Federal Register, Volume 88 Issue 233 (Wednesday, December 6, 2023)

[Federal Register Volume 88, Number 233 (Wednesday, December 6, 2023)]
[Notices]
[Pages 84840-84853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-26731]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99045; File No. SR-CboeBZX-2023-095]

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

November 30, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on November 17, 2023, Cboe BZX Exchange, Inc. (``Exchange'' or ``BZX'')
filed with the Securities and Exchange Commission (``SEC'' or
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 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

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 Fidelity
Ethereum Fund (the ``Trust''),\3\ under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
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\3\ The Trust was formed as a Delaware statutory trust on
October 31, 2023 and is operated as a grantor trust for U.S. federal
tax purposes. The Trust has no fixed termination date.
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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

[[Page 84841]]

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 Fidelity
Ethereum Fund \4\ under BZX Rule 14.11(e)(4),\5\ which governs the
listing and trading of Commodity-Based Trust Shares on the Exchange.\6\
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\4\ The Trust will file 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.
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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.
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\7\ 15 U.S.C. 80a-1.
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Fidelity Ethereum Fund
FD Funds Management LLC is the sponsor of the Trust (the
``Sponsor''). Fidelity Digital Assets Services, LLC (``FDAS''), a
regulated custodian licensed by the New York Department of Financial
Services (the ``Custodian''), will be responsible for custody of the
Trust's Ether (``ETH''). Delaware Trust Company is the trustee
(``Trustee''). The Trust will engage Fidelity Service Company, Inc.
(``FSC''), a Sponsor affiliate, to be the administrator
(``Administrator''). A third-party transfer agent (the ``Transfer
Agent'') will facilitate the issuance and redemption of Shares of the
Trust and respond to correspondence by Trust Shareholders and others
relating to its duties, maintain Shareholder accounts, and make
periodic reports to the Trust. Another affiliate of Sponsor, Fidelity
Distributors Corporation, will be the distributor (``Distributor'') in
connection with the creation and redemption of ``Baskets'' of Shares.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust's net assets.
The Trust's assets will consist of ETH held by the Custodian on behalf
of the Trust. The Trust generally does not intend to hold cash or cash
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 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 platforms or in individual peer-to-peer transactions.
Furthermore, by combining the recordkeeping system of the Ethereum
Blockchain with a flexible scripting language that is programmable and
can be used to implement sophisticated logic and execute a wide variety
of instructions, the Ethereum network is intended to act as a
foundational infrastructure layer on top of which users can build their
own custom software programs, as an alternative to centralized web
servers. In theory, anyone can build their own custom software programs
on the Ethereum network. In this way, the Ethereum network represents a
project to expand blockchain deployment beyond a limited-purpose, peer-
to-peer private money system into a flexible, distributed alternative
computing infrastructure that is available to all. On the Ethereum
network, ETH is the unit of account that users pay for the
computational resources consumed by running their programs.
Heretofore, U.S. retail investors have lacked a U.S. regulated,
U.S. exchange-traded vehicle to gain exposure to ETH. Instead current
options include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot ether or
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high
management fees and potentially volatile premiums and discounts; \8\

[[Page 84842]]

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\
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\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.
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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 crypto asset 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 crypto asset space. The
Trust, like all other series of Commodity-Based Trust Shares, is
designed to protect investors against the risk of losses through fraud
and insolvency that arise by holding digital assets, including ETH, on
centralized platforms.
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\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.
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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 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.
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\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.
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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\
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\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.
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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 to seek to track the performance of ETH, as measured by
the performance of the Fidelity Ethereum Index (the ``Index''), less
the Trust's expenses and other liabilities. In seeking to achieve its
investment objective, the Trust will hold ETH and will value its Shares
daily as of 4:00 p.m. Eastern time using the same methodology used to
calculate the Index and process all creations and redemptions in
transactions with authorized participants. The Trust is not actively
managed.
The Index
The Index is designed to reflect the performance of ETH in U.S.
dollars. The current digital trading platform composition of the Index
is Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. The
Index methodology was developed by Fidelity Product Services, LLC (the
``Index Provider'') and is administered by the Fidelity Index
Committee. Coin Metrics, Inc. is the third-party calculation agent for
the Index.\19\
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\19\ The Sponsor's affiliates have an ownership interest in Coin
Metrics, Inc.
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The Index is constructed using ETH price feeds from eligible ETH
spot

