Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No.1 to a Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust, 24534-24554 [2024-07333]
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[Federal Register Volume 89, Number 68 (Monday, April 8, 2024)] [Notices] [Pages 24534-24554] From the Federal Register Online via the Government Publishing Office [
[www.gpo.gov]] [FR Doc No: 2024-07333] ———————————————————————– SECURITIES AND EXCHANGE COMMISSION [Release No.34-99887; File No.SR-NYSEARCA-2023-70] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No.1 to a Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust April 2, 2024.On October 10, 2023, NYSE Arca, Inc.(“NYSE Arca” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder,2 a proposed rule change to list and trade shares of the Grayscale Ethereum Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares).The proposed rule change was published for comment in the Federal Register on October 27, 2023.3 ————————————————————————— 1 15 U.S.C.
78s(b)(1).2 17 CFR 240.19b-4.3 See Securities Exchange Act Release No.98780 (Oct.23, 2023), 88 FR 73892.Comments on the proposed rule change are available at: .
————————————————————————— On December 5, 2023, pursuant to section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On January 25, 2024, the Commission instituted proceedings under section 19(b)(2)(B) of the Act 6 to determine whether to approve or disapprove the proposed rule change.7 On March 15, 2024, the Exchange filed Amendment No.
1, which replaced and superseded the proposed rule change in its entirety.Amendment No.1 to the proposed rule change is described in Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No.1, from interested persons.
————————————————————————— 4 15 U.S.C.
78s(b)(2).5 See Securities Exchange Act Release No.99082, 88 FR 85962 (Dec.11, 2023).6 15 U.S.C.78s(b)(2)(B).7 See Securities Exchange Act Release No.
99428, 89 FR 6155 (Jan.31, 2024).————————————————————————— I.Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to list and trade shares of the following under NYSE Arca Rule 8.201-E: Grayscale Ethereum Trust (ETH) (the “Trust”).8 This Amendment No.1 to SR-NYSEARCA-2023-70 replaces SR- NYSEARCA-2023-70 as originally filed and supersedes such filing in its entirety.The proposed rule change is available on the Exchange’s website at [www.nyse.com], at the principal office of the Exchange, and at the Commission’s Public Reference Room.————————————————————————— 8 The Trust was previously named Ethereum Investment Trust, whose name was changed pursuant to a Certificate of Amendment to the Certificate of Trust of Ethereum Investment Trust filed with the Delaware Secretary of State on January 11, 2019.
————————————————————————— II.Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change.The text of those statements may be examined at the places specified in Item III below.The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements.A.
Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1.Purpose Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/ or trade pursuant to unlisted trading privileges “Commodity-Based Trust Shares.” 9 The Exchange proposes to list and trade shares (“Shares”) 10 of the Trust pursuant to NYSE Arca Rule 8.201-E.11 ————————————————————————— 9 Commodity-Based Trust Shares are securities issued by a trust that represent investors’ discrete identifiable and undivided beneficial ownership interest in the commodities deposited into the Trust.
10 The Shares are expected to be listed under the ticker symbol “ETH.” 11 On April 17, 2020, the Trust confidentially filed its draft registration statement on Form 10 under the ’34 Act) (File No.377- 03131) (the “Draft Registration Statement on Form 10”).On June 16, 2020, the Trust confidentially filed Amendment No.
1 to the Draft Registration Statement on Form 10.The Jumpstart Our Business Startups Act (the “JOBS Act”), enacted on April 5, 2012, added section 6(e) to the Securities Act of 1933 (the “Securities Act” or “’33 Act”).section 6(e) of the Securities Act provides that an “emerging growth company” may confidentially submit to the Commission a draft registration statement for confidential, non- public review by the Commission staff prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in Securities Act Rule 433(h)(4).
An emerging growth company is defined in section 2(a)(19) of the Securities Act as an issuer with less than $1,000,000,000 total annual gross revenues during its most recently completed fiscal year.
