[Federal Register Volume 90, Number 28 (Wednesday, February 12, 2025)]
[Notices]
[Pages 9470-9488]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-02499]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102372; File No. SR-NYSEARCA-2025-06]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change, as Modified by Amendment No. 1, To List and
Trade Shares of the Grayscale Solana Trust Under NYSE Arca Rule 8.201-
E, Commodity-Based Trust Shares
February 6, 2025.
On January 24, 2025, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) \1\ of the Securities
Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ a
proposed rule change to list and trade shares of the Grayscale Solana
Trust under NYSE Arca Rule 8.201-E, Commodity-Based Trust Shares. On
February 4, 2025, the Exchange filed Amendment No. 1 to the proposed
rule change, which replaced and superseded the original filing in its
entirety. The proposed rule change, as modified by Amendment No. 1, is
described in Items I, II, and III below, which Items have been prepared
by the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change, as modified by Amendment No. 1,
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.201-E: Grayscale Solana Trust (SOL) (the
``Trust'').\4\ This Amendment No. 1 to SR-NYSEARCA-2025-06 replaces SR-
NYSEARCA-2025-06 as originally filed 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.
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\4\ The Trust was previously named Grayscale Solana Trust, whose
name was changed pursuant to a Certificate of Amendment to the
Certificate of Trust of Grayscale Solana Trust filed with the
Delaware Secretary of State on November 23, 2021.
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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.'' \5\ The Exchange proposes to list and trade shares
(``Shares'') \6\ of the Trust pursuant to NYSE Arca Rule 8.201-E.\7\
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\5\ 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.
\6\ The Shares are expected to be listed under the ticker symbol
``GSOL.''
\7\ The descriptions of the Trust, the Shares, and SOL contained
herein are based, in part, on the Annual Reports and Quarterly
Reports published under Alternative Reporting Standards of the OTC
Markets Group Inc. On January 4, 2023, the Trust submitted to the
Commission an amended Form D as a business trust. Shares of the
Trust have been quoted on OTC Market's OTCQB Marketplace under the
symbol ``GSOL'' since April 17, 2023. On March 7, 2024, the Trust
qualified to trade on the OTCQX Best Market. On April 14, 2023 and
March 8, 2024, the Trust published annual reports for GSOL for the
periods ended December 31, 2022 and December 31, 2023, respectively.
On November 11, 2024, August 9, 2024, May 13, 2024, November 10,
2023, August 11, 2023 and May 12, 2023, the Trust published
quarterly reports for GSOL for the periods ended September 30, 2024,
June 30, 2024, March 31, 2024, September 30, 2023, June 30, 2023,
and March 31, 2023, respectively. Reports can be found on OTC
Market's website (https://www.otcmarkets.com/stock/GSOL/disclosure.
The Shares will be of the same class and will have the same rights
as shares of GSOL. According to the Sponsor, freely tradeable shares
of GSOL will remain freely tradeable Shares on the date of the
listing of the Shares that are unregistered under the Securities
Act. Restricted shares of GSOL will remain subject to private
placement restrictions on such date, and the holders of such
restricted shares will continue to hold those Shares subject to
those restrictions until they become freely tradable Shares.
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The Trust is the world's largest Solana (``SOL'') investment fund
by assets under management as of the date of this filing. The Trust has
approximately $134.2 million in assets under management \8\
(representing 0.1% of all SOL in circulation), its Shares trade
millions of dollars in daily volume and are held by more than a quarter
of a million American investor accounts
[[Page 9471]]
seeking exposure to SOL without the cost and complexity of purchasing
the asset directly. However, because the Trust is not currently listed
as an exchange-traded product (``ETP''), the value of the Shares has
not been able to closely track the value of the Trust's underlying SOL.
The Sponsor thus believes that allowing Shares of the Trust to list and
trade on the Exchange as an ETP (i.e., converting the Trust to a spot
SOL ETP) would provide other investors with a safe and secure way to
invest in SOL on a regulated national securities exchange.
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\8\ As of November 22, 2024.
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The sponsor of the Trust is Grayscale Investments, LLC
(``Sponsor''), a Delaware limited liability company. The Sponsor is a
wholly owned subsidiary of Digital Currency Group, Inc. (``Digital
Currency Group''). The trustee for the Trust is Delaware Trust Company
(``Trustee''). The custodian for the Trust is Coinbase Custody Trust
Company, LLC (``Custodian'').\9\ The administrator and transfer agent
of the Trust is expected to be BNY Mellon Asset Servicing, a division
of The Bank of New York Mellon (the ``Transfer Agent''). The
distribution and marketing agent for the Trust is expected to be
Foreside Fund Services, LLC (the ``Marketing Agent''). The index
provider for the Trust is CoinDesk Indices, Inc. (the ``Index
Provider'').
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\9\ According to the Annual Report, Digital Currency Group owns
a minority interest in Coinbase, Inc., which is the parent company
of the Custodian, representing less than 1.0% of its equity.
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The Trust is a Delaware statutory trust, formed on November 9,
2021, that operates pursuant to a trust agreement between the Sponsor
and the Trustee (``Trust Agreement''). The Trust has no fixed
termination date.
Operation of the Trust
According to the Annual Report, the Trust's assets consist solely
of SOL.\10\
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\10\ 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 SOL, generally
through a fork in the Solana Blockchain, an airdrop offered to
holders of SOL 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 SOL 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.
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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,\11\ 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 SOL. In
addition, because the Shares reflect the estimated accrued but unpaid
expenses of the Trust, the number of SOL represented by a Share will
gradually decrease over time as the Trust's SOL are used to pay the
Trust's expenses.
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\11\ The ``Index Price'' means the U.S. dollar value of a SOL
derived from the Digital Asset Trading Platforms (as defined below)
that are reflected in the CoinDesk Solana Price Index (SLX),
calculated at 4:00 p.m., New York time, on each business day. For
purposes of the Trust Agreement, the term Solana Index Price has the
same meaning as the Index Price as defined herein.
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The activities of the Trust are limited to (i) issuing ``Baskets''
(as defined below) in exchange for SOL transferred to the Trust as
consideration in connection with creations, (ii) transferring or
selling SOL as necessary to cover the ``Sponsor's Fee'' \12\ and/or
certain Trust expenses, (iii) transferring SOL 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 SOL 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).
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\12\ The Sponsor's Fee means a fee, payable in SOL, which
accrues daily in U.S. dollars at an annual rate of currently 2.5%,
but which will be lowered in connection with the Trust becoming an
ETP, of the NAV Fee Basis Amount of the Trust as of 4:00 p.m., New
York time, on each day, provided that for a day that is not a
business day, the calculation of the Sponsor's Fee will be based on
the NAV Fee Basis Amount from the most recent business day, reduced
by the accrued and unpaid Sponsor's Fee for such most recent
business day and for each day after such most recent business day
and prior to the relevant calculation date. The ``NAV Fee Basis
Amount'' is calculated in the manner set forth under ``Valuation of
SOL and Determination of NAV'' below.
