the same rationale that the Commission applied 
to a Bitcoin Futures ETF in the Bitcoin Futures Approvals also 
indicates that this test is satisfied for this proposal. In the 
Teucrium Approval, the SEC stated:

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably 
be relied upon to capture the effects on the CME futures market 
caused by a person attempting to manipulate the proposed futures ETP 
by manipulating the price of CME futures contracts, whether that 
attempt is made by directly trading on the CME futures market or 
indirectly by trading outside of the CME futures market. As such, 
when the CME shares its surveillance information with Arca, the 
information would assist in detecting and deterring fraudulent or 
manipulative misconduct related to the non-cash assets held by the 
proposed ETP.\34\
---------------------------------------------------------------------------

    \34\ See Teucrium Approal at 21679.

    The assumptions from this statement are also true for CME ETH 
Futures. CME ETH Futures pricing is based on pricing from spot ETH 
markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME BTC futures market caused by a person attempting to manipulate 
the proposed futures ETP by manipulating the price of CME BTC futures 
contracts . . . indirectly by trading outside of the CME BTC futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of CME BTC Futures. This same logic would extend 
to CME ETH Futures markets where CME's surveillance would be able to 
capture the effects of trading on the relevant spot markets on the 
pricing of CME ETH Futures. This was further acknowledged in the 
Grayscale lawsuit when Judge Rao stated ``. . . the Commission in the 
Teucrium order recognizes that the futures prices are influenced by the 
spot prices, and the Commission concludes in approving futures ETPs 
that any fraud on the spot market can be adequately addressed by the 
fact that the futures market is a regulated one . . .'' The Exchange 
agrees with the Commission on this point and notes that the pricing 
mechanism applicable to the Shares is similar to that of the CME ETH 
Futures. This view is also consistent with the Sponsor's research.
    As such, the part (a) of the significant market test outlined above 
is satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares in the same way that it would be for both 
Bitcoin Futures ETPs and Spot Bitcoin ETPs.
(b) Predominant Influence on Prices in Spot and ETH Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME ETH Futures 
market for a number of reasons. First, because the Trust would not hold 
CME ETH Futures contracts, the only way that it could be the 
predominant force on prices in that market is through the spot markets 
that CME ETH Futures contracts use for pricing.\35\ The Sponsor notes 
that ETH total 24-hour spot trading volume has

[[Page 77124]]

averaged $9.4B over the year ending September 1, 2023,\36\ with 
approximately $950M occurring on venues whose trades are included in 
the sponsor's benchmark.\37\ The Sponsor expects that the Trust would 
represent a very small percentage of this daily trading volume in the 
spot ETH market even in its most aggressive projections for the Trust's 
assets and, thus, the Trust would not have an impact on the spot market 
and therefore could not be the predominant force on prices in the CME 
ETH Futures market. Second, much like the CME Bitcoin Futures market, 
the CME ETH Futures market has progressed and matured significantly. As 
the court found in the Grayscale Order ``Because the spot market is 
deeper and more liquid than the futures market, manipulation should be 
more difficult, not less.'' The Exchange and sponsor agree with this 
sentiment and believe it applies equally to the spot ETH and CME ETH 
Futures markets.
---------------------------------------------------------------------------

    \35\ This logic is reflected by the court in the Grayscale Order 
at 17-18. Specifically, the court found that ``Because Grayscale 
owns no futures contracts, trading in Grayscale can affect the 
futures market only through the spot market . . . But Grayscale 
holds just 3.4 percent of outstanding bitcoin, and the Commission 
did not suggest Grayscale can dominate the price of bitcoin.''
    \36\ Source: TokenTerminal.
    \37\ Source: VanEck research, CryptoCompare.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
    The Exchange is proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares. On June 21, 
2023, the Exchange reached an agreement on terms with Coinbase, Inc. 
(``Coinbase''), an operator of a United States-based spot trading 
platform for ETH that represents a substantial portion of US-based and 
USD denominated ETH trading,\38\ to enter into a surveillance-sharing 
agreement (``Spot Crypto SSA'') and executed an associated term sheet. 
Based on this agreement on terms, the Exchange and Coinbase will 
finalize and execute a definitive agreement that the parties expect to 
be executed prior to allowing trading of the Commodity-Based Trust 
Shares.
---------------------------------------------------------------------------

