
[Federal Register Volume 88, Number 236 (Monday, December 11, 2023)]
[Notices]
[Pages 85945-85958]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-27062]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99081; File No. SR-NASDAQ-2023-045]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To List and Trade Shares of 
the iShares Ethereum Trust Under Nasdaq Rule 5711(d) (Commodity-Based 
Trust Shares)

December 5, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 21, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 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 a proposed rule change to list and trade 
shares of the iShares Ethereum Trust (the ``Trust'') under Nasdaq Rule 
5711(d) (``Commodity-Based Trust Shares''). The shares of the Trust are 
referred to herein as the ``Shares.''
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares under Nasdaq 
Rule 5711(d),\3\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange. iShares Delaware Trust Sponsor LLC, 
a Delaware limited liability company and an indirect subsidiary of 
BlackRock, Inc. (``BlackRock''), is the sponsor of the Trust (the 
``Sponsor''). The Shares will

[[Page 85946]]

be registered with the SEC by means of the Trust's registration 
statement on Form S-1 (the ``Registration Statement'').\4\
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    \3\ The Commission approved Nasdaq Rule 5711 in Securities 
Exchange Act Release No. 66648 (March 23, 2012), 77 FR 19428 (March 
30, 2012) (SR-NASDAQ-2012-013).
    \4\ The descriptions of the Trust contained herein are based, in 
part, on information in the Registration Statement. The Registration 
Statement in not yet effective and the Shares will not trade on the 
Exchange until such time that the Registration Statement is 
effective.
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Description of the Trust
    The Shares will be issued by the Trust, a Delaware statutory trust. 
The Trust will operate pursuant to a trust agreement (the ``Trust 
Agreement'') between the Sponsor, BlackRock Fund Advisors (the 
``Trustee'') as the trustee of the Trust and will appoint a Delaware 
Trustee of the Trust (the ``Delaware Trustee'') by such time that the 
Registration Statement is effective. The Trust issues Shares 
representing fractional undivided beneficial interests in its net 
assets. The assets of the Trust consist primarily of ether held by a 
custodian on behalf of the Trust. Coinbase Custody Trust Company, LLC 
(the ``Ether Custodian''), is the custodian for the Trust's ether 
holdings; and another entity will be the custodian for the Trust's cash 
holdings (the ``Cash Custodian'' and together with the Ether Custodian, 
the ``Custodians'') and the administrator of the Trust (the ``Trust 
Administrator''). Under the Trust Agreement, the Trustee may delegate 
all or a portion of its duties to any agent, and has delegated the bulk 
of the day-to-day responsibilities to the Trust Administrator and 
certain other administrative and record-keeping functions to its 
affiliates and other agents. The Trust is not an investment company 
registered under the Investment Company Act of 1940, as amended (the 
``1940 Act'').
    The investment objective of the Trust is to reflect generally the 
performance of the price of ether. The Trust seeks to reflect such 
performance before payment of the Trust's expenses and liabilities. The 
Shares are intended to constitute a simple means of making an 
investment similar to an investment in ether rather than by acquiring, 
holding and trading ether directly on a peer-to-peer or other basis or 
via a digital asset exchange. The Shares have been designed to remove 
the obstacles represented by the complexities and operational burdens 
involved in a direct investment in ether, while at the same time having 
an intrinsic value that reflects, at any given time, the investment 
exposure to the price of ether owned by the Trust at such time, less 
the Trust's expenses and liabilities. Although the Shares are not the 
exact equivalent of a direct investment in ether, they provide 
investors with an alternative method of achieving investment exposure 
to the price of ether through the public securities market, which may 
be more familiar to them.
Custody of the Trust's Ether
    An investment in the Shares is backed by ether held by the Ether 
Custodian on behalf of the Trust. The Ether Custodian will keep custody 
of all of the Trust's ether, other than that which is maintained in the 
Trading Balance with the Prime Broker, in accounts that are required to 
be segregated from the assets held by the Ether Custodian as principal 
and the assets of its other customers (the ``Vault Balance''), with any 
remainder of the Vault Balance held as part of a ``hot storage''.\5\ 
The Ether Custodian will keep a substantial portion of the private keys 
associated with the Trust's ether in ``cold storage'' \6\ (the ``Cold 
Vault Balance'') The hardware, software, systems, and procedures of the 
Ether Custodian may not be available or cost-effective for many 
investors to access directly.
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    \5\ A portion of the Trust's ether holdings and cash holdings 
from time to time may be held with the Prime Broker, an affiliate of 
the Ether Custodian, in the Trading Balance, in connection with in-
kind creations and redemptions of Baskets and the sale of ether to 
pay the Sponsor's Fee and Trust expenses not assumed by the Sponsor. 
These periodic holdings held in the Trading Balance with the Prime 
Broker represent an omnibus claim on the Prime Broker's ether held 
on behalf of clients; these holdings exist across a combination of 
omnibus hot wallets, omnibus cold wallets, or in accounts in the 
Prime Broker's name on a trading venue (including third-party venues 
and the Prime Broker's own execution venue) where the Prime Broker 
executes orders to buy and sell ether on behalf of its clients.
    \6\ The term ``cold storage'' refers to a safeguarding method by 
which the private keys corresponding to ether stored on a digital 
wallet are removed from any computers actively connected to the 
internet. Cold storage of private keys may involve keeping such 
wallet on a non-networked computer or electronic device or storing 
the public key and private keys relating to the digital wallet on a 
storage device (for example, a USB thumb drive) or printed medium 
(for example, papyrus or paper) and deleting the digital wallet from 
all computers.
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Net Asset Value
    The net asset value of the Trust will be equal to the total assets 
of the Trust, including but not limited to, all ether and cash less 
total liabilities of the Trust, each determined by the Trustee pursuant 
to policies established from time to time by the Trustee or its 
affiliates or otherwise described herein. The methodology used to 
calculate an index (the ``Index'') price to value ether in determining 
the net asset value of the Trust may not be deemed consistent with U.S. 
generally accepted accounting principles (``GAAP'').
    The Sponsor has the exclusive authority to determine the Trust's 
net asset value, which it has delegated to the Trustee under the Trust 
Agreement. The Trustee has delegated to the Trust Administrator the 
responsibility to calculate the net asset value of the Trust and the 
NAV, based on a pricing source selected by the Trustee. In determining 
the Trust's net asset value, the Trust Administrator values the ether 
held by the Trust based on the Index, unless otherwise determined by 
the Sponsor in its sole discretion. The CME CF Ether-Dollar Reference 
Rate -New York Variant (the ``CF Benchmarks Index'') shall constitute 
the Index, unless the CF Benchmarks Index is not available or the 
Sponsor in its sole discretion determines not to use the CF Benchmarks 
Index as the Index. If the CF Benchmarks Index is not available or the 
Sponsor determines, in its sole discretion, that the CF Benchmarks 
Index should not be used, the Trust's holdings may be fair valued in 
accordance with the policy approved by the Sponsor.
    The Trust's periodic financial statements may not utilize net asset 
value or NAV to the extent the methodology used to calculate the Index 
is deemed not to be consistent with GAAP. For purposes of the Trust's 
periodic financial statements, the Trust will utilize a pricing source 
that is consistent with GAAP, as of the financial statement measurement 
date. The Sponsor will determine in its sole discretion the valuation 
sources and policies used to prepare the Trust's financial statements 
in accordance with GAAP.
    The Sponsor may declare a suspension of the calculation of the NAV 
of the Trust under certain circumstances.
Net Asset Value
    On each Business Day, as soon as practicable after 4:00 p.m. 
Eastern Time (``ET''), the Trust Administrator evaluates the ether held 
by the Trust as reflected by the CF Benchmarks Index and determines the 
net asset value of the Trust and the NAV. For purposes of making these 
calculations, a Business Day means any day other than a day when Nasdaq 
is closed for regular trading.
    The CF Benchmarks Index employed by the Trust is calculated on each 
Business Day by aggregating the notional value of ether U.S. dollar 
trading activity across major ether spot platforms. The CF Benchmarks 
Index is designed and administered in accordance with IOSCO Principles 
for Financial Benchmarks. The