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markets and a volume-weighted median price (``VWMP'') methodology,
calculated every 15 seconds based on VWMP spot market data over rolling
5-minute increments to develop an ETH price composite. The Index market
value is the volume-weighted median price of ETH in U.S. dollars over
the previous five minutes, which is calculated by (1) ordering all
individual transactions on eligible spot markets over the previous five
minutes by price, and then (2) selecting the price associated with the
50th percentile of total volume. Using rolling five-minute segments
means malicious actors would need to sustain efforts to manipulate the
market over an extended period of time, or such malicious actors would
need to replicate efforts multiple times across eligible ETH spot
markets, potentially triggering review. This extended period also
supports authorized participant activity by capturing volume over a
longer time period, rather than forcing authorized participants to mark
an individual close or auction. The use of a median price reduces the
ability of outlier prices to impact the NAV, as it systematically
excludes those prices from the NAV calculation. The use of a volume-
weighted median (as opposed to a traditional median) serves as an
additional protection against attempts to manipulate the NAV by
executing a large number of low-dollar trades, because any manipulation
attempt would have to involve a majority of global spot ETH volume in a
five-minute window to have any influence on the NAV.
Availability of Information
In addition to the price transparency of the Index, the Trust will
provide information regarding the Trust's ETH holdings as well as
additional data regarding the Trust. The 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.
Eastern time). 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 \20\ 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 other applicable
quantitative information. The Trust will also disseminate the Trust's
holdings on a daily basis on the Trust's website. The value of the
Index will be made available by one or more major market data vendors,
updated at least every 15 seconds during Regular Trading Hours.
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\20\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
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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 Index.
Information relating to trading, including price and volume
information, in ETH is available from major market data vendors and
from the digital trading platforms on which ETH are traded. Depth of
book information is also available from ETH trading platforms. The
normal trading hours for ETH trading platforms are 24 hours per day,
365 days per year.
The ETH Custodian
The Sponsor has selected FDAS to be the Trust's Custodian. FDAS is
a New York state limited liability trust \21\ that serves as ETH
custodian to institutional and individual investors. The Custodian
maintains a substantial portion of the private keys associated with the
Trust's ETH in ``cold storage'' or similarly secure technology. Cold
storage is a safeguarding method with multiple layers of protections
and protocols, by which the private key(s) corresponding to the Trust's
ETH is (are) generated and stored in an offline manner. Private keys
are generated in offline computers that are not connected to the
internet so that they are resistant to being hacked. Cold storage of
private keys may involve keeping such keys on a non-networked computer
or electronic device or storing the public key and private keys on a
storage device or printed medium and deleting the keys from all
computers.
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\21\ New York state trust companies are subject to rigorous
oversight similar to other types of entities, such as nationally
chartered banking entities, that hold customer assets. Like national
banks, they must obtain specific approval of their primary regulator
for the exercise of their fiduciary powers. Moreover, limited
purpose trust companies engaged in the custody of digital assets are
subject to even more stringent requirements than national banks
which, following initial approval of trust powers, generally can
exercise those powers broadly without further approval of the OCC.
In contrast, NYDFS requires in their approval orders that limited
purpose trust companies obtain separate approval for all material
changes in business.
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The Custodian may receive deposits of ETH but may not send ETH
without use of the corresponding private keys. In order to send ETH
when the private keys are kept in cold storage, either the private keys
must be retrieved from cold storage and entered into a software program
to sign the transaction, or the unsigned transaction must be sent to
the ``cold'' server in which the private keys are held for signature by
the private keys. At that point, the Custodian can transfer the ETH.
The Trust's Transfer Agent will facilitate the settlement of Shares in
response to the placement of creation orders and redemption orders from
Authorized Participants. The Trust generally does not intend to hold
cash or cash equivalents. However, there may be situations where the
Trust will hold cash on a temporary basis. The Trust will enter into a
cash custody agreement with an unaffiliated regulated bank as custodian
of the Trust's cash and cash equivalents.
Net Asset Value
As described in the Registration Statement, for purposes of
calculating the Trust's NAV per Share, the Trust's holdings of ETH will
be valued using the same methodology as used to calculate the Index.
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 NAV of the Trust is calculated by taking the fair market value of
its total assets based on the volume-weighted median price of ETH used
for the calculation of the Index, subtracting any liabilities (which
include accrued expenses), and

