[Federal Register Volume 89, Number 21 (Wednesday, January 31, 2024)]
[Notices]
[Pages 6155-6156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-01860]



[[Page 6155]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99428; File No. SR-NYSEARCA-2023-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade Shares of the Grayscale Ethereum Trust 
Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)

January 25, 2024.
    On October 10, 2023, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Grayscale Ethereum Trust (``Trust'') under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares). The proposed rule change was published 
for comment in the Federal Register on October 27, 2023.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98780 (Oct. 23, 
2023), 88 FR 73892 (``Notice''). Comments on the proposed rule 
change are available at: https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370.htm.
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    On December 5, 2023, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine whether to approve or disapprove the 
proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99082, 88 FR 85962 
(Dec. 11, 2023). The Commission designated January 25, 2024, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ the Exchange proposes 
to list and trade the Shares of the Trust under NYSE Arca Rule 8.201-E, 
which governs the listing and trading of Commodity-Based Trust Shares 
on the Exchange.
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    \7\ See Notice, supra note 3.
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    According to the Exchange, the investment objective of the Trust is 
for the value of the Shares to reflect the value of the Ethereum 
(``ETH'') \8\ held by the Trust, determined by reference to the ``Index 
Price,'' less the Trust's expenses and other liabilities.\9\ The 
``Index Price'' is the U.S. dollar value of an ETH derived from the 
``Digital Asset Exchanges'' \10\ that are reflected in the ``Index,'' 
calculated at 4:00 p.m., New York time, on each business day.\11\ The 
Trust's assets will consist solely of ETH; Incidental Rights; \12\ IR 
Virtual Currency; \13\ proceeds from the sale of ETH, Incidental 
Rights, and IR Virtual Currency pending use of such cash for payment of 
Additional Trust Expenses \14\ or distribution to shareholders, and any 
rights of the Trust pursuant to any agreements, other than the trust 
agreement, to which the Trust is a party.\15\ Each Share represents a 
proportional interest, based on the total number of Shares outstanding, 
in each of the Trust's assets as determined by reference to the Index 
Price, less the Trust's expenses and other liabilities (which include 
accrued but unpaid fees and expenses).\16\ On each business day at 4:00 
p.m., New York time, or as soon thereafter as practicable, the Sponsor 
will evaluate the ETH held by the Trust and calculate and publish the 
``Digital Asset Holdings'' \17\ of the Trust.\18\ When the Trust sells 
or redeems its Shares, it will do so either in ``in-kind'' or ``in-
cash'' transactions with authorized participants in blocks of 100 
Shares.\19\
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    \8\ In its filing, the Exchange defines ``ETH'' as ``Ethereum''. 
See id. at 73893. It, however, also provides that ``[t]he Ethereum 
Network allows people to exchange tokens of value, called Ether, 
which are recorded on a public transaction ledger known as a 
blockchain.'' See id. at 73894.
    \9\ See id. at 73894. Grayscale Investments, LLC (``Sponsor'') 
is the sponsor of the Trust and is a wholly-owned subsidiary of 
Digital Currency Group, Inc. See id. at 73893.
    \10\ A ``Digital Asset Exchange'' is an electronic marketplace 
where participants may trade, buy and sell ETH based on bid-ask 
trading. See id. at 73894 n.16.
    \11\ See id. at 73894 n.14. The index provider for the Trust is 
CoinDesk Indices, Inc. See id. at 73893. While the Exchange does not 
name the ``Index'' that the Trust would use to value the ETH held by 
the Trust, the Exchange provides that the value of the Index, as 
well as additional information regarding the Index, will be 
available at https://www.coindesk.com/indices. See id. at 73910.
    \12\ ``Incidental Rights'' are rights to acquire, or otherwise 
establish dominion and control over, any virtual currency or other 
asset or right, which rights are incident to the Trust's ownership 
of ETH and arise without any action of the Trust, or of the Sponsor 
or trustee on behalf of the Trust. See id. at 73893 n.11.
    \13\ ``IR Virtual Currency'' is any virtual currency tokens, or 
other asset or right, acquired by the Trust through the exercise 
(subject to the applicable provisions of the trust agreement) of any 
Incidental Right. See id. at 73893 n.12.
    \14\ ``Additional Trust Expenses'' are any expenses incurred by 
the Trust in addition to the Sponsor's fee that are not Sponsor-paid 
expenses. See id. at 73893 n.13.
    \15\ See id. at 73893-94.
    \16\ See id. at 73894.
    \17\ The Exchange does not define this term in the proposed rule 
change. Additional information about the calculation of the Digital 
Asset Holdings can be found in the Notice. See id. at 73898.
    \18\ See id.
    \19\ See id. at 73907.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEARCA-2023-70 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \20\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \20\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\21\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \22\
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    \21\ Id.
    \22\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice, in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
    1. Given the nature of the underlying assets held by the Trust, has 
the Exchange properly filed its proposal to list and trade the Shares 
under NYSE

