[Federal Register Volume 89, Number 104 (Wednesday, May 29, 2024)]
[Notices]
[Pages 46441-46462]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-11709]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100217; File No. SR-NYSEARCA-2023-70]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 to a Proposed Rule Change To List and Trade Shares 
of the Grayscale Ethereum Trust

May 22, 2024.
    On October 10, 2023, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of the Grayscale Ethereum 
Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares). The 
proposed rule change was published for comment in the Federal Register 
on October 27, 2023.\3\ On December 5, 2023, pursuant to Section 
19(b)(2) of the Act,\4\ the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On January 25, 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 March 15, 2024, the Exchange filed Amendment No. 1, which 
replaced and superseded the proposed rule change in its entirety. On 
April 2, 2024, the Commission published notice of Amendment No. 1 to 
the proposed rule change.\8\ On April 23, 2024, the Commission 
designated a longer period for Commission action on the proposed rule 
change, as modified by Amendment No. 1.\9\ On May 21, 2024, the 
Exchange filed Amendment No. 2 to the proposed rule change as described 
in Items I and II below, which Items have been prepared by the 
Exchange. Amendment No. 2 replaced and superseded the proposed rule 
change, as modified by Amendment No. 1, in its entirety. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change, as modified by Amendment No. 2, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98780 (Oct. 23, 
2023), 88 FR 73892. Comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99082, 88 FR 85962 
(Dec. 11, 2023).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 99428, 89 FR 6155 
(Jan. 31, 2024).
    \8\ See Securities Exchange Act Release No. 99887, 89 FR 24534 
(Apr. 8, 2024).
    \9\ See Securities Exchange Act Release No. 100014, 89 FR 33414 
(Apr. 29, 2024).
---------------------------------------------------------------------------

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

    The Exchange proposes to list and trade shares of the following 
under NYSE Arca Rule 8.201-E: Grayscale Ethereum Trust (ETH) (the 
``Trust'').\10\ This Amendment No. 2 to SR-NYSEARCA-2023-70 replaces 
Amendment No. 1 to SR-NYSEARCA-2023-70 and supersedes such filing in 
its entirety. The proposed rule change is available on the Exchange's 
website at www.nyse.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.
---------------------------------------------------------------------------

    \10\ The Trust was previously named Ethereum Investment Trust, 
whose name was changed pursuant to a Certificate of Amendment to the 
Certificate of Trust of Ethereum Investment Trust filed with the 
Delaware Secretary of State on January 11, 2019.
---------------------------------------------------------------------------

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

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

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

1. Purpose
    Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/
or trade pursuant to unlisted trading privileges ``Commodity-Based 
Trust Shares.'' \11\ The Exchange proposes to list and trade shares 
(``Shares'') \12\ of the Trust pursuant to NYSE Arca Rule 8.201-E.\13\
---------------------------------------------------------------------------

    \11\ Commodity-Based Trust Shares are securities issued by a 
trust that represent investors' discrete identifiable and undivided 
beneficial ownership interest in the commodities deposited into the 
Trust.
    \12\ The Shares are expected to be listed under the ticker 
symbol ``ETHE.''
    \13\ On April 17, 2020, the Trust confidentially filed its draft 
registration statement on Form 10 under the '34 Act) (File No. 377-
03131) (the ``Draft Registration Statement on Form 10''). On June 
16, 2020, the Trust confidentially filed Amendment No. 1 to the 
Draft Registration Statement on Form 10. The Jumpstart Our Business 
Startups Act (the ``JOBS Act''), enacted on April 5, 2012, added 
Section 6(e) to the Securities Act of 1933 (the ``Securities Act'' 
or ``'33 Act''). Section 6(e) of the Securities Act provides that an 
``emerging growth company'' may confidentially submit to the 
Commission a draft registration statement for confidential, non-
public review by the Commission staff prior to public filing, 
provided that the initial confidential submission and all amendments 
thereto shall be publicly filed not later than 21 days before the 
date on which the issuer conducts a road show, as such term is 
defined in Securities Act Rule 433(h)(4). An emerging growth company 
is defined in Section 2(a)(19) of the Securities Act as an issuer 
with less than $1,000,000,000 total annual gross revenues during its 
most recently completed fiscal year. The Trust meets the definition 
of an emerging growth company and consequently submitted its Draft 
Registration Statement on Form 10 to the Commission on a 
confidential basis. On August 6, 2020, the Trust filed its 
registration statement on Form 10 under the Securities Act (File No. 
000-56193) (the ``Registration Statement on Form 10''). On October 
2, 2020, the Trust filed Amendment No. 1 to the Registration 
Statement on Form 10. On October 5, 2020, the Registration Statement 
on Form 10 was automatically deemed effective. On March 5, 2021, 
February 25, 2022, March 1, 2023, and February 23, 2024, the Trust 
filed its annual report on Form 10-K under the Securities Act (File 
No. 000-56193) (the ``Annual Reports''). On November 6, 2020, May 7, 
2021, August 6, 2021, November 5, 2021, May 6, 2022, August 5, 2022, 
November 4, 2022, May 5, 2023, August 4, 2023, and November 3, 2023, 
the Trust filed its quarterly reports on Form 10-Q under the 
Securities Act (File No. 000-56193) (the ``Quarterly Reports''). The 
descriptions of the Trust, the Shares, and Ether contained herein 
are based, in part, on the Annual Reports and Quarterly Reports. On 
January 17, 2019, the Trust submitted to the Commission an amended 
Form D as a business trust. Shares of the Trust have been quoted on 
OTC Market's OTCQX Best Marketplace under the symbol ``ETHE'' since 
June 20, 2019. On May 23, 2019 and March 20, 2020, the Trust 
published annual reports for ETHE for the periods ended December 31, 
2018 and December 31, 2019, respectively. On May 23, 2019, August 8, 
2019, November 11, 2019, May 8, 2020, and August 6, 2020, the Trust 
published quarterly reports for ETHE for the periods ended March 31, 
2019, June 30, 2019, September 30, 2019, March 31, 2020, and June 
30, 2020, respectively. Reports published before October 5, 2020, 
the date on which the Trust's Shares became registered pursuant to 
Section 12(g) of the Act, can be found on OTC Market's website 
(https://www.otcmarkets.com/stock/ETHE/disclosure), and reports 
published on or after October 5, 2020 can be found on OTC Market's 
website and the Commission's website (https://www.sec.gov/edgar/browse/?CIK=1725210&owner=exclude). The Shares will be of the same 
class and will have the same rights as shares of ETHE. According to 
the Sponsor, freely tradeable shares of ETHE will remain freely 
tradeable Shares on the date of the listing of the Shares that are 
unregistered under the Securities Act. Restricted shares of ETHE 
will remain subject to private placement restrictions on such date, 
and the holders of such restricted shares will continue to hold 
those Shares subject to those restrictions until they become freely 
tradable Shares. On April 23, 2024, the Trust filed a registration 
statement on Form S-3 under the Securities Act (File No. 333-278880) 
(the ``Registration Statement''). The descriptions of the Trust and 
Shares contained herein are based, in part, on the Registration 
Statement. The Registration Statement is not yet effective, and the 
Shares will not trade on the Exchange until such time that the 
Registration Statement is effective.

---------------------------------------------------------------------------

[[Page 46442]]

    The Trust is the world's largest ether (``Ether'') investment fund 
by assets under management as of the date of this filing. The Trust has 
approximately $11.8 billion in assets under management \14\ 
(representing 2.5% of all Ether in circulation), its Shares trade 
millions of dollars in daily volume and are held by more than a quarter 
of a million American investor accounts seeking exposure to Ether 
without the cost and complexity of purchasing the asset directly.\15\ 
However, because the Trust is not currently listed as an exchange-
traded product (``ETP''), the value of the Shares has not been able to 
closely track the value of the Trust's underlying Ether. The Sponsor 
thus believes that allowing Shares of the Trust to list and trade on 
the Exchange as an ETP (i.e., converting the Trust to a spot Ether ETP) 
would unlock over $1.73 billion of value \16\ for the Trust's 
shareholders and provide other investors with a safe and secure way to 
invest in Ether on a regulated national securities exchange.
---------------------------------------------------------------------------

    \14\ As of March 13, 2024.
    \15\ As of the date of the initial filing of this proposed rule 
change. See Securities Exchange Act Release No. 98780 (October 23, 
2023), 88 FR 73892 (October 27, 2023) (Notice of Filing of Proposed 
Rule Change To List and Trade Shares of the Grayscale Ethereum Trust 
Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)).
    \16\ As of March 13, 2024.
---------------------------------------------------------------------------

    The sponsor of the Trust is Grayscale Investments, LLC 
(``Sponsor''), a Delaware limited liability company. The Sponsor is a 
wholly owned subsidiary of Digital Currency Group, Inc. (``Digital 
Currency Group''). The trustee for the Trust is Delaware Trust Company 
(``Trustee''). The custodian for the Trust is Coinbase Custody Trust 
Company, LLC (``Custodian'').\17\ The administrator and transfer agent 
of the Trust is BNY Mellon Asset Servicing, a division of The Bank of 
New York Mellon (the ``Transfer Agent''). The distribution and 
marketing agent for the Trust will be Foreside Fund Services, LLC (the 
``Marketing Agent''). The index provider for the Trust is CoinDesk 
Indices, Inc. (the ``Index Provider'').
---------------------------------------------------------------------------

    \17\ According to the Annual Report, Digital Currency Group owns 
a minority interest in Coinbase, Inc., which is the parent company 
of the Custodian, representing less than 1.0% of its equity.
---------------------------------------------------------------------------

    The Trust is a Delaware statutory trust, formed on December 13, 
2017, that operates pursuant to a trust agreement between the Sponsor 
and the Trustee (``Trust Agreement''). The Trust has no fixed 
termination date.
Operation of the Trust
    According to the Annual Report, the Trust's assets consist solely 
of Ether.\18\
---------------------------------------------------------------------------

    \18\ The Trust will not hold cash or engage a cash custodian 
other than in connection with creations and redemptions. The Trust 
may from time to time come into possession of Incidental Rights and/
or IR Virtual Currency by virtue of its ownership of Ethereum, 
generally through a fork in the Ethereum Blockchain, an airdrop 
offered to holders of Ethereum or other similar event. ``Incidental 
Rights'' are rights to acquire, or otherwise establish dominion and 
control over, any virtual currency or other asset or right, which 
rights are incident to the Trust's ownership of Ethereum and arise 
without any action of the Trust, or of the Sponsor or Trustee on 
behalf of the Trust. ``IR Virtual Currency'' is any virtual currency 
tokens, or other asset or right, acquired by the Trust through the 
exercise (subject to the applicable provisions of the Trust 
Agreement) of any Incidental Right. Although the Trust is permitted 
to take certain actions with respect to Incidental Rights and IR 
Virtual Currency in accordance with its Trust Agreement, at this 
time the Trust will prospectively irrevocably abandon any Incidental 
Rights and IR Virtual Currency. In the event the Trust seeks to 
change this position, the Exchange would file a subsequent proposed 
rule change with the Commission.
---------------------------------------------------------------------------

    Each Share represents a proportional interest, based on the total 
number of Shares outstanding, in each of the Trust's assets as 
determined by reference to the Index Price,\19\ less the Trust's 
expenses and other liabilities (which include accrued but unpaid fees 
and expenses). The Sponsor expects that the market price of the Shares 
will fluctuate over time in response to the market prices of Ether. In 
addition, because the Shares reflect the estimated accrued but unpaid 
expenses of the Trust, the number of Ether represented by a Share will 
gradually decrease over time as the Trust's Ether are used to pay the 
Trust's expenses.
---------------------------------------------------------------------------

    \19\ The ``Index Price'' means the U.S. dollar value of an Ether 
derived from the Digital Asset Trading Platforms that are reflected 
in the CoinDesk Ether Price Index (ETX), calculated at 4:00 p.m., 
New York time, on each business day. For purposes of the Trust 
Agreement, the term Ether Index Price has the same meaning as the 
Index Price as defined herein.
---------------------------------------------------------------------------

    The activities of the Trust are limited to (i) issuing ``Baskets'' 
(as defined below) in exchange for Ether transferred to the Trust as 
consideration in connection with creations, (ii) transferring or 
selling Ether as necessary to cover the ``Sponsor's Fee'' \20\ and/or 
certain Trust expenses, (iii) transferring Ether in exchange for 
Baskets surrendered for redemption (subject to obtaining regulatory 
approval from the Commission and approval of the Sponsor), (iv) causing 
the Sponsor to sell Ether on the termination of the Trust, and (v) 
engaging in all administrative and security procedures necessary to 
accomplish such activities in accordance with the provisions of the 
Trust Agreement, the Custodian Agreement, the Index License Agreement, 
and the Participant Agreements (each as defined below).\21\
---------------------------------------------------------------------------

    \20\ The Sponsor's Fee means a fee, payable in Ether, which 
accrues daily in U.S. dollars at an annual rate of currently 2.5%, 
but which will be lowered in connection with the Trust becoming an 
ETP, of the NAV Fee Basis Amount of the Trust as of 4:00 p.m., New 
York time, on each day, provided that for a day that is not a 
business day, the calculation of the Sponsor's Fee will be based on 
the NAV Fee Basis Amount from the most recent business day, reduced 
by the accrued and unpaid Sponsor's Fee for such most recent 
business day and for each day after such most recent business day 
and prior to the relevant calculation date. The ``NAV Fee Basis 
Amount'' is calculated in the manner set forth under ``Valuation of 
Ether and Determination of NAV'' below.
    \21\ Neither the Trust, nor the Sponsor, nor the Custodian, nor 
any other person associated with the Trust will, directly or 
indirectly, engage in action where any portion of the Trust's Ether 
becomes subject to Ethereum proof-of-stake validation or is used to 
earn additional Ether or generate income or other earnings.
---------------------------------------------------------------------------

    The Trust will not be actively managed. It will not engage in any 
activities designed to obtain a profit from, or to ameliorate losses 
caused by, changes in the market prices of Ether.
Investment Objective
    According to the Annual Report, and as further described below, the 
Trust's investment objective is for the value of the Shares (based on 
Ether per Share) to reflect the value of the Ether held by the Trust, 
determined by reference to the Index Price, less the Trust's expenses 
and other liabilities. While an investment in the Shares is not a 
direct investment in Ether, the Shares are designed to provide 
investors with a cost-effective and convenient way to gain investment 
exposure to Ether. Generally speaking, a substantial direct investment 
in Ether may require expensive and sometimes complicated arrangements 
in connection with the acquisition, security and safekeeping of

[[Page 46443]]

the Ether and may involve the payment of substantial fees to acquire 
such Ether from third-party facilitators through cash payments of U.S. 
dollars. Because the value of the Shares is correlated with the value 
of Ether held by the Trust, it is important to understand the 
investment attributes of, and the market for, Ether.
    The Trust uses the Index Price to calculate its ``NAV,'' which is 
the aggregate value, expressed in U.S. dollars, of the Trust's assets 
(other than U.S. dollars or other fiat currency), less the U.S. dollar 
value of the Trust's expenses and other liabilities calculated in the 
manner set forth under ``Valuation of Ether and Determination of NAV.'' 
``NAV per Share'' is calculated by dividing NAV by the number of Shares 
then outstanding.
Valuation of Ether and Determination of NAV
    The following is a description of the material terms of the Trust 
Agreement as they relate to valuation of the Trust's Ether and the NAV 
calculations.\22\
---------------------------------------------------------------------------

    \22\ While the Sponsor uses the terminology ``NAV'' in this 
filing, the term used in the Trust Agreement is ``Digital Asset 
Holdings.''
---------------------------------------------------------------------------

    On each business day at 4:00 p.m., New York time, or as soon 
thereafter as practicable (the ``Evaluation Time''), the Sponsor will 
evaluate the Ether held by the Trust and calculate and publish the NAV 
of the Trust. To calculate the NAV, the Sponsor will:
    1. Determine the Index Price as of such business day.
    2. Multiply the Index Price by the Trust's aggregate number of 
Ether owned by the Trust as of 4:00 p.m., New York time, on the 
immediately preceding day, less the aggregate number of Ether payable 
as the accrued and unpaid Sponsor's Fee as of 4:00 p.m., New York time, 
on the immediately preceding day.
    3. Add the U.S. dollar value of Ether, calculated using the Index 
Price, receivable under pending creation orders, if any, determined by 
multiplying the number of the Baskets represented by such creation 
orders by the Basket Amount and then multiplying such product by the 
Index Price.\23\
---------------------------------------------------------------------------

    \23\ ``Baskets'' and ``Basket Amount'' have the meanings set 
forth in ``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------