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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 SOL.
The Trust is not a registered investment company under the
Investment Company Act and the Sponsor believes that the Trust is not
required to register under the Investment Company Act.
Investment Objective
According to the Annual Report, and as further described below, the
Trust's investment objective is for the value of the Shares (based on
SOL per Share) to reflect the value of the SOL 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 SOL, the Shares are designed to provide investors
with a cost-effective and convenient way to gain investment exposure to
SOL. Generally speaking, a substantial direct investment in SOL may
require expensive and sometimes complicated arrangements in connection
with the acquisition, security and safekeeping of the SOL and may
involve the payment of substantial fees to acquire such SOL from third-
party facilitators through cash payments of U.S. dollars. Because the
value of the Shares is correlated with the value of SOL held by the
Trust, it is important to understand the investment attributes of, and
the market for, SOL.
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 SOL and Determination of NAV.''
``NAV per Share'' is calculated by dividing NAV by the number of Shares
then outstanding.
Valuation of SOL 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 SOL and the NAV
calculations.\13\
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\13\ While the Sponsor uses the terminology ``NAV'' in this
filing, the term used in the Trust Agreement is ``Digital Asset
Holdings.''
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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 SOL 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 SOL
owned by the Trust as of 4:00 p.m., New York time, on the immediately
preceding day, less the aggregate number of SOL
[[Page 9472]]
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 SOL, 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.\14\
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\14\ ``Baskets'' and ``Basket Amount'' have the meanings set
forth in ``Creation and Redemption of Shares'' below.
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4. Subtract the U.S. dollar amount of accrued and unpaid Additional
Trust Expenses, if any.\15\
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\15\ 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 SOL, 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 SOL 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.
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5. Subtract the U.S. dollar value of the SOL, 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 SOL, the Sponsor will utilize the
cascading set of rules as described in ``Determination of the Index
Price When Index Price is Unavailable'' below.
SOL and the Solana Network \16\
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\16\ The description of SOL and the Solana Network in this
section was provided by the Sponsor and is based on the Annual
Report.
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According to the Annual Report, SOL is a digital asset that is
created and transmitted through the operations of the peer-to-peer
Solana Network, a decentralized network of computers that operates on
cryptographic protocols. No single entity owns or operates the Solana
Network, the infrastructure of which is collectively maintained by a
decentralized user base. The Solana Network allows people to exchange
tokens of value, called SOL, which are recorded on a public transaction
ledger known as a blockchain. SOL can be used to pay for goods and
services, including computational power on the Solana Network, or it
can be converted to fiat currencies, such as the U.S. dollar, at rates
determined on Digital Asset Trading Platforms or in individual end-
user-to-end-user transactions under a barter system. Furthermore, the
Solana Network was designed to allow 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 SOL on the Solana Network. Smart contract
operations are executed on the Solana Blockchain in exchange for
payment of SOL. Like the Ethereum network, the Solana Network is one of
a number of projects intended to expand blockchain use beyond just a
peer-to-peer money system.
The Solana protocol introduced the Proof-of-History (``PoH'')
timestamping mechanism. PoH automatically orders on-chain transactions
by creating a historical record that proves an event has occurred at a
specific moment in time. PoH is intended to provide a transaction
processing speed and capacity advantage over other blockchain networks
like Bitcoin and Ethereum, which rely on sequential production of
blocks and can lead to delays caused by validator confirmations. PoH is
a new blockchain technology that is not widely used. PoH may not
function as intended. For example, it may require more specialized
equipment to participate in the network and fail to attract a
significant number of users. In addition, there may be flaws in the
cryptography underlying PoH, including flaws that affect functionality
of the Solana Network or make the network vulnerable to attack.
In addition to the PoH mechanism described above, the Solana
Network uses a proof-of-stake consensus mechanism to incentivize SOL
holders to validate transactions. 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, 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 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.''
The Solana protocol was first conceived by Anatoly Yakovenko in a
2017 whitepaper. Development of the Solana Network is overseen by the
Solana Foundation, a Swiss non-profit organization, and Solana Labs,
Inc. (the ``Company''), a Delaware corporation, which administered the
original network launch and token distribution.
Although the Company and the Solana Foundation continue to exert
significant influence over the direction of the development of Solana,
the Solana Network, like the Ethereum network, is decentralized and
does not require governmental authorities or financial institution
intermediaries to create, transmit or determine the value of SOL.
As described in the Annual Report, depending on its
characteristics, a digital asset may be considered a ``security'' under
the federal securities laws. The test for determining whether a
particular digital asset is a ``security'' is complex and difficult to
apply, and the outcome is difficult to predict. Public, though non-
binding, statements by senior officials at the SEC have indicated that
the SEC does not consider Bitcoin or Ether to be securities. In
addition, the SEC, by action through delegated authority approving the
exchange rule filings to list shares of trusts holding Ether as
commodity-based ETPs, appears to have implicitly taken the view that
Ether is not a security. The SEC staff has also provided informal
assurances via no-action letter to a handful of promoters that their
digital assets are not securities. On the other hand, the SEC has
brought enforcement actions against the issuers and promoters of
several other digital assets on the basis that the digital assets in
question are securities. More recently, the SEC has also brought
enforcement actions against Digital Asset Trading Platforms for
operating unregistered securities exchanges on the basis that certain
of the digital assets traded on their platforms are securities,
including SOL.
As part of determining whether SOL is a security, or transactions
in SOL by
[[Page 9473]]
the Sponsor are securities transactions, for purposes of the federal
securities laws, the Sponsor takes into account a number of factors,
including the various definitions of ``security'' under the federal
securities laws and federal court decisions interpreting elements of
these definitions, such as the U.S. Supreme Court's decisions in the
Howey and Reves cases and their progeny, as well as reports, orders,
press releases, public statements and speeches by the SEC, its
commissioners and its staff providing guidance on when a digital asset,
or offer and sale of a digital asset, may be a security for purposes of
the federal securities laws. Finally, the Sponsor discusses the
security status of SOL and the Sponsor's transactions in SOL with
external counsel, and has received a memorandum regarding the status of
SOL and the Sponsor's transactions in SOL under the federal securities
laws from external counsel. Through this process the Sponsor believes
that it is applying the proper legal standards in determining that SOL
is not a security in light of the uncertainties inherent in the Howey
and Reves tests.
Smart Contracts and Development on the Solana 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 Solana Network involves building more complex
tools on top of smart contracts, such as decentralized apps (``DApps'')
and organizations that are autonomous, known as decentralized
autonomous organizations (``DAOs''). 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.
In total, as of December 31, 2023, more than 200 DApps are
currently built on the Solana Network, including DApps in the
collectible non-fungible token, gaming, music streaming, and
decentralized finance categories.
Additionally, the Solana 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. As of December 31,
2023, approximately $1.42 billion was being used as collateral on DeFi
platforms.