The Trust meets the definition of an emerging growth company and consequently submitted its Draft Registration Statement on Form 10 to the Commission on a confidential basis.On August 6, 2020, the Trust filed its registration statement on Form 10 under the Securities Act (File No.000-56193) (the “Registration Statement on Form 10”).On October 2, 2020, the Trust filed Amendment No.1 to the Registration Statement on Form 10.
On, October 5, 2020, the Registration Statement on Form 10 was automatically deemed effective.
On March 5, 2021, February 25, 2022, March 1, 2023, and February 23, 2024, the Trust filed its annual report on Form 10-K under the Securities Act (File No.000-56193) (the “Annual Reports”).On November 6, 2020, May 7, 2021, August 6, 2021, November 5, 2021, May 6, 2022, August 5, 2022, November 4, 2022, May 5, 2023, August 4, 2023, and November 3, 2023, the Trust filed its quarterly reports on Form 10-Q under the Securities Act (File No.000-56193) (the “Quarterly Reports”).The descriptions of the Trust, the Shares, and ETH contained herein are based, in part, on the Annual Reports and Quarterly Reports.
On January 17, 2019, the Trust submitted to the Commission an amended Form D as a business trust.Shares of the Trust have been quoted on OTC Market’s OTCQX Best Marketplace under the symbol “ETHE” since June 20, 2019.On May 23, 2019 and March 20, 2020, the Trust published annual reports for ETHE for the periods ended December 31, 2018 and December 31, 2019, respectively.On May 23, 2019, August 8, 2019, November 11, 2019, May 8, 2020, and August 6, 2020, the Trust published quarterly reports for ETHE for the periods ended March 31, 2019, June 30, 2019, September 30, 2019, March 31, 2020, and June 30, 2020, respectively.Reports published before October 5, 2020, the date on which the Trust’s Shares became registered pursuant to section 12(g) of the Act, can be found on OTC Market’s website ( ), and reports published on or after October 5, 2020 can be found on OTC Market’s website and the Commission’s website ( ).The Shares will be of the same class and will have the same rights as shares of ETHE.
According to the Sponsor, freely tradeable shares of ETHE will remain freely tradeable Shares on the date of the listing of the Shares that are unregistered under the Securities Act.Restricted shares of ETHE will remain subject to private placement restrictions on such date, and the holders of such restricted shares will continue to hold those Shares subject to those restrictions until they become freely tradable Shares.
————————————————————————— The Trust is the world’s largest Ethereum (“ETH”) investment fund by assets under management as of the date of this filing.The Trust has approximately $11.8 billion in assets under management 12 (representing 2.5% of all ETH in circulation), its [[Page 24535]] Shares trade millions of dollars in daily volume and are held by more than a quarter of a million American investor accounts seeking exposure to ETH without the cost and complexity of purchasing the asset directly.13 However, because the Trust is not currently listed as an exchange-traded product (“ETP”), the value of the Shares has not been able to closely track the value of the Trust’s underlying ETH.The Sponsor thus believes that allowing Shares of the Trust to list and trade on the Exchange as an ETP (i.e., converting the Trust to a spot Ethereum ETP) would unlock over $1.73 billion of value 14 for the Trust’s shareholders and provide other investors with a safe and secure way to invest in ETH on a regulated national securities exchange.————————————————————————— 12 As of March 13, 2024.
13 As of the date of the initial filing of this proposed rule change.See Securities Exchange Act Release No.98780 (October 23, 2023), 88 FR 73892 (October 27, 2023) (Notice of Filing of Proposed Rule Change To List and Trade Shares of the Grayscale Ethereum Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)).14 As of March 13, 2024.————————————————————————— The sponsor of the Trust is Grayscale Investments, LLC (“Sponsor”), a Delaware limited liability company.The Sponsor is a wholly owned subsidiary of Digital Currency Group, Inc.