    4. Subtract the U.S. dollar amount of accrued and unpaid Additional 
Trust Expenses, if any.\24\
---------------------------------------------------------------------------

    \24\ ``Additional Trust Expenses'' are any expenses incurred by 
the Trust in addition to the Sponsor's Fee that are not Sponsor-paid 
expenses, including, but not limited to, (i) taxes and governmental 
charges, (ii) expenses and costs of any extraordinary services 
performed by the Sponsor (or any other service provider) on behalf 
of the Trust to protect the Trust or the interests of shareholders, 
(iii) any indemnification of the Custodian or other agents, service 
providers or counterparties of the Trust, (iv) the fees and expenses 
related to the listing, quotation or trading of the Shares on any 
marketplace or other alternative trading system, as determined by 
the Sponsor, on which the Shares may then be listed, quoted or 
traded, including but not limited to, NYSE Arca, Inc. (including 
legal, marketing and audit fees and expenses) to the extent 
exceeding $600,000 in any given fiscal year and (v) extraordinary 
legal fees and expenses, including any legal fees and expenses 
incurred in connection with litigation, regulatory enforcement or 
investigation matters.
---------------------------------------------------------------------------

    5. Subtract the U.S. dollar value of the Ether, calculated using 
the Index Price, to be distributed under pending redemption orders, if 
any, determined by multiplying the number of Baskets to be redeemed 
represented by such redemption orders by the Basket Amount and then 
multiplying such product by the Index Price (the amount derived from 
steps 1 through 5 above, the ``NAV Fee Basis Amount'').
    6. Subtract the U.S. dollar amount of the Sponsor's Fee that 
accrues for such business day, as calculated based on the NAV Fee Basis 
Amount for such business day.
    In the event that the Sponsor determines that the primary 
methodology used to determine the Index Price is not an appropriate 
basis for valuation of the Trust's Ether, the Sponsor will utilize the 
cascading set of rules as described in ``Determination of the Index 
Price When Index Price is Unavailable'' below.
Ether and the Ethereum Network \25\
---------------------------------------------------------------------------

    \25\ The description of Ether and the Ethereum Network in this 
section was provided by the Sponsor and is based on the Annual 
Report.
---------------------------------------------------------------------------

    According to the Annual Report, Ether is a digital asset that is 
created and transmitted through the operations of the peer-to-peer 
``Ethereum Network,'' a decentralized network of computers that 
operates on cryptographic protocols. No single entity owns or operates 
the Ethereum Network, the infrastructure of which is collectively 
maintained by a decentralized user base. The Ethereum Network allows 
people to exchange tokens of value, called Ether, which are recorded on 
a public transaction ledger known as a blockchain. Ether can be used to 
pay for goods and services, including computational power on the 
Ethereum Network, or it can be converted to fiat currencies, such as 
the U.S. dollar, at rates determined on ``Digital Asset Markets'' \26\ 
or in individual end-user-to-end-user transactions under a barter 
system.
---------------------------------------------------------------------------

    \26\ A ``Digital Asset Market'' is a ``Brokered Market,'' 
``Dealer Market,'' ``Principal-to-Principal Market'' or ``Exchange 
Market,'' as each such term is defined in the Financial Accounting 
Standards Board Accounting Standards Codification Master Glossary.
    The ``Digital Asset Trading Platform Market'' is the global 
trading platform market for the trading of Ether, which consists of 
transactions on electronic Digital Asset Trading Platforms.
    A ``Digital Asset Trading Platform'' is an electronic 
marketplace where trading participants may trade, buy and sell Ether 
based on bid-ask trading. The largest Digital Asset Trading 
Platforms are online and typically trade on a 24-hour basis, 
publishing transaction price and volume data.
---------------------------------------------------------------------------

    Furthermore, the Ethereum Network also allows users to write and 
implement smart contracts--that is, general-purpose code that executes 
on every computer in the network and can instruct the transmission of 
information and value based on a sophisticated set of logical 
conditions. Using smart contracts, users can create markets, store 
registries of debts or promises, represent the ownership of property, 
move funds in accordance with conditional instructions and create 
digital assets other than Ether on the Ethereum Network. Smart contract 
operations are executed on the Ethereum Blockchain in exchange for 
payment of Ether. The Ethereum Network is one of a number of projects 
intended to expand blockchain use beyond just a peer-to-peer money 
system.
    The Ethereum Network went live on July 30, 2015. Unlike other 
digital assets, such as Bitcoin, which are solely created through a 
progressive mining process, 72.0 million Ether were created in 
connection with the launch of the Ethereum Network. At the time of the 
network launch, a non-profit called the Ethereum Foundation was the 
sole organization dedicated to protocol development.
    The Ethereum Network is decentralized in that it does not require 
governmental authorities or financial institution intermediaries to 
create, transmit, or determine the value of Ether. Rather, following 
the initial distribution of Ether, Ether is created, burned, and 
allocated by the Ethereum Network protocol through a process that is 
currently subject to an issuance and burn rate. The value of Ether is 
determined by the supply of and demand for Ether on the Digital Asset 
Trading Platforms or in private end-user-to-end-user transactions.
    New Ether are created and rewarded to the validators of a block in 
the Ethereum Blockchain for verifying transactions. The Ethereum 
Blockchain is effectively a decentralized database that includes all 
blocks that have been validated, and it is updated to include new 
blocks as they are validated. Each Ether transaction is broadcast to 
the Ethereum Network and, when included

[[Page 46444]]

in a block, recorded in the Ethereum Blockchain. As each new block 
records outstanding Ether transactions, and outstanding transactions 
are settled and validated through such recording, the Ethereum 
Blockchain represents a complete, transparent and unbroken history of 
all transactions of the Ethereum Network.
    Among other things, Ether is used to pay for transaction fees and 
computational services (i.e., smart contracts) on the Ethereum Network; 
users of the Ethereum Network pay for the computational power of the 
machines executing the requested operations with Ether. Requiring 
payment in Ether on the Ethereum Network incentivizes developers to 
write quality applications and increases the efficiency of the Ethereum 
Network because wasteful code costs more, while also ensuring that the 
Ethereum Network remains economically viable by compensating for 
contributed computational resources.
Smart Contracts and Development on the Ethereum Network
    Smart contracts are programs that run on a blockchain that can 
execute automatically when certain conditions are met. Smart contracts 
facilitate the exchange of anything representative of value, such as 
money, information, property, or voting rights. Using smart contracts, 
users can send or receive digital assets, create markets, store 
registries of debts or promises, represent ownership of property or a 
company, move funds in accordance with conditional instructions and 
create new digital assets.
    Development on the Ethereum Network involves building more complex 
tools on top of smart contracts, such as decentralized apps 
(``DApps''); organizations that are autonomous, known as decentralized 
autonomous organizations (``DAOs''); and entirely new decentralized 
networks. For example, a company that distributes charitable donations 
on behalf of users could hold donated funds in smart contracts that are 
paid to charities only if the charity satisfies certain pre-defined 
conditions.
    Moreover, the Ethereum Network has also been used as a platform for 
creating new digital assets and conducting their associated initial 
coin offerings. As of December 31, 2023, a majority of digital assets 
were built on the Ethereum Network, with such assets representing a 
significant amount of the total market value of all digital assets.
    More recently, the Ethereum Network has been used for decentralized 
finance (``DeFi'') or open finance platforms, which seek to democratize 
access to financial services, such as borrowing, lending, custody, 
trading, derivatives and insurance, by removing third-party 
intermediaries. DeFi can allow users to lend and earn interest on their 
digital assets, exchange one digital asset for another and create 
derivative digital assets such as stablecoins, which are digital assets 
pegged to a reserve asset such as fiat currency. Over the course of 
2023, between $20 billion and $30 billion worth of digital assets were 
locked up as collateral on DeFi platforms on the Ethereum Network.\27\
---------------------------------------------------------------------------

    \27\ DeFiLlama, ``Ethereum Total Value Locked,'' https://defillama.com/chain/Ethereum.
---------------------------------------------------------------------------

    In addition, the Ethereum Network and other smart contract 
platforms have been used for creating non-fungible tokens, or ``NFTs.'' 
Unlike digital assets native to smart contract platforms which are 
fungible and enable the payment of fees for smart contract execution. 
Instead, NFTs allow for digital ownership of assets that convey certain 
rights to other digital or real-world assets. This new paradigm allows 
users to own rights to other assets through NFTs, which enable users to 
trade them with others on the Ethereum Network. For example, an NFT may 
convey rights to a digital asset that exists in an online game or a 
DApp, and users can trade their NFT in the DApp or game, and carry them 
to other digital experiences, creating an entirely new free-market, 
internet-native economy that can be monetized in the physical world.
Overview of the Ethereum Network's Operations
    In order to own, transfer, or use Ether directly on the Ethereum 
Network (as opposed to through an intermediary, such as a custodian), a 
person generally must have internet access to connect to the Ethereum 
Network. Ether transactions may be made directly between end-users 
without the need for a third-party intermediary. To prevent the 
possibility of double-spending Ether, a user must notify the Ethereum 
Network of the transaction by broadcasting the transaction data to its 
network peers. The Ethereum Network provides confirmation against 
double-spending by memorializing every transaction in the Ethereum 
Blockchain, which is publicly accessible and transparent. This 
memorialization and verification against double-spending is 
accomplished through the Ethereum Network validation process, which 
adds ``blocks'' of data, including recent transaction information, to 
the Ethereum Blockchain.
Summary of an Ether Transaction
    Prior to engaging in Ether transactions directly on the Ethereum 
Network, a user generally must first install on its computer or mobile 
device an Ethereum Network software program that will allow the user to 
generate a private and public key pair associated with an Ether 
address, commonly referred to as a ``wallet.'' The Ethereum Network 
software program and the Ether address also enable the user to connect 
to the Ethereum Network and transfer Ether to, and receive Ether from, 
other users.
    Each Ethereum Network address, or wallet, is associated with a 
unique ``public key'' and ``private key'' pair. To receive Ether, the 
Ether recipient must provide its public key to the party initiating the 
transfer. This activity is analogous to a recipient for a transaction 
in U.S. dollars providing a routing address in wire instructions to the 
payor so that cash may be wired to the recipient's account. The payor 
approves the transfer to the address provided by the recipient by 
``signing'' a transaction that consists of the recipient's public key 
with the private key of the address from where the payor is 
transferring the Ether. The recipient, however, does not make public or 
provide to the sender its related private key.
    Neither the recipient nor the sender reveal their private keys in a 
transaction, because the private key authorizes transfer of the funds 
in that address to other users. Therefore, if a user loses his or her 
private key, the user may permanently lose access to the Ether 
contained in the associated address. Likewise, Ether is irretrievably 
lost if the private key associated with them is deleted and no backup 
has been made. When sending Ether, a user's Ethereum Network software 
program must validate the transaction with the associated private key. 
In addition, since every computation on the Ethereum Network requires 
processing power, there is a transaction fee involved with the transfer 
that is paid by the payor. The resulting digitally validated 
transaction is sent by the user's Ethereum Network software program to 
the Ethereum Network validators to allow transaction confirmation.
    Ethereum Network validators record and confirm transactions when 
they validate and add blocks of information to the Ethereum Blockchain. 
In proof-of-stake, validators compete to be randomly selected to 
validate transactions. When a validator is selected to validate a 
block, it creates that block, which includes data relating to (i) the 
verification of newly submitted

[[Page 46445]]

and accepted transactions and (ii) a reference to the prior block in 
the Ethereum Blockchain to which the new block is being added. The 
validator becomes aware of outstanding, unrecorded transactions through 
the data packet transmission and distribution discussed above.
    Upon the addition of a block included in the Ethereum Blockchain, 
the Ethereum Network software program of both the spending party and 
the receiving party will show confirmation of the transaction on the 
Ethereum Blockchain and reflect an adjustment to the Ether balance in 
each party's Ethereum Network public key, completing the Ether 
transaction. Once a transaction is confirmed on the Ethereum 
Blockchain, it is irreversible.
    Some Ether transactions are conducted ``off-blockchain'' and are 
therefore not recorded in the Ethereum Blockchain. These ``off-
blockchain transactions'' involve the transfer of control over, or 
ownership of, a specific digital wallet holding Ether or the 
reallocation of ownership of certain Ether in a pooled-ownership 
digital wallet, such as a digital wallet owned by a Digital Asset 
Trading Platform. In contrast to on-blockchain transactions, which are 
publicly recorded on the Ethereum Blockchain, information and data 
regarding off-blockchain transactions are generally not publicly 
available. Therefore, off-blockchain transactions are not truly Ether 
transactions in that they do not involve the transfer of transaction 
data on the Ethereum Network and do not reflect a movement of Ether 
between addresses recorded in the Ethereum Blockchain. For these 
reasons, off-blockchain transactions are subject to risks, as any such 
transfer of Ether ownership is not protected by the protocol behind the 
Ethereum Network or recorded in, and validated through, the blockchain 
mechanism.
Creation of New Ether
Initial Creation of Ether
    Unlike other digital assets such as Bitcoin, which are solely 
created through a progressive mining process, 72.0 million Ether were 
created in connection with the launch of the Ethereum Network. The 
initial 72.0 million Ether were distributed as follows:
    Initial Distribution: 60.0 million Ether, or 83.33% of the supply, 
was sold to the public in a crowd sale conducted between July and 
August 2014 that raised approximately $18 million.
    Ethereum Foundation: 6.0 million Ether, or 8.33% of the supply, was 
distributed to the Ethereum Foundation for operational costs.
    Ethereum Developers: 3.0 million Ether, or 4.17% of the supply, was 
distributed to developers who contributed to the Ethereum Network.
    Developer Purchase Program: 3.0 million Ether, or 4.17% of the 
supply, was distributed to members of the Ethereum Foundation to 
purchase at the initial crowd sale price.
    Following the launch of the Ethereum Network, Ether supply 
initially increased through a progressive mining process. Following the 
introduction of EIP-1559, described below, Ether supply and issuance 
rate varies based on factors such as recent use of the network.
Proof-of-Work Mining Process
    Prior to September 2022, Ethereum operated using a proof-of-work 
consensus mechanism. Under proof-of-work, in order to incentivize those 
who incurred the computational costs of securing the network by 
validating transactions, there was a reward given to the computer that 
was able to create the latest block on the chain. Every 14 seconds, on 
average, a new block was added to the Ethereum Blockchain with the 
latest transactions processed by the network, and the computer that 
generated this block was awarded a variable amount of Ether, depending 
on use of the network at the time. In certain mining scenarios, Ether 
was sometimes sent to another miner if they were also able to find a 
solution, but their block was not included. This scenario is referred 
to as an uncle/aunt reward. Due to the nature of the algorithm for 
block generation, this process (generating a ``proof-of-work'') was 
guaranteed to be random. The process by which a digital asset was 
``mined'' resulted in new blocks being added to such digital asset's 
blockchain and new digital assets being issued to the miners. Prior to 
the Merge upgrade, described below, computers on the Ethereum Network 
engaged in a set of prescribed complex mathematical calculations in 
order to add a block to the Ethereum Blockchain and thereby confirm 
Ether transactions included in that block's data.
Proof-of-Stake Process
    In the second half of 2020, the Ethereum Network began the first of 
several stages of an upgrade that was initially known as ``Ethereum 
2.0'' and eventually became known as the ``Merge'' to transition the 
Ethereum Network from a proof-of-work consensus mechanism to a proof-
of-stake consensus mechanism. The Merge was completed on September 15, 
2022, and the Ethereum Network has operated on a proof-of-stake model 
since such time.
    Unlike proof-of-work, in which miners expend computational 
resources to compete to validate transactions and are rewarded coins in 
proportion to the amount of computational resources expended, in proof-
of-stake, miners (sometimes called validators) risk or ``stake'' coins 
to compete to be randomly selected to validate transactions and are 
rewarded coins in proportion to the amount of coins staked. Any 
malicious activity, such as validating multiple blocks, disagreeing 
with the eventual consensus, or otherwise violating protocol rules, 
results in the forfeiture or ``slashing'' of a portion of the staked 
coins. Proof-of-stake is viewed as more energy efficient and scalable 
than proof-of-work and is sometimes referred to as ``virtual mining.'' 
As of December 31, 2023, every 12 seconds, approximately, a new block 
is added to the Ethereum Blockchain with the latest transactions 
processed by the network, and the validator that generated this block 
is awarded Ether.
Limits on Ether Supply
    The rate at which new Ether are issued and put into circulation is 
expected to vary. As of December 31, 2023, following the Merge, 
approximately 2,400 Ether are issued per day, though the issuance rate 
varies based on the number of validators on the network. In addition, 
the issuance of new Ether could be partially or completely offset by 
the burn mechanism introduced by the EIP-1559 modification, under which 
Ether are removed from supply at a rate that varies with network usage. 
On occasion, the Ether supply has been deflationary over a 24-hour 
period as a result of the burn mechanism. The attributes of the new 
consensus algorithm are subject to change, but in sum, the new 
consensus algorithm and related modifications reduced total new Ether 
issuances and could turn the Ether supply deflationary over the long 
term.
    As of December 31, 2023, approximately 120 million Ether were 
outstanding.\28\
---------------------------------------------------------------------------