In addition, the Solana 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 Solana 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 Solana Network's Operations
In order to own, transfer or use SOL directly on the Solana Network
(as opposed to through an intermediary, such as a custodian), a person
generally must have internet access to connect to the Solana Network.
SOL transactions may be made directly between end-users without the
need for a third-party intermediary. To prevent the possibility of
double-spending SOL, a user must notify the Solana Network of the
transaction by broadcasting the transaction data to its network peers.
The Solana Network provides confirmation against double-spending by
memorializing every transaction in the Solana Blockchain, which is
publicly accessible and transparent. This memorialization and
verification against double-spending is accomplished through the Solana
Network validation process, which adds ``blocks'' of data, including
recent transaction information, to the Solana Blockchain. Unlike other
blockchains that rely solely on sequential production of blocks through
PoW or PoS mechanisms, however, the Solana Network introduces PoH,
which creates a historical record that proves an event has occurred at
a specific moment in time.
Summary of a SOL Transaction
Prior to engaging in SOL transactions directly on the Solana
Network, a user generally must first install on its computer or mobile
device a Solana Network software program that will allow the user to
generate a private and public key pair associated with a SOL address.
The Solana Network software program and the SOL address also enable the
user to connect to the Solana Network and transfer SOL to, and receive
SOL from, other users.
Each Solana Network address, or wallet, is associated with a unique
``public key'' and ``private key'' pair. To receive SOL, the SOL
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 SOL. 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 SOL contained
in the associated address. Likewise, SOL is irretrievably lost if the
private key associated with them is deleted and no backup has been
made. When sending SOL, a user's Solana Network software program must
validate the transaction with the associated private key. In addition,
since every computation on the Solana 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 Solana Network software program to the Solana Network
validators to allow transaction confirmation.
Solana Network validators record and confirm transactions when they
validate and add blocks of information to the Solana Blockchain. 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
Solana Blockchain to which the new block is being added. The validator
becomes aware of outstanding,
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unrecorded transactions through the data packet transmission and
distribution discussed above.
Upon the addition of a block of SOL transactions, the Solana
Network software program of both the spending party and the receiving
party will show confirmation of the transaction on the Solana
Blockchain and reflect an adjustment to the SOL balance in each party's
Solana Network public key, completing the SOL transaction. Once a
transaction is confirmed on the Solana Blockchain, it is irreversible.
Some SOL transactions are conducted ``off-blockchain'' and are
therefore not recorded in the Solana Blockchain. These ``off-blockchain
transactions'' involve the transfer of control over, or ownership of, a
specific digital wallet holding SOL or the reallocation of ownership of
certain SOL 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 Solana
Blockchain, information and data regarding off-blockchain transactions
are generally not publicly available. Therefore, off-blockchain
transactions are not truly SOL transactions in that they do not involve
the transfer of transaction data on the Solana Network and do not
reflect a movement of SOL between addresses recorded in the Solana
Blockchain. For these reasons, off-blockchain transactions are subject
to risks as any such transfer of SOL ownership is not protected by the
protocol behind the Solana Network or recorded in, and validated
through, the blockchain mechanism.
Initial Creation of SOL
Unlike other digital assets such as Bitcoin, which are solely
created through a progressive mining process, 500 million SOL were
created in connection with the launch of the Solana Network. The
initial 500 million SOL were distributed as follows:
Investors: 189 million SOL, or 37.8% of the supply, was
sold in private sales to venture capital and other investors conducted
between 2018 to 2021.
Solana Foundation: 52 million SOL, or 10.4% of the supply,
was distributed to the Solana Foundation for operational costs incurred
in the development of the Solana Network.
Solana Labs, Inc.: 64 million SOL, or 12.8% of the supply,
was retained by Solana Labs to be used, at least in part, to compensate
the employees of Solana Labs.
Community: 195 million SOL, or 39.0% of the supply, was
distributed to the Solana Foundation to be deployed as bounties,
incentive programs, marketing and grants.
Following the launch of the Solana Network, SOL supply increases
through a progressive minting process.
SOL Supply
The rate at which new SOL supply has been minted and put into
circulation has varied since network launch. Additionally, the Solana
protocol reduces the SOL supply by eliminating 50% of transaction fees
paid to the network. As a result, net changes in SOL supply are
expected to vary in the future.
At network launch, the SOL circulating supply was 8 million SOL.
Between network launch and December 31, 2023, the circulating supply of
SOL increased by roughly 5,266% to approximately 429 million SOL.
In February 2021, the SOL supply inflation rate was changed from
0.1% to a new initial inflation rate of 8%. The 8% initial inflation
rate is scheduled to decline in 15% increments until a long-term
inflation rate of 1.5% is reached. As of December 31, 2023, the SOL
supply issuance rate was approximately 5.6% on an annual basis before
any offsets for eliminated transaction fees.
Modifications to the SOL Protocol
Historically the Solana Network's development has been overseen by
Solana Labs, the Solana Foundation and other core developers. The
Solana Foundation and core developers are able to access and alter the
Solana Network source code and, as a result, they are responsible for
quasi-official releases of updates and other changes to the Solana
Network's source code.
For example, in March 2020, the Solana Network launched the Mainnet
Beta version of the Solana Network, one month after launching the
testnet, Tour de SOL. Solana Labs led the development of these
reference implementations.
The release of updates to the Solana Network's source code does not
guarantee that the updates will be automatically adopted. Users and
nodes must accept any changes made to the Solana source code by
downloading the proposed modification of the Solana Network's source
code. A modification of the Solana Network's source code is only
effective with respect to the Solana users that download it. If a
modification is accepted only by a percentage of users and validators,
a division in the Solana 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 Solana Network only if accepted by participants
collectively having a majority of the processing power on the Solana
Network.
Core development of the Solana source code has increasingly focused
on modifications of the Solana 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 SOL as tokens for the
facilitation of their non-financial uses, thereby potentially
increasing demand for SOL and the utility of the Solana Network as a
whole. Conversely, projects that operate and are built within the
Solana Blockchain may increase the data flow on the Solana Network and
could either ``bloat'' the size of the Solana Blockchain or slow
confirmation times.
Forms of Attack Against the Solana Network
All networked systems are vulnerable to various kinds of attacks.
As with any computer network, the Solana Network contains certain
flaws. For example, the Solana Network is currently vulnerable to a
``51% attack'' where, if a party or group were to gain control of more
than 50% of the staked SOL, a malicious actor would be able to gain
full control of the network and the ability to manipulate the Solana
Blockchain. As of December 31, 2023, the top three largest staking
pools controlled approximately 93.5% of the SOL staked on the Solana
Network.
In addition, many digital asset networks have been subjected to a
number of denial of service attacks, which has led to temporary delays
in block creation and in the transfer of SOL.