(“Digital Currency Group”).The trustee for the Trust is Delaware Trust Company (“Trustee”).The custodian for the Trust is Coinbase Custody Trust Company, LLC (“Custodian”).15 The administrator and transfer agent of the Trust is BNY Mellon Asset Servicing, a division of The Bank of New York Mellon (the “Transfer Agent”).The distribution and marketing agent for the Trust will be Foreside Fund Services, LLC (the “Marketing Agent”).The index provider for the Trust is CoinDesk Indices, Inc.(the “Index Provider”).
————————————————————————— 15 According to the Annual Report, Digital Currency Group owns a minority interest in Coinbase, Inc., which is the parent company of the Custodian, representing less than 1.0% of its equity.————————————————————————— The Trust is a Delaware statutory trust, formed on December 13, 2017, that operates pursuant to a trust agreement between the Sponsor and the Trustee (“Trust Agreement”).The Trust has no fixed termination date.Operation of the Trust According to the Annual Report, the Trust’s assets consist solely of ETH.16 ————————————————————————— 16 The Trust may from time to time come into possession of Incidental Rights and/or IR Virtual Currency by virtue of its ownership of Ethereum, generally through a fork in the Ethereum Blockchain, an airdrop offered to holders of Ethereum or other similar event.“Incidental Rights” are rights to acquire, or otherwise establish dominion and control over, any virtual currency or other asset or right, which rights are incident to the Trust’s ownership of Ethereum and arise without any action of the Trust, or of the Sponsor or Trustee on behalf of the Trust.“IR Virtual Currency” is any virtual currency tokens, or other asset or right, acquired by the Trust through the exercise (subject to the applicable provisions of the Trust Agreement) of any Incidental Right.
Although the Trust is permitted to take certain actions with respect to Incidental Rights and IR Virtual Currency in accordance with its Trust Agreement, at this time the Trust will prospectively irrevocably abandon any Incidental Rights and IR Virtual Currency.
In the event the Trust seeks to change this position, the Exchange would file a subsequent proposed rule change with the Commission.
————————————————————————— Each Share represents a proportional interest, based on the total number of Shares outstanding, in each of the Trust’s assets as determined by reference to the Index Price,17 less the Trust’s expenses and other liabilities (which include accrued but unpaid fees and expenses).The Sponsor expects that the market price of the Shares will fluctuate over time in response to the market prices of ETH.In addition, because the Shares reflect the estimated accrued but unpaid expenses of the Trust, the number of ETH represented by a Share will gradually decrease over time as the Trust’s ETH are used to pay the Trust’s expenses.————————————————————————— 17 The “Index Price” means the U.S.
dollar value of an ETH derived from the Digital Asset Trading Platforms that are reflected in the CoinDesk Ether Price Index (ETX), calculated at 4:00 p.m., New York time, on each business day.For purposes of the Trust Agreement, the term ETH Index Price has the same meaning as the Index Price as defined herein.————————————————————————— The activities of the Trust are limited to (i) issuing “Baskets” (as defined below) in exchange for ETH transferred to the Trust as consideration in connection with creations, (ii) transferring or selling ETH or any other staking consideration as necessary to cover the “Sponsor’s Fee” 18 and/or certain Trust expenses, (iii) transferring ETH in exchange for Baskets surrendered for redemption (subject to obtaining regulatory approval from the SEC and approval of the Sponsor), (iv) causing the Sponsor to sell ETH or any other staking consideration on the termination of the Trust, and (v) engaging in all administrative and security procedures necessary to accomplish such activities in accordance with the provisions of the Trust Agreement, the Custodian Agreement, the Index License Agreement, and the Participant Agreements (each as defined below).————————————————————————— 18 The Sponsor’s Fee means a fee, payable in ETH, which accrues daily in U.S.dollars at an annual rate of currently 2.5%, but which will be lowered in connection with the Trust becoming an ETP, of the NAV Fee Basis Amount of the Trust as of 4:00 p.m., New York time, on each day, provided that for a day that is not a business day, the calculation of the Sponsor’s Fee will be based on the NAV Fee Basis Amount from the most recent business day, reduced by the accrued and unpaid Sponsor’s Fee for such most recent business day and for each day after such most recent business day and prior to the relevant calculation date.The “NAV Fee Basis Amount” is calculated in the manner set forth under “Valuation of ETH and Determination of NAV” below.————————————————————————— The Trust will not be actively managed.It will not engage in any activities designed to obtain a profit from, or to ameliorate losses caused by, changes in the market prices of ETH.
