[Federal Register Volume 89, Number 83 (Monday, April 29, 2024)]
[Notices]
[Pages 33414-33427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-09064]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100016; File No. SR-NASDAQ-2023-045]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List 
and Trade Shares of the iShares Ethereum Trust Under Nasdaq Rule 
5711(d), Commodity-Based Trust Shares

April 23, 2024.
    On November 21, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' 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 
iShares Ethereum Trust (``Trust'') under Nasdaq Rule 5711(d), 
Commodity-Based Trust Shares. The proposed rule change was published 
for comment in the Federal Register on December 11, 2023.\3\
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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. 99081 (Dec. 5, 
2023), 88 FR 85945. Comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-nasdaq-2023-045/srnasdaq2023045.htm.
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    On January 24, 2024, pursuant to section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ On March 4, 2024, the Commission instituted proceedings 
under section 19(b)(2)(B) of the Act \6\ to determine whether to 
approve or disapprove the proposed rule change.\7\ On April 19, 2024, 
the Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced

[[Page 33415]]

and superseded the proposed rule change in its entirety. Amendment No. 
1 is described in Items I and II below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 1, 
from interested persons.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99419, 89 FR 5970 
(Jan. 30, 2024).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 99665, 89 FR 16811 
(Mar. 8, 2024).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to a proposed rule change to list and trade 
shares of the iShares Ethereum Trust (the ``Trust'') under Nasdaq Rule 
5711(d) (``Commodity-Based Trust Shares''). The shares of the Trust are 
referred to herein as the ``Shares.'' This Amendment No. 1 supersedes 
the original filing in its entirety.
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares under Nasdaq 
Rule 5711(d),\8\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange. iShares Delaware Trust Sponsor LLC, 
a Delaware limited liability company and an indirect subsidiary of 
BlackRock, Inc. (``BlackRock''), is the sponsor of the Trust (the 
``Sponsor''). The Shares will be registered with the SEC by means of 
the Trust's registration statement on Form S-1 (the ``Registration 
Statement'').\9\
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    \8\ The Commission approved Nasdaq Rule 5711 in Securities 
Exchange Act Release No. 66648 (March 23, 2012), 77 FR 19428 (March 
30, 2012) (SR-NASDAQ-2012-013).
    \9\ The descriptions of the Trust contained herein are based, in 
part, on information in the Registration Statement. The Registration 
Statement in not yet effective and the Shares will not trade on the 
Exchange until such time that the Registration Statement is 
effective.
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Description of the Trust
    The Shares will be issued by the Trust, a Delaware statutory trust. 
The Trust will operate pursuant to a trust agreement (the ``Trust 
Agreement'') between the Sponsor, BlackRock Fund Advisors (the 
``Trustee'') as the trustee of the Trust and will appoint a Delaware 
Trustee of the Trust (the ``Delaware Trustee'') by such time that the 
Registration Statement is effective. The Trust issues Shares 
representing fractional undivided beneficial interests in its net 
assets. The assets of the Trust will consist only of ether held by a 
custodian on behalf of the Trust, except under limited circumstances 
when transferred through the Trust's prime broker temporarily 
(described below), and cash. Coinbase Custody Trust Company, LLC (the 
``Ether Custodian''), is the custodian for the Trust's ether holdings, 
and maintains a custody account for the Trust (``Custody Account''); 
Coinbase, Inc. (the ``Prime Execution Agent''), an affiliate of the 
Ether Custodian, is the prime broker for the Trust and maintains a 
trading account for the Trust (``Trading Account''); and another entity 
will be the custodian for the Trust's cash holdings (the ``Cash 
Custodian'' and together with the Ether Custodian, the ``Custodians'') 
and the administrator of the Trust (the ``Trust Administrator''). Under 
the Trust Agreement, the Trustee may delegate all or a portion of its 
duties to any agent, and has delegated the bulk of the day-to-day 
responsibilities to the Trust Administrator and certain other 
administrative and record-keeping functions to its affiliates and other 
agents. The Trust is not an investment company registered under the 
Investment Company Act of 1940, as amended (the ``1940 Act'').
    The investment objective of the Trust is to reflect generally the 
performance of the price of ether. The Trust seeks to reflect such 
performance before payment of the Trust's expenses and liabilities. The 
Shares are intended to constitute a simple means of making an 
investment similar to an investment in ether through the public 
securities market rather than by acquiring, holding and trading ether 
directly on a peer-to-peer or other basis or via a digital asset 
platforms. The Shares have been designed to remove the obstacles 
represented by the complexities and operational burdens involved in a 
direct investment in ether, while at the same time having an intrinsic 
value that reflects, at any given time, the investment exposure to the 
ether owned by the Trust at such time, less the Trust's expenses and 
liabilities. Although the Shares are not the exact equivalent of a 
direct investment in ether, they provide investors with an alternative 
method of achieving investment exposure to ether through the public 
securities market, which may be more familiar to them.
Custody of the Trust's Ether and Creation and Redemption
    An investment in the Shares is backed by ether held by the Ether 
Custodian on behalf of the Trust. All of the Trust's ether will be held 
in the Custody Account, other than the Trust's ether which is 
temporarily maintained in the Trading Account under limited 
circumstances, i.e., in connection with creation and redemption Basket 
\10\ activity or sales of ether deducted from the Trust's holdings in 
payment of Trust expenses or the Sponsor's fee (or, in extraordinary 
circumstances, upon liquidation of the Trust). The Custody Account 
includes all of the Trust's ether held at the Ether Custodian, but does 
not include the Trust's ether temporarily maintained at the Prime 
Execution Agent in the Trading Account from time to time. The Ether 
Custodian will keep all of the private keys associated with the Trust's 
ether held in the Custody Account in ``cold storage''.\11\ The 
hardware, software, systems, and procedures of the Ether Custodian may 
not be available or cost-effective for many investors to access 
directly.
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    \10\ The Trust issues and redeems Shares only in blocks of 
40,000 or integral multiples thereof. A block of 40,000 Shares is 
called a ``Basket.'' These transactions take place in exchange for 
ether.
    \11\ The term ``cold storage'' refers to a safeguarding method 
by which the private keys corresponding to the Trust's ether are 
generated and stored in an offline manner, subject to layers of 
procedures designed to enhance security. Private keys are generated 
by the Ether Custodian in offline computers that are not connected 
to the internet so that they are more resistant to being hacked.
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    The Trust's ether holdings and cash holdings from time to time may 
temporarily be maintained in the Trading Account held with the Prime 
Execution Agent, an affiliate of the Ether Custodian. Coinbase Inc. 
serves as the Trust's Prime Execution Agent pursuant to the Trust's 
agreement with the Prime Execution Agent (``Prime Execution Agent 
Agreement''). In this capacity, the Prime Execution Agent facilitates 
the