    \28\ CoinMarketCap, ``Ethereum,'' https://coinmarketcap.com/currencies/ethereum/.
---------------------------------------------------------------------------

Modifications to the Ether Protocol
    The Ethereum Network is an open source project with no official 
developer or group of developers that controls it. However, the 
Ethereum Network's development has historically been overseen by the 
Ethereum Foundation

[[Page 46446]]

and other core developers. The Ethereum Foundation and core developers 
are able to access and alter the Ethereum Network source code and, as a 
result, they are responsible for quasi-official releases of updates and 
other changes to the Ethereum Network's source code.
    For example, in 2019, the Ethereum Network completed a network 
upgrade called Metropolis that was designed to enhance the usability of 
the Ethereum Network and was introduced in two stages. The first stage, 
called Byzantium, was implemented in October 2017. The purpose of 
Byzantium was to increase the network's privacy, security, and 
scalability and reduce the block reward from 5.0 Ether to 3.0 Ether. 
The second stage, called Constantinople, was implemented in February 
2019, along with another upgrade, called St. Petersburg. Another 
network upgrade, called Istanbul, was implemented in December 2019. The 
purpose of Istanbul was to make the network more resistant to denial of 
service attacks, enable greater Ether and Zcash interoperability as 
well as other Equihash-based proof-of-work digital assets, and to 
increase the scalability and performance for solutions on zero-
knowledge privacy technology like SNARKs and STARKs. The purpose of 
these upgrades was to prepare the Ethereum Network for the introduction 
of a proof-of-stake algorithm and reduce the block reward from 3.0 
Ether to 2.0 Ether. In the second half of 2020, the Ethereum Network 
began the first of several stages of an upgrade culminating in the 
Merge. The Merge amended the Ethereum Network's consensus mechanism to 
include proof-of-stake. In April 2023, the Ethereum Network completed a 
network upgrade called Shapella, which enabled users to unstake their 
previously-staked Ether and remove it from the relevant smart contract. 
Forthcoming planned upgrades include Dencun, which will enable ``proto-
danksharding.'' The purpose of proto-danksharding is to increase 
scalability of the Ethereum Network by allowing easy synchronization 
with Layer 2 networks capable of processing many more transactions than 
the Ethereum Blockchain alone. The intended effect would be to increase 
the rate of transactions that can be processed by the Ethereum Network.
    In 2021, the Ethereum Network implemented the EIP-1559 upgrade. 
EIP-1559 changed the methodology used to calculate the fees paid to 
miners (now validators). This new methodology splits fees into two 
components: a base cost and priority fee. The base cost is now removed 
from circulation, or ``burnt'', and the priority fee is paid to 
validators. EIP-1559 has reduced the total net issuance of Ether fees 
to validators. The release of updates to the Ethereum Network's source 
code does not guarantee that the updates will be automatically adopted. 
Users and validators must accept any changes made to the Ethereum 
source code by downloading the proposed modification of the Ethereum 
Network's source code. A modification of the Ethereum Network's source 
code is effective only with respect to the Ethereum users and 
validators that download it. If a modification is accepted by only a 
percentage of users and validators, a division in the Ethereum Network 
will occur such that one network will run the pre-modification source 
code and the other network will run the modified source code. Such a 
division is known as a ``fork.'' Consequently, as a practical matter, a 
modification to the source code becomes part of the Ethereum Network 
only if accepted by participants collectively having most of the 
validation power on the Ethereum Network.
    Core development of the Ethereum source code has increasingly 
focused on modifications of the Ethereum protocol to increase speed and 
scalability and also allow for financial and non-financial next 
generation uses. The Trust's activities will not directly relate to 
such projects, though such projects may utilize Ether as tokens for the 
facilitation of their non-financial uses, thereby potentially 
increasing demand for Ether and the utility of the Ethereum Network as 
a whole. Conversely, projects that operate and are built within the 
Ethereum Blockchain may increase the data flow on the Ethereum Network 
and could either ``bloat'' the size of the Ethereum Blockchain or slow 
confirmation times.
Custody of the Trust's Ether
    Digital assets and digital asset transactions are recorded and 
validated on blockchains, the public transaction ledgers of a digital 
asset network. Each digital asset blockchain serves as a record of 
ownership for all of the units of such digital asset, even in the case 
of certain privacy-preserving digital assets, where the transactions 
themselves are not publicly viewable. All digital assets recorded on a 
blockchain are associated with a public blockchain address, also 
referred to as a digital wallet. Digital assets held at a particular 
public blockchain address may be accessed and transferred using a 
corresponding private key.
Key Generation
    Public addresses and their corresponding private keys are generated 
by the Custodian in secret key generation ceremonies at secure 
locations inside faraday cages, which are enclosures used to block 
electromagnetic fields and thus mitigate against attacks. The Custodian 
uses quantum random number generators to generate the public and 
private key pairs.
    Once generated, private keys are encrypted, separated into 
``shards,'' and then further encrypted. After the key generation 
ceremony, all materials used to generate private keys, including 
computers, are destroyed. All key generation ceremonies are performed 
offline. No party other than the Custodian has access to the private 
key shards of the Trust, including the Trust itself.
Key Storage
    Private key shards are distributed geographically in secure vaults 
around the world, including in the United States. The locations of the 
secure vaults may change regularly and are kept confidential by the 
Custodian for security purposes.
    The ``Digital Asset Account'' is a segregated custody account 
controlled and secured by the Custodian to store private keys, which 
allows for the transfer of ownership or control of the Trust's Ether on 
the Trust's behalf. The Digital Asset Account uses offline storage, or 
``cold,'' mechanisms to secure the Trust's private keys. The term cold 
storage refers to a safeguarding method by which the private keys 
corresponding to digital assets are disconnected and/or deleted 
entirely from the internet. Cold storage of private keys may involve 
keeping such keys on a non-networked (or ``air-gapped'') computer or 
electronic device or storing the private keys on a storage device (for 
example, a USB thumb drive) or printed medium (for example, papyrus, 
paper, or a metallic object). A digital wallet may receive deposits of 
digital assets but may not send digital assets without use of the 
digital assets' corresponding private keys. In order to send digital 
assets from a digital wallet in which the private keys are kept in cold 
storage, either the private keys must be retrieved from cold storage 
and entered into an online, or ``hot,'' digital asset software program 
to sign the transaction, or the unsigned transaction must be 
transferred to the cold server in which the private keys are held for 
signature by the private keys and then transferred back to the online 
digital asset software

[[Page 46447]]

program. At that point, the user of the digital wallet can transfer its 
digital assets.
Security Procedures
    The Custodian is the custodian of the Trust's private keys (which, 
as noted above, facilitate the transfer of ownership or control of the 
Trust's Ether) in accordance with the terms and provisions of the 
custodian agreement by and between the Custodian, the Sponsor and the 
Trust (the ``Custodian Agreement''). Transfers from the Digital Asset 
Account require certain security procedures, including, but not limited 
to, multiple encrypted private key shards, usernames, passwords and 2-
step verification. Multiple private key shards held by the Custodian 
must be combined to reconstitute the private key to sign any 
transaction in order to transfer the Trust's assets. Private key shards 
are distributed geographically in secure vaults around the world, 
including in the United States.
    As a result, if any one secure vault is ever compromised, this 
event will have no impact on the ability of the Trust to access its 
assets, other than a possible delay in operations, while one or more of 
the other secure vaults is used instead. These security procedures are 
intended to remove single points of failure in the protection of the 
Trust's assets.
    Transfers of Ether to the Digital Asset Account will be available 
to the Trust once processed on the Blockchain.
    Subject to obtaining regulatory approval to operate a redemption 
program and authorization of the Sponsor, the process of accessing and 
withdrawing Ether from the Trust to redeem a Basket by an Authorized 
Participant \29\ will follow the same general procedure as transferring 
Ether to the Trust to create a Basket by an Authorized Participant, 
only in reverse.
---------------------------------------------------------------------------

    \29\ ``Authorized Participant'' has the meaning set forth in 
``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------

    The Sponsor will maintain ownership and control of the Trust's 
Ether in a manner consistent with good delivery requirements for spot 
commodity transactions.
Ether Value
Digital Asset Trading Platform Valuation
    According to the Annual Report, the value of Ether is determined by 
the value that various market participants place on Ether through their 
transactions. The most common means of determining the value of an 
Ether is by surveying one or more Digital Asset Trading Platforms where 
Ether is traded publicly and transparently (e.g., Coinbase, Kraken, 
LMAX Digital, and Crypto.com). Additionally, there are over-the-counter 
dealers or market makers that transact in Ether.
Digital Asset Trading Platform Public Market Data
    On each online Digital Asset Trading Platform, Ether is traded with 
publicly disclosed valuations for each executed trade, measured by one 
or more fiat currencies such as the U.S. dollar or euro, or by the 
widely used cryptocurrency Bitcoin. Over-the-counter dealers or market 
makers do not typically disclose their trade data.
    As of December 31, 2023, the Digital Asset Trading Platforms 
included in the Index were Coinbase, Kraken, LMAX Digital, and 
Crypto.com. As further described below, the Sponsor and the Trust 
reasonably believe each of these Digital Asset Trading Platforms are in 
material compliance with applicable U.S. federal and state licensing 
requirements and maintain practices and policies designed to comply 
with know-your-customer (``KYC'') and anti-money-laundering (``AML'') 
regulations.
    Coinbase: A U.S.-based trading platform registered as a money 
services business (``MSB'') with the U.S. Department of the Treasury's 
Financial Crimes Enforcement Network (``FinCEN'') and licensed as a 
virtual currency business under the New York State Department of 
Financial Services (``NYDFS'') BitLicense, as well as a money 
transmitter in various U.S. states.
    Crypto.com: A Singapore-based trading platform registered as an MSB 
with FinCEN and licensed as a money transmitter in various U.S. states. 
Crypto.com does not hold a BitLicense.
    Kraken: A U.S.-based trading platform registered as an MSB with 
FinCEN and licensed as a money transmitter in various U.S. states. 
Kraken does not hold a BitLicense.
    LMAX Digital: A U.K.-based trading platform registered as a broker 
with the Financial Conduct Authority. LMAX Digital does not hold a 
BitLicense.
    Currently, there are several Digital Asset Trading Platforms 
operating worldwide, and online Digital Asset Trading Platforms 
represent a substantial percentage of Ether buying and selling activity 
and provide the most data with respect to prevailing valuations of 
Ether. These trading platforms include established trading platforms 
such as those included in the Index, which provide a number of options 
for buying and selling Ether. The below table reflects the trading 
volume in Ether and market share \30\ of the Ether-U.S. dollar trading 
pairs of each of the Digital Asset Trading Platforms included in the 
Index as of December 31, 2023 (collectively, ``Constituent Trading 
Platforms''),\31\ using data reported by the Index Provider from 
December 14, 2017 to December 31, 2023:
---------------------------------------------------------------------------

    \30\ Market share is calculated using trading volume (in Ether) 
for certain Digital Asset Trading Platforms, including Coinbase, 
Kraken, LMAX Digital and Crypto.com, as well as certain other large 
U.S.-dollar denominated Digital Asset Trading Platforms that were 
not included in the Index as of December 31, 2023, including 
Bitstamp, Binance. US (data included from April 1, 2020), Bittrex 
(data included from July 31, 2018), Bitfinex, Bitflyer (data 
included from November 13, 2022), Cboe Digital (data included from 
October 1, 2020), Gemini, HitBTC (data included from June 13, 2019 
through March 31, 2020), itBit (data included from December 27, 
2018), OKCoin (data included from December 25, 2018) and FTX.US 
(data included from July 1, 2021 through November 12, 2022).
    \31\ On January 19, 2020, the Index Provider removed itBit due 
to a lack of trading volume and added LMAX Digital to the Index 
based on the trading platform meeting the liquidity thresholds as 
part of its scheduled quarterly review. On July 23, 2022, the Index 
Provider removed Bitstamp from the Index due to the trading 
platform's failure to meet the minimum liquidity requirement, and 
added FTX.US as a Constituent Trading Platform based on its 
satisfaction of the minimum liquidity requirement as part of its 
scheduled quarterly review. On November 10, 2022, the Index Provider 
removed FTX.US from the Index due to the trading platform's 
announcement that trading on the trading platform would be halted, 
which would impact FTX.US's ability to reliably publish trade prices 
and volume on a real-time basis through APIs, and did not add any 
Constituent Trading Platforms as part of its review. On January 28, 
2023, the Index Provider added Binance.US to the Index due to the 
trading platform meeting the minimum liquidity requirement, and did 
not remove any Constituent Trading Platforms as part of its 
quarterly review. On June 17, 2023, the Index Provider removed 
Binance.US from the Index due to Binance.US's announcement that the 
trading platform was suspending U.S. dollar (``USD'') deposits and 
withdrawals and planned to delist its USD trading pairs, and did not 
add any Constituent Trading Platforms as part of its review. On 
October 28, 2023, the Index Provider added Crypto.com to the Index 
due to the trading platform meeting the minimum liquidity 
requirement, and did not remove any Constituent Trading Platforms as 
part of its scheduled quarterly review.

[[Page 46448]]



------------------------------------------------------------------------
                                                                  Market
 Digital asset trading platforms included in the      Volume      share
          index as of December 31, 2023               (ether)      (%)
------------------------------------------------------------------------
Coinbase.........................................   416,006,668    34.75
Kraken...........................................   135,358,403    11.31
LMAX Digital.....................................    69,287,707     5.79
Crypto.com.......................................    14,750,030     1.23
                                                  ----------------------
    Total Ether-U.S. Dollar trading pair.........   635,402,808    53.08
------------------------------------------------------------------------

    The domicile, regulation, and legal compliance of the Digital Asset 
Trading Platforms included in the Index varies. Information regarding 
each Digital Asset Trading Platform may be found, where available, on 
the websites for such Digital Asset Trading Platforms, among other 
places.
The Index and the Index Price
    The Index is a U.S. dollar-denominated composite reference rate for 
the price of Ether. The Index is designed to (i) mitigate the effects 
of fraud, manipulation and other anomalous trading activity from 
impacting the Ether reference rate, (ii) provide a real-time, volume-
weighted fair value of Ether and (iii) appropriately handle and adjust 
for non-market related events.
    The Index Price is determined by the Index Provider through a 
process in which trade data is cleansed and compiled in such a manner 
as to algorithmically reduce the impact of anomalistic or manipulative 
trading. This is accomplished by adjusting the weight of each data 
input based on price deviation relative to the observable set, as well 
as recent and long-term trading volume at each venue relative to the 
observable set.
    The value of the Index is calculated and disseminated on a 24-hour 
basis and will be available on a continuous basis at https://www.coindesk.com/indices.
Constituent Trading Platform Selection
    According to the Annual Report, the Digital Asset Trading Platforms 
that are included in the Index are selected by the Index Provider 
utilizing a methodology that is guided by the International 
Organization of Securities Commissions (``IOSCO'') principles for 
financial benchmarks. For a trading platform to become a Constituent 
Trading Platform, it must satisfy the criteria listed below (the 
``Inclusion Criteria''):
     Sufficient USD liquidity relative to the size of the 
listed assets;
     No evidence in the past 12 months of trading restrictions 
on individuals or entities that would otherwise meet the trading 
platform's eligibility requirements to trade;
     No evidence in the past 12 months of undisclosed 
restrictions on deposits or withdrawals from user accounts;
     Real-time price discovery;
     Limited or no capital controls; \32\
---------------------------------------------------------------------------

    \32\ ``Capital controls'' in this context means governmental 
sanctions that would limit the movement of capital into, or out of, 
the jurisdiction in which such Digital Asset Trading Platforms 
operate.
---------------------------------------------------------------------------

     Transparent ownership including a publicly-owned ownership 
entity;
     Publicly available language and policies addressing legal 
and regulatory compliance in the U.S., including KYC (Know Your 
Customer), AML (Anti-Money Laundering) and other policies designed to 
comply with relevant regulations that might apply to it;
     Be a U.S.-domiciled trading platform or a non-U.S. 
domiciled trading platform that is able to service U.S. investors; and
     Offer programmatic spot trading of the trading pair \33\ 
and reliably publish trade prices and volumes on a real-time basis 
through Rest and Websocket APIs.
---------------------------------------------------------------------------