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dividing that total by the total number of outstanding Shares. The
Administrator calculates the NAV of the Trust once each Exchange
trading day. The NAV for a normal trading day will be released after
4:00 p.m. Eastern time. Trading during the core trading session on the
Exchange typically closes at 4:00 p.m. Eastern time. However, NAVs are
not officially struck until later in the day (often by 5:30 p.m.
Eastern time and almost always by 8:00 p.m. Eastern time). The pause
between 4:00 p.m. Eastern time and 5:30 p.m. Eastern time (or later)
provides an opportunity to algorithmically detect, flag, investigate,
and correct unusual pricing should it occur.
Creation and Redemption of Shares
When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in 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.
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 the time noted in the
Authorized Participant Agreement or as provided separately to all
Authorized Participants. 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 the aggregation of Shares
associated with a Creation Basket. The procedures by which an
authorized participant can redeem one or more Creation Baskets mirror
the procedures for the creation of Creation Baskets.
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 \22\ 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.
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\22\ 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.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
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

[[Page 84845]]

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.\23\
---------------------------------------------------------------------------

\23\ 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 \24\
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.
---------------------------------------------------------------------------

\24\ 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 \25\
---------------------------------------------------------------------------

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

CME began offering trading in Ether Futures in February 2021. Each
contract represents 50 ETH and is based on the CME CF Ether-Dollar
Reference Rate.\26\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to
CME 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 2022 respectively.\27\
---------------------------------------------------------------------------

\26\ 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.
\27\ Source: CME, 7/31/23.
---------------------------------------------------------------------------

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

\28\ 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

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BILLING CODE 8011-01-C
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\29\ including Commodity-Based Trust Shares,\30\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\31\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the Act and that this filing sufficiently

[[Page 84848]]

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.
---------------------------------------------------------------------------

\29\ See Exchange Rule 14.11(f).
\30\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\31\ The Exchange believes that ETH is resistant to price
manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of ETH trading render it difficult and
prohibitively costly to manipulate the price of ETH. The
fragmentation across ETH platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of ETH prices
through continuous trading activity challenging. To the extent that
there are ETH 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 \32\ 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.\33\
---------------------------------------------------------------------------

\32\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance-sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the ISG
constitutes such a surveillance sharing agreement. See Securities
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix
Disapproval'').
\33\ 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.^{34 35}
---------------------------------------------------------------------------

\34\ 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.
\35\ 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.\36\
---------------------------------------------------------------------------

\36\ 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.
The Commission has stated in a prior disapproval order that ``the
lead-lag relationship between the bitcoin 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 bitcoin futures market to successfully manipulate prices on those
spot platforms that feed into the proposed ETP's pricing mechanism.''
\37\ The Commission further noted that ``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.'' \38\
---------------------------------------------------------------------------

\37\ Self-Regulatory Organizations; NYSE Arca, Inc.; 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, 84 FR 55382, 55411 (Oct 16,
2019).
\38\ Id.
---------------------------------------------------------------------------