[[Page 33416]]

buying and selling of ether by the Trust in response to cash creations 
and redemptions between the Trust and registered broker-dealers that 
are Depositary Trust Company (``DTC'') participants that enter into an 
authorized participant agreement with the Sponsor and the Trustee 
(``Authorized Participants''), and the sale of ether to pay the 
Sponsor's fee, any other Trust expenses not assumed by the Sponsor, to 
the extent applicable, and in extraordinary circumstances, in 
connection with the liquidation of the Trust's ether.
    The Authorized Participants will deliver only cash to create shares 
and will receive only cash when redeeming shares. Further, Authorized 
Participants will not directly or indirectly purchase, hold, deliver, 
or receive ether as part of the creation or redemption process or 
otherwise direct the Trust or a third party with respect to purchasing, 
holding, delivering, or receiving ether as part of the creation or 
redemption process.
    The Trust will create shares by receiving ether from a third party 
that is not the Authorized Participant and the Trust--not the 
Authorized Participant--is responsible for selecting the third party to 
deliver the ether. Further, the third party will not be acting as an 
agent of the Authorized Participant with respect to the delivery of the 
ether to the Trust or acting at the direction of the Authorized 
Participant with respect to the delivery of the ether to the Trust. The 
Trust will redeem shares by delivering ether to a third party that is 
not the Authorized Participant and the Trust--not the Authorized 
Participant--is responsible for selecting the third party to receive 
the ether. Further, the third party will not be acting as an agent of 
the Authorized Participant with respect to the receipt of the ether 
from the Trust or acting at the direction of the Authorized Participant 
with respect to the receipt of the ether from the Trust. The third 
party will be unaffiliated with the Trust and the Sponsor.
    In connection with cash creations and cash redemptions, the 
Authorized Participants will submit orders to create or redeem Baskets 
of Shares exclusively in exchange for cash. The Trust will engage in 
ether transactions to convert cash into ether (in association with 
creation orders) and ether into cash (in association with redemption 
orders). The Trust will conduct its ether purchase and sale 
transactions by, in its sole discretion, choosing to trade directly 
with designated third parties (each, an ``Ether Trading 
Counterparty''), who are not registered broker-dealers pursuant to 
written agreements between each such Ether Trading Counterparty and the 
Trust, or choosing to trade through the Prime Execution Agent acting in 
an agency capacity with third parties through its Coinbase Prime 
service \12\ pursuant to the Prime Execution Agent Agreement. Ether 
Trading Counterparties settle trades with the Trust using their own 
accounts at the Prime Execution Agent when trading with the Trust.
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    \12\ The Coinbase Prime service is an execution service pursuant 
to which Coinbase will execute ether orders for the Trust by 
accessing liquidity from sources such as ether trading platforms, 
which can include Coinbase's own platform, and other liquidity 
providers. Trades can be executed according to an algorithm or on 
the basis of firm quotes sought by requests-for-quote (``RFQ'') for 
a two-way price sent to liquidity providers. Algorithmic trades can 
be self-directed or executed by Coinbase's high touch execution 
desk, Coinbase Execution Services.
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    For a creation of a Basket of Shares, the Authorized Participant 
will be required to submit the creation order by an early order cutoff 
(``Creation Early Cutoff Time''). The Creation Early Cutoff Time will 
initially be 6:00 p.m. ET on the business day prior to trade date.
    On the date of the Creation Early Cutoff Time for a creation order, 
the Trust will choose, in its sole discretion, to enter into a 
transaction with an Ether Trading Counterparty or the Prime Execution 
Agent to buy ether in exchange for the cash proceeds from such creation 
order. On settlement date for a creation, the Trust delivers Shares to 
the Authorized Participant in exchange for cash received from the 
Authorized Participant. Also, on or around the settlement date, the 
Ether Trading Counterparty or Prime Execution Agent, as applicable, 
deposits the required ether pursuant to its trade with the Trust into 
the Trust's Trading Account in exchange for cash. In the event the 
Trust has not been able to successfully execute and complete settlement 
of an ether transaction by the settlement date of the creation order, 
the Authorized Participant will be given the option to (1) cancel the 
creation order, or (2) accept that the Trust will continue to attempt 
to complete the execution, which will delay the settlement date of the 
creation order. With respect to a creation order, as between the Trust 
and the Authorized Participant, the Authorized Participant is 
responsible for the dollar cost of the difference between the ether 
price utilized in calculating NAV per Share on trade date and the price 
at which the Trust acquires the ether to the extent the price realized 
in buying the ether is higher than the ether price utilized in the NAV. 
To the extent the price realized in buying the ether is lower than the 
price utilized in the NAV, the Authorized Participant shall get to keep 
the dollar impact of any such difference.
    Because the Trust's Trading Account may not be funded with cash on 
trade date for the purchase of ether associated with a cash creation 
order, the Trust may borrow trade credits (``Trade Credits'') in the 
form of cash from Coinbase Credit, Inc. (the ``Trade Credit Lender''), 
an affiliate of the Prime Execution Agent, under the trade financing 
agreement (``Trade Financing Agreement'') or may require the Authorized 
Participant to deliver the required cash for the creation order on 
trade date. The extension of Trade Credits on trade date allows the 
Trust to purchase ether through the Prime Execution Agent on trade 
date, with such ether being deposited in the Trust's Trading Account. 
On settlement date for a creation order, the Trust delivers Shares to 
the Authorized Participant in exchange for cash received from the 
Authorized Participant. To the extent Trade Credits were utilized, the 
Trust uses the cash to repay the Trade Credits borrowed from the Trade 
Credit Lender. On settlement date for a creation order, the ether 
purchased is swept from the Trust's Trading Account to the Trust's 
Custody Account pursuant to a regular end-of-day sweep process.
    For a redemption of a Basket of Shares, the Authorized Participant 
will be required to submit a redemption order by an early order cutoff 
(the ``Redemption Early Cutoff Time''). The Redemption Early Cutoff 
Time will initially be 6:00 p.m. ET on the business day prior to trade 
date. On the date of the Redemption Early Cutoff Time for a redemption 
order, the Trust may choose, in its sole discretion, to enter into a 
transaction with an Ether Trading Counterparty or the Prime Execution 
Agent, to sell ether in exchange for cash. After the Redemption Early 
Cutoff Time, the Trust instructs the Ether Custodian to prepare to move 
the associated ether from the Trust's Custody Account to the Trust's 
Trading Account. On settlement date for a redemption order, the 
Authorized Participant delivers the necessary Shares to the Trust, and 
on or around settlement date, an Ether Trading Counterparty or Prime 
Execution Agent, as applicable, delivers the cash associated with the 
Trust's sale of ether to the Trust in exchange for the Trust's ether, 
and the Trust delivers cash to the Authorized Participant. In the event 
the Trust has not been able to successfully execute and complete 
settlement of an ether transaction by the settlement date, the 
Authorized Participant will be given the option to

[[Page 33417]]