    \33\ Trading platforms with programmatic trading offer traders 
an application programming interface that permits trading by sending 
programmed commands to the trading platform.
---------------------------------------------------------------------------

    A Digital Asset Trading Platform is removed as a Constituent 
Trading Platform when it no longer satisfies the Inclusion Criteria. 
The Index Provider does not currently include data from over-the-
counter markets or derivatives platforms among the Constituent Trading 
Platforms. According to the Annual Report, over-the-counter data is not 
currently included because of the potential for trades to include a 
significant premium or discount paid for larger liquidity, which 
creates an uneven comparison relative to more active markets. There is 
also a higher potential for over-the-counter transactions to not be 
arms-length, and thus not be representative of a true market price. 
Ether derivative markets data, including Ether futures markets and 
perpetuals markets data, are also not currently included. While the 
Index Provider has no plans to include data from over-the-counter 
markets or derivative platforms at this time, the Index Provider will 
consider IOSCO principles for financial benchmarks, the management of 
trading venues of Ether derivatives and the aforementioned Inclusion 
Criteria when considering whether to include over-the-counter or 
derivative platform data in the future.
    The Index Provider and the Sponsor have entered into the index 
license agreement, dated as of February 1, 2022 (as amended, the 
``Index License Agreement''), governing the Sponsor's use of the Index 
Price.\34\ Pursuant to the terms of the Index License Agreement, the 
Index Provider may adjust the calculation methodology for the Index 
Price without notice to, or consent of, the Trust or its shareholders. 
The Index Provider may decide to change the calculation methodology to 
maintain the integrity of the Index Price calculation should it 
identify or become aware of previously unknown variables or issues with 
the existing methodology that it believes could materially impact its 
performance and/or reliability. The Index Provider has sole discretion 
over the determination of Index Price and may change the methodologies 
for determining the Index Price from time to time. Shareholders will be 
notified of any material changes to the calculation methodology or the 
Index Price in the Trust's current reports and will be notified of all 
other changes that the Sponsor considers significant in the Trust's 
periodic or current reports. The Sponsor will determine the materiality 
of any changes to the Index Price on a case-by-case basis, in 
consultation with external counsel.
---------------------------------------------------------------------------

    \34\ Upon entering into the Index License Agreement, the Sponsor 
and the Index Provider terminated the license agreement between the 
parties dated as of February 28, 2019.
---------------------------------------------------------------------------

    The Index Provider may change the trading venues that are used to 
calculate the Index or otherwise change the way in which the Index is 
calculated at any time. For example, the Index Provider has scheduled 
quarterly reviews in which it may add or remove Constituent Trading 
Platforms that satisfy or fail the Inclusion Criteria. The Index 
Provider does not have any obligation to consider the interests of the 
Sponsor, the Trust, the shareholders, or anyone else in

[[Page 46449]]

connection with such changes. While the Index Provider is not required 
to publicize or explain the changes or to alert the Sponsor to such 
changes, it has historically notified the Trust (and other subscribers 
to the Index) of any material changes to the Constituent Trading 
Platforms, including any additions or removals, contemporaneous with 
its issuance of press releases in connection with the same. The Sponsor 
will notify investors of any such material event by filing a current 
report on Form 8-K. Although the Index methodology is designed to 
operate without any manual intervention, rare events would justify 
manual intervention. Intervention of this kind would be in response to 
non-market-related events, such as the halting of deposits or 
withdrawals of funds on a Digital Asset Trading Platform, the 
unannounced closure of operations on a Digital Asset Trading Platform, 
insolvency or the compromise of user funds. In the event that such an 
intervention is necessary, the Index Provider would issue a public 
announcement through its website, API and other established 
communication channels with its clients.
Determination of the Index Price
    The Index applies an algorithm to the price of Ether on the 
Constituent Trading Platforms calculated on a per second basis over a 
24-hour period. The Index's algorithm is expected to reflect a four-
pronged methodology to calculate the Index Price from the Constituent 
Trading Platforms:
     Volume Weighting: Constituent Trading Platforms with 
greater liquidity receive a higher weighting in the Index, increasing 
the ability to execute against (i.e., replicate) the Index in the 
underlying spot markets.
     Price-Variance Weighting: The Index Price reflects data 
points that are discretely weighted in proportion to their variance 
from the rest of the Constituent Trading Platforms. As the price at a 
particular trading platform diverges from the prices at the rest of the 
Constituent Trading Platforms, its weight in the Index Price 
consequently decreases.
     Inactivity Adjustment: The Index Price algorithm penalizes 
stale activity from any given Constituent Trading Platform. When a 
Constituent Trading Platform does not have recent trading data, its 
weighting in the Index Price is gradually reduced until it is de-
weighted entirely. Similarly, once trading activity at a Constituent 
Trading Platform resumes, the corresponding weighting for that 
Constituent Trading Platform is gradually increased until it reaches 
the appropriate level.
     Manipulation Resistance: In order to mitigate the effects 
of wash trading and order book spoofing, the Index only includes 
executed trades in its calculation. Additionally, the Index only 
includes Constituent Trading Platforms that charge trading fees to its 
users in order to attach a real, quantifiable cost to any manipulation 
attempts.
    The Index Provider re-evaluates the weighting algorithm on a 
periodic basis, but maintains discretion to change the way in which an 
Index Price is calculated based on its periodic review or in extreme 
circumstances and does not make the exact methodology to calculate the 
Index Price publicly available. Nonetheless, the Sponsor believes that 
the Index is designed to limit exposure to trading or price distortion 
of any individual Digital Asset Trading Platform that experiences 
periods of unusual activity or limited liquidity by discounting, in 
real-time, anomalous price movements at individual Digital Asset 
Trading Platforms.
    The Sponsor believes the Index Provider's selection process for 
Constituent Trading Platforms as well as the methodology of the Index 
Price's algorithm provides a more accurate picture of Ether price 
movements than a simple average of Digital Asset Trading Platform spot 
prices, and that the weighting of Ether prices on the Constituent 
Trading Platforms limits the inclusion of data that is influenced by 
temporary price dislocations that may result from technical problems, 
limited liquidity or fraudulent activity elsewhere in the Ether spot 
market. By referencing multiple trading venues and weighting them based 
on trade activity, the Sponsor believes that the impact of any 
potential fraud, manipulation or anomalous trading activity occurring 
on any single venue is reduced.
    If the Index Price becomes unavailable, or if the Sponsor 
determines in good faith that such Index Price does not reflect an 
accurate price for Ether, then the Sponsor will, on a best efforts 
basis, contact the Index Provider to obtain the Index Price directly 
from the Index Provider. If after such contact such Index Price remains 
unavailable or the Sponsor continues to believe in good faith that such 
Index Price does not reflect an accurate price for Ether, then the 
Sponsor will employ a cascading set of rules to determine the Index 
Price, as described below in ``Determination of the Index Price When 
Index Price is Unavailable.''
    The Trust values its Ether for operational purposes by reference to 
the Index Price. The Index Price is the value of an Ether as 
represented by the Index, calculated at 4:00 p.m., New York time, on 
each business day.
Illustrative Example
    For the purposes of illustration, outlined below are examples of 
how the attributes that impact weighting and adjustments in the 
aforementioned methodology may be utilized to generate the Index Price 
for a digital asset. For example, Constituent Trading Platforms used to 
calculate the Index Price of the digital asset may include trading 
platforms such as Coinbase, Kraken, LMAX Digital, and Crypto.com.
    The Index Price algorithm, as described above, accounts for 
manipulation at the outset by only including data from executed trades 
on Constituent Trading Platforms that charge trading fees. Then, the 
below-listed elements may impact the weighting of the Constituent 
Trading Platforms on the Index Price as follows:
     Volume Weighting: Each Constituent Trading Platform will 
be weighted to appropriately reflect the trading volume share of the 
Constituent Trading Platform relative to all the Constituent Trading 
Platforms during this same period. For example, an average hourly 
weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase, Kraken, 
LMAX Digital, and Crypto.com, respectively, would represent each 
Constituent Trading Platform's share of trading volume during the same 
period.
     Inactivity Adjustment: Assume that a Constituent Trading 
Platform represented a 14% weighting on the Index Price of the digital 
asset, which is based on the per-second calculations of its trading 
volume and price-variance relative to the cohort of Constituent Trading 
Platforms included in such Index, and then went offline for 
approximately two hours. The index algorithm would automatically 
recognize inactivity and start de-weighting the Constituent Trading 
Platform at the 3-minute mark and continue to do so over a 7-minute 
period until its influence was effectively zero, 10 minutes after 
becoming inactive. As soon as trading activity resumed at the 
Constituent Trading Platform, the index algorithm would re-weight it to 
the appropriate weighting based on trading volume and price-variance 
relative to the cohort of Constituent Trading Platforms included in the 
Index. Due to the period of inactivity, it would re-weight the 
Constituent Trading Platform activity to a weight lower than its 
original weighting--for example, to 12%.

[[Page 46450]]

     Price-Variance Weighting: The price-variance weighting 
adjustment is a relative measure of each Constituent Trading Platform 
versus the cohort of Constituent Trading Platforms. The further the 
price at a Constituent Trading Platform is from the mean price of the 
cohort, the less influence that trading platform's price will have on 
the algorithm that produces the Index Price, as the trading platform 
data is discretely weighted in proportion to their variance from the 
rest of the trading platforms on a per-second basis and there is no 
minimum threshold the variance must meet for this adjustment to take 
place. For example, assume that for a one-hour period, the digital 
asset's execution prices on one Constituent Trading Platform were 
trading more than 7% higher than the average execution prices on 
another Constituent Trading Platform. The algorithm will automatically 
detect the anomaly (price variance) and reduce that specific 
Constituent Trading Platform's weighting during that one-hour period, 
ensuring a reliable spot reference price that is unaffected by the 
localized event and that is reflective of broader market activity.
Determination of the Index Price When Index Price Is Unavailable
    The Sponsor uses the following cascading set of rules to calculate 
the Index Price when the Index Price is unavailable.\35\ For the 
avoidance of doubt, the Sponsor will employ the below rules 
sequentially and in the order as presented below, should one or more 
specific rule(s) fail:
---------------------------------------------------------------------------

    \35\ The Sponsor updated these rules on January 11, 2022.
---------------------------------------------------------------------------

    1. Index Price = The price set by the Index as of 4:00 p.m., New 
York time, on the valuation date.\36\ If the Index becomes unavailable, 
or if the Sponsor determines in good faith that the Index does not 
reflect an accurate price, then the Sponsor will, on a best efforts 
basis, contact the Index Provider to obtain the Index Price directly 
from the Index Provider. If after such contact the Index remains 
unavailable or the Sponsor continues to believe in good faith that the 
Index does not reflect an accurate price, then the Sponsor will employ 
the next rule to determine the Index Price. There are no predefined 
criteria to make a good faith assessment and it will be made by the 
Sponsor in its sole discretion.
---------------------------------------------------------------------------

    \36\ The valuation date is any day for which the value of the 
Ether in the Trust may be calculated utilizing the Index Price.
---------------------------------------------------------------------------

    2. Index Price = The price set by Coin Metrics Real-Time Rate (the 
``Secondary Index'') as of 4:00 p.m., New York time, on the valuation 
date (the ``Secondary Index Price''). The Secondary Index Price is a 
real-time reference rate price, calculated using trade data from 
constituent markets selected by Coin Metrics, Inc. (the ``Secondary 
Index Provider''). The Secondary Index Price is calculated by applying 
weighted-median techniques to such trade data where half the weight is 
derived from the trading volume on each constituent market and half is 
derived from inverse price variance, where a constituent market with 
high price variance as a result of outliers or market anomalies 
compared to other constituent markets is assigned a smaller weight. If 
the Secondary Index becomes unavailable, or if the Sponsor determines 
in good faith that the Secondary Index does not reflect an accurate 
price, then the Sponsor will, on a best efforts basis, contact the 
Secondary Index Provider to obtain the Secondary Index Price directly 
from the Secondary Index Provider. If after such contact the Secondary 
Index remains unavailable or the Sponsor continues to believe in good 
faith that the Secondary Index does not reflect an accurate price, then 
the Sponsor will employ the next rule to determine the Index Price. 
There are no predefined criteria to make a good faith assessment and it 
will be made by the Sponsor in its sole discretion.
    3. Index Price = The price set by the Trust's principal market (as 
defined in the Annual Report) (the ``Tertiary Pricing Option'') as of 
4:00 p.m., New York time, on the valuation date. The Tertiary Pricing 
Option is a spot price derived from the principal market's public data 
feed that is believed to be consistently publishing pricing information 
as of 4:00 p.m., New York time, and is provided to the Sponsor via an 
application programming interface. If the Tertiary Pricing Option 
becomes unavailable, or if the Sponsor determines in good faith that 
the Tertiary Pricing Option does not reflect an accurate price, then 
the Sponsor will, on a best efforts basis, contact the Tertiary Pricing 
Provider to obtain the Tertiary Pricing Option directly from the 
Tertiary Pricing Provider. If after such contact the Tertiary Pricing 
Option remains unavailable after such contact or the Sponsor continues 
to believe in good faith that the Tertiary Pricing Option does not 
reflect an accurate price, then the Sponsor will employ the next rule 
to determine the Index Price. There are no predefined criteria to make 
a good faith assessment and it will be made by the Sponsor in its sole 
discretion.
    4. Index Price = The Sponsor will use its best judgment to 
determine a good faith estimate of the Index Price. There are no 
predefined criteria to make a good faith assessment and it will be made 
by the Sponsor in its sole discretion.
    In the event of a fork, the Index Provider may calculate the Index 
Price based on a digital asset that the Sponsor does not believe to be 
an appropriate asset of the Trust (i.e., a digital asset other than 
Ether).\37\ In this event, the Sponsor has full discretion to use a 
different index provider or calculate the Index Price itself using its 
best judgment. In such an event, the Exchange will submit a proposed 
rule filing to contemplate the assets that would subsequently be held 
by the Trust.
---------------------------------------------------------------------------

    \37\ According to the Annual Report, when a modification is 
introduced and a substantial majority of users and validators 
consent to the modification, the change is implemented and the 
network remains uninterrupted. However, if less than a substantial 
majority of users and validators consent to the proposed 
modification, and the modification is not compatible with the 
software prior to its modification, the consequence would be what is 
known as a ``hard fork'' of the Ethereum Network, with one group 
running the pre-modified software and the other running the modified 
software. The effect of such a fork would be the existence of two 
versions of Ether running in parallel, yet lacking 
interchangeability. For example, in July 2016, Ethereum ``forked'' 
into Ethereum and a new digital asset, Ethereum Classic, as a result 
of the Ethereum Network community's response to a significant 
security breach in which an anonymous hacker exploited a smart 
contract running on the Ethereum Network to syphon approximately $60 
million of Ether held by the DAO, a distributed autonomous 
organization, into a segregated account. In response to the hack, 
most participants in the Ethereum community elected to adopt a 
``fork'' that effectively reversed the hack. However, a minority of 
users continued to develop the original blockchain, with the digital 
asset on that blockchain now referred to as Ethereum Classic, or 
ETC. ETC now trades on several Digital Asset Trading Platforms. In 
the event of a hard fork of the Ethereum Network, the Sponsor will, 
if permitted by the terms of the Trust Agreement, use its discretion 
to determine, in good faith, which peer-to-peer network, among a 
group of incompatible forks of the Ethereum Network, is generally 
accepted as the Ethereum Network and should therefore be considered 
the appropriate network for the Trust's purposes. The Sponsor will 
base its determination on a variety of then relevant factors, 
including, but not limited to, the Sponsor's beliefs regarding 
expectations of the core developers of Ether, users, services, 
businesses, miners, and other constituencies, as well as the actual 
continued acceptance of, validating power on, and community 
engagement with, the Ethereum Network. There is no guarantee that 
the Sponsor will choose the digital asset that is ultimately the 
most valuable fork, and the Sponsor's decision may adversely affect 
the value of the Shares as a result. The Sponsor may also disagree 
with shareholders, security vendors, and the Index Provider on what 
is generally accepted as Ether and should therefore be considered 
``Ether'' for the Trust's purposes, which may also adversely affect 
the value of the Shares as a result.
---------------------------------------------------------------------------

    The Sponsor may, in its sole discretion, select a different index 
provider, select a different index price provided by the Index 
Provider,

[[Page 46451]]

calculate the Index Price by using the cascading set of rules set forth 
above, or change the cascading set of rules set forth above at any 
time.\38\
---------------------------------------------------------------------------

    \38\ The Sponsor will provide notice of any such changes in the 
Trust's periodic or current reports and, if the Sponsor makes such a 
change other than on an ad hoc or temporary basis, will file a 
proposed rule change with the Commission.
---------------------------------------------------------------------------