For example, on September 14, 2021, the Solana Network experienced
a significant disruption, later attributed to a type of denial of
service attack, and was offline for 17 hours, only returning to full
functionality 24 hours later. While persons associated with Solana Labs
and/or the Solana Foundation are understood to have played a key role
in bringing the network back online, the broader community also played
a key role, as Solana validators coordinated to upgrade and restart the
network. Any similar attacks on the Solana Network that impact the
ability to transfer SOL could have a material adverse effect on the
price of SOL and the value of the Shares.
[[Page 9475]]
Custody of the Trust's SOL
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 SOL 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 SOL) 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 SOL 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 SOL from the Trust to redeem a Basket by an Authorized
Participant will follow the same general procedure as transferring SOL
to the Trust to create a Basket by an Authorized Participant, only in
reverse.
The Sponsor will maintain ownership and control of the Trust's SOL
in a manner consistent with good delivery requirements for spot
commodity transactions.
SOL Value
Digital Asset Trading Platform Valuation
The value of SOL is determined by the value that various market
participants place on SOL through their transactions. The most common
means of determining the value of a SOL is by surveying one or more
Digital Asset Trading Platforms where SOL is traded publicly and
transparently (e.g., Coinbase, LMAX Digital, and Kraken).
Digital Asset Trading Platform Public Market Data
On each online Digital Asset Trading Platform, SOL 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 September 30, 2024, the Digital Asset Trading Platforms
included in the Index were Coinbase, LMAX Digital and Kraken. 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 anti-money laundering (``AML'') and know-your-customer (``KYC'')
regulations.
Coinbase: A U.S.-based trading platform registered as a
money services business (``MSB'') with the 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.
LMAX Digital: A U.K.-based trading platform registered as
a broker with FCA. LMAX Digital 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.
Currently, there are several Digital Asset Trading Platforms
operating worldwide and online Digital Asset Trading Platforms
represent a substantial percentage of SOL buying and selling activity
and provide the most data with respect to prevailing
[[Page 9476]]
valuations of SOL. These trading platforms include established trading
platforms such as trading platforms included in the Index which provide
a number of options for buying and selling SOL. The below table
reflects the trading volume in SOL and market share of the SOL-U.S.
dollar trading pairs of each of the Digital Asset Trading Platforms
included in the Index as of September 30, 2024 (collectively,
``Constituent Trading Platforms''), using data since the inception of
the Trust's operations:
----------------------------------------------------------------------------------------------------------------
SOL Trading Platforms included in the index as of September
30, 2024 \1\ Volume (SOL) Market share \2\
----------------------------------------------------------------------------------------------------------------
Coinbase...................................................... 1,784,513,563 66.15%
Kraken........................................................ 436,825,854 16.19%
LMAX Digital.................................................. 30,394,040 1.13%
-------------------------------------------------
Total U.S. Dollar-SOL trading pair........................ 2,251,733,457 83.47%
----------------------------------------------------------------------------------------------------------------
\1\ 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 added LMAX Digital to the Index due to the trading platform meeting the minimum
liquidity requirement. Effective October 27, 2024, the Index Provider added Crypto.com to the Index due to the
trading platform meeting the Index Provider's minimum liquidity requirement, and did not remove any
Constituent Trading Platforms as part of its scheduled quarterly review.
\2\ Market share is calculated using trading volume (in SOL) for certain Digital Asset Trading Platforms
including, Coinbase, LMAX Digital and Kraken, as well as certain other large U.S.-dollar denominated Digital
Asset Trading Platforms that were not included in the Index as of September 30, 2024, including Binance.US,
Bitfinex, Bitstamp, Bittrex, Cex.io, Crypto.com, FTX.US, Gate.io, Gemini, itBit, and OKCoin.
The Index and the Index Price
The Index is a U.S. dollar-denominated composite reference rate for
the price of SOL. The Index is designed to (1) mitigate the effects of
fraud, manipulation and other anomalous trading activity from impacting
the SOL reference rate, (2) provide a real-time, volume-weighted fair
value of SOL and (3) appropriately handle and adjust for non-market
related events.
The Index Price is determined by the Index Provider through a
process in which trade data is cleansed and compiled in such a manner
as to algorithmically reduce the impact of anomalistic or manipulative
trading. This is accomplished by adjusting the weight of each data
input based on price deviation relative to the observable set, as well
as recent and long-term trading volume at each venue relative to the
observable set.
The value of the Index is calculated and disseminated on a 24-hour
basis and will be available on a continuous basis at https://www.coindesk.com/indices.
Constituent Trading Platform Selection
According to the Annual Report, the Digital Asset Trading Platforms
that are included in the Index are selected by the Index Provider
utilizing a methodology that is guided by the International
Organization of Securities Commissions (``IOSCO'') principles for
financial benchmarks. For a trading platform to become a Constituent
Trading Platform, it must satisfy each of the criteria listed below
(the ``Inclusion Criteria''):
Sufficient USD or USDC 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; \17\
---------------------------------------------------------------------------
\17\ ``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-known 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 trading platform that is licensed and able to service
investors in one or more of the following jurisdictions:
[cir] United States
[cir] United Kingdom
[cir] European Union
[cir] Hong Kong
[cir] Singapore
Offer programmatic spot trading of the trading pair \18\
and reliably publish trade prices and volumes on a real-time basis
through Rest and Websocket APIs.
---------------------------------------------------------------------------
\18\ Trading platforms with programmatic trading offer traders
an application programming interface that permits trading by sending
programmed commands to the trading platform.
---------------------------------------------------------------------------
A Digital Asset Trading Platform is removed as a Constituent
Trading Platform when it no longer satisfies the Inclusion Criteria.
The Index Provider does not currently include data from over-the-
counter markets or derivatives platforms among the Constituent Trading
Platforms. According to the Annual Report, over-the-counter data is not
currently included because of the potential for trades to include a
significant premium or discount paid for larger liquidity, which
creates an uneven comparison relative to more active markets. There is
also a higher potential for over-the-counter transactions to not be
arms-length, and thus not be representative of a true market price.
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.\19\ 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
[[Page 9477]]
case-by-case basis, in consultation with external counsel.
---------------------------------------------------------------------------
\19\ 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 SOL on the
Constituent Trading Platforms calculated on a per second basis over a
24-hour period. The Index's algorithm is expected to reflect a four-
pronged methodology to calculate the Index Price from the Constituent
Trading Platforms:
Volume Weighting: Constituent Trading Platforms with
greater liquidity receive a higher weighting in the Index, increasing
the ability to execute against (i.e., replicate) the Index in the
underlying spot markets.
Price-Variance Weighting: The Index Price reflects data
points that are discretely weighted in proportion to their variance
from the rest of the Constituent Trading Platforms. As the price at a
particular trading platform diverges from the prices at the rest of the
Constituent Trading Platforms, its weight in the Index Price
consequently decreases.