Investment Objective According to the Annual Report, and as further described below, the Trust’s investment objective is for the value of the Shares (based on ETH per Share) to reflect the value of the ETH held by the Trust, determined by reference to the Index Price, less the Trust’s expenses and other liabilities.While an investment in the Shares is not a direct investment in ETH, the Shares are designed to provide investors with a cost-effective and convenient way to gain investment exposure to ETH.Generally speaking, a substantial direct investment in ETH may require expensive and sometimes complicated arrangements in connection with the acquisition, security and safekeeping of the ETH and may involve the payment of substantial fees to acquire such ETH from third- party facilitators through cash payments of U.S.dollars.Because the value of the Shares is correlated with the value of ETH held by the Trust, it is important to understand the investment attributes of, and the market for, ETH.The Trust uses the Index Price to calculate its “NAV,” which is the aggregate value, expressed in U.S.dollars, of the Trust’s assets (other than U.S.dollars or other fiat currency), less the U.S.
dollar value of the Trust’s expenses and other liabilities calculated in the manner set forth under “Valuation of ETH and Determination of NAV.” “NAV per Share” is calculated by dividing NAV by the number of Shares then outstanding.Valuation of ETH and Determination of NAV The following is a description of the material terms of the Trust Agreement as they relate to valuation of the Trust’s ETH and the NAV calculations.19 ————————————————————————— 19 While the Sponsor uses the terminology “NAV” in this filing, the term used in the Trust Agreement is “Digital Asset Holdings.” ————————————————————————— On each business day at 4:00 p.m., New York time, or as soon thereafter as practicable (the “Evaluation Time”), the Sponsor will evaluate the ETH held by the Trust and calculate and publish the NAV of the Trust.
To calculate the NAV, the Sponsor will: 1.Determine the Index Price as of such business day.
[[Page 24536]] 2.Multiply the Index Price by the Trust’s aggregate number of ETH owned by the Trust as of 4:00 p.m., New York time, on the immediately preceding day, less the aggregate number of ETH payable as the accrued and unpaid Sponsor’s Fee as of 4:00 p.m., New York time, on the immediately preceding day.3.Add the U.S.
dollar value of ETH, calculated using the Index Price, receivable under pending creation orders, if any, determined by multiplying the number of the Baskets represented by such creation orders by the Basket Amount and then multiplying such product by the Index Price.20 ————————————————————————— 20 “Baskets” and “Basket Amount” have the meanings set forth in “Creation and Redemption of Shares” below.————————————————————————— 4.Subtract the U.S.dollar amount of accrued and unpaid Additional Trust Expenses, if any.21 ————————————————————————— 21 “Additional Trust Expenses” are any expenses incurred by the Trust in addition to the Sponsor’s Fee that are not Sponsor-paid expenses, including, but not limited to, (i) taxes and governmental charges, (ii) expenses and costs of any extraordinary services performed by the Sponsor (or any other service provider) on behalf of the Trust to protect the Trust or the interests of shareholders, (iii) any indemnification of the Custodian or other agents, service providers or counterparties of the Trust, (iv) the fees and expenses related to the listing, quotation or trading of the Shares on any marketplace or other alternative trading system, as determined by the Sponsor, on which the Shares may then be listed, quoted or traded, including but not limited to, NYSE Arca, Inc.
(including legal, marketing and audit fees and expenses) to the extent exceeding $600,000 in any given fiscal year and (v) extraordinary legal fees and expenses, including any legal fees and expenses incurred in connection with litigation, regulatory enforcement or investigation matters.————————————————————————— 5.Subtract the U.S.dollar value of the ETH, calculated using the Index Price, to be distributed under pending redemption orders, if any, determined by multiplying the number of Baskets to be redeemed represented by such redemption orders by the Basket Amount and then multiplying such product by the Index Price (the amount derived from steps 1 through 5 above, the “NAV Fee Basis Amount”).