The Impact of the Approval of Ether Futures ETFs on Spot Ether ETPs 
Like the Trust
    On October 2, 2023, the first Ether-based exchange-traded funds 
(``ETFs'') were approved by the Commission for trading.\39\ The ETFs 
hold Ether futures contracts that trade on the Chicago Mercantile 
Exchange (``CME'') and settle using the CME CF Ethereum Reference Rate 
(``ERR''), which is priced based on the spot Ether markets Coinbase, 
Kraken, LMAX Digital, Bitstamp, Gemini, and itBit, essentially the same 
spot markets that are included in the Index that the Trust uses to 
value its Ether holdings. Given that the Commission has approved ETFs 
that offer exposure to CME Ether futures, which themselves are priced 
based on the underlying spot Ether market, the Sponsor believes that 
the Commission must also approve ETPs that offer exposure to spot 
Ether, like the Trust.
---------------------------------------------------------------------------

    \39\ These ETFs included the Bitwise Ethereum Strategy ETF, 
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether 
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin & 
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy 
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum 
Strategy ETF, and Volatility Shares Ethereum Strategy ETF.
---------------------------------------------------------------------------

    In the context of other digital asset-based ETF and ETP proposals 
for Bitcoin, the Commission has sought to justify treating futures-
based ETFs differently from spot-based ETPs because of (i) distinctions 
between the regulations under which the two products would be 
registered (the Investment Company Act of 1940 (the `` '40 Act'') for 
digital-asset futures ETFs and '33 Act for spot digital-asset ETPs) and 
(ii) the existence of regulation and surveillance-sharing over the CME 
digital-asset futures market through the Intermarket Surveillance Group 
(``ISG''), as compared to the spot market for those digital assets.\40\ 
The Sponsor believes that this reasoning is unsupported for the 
following reasons.
---------------------------------------------------------------------------

    \40\ See, e.g., Chair Gary Gensler Public Statement, ``Remarks 
Before the Aspen Security Forum,'' (August 3, 2021), stating that 
the Chair looked forward to the Commission's review of Bitcoin-based 
ETF proposals registered under the '40 Act, ``particularly if those 
are limited to [the] CME-traded Bitcoin futures,'' noting the 
``significant investor protection'' offered by the '40 Act, https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03; Securities Exchange Act Release No. 93559 (November 12, 
2021), 86 FR 64539 (November 18, 2021) (SR-CboeBZX-2021-019) (Order 
Disapproving a Proposed Rule Change to List and Trade Shares of the 
VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares) (``VanEck Order'') (denying the first spot bitcoin ETP 
registered under the '33 Act following the first approval of a 
bitcoin futures ETF registered under the `40 Act, noting the 
differences in the standard of review that applies to such 
products); Securities Exchange Act Release No. 94620 (April 6, 
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin 
Futures Fund under NYSE ARCA Rule 8.200-E, Commentary .02 (Trust 
Issued Receipts)) (``Teucrium Order'') (approving the first bitcoin 
futures ETP registered under the '33 Act, stating that ``With 
respect to the proposed ETP, the underlying bitcoin assets are CME 
bitcoin futures contracts. The relevant analysis, therefore, is 
whether Arca has a comprehensive surveillance sharing agreement with 
a regulated market of significant size related to CME bitcoin 
futures contracts. As discussed below, taking into consideration the 
direct relationship between the regulated market with which Arca has 
a surveillance-sharing agreement and the assets held by the proposed 
ETP, as well as developments with respect to the CME bitcoin futures 
market--including the launch of exchange-traded funds registered 
under the Investment Company Act of 1940 (``1940 Act'') that hold 
CME bitcoin futures (``Bitcoin Futures ETFs'')--the Commission 
concludes that the Exchange has the requisite surveillance-sharing 
agreement.'').
---------------------------------------------------------------------------

The '40 Act Offers no More Investor Protections Than the '33 Act in the 
Context of Ether-Based ETF and ETP Proposals
    While the '40 Act has certain added investor protections that the 
'33 Act does not require, these protections do not seek to allay harms 
arising from underlying assets or markets of assets that ETFs hold, 
such as the potential for fraud or manipulation in such markets. In 
other words, the Sponsor does not believe that the application of the 
'40 Act supports the purported justifications the Commission has made 
in denying other spot digital asset ETPs. Instead, the '40 Act seeks to 
remedy certain abusive practices in the management of investment 
companies such as ETFs, and thus places certain restrictions on ETFs 
and ETF sponsors. The '40 Act explicitly lists out the types of abuses 
it seeks to prevent, and places certain restrictions related to 
accounting, borrowing, custody, fees, and independent boards, among 
others. Notably, none of these restrictions address an ETF's underlying 
assets, whether Ether futures or spot Ether, or the markets from which 
such assets' pricing is derived, whether the Ether futures market or 
spot Ether markets. As a result, the Sponsor believes that the 
distinction between registration of Ether futures ETFs under the '40 
Act and the registration of spot Ether ETPs under the '33 Act is one 
without a difference in the context of Ether-based ETP proposals.
Surveillance-Sharing With the CME Ether Futures Market Is Sufficient To 
Protect Against Fraud and Manipulation in the Underlying Spot Ether 
Market
    The Sponsor believes that, because the CME Ether futures market is 
priced based on the underlying spot Ether market, any fraud or 
manipulation in the spot market would necessarily affect the price of 
CME Ether futures, thereby affecting the net asset value of an ETP 
holding spot Ether or an ETF holding CME Ether futures, as well as the 
price investors pay for such product's shares.\41\ The Sponsor also 
believes that a correlation analysis conducted by Coinbase, Inc. 
further corroborates this conclusion. Coinbase, Inc.'s analysis found 
that the CME Ether futures market has been consistently and highly 
correlated with the spot Ether market throughout the past (nearly) 
three years, with an even greater correlation than that cited by the 
Commission with respect to the CME Bitcoin futures and spot Bitcoin 
market in approving proposed rule changes to list and trade spot 
Bitcoin-based ETPs.\42\
---------------------------------------------------------------------------

    \41\ See Grayscale Investments, LLC v. Securities and Exchange 
Commission (``Grayscale v. SEC''), No. 22-1142, Brief of Petitioner 
Grayscale Investments, LLC (October 11, 2022) (advancing the same 
argument regarding CME Bitcoin futures and the underlying spot 
Bitcoin market).
    \42\ See Comment Letter from Paul Grewal, Chief Legal Officer, 
Coinbase, Inc. (February 21, 2024), available at: https://www.sec.gov/comments/sr-nysearca-2023-70/srnysearca202370-432799-1074283.pdf (noting that ``the correlation between the CME ETH 
futures market and the spot ETH market for the full sample period is 
99.3% using data at an hourly interval, 96.2% using data at a five-
minute interval, and 84.7% using data at a one-minute interval''); 
Securities Exchange Act Release No. 34-99306 (January 10, 2024), 89 
FR 3008 at 3010-11 (January 17, 2024) (SR-NYSEARCA-2021-90; SR-
NYSEARCA-2023-44; SRNYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ-
2023-019; SR-CboeBZX-2023028; SR-CboeBZX-2023-038; SR-CboeBZX-2023-
040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; SR-CboeBZX-2023-072) 
(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).
---------------------------------------------------------------------------

    Given the similarity between an ETP holding spot Ether and an ETF 
holding CME Ether futures, the Sponsor believes that it must be the 
case that CME surveillance can either detect spot-market fraud that 
affects both futures ETFs and spot ETPs, or that such surveillance 
cannot do so for either type of product. Having approved CME Ether 
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

[[Page 46452]]

the Sponsor thus believes that it must also approve spot Ether ETPs on 
that basis.
* * * * *
    In summary, the Sponsor believes that the distinctions between the 
'40 Act and the '33 Act, and the surveillance-sharing available for the 
CME Ether futures market versus the spot Ether market, are not 
meaningful in the context of Ether-based ETF and ETP proposals, and 
that such reasoning cannot be a basis for the Commission treating Ether 
futures ETFs differently from spot Ether ETPs like the Trust. The 
Sponsor believes that the Commission's approval of CME Ether futures 
ETFs means it must also approve spot Ether ETPs like the Trust.
The Structure and Operation of the Trust Protects Investors and 
Satisfies Commission Requirements for Ether-Based Exchange Traded 
Products
    Even if the Commission had not approved CME Ether futures ETFs, the 
Sponsor still believes the Commission should approve the listing and 
trading of Shares of the Trust. In the context of prior spot digital 
asset ETP proposal disapproval orders for Bitcoin, the Commission 
expressed concerns about the underlying Digital Asset Market due to the 
potential for fraud and manipulation and has outlined the reasons why 
such ETP proposals have been unable to satisfy these concerns.\43\ For 
purposes of the Trust's Ether-based ETP proposal, the Sponsor 
anticipates that the Commission may have the same concerns and 
addresses each of these in turn below.
---------------------------------------------------------------------------

    \43\ See Securities Exchange Act Release Nos. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order 
Setting Aside Action by Delegated Authority and Disapproving a 
Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List 
and Trade Shares of the Winklevoss Bitcoin Trust) (the ``Winklevoss 
Order''); 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019) 
(SR-NYSEArca-2019-01) (Order Disapproving a Proposed Rule Change, as 
Modified by Amendment No. 1, Relating to the Listing and Trading of 
Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-
E) (the ``Bitwise Order''); 88284 (February 26, 2020), 85 FR 12595 
(March 3, 2020) (SR-NYSEArca-2019-39) (Order Disapproving a Proposed 
Rule Change, as Modified by Amendment No. 1, to Amend NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares) and to List and Trade Shares 
of the United States Bitcoin and Treasury Investment Trust Under 
NYSE Arca Rule 8.201-E) (the ``Wilshire Phoenix Order''); 83904 
(August 22, 2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017-
139) (Order Disapproving a Proposed Rule Change to List and Trade 
the Shares of the ProShares Bitcoin ETF and the ProShares Short 
Bitcoin ETF) (the ``ProShares Order''); 83912 (August 22, 2018), 83 
FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02) (Order Disapproving 
a Proposed Rule Change Relating to Listing and Trading of the 
Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X 
Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily 
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares 
Under NYSE Arca Rule 8.200-E) (the ``Direxion Order''); 83913 
(August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-2018-
01) (Order Disapproving a Proposed Rule Change to List and Trade the 
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short 
Bitcoin ETF) (the ``GraniteShares Order'') (together, the ``Prior 
Spot Digital Asset ETP Disapproval Orders'').
---------------------------------------------------------------------------

    In the Prior Spot Digital Asset ETP Disapproval Orders, the 
Commission outlined that a proposal relating to a digital asset-based 
ETP could satisfy its concerns regarding potential for fraud and 
manipulation by demonstrating:
    (1) Inherent Resistance to Fraud and Manipulation: that the 
underlying commodity market is inherently resistant to fraud and 
manipulation;
    (2) Other Means to Prevent Fraud and Manipulation: that there are 
other means to prevent fraudulent and manipulative acts and practices 
that are sufficient; or
    (3) Surveillance Sharing: that the listing exchange has entered 
into a surveillance sharing agreement with a regulated market of 
significant size relating to the underlying or reference assets.
    As described below, the Sponsor believes the structure and 
operation of the Trust are designed to prevent fraudulent and 
manipulative acts and practices, to protect investors and the public 
interest, and to respond to the specific concerns that the Commission 
may have with respect to potential fraud and manipulation in the 
context of an Ether-based ETP.
How the Trust Meets Standards in the Prior Spot Digital Asset ETP 
Disapproval Orders
1. Resistance to or Prevention of Fraud and Manipulation
    In the Prior Spot Digital Asset ETP Disapproval Orders, the 
Commission disagreed with the proposition that a digital asset's 
fungibility, transportability and exchange tradability combine to 
provide unique protections against, and allow such digital asset to be 
uniquely resistant to, attempts at price manipulation. The Commission 
reached its conclusion based on concessions by one issuer that 95% of 
the reported trading in the digital asset, Bitcoin, is ``fake'' or non-
economic, effectively admitting that the properties of Bitcoin do not 
make it inherently resistant to manipulation. Such issuer's concessions 
were further compounded by evidence of potential and actual fraud and 
manipulation in the historical trading of Bitcoin on certain 
marketplaces such as (1) ``wash'' trading, (2) trading based on 
material, non-public information, including the dissemination of false 
and misleading information, (3) manipulative activity involving Tether, 
and (4) fraud and manipulation.\44\
---------------------------------------------------------------------------

    \44\ See Bitwise Order, 84 FR at 55383 (discussing analysis of 
the Bitcoin spot market that asserts that 95% of the spot market is 
dominated by fake and non-economic activity, such as wash trades), 
55391 (discussing possible sources of fraud and manipulation in the 
bitcoin spot market). See also Winklevoss Order, 83 FR at 37585-86 
(discussing pending litigation against a Bitcoin trading platform 
for fraudulent conduct relating to Tether); Bitwise Order, 84 FR at 
55391 n.140, 55402 & n.331 (same); Winklevoss Order, 83 FR at 37584-
86 (discussing potential types of manipulation in the Bitcoin spot 
market). The Commission has also noted that fraud and manipulation 
in the Bitcoin spot market could persist for a significant duration. 
See, e.g., Bitwise Order, 84 FR at 55405 & n.379.
---------------------------------------------------------------------------

    The Sponsor acknowledges the possibility that fraud and 
manipulation may exist in commodity markets and that digital asset 
trading, such as Ether, on any given trading platform may be no more 
uniquely resistant to fraud and manipulation than other commodity 
markets.\45\ However, the Sponsor believes that the fundamental 
features of digital assets, including fungibility, transportability and 
exchange tradability offer novel protections beyond those that exist in 
traditional commodity markets or equity markets when combined with 
other means, as discussed further below.
---------------------------------------------------------------------------

    \45\ See generally Bitwise Order.
---------------------------------------------------------------------------

2. Other Means To Prevent Fraud and Manipulation
    The Commission has recognized that a listing exchange could 
demonstrate that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement.\46\ In evaluating the 
effectiveness of this type of resistance, the Commission does not apply 
a ``cannot be manipulated'' standard. Instead, the Commission requires 
that such resistance to fraud and manipulation be novel and beyond 
those protections that exist in traditional commodity markets or equity 
markets for which the Commission has long required surveillance-sharing 
agreements in the context of listing derivative securities 
products.\47\
---------------------------------------------------------------------------

    \46\ See Winklevoss Order, 84 FR at 37580, 37582-91; Bitwise 
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at 
12597.
    \47\ See Winklevoss Order, 84 FR at 37582; Wilshire Phoenix 
Order, 85 FR at 12597.
---------------------------------------------------------------------------

    The Sponsor believes the Index represents a novel means to prevent 
fraud and manipulation from impacting a reference price for Ether and 
that it offers protections beyond those that exist in traditional 
commodity markets or equity markets. The Index operates materially 
similarly to CoinDesk Bitcoin

[[Page 46453]]

Price Index (XBX). Specifically, digital assets, such as Ether, are 
novel and exist outside traditional commodity markets. It therefore 
stands to reason that the methods by which they trade will be novel and 
that the market for digital assets like Ether will have different 
attributes than traditional commodity markets. Digital assets like 
Ether were only introduced within the past decade, twenty years after 
the first U.S. ETFs were offered \48\ and 150 years after the first 
futures were offered.\49\ In contrast to older commodities such as 
gold, silver, platinum, palladium or copper, which the Commission has 
noted all had at least one significant, regulated market for trading 
futures on the underlying commodity at the time commodity trust ETPs 
were approved for listing and trading, the first trading in digital 
assets like Ether took place entirely in an open, transparent and 
online setting where other commodities cannot trade.
---------------------------------------------------------------------------

    \48\ SEC, ``Investor Bulletin: Exchange-Traded Funds (ETFs),'' 
August 2012, https://www.sec.gov/investor/alerts/etfs.pdf.
    \49\ Commodity Futures Trading Commission (``CFTC''), ``History 
of the CFTC,'' https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html.
---------------------------------------------------------------------------

    The Trust has priced its Shares consistently for more than six 
years based on the Index. The Sponsor believes the Trust's use of the 
Index specifically addresses the Commission's concerns in that the 
Index serves as an alternative means to prevent fraud and manipulation. 
Specifically, the Index can (i) mitigate the effects of fraud, 
manipulation and other anomalous trading activity on the Ether 
reference rate, (ii) provide a real-time, volume-weighted fair value of 
Ether and (iii) appropriately handle and adjust for non-market related 
events.
    As described in more detail below, the Sponsor believes that the 
Index accomplishes those objectives in the following ways:
    1. The Index tracks the Digital Asset Trading Platform Market price 
through trading activity at ``U.S.-Compliant Trading Platform''; \50\
---------------------------------------------------------------------------