(1) cancel the redemption order, or (2) accept that the Trust will 
continue to attempt to complete the execution, which will delay the 
settlement date. With respect to a redemption order, between the Trust 
and the Authorized Participant, the Authorized Participant will be 
responsible for the dollar cost of the difference between the ether 
price utilized in calculating the NAV per Share on trade date and the 
price realized in selling the ether to raise the cash needed for the 
cash redemption order to the extent the price realized in selling the 
ether is lower than the ether price utilized in the NAV. To the extent 
the price realized in selling the bitcoin is higher than the price 
utilized in the NAV, the Authorized Participant will get to keep the 
dollar impact of any such difference.
    The Trust may use financing in connection with a redemption order 
when ether remains in the Trust's Custody Account at the point of 
intended execution of a sale of ether. In those circumstances, the 
Trust may borrow Trade Credits in the form of ether from the Trade 
Credit Lender, which allows the Trust to sell ether through the Prime 
Execution Agent on trade date, and the cash proceeds are deposited in 
the Trust's Trading Account. On settlement date for a redemption order, 
the Trust delivers cash to the Authorized Participant in exchange for 
Shares received from the Authorized Participant. In the event financing 
was used, the Trust will use the ether moved from the Trust's Custody 
Account to the Trading Account to repay the Trade Credits borrowed from 
the Trade Credit Lender.
Net Asset Value
    The net asset value (``NAV'') of the Trust is used by the Trust in 
its day-to-day operations to measure the net value of the Trust's 
assets. The NAV of the Trust will be equal to the total assets of the 
Trust, which will consist of ether and cash, less total liabilities of 
the Trust, each determined by the Trustee pursuant to policies 
established from time to time by the Trustee or its affiliates as 
described herein.
    The Sponsor has the exclusive authority to determine the Trust's 
NAV, which it has delegated to the Trustee under the Trust Agreement. 
The Trustee has delegated to the Trust Administrator the responsibility 
to calculate the NAV and the NAV per Share for the Trust, based on a 
pricing source selected by the Trustee. In determining the Trust's NAV 
per Share, the Trust Administrator will value the ether held by the 
Trust based on the index price, unless the Sponsor in its sole 
discretion determines that the index is unreliable. The CME CF Ether-
Dollar Reference Rate--New York Variant for the Ether-U.S. Dollar 
trading pair (the ``CF Benchmarks Index'') shall constitute the index 
(``the ``Index''), unless the CF Benchmarks Index is not available or 
the Sponsor in its sole discretion determines that the CF Benchmarks 
Index is unreliable and therefore determines not to use the CF 
Benchmarks Index as the Index. If the CF Benchmarks Index is not 
available or the Sponsor determines, in its sole discretion, that the 
CF Benchmarks Index is unreliable, (together a ``Fair Value Event''), 
the Trust's holdings may be fair valued on a temporary basis in 
accordance with the fair value policies approved by the Trustee. If the 
CF Benchmarks Index is not used as the Index price, owners of the 
beneficial interests of Shares (the ``Shareholders'') will be notified 
in a prospectus supplement or on the Trust's website and, if this index 
change is on a permanent basis, a filing with the SEC under Rule 19b-4 
of the Act will be required.
    A Fair Value Event value determination will be based upon all 
available factors that the Sponsor or Trustee deems relevant at the 
time of the determination, and may be based on analytical values 
determined by the Sponsor or Trustee using third-party valuation 
models.
    Fair value policies approved by the Trustee will seek to determine 
the fair value price that the Trust might reasonably expect to receive 
from the current sale of that asset or liability in an arm's-length 
transaction on the date on which the asset or liability is being valued 
consistent with ``Relevant Transactions''.\13\ In the instance of a 
Fair Value Event and pursuant the Sponsor's fair valuation policies and 
procedures Volume Weighted Average Prices (``VWAP'') or Volume Weighted 
Median Prices (``VWMP'') from another index administrator (``Secondary 
Index'') would be utilized. If a Secondary Index is not available or 
the Sponsor in its sole discretion determines the Secondary Index is 
unreliable the price set by the Trust's principal market as of 4:00 
p.m. ET, on the valuation date would be utilized.
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    \13\ A ``Relevant Transaction'' is any cryptocurrency versus 
U.S. dollar spot trade that occurs during the observation window 
between 3:00 p.m. and 4:00 p.m. ET on a ``Constituent Platform'' in 
the ETH/USD pair that is reported and disseminated by a Constituent 
Platform through its publicly available application programming 
interface and observed by the ``Index Administrator'', as such terms 
are defined below.
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    In the event the principal market price is not available or the 
Sponsor in its sole discretion determines the principal market 
valuation is unreliable the Sponsor will use its best judgment to 
determine a good faith estimate of fair value. The Trustee identifies 
and determines the Trust's principal market (or in the absence of a 
principal market, the most advantageous market) for ether consistent 
with the application of fair value measurement framework in FASB ASC 
820-10.\14\ The principal market is the market where the reporting 
entity would normally enter into a transaction to sell the asset or 
transfer the liability. The principal market must be available to and 
be accessible by the reporting entity. The reporting entity is the 
Trust.
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    \14\ See FASB (Financial Accounting Standards Board) Accounting 
standards codification (ASC) 820-10. For financial reporting 
purposes only, the Trustee has adopted a valuation policy that 
outlines the methodology for valuing the Trust's assets. The policy 
also outlines the methodology for determining the principal market 
(or in the absence of a principal market, the most advantageous 
market) in accordance with FASB ASC 820-10.
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Net Asset Value Calculation and Index
    On each Business Day (as defined below), as soon as practicable 
after 4:00 p.m. ET, the Trust Administrator evaluates the ether held by 
the Trust as reflected by the CF Benchmarks Index and determines the 
NAV per Share. For purposes of making these calculations, a Business 
Day means any day other than a day when Nasdaq is closed for regular 
trading (``Business Day'').
    The CF Benchmarks Index employed by the Trust is calculated on each 
Business Day by aggregating the notional value of ether trading 
activity across major ether spot platforms. The CF Benchmarks Index is 
designed based on the IOSCO Principles for Financial Benchmarks. The 
administrator of the CF Benchmarks Index is CF Benchmarks Ltd. (the 
``Index Administrator''). The CF Benchmarks Index serves as a once-a-
day benchmark rate of the U.S. dollar price of ether (USD/ETH), 
calculated as of 4:00 p.m. ET. The CF Benchmarks Index aggregates the 
trade flow of several ether platforms, during an observation window 
between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one 
ether at 4:00 p.m. ET. Specifically, the CF Benchmarks Index is 
calculated based on the ``Relevant Transactions'' of all of its 
constituent ether platforms, which are currently: Bitstamp, Coinbase, 
Gemini, itBit, Kraken, and LMAX Digital (the ``Constituent 
Platforms''), and which may change from time to time.
    If the CF Benchmarks Index is not available or the Sponsor 
determines, in