Inactivity Adjustment: The Index Price algorithm penalizes
stale activity from any given Constituent Trading Platform. When a
Constituent Trading Platform does not have recent trading data, its
weighting in the Index Price is gradually reduced until it is de-
weighted entirely. Similarly, once trading activity at a Constituent
Trading Platform resumes, the corresponding weighting for that
Constituent Trading Platform is gradually increased until it reaches
the appropriate level.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Index only includes
executed trades in its calculation. Additionally, the Index only
includes Constituent Trading Platforms that charge trading fees to its
users in order to attach a real, quantifiable cost to any manipulation
attempts.
The Index Provider re-evaluates the weighting algorithm on a
periodic basis, but maintains discretion to change the way in which an
Index Price is calculated based on its periodic review or in extreme
circumstances and does not make the exact methodology to calculate the
Index Price publicly available. Nonetheless, the Sponsor believes that
the Index is designed to limit exposure to trading or price distortion
of any individual Digital Asset Trading Platform that experiences
periods of unusual activity or limited liquidity by discounting, in
real-time, anomalous price movements at individual Digital Asset
Trading Platforms.
The Sponsor believes the Index Provider's selection process for
Constituent Trading Platforms as well as the methodology of the Index
Price's algorithm provides a more accurate picture of SOL price
movements than a simple average of Digital Asset Trading Platform spot
prices, and that the weighting of SOL 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 SOL 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 SOL, 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 SOL, 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 SOL for operational purposes by reference to
the Index Price. The Index Price is the value of SOL 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
[[Page 9478]]
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.\20\ 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:
---------------------------------------------------------------------------
\20\ 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.\21\ 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.
---------------------------------------------------------------------------
\21\ The valuation date is any day for which the value of the
SOL in the Trust may be calculated utilizing the Index Price.
---------------------------------------------------------------------------
2. Index Price = The price set by Coin Metrics Real-Time Rate (the
``Secondary Index'') as of 4:00 p.m., New York time, on the valuation
date (the ``Secondary Index Price''). The Secondary Index Price is a
real-time reference rate price, calculated using trade data from
constituent markets selected by Coin Metrics, Inc. (the ``Secondary
Index Provider''). The Secondary Index Price is calculated by applying
weighted-median techniques to such trade data where half the weight is
derived from the trading volume on each constituent market and half is
derived from inverse price variance, where a constituent market with
high price variance as a result of outliers or market anomalies
compared to other constituent markets is assigned a smaller weight. If
the Secondary Index becomes unavailable, or if the Sponsor determines
in good faith that the Secondary Index does not reflect an accurate
price, then the Sponsor will, on a best efforts basis, contact the
Secondary Index Provider to obtain the Secondary Index Price directly
from the Secondary Index Provider. If after such contact the Secondary
Index remains unavailable or the Sponsor continues to believe in good
faith that the Secondary Index does not reflect an accurate price, then
the Sponsor will employ the next rule to determine the Index Price.
There are no predefined criteria to make a good faith assessment and it
will be made by the Sponsor in its sole discretion.
3. Index Price = The price set by the Trust's principal market (as
defined in the Annual Report) (the ``Tertiary Pricing Option'') as of
4:00 p.m., New York time, on the valuation date. The Tertiary Pricing
Option is a spot price derived from the principal market's public data
feed that is believed to be consistently publishing pricing information
as of 4:00 p.m., New York time, and is provided to the Sponsor via an
application programming interface. If the Tertiary Pricing Option
becomes unavailable, or if the Sponsor determines in good faith that
the Tertiary Pricing Option does not reflect an accurate price, then
the Sponsor will, on a best efforts basis, contact the Tertiary Pricing
Provider to obtain the Tertiary Pricing Option directly from the
Tertiary Pricing Provider. If after such contact the Tertiary Pricing
Option remains unavailable after such contact or the Sponsor continues
to believe in good faith that the Tertiary Pricing Option does not
reflect an accurate price, then the Sponsor will employ the next rule
to determine the Index Price. There are no predefined criteria to make
a good faith assessment and it will be made by the Sponsor in its sole
discretion.
4. Index Price = The Sponsor will use its best judgment to
determine a good faith estimate of the Index Price. There are no
predefined criteria to make a good faith assessment and it will be made
by the Sponsor in its sole discretion.
In the event of a fork, the Index Provider may calculate the Index
Price based on a digital asset that the Sponsor does not believe to be
an appropriate asset of the Trust (i.e., a digital asset other than
SOL).\22\ 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.
---------------------------------------------------------------------------
\22\ According to the Annual Report, the Solana Network operates
using open-source protocols, meaning that any user can download the
software, modify it and then propose that the users and validators
of SOL adopt the modification. 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 Solana 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 SOL
running in parallel, yet lacking interchangeability. Forks may also
occur as a network community's response to a significant security
breach.
---------------------------------------------------------------------------
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.\23\
---------------------------------------------------------------------------
\23\ 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.
---------------------------------------------------------------------------
[[Page 9479]]
The Structure and Operation of the Trust Protects Investors and
Satisfies Commission Requirements for SOL-Based Exchange Traded
Products
The Sponsor 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 and Ethereum, 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.\24\ For purposes of the Trust's SOL-based ETP proposal, the
Sponsor anticipates that the Commission may have the same concerns and
addresses each of these in turn below.
---------------------------------------------------------------------------
\24\ 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 a SOL-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.\25\
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\25\ 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 SOL, on any given trading platform may be no more
uniquely resistant to fraud and manipulation than other commodity
markets.\26\ 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.
---------------------------------------------------------------------------
\26\ See generally Bitwise Order.
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Further, the Sponsor believes that SOL is arguably less susceptible
to manipulation than other commodities that underlie ETPs. For example,
with respect to a physical commodity, there may be inside information
relating to the supply of the physical commodity, such as the discovery
of new sources of supply or significant disruptions at mining
facilities that supply the commodity that simply are inapplicable to
SOL. The Sponsor also believes that the fragmentation across SOL
trading platforms, the relatively slow speed of transactions, and the
capital necessary to maintain a significant presence on each trading
platform make manipulation of SOL prices through continuous trading
activity unlikely. Moreover, the linkage between the SOL markets and
the presence of arbitrageurs in those markets means that the
manipulation of the price of SOL on any single venue would require
manipulation of the global SOL price in order to be effective.
Arbitrageurs must have funds distributed across multiple SOL trading
platforms in order to take advantage of temporary price dislocations,
thereby making it unlikely that there will be strong concentration of
funds on any particular SOL trading platform. As a result, the
potential for manipulation on a particular SOL trading platform would
require overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences. For all
of these reasons, the Sponsor believes that SOL is not particularly
susceptible to manipulation, especially as compared to other approved
ETP reference assets.
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
[[Page 9480]]
agreement.\27\ 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.\28\
---------------------------------------------------------------------------
\27\ See Winklevoss Order, 84 FR at 37580, 37582-91; Bitwise
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at
12597.
\28\ See Winklevoss Order, 84 FR at 37582; Wilshire Phoenix
Order, 85 FR at 12597.