    \50\ ``U.S.-Compliant Trading Platforms'' are trading platforms 
in the Digital Asset Trading Platform Market that are compliant with 
applicable U.S. federal and state licensing requirements and 
practices regarding AML and KYC regulations. All Constituent Trading 
Platforms are U.S.-Compliant Trading Platforms. ``Non-U.S.-Compliant 
Trading Platforms'' are all other trading platforms in the Digital 
Asset Trading Platform Market. As of December 31, 2023, the U.S.-
Compliant Trading Platforms that the Index Provider considered for 
inclusion in the Index were Coinbase, Kraken, LMAX Digital and 
Crypto.com.
    From these U.S.-Compliant Trading Platforms, the Index Provider 
then applies additional Inclusion Criteria to determine the 
Constituent Trading Platforms.
---------------------------------------------------------------------------

    2. The Index mitigates the impact of instances of fraud, 
manipulation and other anomalous trading activity in real-time through 
systematic adjustments;
    3. The Index is constructed and maintained by an expert third-party 
index provider, allowing for prudent handling of non-market-related 
events; and
    4. The Index mitigates the impact of instances of fraud, 
manipulation and other anomalous trading activity concentrated on any 
one specific trading platform through a cross-trading platform 
composite index rate.
    1. The Index tracks the Digital Asset Trading Platform Market price 
through trading activity at ``U.S.-Compliant Trading Platforms''.
    To reduce the risk of fraud, manipulation, and other anomalous 
trading activity from impacting the Index, only U.S.-Compliant Trading 
Platforms are eligible to be included in the Index.
    The Index maintains a minimum number of three trading platforms and 
a maximum number of five trading platforms to track the Digital Asset 
Trading Platform Market while offering replicability for traders and 
market makers.\51\
---------------------------------------------------------------------------

    \51\ According to the Sponsor, the more trading platforms 
included in the Index, the more ability there is for traders and 
market makers to trade against the Index by arbitraging price 
differences. For example, in the event of variances between Ether 
prices on Constituent Trading Platforms and non-Constituent Trading 
Platforms, arbitrage trading opportunities would exist. These 
discrepancies generally consolidate over time, as price differences 
across trading platforms are realized and capitalized upon by 
traders and market makers.
---------------------------------------------------------------------------

    U.S.-Compliant Trading Platforms possess safeguards that protect 
against fraud and manipulation. For example, U.S.-Compliant Trading 
Platforms regulated by the NYDFS under the BitLicense program have 
regulatory requirements to implement measures designed to effectively 
detect, prevent, and respond to fraud, attempted fraud, market 
manipulation, and similar wrongdoing, and to monitor, control, 
investigate and report back to the NYDFS regarding any wrongdoing.\52\ 
These trading platforms also have the following obligations: \53\
---------------------------------------------------------------------------

    \52\ See, e.g., ``DFS Takes Action to Deter Fraud and 
Manipulation in Virtual Currency Markets,'' available at: https://www.dfs.ny.gov/about/press/pr1802071.htm.
    \53\ See ``New York's Final ``BitLicense'' Rule: Overview and 
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk, 
available at: https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf.
---------------------------------------------------------------------------

     Submission of audited financial statements including 
income statements, statements of assets/liabilities, insurance, and 
banking;
     Compliance with capitalization requirements set at NYDFS's 
discretion;
     Prohibitions against the sale or encumbrance to protect 
full reserves of custodian assets;
     Fingerprints and photographs of employees with access to 
customer funds;
     Retention of a qualified Chief Information Security 
Officer and annual penetration testing/audits;
     Documented business continuity and disaster recovery plan, 
independently tested annually; and
     Participation in an independent exam by NYDFS.
    Other U.S.-Compliant Trading Platforms have voluntarily implemented 
measures to protect against common forms of market manipulation.\54\
---------------------------------------------------------------------------

    \54\ As of the date of this filing, one of the four Constituent 
Trading Platforms, Coinbase, is regulated by NYDFS.
---------------------------------------------------------------------------

    Furthermore, all U.S.-Compliant Trading Platforms are considered 
MSBs that are subject to FinCEN's federal and state reporting 
requirements that provide additional safeguards. For example, 
unscrupulous traders may be less likely to engage in fraudulent or 
manipulative acts and practices on trading platforms that (1) report 
suspicious activity to FinCEN as money services businesses, (2) report 
to state regulators as money transmitters, and/or (3) require customer 
identification through KYC procedures. U.S.-Compliant Trading Platforms 
are required to: \55\
---------------------------------------------------------------------------

    \55\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsarequirements-msbs.
---------------------------------------------------------------------------

     Identify people with ownership stakes or controlling roles 
in the MSB;
     Establish a formal Anti-Money Laundering (AML) policy in 
place with documentation, training, independent review, and a named 
compliance officer;
     Implement strict customer identification and verification 
policies and procedures;
     File Suspicious Activity Reports (SARs) for suspicious 
customer transactions;
     File Currency Transaction Reports (CTRs) for cash-in or 
cash-out transactions greater than $10,000; and
     Maintain a five-year record of currency exchanges greater 
than $1,000 and money transfers greater than $3,000.
    Lastly, because of Ether's classification as a commodity, the CFTC 
has authority to police fraud and manipulation on U.S.-Compliant 
Trading Platforms.\56\
---------------------------------------------------------------------------

    \56\ ``U.S. CFTC Chief Behnam Reinforces View of Ether as 
Commodity,'' CoinDesk (Mar. 28, 2023), https://www.coindesk.com/policy/2023/03/28/us-cftc-chief-behnam-reinforces-view-of-ether-as-commodity/; CME Group, https://www.cmegroup.com/markets/cryptocurrencies/ether/ether.html?gad=1&gclid=EAIaIQobChMI44KBmu7ygAMVavvjBx2P4g5yEAAYASAAEgJSZfD_BwE&gclsrc=aw.ds.

---------------------------------------------------------------------------

[[Page 46454]]

    The Sponsor acknowledges that there are substantial differences 
between FinCEN and New York state regulations and the Commission's 
regulation of the national securities exchanges.\57\ The Sponsor does 
not believe the inclusion of U.S.-Compliant Trading Platforms is in and 
of itself sufficient to prove that the Index is an alternative means to 
prevent fraud and manipulation such that surveillance sharing 
agreements are not required, but does believe that the inclusion of 
only U.S.-Compliant Trading Platforms in the Index is one significant 
way in which the Index is protected from the potential impacts of fraud 
and manipulation.
---------------------------------------------------------------------------

    \57\ See Bitwise Order, 84 FR at 55392; Wilshire Phoenix Order, 
85 FR at 12603.
---------------------------------------------------------------------------

    2. The Index mitigates the impact of instances of fraud, 
manipulation, and other anomalous trading activity in real-time through 
systematic adjustments.
    The Index is calculated once every second according to a systematic 
methodology that relies on observed trading activity on the Constituent 
Trading Platforms. While the precise methodology underlying the Index 
is currently proprietary, the key elements of the Index are outlined 
below:
     Volume Weighting: Constituent Trading Platforms with 
greater liquidity receive a higher weighting in the Index, increasing 
the ability to execute against (i.e., replicate) the Index in the 
underlying spot markets.
     Price-Variance Weighting: The Index reflects data points 
that are discretely weighted in proportion to their variance from the 
rest of the Constituent Trading Platforms. As the price at a 
Constituent Trading Platform diverges from the prices at the rest of 
the Constituent Trading Platforms, its weight in the Index consequently 
decreases.
     Inactivity Adjustment: The Index algorithm penalizes stale 
activity from any given Constituent Trading Platform. When a 
Constituent Trading Platform does not have recent trading data, its 
weighting in the Index is gradually reduced, until it is de-weighted 
entirely. Similarly, once trading activity at the Constituent Trading 
Platform resumes, the corresponding weighting for that Constituent 
Trading Platform is gradually increased until it reaches the 
appropriate level.
     Manipulation Resistance: In order to mitigate the effects 
of wash trading and order book spoofing, the Index only includes 
executed trades in its calculation. Additionally, the Index only 
includes Constituent Trading Platforms that charge trading fees to its 
users in order to attach a real, quantifiable cost to any manipulation 
attempts.
    3. The Index is constructed and maintained by an expert third-party 
index provider, allowing for prudent handling of non-market-related 
events.
    The Index Provider reviews and periodically updates which trading 
platforms are included in the Index by utilizing a methodology that is 
guided by the IOSCO principles for financial benchmarks.
    According to the Index methodology, for a trading platform to 
become a Constituent Trading Platform, it must satisfy the following 
Inclusion Criteria:
     Sufficient USD liquidity relative to the size of the 
listed assets;
     No evidence in the past 12 months of trading restrictions 
on individuals or entities that would otherwise meet the trading 
platform's eligibility requirements to trade;
     No evidence in the past 12 months of undisclosed 
restrictions on deposits or withdrawals from user accounts;
     Real-time price discovery;
     Limited or no capital controls;
     Transparent ownership including a publicly-owned ownership 
entity;
     Publicly available language and policies addressing legal 
and regulatory compliance in the US, including KYC (Know Your 
Customer), AML (Anti-Money Laundering) and other policies designed to 
comply with relevant regulations that might apply to it;
     Be a U.S.-domiciled trading platform or a non-U.S. 
domiciled trading platform that is able to service U.S. investors;
     Offer programmatic spot trading of the trading pair and 
reliably publish trade prices and volumes on a real-time basis through 
Rest and Websocket APIs.
    Although the Index methodology is designed to operate without any 
human interference, rare events would justify manual intervention. 
Manual intervention would only be in response to ``non-market-related 
events'' (e.g., halting of deposits or withdrawals of funds, 
unannounced closure of trading platform operations, insolvency, 
compromise of user funds, etc.). In the event that such an intervention 
is necessary, the Index Provider would issue a public announcement 
through its website, API and other established communication channels 
with its clients.\58\
---------------------------------------------------------------------------

    \58\ To the extent any such intervention has a material impact 
on the Trust, the Sponsor will also issue a public announcement.
---------------------------------------------------------------------------

    4. The Index mitigates the impact of instances of fraud, 
manipulation and other anomalous trading activity concentrated on any 
one specific trading platform through a cross-trading platform 
composite index rate.
    The Index is based on the price and volume data of multiple U.S.-
Compliant Trading Platforms that satisfy the Index Provider's Inclusion 
Criteria. By referencing multiple trading venues and weighting them 
based on trade activity, the impact of any potential fraud, 
manipulation, or anomalous trading activity occurring on any single 
venue is reduced. Specifically, the effects of fraud, manipulation, or 
anomalous trading activity occurring on any single venue are de-
weighted and consequently diluted by non-anomalous trading activity 
from other Constituent Trading Platforms.
    Although the Index is designed to accurately capture the market 
price of Ether, third parties may be able to purchase and sell Ether on 
public or private markets included or not included among the 
Constituent Trading Platforms, and such transactions may take place at 
prices materially higher or lower than the Index Price. For example, 
based on data provided by the Index Provider, on any given day during 
the twelve months ended December 31, 2023, the maximum differential 
between the 4:00 p.m., New York time spot price of any single Digital 
Asset Trading Platform included in the Index and the Index Price was 
2.76% and the average of the maximum differentials of the 4:00 p.m., 
New York time spot price of each Digital Asset Trading Platform 
included in the Index and the Index Price was 0.75%. During this same 
period, the average differential between the 4:00 p.m., New York time 
spot prices of all the Digital Asset Trading Platforms included in the 
Index and the Index Price was 0.012%.\59\
---------------------------------------------------------------------------

    \59\ All Digital Asset Trading Platforms that were included in 
the Index throughout the period were considered in this analysis.
---------------------------------------------------------------------------

    Since inception of the Trust, the Trust has consistently priced its 
Shares at 4:00 p.m., New York time based on the Index Price. While that 
pricing would be known to the market, the Sponsor believes that, even 
if efforts to manipulate the price of Ether at 4:00 p.m., E.T. were 
successful on any trading platform, such activity would have had a 
negligible effect on the pricing of the Trust, due to the controls 
embedded in the structure of the Index.

[[Page 46455]]

    Accordingly, the Sponsor believes that the Index has proven its 
ability to (i) mitigate the effects of fraud, manipulation and other 
anomalous trading activity on the Ether reference rate, (ii) provide a 
real-time, volume-weighted fair value of Ether and (iii) appropriately 
handle and adjust for non-market related events. For these reasons, the 
Sponsor believes that the Index represents an effective alternative 
means to prevent fraud and manipulation and the Trust's reliance on the 
Index addresses the Commission's concerns with respect to potential 
fraud and manipulation.
3. A Significant, Regulated and Surveilled Market Exists and Is Closely 
Connected With Spot Market for Ether
    In the Prior Spot Digital Asset ETP Disapproval Orders, the 
Commission described both the need for and the definition of a 
surveilled market of significant size for commodity-trust ETPs like the 
Trust to date.\60\ Specifically, the Commission explained that:
---------------------------------------------------------------------------

    \60\ See Winklevoss Order, 83 FR at 37593-94; Bitwise Order, 84 
FR at 55383, 55410; Wilshire Phoenix Order, 85 FR at 12609.

for the commodity-trust ETPs approved to date for listing and 
trading, there has been in every case at least one significant, 
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP 
listing exchange has entered into surveillance-sharing agreements 
with, or held Intermarket Surveillance Group membership in common 
with, that market.\61\
---------------------------------------------------------------------------

    \61\ See Winklevoss Order, 83 FR at 37594.

    Further, the Commission stated that its interpretation of the term 
``market of significant size'' depends on the interrelationship between 
the market with which the listing exchange has a surveillance-sharing 
agreement and the proposed ETP.\62\ Accordingly, the terms 
``significant market'' and ``market of significant size'' could mean:
---------------------------------------------------------------------------

    \62\ See Winklevoss Order, 83 FR at 37594; Bitwise Order, 84 FR 
at 55410; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43925; Direxion Order, 83 FR at 43914; Wilshire Phoenix Order, 
85 FR at 12609.

a market (or group of markets) as to which (a) there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist in detecting and 
deterring misconduct, and (b) it is unlikely that trading in the ETP 
would be the predominant influence on prices in that market.\63\
---------------------------------------------------------------------------

    \63\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that will provide guidance to market 
participants.