[[Page 84849]]

trading across markets located globally. As discussed below, Sponsor's
analysis concludes that the CME ETH Futures market is the leading
market for price discovery across USD ETH markets located globally,
including ETH spot markets and offshore, unregulated ETH futures
markets. Thus, Sponsor's analysis supports the conclusion that there is
a reasonable likelihood that a person attempting to manipulate the
Shares would also have to trade on the CME ETH Futures market to
manipulate the Trust.
In ``Suitable Price Discovery Measurement of Bitcoin Spot and
Futures Markets'' \39\ (Robertson and Zhang, 2022), the authors
demonstrate that, for analyzing intraday information flow and
accounting for the varying levels of sparsity among bitcoin markets,
the framework of correlation-based lead-lag analysis using the Hayashi-
Yoshida (HY) estimator \40\ to compute correlation, along with lead-lag
seconds and lead-lag ratio is suitable. Based on the similar market
infrastructure (high level of sparsity) in both CME ETH Future market
and CME Bitcoin Future market, Sponsor applied the same rationale and
used the lead-lag framework on ETH spot and futures markets. Sponsor
obtained tick level trade data for ETH spot prices and futures prices
used in its analysis from Coin Metrics for the period spanning from
January 1, 2021 to June 30, 2021. Sponsor's analysis used all available
spot and futures ETH markets, but, in order to exclude any impacts
caused by exchange rate movements, Sponsor limited the dataset to ETH-
USD and ETH-USDT trades. Sponsor's results suggest that the CME ETH
futures market plays the most important leading role in price discovery
during the time period included in the analysis. 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.
---------------------------------------------------------------------------

\39\ Robertson, Kevin, and Jiani Zhang. (2022) ``Suitable Price
Discovery Measurement of Bitcoin Spot and Futures Markets.''
Available at SSRN: https://ssrn.com/abstract=4012165 or http://dx.doi.org/10.2139/ssrn.4012165.
\40\ Hayashi, Takaki, and Nakahiro Yoshida. ``On covariance
estimation of non-synchronously observed diffusion processes.''
Bernoulli 11, no. 2 (2005): 359-379. http://www.jstor.org/stable/3318933. The authors proposed a novel method (HY estimator) of
estimating the covariance of two diffusion processes when they are
observed only at discrete times in a non-synchronous manner. This
methodology addresses the issue that the traditional realized
covariance estimator encounters, which is that the choice of regular
interval size and data interpolation scheme can lead to unreliable
estimation. The new method Hayashi and Yoshida introduced in this
paper is free from any interpolation and therefore avoids the bias
and other problems caused by it.
---------------------------------------------------------------------------

(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.\41\ The Sponsor notes
that ETH total 24-hour spot trading volume has averaged $9.4 billion
over the year ending September 1, 2023.\42\ 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.
---------------------------------------------------------------------------

\41\ 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.''
\42\ Source: TokenTerminal.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange 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,\43\ 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.
---------------------------------------------------------------------------

\43\ 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.\44\ 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 trading 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.\45\
---------------------------------------------------------------------------

\44\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\45\ 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

[[Page 84850]]

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 \46\ in general and Section 6(b)(5) of the Act \47\ 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.
---------------------------------------------------------------------------

\46\ 15 U.S.C. 78f.
\47\ 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; \48\ and (ii) the
requirement that an exchange proposal be designed, in general, to
protect investors and the public interest. The Exchange believes that
this proposal is consistent with the requirements of Section 6(b)(5) of
the Act and that this filing sufficiently demonstrates that the CME 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.
---------------------------------------------------------------------------

\48\ 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 trading platforms engaged in or allowing wash trading
or other activity intended to manipulate the price of ETH on other
markets, such pricing does not normally impact prices on other
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 trading platform
or OTC platform. As a result, the potential for manipulation on a
trading platform would require overcoming the liquidity supply of
such arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place 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.\49\
---------------------------------------------------------------------------

\49\ 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.^{50 51}
---------------------------------------------------------------------------

\50\ 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.
\51\ 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.
---------------------------------------------------------------------------