6.Subtract the U.S.dollar amount of the Sponsor’s Fee that accrues for such business day, as calculated based on the NAV Fee Basis Amount for such business day.In the event that the Sponsor determines that the primary methodology used to determine the Index Price is not an appropriate basis for valuation of the Trust’s ETH, the Sponsor will utilize the cascading set of rules as described in “Trust Valuation of ETH” below.
ETH and the Ethereum Network 22 ————————————————————————— 22 The description of ETH and the Ethereum Network in this section was provided by the Sponsor and is based on the Annual Report.————————————————————————— According to the Annual Report, Ethereum, or ETH, is a digital asset that is created and transmitted through the operations of the peer-to-peer “Ethereum Network,” a decentralized network of computers that operates on cryptographic protocols.No single entity owns or operates the Ethereum Network, the infrastructure of which is collectively maintained by a decentralized user base.The Ethereum Network allows people to exchange tokens of value, called Ether, which are recorded on a public transaction ledger known as a blockchain.
ETH can be used to pay for goods and services, including computational power on the Ethereum network, or it can be converted to fiat currencies, such as the U.S.dollar, at rates determined on “Digital Asset Markets” 23 or in individual end-user-to-end-user transactions under a barter system.————————————————————————— 23 A “Digital Asset Market” is a “Brokered Market,” “Dealer Market,” “Principal-to-Principal Market” or “Exchange Market,” as each such term is defined in the Financial Accounting Standards Board Accounting Standards Codification Master Glossary.The “Digital Asset Trading Platform Market” is the global trading platform market for the trading of ETH, which consists of transactions on electronic Digital Asset Trading Platforms.
A “Digital Asset Trading Platform” is an electronic marketplace where trading participants may trade, buy and sell ETH based on bid- ask trading.The largest Digital Asset Trading Platforms are online and typically trade on a 24-hour basis, publishing transaction price and volume data.————————————————————————— Furthermore, the Ethereum Network also allows users to write and implement smart contracts–that is, general-purpose code that executes on every computer in the network and can instruct the transmission of information and value based on a sophisticated set of logical conditions.Using smart contracts, users can create markets, store registries of debts or promises, represent the ownership of property, move funds in accordance with conditional instructions and create digital assets other than ETH on the Ethereum Network.
Smart contract operations are executed on the Ethereum Blockchain in exchange for payment of ETH.The Ethereum Network is one of a number of projects intended to expand blockchain use beyond just a peer-to-peer money system.The Ethereum Network went live on July 30, 2015.Unlike other digital assets, such as Bitcoin, which are solely created through a progressive mining process, 72.0 million ETH were created in connection with the launch of the Ethereum Network.At the time of the network launch, a non-profit called the Ethereum Foundation was the sole organization dedicated to protocol development.The Ethereum Network is decentralized in that it does not require governmental authorities or financial institution intermediaries to create, transmit, or determine the value of ETH.
Rather, following the initial distribution of ETH, ETH is created, burned, and allocated by the Ethereum Network protocol through a process that is currently subject to an issuance and burn rate.The value of ETH is determined by the supply of and demand for ETH on the Digital Asset Trading Platforms or in private end-user-to-end-user transactions.
New ETH are created and rewarded to the validators of a block in the Ethereum Blockchain for verifying transactions.The Ethereum Blockchain is effectively a decentralized database that includes all blocks that have been validated, and it is updated to include new blocks as they are validated.Each ETH transaction is broadcast to the Ethereum Network and, when included in a block, recorded in the Ethereum Blockchain.As each new block records outstanding ETH transactions, and outstanding transactions are settled and validated through such recording, the Ethereum Blockchain represents a complete, transparent and unbroken history of all transactions of the Ethereum Network.