[[Page 33418]]

its sole discretion, that the CF Benchmarks Index is unreliable and so 
should not be used, the Trust's holdings may be fair valued in 
accordance with the policy approved by the Trustee.
    The Trust is intended to provide a way for Shareholders to obtain 
exposure to ether by investing in the Shares rather than by acquiring, 
holding and trading ether directly on a peer-to-peer or other basis or 
via a digital asset platform. An investment in Shares of the Trust is 
not the same as an investment directly in ether on a peer-to-peer or 
other basis or via a digital asset platform.
Intraday Indicative Value
    In order to provide updated information relating to the Trust for 
use by Shareholders, the Trust intends to publish an intraday 
indicative value per Share (``IIV'') using the CME CF Ether-Dollar Real 
Time Index. One or more major market data vendors will provide an IIV 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's regular market 
session of 9:30 a.m. to 4:00 p.m. ET (the ``Regular Market Session''). 
The IIV will be calculated by using the prior day's closing NAV per 
Share as a base and updating that value during the Exchange's Regular 
Market Session to reflect changes in the value of the Trust's NAV per 
Share during the trading day.
    The IIV is disseminated during the Exchange's Regular Market 
Session should not be viewed as an actual real time update of the NAV 
per Share, which will be calculated only once at the end of each 
trading day.
    The IIV will be widely disseminated on a per Share basis every 15 
seconds during the Exchange's Regular Market Session by one or more 
major market data vendors. In addition, the IIV will be available 
through online information services. All aspects of the Index 
Methodology are publicly available at the website of Index Provider, CF 
Benchmarks (https://www.cfbenchmarks.com).
Creation and Redemption of Shares
    The Trust issues and redeems Baskets \15\ on a continuous basis. 
Baskets are only issued or redeemed in exchange for an amount of cash 
determined by the Trustee on each day that Nasdaq is open for regular 
trading. No Shares are issued unless the Cash Custodian has allocated 
to the Trust's account the corresponding amount of cash. The amount of 
cash necessary for the creation of a Basket, or to be received upon 
redemption of a Basket, will decrease over the life of the Trust, due 
to the payment or accrual of fees and other expenses or liabilities 
payable by the Trust. Baskets may be created or redeemed only by 
Authorized Participants, who pay BlackRock Investments, LLC (``BRIL''), 
an affiliate of the Trustee and a wholly owned subsidiary of BlackRock, 
Inc., that has been retained by the Trust to perform certain order 
processing, Authorized Participant communications, and related services 
in connection with the issuance and redemption of Baskets, a 
transaction fee for each order to create or redeem Baskets.
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    \15\ Baskets will be offered continuously at the NAV per Share 
for 40,000 Shares. Therefore, a Basket of Shares would be valued at 
NAV per Share multiplied by the Basket size and the ether required 
to be delivered in exchange for a creation of a Basket would equal 
the dollar value of the NAV per Share multiplied by the Basket size 
for such creations. The Trust may change the number of Shares in a 
Basket. Only Authorized Participants may purchase or redeem Baskets. 
Shares will be offered to the public from time to time at varying 
prices that will reflect the price of ether and the trading price of 
the Shares on Nasdaq at the time of the offer.
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    The Sponsor will maintain ownership and control of the ether in a 
manner consistent with good delivery requirements for spot commodity 
transactions.
Overview of the Ethereum Industry
    Ethereum is free software that is hosted on computers distributed 
throughout the globe. It employs an array of computer code-based logic, 
called a protocol, to create a unified understanding of ownership, 
commercial activity, and economic 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. 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 ether (``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 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.
    Up to now, U.S. retail investors have lacked a U.S. regulated, U.S. 
exchange-traded vehicle to gain exposure to ETH. Instead, current 
options include: (i) facing the counter-party risk, legal uncertainty, 
technical risk, and complexity associated with accessing spot ether or 
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high 
management fees and potentially volatile premiums and discounts. 
Meanwhile, investors in other countries, including Germany, Switzerland 
and France, are able to use more traditional exchange listed and traded 
products (including exchange-traded funds holding physical ETH) to gain 
exposure to ETH. Investors across Europe have access to products which 
trade on regulated exchanges and provide exposure to a broad array of 
spot crypto assets. U.S. investors, by contrast, are left with fewer 
and more risky means of getting ether exposure.\16\
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    \16\ 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 cryptoasset exposure through a Spot 
ETH ETP are forced to find alternative exposure through generally 
riskier means. For example, investors in OTC ETH Funds are not afforded 
the benefits and protections of regulated Spot ETH ETPs, resulting in 
retail investors suffering losses due to drastic movements in the 
premium/discount of OTC ETH Funds. An investor who purchased the 
largest

[[Page 33419]]

OTC ETH Fund in January 2021 and held the position at the end of 2022 
would have suffered a 30% loss due to the change in 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,\17\ Celsius Network LLC,\18\ 
BlockFi Inc.\19\ and Voyager Digital Holdings, Inc.\20\ have become 
unsecured creditors in the insolvencies of those entities. If a Spot 
ETH ETP was available, it is likely that at least a portion of the 
billions of dollars tied up in those proceedings would still reside in 
the brokerage accounts of U.S. investors, having instead been invested 
in a transparent, regulated, and well-understood structure--a Spot ETH 
ETP. To this point, approval of a Spot ETH ETP would represent a major 
win for the protection of U.S. investors in the cryptoasset space. The 
Trust, like all other series of Commodity-Based Trust Shares, is 
designed to protect investors against the risk of losses through fraud 
and insolvency that arise by holding digital assets, including ETH, on 
centralized platforms.
---------------------------------------------------------------------------

    \17\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \18\ See Celsius Network LLC, et al., Case No. 22-10964.
    \19\ See BlockFi Inc., Case No. 22-19361.
    \20\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

Applicable Standard
    The Commission has historically approved or disapproved exchange 
filings to list and trade series of Trust Issued Receipts, including 
spot based Commodity-Based Trust Shares, on the basis of whether the 
listing exchange has in place a comprehensive surveillance sharing 
agreement with a regulated market of significant size related to the 
underlying commodity to be held.\21\ 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 (``CFTC'') regulated futures market.\22\ Further to

[[Page 33420]]

this point, the Commission's prior orders have noted that the spot 
commodities and currency markets for which it has previously approved 
spot exchange traded products (``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 First Gold Approval Order ``was based on an 
assumption that the currency market and the spot gold market were 
largely unregulated.'' \23\
---------------------------------------------------------------------------