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The Sponsor believes the Index represents a novel means to prevent
fraud and manipulation from impacting a reference price for SOL and
that it offers protections beyond those that exist in traditional
commodity markets or equity markets. Specifically, digital assets, such
as SOL, 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 SOL will have
different attributes than traditional commodity markets. Digital assets
like SOL were only introduced within the past decade, twenty years
after the first U.S. ETFs were offered \29\ and 150 years after the
first futures were offered.\30\ 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 SOL took place entirely in an open, transparent and
online setting where other commodities cannot trade.
---------------------------------------------------------------------------
\29\ SEC, ``Investor Bulletin: Exchange-Traded Funds (ETFs),''
August 2012, https://www.sec.gov/investor/alerts/etfs.pdf.
\30\ Commodity Futures Trading Commission (``CFTC''), ``History
of the CFTC,'' https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html.
---------------------------------------------------------------------------
The Trust has priced its Shares consistently for more than three
years based on the Index. The Sponsor believes the Trust's use of the
Index specifically addresses the Commission's concerns in that the
Index serves as an alternative means to prevent fraud and manipulation.
Specifically, the Index can (i) mitigate the effects of fraud,
manipulation and other anomalous trading activity on the SOL reference
rate, (ii) provide a real-time, volume-weighted fair value of SOL and
(iii) appropriately handle and adjust for non-market related events.
As described in more detail below, the Sponsor believes that the
Index accomplishes those objectives in the following ways:
1. The Index tracks the Digital Asset Trading Platform Market price
through trading activity at ``U.S.-Compliant Trading Platforms''; \31\
---------------------------------------------------------------------------
\31\ ``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 the date of this filing, the
U.S.-Compliant Trading Platforms that the Index Provider considered
for inclusion in the Index were Coinbase, Kraken, LMAX Digital and
Crypto.com. From these U.S.-Compliant Trading Platforms, the Index
Provider then applies additional Inclusion Criteria to determine the
Constituent Trading Platforms.
---------------------------------------------------------------------------
2. The Index mitigates the impact of instances of fraud,
manipulation and other anomalous trading activity in real-time through
systematic adjustments;
3. The Index is constructed and maintained by an expert third-party
index provider, allowing for prudent handling of non-market-related
events; and
4. The Index mitigates the impact of instances of fraud,
manipulation and other anomalous trading activity concentrated on any
one specific trading platform through a cross-trading platform
composite index rate.
1. The Index Tracks the Digital Asset Trading Platform Market Price
Through Trading Activity at ``U.S.-Compliant Trading Platforms.''
To reduce the risk of fraud, manipulation, and other anomalous
trading activity from impacting the Index, only U.S.-Compliant Trading
Platforms are eligible to be included in the Index.
The Index maintains a minimum number of three trading platforms and
a maximum number of five trading platforms to track the Digital Asset
Trading Platform Market while offering replicability for traders and
market makers.\32\
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\32\ 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 SOL
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.\33\
These trading platforms also have the following obligations: \34\
---------------------------------------------------------------------------
\33\ 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.
\34\ 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.\35\
---------------------------------------------------------------------------
\35\ 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: \36\
---------------------------------------------------------------------------
\36\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsarequirements-msbs.
---------------------------------------------------------------------------
Identify people with ownership stakes or controlling roles
in the MSB;
[[Page 9481]]
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.
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.\37\ 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.
---------------------------------------------------------------------------
\37\ See Bitwise Order, 84 FR at 55392; Wilshire Phoenix Order,
85 FR at 12603.
---------------------------------------------------------------------------
2. The Index Mitigates the Impact of Instances of Fraud, Manipulation,
and Other Anomalous Trading Activity in Real-Time Through Systematic
Adjustments
The Index is calculated once every second according to a systematic
methodology that relies on observed trading activity on the Constituent
Trading Platforms. While the precise methodology underlying the Index
is currently proprietary, the key elements of the Index are outlined
below:
Volume Weighting: Constituent Trading Platforms with
greater liquidity receive a higher weighting in the Index, increasing
the ability to execute against (i.e., replicate) the Index in the
underlying spot markets.
Price-Variance Weighting: The Index reflects data points
that are discretely weighted in proportion to their variance from the
rest of the Constituent Trading Platforms. As the price at a
Constituent Trading Platform diverges from the prices at the rest of
the Constituent Trading Platforms, its weight in the Index consequently
decreases.
Inactivity Adjustment: The Index algorithm penalizes stale
activity from any given Constituent Trading Platform. When a
Constituent Trading Platform does not have recent trading data, its
weighting in the Index is gradually reduced, until it is de-weighted
entirely. Similarly, once trading activity at the Constituent Trading
Platform resumes, the corresponding weighting for that Constituent
Trading Platform is gradually increased until it reaches the
appropriate level.
Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Index only includes
executed trades in its calculation. Additionally, the Index only
includes Constituent Trading Platforms that charge trading fees to its
users in order to attach a real, quantifiable cost to any manipulation
attempts.
The Index Provider reviews and periodically updates the Constituent
Trading Platforms included in the Index by utilizing a methodology that
is guided by the IOSCO principles for financial benchmarks.
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 each of the
following Inclusion Criteria:
Sufficient USD or USDC 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-known 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 trading platform that is licensed and able to service
investors in one or more of the following jurisdictions:
[cir] United States,
[cir] United Kingdom,
[cir] European Union,
[cir] Hong Kong,
[cir] Singapore; and
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.\38\
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\38\ 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 SOL, third parties may be able to purchase and sell SOL on
public or private markets not included among the constituent Digital
Asset Trading Platforms of the Index, and such transactions may take
place at prices materially higher or lower than the Index Price.
Moreover, there may be variances in the prices of SOL on the various
Digital Asset Trading Platforms, including as a result of differences
in fee structures or administrative procedures on different Digital
Asset Trading Platforms. For example, based on data
[[Page 9482]]
provided by the Index Provider,\39\ on any given day during the twelve
months ended September 30, 2024, 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 1.85% 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 1.09%. 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 0.01%.
---------------------------------------------------------------------------
\39\ All Digital Asset Trading Platforms that were included in
the Index throughout the period were considered in this analysis.
---------------------------------------------------------------------------
The Trust has consistently priced its Shares at 4:00 p.m., E.T.
based on the Index Price for over three years. While that pricing would
be known to the market, the Sponsor believes that, even if efforts to
manipulate the price of SOL at 4:00 p.m., E.T. were successful on any
Digital Asset 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 SOL reference rate, (ii) provide a
real-time, volume-weighted fair value of SOL 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.
* * * * *
In summary, the Sponsor believes that the foregoing addresses
concerns the Commission may have with respect to SOL-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 SOL 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 three years,
and the Index has proven its ability to (i) mitigate the effects of
fraud, manipulation and other anomalous trading activity on the SOL
reference rate, (ii) provide a real-time, volume-weighted fair value of
SOL and (iii) appropriately handle and adjust for non-market related
events.
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 SOL 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 SOL as part of the creation or
redemption process.