    In the context of the Prior Spot Digital Asset ETP Disapproval 
Orders specifically, the Commission has stated that establishing a 
lead-lag relationship between the futures market and the spot market is 
central to understanding whether it is reasonably likely that a would-
be manipulator of the ETP would need to trade on the futures market to 
successfully manipulate prices on those spot platforms that feed into 
the proposed ETP's pricing mechanism such that a surveillance-sharing 
agreement would assist the ETP listing market in detecting and 
deterring misconduct.\64\ In particular, if the spot market leads the 
futures market, this would indicate that it would not be necessary to 
trade on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move to 
meet the spot price.
---------------------------------------------------------------------------

    \64\ See Bitwise Order, 84 FR at 55411; Wilshire Phoenix Order, 
85 FR at 12612.
---------------------------------------------------------------------------

    While studies have found that the CME Bitcoin futures market does 
lead the spot market in the context of Bitcoin,\65\ as explained in the 
Sponsor's briefs and argument in its prevailing case before the D.C. 
Circuit Court of Appeals regarding its Bitcoin-based ETP proposal, the 
lead/lag question is irrelevant. If a would-be manipulator were to 
attempt to manipulate either a spot ETP or futures ETP by trading 
futures on the CME, then a surveillance-sharing agreement with the CME 
would provide access to information concerning that activity.\66\ If, 
on the other hand, a would-be manipulator were to attempt to manipulate 
either a spot ETP or a futures ETP by trading on the spot market, then 
a surveillance-sharing agreement with the CME would also be able to 
provide access to information concerning that activity. If that were 
not true, the Commission could not have approved the Bitcoin futures 
ETPs. Given that the Commission has approved Bitcoin futures ETPs, the 
Commission must have concluded that the CME is capable of detecting 
manipulation attempts in the spot Bitcoin market. And given that the 
Commission has now approved CME Ether futures ETFs, it must have 
concluded that the CME is capable of detecting manipulation attempts in 
the spot Ether market as well. Accordingly, the Sponsor believes that 
disapproval of the instant proposal on such grounds would be arbitrary 
given that Shares of the Trust would be just as protected from fraud as 
shares of previously approved CME Ether futures ETFs.
---------------------------------------------------------------------------

    \65\ See Memorandum to File from Neel Maitra, Senior Special 
Counsel (Fintech & Crypto Specialist), Division of Trading and 
Markets, U.S. Securities and Exchange Commission re: Meeting with 
Representatives from Fidelity Digital Assets, et al. and attachment 
(SR-CboeBZX-2021-039) (September 8, 2021), available at: https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf; Letter from Bitwise Asset Management, Inc. re: File 
Number SR-NYSEArca-2021-89 (February 25, 2022), available at: 
https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20117902-270822.pdf; Letter from Wilson Sonsini Goodrich and Rosati, 
P.C. and Chapman and Cutler LLP, on behalf of Bitwise Asset 
Management, Inc. re: File No. SR-NYSEArca-2021-89 (March 7, 2022), 
available at: https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20118794-271630.pdf.
    \66\ Grayscale v. SEC, Commission Reply Br. 27.
---------------------------------------------------------------------------

    Regardless of the irrelevance of the lead/lag relationship and the 
mixed findings regarding the lead/lag relationship between the CME 
futures and spot markets in the context of Ether, the Sponsor believes 
that the CME Ether futures market represents a large, surveilled and 
regulated market and meets the Commission's definition of a 
``significant market.'' For example, from November 1, 2019 to December 
31, 2023, the CME Ether futures market trading volume was over $461 
billion, compared to $732 billion in trading volume across the 
Constituent Trading Platforms included in the Index. With over 60% of 
the Index trading volume, the CME Ether futures market represents 
significant coverage of U.S.-Compliant Trading Platforms in the Ether 
market.
    Given the size of the CME Ether futures markets, the Sponsor 
believes such markets meet the Commission's definition of ``significant 
market'' because there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, since arbitrage between the 
derivative and spot markets would tend to counter an attempt to 
manipulate the spot market alone. As a result, the Exchange's ability 
to obtain information regarding trading in the Shares and futures from 
markets and other entities that are members of the Intermarket Trading 
Group (``ISG''), including the CME, would assist the Exchange in 
detecting and deterring misconduct.
    The Sponsor also believes it is unlikely that the ETP would become 
the predominant influence on prices in the market. While future inflows 
to the proposed Trust cannot be predicted, to provide comparable data, 
the Sponsor examined the change in market capitalization of Ether with 
net inflows into the Trust, which currently trades on OTC Markets and 
is largest and most liquid Ether investment product in the

[[Page 46456]]

world.\67\ From November 1, 2019 to December 31, 2023, the market 
capitalization of Ether grew from $20 billion to $273 billion, a $250 
billion increase. Over the same period, the Trust experienced $1.2 
billion of inflows. The cumulative inflow into the Trust over the 
stated time period was only 0.5% of the aggregate growth of Ether's 
market capitalization.
---------------------------------------------------------------------------

    \67\ To further illustrate the size and liquidity of the Trust, 
as of March 8, 2024, compared with global commodity ETPs, the Trust 
would rank 8th in assets under management and 10th in notional 
trading volume for the preceding 30 days.
---------------------------------------------------------------------------

    Additionally, the Trust experienced approximately $71 billion of 
trading volume from November 1, 2019 to December 31, 2023, only 15% of 
the CME Ether futures market and 10% of the Index over the same period.
* * * * *
    In summary, the Sponsor believes that the foregoing addresses 
concerns the Commission may have with respect to Ether-based ETPs, 
based on the Commission's articulated concerns with respect to 
potential fraud and manipulation in Bitcoin-based ETPs. Specifically, 
the Sponsor believes that, although Ether is not itself inherently 
resistant to fraud and manipulation, the Index represents an effective 
means to prevent fraudulent and manipulative acts and practices. As 
discussed above, the Trust has used the Index to price the Shares for 
more than six years, and the Index has proven its ability to (i) 
mitigate the effects of fraud, manipulation and other anomalous trading 
activity on the Ether reference rate, (ii) provide a real-time, volume-
weighted fair value of Ether and (iii) appropriately handle and adjust 
for non-market related events. The Sponsor also believes that the CME 
Ether futures market is a significant, surveilled and regulated market 
that is closely connected with the spot market for Ether and fulfills 
the requirements for surveillance sharing given the Exchange's ability 
to obtain information from markets and other entities that are members 
of the ISG to assist in detecting and deterring misconduct.
Creation and Redemption of Shares
    Authorized Participants may submit orders to create or redeem 
Shares under procedures for ``Cash Orders.''
    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, or an affiliate 
of the Trust (and in any event 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, or an affiliate of the Trust (and 
in any event 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.
    Cash Orders are made through the participation of a Liquidity 
Provider \68\ who obtains or receives Ether in exchange for cash, and 
are facilitated by the Transfer Agent and Grayscale Investments, LLC, 
acting in its capacity as the Liquidity Engager. Liquidity Providers 
are not party to the Participant Agreements and are engaged separately 
by the Liquidity Engager.
---------------------------------------------------------------------------

    \68\ A ``Liquidity Provider'' means one or more eligible 
companies that facilitate the purchase and sale of Ether in 
connection with creations or redemptions pursuant to Cash Orders. 
The Liquidity Providers with which Grayscale Investments, LLC, 
acting other than in its capacity as the Sponsor (in such other 
capacity, the ``Liquidity Engager'') will engage in Ether 
transactions are third parties that are not affiliated with the 
Sponsor or the Trust and are not acting as agents of the Trust, the 
Sponsor, or any Authorized Participant, and all transactions will be 
done on an arms-length basis. Except for the contractual 
relationships between each Liquidity Provider and Grayscale 
Investments, LLC in its capacity as the Liquidity Engager, there is 
no contractual relationship between each Liquidity Provider and the 
Trust, the Sponsor, or any Authorized Participant. When seeking to 
buy Ether in connection with creations or sell Ether in connection 
with redemptions, the Liquidity Engager will seek to obtain 
commercially reasonable prices and terms from the approved Liquidity 
Providers. Once agreed upon, the transaction will generally occur on 
an ``over-the-counter'' basis.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust creates Baskets 
(as described below) of Shares only upon receipt of Ether and redeems 
Shares only by distributing Ether. ``Authorized Participants'' are the 
only persons that may place orders to create and redeem Baskets. Each 
Authorized Participant must (i) be a registered broker-dealer and (ii) 
enter into an agreement with the Sponsor and Transfer Agent that 
provides the procedures for the creation and redemption of Baskets and 
for the delivery of Ether required for the creation and redemption of 
Baskets via a Liquidity Provider (each, a ``Participant Agreement''). 
An Authorized Participant may act for its own account or as agent for 
broker-dealers, custodians and other securities market participants 
that wish to create or redeem Baskets. Shareholders who are not 
Authorized Participants will only be able to create or redeem their 
Shares through an Authorized Participant.
    The Trust issues Shares to and redeems Shares from Authorized 
Participants on an ongoing basis, but only in one or more ``Baskets'' 
(with a Basket being a block of 10,000 Shares). The Trust will not 
issue fractions of a Basket.
    The creation and redemption of Baskets will be made only in 
exchange for the delivery to the Trust, or the distribution by the 
Trust, of the number of whole and fractional Ether represented by each 
Basket being created or redeemed, which is determined by dividing (x) 
the number of Ether owned by the Trust at 4:00 p.m., New York time, on 
the trade date of a creation or redemption order, after deducting the 
number of Ether representing the U.S. dollar value of accrued but 
unpaid fees and expenses of the Trust (converted using the Index Price 
at such time, and carried to the eighth decimal place), by (y) the 
number of Shares outstanding at such time (with the quotient so 
obtained calculated to one one-hundred-millionth of one Ether (i.e., 
carried to the eighth decimal place)), and multiplying such quotient by 
10,000 (the ``Basket Amount''). The U.S. dollar value of a Basket is 
calculated by multiplying the Basket Amount by the Index Price as of 
the trade date (the ``Basket NAV''). The Basket NAV multiplied by the 
number of Baskets being created or redeemed is referred to as the 
``Total Basket NAV.'' All questions as to the calculation of the Basket 
Amount will be conclusively determined by the Sponsor and will be final 
and binding on all persons interested in the Trust. The number of Ether 
represented by a Share will gradually decrease over time as the Trust's 
Ether are used to pay the Trust's expenses. As of December 31, 2023, 
each Share represented approximately 0.0096 of one Ether.
    The creation of Baskets requires the delivery by the Authorized 
Participant

[[Page 46457]]

of the Total Basket Amount and the redemption of Baskets requires the 
distribution to the Authorized Participant of the Total Basket Amount.
    Although the Trust creates Baskets only upon the receipt of Ether, 
and redeems Baskets only by distributing Ether, an Authorized 
Participant will submit Cash Orders, pursuant to which the Authorized 
Participant will deposit cash with, or accept cash from, the Transfer 
Agent in connection with the creation and redemption of Baskets.
    Cash Orders will be facilitated by the Transfer Agent and Liquidity 
Engager, acting other than in its capacity as Sponsor. On an order-by-
order basis, the Liquidity Engager will engage one or more Liquidity 
Providers to obtain or receive Ether in exchange for cash in connection 
with such order, as described in more detail below.
    Unless the Sponsor requires that a Cash Order be effected at actual 
execution prices (an ``Actual Execution Cash Order''),\69\ each 
Authorized Participant that submits a Cash Order to create or redeem 
Baskets (a ``Variable Fee Cash Order'') \70\ will pay a fee (the 
``Variable Fee'') based on the Total Basket NAV, and any price 
differential of Ether between the trade date and the settlement date 
will be borne solely by the Liquidity Provider until such Ether have 
been received or liquidated by the Trust. The Variable Fee is intended 
to cover all of a Liquidity Provider's expenses in connection with the 
creation or redemption order, including any Ether trading platform fees 
that the Liquidity Provider incurs in connection with buying or selling 
Ether. The amount may be changed by the Sponsor in its sole discretion 
at any time, and Liquidity Providers will communicate to the Sponsor in 
advance the Variable Fee they would be willing to accept in connection 
with a Variable Fee Cash Order, based on market conditions and other 
factors existing at the time of such Variable Fee Cash Order.
---------------------------------------------------------------------------

    \69\ With respect to a creation or redemption pursuant to an 
Actual Execution Cash Order, as between the Trust and an Authorized 
Participant, the Authorized Participant is responsible for the 
dollar cost of the difference between the Ether price utilized in 
calculating Total Basket NAV on the trade date and the price at 
which the Trust acquires or disposes of the Ether on the settlement 
date. If the price realized in acquiring or disposing of the 
corresponding Total Basket Amount is higher than the Total Basket 
NAV, the Authorized Participant will bear the dollar cost of such 
difference, in the case of a creation, by delivering cash in the 
amount of such shortfall (the ``Additional Creation Cash'') to the 
Cash Account or, in the case of a redemption, with the amount of 
cash to be delivered to the Authorized Participant being reduced by 
the amount of such difference (the ``Redemption Cash Shortfall''). 
If the price realized in acquiring the corresponding Total Basket 
Amount is lower than the Total Basket NAV, the Authorized 
Participant will benefit from such difference, with the Trust 
promptly returning cash in the amount of such excess (the ``Excess 
Creation Cash'') to the Authorized Participant.
    \70\ Unless the Sponsor determines otherwise in its sole 
discretion based on market conditions and other factors existing at 
the time of such Cash Order, all creations and redemptions pursuant 
to Cash Orders are expected to be executed as Variable Fee Cash 
Orders, and any price differential of Ether between the trade date 
and the settlement date will be borne solely by the Liquidity 
Provider until such Ether have been received by the Trust.
---------------------------------------------------------------------------

    Alternatively, the Sponsor may require that a Cash Order be 
effected as an Actual Execution Cash Order, in its sole discretion 
based on market conditions and other factors existing at the time of 
such Cash Order, and under such circumstances, any price differential 
of Ether between the trade date and the settlement date will be borne 
solely by the Authorized Participant until such Ether have been 
received or liquidated by the Trust.
    In the case of creations, to transfer the Total Basket Amount to 
the Trust's Digital Asset Account, the Liquidity Provider will transfer 
Ether to one of the public key addresses associated with the Digital 
Asset Account and as provided by the Sponsor. In the case of 
redemptions, the same procedure is conducted, but in reverse, using the 
public key addresses associated with the wallet of the Liquidity 
Provider and as provided by such party. All such transactions will be 
conducted on the Blockchain and parties acknowledge and agree that such 
transfers may be irreversible if done incorrectly.
    Authorized Participants do not pay a transaction fee to the Trust 
in connection with the creation or redemption of Baskets, but there may 
be transaction fees associated with the validation of the transfer of 
Ether by the Ethereum Network, which will be paid by the Custodian in 
the case of redemptions and the Authorized Participant or the Liquidity 
Provider in the case of creations. Service providers may charge 
Authorized Participants administrative fees for order placement and 
other services related to creation of Baskets. As discussed above, 
Authorized Participants will also pay the Variable Fee in connection 
with Variable Fee Cash Orders. Under certain circumstances Authorized 
Participants may also be required to deposit additional cash in the 
Cash Account, or be entitled to receive excess cash from the Cash 
Account, in connection with creations and redemptions pursuant to 
Actual Execution Cash Orders. Authorized Participants will receive no 
fees, commissions or other form of compensation or inducement of any 
kind from either the Sponsor or the Trust and no such person has any 
obligation or responsibility to the Sponsor or the Trust to effect any 
sale or resale of Shares.
    The following is a summary of the procedures for the creation and 
redemption of Baskets.
Creation Procedures
    On any business day, an Authorized Participant may place an order 
with the Transfer Agent to create one or more Baskets.
    Cash Orders for creation must be placed with the Transfer Agent no 
later than 1:59:59 p.m., New York time.
    The Sponsor may in its sole discretion limit the number of Shares 
created pursuant to Cash Orders on any specified day without notice to 
the Authorized Participants and may direct the Marketing Agent to 
reject any Cash Orders in excess of such capped amount. In exercising 
its discretion to limit the number of Shares created pursuant to Cash 
Orders, the Sponsor expects to take into consideration a number of 
factors, including the availability of Liquidity Providers to 
facilitate Cash Orders and the cost of processing Cash Orders.
    Creations under Cash Orders will take place as follows, where ``T'' 
is the trade date and each day in the sequence must be a business day. 
Before a creation order is placed, the Sponsor determines if such 
creation order will be a Variable Fee Cash Order or an Actual Execution 
Cash Order, which determination is communicated to the Authorized 
Participant.

[[Page 46458]]



------------------------------------------------------------------------
                                          Settlement date (T+1, or T+2,
             Trade date (T)               as established at the time of
                                                 order placement)
------------------------------------------------------------------------
 The Authorized Participant       The Authorized
 places a creation order with the         Participant delivers to the
 Transfer Agent.                          Cash Account: *
 The Marketing Agent accepts     (x) in the case of a Variable
 (or rejects) the creation order, which   Fee Cash Order, the Total
 is communicated to the Authorized        Basket NAV, plus any Variable
 Participant by the Transfer Agent.       Fee; or
 The Sponsor notifies the        (y) in the case of an Actual
 Liquidity Provider of the creation       Execution Cash Order, the
 order.                                   Total Basket NAV, plus any
 The Sponsor determines the       Additional Creation Cash, less
 Total Basket NAV and any Variable Fee    any Excess Creation Cash, if
 and Additional Creation Cash as soon     applicable (such amount, as
 as practicable after 4:00 p.m., New      applicable, the ``Required
 York time.                               Creation Cash'').
                                          The Liquidity Provider
                                          transfers the Total Basket
                                          Amount to the Trust's Digital
                                          Asset Account.
                                          Once the Trust is in
                                          simultaneous possession of (x)
                                          the Total Basket Amount and
                                          (y) the Required Creation
                                          Cash, the Trust issues the
                                          aggregate number of Shares
                                          corresponding to the Baskets
                                          ordered by the Authorized
                                          Participant, which the
                                          Transfer Agent holds for the
                                          benefit of the Authorized
                                          Participant.
                                          Cash equal to the
                                          Required Creation Cash is
                                          delivered to the Liquidity
                                          Provider from the Cash
                                          Account.
                                          The Transfer Agent
                                          delivers Shares to the
                                          Authorized Participant by
                                          crediting the number of
                                          Baskets created to the
                                          Authorized Participant's DTC
                                          account.
------------------------------------------------------------------------
* The ``Cash Account'' means the account maintained by the Transfer
  Agent for purposes of receiving cash from, and distributing cash to,
  Authorized Participants in connection with creations and redemptions
  pursuant to Cash Orders. For the avoidance of doubt, the Trust shall
  have no interest (beneficial, equitable or otherwise) in the Cash
  Account or any cash held therein.