[[Page 85947]]

Administrator of the CF Benchmarks Index is CF Benchmarks Ltd. (the 
``Index Administrator''). The CF Benchmarks Index serves as a once-a-
day benchmark rate of the U.S. dollar price of ether denominated in 
U.S. dollars (USD/ETH), calculated as of 4:00 p.m. ET. The CF 
Benchmarks Index aggregates the trade flow of ether-U.S. dollar markets 
operated by several ether spot trading platforms, during an observation 
window between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of 
ether at 4:00 p.m. ET. Specifically, the CF Benchmarks Index is 
calculated based on the ``Relevant Transactions'' \7\ of all spot 
trading platforms for ether-USD that meet the CME CF Constituent 
Exchange Criteria, which are currently: Bitstamp, Coinbase, Gemini, 
itBit, Kraken, and LMAX Digital (the ``Constituent Exchanges''), and 
which may change from time to time. Any changes to this composition of 
spot trading platforms are announced on the Administrator's website 
(www.cfbenchmarks.com).
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    \7\ A ``Relevant Transaction'' is any cryptocurrency versus U.S. 
dollar spot trade that occurs during the observation window between 
3:00 p.m. and 4:00 p.m. ET on a Constituent Exchange in the ETH/USD 
pair that is reported and disseminated by a Constituent Exchange 
through its publicly available API and observed by the Index 
Administrator.
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    If the CF Benchmarks Index is not available or the Sponsor 
determines, in its sole discretion, that the CF Benchmarks Index should 
not be used, the Trust's holdings may be fair valued in accordance with 
the policy approved by the Sponsor.
    The Trust is intended to provide a way for Shareholders to obtain 
exposure to ether by investing in the Shares rather than by acquiring, 
holding and trading ether directly on a peer-to-peer or other basis or 
via a digital asset exchange. An investment in Shares of the Trust is 
not the same as an investment directly in ether on a peer-to-peer or 
other basis or via a digital asset exchange.
Creation and Redemption of Shares
    The Trust issues and redeems baskets (``Baskets'') \8\ on a 
continuous basis. Baskets are only issued or redeemed in exchange for 
an amount of ether determined by the Trustee on each day that Nasdaq is 
open for regular trading. No Shares are issued unless the Ether 
Custodian or Prime Broker has allocated to the Trust's account the 
corresponding amount of ether. The amount of ether necessary for the 
creation of a Basket, or to be received upon redemption of a Basket, 
will decrease over the life of the Trust, due to the payment or accrual 
of fees and other expenses or liabilities payable by the Trust. Baskets 
may be created or redeemed only by Authorized Participants, who pay 
BlackRock Investments, LLC (``BRIL''), an affiliate of the Trustee that 
has been retained by the Trust to perform certain order processing, 
Authorized Participant communications, and related services in 
connection with the issuance and redemption of Baskets (``ETF 
Services''), a transaction fee for each order to create or redeem 
Baskets.
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    \8\ The Trust issues and redeems Shares only in blocks of a 
certain specified size or integral multiples thereof. A block of 
Shares is called a ``Basket.'' These transactions take place in 
exchange for ether. Baskets will be offered continuously at the net 
asset value per Share (``NAV'') for the Basket of Shares on the day 
that an order to create a Basket is accepted by the Trust. The Trust 
may change the number of Shares in a Basket. Only registered broker-
dealers that become authorized participants by entering into a 
contract with the Sponsor and the Trustee (``Authorized 
Participants'') may purchase or redeem Baskets. Shares will be 
offered to the public from time to time at varying prices that will 
reflect the price of ether and the trading price of the Shares on 
Nasdaq at the time of the offer.
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Background
    Ethereum is free software that is hosted on computers distributed 
throughout the globe. It employs an array of computer code-based logic, 
called a protocol, to create a unified understanding of ownership, 
commercial activity, and economic logic. This allows users to engage in 
commerce without the need to trust any of its participants or 
counterparties. Ethereum code creates verifiable and unambiguous rules 
that assign clear, strong property rights to create a platform for 
unrestrained business formation and free exchange. No single 
intermediary or entity operates or controls the Ethereum network 
(referred to as ``decentralization''), the transaction validation and 
recordkeeping infrastructure of which is collectively maintained by a 
disparate user base. The Ethereum network allows people to exchange 
tokens of value, or ether (``ETH''), which are recorded on a 
distributed public recordkeeping system or ledger known as a blockchain 
(the ``Ethereum Blockchain''), and which can be used to pay for goods 
and services, including computational power on the Ethereum network, or 
converted to fiat currencies, such as the U.S. dollar, at rates 
determined on digital asset exchanges or in individual peer-to-peer 
transactions. Furthermore, by combining the recordkeeping system of the 
Ethereum Blockchain with a flexible scripting language that is 
programmable and can be used to implement sophisticated logic and 
execute a wide variety of instructions, the Ethereum network is 
intended to act as a foundational infrastructure layer on top of which 
users can build their own custom software programs, as an alternative 
to centralized web servers. In theory, anyone can build their own 
custom software programs on the Ethereum network. In this way, the 
Ethereum network represents a project to expand blockchain deployment 
beyond a peer-to-peer private money system into a flexible, distributed 
alternative computing infrastructure that is available to all. On the 
Ethereum network, ETH is the unit of account that users pay for the 
computational resources consumed by running their programs.
    Up to now, U.S. retail investors have lacked a U.S. regulated, U.S. 
exchange-traded vehicle to gain exposure to ETH. Instead, current 
options include: (i) facing the counter-party risk, legal uncertainty, 
technical risk, and complexity associated with accessing spot ether or 
(ii) over-the-counter ether funds (``OTC ETH Funds'') with high 
management fees and potentially volatile premiums and discounts. 
Meanwhile, investors in other countries, including Germany, Switzerland 
and France, are able to use more traditional exchange listed and traded 
products (including exchange-traded funds holding physical ETH) to gain 
exposure to ETH. Investors across Europe have access to products which 
trade on regulated exchanges and provide exposure to a broad array of 
spot crypto assets. U.S. investors, by contrast, are left with fewer 
and more risky means of getting ether exposure.\9\
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    \9\ The Exchange notes that the list of countries above is not 
exhaustive and that securities regulators in a number of additional 
countries have either approved or otherwise allowed the listing and 
trading of Spot ETH ETPs.
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    To this point, the lack of an ETP that holds spot ETH (a ``Spot ETH 
ETP'') exposes U.S. investor assets to significant risk because 
investors that would otherwise seek cryptoasset exposure through a Spot 
ETH ETP are forced to find alternative exposure through generally 
riskier means. For example, investors in OTC ETH Funds are not afforded 
the benefits and protections of regulated Spot ETH ETPs, resulting in 
retail investors suffering losses due to drastic movements in the 
premium/discount of OTC ETH Funds. An investor who purchased the 
largest OTC ETH Fund in January 2021 and held the position at the end 
of 2022 would have suffered a 30% loss due to the change in the 
premium/discount, even if the price of ETH did not change. Many retail 
investors likely suffered losses due to this premium/discount in OTC 
ETH Fund trading; all such losses could have been avoided if a Spot ETH 
ETP had been available. Additionally,