    \21\ 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.
    \22\ See streetTRACKS Gold Shares, Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX 
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares 
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold 
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993, 
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS 
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR 
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS 
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74 
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of 
proposed rule change included NYSE Arca's representation that 
``[t]he most significant palladium futures exchanges are the NYMEX 
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest 
exchange in the world for trading precious metals futures and 
options,'' and that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which NYMEX is a member, 
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act 
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29, 
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included 
NYSE Arca's representation that ``[t]he most significant platinum 
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' 
that ``NYMEX is the largest exchange in the world for trading 
precious metals futures and options,'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9, 
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical 
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of 
proposed rule change included NYSE Arca's representation that the 
COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group, Exchange Act Release No. 
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott 
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5, 
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act 
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17, 
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant gold, silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act 
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15, 
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release 
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE 
Arca's representation that ``the most significant gold futures 
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that 
``COMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8, 
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott 
Physical Platinum and Palladium Trust, Exchange Act Release No. 
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012–111) (notice of proposed rule change included 
NYSE Arca's representation that ``[f]utures on platinum and 
palladium are traded on two major exchanges: The New York Mercantile 
Exchange . . . and Tokyo Commodities Exchange'' and that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' of which COMEX is a member, Exchange Act Release No. 68101 
(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX 
Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No. 
66930 (May 7, 2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-
2012-18) (notice of proposed rule change included NYSE Arca's 
representation that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which COMEX is a member, 
and that gold futures are traded on COMEX and the Tokyo Commodity 
Exchange, with a cross- reference to the proposed rule change to 
list and trade shares of the ETFS Gold Trust, in which NYSE Arca 
represented that COMEX is one of the ``major world gold markets,'' 
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-
43, 17547 (Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange 
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 
75485-86 (Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper 
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 
13727, 13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); 
First Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14, 
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) 
(notice of proposed rule change included NYSE Arca's representation 
that FINRA, on behalf of the exchange, may obtain trading 
information regarding gold futures and options on gold futures from 
members of the Intermarket Surveillance Group, including COMEX, or 
from markets ``with which [NYSE Arca] has in place a comprehensive 
surveillance sharing agreement,'' and that gold futures are traded 
on COMEX and the Tokyo Commodity Exchange, with a cross-reference to 
the proposed rule change to list and trade shares of the ETFS Gold 
Trust, in which NYSE Arca represented that COMEX is one of the 
``major world gold markets,'' Exchange Act Release No. 69847 (June 
25, 2013), 78 FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold 
Trust, Exchange Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 
4786-87 (Jan. 29, 2014) (SR-NYSEArca-2013-137) (notice of proposed 
rule change included NYSE Arca's representation that ``COMEX is the 
largest gold futures and options exchange'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
including with respect to transactions occurring on COMEX pursuant 
to CME and NYMEX's membership, or from exchanges ``with which [NYSE 
Arca] has in place a comprehensive surveillance sharing agreement,'' 
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369, 
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release 
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15, 
2016) (SR-NYSEArca-2016-84).
    \23\ 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. With this 
in mind, the CME ether futures (``Ether Futures'') market, as described 
below, is the proper market to consider in determining whether there is 
a related regulated market of significant size.
    Recently, the Commission issued an order granting approval for 
proposals to list bitcoin-based commodity trust and bitcoin-based trust 
issued receipts (these proposed funds are nearly identical to the 
Trust, but proposed to hold bitcoin instead of ether) (``Spot Bitcoin 
ETPs'').\24\ In considering the Spot Bitcoin ETPs, the Commission 
determined in the Spot Bitcoin ETP Approval Order that the CME Bitcoin 
Futures market is a regulated market of significant size.
---------------------------------------------------------------------------

    \24\ See Exchange Act Release No. 99306 (January 10, 2024), 89 
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE 
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; 
Order Granting Accelerated Approval of Proposed Rule Changes, as 
Modified by Amendments Thereto, To List and Trade Bitcoin-Based 
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin 
ETP Approval Order'').
---------------------------------------------------------------------------

    Specifically, the Commission stated:

    [B]ased on the record before the Commission and the improved 
quality of the correlation analysis in the record . . . the 
Commission is able to conclude that fraud or manipulation that 
impacts prices in spot bitcoin markets would likely similarly impact 
CME bitcoin futures prices. And because the CME's surveillance can 
assist in detecting those impacts on CME bitcoin futures prices, the 
Exchanges' comprehensive surveillance-sharing agreement with the 
CME-a U.S. regulated market whose bitcoin futures market is 
consistently highly correlated to spot bitcoin, albeit not of 
``significant size'' related to spot bitcoin-can be reasonably 
expected to assist in surveilling for fraudulent and manipulative 
acts and practices in the specific context of the [p]roposals.\25\
---------------------------------------------------------------------------

    \25\ See the Spot Bitcoin ETP Approval Order at 3011-3012.

    The Exchange and Sponsor applaud the Commission for allowing the 
launch of ETFs registered under the Investment Company Act of 1940, as 
amended (the ``1940 Act'') that provide exposure to ether primarily 
through CME Ether Futures. Allowing such products to list and trade is 
a productive first step in providing U.S. investors and traders with 
transparent, exchange-listed tools for expressing a view on ether.
    On October 2, 2023 the SEC approved nine ETH-based ETFs for 
trading.\26\ The ETFs hold ETH futures contracts that trade on the CME 
and settle using the CME CF Ethereum Reference Rate (``ERR''), which is 
priced based on the spot ETH markets Coinbase, Kraken, LMAX, Bitstamp, 
Gemini, and itBit, essentially the same spot markets that are included 
in the Index that the Trust uses to value its ETH holdings. Given that 
the Commission has approved ETFs that offer exposure to ETH futures, 
which themselves are priced based on the underlying spot ETH market, 
the Sponsor believes that the Commission must also approve ETPs that 
offer exposure to spot ETH, like the Trust.
---------------------------------------------------------------------------

    \26\ These ETFs included the Bitwise Ethereum Strategy ETF, 
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether 
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin & 
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy 
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum 
Strategy ETF, and Volatility Shares Ethereum Strategy ETF 
(collectively, the ``ETH Futures ETFs'').
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list spot ether ETPs, like the 
Trust, compared to the Ether Futures ETFs would lead to the conclusion 
that any concerns related to preventing fraudulent and manipulative 
acts and practices related to spot ether ETPs would apply equally to 
the spot markets underlying the futures contracts held by an Ether 
Futures ETF. Both the Exchange and Sponsor believe that the CME Ether 
Futures market is a regulated market of significant size and that such 
manipulation concerns are mitigated, as described extensively below. 
After allowing the listing and trading of Ether Futures ETFs that hold 
primarily CME Ether Futures, however, the only consistent outcome would 
be approving spot ether ETPs on the basis that the CME Ether Futures 
market is a regulated market of significant size.
    The Sponsor believes that because the CME ETH futures market is 
priced based on the underlying spot ETH market, any fraud or 
manipulation in the spot market would necessarily affect the price of 
ETH futures, thereby affecting the net asset value of an ETP holding 
spot ETH or an ETF holding ETH futures, as well as the price investors 
pay for such product's shares. Accordingly, either CME surveillance can 
detect spot-market fraud that affects both futures ETFs and spot ETPs, 
or that surveillance cannot do so for either type of product. Having 
approved ETH futures ETFs in part on the basis of such surveillance, 
the Commission has clearly determined that CME surveillance can detect 
spot-market fraud that would affect spot ETPs, and the Sponsor thus 
believes that it must also approve spot ETH ETPs on that basis.
    In summary, 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.
CME ETH Futures
    CME began offering trading in Ether Futures in February 2021. Each 
contract represents 50 ETH and is based on the