Redemption Procedures
    The procedures by which an Authorized Participant can redeem one or 
more Baskets mirror the procedures for the creation of Baskets. On any 
business day, an Authorized Participant may place a redemption order 
specifying the number of Baskets to be redeemed.
    The redemption of Shares pursuant to Cash Orders will only take 
place if approved by the Sponsor in writing, in its sole discretion and 
on a case-by-case basis. In exercising its discretion to approve the 
redemption of Shares pursuant to Cash Orders, the Sponsor expects to 
take into consideration a number of factors, including the availability 
of Liquidity Providers to facilitate Cash Orders and the cost of 
processing Cash Orders.
    Cash Orders for redemption must be placed no later than 1:59:59 
p.m., New York time on each business day. The Authorized Participants 
may only redeem Baskets and cannot redeem any Shares in an amount less 
than a Basket.
    Redemptions under Cash Orders will take place as follows, where 
``T'' is the trade date and each day in the sequence must be a business 
day. Before a redemption order is placed, the Sponsor determines if 
such redemption order will be a Variable Fee Cash Order or an Actual 
Execution Cash Order, which determination is communicated to the 
Authorized Participant.

------------------------------------------------------------------------
                                         Settlement date (T+1 (or T+2 on
            Trade date (T)              case[dash]by[dash]case basis, as
                                              approved by sponsor))
------------------------------------------------------------------------
 The Authorized Participant      The Authorized
 places a redemption order with the      Participant delivers Baskets to
 Transfer Agent.                         be redeemed from its DTC
 The Marketing Agent accepts     account to the Transfer Agent.
 (or rejects) the redemption order,      The Liquidity Provider
 which is communicated to the            delivers to the Cash Account:
 Authorized Participant by the          (x) in the case of a Variable
 Transfer Agent.                         Fee Cash Order, the Total
 The Sponsor notifies the        Basket NAV less any Variable
 Liquidity Provider of the redemption    Fee; or
 order.                                 (y) in the case of an Actual
 The Sponsor determines the      Execution Cash Order, the
 Total Basket NAV and, in the case of    actual proceeds to the Trust
 a Variable Fee Cash Order, any          from the liquidation of the
 Variable Fee, as soon as practicable    Total Basket Amount (such
 after 4:00 p.m., New York time.         amount, as applicable, the
                                         ``Required Redemption Cash'').
                                         Once the Trust is in
                                         simultaneous possession of (x)
                                         the Total Basket Amount and (y)
                                         the Required Redemption Cash,
                                         the Transfer Agent cancels the
                                         Shares comprising the number of
                                         Baskets redeemed by the
                                         Authorized Participant.
                                         The Custodian sends the
                                         Liquidity Provider the Total
                                         Basket Amount, and cash equal
                                         to the Required Redemption Cash
                                         is delivered to the Authorized
                                         Participant from the Cash
                                         Account.
------------------------------------------------------------------------

Suspension or Rejection of Orders and Total Basket Amount
    The creation or redemption of Shares may be suspended generally, or 
refused with respect to particular requested creations or redemptions, 
during any period when the transfer books of the Transfer Agent are 
closed or if circumstances outside the control of the Sponsor or its 
delegates make it for all practicable purposes not feasible to process 
creation orders or redemption

[[Page 46459]]

orders or for any other reason at any time or from time to time.\71\ 
The Transfer Agent may reject an order or, after accepting an order, 
may cancel such order if: (i) such order is not presented in proper 
form as described in the Participant Agreement, (ii) the transfer of 
the Total Basket Amount comes from an account other than a Ether wallet 
address that is known to the Custodian as belonging to a Liquidity 
Provider or (iii) the fulfillment of the order, in the opinion of 
counsel, might be unlawful, among other reasons. None of the Sponsor or 
its delegates will be liable for the suspension, rejection or 
acceptance of any creation order or redemption order.
---------------------------------------------------------------------------

    \71\ Extenuating circumstances outside of the control of the 
Sponsor and its delegates or that could cause the transfer books of 
the Transfer Agent to be closed are outlined in the Participant 
Agreement and include, for example, public service or utility 
problems, power outages resulting in telephone, telecopy and 
computer failures, acts of God such as fires, floods or extreme 
weather conditions, market conditions or activities causing trading 
halts, systems failures involving computer or other information 
systems, including any failures or outages of the Ethereum Network, 
affecting the Authorized Participant, the Sponsor, the Trust, the 
Transfer Agent, the Marketing Agent and the Custodian and similar 
extraordinary events.
---------------------------------------------------------------------------

Availability of Information
    The Trust's website (https://grayscale.com/crypto-products/grayscale-ethereum-trust/) will include quantitative information on a 
per Share basis updated on a daily basis, including, (i) the current 
NAV per Share daily and the prior business day's NAV per Share and the 
reported closing price of the Shares; (ii) the mid-point of the bid-ask 
price \72\ as of the time the NAV per Share is calculated (``Bid-Ask 
Price'') and a calculation of the premium or discount of such price 
against such NAV per Share; and (iii) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily Bid-
Ask Price against the NAV per Share, within appropriate ranges, for 
each of the four previous calendar quarters (or for as long as the 
Trust has been trading as an ETP if shorter). In addition, on each 
business day the Trust's website will provide pricing information for 
the Shares.
---------------------------------------------------------------------------

    \72\ The bid-ask price of the Trust is determined using the 
highest bid and lowest offer on the Consolidated Tape as of the time 
of calculation of the closing day NAV.
---------------------------------------------------------------------------

    One or more major market data vendors, will provide an intra-day 
indicative value (``IIV'') per Share updated every 15 seconds, as 
calculated by the Exchange or a third party financial data provider 
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m., 
E.T.). The IIV will be calculated using the same methodology as the NAV 
per Share of the Trust (as described above), specifically by using the 
prior day's closing NAV per Share as a base and updating that value 
during the NYSE Arca Core Trading Session to reflect changes in the 
value of the Index during the trading day.
    The IIV disseminated during the NYSE Arca Core Trading 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 NYSE Arca Core Trading Session by one or more major 
market data vendors. In addition, the IIV will be available through on-
line information services.
    The NAV for the Trust will be calculated by the Sponsor once a day 
and will be disseminated daily to all market participants at the same 
time. To the extent that the Sponsor has utilized the cascading set of 
rules described in ``Index Price'' above, the Trust's website will note 
the valuation methodology used and the price per Ether resulting from 
such calculation. Quotation and last-sale information regarding the 
Shares will be disseminated through the facilities of the Consolidated 
Tape Association (``CTA'').
    Quotation and last sale information for Ether will be widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. In addition, real-time price (and volume) data 
for Ether is available by subscription from Reuters and Bloomberg. The 
spot price of Ether is available on a 24-hour basis from major market 
data vendors, including Bloomberg and Reuters. Information relating to 
trading, including price and volume information, in Ether will be 
available from major market data vendors and from the trading platforms 
on which Ether are traded. The normal trading hours for Digital Asset 
Trading Platforms are 24-hours per day, 365-days per year.
    On each business day, the Sponsor will publish the Index Price, the 
Trust's NAV, and the NAV per Share on the Trust's website as soon as 
practicable after its determination. If the NAV and NAV per Share have 
been calculated using a price per Ether other than the Index Price for 
such Evaluation Time, the publication on the Trust's website will note 
the valuation methodology used and the price per Ether resulting from 
such calculation.
    The Trust will provide website disclosure of its NAV daily. The 
website disclosure of the Trust's NAV will occur at the same time as 
the disclosure by the Sponsor of the NAV to Authorized Participants so 
that all market participants are provided such portfolio information at 
the same time. Therefore, the same portfolio information will be 
provided on the public website as well as in electronic files provided 
to Authorized Participants. Accordingly, each investor will have access 
to the current NAV of the Trust through the Trust's website, as well as 
from one or more major market data vendors.
    The value of the Index, as well as additional information regarding 
the Index, will be available on a continuous basis at https://www.coindesk.com/indices.
    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.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m., E.T. in 
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading 
Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting 
and entry of orders in equity securities traded on the NYSE Arca 
Marketplace is $0.01, with the exception of securities that are priced 
less than $1.00, for which the MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will 
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain 
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting 
as registered Market Makers in Commodity-Based Trust Shares to 
facilitate surveillance. The Exchange represents that, for initial and 
continued listing, the Trust will be in compliance with Rule 10A-3 \73\ 
under the Act, as provided by NYSE Arca Rule 5.3-E. A minimum of 
100,000 Shares of the Trust will be outstanding at the

[[Page 46460]]

commencement of trading on the Exchange.
---------------------------------------------------------------------------

    \73\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------

Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Trust.\74\ Trading in Shares of the Trust 
will be halted if the circuit breaker parameters in NYSE Arca Rule 
7.12-E have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
---------------------------------------------------------------------------

    \74\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------

    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the IIV or the value of the Index 
occurs. If the interruption to the dissemination of the IIV or the 
value of the Index persists past the trading day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption. In addition, if the Exchange 
becomes aware that the NAV per Share is not disseminated to all market 
participants at the same time, it will halt trading in the Shares until 
such time as the NAV per Share is available to all market participants.
Surveillance
    The Exchange represents that trading in the Shares of the Trust 
will be subject to the existing trading surveillances administered by 
the Exchange, as well as cross-market surveillances administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\75\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.
---------------------------------------------------------------------------

    \75\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares with other 
markets and other entities that are members of the ISG, and the 
Exchange or FINRA, on behalf of the Exchange, or both, may obtain 
trading information regarding trading in the Shares and Ether 
derivatives from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares and 
Ether derivatives from markets and other entities that are members of 
ISG or with which the Exchange has in place a comprehensive 
surveillance sharing agreement (``CSSA'').\76\ The Exchange is also 
able to obtain information regarding trading in the Shares and any 
underlying Ether, Ether futures contracts, options on Ether futures, or 
any other Ether derivatives in connection with ETP Holders' proprietary 
trades, or customer trades effected through ETP Holders on any relevant 
market. Under NYSE Arca Rule 8.201-E(g), an ETP Holder acting as a 
registered Market Maker in the Shares is required to provide the 
Exchange with information relating to its accounts for trading in any 
underlying commodity, related futures or options on futures, or any 
other related derivatives. Commentary .04 of NYSE Arca Rule 11.3-E 
requires an ETP Holder acting as a registered Market Maker, and its 
affiliates, in the Shares to establish, maintain and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
any material nonpublic information with respect to such products, any 
components of the related products, any physical asset or commodity 
underlying the product, applicable currencies, underlying indexes, 
related futures or options on futures, and any related derivative 
instruments (including the Shares). As a general matter, the Exchange 
has regulatory jurisdiction over its ETP Holders and their associated 
persons, which include any person or entity controlling an ETP Holder. 
To the extent the Exchange may be found to lack jurisdiction over a 
subsidiary or affiliate of an ETP Holder that does business only in 
commodities or futures contracts and that subsidiary or affiliate is a 
member of another regulatory organization, the Exchange could obtain 
information regarding the activities of such subsidiary or affiliate 
through a surveillance sharing agreement with that regulatory 
organization.
---------------------------------------------------------------------------

    \76\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Trust may trade on markets that are members of ISG or with which the 
Exchange has in place a CSSA.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    All statements and representations made in this filing regarding 
(a) the description of the index, portfolio, or reference assets of the 
Trust, (b) limitations on index or portfolio holdings or reference 
assets, or (c) the applicability of Exchange listing rules specified in 
this rule filing shall constitute continued listing requirements for 
listing the Shares on the Exchange.
    The Sponsor has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an ``Information Bulletin'' of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (1) 
the procedures for creations of Shares in Baskets; (2) NYSE Arca Rule 
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to 
learn the essential facts relating to every customer prior to trading 
the Shares; (3) information regarding how the value of the Index and 
NAV are disseminated; (4) the possibility that trading spreads and the 
resulting premium or discount on the Shares may widen during the 
Opening and Late Trading Sessions, when an updated IIV will not be 
calculated or publicly disseminated; (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 Exchange notes that investors purchasing 
Shares directly from the Trust will receive a prospectus.
    In addition, the Information Bulletin will reference that the Trust 
is subject to various fees and expenses as described in the Annual 
Report. The Information Bulletin will disclose that information about 
the Shares of the Trust is publicly available on the Trust's website.
    The Information Bulletin will also discuss any relief, if granted, 
by the

[[Page 46461]]

Commission or the staff from any rules under the Act.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \77\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Rule 8.201-E. The 
Exchange has in place surveillance procedures that are adequate to 
properly monitor trading in the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws. The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares with 
other markets that are members of the ISG, and the Exchange or FINRA, 
on behalf of the Exchange, or both, may obtain trading information 
regarding trading in the Shares from such markets. In addition, the 
Exchange may obtain information regarding trading in the Shares from 
markets that are members of ISG or with which the Exchange has in place 
a CSSA. Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is 
able to obtain information regarding trading in the Shares and the 
underlying Ether or any Ether derivative through ETP Holders acting as 
registered Market Makers, in connection with such ETP Holders' 
proprietary trades which they effect on any relevant market.
    The proposed rule change is also designed to prevent fraudulent and 
manipulative acts and practices because, although the Digital Asset 
Trading Platform Market is not inherently resistant to fraud and 
manipulation, the Index serves as a means sufficient to mitigate the 
impact of instances of fraud and manipulation on a reference price for 
Ether. Specifically, the Index provides a better benchmark for the 
price of Ether than the Digital Asset Trading Platform Market price 
because it (1) tracks the Digital Asset Trading Platform Market price 
through trading activity at U.S.-Compliant Trading Platforms; (2) 
mitigates the impact of instances of fraud, manipulation and other 
anomalous trading activity in real-time through systematic adjustments; 
(3) is constructed and maintained by an expert third-party index 
provider, allowing for prudent handling of non-market-related events; 
and (4) mitigates the impact of instances of fraud, manipulation and 
other anomalous trading activity concentrated on any one specific 
trading platform through a cross-trading platform composite index rate. 
The Trust has used the Index to price the Shares for more than six 
years, and the Index has proven its ability to (i) mitigate the effects 
of fraud, manipulation and other anomalous trading activity from 
impacting the Ether reference rate, (ii) provide a real-time, volume-
weighted fair value of Ether and (iii) appropriately handle and adjust 
for non-market related events, such that efforts to manipulate the 
price of Ether would have had a negligible effect on the pricing of the 
Trust, due to the controls embedded in the structure of the Index. In 
addition, certain of the Index's Constituent Trading Platforms also 
have or have begun to implement market surveillance infrastructure to 
further detect, prevent, and respond to fraud, attempted fraud, and 
similar wrongdoing, including market manipulation. The proposed rule 
change is also designed to prevent fraudulent and manipulative acts and 
practices based on the existence of the CME Ether futures market as a 
large, surveilled and regulated market that is closely connected with 
the spot market for Ether and through which the Exchange could obtain 
information to assist in detecting and deterring potential fraud or 
manipulation.
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that there is a considerable amount of Ether price and market 
information available on public websites and through professional and 
subscription services. Investors may obtain, on a 24-hour basis, Ether 
pricing information based on the spot price for Ether from various 
financial information service providers. The closing price and 
settlement prices of Ether are readily available from the Digital Asset 
Trading Platforms and other publicly available websites. In addition, 
such prices are published in public sources, or on-line information 
services such as Bloomberg and Reuters. The NAV per Share will be 
calculated daily and made available to all market participants at the 
same time. The Trust will provide website disclosure of its NAV daily. 
One or more major market data vendors will disseminate for the Trust on 
a daily basis information with respect to the most recent NAV per Share 
and Shares outstanding. In addition, if the Exchange becomes aware that 
the NAV per Share is not disseminated to all market participants at the 
same time, it will halt trading in the Shares until such time as the 
NAV is available to all market participants. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the CTA. The IIV will be widely disseminated on a per 
Share basis every 15 seconds during the NYSE Arca Core Trading Session 
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major 
market data vendors. The Exchange represents that the Exchange may halt 
trading during the day in which an interruption to the dissemination of 
the IIV or the value of the Index occurs. If the interruption to the 
dissemination of the IIV or the value of the Index persists past the 
trading day in which it occurred, the Exchange will halt trading no 
later than the beginning of the trading day following the interruption.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
an additional type of exchange-traded product that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace. As noted above, the Exchange has in place surveillance 
procedures relating to trading in the Shares and may obtain information 
via ISG from other exchanges that are members of ISG or with which the 
Exchange has entered into a CSSA. In addition, as noted above, 
investors will have ready access to information regarding the Trust's 
NAV, IIV, and quotation and last sale information for the Shares.

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

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

[[Page 46462]]

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

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

Electronic Comments

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

Paper Comments

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

All submissions should refer to file number SR-NYSEARCA-2023-70. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NYSEARCA-2023-70 and should 
be submitted on or before June 20, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\78\
---------------------------------------------------------------------------

    \78\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-11709 Filed 5-28-24; 8:45 am]
BILLING CODE 8011-01-P