[[Page 85948]]

many U.S. investors that held their digital assets in accounts at 
FTX,\10\ Celsius Network LLC,\11\ BlockFi Inc.\12\ and Voyager Digital 
Holdings, Inc.\13\ have become unsecured creditors in the insolvencies 
of those entities. If a Spot ETH ETP was available, it is likely that 
at least a portion of the billions of dollars tied up in those 
proceedings would still reside in the brokerage accounts of U.S. 
investors, having instead been invested in a transparent, regulated, 
and well-understood structure--a Spot ETH ETP. To this point, approval 
of a Spot ETH ETP would represent a major win for the protection of 
U.S. investors in the cryptoasset space. The Trust, like all other 
series of Commodity-Based Trust Shares, is designed to protect 
investors against the risk of losses through fraud and insolvency that 
arise by holding digital assets, including ETH, on centralized 
platforms.
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    \10\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \11\ See Celsius Network LLC, et al., Case No. 22-10964.
    \12\ See BlockFi Inc., Case No. 22-19361.
    \13\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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Applicable Standard
    The Commission has historically approved or disapproved exchange 
filings to list and trade series of Trust Issued Receipts, including 
spot based Commodity-Based Trust Shares, on the basis of whether the 
listing exchange has in place a comprehensive surveillance sharing 
agreement with a regulated market of significant size related to the 
underlying commodity to be held.\14\ Prior orders from the Commission 
have pointed out that in every prior approval order for Commodity-Based 
Trust Shares, there has been a derivatives market that represents the 
regulated market of significant size, generally a Commodity Futures 
Trading Commission regulated futures market.\15\ Further to this point,

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the Commission's prior orders have noted that the spot commodities and 
currency markets for which it has previously approved spot exchange 
traded products (``ETPs'') are generally unregulated and that the 
Commission relied on the underlying futures market as the regulated 
market of significant size that formed the basis for approving the 
series of Currency and Commodity-Based Trust Shares, including gold, 
silver, platinum, palladium, copper, and other commodities and 
currencies. The Commission specifically noted in the Winklevoss Order 
that the First Gold Approval Order ``was based on an assumption that 
the currency market and the spot gold market were largely 
unregulated.'' \16\
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    \14\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order''). Prior orders from the Commission have pointed 
out that in every prior approval order for Commodity-Based Trust 
Shares, there has been a derivatives market that represents the 
regulated market of significant size, generally a Commodity Futures 
Trading Commission (the ``CFTC'') regulated futures market. Further 
to this point, the Commission's prior orders have noted that the 
spot commodities and currency markets for which it has previously 
approved spot ETPs are generally unregulated and that the Commission 
relied on the underlying futures market as the regulated market of 
significant size that formed the basis for approving the series of 
Currency and Commodity-Based Trust Shares, including gold, silver, 
platinum, palladium, copper, and other commodities and currencies. 
The Commission specifically noted in the Winklevoss Order that the 
approval order issued related to the first spot gold ETP ``was based 
on an assumption that the currency market and the spot gold market 
were largely unregulated.'' See Winklevoss Order at 37592. As such, 
the regulated market of significant size test does not require that 
the spot ether market be regulated in order for the Commission to 
approve this proposal, and precedent makes clear that an underlying 
market for a spot commodity or currency being a regulated market 
would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to 
surveillance sharing agreements with the underlying futures market 
in order to determine whether such products were consistent with the 
Act.
    \15\ See streetTRACKS Gold Shares, Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX 
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares 
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold 
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993, 
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS 
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR 
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS 
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74 
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of 
proposed rule change included NYSE Arca's representation that 
``[t]he most significant palladium futures exchanges are the NYMEX 
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest 
exchange in the world for trading precious metals futures and 
options,'' and that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which NYMEX is a member, 
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act 
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29, 
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included 
NYSE Arca's representation that ``[t]he most significant platinum 
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' 
that ``NYMEX is the largest exchange in the world for trading 
precious metals futures and options,'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9, 
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical 
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of 
proposed rule change included NYSE Arca's representation that the 
COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group, Exchange Act Release No. 
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott 
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5, 
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act 
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17, 
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant gold, silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act 
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15, 
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release 
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE 
Arca's representation that ``the most significant gold futures 
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that 
``COMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8, 
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott 
Physical Platinum and Palladium Trust, Exchange Act Release No. 
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012–111) (notice of proposed rule change included 
NYSE Arca's representation that ``[f]utures on platinum and 
palladium are traded on two major exchanges: The New York Mercantile 
Exchange . . . and Tokyo Commodities Exchange'' and that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' of which COMEX is a member, Exchange Act Release No. 68101 
(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX 
Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No. 
66930 (May 7, 2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-
2012-18) (notice of proposed rule change included NYSE Arca's 
representation that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which COMEX is a member, 
and that gold futures are traded on COMEX and the Tokyo Commodity 
Exchange, with a cross-reference to the proposed rule change to list 
and trade shares of the ETFS Gold Trust, in which NYSE Arca 
represented that COMEX is one of the ``major world gold markets,'' 
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-
43, 17547 (Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange 
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 
75485-86 (Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper 
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 
13727, 13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); 
First Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14, 
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) 
(notice of proposed rule change included NYSE Arca's representation 
that FINRA, on behalf of the exchange, may obtain trading 
information regarding gold futures and options on gold futures from 
members of the Intermarket Surveillance Group, including COMEX, or 
from markets ``with which [NYSE Arca] has in place a comprehensive 
surveillance sharing agreement,'' and that gold futures are traded 
on COMEX and the Tokyo Commodity Exchange, with a cross-reference to 
the proposed rule change to list and trade shares of the ETFS Gold 
Trust, in which NYSE Arca represented that COMEX is one of the 
``major world gold markets,'' Exchange Act Release No. 69847 (June 
25, 2013), 78 FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold 
Trust, Exchange Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 
4786-87 (Jan. 29, 2014) (SR-NYSEArca-2013-137) (notice of proposed 
rule change included NYSE Arca's representation that ``COMEX is the 
largest gold futures and options exchange'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
including with respect to transactions occurring on COMEX pursuant 
to CME and NYMEX's membership, or from exchanges ``with which [NYSE 
Arca] has in place a comprehensive surveillance sharing agreement,'' 
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369, 
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release 
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15, 
2016) (SR-NYSEArca-2016-84).
    \16\ See Winklevoss Order at 37592.
---------------------------------------------------------------------------

    As such, the regulated market of significant size test does not 
require that the spot ether market be regulated in order for the 
Commission to approve this proposal, and precedent makes clear that an 
underlying market for a spot commodity or currency being a regulated 
market would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to surveillance 
sharing agreements with the underlying futures market in order to 
determine whether such products were consistent with the Act. With this 
in mind, the Bitcoin Futures market, as defined below, is the proper 
market to consider in determining whether there is a related regulated 
market of significant size.
    Further to this point, the Exchange notes that the Commission has 
approved proposals related to the listing and trading of funds that 
would primarily hold Bitcoin Futures that are registered under the 
Securities Act of 1933 (``1933 Act'') instead of the 1940 Act.\17\ In 
the Teucrium Approval, the Commission found the Bitcoin Futures market 
to be a regulated market of significant size as it relates to Bitcoin 
Futures, which was inconsistent with prior disapproval orders for ETPs 
that would hold actual bitcoin instead of derivatives contracts (``Spot 
Bitcoin ETPs'') that use the same pricing methodology as the Bitcoin 
Futures. However, and as discussed below, in recent weeks the SEC has 
approved a number of ETH-based exchange-traded funds (``ETFs'') for 
trading.
---------------------------------------------------------------------------

    \17\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5, 
2022) (collectively, with the Teucrium Approval, the ``Bitcoin 
Futures Approvals'').
---------------------------------------------------------------------------

