[Federal Register Volume 89, Number 107 (Monday, June 3, 2024)]
[Notices]
[Pages 47618-47639]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12042]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100233; File No. SR-NYSEARCA-2024-44]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 3, To List and
Trade Shares of the Grayscale Ethereum Mini Trust
May 28, 2024.
On May 21, 2024, 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 Mini Trust (ETH) under
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares). On May 22, 2024,
the Exchange filed Amendment No. 2 to the proposed rule change, which
replaced and superseded the proposed rule change as originally
filed.\3\ On May 23, 2024, the Exchange filed Amendment No. 3 to the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. Amendment No. 3 replaced and
superseded the proposed rule change, as modified by Amendment No. 2, in
its entirety. The Commission is publishing this notice to solicit
comments on the proposed rule change, as modified by Amendment No. 3,
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Exchange filed Amendment No. 1 to the proposed rule
change on May 21, 2024 but subsequently withdrew Amendment No. 1 on
May 22, 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 Mini Trust (ETH) (the
``Trust''). This Amendment No. 3 to SR-NYSEARCA-2024-44 replaces
Amendment No. 2 to SR-NYSEARCA-2024-44 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.
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.'' \4\ The Exchange proposes to list and trade shares
(``Shares'') \5\ of the Trust pursuant to NYSE Arca Rule 8.201-E.\6\
---------------------------------------------------------------------------
\4\ 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.
\5\ The Shares are expected to be listed under the ticker symbol
``ETH.''
\6\ On April 23, 2024, the Trust filed a registration statement
on Form S-1 under the Securities Act (File No. 333-278878) (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.
---------------------------------------------------------------------------
The sponsor of the Trust is Grayscale Investments, LLC
(``Sponsor''), a
[[Page 47619]]
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'').\7\ 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'').
---------------------------------------------------------------------------
\7\ According to the Registration Statement, 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 April 23, 2024,
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 Registration Statement, the Trust's assets consist
solely of ether (``Ether'').\8\
---------------------------------------------------------------------------
\8\ 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,\9\ 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.
---------------------------------------------------------------------------
\9\ 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'' \10\ 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).\11\
---------------------------------------------------------------------------
\10\ The Sponsor's Fee means a fee, payable in Ether, which
accrues daily in U.S. dollars at an annual rate that is a percentage
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 Sponsor's Fee will be determined
upon listing on the Exchange. The ``NAV Fee Basis Amount'' is
calculated in the manner set forth under ``Valuation of Ether and
Determination of NAV'' below.
\11\ 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 Registration Statement, 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 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.\12\
---------------------------------------------------------------------------
\12\ 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.\13\
---------------------------------------------------------------------------
\13\ ``Baskets'' and ``Basket Amount'' have the meanings set
forth in ``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------
[[Page 47620]]
4. Subtract the U.S. dollar amount of accrued and unpaid Additional
Trust Expenses, if any.\14\
---------------------------------------------------------------------------
\14\ ``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 \15\
---------------------------------------------------------------------------
\15\ The description of Ether and the Ethereum Network in this
section was provided by the Sponsor and is based on the Registration
Statement.
---------------------------------------------------------------------------
According to the Registration Statement, 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'' \16\
or in individual end-user-to-end-user transactions under a barter
system.
---------------------------------------------------------------------------
\16\ 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 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
[[Page 47621]]
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.\17\
---------------------------------------------------------------------------
\17\ 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 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
[[Page 47622]]
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.\18\
---------------------------------------------------------------------------
\18\ 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 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.
[[Page 47623]]
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 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 \19\ will follow the same general procedure as transferring
Ether to the Trust to create a Basket by an Authorized Participant,
only in reverse.
---------------------------------------------------------------------------
\19\ ``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.
[[Page 47624]]
Ether Value
Digital Asset Trading Platform Valuation
According to the Registration Statement, 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 \20\ 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''),\21\ using data reported by the Index Provider from
December 14, 2017 to December 31, 2023:
---------------------------------------------------------------------------
\20\ 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).
\21\ 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.
------------------------------------------------------------------------
Digital Asset Trading Platforms included Market share
in the Index as of December 31, 2023 Volume (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
[[Page 47625]]
basis at https://www.coindesk.com/indices.
Constituent Trading Platform Selection
According to the Registration Statement, 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; \22\
---------------------------------------------------------------------------
\22\ ``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 \23\
and reliably publish trade prices and volumes on a real-time basis
through Rest and Websocket APIs.
---------------------------------------------------------------------------
\23\ 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 Registration Statement, 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.\24\ 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.
---------------------------------------------------------------------------
\24\ 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 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.
[[Page 47626]]
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%.
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.\25\ 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:
---------------------------------------------------------------------------
\25\ 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.\26\ 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.
---------------------------------------------------------------------------
\26\ 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,
[[Page 47627]]
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 Registration Statement) (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).\27\ 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.
---------------------------------------------------------------------------
\27\ According to the Registration Statement, 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, 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.\28\
---------------------------------------------------------------------------
\28\ 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.\29\ 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 exchange-traded products (``ETPs'')
that offer exposure to spot Ether, like the Trust.
---------------------------------------------------------------------------
\29\ 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.\30\
The Sponsor believes
[[Page 47628]]
that this reasoning is unsupported for the following reasons.
---------------------------------------------------------------------------
\30\ 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.\31\ 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.\32\
---------------------------------------------------------------------------
\31\ 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).
\32\ 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 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.\33\
[[Page 47629]]
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.
---------------------------------------------------------------------------
\33\ 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.\34\
---------------------------------------------------------------------------
\34\ 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.\35\ 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.
---------------------------------------------------------------------------
\35\ 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.\36\ 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.\37\
---------------------------------------------------------------------------
\36\ See Winklevoss Order, 84 FR at 37580, 37582-91; Bitwise
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at
12597.