Among other things, ETH is used to pay for transaction fees and computational services (i.e., smart contracts) on the Ethereum Network; users of the Ethereum Network pay for the computational power of the machines executing the requested operations with ETH.Requiring payment in ETH on the Ethereum Network incentivizes developers to write quality applications and increases the efficiency of the Ethereum Network because wasteful code costs more, while also ensuring that the Ethereum Network remains economically viable by compensating for contributed computational resources.Smart Contracts and Development on the Ethereum Network Smart contracts are programs that run on a blockchain that can execute automatically when certain conditions are met.Smart contracts facilitate the exchange of anything representative of value, such as money, information, property, or voting rights.
Using smart contracts, users can send or receive digital assets, create markets, store registries of debts or promises, represent ownership of property or a company, move funds in accordance with [[Page 24537]] conditional instructions and create new digital assets.Development on the Ethereum Network involves building more complex tools on top of smart contracts, such as decentralized apps (“DApps”); organizations that are autonomous, known as decentralized autonomous organizations (“DAOs”); and entirely new decentralized networks.
For example, a company that distributes charitable donations on behalf of users could hold donated funds in smart contracts that are paid to charities only if the charity satisfies certain pre-defined conditions.Moreover, the Ethereum Network has also been used as a platform for creating new digital assets and conducting their associated initial coin offerings.As of December 31, 2023, a majority of digital assets were built on the Ethereum Network, with such assets representing a significant amount of the total market value of all digital assets.More recently, the Ethereum Network has been used for decentralized finance (“DeFi”) or open finance platforms, which seek to democratize access to financial services, such as borrowing, lending, custody, trading, derivatives and insurance, by removing third-party intermediaries.DeFi can allow users to lend and earn interest on their digital assets, exchange one digital asset for another and create derivative digital assets such as stablecoins, which are digital assets pegged to a reserve asset such as fiat currency.Over the course of 2023, between $20 billion and $30 billion worth of digital assets were locked up as collateral on DeFi platforms on the Ethereum Network.24 ————————————————————————— 24 DeFiLlama, “Ethereum Total Value Locked,” .
————————————————————————— In addition, the Ethereum Network and other smart contract platforms have been used for creating non-fungible tokens, or “NFTs.” Unlike digital assets native to smart contract platforms which are fungible and enable the payment of fees for smart contract execution.Instead, NFTs allow for digital ownership of assets that convey certain rights to other digital or real-world assets.This new paradigm allows users to own rights to other assets through NFTs, which enable users to trade them with others on the Ethereum Network.For example, an NFT may convey rights to a digital asset that exists in an online game or a DApp, and users can trade their NFT in the DApp or game, and carry them to other digital experiences, creating an entirely new free-market, internet-native economy that can be monetized in the physical world.Overview of the Ethereum Network’s Operations In order to own, transfer, or use ETH directly on the Ethereum Network (as opposed to through an intermediary, such as a custodian), a person generally must have internet access to connect to the Ethereum Network.ETH transactions may be made directly between end-users without the need for a third-party intermediary.To prevent the possibility of double-spending ETH, a user must notify the Ethereum Network of the transaction by broadcasting the transaction data to its network peers.The Ethereum Network provides confirmation against double-spending by memorializing every transaction in the Ethereum Blockchain, which is publicly accessible and transparent.
This memorialization and verification against double-spending is accomplished through the Ethereum Network validation process, which adds “blocks” of data, including recent transaction information, to the Ethereum Blockchain.Summary of an ETH Transaction Prior to engaging in ETH transactions directly on the Ethereum Network, a user generally must first install on its computer or mobile device an Ethereum Network software program that will allow the user to generate a private and public key pair associated with an ETH address, commonly referred to as a “wallet.” The Ethereum Network software program and the ETH address also enable the user to connect to the Ethereum Network and transfer ETH to, and receive ETH from, other users.Each Ethereum Network address, or wallet, is associated with a unique “public key” and “private key” pair.To receive ETH, the ETH recipient must provide its public key to the party initiating the transfer.