    Meanwhile, the Commission has continued to disapprove proposals to 
list and trade Spot Bitcoin ETPs that would hold spot bitcoin on the 
seemingly conflicting basis that the CME Bitcoin Futures market is not 
a regulated market of significant size.\18\ In the recently decided 
Grayscale Investments, LLC v. Securities and Exchange Commission,\19\ 
however, the court resolved this conflict by finding that the SEC had 
failed to provide a coherent explanation as to why it had approved the 
Bitcoin Futures ETPs while disapproving the proposal to list and trade 
shares of the Grayscale Bitcoin Trust and vacating the disapproval 
order.\20\
---------------------------------------------------------------------------

    \18\ The proposed spot bitcoin funds are nearly identical to the 
Trust but proposed to hold bitcoin instead of ETH.
    \19\ Grayscale Investments, LLC v. Securities and Exchange 
Commission, et al., Case No. 22-1142 (the ``Grayscale Order'').
    \20\ Id.
---------------------------------------------------------------------------

    As mentioned above, on October 2, 2023 the SEC approved nine ETH-
based ETFs for trading.\21\ The ETFs hold ETH futures contracts that 
trade on the CME and settle using the CME CF Ethereum Reference Rate 
(``ERR''), which is priced based on the spot ETH markets Coinbase, 
Kraken, LMAX, Bitstamp, Gemini, and itBit, essentially the same spot 
markets that are included in the Index that the Trust uses to value its 
ETH holdings. Given that the Commission has approved ETFs that offer 
exposure to ETH futures, which themselves are priced based on the 
underlying spot ETH market, the Sponsor believes that the Commission 
must also approve ETPs that offer exposure to spot ETH, like the Trust.
---------------------------------------------------------------------------

    \21\ These ETFs included the Bitwise Ethereum Strategy ETF, 
Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether 
Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin & 
Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy 
ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum 
Strategy ETF, and Volatility Shares Ethereum Strategy ETF 
(collectively, the ``ETH Futures Approvals'').
---------------------------------------------------------------------------

    In the context of other digital asset-based ETF and ETP proposals 
for Bitcoin, the SEC has sought to justify treating futures-based ETFs 
differently from spot-based ETFs because of (i) distinctions between 
the regulations under which the two products would be registered (under 
the 1940 Act for digital-asset futures ETFs and 1933 Act for spot 
digital-asset ETPs), and (ii) the existence of regulation and 
surveillance-sharing over the CME digital-asset futures market through 
the Intermarket Surveillance Group (``ISG''), as compared to the spot 
market for those digital assets.\22\
---------------------------------------------------------------------------

    \22\ See, e.g., Chair Gary Gensler Public Statement, ``Remarks 
Before the Aspen Security Forum,'' (August 3, 2021), stating that 
the Chair looked forward to the Commission's review of Bitcoin-based 
ETF proposals registered under the 1940 Act, ``particularly if those 
are limited to [the] CME-traded Bitcoin futures,'' noting the 
``significant investor protection'' offered by the 1940 Act, https://www.sec.gov/news/public-statement/gensler-aspen-security-forum-2021-08-03; Securities Exchange Act Release No. 93559 (November 12, 
2021), 86 FR 64539 (November 18, 2021) (SR-CboeBZX-2021-019) (Order 
Disapproving a Proposed Rule Change to List and Trade Shares of the 
VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares) (``VanEck Order'') (denying the first spot bitcoin ETP 
registered under the 1933 Act following the first approval of a 
bitcoin futures ETF registered under the 1940 Act, noting the 
differences in the standard of review that applies to such 
products); Securities Exchange Act Release No. 94620 (April 6, 
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 2, to List and Trade Shares of the Teucrium Bitcoin 
Futures Fund under NYSE ARCA Rule 8.200-E, Commentary .02 (Trust 
Issued Receipts)) (``Teucrium Order'') (approving the first bitcoin 
futures ETP registered under the 1933 Act, stating that ``With 
respect to the proposed ETP, the underlying bitcoin assets are CME 
bitcoin futures contracts. The relevant analysis, therefore, is 
whether Arca has a comprehensive surveillance sharing agreement with 
a regulated market of significant size related to CME bitcoin 
futures contracts. As discussed below, taking into consideration the 
direct relationship between the regulated market with which Arca has 
a surveillance-sharing agreement and the assets held by the proposed 
ETP, as well as developments with respect to the CME bitcoin futures 
market--including the launch of exchange-traded funds registered 
under the Investment Company Act of 1940 (``1940 Act'') that hold 
CME bitcoin futures (``Bitcoin Futures ETFs'')--the Commission 
concludes that the Exchange has the requisite surveillance-sharing 
agreement.'').
---------------------------------------------------------------------------

    While the 1940 Act has certain added investor protections that the 
1933 Act does not require, these protections do not seek to allay harms 
arising from underlying assets or markets of assets that ETFs hold, 
such as the potential for fraud or manipulation in such markets. In 
other words, the Sponsor does not believe that the application of the 
1940 Act supports the purported justifications the Commission has made 
in denying other spot digital asset ETPs. Instead, the 1940 Act seeks 
to remedy certain abusive practices in the management of investment 
companies such as ETFs, and thus places certain restrictions on ETFs 
and ETF sponsors. The 1940 Act explicitly lists out the types of abuses 
it seeks to prevent, and places certain restrictions related to

[[Page 85950]]

accounting, borrowing, custody, fees, and independent boards, among 
others. Notably, none of these restrictions address an ETF's underlying 
assets, whether ETH futures or spot ETH, or the markets from which such 
assets' pricing is derived, whether the CME ETH futures market or spot 
ETH markets. As a result, the Sponsor believes that the distinction 
between registration of ETH futures ETFs under the 1940 Act and the 
registration of spot ETH ETPs under the 1933 Act is one without a 
difference in the context of ETH-based ETP proposals.
    As to (i) above, the Sponsor believes that because the CME ETH 
futures market is priced based on the underlying spot ETH market, any 
fraud or manipulation in the spot market would necessarily affect the 
price of ETH futures, thereby affecting the net asset value of an ETP 
holding spot ETH or an ETF holding ETH futures, as well as the price 
investors pay for such product's shares. Accordingly, either CME 
surveillance can detect spot-market fraud that affects both futures 
ETFs and spot ETPs, or that surveillance cannot do so for either type 
of product. Having approved ETH futures ETFs in part on the basis of 
such surveillance, the Commission has clearly determined that CME 
surveillance can detect spot-market fraud that would affect spot ETPs, 
and the Sponsor thus believes that it must also approve spot ETH ETPs 
on that basis.
    In summary, both the Exchange and the Sponsor believe that this 
proposal and the included analysis are sufficient to establish that the 
CME ETH Futures market represents a regulated market of significant 
size as it relates both to the CME ETH Futures market and to the spot 
ETH market and that this proposal should be approved.
    Additionally, the Sponsor believes that the distinctions between 
the 1940 Act and the 1933 Act, and the surveillance-sharing available 
for the CME ETH futures market versus the spot ETH market, are not 
meaningful in the context of ETH-based ETF and ETP proposals, and that 
such reasoning cannot be a basis for the Commission treating ETH 
futures ETFs differently from spot ETH ETPs like the Trust. The Sponsor 
believes that the Commission's approval of ETH futures ETFs means it 
must also approve spot ETH ETPs like the Trust.
CME ETH Futures
    CME began offering trading in Ether Futures in February 2021. Each 
contract represents 50 ETH and is based on the CME CF Ether-Dollar 
Reference Rate.\23\ The contracts trade and settle like other cash-
settled commodity futures contracts. Most measurable metrics related to 
CME ETH Futures have generally trended up since launch, although some 
metrics have slowed recently. For example, there were 78,571 CME ETH 
Futures contracts traded in September 2023 (approximately $6.3 billion) 
compared to 163,114 ($11.9 billion) and 130,546 ($21.2 billion) 
contracts traded in September 2022, and September 2022 
respectively.\24\ The daily correlation between the spot ETH and the 
CME ETH Futures is 0.9993 from the period of 10/13/22 through 10/13/
23.\25\ The number of large open interest holders \26\ and unique 
accounts trading CME ETH Futures have both increased, even in the face 
of heightened Ether price volatility.
---------------------------------------------------------------------------