[[Page 33421]]

CME CF Ether-Dollar Reference Rate.\27\ 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 78,571 CME ETH Futures contracts traded in September 2023 
(approximately $6.3 billion) compared to 163,114 ($11.9 billion) and 
130,546 ($21.2 billion) contracts traded in September 2022, and 
September 2022 respectively.\28\ The daily correlation between the spot 
ETH and the CME ETH Futures is 0.9993 from the period of 10/13/22 
through 10/13/23.\29\ The number of large open interest holders \30\ 
and unique accounts trading CME ETH Futures have both increased, even 
in the face of heightened Ether price volatility.
---------------------------------------------------------------------------

    \27\ 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.
    \28\ Source: Bloomberg, BlackRock calculations. Data as of 10/
18/2023 for period shown (2/8/2021 to 9/30/2023).
    \29\ Source: S&P Ethereum Index, S&P CME Ether Futures Index 
(Spot).
    \30\ A large open interest holder in CME ETH Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
1250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than 
$2.3 million in CME ETH Futures.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN29AP24.000

[GRAPHIC] [TIFF OMITTED] TN29AP24.001


[[Page 33422]]


BILLING CODE 8011-01-C
Preventing Fraudulent and Manipulative Practices
    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 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.
---------------------------------------------------------------------------

    \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 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 platform or Over-the 
Counter platform (``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.\33\ 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.\34\
---------------------------------------------------------------------------

    \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\ For a list of the current members and affiliate members of 
ISG, see https://www.isgportal.com/.
    \34\ 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.\35\
---------------------------------------------------------------------------

    \35\ 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.
---------------------------------------------------------------------------

    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct. In light of the similarly high 
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME 
Bitcoin Futures, applying the same rationale that the Commission 
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order 
\36\ also indicates that this test is satisfied for this proposal. As 
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded 
that: . . . fraud or manipulation that impacts prices in spot bitcoin 
markets would likely similarly impact CME bitcoin futures prices. And 
because the CME's surveillance can assist in detecting those impacts on 
CME bitcoin futures prices, the Exchanges' comprehensive surveillance-
sharing agreement with the CME . . . can be reasonably expected to 
assist in surveilling for fraudulent and manipulative acts and 
practices in the specific context of the [p]roposals.\37\ The 
assumptions from this statement are also true for CME Ether Futures. 
CME Ether Futures pricing is based on pricing from spot ether markets. 
The statement from the Spot Bitcoin ETP Approval Order that the 
surveillance-sharing agreement with the CME ``can be reasonably 
expected to assist in surveilling for fraudulent and manipulative acts 
and practices in the specific context of the [p]roposals'' makes clear 
that the Commission believes that CME's surveillance can capture the 
effects of trading on the relevant spot markets on the pricing of CME 
Bitcoin Futures. This same logic would extend to CME Ether Futures 
markets where CME's surveillance would be able to capture the effects 
of trading on the relevant spot markets on the pricing of CME Ether 
Futures.
---------------------------------------------------------------------------

    \36\ See Exchange Act Release No. 99306 (January 10, 2024), 89 
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE 
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; 
Order Granting Accelerated Approval of Proposed Rule Changes, as 
Modified by Amendments Thereto, To List and Trade Bitcoin-Based 
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin 
ETP Approval Order'').
    \37\ See the Spot Bitcoin ETP Approval Order at 3011-3012.
---------------------------------------------------------------------------

(A) 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 or spot market for a number of reasons. First,

[[Page 33423]]

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.\38\ The Sponsor notes that ETH total 24-hour spot trading 
volume has averaged $9.1B over the year ending October 16, 2023,\39\ 
with approximately $1.7B occurring on venues whose trades are included 
in the sponsor's benchmark.\40\ 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.
---------------------------------------------------------------------------

    \38\ 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.''
    \39\ Source: CoinGecko.
    \40\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------

(B) 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.
    As noted in the Surveillance section, the surveillance program 
includes real-time patterns for price and volume movements and post-
trade surveillance patterns (e.g., spoofing, marking the close, 
pinging, phishing). In addition to the Exchange's existing 
surveillance, a new pattern will be added to surveil for significant 
deviation in the Commodity-Based Trust Shares' price from the 
underlying asset's price. The Exchange will use the trade data from an 
external vendor that consolidates the real-time data from multiple 
ether platforms.
    Trading of Shares on the Exchange will be subject to the Exchange's 
surveillance program for derivative products, as well as cross-market 
surveillances administered by Financial Industry Regulatory Authority 
(``FINRA''), on behalf of the Exchange pursuant to a regulatory 
services agreement, which are also designed to detect violations of 
Exchange rules and applicable federal securities laws. The Exchange is 
responsible for FINRA's performance under this regulatory services 
agreement.
    The Exchange will require the Trust to represent to the Exchange 
that it will advise the Exchange of any failure by the Trust to comply 
with the continued listing requirements, and, pursuant to its 
obligations under section 19(g)(1) of the Exchange Act, the Exchange 
will surveil for compliance with the continued listing requirements. If 
the Trust is not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under the 
Nasdaq 5800 Series. In addition, the Exchange also has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.
    The Exchange will communicate as needed regarding trading in the 
Shares with other markets and other entities that are members of the 
ISG, and the Exchange may obtain trading information regarding trading 
in the Shares from such markets and other entities.
Spot and Proxy Exposure to Ether
    Exposure to ether through an ETP also presents certain advantages 
for retail investors compared to buying spot ether directly. The most 
notable advantage from the Sponsor's perspective is the elimination of 
the need for an individual retail investor to either manage their own 
private keys or to hold ether through a cryptocurrency exchange that 
lacks sufficient protections. Typically, retail exchanges hold most, if 
not all, retail investors' ether in ``hot'' (internet connected) 
storage and do not make any commitments to indemnify retail investors 
or to observe any particular cybersecurity standard. Meanwhile, a 
retail investor holding spot ether directly in a self-hosted wallet may 
suffer from inexperience in private key management (e.g., insufficient 
password protection, lost key, etc.), which point of failure could 
cause them to lose some or all of their ether holdings. Thus, with 
respect to custody of the Trust's ether assets, the Trust presents 
advantages from an investment protection standpoint for retail 
investors compared to owning spot ether directly or via a digital asset 
exchange.
Availability of Information
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the prior Business 
Day's NAV per Share; (b) the prior Business Day's Nasdaq official 
closing price; (c) calculation of the premium or discount of such 
Nasdaq official closing price against such NAV per Share; (d) 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); (e) the prospectus; and (f) 
other applicable quantitative information. The NAV per Share for the 
Trust will be calculated by the Trust 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 relevant securities 
information processor. Also, an estimated value that reflects an 
estimated IIV will be disseminated. For more information on the IIV, 
including the calculation methodology, see ``Intraday Indicative 
Value'' above.
    The IIV disseminated during the Exchange's Regular Market Session 
should not be viewed as an actual real time update of the NAV per 
Share, which will be calculated only once at the end of each trading 
day. The IIV will be widely disseminated on a per Share basis every 15 
seconds during the Exchange's Regular Market Session by one or more 
major market data vendors. In addition, the IIV will be available 
through online information services.
    Quotation and last sale information for ether is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as CF Benchmarks. Information relating 
to trading, including price and volume information, in ether is 
available from major market data vendors and from the platforms on 
which ether are traded. Depth of book information is also available 
from ether platforms. The normal trading hours for ether platforms are 
24 hours per day, 365 days per year.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will