    \38\ According to a report from The Block, Coinbase represented 
45%% of USD denominated exchange trading volume in August 2023. 
https://www.theblock.co/data/crypto-markets/spot/usd-support-exchange-volume-market-share.
---------------------------------------------------------------------------

    The Spot Crypto SSA is expected to be a bilateral surveillance-
sharing agreement between the Exchange and Coinbase that is intended to 
supplement the Exchange's market surveillance program. The Spot Crypto 
SSA is expected to have the hallmarks of a surveillance-sharing 
agreement between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot ETH trades on Coinbase where 
the Exchange determines it is necessary as part of its surveillance 
program for the Commodity-Based Trust Shares.\39\ This means that the 
Exchange expects to receive market data for orders and trades from 
Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares. In addition, the Exchange can request 
further information from Coinbase related to spot ETH trading activity 
on the Coinbase exchange platform, if the Exchange determines that such 
information would be necessary to detect and investigate potential 
manipulation in the trading of the Commodity-Based Trust Shares.\40\
---------------------------------------------------------------------------

    \39\ For additional information regarding ISG and the hallmarks 
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
    \40\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC 
and Cboe Clear Digital, LLC.
---------------------------------------------------------------------------

(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to ETH through OTC ETH Funds is greater than $5 
billion. With that growth, so too has grown the quantifiable investor 
protection issues to U.S. investors through premium/discount volatility 
and management fees for OTC ETH Funds. The Exchange believes that, as 
described above, the concerns related to the prevention of fraudulent 
and manipulative acts and practices have been sufficiently addressed to 
be consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, such concerns are now at the very least 
outweighed by investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to ETH in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in ETH Futures ETFs and operating companies that are 
imperfect proxies for ETH exposure; and (iv) providing an alternative 
to custodying spot ETH.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \41\ in general and Section 6(b)(5) of the Act \42\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

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

    The Commission has approved numerous series of Trust Issued 
Receipts, including Commodity-Based Trust Shares, to be listed on U.S. 
national securities exchanges. In order for any proposed rule change 
from an exchange to be approved, the Commission must determine that, 
among other things, the proposal is consistent with the requirements of 
Section 6(b)(5) of the Act, specifically including: (i) the requirement 
that a national securities exchange's rules are designed to prevent 
fraudulent and manipulative acts and practices; \43\ and (ii) the 
requirement that an exchange proposal be designed, in general, to

[[Page 77125]]

protect investors and the public interest. The Exchange believes that 
this proposal is consistent with the requirements of Section 6(b)(5) of 
the Act and that this filing sufficiently demonstrates that the CME ETH 
Futures market represents a regulated market of significant size and 
that, on the whole, the manipulation concerns previously articulated by 
the Commission are sufficiently mitigated to the point that they are 
outweighed by quantifiable investor protection issues that would be 
resolved by approving this proposal.
---------------------------------------------------------------------------

    \43\ The Exchange believes that ETH is resistant to price 
manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of ETH trading render it difficult and 
prohibitively costly to manipulate the price of ETH. The 
fragmentation across ETH platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of ETH prices 
through continuous trading activity challenging. To the extent that 
there are ETH exchanges engaged in or allowing wash trading or other 
activity intended to manipulate the price of ETH on other markets, 
such pricing does not normally impact prices on other exchange 
because participants will generally ignore markets with quotes that 
they deem non-executable. Moreover, the linkage between the ETH 
markets and the presence of arbitrageurs in those markets means that 
the manipulation of the price of ETH price on any single venue would 
require manipulation of the global ETH price in order to be 
effective. Arbitrageurs must have funds distributed across multiple 
trading platforms in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular ETH exchange or OTC 
platform. As a result, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place with a regulated market of significant size. Both 
the Exchange and CME are members of ISG. The only remaining issue to be 
addressed is whether the ETH Futures market constitutes a market of 
significant size, which both the Exchange and the Sponsor believe that 
it does. The terms ``significant market'' and ``market of significant 
size'' include a market (or group of markets) as to which: (a) there is 
a reasonable likelihood that a person attempting to manipulate the ETP 
would also have to trade on that market to manipulate the ETP, so that 
a surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct; and (b) it is unlikely that trading 
in the ETP would be the predominant influence on prices in that 
market.\44\
---------------------------------------------------------------------------