    \23\ The CME CF Ether-Dollar Reference Rate is based on a 
publicly available calculation methodology based on pricing sourced 
from several crypto exchanges and trading platforms, including 
Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
    \24\ Source: Bloomberg, BlackRock calculations. Data as of 10/
18/2023 for period shown (2/8/2021 to 9/30/2023).
    \25\ Source: S&P Ethereum Index, S&P CME Ether Futures Index 
(Spot).
    \26\ A large open interest holder in CME ETH Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
1250 ether. At a price of approximately $1,867 per ether on 7/31/
2023, more than 59 firms had outstanding positions of greater than 
$2.3 million in CME ETH Futures.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 85951]]

[GRAPHIC] [TIFF OMITTED] TN11DE23.000

[GRAPHIC] [TIFF OMITTED] TN11DE23.001

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

    \27\ The Exchange believes that ETH is resistant to price 
manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of ETH trading render it difficult and 
prohibitively costly to manipulate the price of ETH. The 
fragmentation across ETH platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of ETH prices 
through continuous trading activity challenging. To the extent that 
there are ETH exchanges engaged in or allowing wash trading or other 
activity intended to manipulate the price of ETH on other markets, 
such pricing does not normally impact prices on other exchange 
because participants will generally ignore markets with quotes that 
they deem non-executable. Moreover, the linkage between the ETH 
markets and the presence of arbitrageurs in those markets means that 
the manipulation of the price of ETH price on any single venue would 
require manipulation of the global ETH price in order to be 
effective. Arbitrageurs must have funds distributed across multiple 
trading platforms in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular ETH exchange or OTC 
platform. As a result, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences.
---------------------------------------------------------------------------

    In order for any proposed rule change from an exchange to be 
approved, the Commission must determine that, among other things, the 
proposal is consistent with the requirements of section 6(b)(5) of the 
Act, specifically including: (i) the requirement that a national 
securities exchange's rules are designed to prevent fraudulent and 
manipulative acts and practices; \27\ and (ii) the requirement that an 
exchange proposal be designed, in general, to protect investors and the 
public interest.

[[Page 85952]]

The Exchange believes that this proposal is consistent with the 
requirements of section 6(b)(5) of the Act and that this filing 
sufficiently demonstrates that the CME ETH Futures market represents a 
regulated market of significant size and that, on the whole, the 
manipulation concerns previously articulated by the Commission are 
sufficiently mitigated to the point that they are outweighed by 
quantifiable investor protection issues that would be resolved by 
approving this proposal.
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance sharing 
agreement in place \28\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\29\ The only remaining 
issue to be addressed is whether the ETH Futures market constitutes a 
market of significant size, which both the Exchange and the Sponsor 
believe that it does. The terms ``significant market'' and ``market of 
significant size'' include a market (or group of markets) as to which: 
(a) there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
manipulate the ETP, so that a surveillance sharing agreement would 
assist the listing exchange in detecting and deterring misconduct; and 
(b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\30\
---------------------------------------------------------------------------

    \28\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in the ISG 
constitutes such a surveillance sharing agreement. See Securities 
Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 
(March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix 
Disapproval'').
    \29\ For a list of the current members and affiliate members of 
ISG, see https://www.isgportal.com/.
    \30\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance sharing agreement.\31\
---------------------------------------------------------------------------

    \31\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

(A) Reasonable Likelihood That a Person Attempting To Manipulate the 
ETP Would Also Have To Trade on That Market To Manipulate the ETP
    In light of the similarly high correlation between spot ETH/CME ETH 
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999, 
respectively),\32\ applying the same rationale that the Commission 
applied to a Bitcoin Futures ETF in the Bitcoin Futures Approvals and 
the ETH Futures ETFs in the ETH Futures Approvals also indicates that 
this test is satisfied for this proposal. In the Teucrium Approval, the 
SEC stated:
---------------------------------------------------------------------------

    \32\ Source: S&P Ethereum Index, S&P CME Ether Futures Index 
(Spot), S&P Bitcoin Index, and S&P CME Bitcoin Futures Index (Spot).
---------------------------------------------------------------------------

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real time and ongoing basis in order to detect and 
prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably be 
relied upon to capture the effects on the CME futures market caused by 
a person attempting to manipulate the proposed futures ETP by 
manipulating the price of CME futures contracts, whether that attempt 
is made by directly trading on the CME futures market or indirectly by 
trading outside of the CME futures market. As such, when the CME shares 
its surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct related 
to the non cash assets held by the proposed ETP.\33\
---------------------------------------------------------------------------

    \33\ See Teucrium Approval at 21679.
---------------------------------------------------------------------------

    The assumptions from this statement are also true for CME ETH 
Futures, a number of which have recently been approved by the 
Commission.\34\ CME ETH Futures pricing is based on pricing from spot 
ETH markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME BTC futures market caused by a person attempting to manipulate 
the proposed futures ETP by manipulating the price of CME BTC futures 
contracts . . . indirectly by trading outside of the CME BTC futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of CME BTC Futures. This same logic would extend 
to CME ETH Futures markets where CME's surveillance would be able to 
capture the effects of trading on the relevant spot markets on the 
pricing of CME ETH Futures. This was further acknowledged in the 
Grayscale lawsuit when Judge Rao stated ``. . . the Commission in the 
Teucrium order recognizes that the futures prices are influenced by the 
spot prices, and the Commission concludes in approving futures ETPs 
that any fraud on the spot market can be adequately addressed by the 
fact that the futures market is a regulated one . . .'' The Exchange 
agrees with the Commission on this point and notes that the pricing 
mechanism applicable to the Shares is similar to that of the CME ETH 
Futures.
---------------------------------------------------------------------------

    \34\ See supra footnote 21.
---------------------------------------------------------------------------

    As such, the part (a) of the significant market test outlined above 
is satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares in the same way that it would be for the 
Bitcoin Futures ETPs, the ETH Futures ETPs and Spot Bitcoin ETPs.
(B) Predominant Influence on Prices in Spot and ETH Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME ETH Futures 
market or spot market for a number of reasons. First, because the Trust 
would not hold CME ETH Futures contracts, the only way that it could be 
the predominant force on prices in that market is through the spot 
markets that CME ETH Futures contracts use for pricing.\35\ The Sponsor 
notes that ETH total 24-hour spot

[[Page 85953]]

trading volume has averaged $9.1B over the year ending October 16, 
2023,\36\ with approximately $1.7B occurring on venues whose trades are 
included in the sponsor's benchmark.\37\ The Sponsor expects that the 
Trust would represent a very small percentage of this daily trading 
volume in the spot ETH market even in its most aggressive projections 
for the Trust's assets and, thus, the Trust would not have an impact on 
the spot market and therefore could not be the predominant force on 
prices in the CME ETH Futures market. Second, much like the CME Bitcoin 
Futures market, the CME ETH Futures market has progressed and matured 
significantly. As the court found in the Grayscale Order ``Because the 
spot market is deeper and more liquid than the futures market, 
manipulation should be more difficult, not less.'' The Exchange and 
sponsor agree with this sentiment and believe it applies equally to the 
spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------