[[Page 33424]]

be published daily in the financial section of newspapers.
Initial and Continued Listing
    The Shares will be subject to Nasdaq Rule 5711(d)(vi), 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 per Share will be calculated daily and will be 
made available to all market participants at the same time. A minimum 
of 80,000 Commodity-Based Trust Shares, or the equivalent of 2 Baskets, 
will be required to be outstanding at the time of commencement of 
trading on the Exchange. Upon termination of the Trust, the Shares will 
be removed from listing. The Delaware Trustee, will be a trust company 
having substantial capital and surplus and the experience and 
facilities for handling corporate trust business, as required under 
Nasdaq Rule 5711(d)(vi)(D) and no change will be made to the Delaware 
Trustee without prior notice to and approval of the Exchange.
    As required in Nasdaq Rule 5711(d)(viii), 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 the underlying 
commodity, related futures or options on futures, or any other related 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker in 
the Shares shall trade in the underlying commodity, related futures or 
options on futures, or any other related 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 
Nasdaq Rule 5711(d). In addition to the existing obligations under 
Exchange rules regarding the production of books and records, the 
registered Market Maker in the Shares shall make available to the 
Exchange such books, records or other information pertaining to 
transactions by such entity or any limited partner, officer or approved 
person thereof, registered or non-registered employee affiliated with 
such entity for its or their own accounts in the underlying commodity, 
related futures or options on futures, or any other related 
derivatives, as may be requested by the Exchange.
    The Exchange is able to obtain information regarding trading in the 
Shares and the underlying ether, Ether Futures contracts, options on 
Ether Futures, or any other ether derivative through members acting as 
registered Market Makers, in connection with their proprietary or 
customer trades.
    As a general matter, the Exchange has regulatory jurisdiction over 
its members, and their associated persons. The Exchange also has 
regulatory jurisdiction over any person or entity controlling a member, 
as well as a subsidiary or affiliate of a member that is in the 
securities business. A subsidiary or affiliate of a member organization 
that does business only in commodities would not be subject to Exchange 
jurisdiction, but the Exchange could obtain information regarding the 
activities of such subsidiary or affiliate through surveillance sharing 
agreements with regulatory organizations of which such subsidiary or 
affiliate is a member.
Trading 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. The Exchange will 
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. (ET). The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. The Shares of the Trust will conform to 
the initial and continued listing criteria set forth in Nasdaq Rule 
5711(d).
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 Nasdaq Rules 4120 and 4121, including 
without limitation the conditions specified in Nasdaq Rule 4120(a)(9) 
and (10) and the trading pauses under Nasdaq Rules 4120(a)(11) and 
(12).
    Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) the extent to which trading is not 
occurring in the ether underlying the Shares; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present.
    If the IIV or the value of the Index is not being disseminated as 
required, the Exchange may halt trading during the day in which the 
interruption to the dissemination of the IIV or the value of the Index 
occurs. If the interruption to the dissemination of the IIV or the 
value of the Index persists past the trading day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption.
    In addition, if the Exchange becomes aware that the NAV per Share 
with respect to the Shares is not disseminated to all market 
participants at the same time, it will halt trading in the Shares until 
such time as the NAV per Share is available to all market participants.
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. The surveillance 
program includes real-time patterns for price and volume movements and 
post-trade surveillance patterns (e.g., spoofing, marking the close, 
pinging, phishing). In addition to the Exchange's existing 
surveillance, a new pattern will be added to surveil for significant 
deviation in the Commodity-Based Trust Shares' price from the 
underlying asset's price. The Exchange will use the trade data from an 
external vendor that consolidates the real-time data from multiple 
ether platforms. Trading of Shares on the Exchange will be subject to 
the Exchange's surveillance program for derivative products, as well as 
cross-market surveillance administered by FINRA, on behalf of the 
Exchange pursuant to a regulatory services agreement, which are also 
designed to detect violations of Exchange rules and applicable federal 
securities laws. The Exchange is responsible for FINRA's performance 
under this regulatory services agreement. The Exchange will require the 
Trust to represent to the Exchange that it will advise the Exchange of 
any failure by the Trust to comply with the continued listing 
requirements, and, pursuant to its obligations under section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under the Nasdaq 5800 Series. In addition, the 
Exchange also has a general policy prohibiting the distribution of 
material, non-public information by its employees.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares with other 
markets and other entities that are members of the ISG, and the 
Exchange or FINRA, on

[[Page 33425]]

behalf of the Exchange, or both, may obtain trading information 
regarding trading in the Shares from such markets and other entities. 
The Exchange also may obtain information regarding trading in the 
Shares and listed bitcoin 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.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an information circular (``Information Circular'') of the 
special characteristics and risks associated with trading the Shares. 
Specifically, the Information Circular will discuss the following: (1) 
the procedures for creations and redemptions of Shares in Baskets (and 
that Shares are not individually redeemable); (2) Section 10 of Nasdaq 
General Rule 9, which imposes suitability obligations on Nasdaq members 
with respect to recommending transactions in the Shares to customers; 
(3) how information regarding the IIV is disseminated; (4) the risks 
involved in trading the Shares during the pre-market and post-market 
sessions when an updated IIV will not be calculated or publicly 
disseminated; (5) the requirement that members deliver a prospectus to 
investors purchasing newly issued Shares prior to or concurrently with 
the confirmation of a transaction; and (6) trading information. The 
Information Circular will also discuss any exemptive, no action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    The Information Circular will also reference the fact that there is 
no regulated source of last sale information regarding ether, that the 
Commission has no jurisdiction over the trading of ether as a 
commodity, and that the CFTC has regulatory jurisdiction over the 
trading of ETH Futures contracts and options on ETH Futures contracts.
    Additionally, the Information Circular will reference that the 
Trust is subject to various fees and expenses described in the 
Registration Statement. The Information Circular will also disclose the 
trading hours of the Shares. The Information Circular will disclose 
that information about the Shares will be publicly available on the 
Trust's website.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act \41\ in general and section 6(b)(5) of the Act \42\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