    \44\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.45 46
---------------------------------------------------------------------------

    \45\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
    \46\ According to reports, the Commission is poised to allow the 
launch of ETFs registered under the Investment Company Act of 1940, 
as amended (the ``1940 Act''), that provide exposure to ETH 
primarily through CME ETH Futures (``ETH Futures ETFs'') as early as 
October 2023. Allowing such products to list and trade is a 
productive first step in providing U.S. investors and traders with 
transparent, exchange-listed tools for expressing a view on ETH. 
https://www.bloomberg.com/news/articles/2023-08-17/sec-said-to-be-poised-to-allow-us-debut-of-ether-futures-etfs-eth#xj4y7vzkg.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct.
    In light of the similarly high correlation between spot ETH/CME ETH 
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999, 
respectively), applying the same rationale that the Commission applied 
to a Bitcoin Futures ETF in the Bitcoin Futures Approvals also 
indicates that this test is satisfied for this proposal. In the 
Teucrium Approval, the SEC stated:

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably 
be relied upon to capture the effects on the CME futures market 
caused by a person attempting to manipulate the proposed futures ETP 
by manipulating the price of CME futures contracts, whether that 
attempt is made by directly trading on the CME futures market or 
indirectly by trading outside of the CME futures market. As such, 
when the CME shares its surveillance information with Arca, the 
information would assist in detecting and deterring fraudulent or 
manipulative misconduct related to the non-cash assets held by the 
proposed ETP.\47\
---------------------------------------------------------------------------

    \47\ See Teucrium Approval at 21679.

    The assumptions from this statement are also true for CME ETH 
Futures. CME ETH Futures pricing is based on pricing from spot ETH 
markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME BTC futures market caused by a person attempting to manipulate 
the proposed futures ETP by manipulating the price of CME BTC futures 
contracts . . . indirectly by trading outside of the CME BTC futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of CME BTC Futures. This same logic would extend 
to CME ETH Futures markets where CME's surveillance would be able to 
capture the effects of trading on the relevant spot markets on the 
pricing of CME ETH Futures. This was further acknowledged in the 
Grayscale lawsuit when Judge Rao stated ``. . . the Commission in the 
Teucrium order recognizes that the futures prices are influenced by the 
spot prices, and the Commission concludes in approving futures ETPs 
that any fraud on the spot market can be adequately addressed by the 
fact that the futures market is a regulated one . . .'' The Exchange 
agrees with the Commission on this point and notes that the pricing 
mechanism applicable to the Shares is similar to that of the CME ETH 
Futures. This view is also consistent with the Sponsor's research.
    As such, the part (a) of the significant market test outlined above 
is satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares in the same way that it would be for both 
Bitcoin Futures ETPs and Spot Bitcoin ETPs.
(b) Predominant Influence on Prices in Spot and ETH Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME ETH Futures 
market for a number of reasons. First, because the Trust would not hold 
CME ETH Futures contracts, the only way that it could be the 
predominant force on prices in that market is through the spot markets 
that CME ETH Futures contracts use for pricing.\48\ The Sponsor notes 
that ETH total 24-hour spot trading volume has averaged $9.4B over the 
year ending September 1, 2023,\49\ with approximately $950M occurring 
on venues whose trades are included in the sponsor's benchmark.\50\ The 
Sponsor expects that the Trust would represent a very small percentage 
of this daily trading volume in the spot ETH market even in its most 
aggressive projections for the Trust's assets and, thus, the Trust 
would not have an impact on the spot market and therefore could not be 
the predominant force on prices in the CME ETH Futures market. Second, 
much like the CME Bitcoin Futures market, the CME ETH Futures market 
has progressed and matured significantly.