    \35\ This logic is reflected by the court in the Grayscale Order 
at 17-18. Specifically, the court found that ``Because Grayscale 
owns no futures contracts, trading in Grayscale can affect the 
futures market only through the spot market . . . But Grayscale 
holds just 3.4 percent of outstanding bitcoin, and the Commission 
did not suggest Grayscale can dominate the price of bitcoin.''
    \36\ Source: CoinGecko.
    \37\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------

(C) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
SSA With Ether Spot Market
    The Exchange is also proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares.
    On June 8, 2023, the Exchange reached an agreement on terms with 
Coinbase, Inc. (``Coinbase'') to enter into a Surveillance-Sharing 
Agreement, and the associated term sheet became effective as of June 
16, 2023. Based on this agreement on terms, the Exchange and Coinbase 
will finalize and execute a definitive agreement that the parties 
expect to be executed prior to allowing trading of the Commodity-Based 
Trust Shares. Trading of ETH on Coinbase represents a significant 
portion of US-based ETH trading. The Sponsor has stated to the Exchange 
that, based on publicly available data reported by spot ether platforms 
active in the U.S. market, trading on Coinbase has represented 
approximately 66% of US-dollar to ether trading on such U.S.-based 
platforms out of total YTD volume across these platforms of 
approximately U.S. $93 billion, as of October 16, 2023.\38\
---------------------------------------------------------------------------

    \38\ This analysis is based on the following spot ether 
platforms: Coinbase, Binance US, Kraken, Bitstamp, Gemini, and 
itBit.
---------------------------------------------------------------------------

    The Surveillance Sharing Agreement is expected to be a bilateral 
surveillance-sharing agreement between Nasdaq and Coinbase that is 
intended to supplement the Exchange's market surveillance program. The 
Surveillance Sharing Agreement is expected to have the hallmarks of a 
surveillance-sharing agreement between two members of the ISG, which 
would give the Exchange supplemental access to data regarding spot 
ether trades on Coinbase where the Exchange determines it is necessary 
as part of its surveillance program for the Commodity-Based Trust 
Shares. This means that the Exchange expects to receive market data for 
orders and trades from Coinbase, which it will utilize in surveillance 
of the trading of Commodity-Based Trust Shares. In addition, the 
Exchange can request further information from Coinbase related to spot 
ether trading activity on the Coinbase exchange platform, if the 
Exchange determines that such information would be necessary to detect 
and investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.
(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to ETH through OTC ETH Funds is greater than $5 
billion. With that growth, so too has grown the quantifiable investor 
protection issues to U.S. investors through premium/discount volatility 
and management fees for OTC ETH Funds. The Exchange believes that, as 
described above, the concerns related to the prevention of fraudulent 
and manipulative acts and practices have been sufficiently addressed to 
be consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, such concerns are now at the very least 
outweighed by investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to ETH in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in ETH Futures ETFs and operating companies that are 
imperfect proxies for ETH exposure; and (iv) providing an alternative 
to custodying spot ETH.
Spot and Proxy Exposure to Ether
    Exposure to ether through an ETP also presents certain advantages 
for retail investors compared to buying spot ether directly. The most 
notable advantage from the Sponsor's perspective is the elimination of 
the need for an individual retail investor to either manage their own 
private keys or to hold ether through a cryptocurrency exchange that 
lacks sufficient protections. Typically, retail exchanges hold most, if 
not all, retail investors' ether in ``hot'' (internet connected) 
storage and do not make any commitments to indemnify retail investors 
or to observe any particular cybersecurity standard. Meanwhile, a 
retail investor holding spot ether directly in a self-hosted wallet may 
suffer from inexperience in private key management (e.g., insufficient 
password protection, lost key, etc.), which point of failure could 
cause them to lose some or all of their ether holdings. Thus, with 
respect to custody of the Trust's ether assets, the Trust presents 
advantages from an investment protection standpoint for retail 
investors compared to owning spot ether directly or via a digital asset 
exchange.
Availability of Information
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the prior business 
day's NAV; (b) the prior business day's Official Closing Price; (c) 
calculation of the premium or discount of such Official Closing Price 
against such NAV; (d) data in chart form displaying the frequency 
distribution of discounts and premiums of the Official Closing Price 
against the NAV, within appropriate ranges for each of the four 
previous calendar quarters (or for the life of the Trust, if shorter); 
(e) the prospectus; and (f) other applicable quantitative information. 
The Trust Administrator will also disseminate the Trust's holdings on a 
daily basis on the Trust's website. The price of ether will be made 
available by one or more major market data vendors, updated at least 
every 15 seconds during the Regular Market Session. Information about 
the CF Benchmarks Index, including key elements of how the CF 
Benchmarks Index is calculated, will be publicly available at https://

[[Page 85954]]

www.cfbenchmarks.com/. Also, an estimated value that reflects an 
estimated intraday value of the Trust's portfolio (the ``Intraday 
Indicative Value'' or ``IIV''), will be disseminated.
    One or more major market data vendors will provide an IIV per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Market 
Session (9:30 a.m. to 4:00 p.m. (ET)). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during the Exchange's Regular Market Session to reflect changes 
in the value of the Trust's NAV during the trading day.
    The IIV disseminated during the Exchange's Regular Market Session 
should not be viewed as an actual real time update of the NAV, which 
will be calculated only once at the end of each trading day. The IIV 
will be widely disseminated on a per Share basis every 15 seconds 
during the Exchange's Regular Market Session by one or more major 
market data vendors. In addition, the IIV will be available through 
online information services.
    The NAV for the Trust will be calculated by the Trust Administrator 
once a day and will be disseminated daily to all market participants at 
the same time. Quotation and last sale information regarding the Shares 
will be disseminated through the facilities of the Consolidated Tape 
Association (``CTA'').
Initial and Continued Listing
    The Shares will be subject to Nasdaq Rule 5711(d)(vi), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and will be made 
available to all market participants at the same time. Upon termination 
of the Trust, the Shares will be removed from listing. The Delaware 
Trustee, will be a trust company having substantial capital and surplus 
and the experience and facilities for handling corporate trust 
business, as required under Nasdaq Rule 5711(d)(vi)(D) and no change 
will be made to the Delaware Trustee without prior notice to and 
approval of the Exchange.
    As required in Nasdaq Rule 5711(d)(vii), the Exchange notes that 
any registered market maker (``Market Maker'') in the Shares must file 
with the Exchange, in a manner prescribed by the Exchange, and keep 
current a list identifying all accounts for trading the underlying 
commodity, related futures or options on futures, or any other related 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker in 
the Shares shall trade in the underlying commodity, related futures or 
options on futures, or any other related derivatives, in an account in 
which a registered Market Maker, directly or indirectly, controls 
trading activities, or has a direct interest in the profits or losses 
thereof, which has not been reported to the Exchange as required by 
Nasdaq Rule 5711(d). In addition to the existing obligations under 
Exchange rules regarding the production of books and records, the 
registered Market Maker in the Shares shall make available to the 
Exchange such books, records or other information pertaining to 
transactions by such entity or any limited partner, officer or approved 
person thereof, registered or non-registered employee affiliated with 
such entity for its or their own accounts in the underlying commodity, 
related futures or options on futures, or any other related 
derivatives, as may be requested by the Exchange.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. The Exchange will 
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. (ET). The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. The Shares of the Trust will conform to 
the initial and continued listing criteria set forth in Nasdaq Rule 
5711(d).
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in Nasdaq Rules 4120 and 4121, including 
without limitation the conditions specified in Nasdaq Rule 4120(a)(9) 
and the trading pauses under Nasdaq Rules 4120(a)(11) and (12).
    Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) the extent to which trading is not 
occurring in the ether underlying the Shares; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present.
    If the IIV or the value of the underlying futures contract is not 
being disseminated as required, the Exchange may halt trading during 
the day in which the interruption to the dissemination of the IIV or 
the value of the underlying futures contract occurs. If the 
interruption to the dissemination of the IIV or the value of the 
underlying ether 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 with 
respect to the Shares is not disseminated to all market participants at 
the same time, it will halt trading in the Shares until such time as 
the NAV is available to all market participants.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of Shares on 
the Exchange will be subject to the Exchange's surveillance procedures 
for derivative products. The Exchange will require the Trust to 
represent to the Exchange that it will advise the Exchange of any 
failure by the Trust to comply with the continued listing requirements, 
and, pursuant to its obligations under section 19(g)(1) of the Exchange 
Act, the Exchange will surveil for compliance with the continued 
listing requirements. If the Trust is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under the Nasdaq 5800 Series. In addition, the Exchange also 
has a general policy prohibiting the distribution of material, non-
public information by its employees.
    Additionally, on June 8, 2023, the Exchange reached an agreement on 
terms with Coinbase to enter into a Surveillance Sharing Agreement, and 
the associated term sheet became effective as of June 16, 2023. Based 
on this agreement on terms, the Exchange and Coinbase will finalize and 
execute a definitive agreement that the parties expect to be executed 
prior to allowing trading of the Commodity-Based Trust Shares. Trading 
of ether on Coinbase represents a significant portion of US-based ether 
trading. The Sponsor has stated to the Exchange that, based on publicly 
available data reported by spot ether platforms active in the U.S. 
market, trading on Coinbase has represented approximately 66% of US-
dollar to ETH trading on such U.S.-based platforms out of total YTD 
volume