\37\ 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 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 \38\ and
150 years after the first futures were offered.\39\ 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.
---------------------------------------------------------------------------
\38\ SEC, ``Investor Bulletin: Exchange-Traded Funds (ETFs),''
August 2012, https://www.sec.gov/investor/alerts/etfs.pdf.
\39\ Commodity Futures Trading Commission (``CFTC''), ``History
of the CFTC,'' https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html.
---------------------------------------------------------------------------
An affiliate of the Trust that is structured identically to the
Trust and also seeking to list its shares as an ETP on the Exchange,
Grayscale Ethereum Trust (ETH) (``ETHE''), has priced its Shares
consistently for more than six years based on the Index.\40\ 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.
---------------------------------------------------------------------------
\40\ The Trust and ETHE are identically structured investment
vehicles and will have the same service providers. The Trust will
have a materially lower sponsor's fee than ETHE.
---------------------------------------------------------------------------
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''; \41\
---------------------------------------------------------------------------
\41\ ``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.
---------------------------------------------------------------------------
[[Page 47630]]
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.\42\
---------------------------------------------------------------------------
\42\ 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.\43\
These trading platforms also have the following obligations: \44\
---------------------------------------------------------------------------
\43\ 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.
\44\ 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.\45\
---------------------------------------------------------------------------
\45\ 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: \46\
---------------------------------------------------------------------------
\46\ 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.\47\
---------------------------------------------------------------------------
\47\ ``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.
---------------------------------------------------------------------------
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.\48\ 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.
---------------------------------------------------------------------------
\48\ 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
[[Page 47631]]
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.\49\
---------------------------------------------------------------------------
\49\ 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%.\50\
---------------------------------------------------------------------------
\50\ All Digital Asset Trading Platforms that were included in
the Index throughout the period were considered in this analysis.
---------------------------------------------------------------------------
As described above, the Trust's affiliate, ETHE, 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.
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.\51\ Specifically, the Commission explained that:
---------------------------------------------------------------------------
\51\ 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.\52\
---------------------------------------------------------------------------
\52\ 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.\53\ Accordingly, the terms
``significant market'' and ``market of significant size'' could mean:
---------------------------------------------------------------------------
\53\ 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.
[[Page 47632]]
---------------------------------------------------------------------------
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.\54\
---------------------------------------------------------------------------
\54\ 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.\55\ 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.
---------------------------------------------------------------------------
\55\ 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,\56\ 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.\57\ 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.
---------------------------------------------------------------------------
\56\ 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.
\57\ 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 ETHE, another spot Ether fund that the Sponsor
manages. ETHE currently trades on OTC Markets and is largest and most
liquid Ether investment product in the world.\58\ 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,
ETHE experienced $1.2 billion of inflows. The cumulative inflow into
ETHE over the stated time period was only 0.5% of the aggregate growth
of Ether's market capitalization.
---------------------------------------------------------------------------
\58\ To further illustrate the size and liquidity of ETHE, as of
March 8, 2024, compared with global commodity ETPs, ETHE would rank
8th in assets under management and 10th in notional trading volume
for the preceding 30 days.
---------------------------------------------------------------------------
Additionally, ETHE 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.
[[Page 47633]]
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 \59\ 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.
---------------------------------------------------------------------------
\59\ 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.
The creation of Baskets requires the delivery by the Authorized
Participant 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''),\60\ each
Authorized Participant that submits a Cash Order to create or redeem
Baskets (a ``Variable Fee Cash Order'') \61\ will pay a fee (the
[[Page 47634]]
``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.
---------------------------------------------------------------------------
\60\ 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.
\61\ 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.
------------------------------------------------------------------------
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.
[[Page 47635]]
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-by-case basis, as approved
by Sponsor))
------------------------------------------------------------------------
The Authorized Participant The Authorized
places a redemption order with the Participant delivers Baskets
Transfer Agent. to be redeemed from its DTC
account to the Transfer Agent.
The Marketing Agent accepts The Liquidity Provider
(or rejects) the redemption order, delivers to the Cash Account:
which is communicated to the (x) in the case of a Variable
Authorized Participant by the Transfer Fee Cash Order, the Total
Agent. Basket NAV less any Variable
The Sponsor notifies the Fee; or
Liquidity Provider of the redemption (y) in the case of an Actual
order.. Execution Cash Order, the
The Sponsor determines the actual proceeds to the Trust
Total Basket NAV and, in the case of a from the liquidation of the
Variable Fee Cash Order, any Variable Total Basket Amount (such
Fee, as soon as practicable after 4:00 amount, as applicable, the
p.m., New York time.. ``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 orders or for any other reason at any
time or from time to time.\62\ 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.
---------------------------------------------------------------------------
\62\ 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-mini-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 \63\ 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.
---------------------------------------------------------------------------
\63\ 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
[[Page 47636]]
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 \64\
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 commencement of
trading on the Exchange.
---------------------------------------------------------------------------
\64\ 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.\65\ 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.
---------------------------------------------------------------------------
\65\ 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.\66\ 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.
---------------------------------------------------------------------------
\66\ 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'').\67\ 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
[[Page 47637]]
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.
---------------------------------------------------------------------------
\67\ 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 issues 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
Registration Statement. 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 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) \68\ 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.
---------------------------------------------------------------------------
\68\ 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.
ETHE 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
[[Page 47638]]
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, which will enhance
competition among market participants, to the benefit of investors and
the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NYSEARCA-2024-44 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-2024-44. 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-2024-44 and should
be submitted on or before June 24, 2024.
[[Page 47639]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\69\
---------------------------------------------------------------------------
\69\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-12042 Filed 5-31-24; 8:45 am]
BILLING CODE 8011-01-P