[[Page 77126]]

As the court found in the Grayscale Order, ``Because the spot market is 
deeper and more liquid than the futures market, manipulation should be 
more difficult, not less.'' The Exchange and Sponsor agree with this 
sentiment and believe it applies equally to the spot ETH and CME ETH 
Futures markets.
---------------------------------------------------------------------------

    \48\ This logic is reflected by the court in the Grayscale Order 
at 17-18. Specifically, the court found that ``Because Grayscale 
owns no futures contracts, trading in Grayscale can affect the 
futures market only through the spot market . . . But Grayscale 
holds just 3.4 percent of outstanding bitcoin, and the Commission 
did not suggest Grayscale can dominate the price of bitcoin.''
    \49\ Source: TokenTerminal.
    \50\ Source: VanEck research, CryptoCompare.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
    The Exchange is proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares. On June 21, 
2023, the Exchange reached an agreement on terms with Coinbase, Inc. 
(``Coinbase''), an operator of a United States-based spot trading 
platform for ETH that represents a substantial portion of US-based and 
USD denominated ETH trading, to enter into a Spot Crypto SSA and 
executed an associated term sheet. Based on this agreement on terms, 
the Exchange and Coinbase will finalize and execute a definitive 
agreement that the parties expect to be executed prior to allowing 
trading of the Commodity-Based Trust Shares.
    The Spot Crypto SSA is expected to be a bilateral surveillance-
sharing agreement between the Exchange and Coinbase that is intended to 
supplement the Exchange's market surveillance program. The Spot Crypto 
SSA is expected to have the hallmarks of a surveillance-sharing 
agreement between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot ETH trades on Coinbase where 
the Exchange determines it is necessary as part of its surveillance 
program for the Commodity-Based Trust Shares. This means that the 
Exchange expects to receive market data for orders and trades from 
Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares. In addition, the Exchange can request 
further information from Coinbase related to spot ETH trading activity 
on the Coinbase exchange platform, if the Exchange determines that such 
information would be necessary to detect and investigate potential 
manipulation in the trading of the Commodity-Based Trust Shares.
(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to ETH through OTC ETH Funds is greater than $5 
billion. With that growth, so too has grown the quantifiable investor 
protection issues to U.S. investors through premium/discount volatility 
and management fees for OTC ETH Funds. The Exchange believes that, as 
described above, the concerns related to the prevention of fraudulent 
and manipulative acts and practices have been sufficiently addressed to 
be consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, such concerns are now at the very least 
outweighed by investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to ETH in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in ETH Futures ETFs and operating companies that are 
imperfect proxies for ETH exposure; and (iv) providing an alternative 
to custodying spot ETH.
Commodity-Based Trust Shares--Rule 14.11(e)(4)
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed ETH 
derivatives via the ISG, from other exchanges who are members or 
affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about ETH and will be available regarding the Trust and the 
Shares. In addition to the price transparency of the Index, the Trust 
will provide information regarding the Trust's ETH holdings as well as 
additional data regarding the Trust. The Trust will provide an IIV per 
Share updated every 15 seconds, as calculated by the Exchange or a 
third-party financial data provider during the Exchange's Regular 
Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated 
by using the prior day's closing NAV per Share as a base and updating 
that value during Regular Trading Hours to reflect changes in the value 
of the Trust's ETH holdings during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price in relation to the NAV as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on

[[Page 77127]]

a daily basis on the Trust's website. The price of ETH will be made 
available by one or more major market data vendors, updated at least 
every 15 seconds during Regular Trading Hours. Information about the 
Index, including key elements of how the Index is calculated, will be 
publicly available at
    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the CTA.
    Quotation and last sale information for ETH is widely disseminated 
through a variety of major market data vendors, including Bloomberg and 
Reuters, as well as the Index. Information relating to trading, 
including price and volume information, in ETH is available from major 
market data vendors and from the exchanges on which ETH are traded. 
Depth of book information is also available from ETH exchanges. The 
normal trading hours for ETH exchanges are 24 hours per day, 365 days 
per year.
    In sum, the Exchange believes that this proposal is consistent with 
the requirements of Section 6(b)(5) of the Act, that this filing 
sufficiently demonstrates that the CME ETH Futures market represents a 
regulated market of significant size, and that on the whole the 
manipulation concerns previously articulated by the Commission are 
sufficiently mitigated to the point that they are outweighed by 
investor protection issues that would be resolved by approving this 
proposal. For the above reasons, the Exchange believes that the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act.

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

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

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. by order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2023-087 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-CboeBZX-2023-087. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-CboeBZX-2023-087 and should 
be submitted on or before November 29, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\51\
---------------------------------------------------------------------------

    \51\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-24623 Filed 11-7-23; 8:45 am]
BILLING CODE 8011-01-P