[[Page 85955]]

across these platforms of approximately U.S. $93 billion, as of October 
16, 2023.\39\
---------------------------------------------------------------------------

    \39\ This analysis is based on the following spot ether 
platforms: Coinbase, Binance US, Kraken, Bitstamp, Gemini, and 
itBit.
---------------------------------------------------------------------------

    The Surveillance Sharing Agreement is expected to be a bilateral 
surveillance-sharing agreement between Nasdaq and Coinbase that is 
intended to supplement the Exchange's market surveillance program. The 
Surveillance Sharing Agreement is expected to have the hallmarks of a 
surveillance-sharing agreement between two members of the ISG, which 
would give the Exchange supplemental access to data regarding spot 
ether trades on Coinbase where the Exchange determines it is necessary 
as part of its surveillance program for the Commodity-Based Trust 
Shares. This means that the Exchange expects to receive market data for 
orders and trades from Coinbase, which it will utilize in surveillance 
of the trading of Commodity-Based Trust Shares. In addition, the 
Exchange can request further information from Coinbase related to spot 
ether trading activity on the Coinbase exchange platform, if the 
Exchange determines that such information would be necessary to detect 
and investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) the procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Section 10 of Nasdaq General Rule 9, 
which imposes suitability obligations on Nasdaq members with respect to 
recommending transactions in the Shares to customers; (3) how 
information regarding the IIV is disseminated; (4) the risks involved 
in trading the Shares during the Pre-Market and Post Market Sessions 
when an updated IIV will not be calculated or publicly disseminated; 
(5) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (6) trading information. The 
Information Circular will also discuss any exemptive, no action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the 
Trust is subject to various fees and expenses described in the Draft 
Registration Statement. The Information Circular will also disclose the 
trading hours of the Shares. The Information Circular will disclose 
that information about the Shares will be publicly available on the 
Trust's website.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act \40\ in general and section 6(b)(5) of the Act \41\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78f.
    \41\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\42\ including Commodity-Based Trust Shares,\43\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; and 
(ii) the requirement that an exchange proposal be designed, in general, 
to protect investors and the public interest. The Exchange believes 
that this proposal is consistent with the requirements of section 
6(b)(5) of the Act because this filing sufficiently demonstrates that 
the CME ETH Futures market represents a regulated market of significant 
size and that, on the whole, the manipulation concerns previously 
articulated by the Commission are sufficiently mitigated to the point 
that they are outweighed by quantifiable investor protection issues 
that would be resolved by approving this proposal.
---------------------------------------------------------------------------

    \42\ See Exchange Rule 5720.
    \43\ Commodity-Based Trust Shares, as described in Exchange Rule 
5711(d), are a type of Trust Issued Receipt.
---------------------------------------------------------------------------

Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, the Commission 
requires that an exchange demonstrate that there is a comprehensive 
surveillance-sharing agreement in place with a regulated market of 
significant size. Both the Exchange and CME are members of ISG.\44\ As 
such, the only remaining issue to be addressed is whether the ETH 
Futures market constitutes a market of significant size, which the 
Exchange and the Sponsor believes that it does. The terms ``significant 
market'' and ``market of significant size'' include a market (or group 
of markets) as to which: (a) there is a reasonable likelihood that a 
person attempting to manipulate the ETP would also have to trade on 
that market to manipulate the ETP, so that a surveillance-sharing 
agreement would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\45\
---------------------------------------------------------------------------

    \44\ For a list of the current members and affiliate members of 
ISG, see https://www.isgportal.com/.
    \45\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\46\
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    \46\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
---------------------------------------------------------------------------

(a) Reasonable Likelihood That a Person Attempting To Manipulate the 
ETP Would Also Have To Trade on That Market To Manipulate the ETP
    The significant market test requires that there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct.
    In light of the similarly high correlation between spot ETH/CME ETH 
Futures and spot bitcoin/CME Bitcoin Futures (.998 vs. .999, 
respectively),\47\

[[Page 85956]]

applying the same rationale that the Commission applied to a Bitcoin 
Futures ETF in the Bitcoin Futures Approvals also indicates that this 
test is satisfied for this proposal. In the Teucrium Approval, the SEC 
stated:
---------------------------------------------------------------------------

    \47\ Source: S&P Ethereum Index, S&P CME Ether Futures Index 
(Spot), S&P Bitcoin Index, and S&P CME Bitcoin Futures Index (Spot).
---------------------------------------------------------------------------

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real time and ongoing basis in order to detect and 
prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably be 
relied upon to capture the effects on the CME futures market caused by 
a person attempting to manipulate the proposed futures ETP by 
manipulating the price of CME futures contracts, whether that attempt 
is made by directly trading on the CME futures market or indirectly by 
trading outside of the CME futures market. As such, when the CME shares 
its surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct related 
to the non cash assets held by the proposed ETP.\48\
---------------------------------------------------------------------------

    \48\ See Teucrium Approval at 21679.
---------------------------------------------------------------------------

    The assumptions from this statement are also true for CME ETH 
Futures. CME ETH Futures pricing is based on pricing from spot ETH 
markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME BTC futures market caused by a person attempting to manipulate 
the proposed futures ETP by manipulating the price of CME BTC futures 
contracts . . . indirectly by trading outside of the CME BTC futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of CME BTC Futures. This same logic would extend 
to CME ETH Futures markets where CME's surveillance would be able to 
capture the effects of trading on the relevant spot markets on the 
pricing of CME ETH Futures. This was further acknowledged in the 
Grayscale lawsuit when Judge Rao stated ``. . . the Commission in the 
Teucrium order recognizes that the futures prices are influenced by the 
spot prices, and the Commission concludes in approving futures ETPs 
that any fraud on the spot market can be adequately addressed by the 
fact that the futures market is a regulated one . . .'' The Exchange 
agrees with the Commission on this point and notes that the pricing 
mechanism applicable to the Shares is similar to that of the CME ETH 
Futures. This view is also consistent with the Sponsor's research.
    As such, the Exchange believes that part (a) of the significant 
market test outlined above is satisfied and that common membership in 
ISG between the Exchange and CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares in the same way that 
it would be for both Bitcoin Futures ETPs and Spot Bitcoin ETPs.
(b) Predominant Influence on Prices in Spot and ETH Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in CME ETH Futures market 
or spot market for a number of reasons. First, because the Trust would 
not hold CME ETH Futures contracts, the only way that it could be the 
predominant force on prices in that market is through the spot markets 
that CME ETH Futures contracts use for pricing.\49\ The Sponsor notes 
that ETH total 24-hour spot trading volume has averaged $9.1B over the 
year ending October 16, 2023,\50\ with approximately $1.7B occurring on 
venues whose trades are included in the sponsor's benchmark.\51\ The 
Sponsor expects that the Trust would represent a very small percentage 
of this daily trading volume in the spot ETH market even in its most 
aggressive projections for the Trust's assets and, thus, the Trust 
would not have an impact on the spot market and therefore could not be 
the predominant force on prices in the CME ETH Futures market. Second, 
much like the CME Bitcoin Futures market, the CME ETH Futures market 
has progressed and matured significantly. As the court found in the 
Grayscale Order ``Because the spot market is deeper and more liquid 
than the futures market, manipulation should be more difficult, not 
less.'' The Exchange and sponsor agree with this sentiment and believe 
it applies equally to the spot ETH and CME ETH Futures markets.
---------------------------------------------------------------------------