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

    The Commission has approved numerous series of Trust Issued 
Receipts,\43\ including Commodity-Based Trust Shares,\44\ 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; 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 because this filing sufficiently demonstrates that 
the CME ETH Futures market represents a regulated market of significant 
size and that, on the whole, the manipulation concerns previously 
articulated by the Commission are sufficiently mitigated to the point 
that they are outweighed by quantifiable investor protection issues 
that would be resolved by approving this proposal.
---------------------------------------------------------------------------

    \43\ See Exchange Rule 5720.
    \44\ Commodity-Based Trust Shares, as described in Exchange Rule 
5711(d), are a type of Trust Issued Receipt.
---------------------------------------------------------------------------

Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, 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.\45\ As 
such, the only remaining issue to be addressed is whether the ETH 
Futures market constitutes a market of significant size, which the 
Exchange believes 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.\46\
---------------------------------------------------------------------------

    \45\ For a list of the current members and affiliate members of 
ISG, see https://www.isgportal.com/.
    \46\ 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.\47\
---------------------------------------------------------------------------

    \47\ 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.
---------------------------------------------------------------------------

    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct. In light of the similarly high 
correlation between spot ETH/CME Ether Futures and spot bitcoin/CME 
Bitcoin Futures, applying the same rationale that the Commission 
applied to a Spot Bitcoin ETP in the Spot Bitcoin ETP Approval Order 
\48\ also indicates that this test is satisfied for this proposal. As 
noted above, in the Spot Bitcoin ETP Approval Order, the SEC concluded 
that: . . . fraud or manipulation that impacts prices in spot bitcoin 
markets would likely similarly impact CME bitcoin futures prices. And 
because the CME's surveillance can assist in detecting those impacts on 
CME bitcoin futures prices, the Exchanges' comprehensive surveillance-
sharing agreement with the CME . . . can be reasonably expected to 
assist in

[[Page 33426]]

surveilling for fraudulent and manipulative acts and practices in the 
specific context of the [p]roposals.\49\ The assumptions from this 
statement are also true for CME Ether Futures. CME Ether Futures 
pricing is based on pricing from spot ether markets. The statement from 
the Spot Bitcoin ETP Approval Order that the surveillance-sharing 
agreement with the CME ``can be reasonably expected to assist in 
surveilling for fraudulent and manipulative acts and practices in the 
specific context of the [p]roposals'' makes clear that the Commission 
believes that CME's surveillance can capture the effects of trading on 
the relevant spot markets on the pricing of CME Bitcoin Futures. This 
same logic would extend to CME Ether Futures markets where CME's 
surveillance would be able to capture the effects of trading on the 
relevant spot markets on the pricing of CME Ether Futures.
---------------------------------------------------------------------------

    \48\ See Exchange Act Release No. 99306 (January 10, 2024), 89 
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE 
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.; 
Order Granting Accelerated Approval of Proposed Rule Changes, as 
Modified by Amendments Thereto, To List and Trade Bitcoin-Based 
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin 
ETP Approval Order'').
    \49\ See the Spot Bitcoin ETP Approval Order at 3011-3012.
---------------------------------------------------------------------------

(a) 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 CME ETH Futures market 
or spot 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.\50\ The Sponsor notes 
that ETH total 24-hour spot trading volume has averaged $9.1B over the 
year ending October 16, 2023,\51\ with approximately $1.7B occurring on 
venues whose trades are included in the sponsor's benchmark.\52\ 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.
---------------------------------------------------------------------------

    \50\ 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.''
    \51\ Source: CoinGecko.
    \52\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------

(b) 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.
    As noted in the Surveillance section, the surveillance program 
includes real-time patterns for price and volume movements and post-
trade surveillance patterns (e.g., spoofing, marking the close, 
pinging, phishing). In addition to the Exchange's existing 
surveillance, a new pattern will be added to surveil for significant 
deviation in the Commodity-Based Trust Shares' price from the 
underlying asset's price. The Exchange will use the trade data from an 
external vendor that consolidates the real-time data from multiple 
ether platforms.
    Trading of Shares on the Exchange will be subject to the Exchange's 
surveillance program for derivative products, as well as cross-market 
surveillances administered by Financial Industry Regulatory Authority 
(``FINRA''), on behalf of the Exchange pursuant to a regulatory 
services agreement, which are also designed to detect violations of 
Exchange rules and applicable federal securities laws. The Exchange is 
responsible for FINRA's performance under this regulatory services 
agreement.
    The Exchange will require the Trust to represent to the Exchange 
that it will advise the Exchange of any failure by the Trust to comply 
with the continued listing requirements, and, pursuant to its 
obligations under section 19(g)(1) of the Exchange Act, the Exchange 
will surveil for compliance with the continued listing requirements. If 
the Trust is not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under the 
Nasdaq 5800 Series. In addition, the Exchange also has a general policy 
prohibiting the distribution of material, non-public information by its 
employees.
    The Exchange will communicate as needed regarding trading in the 
Shares with other markets and other entities that are members of the 
ISG, and the Exchange may obtain trading information regarding trading 
in the Shares from such markets and other entities.
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--Nasdaq Rule 5711(d)
    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 Nasdaq Rule 5711(d). 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

[[Page 33427]]

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 the Nasdaq 5800 Series. 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 CF Benchmarks 
Index, the Trust will provide information regarding the Trust's ETH 
holdings as well as additional data regarding the Trust.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the prior Business 
Day's NAV per Share; (b) the prior Business Day's Nasdaq official 
closing price; (c) calculation of the premium or discount of such 
Nasdaq official closing Price against such NAV per Share; (d) data in 
chart form displaying the frequency distribution of discounts and 
premiums of the Nasdaq official closing price against the NAV per 
Share, within appropriate ranges for each of the four previous calendar 
quarters (or for the life of the Trust, if shorter); (e) the 
prospectus; and (f) other applicable quantitative information. The NAV 
per Share for the Trust will be calculated by the Trust 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 relevant securities 
information processor. Also, an estimated value that reflects an 
estimated IIV will be disseminated. For more information on the IIV, 
including the calculation methodology, see ``Intraday Indicative 
Value'' above.
    The IIV disseminated during the Exchange's Regular Market Session 
should not be viewed as an actual real time update of the NAV per 
Share, which will be calculated only once at the end of each trading 
day. The IIV will be widely disseminated on a per Share basis every 15 
seconds during the Exchange's Regular Market Session by one or more 
major market data vendors. In addition, the IIV will be available 
through online information services.
    Quotation and last sale information for ether is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as CF Benchmarks. Information relating 
to trading, including price and volume information, in ETH is available 
from major market data vendors and from the exchanges on which ETH is 
traded. Depth of book information is also available from ETH exchanges. 
The normal trading hours for ETH exchanges are 24 hours per day, 365 
days per year.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers.
    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 e 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 
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

    No written comments were either solicited or received.

III. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NASDAQ-2023-045 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-NASDAQ-2023-045. 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-NASDAQ-2023-045 and should 
be submitted on or before May 20, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-09064 Filed 4-26-24; 8:45 am]
BILLING CODE 8011-01-P