The Trust will create Shares by receiving SOL 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 SOL. Further,
the third party will not be acting as an agent of the Authorized
Participant with respect to the delivery of the SOL to the Trust or
acting at the direction of the Authorized Participant with respect to
the delivery of the SOL to the Trust. The Trust will redeem Shares by
delivering SOL 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 SOL. Further, the third party will not be acting as an
agent of the Authorized Participant with respect to the receipt of the
SOL from the Trust or acting at the direction of the Authorized
Participant with respect to the receipt of the SOL from the Trust.
Cash Orders are made through the participation of a Liquidity
Provider \40\ who obtains or receives SOL 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.
---------------------------------------------------------------------------
\40\ A ``Liquidity Provider'' means one or more eligible
companies that facilitate the purchase and sale of SOL 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 SOL 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 SOL in
connection with creations or sell SOL 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.
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According to the Registration Statement, the Trust creates Baskets
(as described below) of Shares only upon receipt of SOL and redeems
Shares only by distributing SOL. ``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 SOL 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 SOL represented by each
Basket being created or redeemed, which is determined by dividing (x)
the number of SOL 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 SOL 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 SOL (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
[[Page 9483]]
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 SOL
represented by a Share will gradually decrease over time as the Trust's
SOL are used to pay the Trust's expenses. As of September 30, 2024,
each Share represented approximately 0.3723 of one SOL.
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 SOL,
and redeems Baskets only by distributing SOL, 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 SOL 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''),\41\ each
Authorized Participant that submits a Cash Order to create or redeem
Baskets (a ``Variable Fee Cash Order'') \42\ will pay a fee (the
``Variable Fee'') based on the Total Basket NAV, and any price
differential of SOL between the trade date and the settlement date will
be borne solely by the Liquidity Provider until such SOL 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 SOL trading platform fees
that the Liquidity Provider incurs in connection with buying or selling
SOL 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.
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\41\ 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 SOL price utilized in
calculating Total Basket NAV on the trade date and the price at
which the Trust acquires or disposes of the SOL 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.
\42\ 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 SOL between the trade date and
the settlement date will be borne solely by the Liquidity Provider
until such SOL have been received by the Trust.
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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 SOL between the trade date and the settlement date will be borne
solely by the Authorized Participant until such SOL 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
SOL 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
SOL by the SOL Network, which will be paid by the Custodian in the case
of redemptions and the Authorized Participant or the Liquidity Provider
in the case of creations. Service providers may charge Authorized
Participants administrative fees for order placement and other services
related to creation of Baskets. As discussed above, Authorized
Participants will also pay the Variable Fee in connection with Variable
Fee Cash Orders. Under certain circumstances Authorized Participants
may also be required to deposit additional cash in the Cash Account, or
be entitled to receive excess cash from the Cash Account, in connection
with creations and redemptions pursuant to Actual Execution Cash
Orders. Authorized Participants will receive no fees, commissions or
other form of compensation or inducement of any kind from either the
Sponsor or the Trust and no such person has any obligation or
responsibility to the Sponsor or the Trust to effect any sale or resale
of Shares.
The following is a summary of the procedures for the creation and
redemption of Baskets.
Creation Procedures
On any business day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Baskets.
Cash Orders for creation must be placed with the Transfer Agent no
later than 1:59:59 p.m., New York time.
The Sponsor may in its sole discretion limit the number of Shares
created pursuant to Cash Orders on any specified day without notice to
the Authorized Participants and may direct the Marketing Agent to
reject any Cash Orders in excess of such capped amount. In exercising
its discretion to limit the number of Shares created pursuant to Cash
Orders, the Sponsor expects to take into consideration a number of
factors, including the availability of Liquidity Providers to
facilitate Cash Orders and the cost of processing Cash Orders.
Creations under Cash Orders will take place as follows, where ``T''
is the trade date and each day in the sequence must be a business day.
Before a creation order is placed, the Sponsor determines if such
creation order will be a Variable Fee Cash Order or an Actual Execution
Cash Order, which determination is communicated to the Authorized
Participant.
[[Page 9484]]
------------------------------------------------------------------------
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: \1\
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.
------------------------------------------------------------------------
\1\ The ``Cash Account'' means the account maintained by the Transfer
Agent for purposes of receiving cash from, and distributing cash to,
Authorized Participants in connection with creations and redemptions
pursuant to Cash Orders. For the avoidance of doubt, the Trust shall
have no interest (beneficial, equitable or otherwise) in the Cash
Account or any cash held therein.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place a redemption order
specifying the number of Baskets to be redeemed.
The redemption of Shares pursuant to Cash Orders will only take
place if approved by the Sponsor in writing, in its sole discretion and
on a case-by-case basis. In exercising its discretion to approve the
redemption of Shares pursuant to Cash Orders, the Sponsor expects to
take into consideration a number of factors, including the availability
of Liquidity Providers to facilitate Cash Orders and the cost of
processing Cash Orders.
Cash Orders for redemption must be placed no later than 1:59:59
p.m., New York time on each business day. The Authorized Participants
may only redeem Baskets and cannot redeem any Shares in an amount less
than a Basket.
Redemptions under Cash Orders will take place as follows, where
``T'' is the trade date and each day in the sequence must be a business
day. Before a redemption order is placed, the Sponsor determines if
such redemption order will be a Variable Fee Cash Order or an Actual
Execution Cash Order, which determination is communicated to the
Authorized Participant.
------------------------------------------------------------------------
Settlement date (T+1 (or T+2 on
Trade date (T) case-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
The Marketing Agent accepts account to the Transfer Agent.
(or rejects) the redemption order, The Liquidity Provider
which is communicated to the delivers to the Cash Account:
Authorized Participant by the Transfer (x) in the case of a Variable
Agent. Fee Cash Order, the Total
The Sponsor notifies the Basket NAV less any Variable
Liquidity Provider of the redemption Fee; or
order. (y) in the case of an Actual
The Sponsor determines the Execution Cash Order, the
Total Basket NAV and, in the case of a actual proceeds to the Trust
Variable Fee Cash Order, any Variable from the liquidation of the
Fee, as soon as practicable after 4:00 Total Basket Amount (such
p.m., New York time. amount, as applicable, the
``Required Redemption Cash'').
Once the Trust is in
simultaneous possession of (x)
the Total Basket Amount and
(y) the Required Redemption
Cash, the Transfer Agent
cancels the Shares comprising
the number of Baskets redeemed
by the Authorized Participant.
The Custodian sends
the Liquidity Provider the
Total Basket Amount, and cash
equal to the Required
Redemption Cash is delivered
to the Authorized Participant
from the Cash Account.
------------------------------------------------------------------------
Suspension or Rejection of Orders and Total Basket Amount
The creation or redemption of Shares may be suspended generally, or
refused with respect to particular requested creations or redemptions,
during any period when the transfer books of the Transfer Agent are
closed or if circumstances outside the control of the Sponsor or its
delegates make it for all practicable purposes not feasible to process
creation orders or redemption orders or for any other reason at any
time or from time to time.\43\ The Transfer Agent may reject an order
or, after accepting an order, may cancel
[[Page 9485]]
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 SOL 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.