[[Page 6156]]

Arca Rule 8.201-E (Commodity-Based Trust Shares)? \23\
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    \23\ NYSE Arca Rule 8.201-E(c)(1) defines the term ``Commodity-
Based Trust Shares'' as a security (a) that is issued by a trust 
that holds (1) a specified commodity deposited with the trust, or 
(2) a specified commodity and, in addition to such specified 
commodity, cash; (b) that is issued by such trust in a specified 
aggregate minimum number in return for a deposit of a quantity of 
the underlying commodity and/or cash; and (c) that, when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request by such trust which will deliver to the redeeming holder the 
quantity of the underlying commodity and/or cash.
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    2. The Exchange raises substantially similar arguments to support 
the listing and trading of the Shares as those made in proposals to 
list and trade spot bitcoin exchange-traded products (``Bitcoin 
ETPs''). Do commenters agree that arguments to support the listing of 
Bitcoin ETPs apply equally to the Shares? Are there particular features 
related to ETH and its ecosystem, including its proof of stake 
consensus mechanism and concentration of control or influence by a few 
individuals or entities, that raise unique concerns about ETH's 
susceptibility to fraud and manipulation?
    3. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
ETH markets and the ETH markets' susceptibility to manipulation?
    4. Based on data and analysis provided by the Exchange,\24\ do 
commenters agree with the Exchange that the Chicago Mercantile Exchange 
(``CME''), on which CME ETH futures trade, represents a regulated 
market of significant size related to spot ETH? \25\ What are 
commenters' views on whether there is a reasonable likelihood that a 
person attempting to manipulate the Shares would also have to trade on 
the CME to manipulate the Shares? \26\ Do commenters agree with the 
Exchange that it is unlikely that trading in the Shares would be the 
predominant influence on prices in the CME ETH futures market? \27\
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    \24\ See Notice, 88 FR at 73906-07.
    \25\ See id. at 73906.
    \26\ See id.
    \27\ See id.
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    5. Some sponsors of proposed ETH exchange-traded products 
(``ETPs'') have made statements regarding the correlation between ETH 
spot markets and the CME ETH futures market.\28\ What are commenters' 
views on the correlation between the ETH spot market and the CME ETH 
futures market? What are commenters' views on the extent to which a 
surveillance-sharing agreement with the CME would assist in detecting 
and deterring fraud and manipulation that impacts an ETP that holds 
spot ETH, and on whether correlation analysis provides any evidence to 
this effect? What are commenters' views generally on whether an ETP 
that holds only CME ETH futures and an ETP that only holds spot ETH are 
similar products?
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    \28\ See, e.g., Notice of Filing of a Proposed Rule Change to 
List and Trade Shares of the VanEck Ethereum ETF under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act 
Release No. 98457 (Sept. 20, 2023), 88 FR 66076 (Sept. 26, 2023), 
66081 (stating that ``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.'').
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\29\
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    \29\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by February 21, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 6, 2024.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number
    SR-NYSEARCA-2023-70 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-NYSEARCA-2023-70. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NYSEARCA-2023-70 and should 
be submitted on or before February 21, 2024. Rebuttal comments should 
be submitted by March 6, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-01860 Filed 1-30-24; 8:45 am]
BILLING CODE 8011-01-P