[[Page 84851]]

deterring fraudulent or manipulative misconduct related to the non-
cash assets held by the proposed ETP.\52\
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\52\ 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.
The Commission has stated in a prior disapproval order that ``the
lead-lag relationship between the bitcoin 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 bitcoin futures market to successfully manipulate prices on those
spot platforms that feed into the proposed ETP's pricing mechanism.''
\53\ The Commission further noted that ``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.'' \54\
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\53\ Self-Regulatory Organizations; NYSE Arca, Inc.; 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, 84 FR 55382, 55411 (Oct 16,
2019).
\54\ Id.
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Based on the Commission's prior guidance and the commonality shared
between bitcoin markets and ETH markets, Sponsor conducted a detailed
price discovery study through its lead-lag analysis of ETH spot and
futures trading across markets located globally. As discussed below,
Sponsor's analysis concludes that the CME ETH Futures market is the
leading market for price discovery across USD ETH markets located
globally, including ETH spot markets and offshore, unregulated ETH
futures markets. Thus, Sponsor's analysis supports the conclusion that
there is a reasonable likelihood that a person attempting to manipulate
the Shares would also have to trade on the CME ETH Futures market to
manipulate the Trust.
In ``Suitable Price Discovery Measurement of Bitcoin Spot and
Futures Markets'' \55\ (Robertson and Zhang, 2022), the authors
demonstrate that, for analyzing intraday information flow and
accounting for the varying levels of sparsity among bitcoin markets,
the framework of correlation-based lead-lag analysis using the Hayashi-
Yoshida (HY) estimator \56\ to compute correlation, along with lead-lag
seconds and lead-lag ratio is suitable. Based on the similar market
infrastructure (high level of sparsity) in both CME ETH Future market
and CME Bitcoin Future market, Sponsor applied the same rationale and
used the lead-lag framework on ETH spot and futures markets. Sponsor
obtained tick level trade data for ETH spot prices and futures prices
used in its analysis from Coin Metrics for the period spanning from
January 1, 2021 to June 30, 2021. Sponsor's analysis used all available
spot and futures ETH markets, but, in order to exclude any impacts
caused by exchange rate movements, Sponsor limited the dataset to ETH-
USD and ETH-USDT trades. Sponsor's results suggest that the CME ETH
futures market plays the most important leading role in price discovery
during the time period included in the analysis. 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.
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\55\ Robertson, Kevin and Jiani Zhang. (2022) ``Suitable Price
Discovery Measurement of Bitcoin Spot and Futures Markets.''
Available at SSRN: https://ssrn.com/abstract=4012165 or http://dx.doi.org/10.2139/ssrn.4012165.
\56\ Hayashi, Takaki and Nakahiro Yoshida. ``On covariance
estimation of non-synchronously observed diffusion processes.''
Bernoulli 11, no. 2 (2005): 359-379. http://www.jstor.org/stable/3318933. The authors proposed a novel method (HY estimator) of
estimating the covariance of two diffusion processes when they are
observed only at discrete times in a non-synchronous manner. This
methodology addresses the issue that the traditional realized
covariance estimator encounters, which is that the choice of regular
interval size and data interpolation scheme can lead to unreliable
estimation. The new method Hayashi and Yoshida introduced in this
paper is free from any interpolation and therefore avoids the bias
and other problems caused by it.
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(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.\57\ The Sponsor notes
that ETH total 24-hour spot trading volume has averaged $9.4B over the
year ending September 1, 2023.\58\ 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.
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\57\ 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.''
\58\ Source: TokenTerminal.
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[[Page 84852]]

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 trading 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 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 [sic].
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,

[[Page 84853]]

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 trading platforms
on which ETH are traded. Depth of book information is also available
from ETH trading platforms. The normal trading hours for ETH trading
platforms are 24 hours per day, 365 days per year.
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 neither solicited nor received 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-2023-095 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-2023-095. 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-2023-095 and should
be submitted on or before December 27, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-26731 Filed 12-5-23; 8:45 am]
BILLING CODE 8011-01-P