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\43\ 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 Solana Network,
affecting the Authorized Participant, the Sponsor, the Trust, the
Transfer Agent, the Marketing Agent and the Custodian and similar
extraordinary events.
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Availability of Information
The Trust's website (https://grayscale.com/crypto-products/grayscale-solana-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 \44\ 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.
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\44\ 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.
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One or more major market data vendors, will provide an intra-day
indicative value (``IIV'') per Share updated every 15 seconds, as
calculated by the Exchange or a third party financial data provider
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m.,
E.T.). The IIV will be calculated using the same methodology as the NAV
per Share of the Trust (as described above), specifically by using the
prior day's closing NAV per Share as a base and updating that value
during the NYSE Arca Core Trading Session to reflect changes in the
value of the Index during the trading day.
The IIV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real-time update of the NAV per
Share, which will be calculated only once at the end of each trading
day. The IIV will be widely disseminated on a per Share basis every 15
seconds during the NYSE Arca Core Trading Session by one or more major
market data vendors. In addition, the IIV will be available through on-
line information services.
The NAV for the Trust will be calculated by the Sponsor once a day
and will be disseminated daily to all market participants at the same
time. To the extent that the Sponsor has utilized the cascading set of
rules described in ``Index Price'' above, the Trust's website will note
the valuation methodology used and the price per SOL 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 SOL 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 SOL is available by subscription from Reuters and Bloomberg. The
spot price of SOL 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 SOL will be
available from major market data vendors and from the trading platforms
on which SOL 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 SOL 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 SOL 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 \45\
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.
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\45\ 17 CFR 240.10A-3.
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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.\46\ 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
[[Page 9486]]
Exchange, make trading in the Shares inadvisable.
---------------------------------------------------------------------------
\46\ 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.\47\ 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.
---------------------------------------------------------------------------
\47\ 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 SOL derivatives
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in the Shares and SOL 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'').\48\ The Exchange is also able to obtain
information regarding trading in the Shares and any underlying SOL or
SOL derivatives in connection with ETP Holders' proprietary trades, or
customer trades effected through ETP Holders on any relevant market.
Under NYSE Arca Rule 8.201-E(g), an ETP Holder acting as a registered
Market Maker in the Shares is required to provide the Exchange with
information relating to its accounts for trading in any underlying
commodity, related futures or options on futures, or any other related
derivatives. Commentary .04 of NYSE Arca Rule 11.3-E requires an ETP
Holder acting as a registered Market Maker, and its affiliates, in the
Shares to establish, maintain and enforce written policies and
procedures reasonably designed to prevent the misuse of any material
nonpublic information with respect to such products, any components of
the related products, any physical asset or commodity underlying the
product, applicable currencies, underlying indexes, related futures or
options on futures, and any related derivative instruments (including
the Shares). As a general matter, the Exchange has regulatory
jurisdiction over its ETP Holders and their associated persons, which
include any person or entity controlling an ETP Holder. To the extent
the Exchange may be found to lack jurisdiction over a subsidiary or
affiliate of an ETP Holder that does business only in commodities or
futures contracts and that subsidiary or affiliate is a member of
another regulatory organization, the Exchange could obtain information
regarding the activities of such subsidiary or affiliate through
surveillance sharing agreements with regulatory organizations to the
extent the Exchange has such an agreement with an organization of which
the subsidiary or affiliate is a member.
---------------------------------------------------------------------------
\48\ 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 Annual
Report. The Information Bulletin will disclose that information about
the Shares of the Trust is publicly available on the Trust's website.
The Information Bulletin will also discuss any relief, if granted,
by the 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) \49\ 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
[[Page 9487]]
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\49\ 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 SOL or any SOL derivative through ETP Holders' proprietary
trades or customer trades effected through ETP Holders 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
SOL. Specifically, the Index provides a better benchmark for the price
of SOL than the Digital Asset Trading Platform Market price because it
(1) tracks the Digital Asset Trading Platform Market price through
trading activity at U.S.-Compliant Trading Platforms; (2) mitigates the
impact of instances of fraud, manipulation and other anomalous trading
activity in real-time through systematic adjustments; (3) is
constructed and maintained by an expert third-party index provider,
allowing for prudent handling of non-market-related events; and (4)
mitigates the impact of instances of fraud, manipulation and other
anomalous trading activity concentrated on any one specific trading
platform through a cross-trading platform composite index rate. The
Trust has used the Index to price the Shares for more than three years,
and the Index has proven its ability to (i) mitigate the effects of
fraud, manipulation and other anomalous trading activity from impacting
the SOL reference rate, (ii) provide a real-time, volume-weighted fair
value of SOL and (iii) appropriately handle and adjust for non-market
related events, such that efforts to manipulate the price of SOL would
have had a negligible effect on the pricing of the Trust, due to the
controls embedded in the structure of the Index. In addition, certain
of the Index's Constituent Trading Platforms also have or have begun to
implement market surveillance infrastructure to further detect,
prevent, and respond to fraud, attempted fraud, and similar wrongdoing,
including market manipulation.
The proposed rule change is 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 SOL price and market information
available on public websites and through professional and subscription
services. Investors may obtain, on a 24-hour basis, SOL pricing
information based on the spot price for SOL from various financial
information service providers. The closing price and settlement prices
of SOL are readily available from the Digital Asset Trading Platforms
and other publicly available websites. In addition, such prices are
published in public sources, or on-line information services such as
Bloomberg and Reuters. The NAV per Share will be calculated daily and
made available to all market participants at the same time. The Trust
will provide website disclosure of its NAV daily. One or more major
market data vendors will disseminate for the Trust on a daily basis
information with respect to the most recent NAV per Share and Shares
outstanding. In addition, if the Exchange becomes aware that the NAV
per Share is not disseminated to all market participants at the same
time, it will halt trading in the Shares until such time as the NAV is
available to all market participants. Quotation and last-sale
information regarding the Shares will be disseminated through the
facilities of the CTA. The IIV will be widely disseminated on a per
Share basis every 15 seconds during the NYSE Arca Core Trading Session
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major
market data vendors. The Exchange represents that the Exchange may halt
trading during the day in which an interruption to the dissemination of
the IIV or the value of the Index occurs. If the interruption to the
dissemination of the IIV or the value of the Index persists past the
trading day in which it occurred, the Exchange will halt trading no
later than the beginning of the trading day following the interruption.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace. As noted above, the Exchange has in place surveillance
procedures relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA. In addition, as noted above,
investors will have ready access to information regarding the Trust's
NAV, IIV, and quotation and last sale information for the Shares.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product, and the first such product
based on SOL, 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.
[[Page 9488]]
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-2025-06 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-2025-06. 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-2025-06 and should
be submitted on or before March 5, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-02499 Filed 2-11-25; 8:45 am]
BILLING CODE 8011-01-P