    \49\ This logic is reflected by the court in the Grayscale Order 
at 17-18. Specifically, the court found that ``Because Grayscale 
owns no futures contracts, trading in Grayscale can affect the 
futures market only through the spot market . . . But Grayscale 
holds just 3.4 percent of outstanding bitcoin, and the Commission 
did not suggest Grayscale can dominate the price of bitcoin.''
    \50\ Source: CoinGecko.
    \51\ Source: CoinGecko, The Block, and BlackRock calculations.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
Surveillance Sharing Agreement With Ether Spot Market
    The Exchange is also proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares.
    On June 8, 2023 the Exchange reached an agreement on terms with 
Coinbase, to enter into a Surveillance-Sharing Agreement, and the 
associated term sheet became effective as of June 16, 2023. Based on 
this agreement on terms, the Exchange and Coinbase will finalize and 
execute a definitive agreement that the parties expect to be executed 
prior to allowing trading of the Commodity-Based Trust Shares. Trading 
of ETH on Coinbase represents a significant portion of US-based ETH 
trading. The Sponsor has stated to the Exchange that, based on publicly 
available data reported by spot ether platforms active in the U.S. 
market, trading on Coinbase has represented approximately 66% of US-
dollar to ether trading on such U.S.-based platforms out of total YTD 
volume across these platforms of approximately U.S. $93 billion, as of 
October 16, 2023.\52\
---------------------------------------------------------------------------

    \52\ This analysis is based on the following spot ether 
platforms: Coinbase, Binance US, Kraken, Bitstamp, Gemini, and 
itBit.
---------------------------------------------------------------------------

    The Surveillance Sharing Agreement is expected to be a bilateral 
surveillance-sharing agreement between Nasdaq and Coinbase that is 
intended to supplement the Exchange's market surveillance program. The 
Surveillance Sharing Agreement is expected to have the hallmarks of a 
surveillance-sharing agreement between two members of the ISG, which 
would give the Exchange supplemental access to data regarding spot 
ether trades on Coinbase where the Exchange determines it is necessary 
as part of its surveillance program for the Commodity-Based Trust 
Shares. This means that the Exchange expects to receive market data for 
orders and trades from Coinbase, which it will utilize in surveillance 
of the trading of Commodity-Based Trust Shares. In addition, the 
Exchange can request further information from Coinbase related to spot 
ether trading activity on the Coinbase exchange platform, if the 
Exchange determines that such information would be necessary to detect 
and investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.

[[Page 85957]]

Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to ETH through OTC ETH Funds is greater than $5 
billion. With that growth, so too has grown the quantifiable investor 
protection issues to U.S. investors through premium/discount volatility 
and management fees for OTC ETH Funds. The Exchange believes that, as 
described above, the concerns related to the prevention of fraudulent 
and manipulative acts and practices have been sufficiently addressed to 
be consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, such concerns are now at the very least 
outweighed by investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to ETH in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in ETH Futures ETFs and operating companies that are 
imperfect proxies for ETH exposure; and (iv) providing an alternative 
to custodying spot ETH.
Commodity-Based Trust Shares--Nasdaq Rule 5711(d)
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Nasdaq Rule 5711(d). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under the Nasdaq 5800 Series. The 
Exchange may obtain information regarding trading in the Shares and 
listed ETH derivatives via the ISG, from other exchanges who are 
members or affiliates of the ISG, or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about ETH and will be available regarding the Trust and the 
Shares. In addition to the price transparency of the CF Benchmarks 
Index, the Trust will provide information regarding the Trust's ETH 
holdings as well as additional data regarding the Trust.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the prior business 
day's NAV; (b) the prior business day's Official Closing Price; (c) 
calculation of the premium or discount of such Official Closing Price 
against such NAV; (d) data in chart form displaying the frequency 
distribution of discounts and premiums of the Official Closing Price 
against the NAV, within appropriate ranges for each of the four 
previous calendar quarters (or for the life of the Trust, if shorter); 
(e) the prospectus; and (f) other applicable quantitative information. 
The Trust Administrator will also disseminate the Trust's holdings on a 
daily basis on the Trust's website. The price of ether will be made 
available by one or more major market data vendors, updated at least 
every 15 seconds during the Regular Market Session. Information about 
the CF Benchmarks Index, including key elements of how the CF 
Benchmarks Index is calculated, will be publicly available at https://www.cfbenchmarks.com/. Also, an estimated value that reflects an 
estimated IIV, will be disseminated.
    One or more major market data vendors will provide an IIV per Share 
updated every 15 seconds, as calculated by the Exchange or a third-
party financial data provider during the Exchange's Regular Market 
Session (9:30 a.m. to 4:00 p.m. (ET)). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during the Exchange's Regular Market Session to reflect changes 
in the value of the Trust's NAV during the trading day.
    The IIV disseminated during the Exchange's Regular Market Session 
should not be viewed as an actual real time update of the NAV, which 
will be calculated only once at the end of each trading day. The IIV 
will be widely disseminated on a per Share basis every 15 seconds 
during the Exchange's Regular Market Session by one or more major 
market data vendors. In addition, the IIV will be available through 
online information services.
    The NAV for the Trust will be calculated by the Trust Administrator 
once a day and will be disseminated daily to all market participants at 
the same time. Quotation and last sale information regarding the Shares 
will be disseminated through the facilities of the CTA.
    Quotation and last sale information for ether is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as CF Benchmarks. Information relating 
to trading, including price and volume information, in ETH is available 
from major market data vendors and from the exchanges on which ETH is 
traded. Depth of book information is also available from ETH exchanges. 
The normal trading hours for ETH exchanges are 24 hours per day, 365 
days per year.
    In sum, the Exchange believes that this proposal is consistent with 
the requirements of section 6(b)(5) of the Act, that this filing 
sufficiently demonstrates that the e CME ETH Futures market represents 
a regulated market of significant size, and that on the whole the 
manipulation concerns previously articulated by the Commission are 
sufficiently mitigated to the point that they are outweighed by 
investor protection issues that would be resolved by approving this 
proposal.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of section 6(b)(5) of the 
Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change rather will facilitate the listing and trading of 
additional exchange-traded product that will enhance competition among 
both market participants and listing venues, to the benefit of 
investors and the marketplace.

[[Page 85958]]

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

    No written comments were either solicited or received.

III. 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 Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NASDAQ-2023-045 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-NASDAQ-2023-045. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NASDAQ-2023-045 and should 
be submitted on or before January 2, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\53\
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    \53\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-27062 Filed 12-8-23; 8:45 am]
BILLING CODE 8011-01-P