This activity is analogous to a recipient for a transaction in U.S.dollars providing a routing address in wire instructions to the payor so that cash may be wired to the recipient’s account.The payor approves the transfer to the address provided by the recipient by “signing” a transaction that consists of the recipient’s public key with the private key of the address from where the payor is transferring the ETH.The recipient, however, does not make public or provide to the sender its related private key.Neither the recipient nor the sender reveal their private keys in a transaction, because the private key authorizes transfer of the funds in that address to other users.
Therefore, if a user loses his or her private key, the user may permanently lose access to the ETH contained in the associated address.Likewise, ETH is irretrievably lost if the private key associated with them is deleted and no backup has been made.When sending ETH, a user’s Ethereum Network software program must validate the transaction with the associated private key.In addition, since every computation on the Ethereum Network requires processing power, there is a transaction fee involved with the transfer that is paid by the payor.The resulting digitally validated transaction is sent by the user’s Ethereum Network software program to the Ethereum Network validators to allow transaction confirmation.
Ethereum Network validators record and confirm transactions when they validate and add blocks of information to the Ethereum Blockchain.In proof-of-stake, validators compete to be randomly selected to validate transactions.When a validator is selected to validate a block, it creates that block, which includes data relating to (i) the verification of newly submitted and accepted transactions and (ii) a reference to the prior block in the Ethereum Blockchain to which the new block is being added.The validator becomes aware of outstanding, unrecorded transactions through the data packet transmission and distribution discussed above.Upon the addition of a block included in the Ethereum Blockchain, the Ethereum Network software program of both the spending party and the receiving party will show confirmation of the transaction on the Ethereum Blockchain and reflect an adjustment to the ETH balance in each party’s Ethereum Network public key, completing the ETH transaction.Once a transaction is confirmed on the Ethereum Blockchain, it is irreversible.
Some ETH transactions are conducted “off-blockchain” and are therefore not recorded in the Ethereum Blockchain.These “off- blockchain transactions” involve the transfer of control over, or ownership of, a specific digital wallet holding ETH or the reallocation of ownership of certain ETH in a pooled-ownership digital wallet, such as a digital wallet owned by a Digital Asset Trading Platform.In contrast to on-blockchain transactions, which are publicly recorded on the Ethereum Blockchain, information and data regarding off-blockchain transactions are generally not publicly available.Therefore, off- blockchain transactions are not truly ETH transactions in that they do not involve the transfer of transaction data on the Ethereum Network and do not reflect a movement [[Page 24538]] of ETH between addresses recorded in the Ethereum Blockchain.
For these reasons, off-blockchain transactions are subject to risks, as any such transfer of ETH ownership is not protected by the protocol behind the Ethereum Network or recorded in, and validated through, the blockchain mechanism.Creation of New ETH Initial Creation of ETH Unlike other digital assets such as Bitcoin, which are solely created through a progressive mining process, 72.0 million ETH were created in connection with the launch of the Ethereum Network.The initial 72.0 million ETH were distributed as follows: Initial Distribution: 60.0 million ETH, or 83.33% of the supply, was sold to the public in a crowd sale conducted between July and August 2014 that raised approximately $18 million.Ethereum Foundation: 6.0 million ETH, or 8.33% of the supply, was distributed to the Ethereum Foundation for operational costs.Ethereum Developers: 3.0 million ETH, or 4.17% of the supply, was distributed to developers who contributed to the Ethereum Network.Developer Purchase Program: 3.0 million ETH, or 4.17% of the supply, was distributed to members of the Ethereum Foundation to purchase at the initial crowd sale price.Following the launch of the Ethereum Network, ETH supply initially increased through a progressive mining process.Following the introduction of EIP-1559, described below, ETH supply and issuance rate varies based on factors such as recent use of the network.
Proof-of-Work Mining Process Prior to September 2022, Ethereum operated using a proof-of-work consensus mechanism.Under proof-of-work, in order to incentivize those who incurred the computational costs of securing the network by validating transactions, there was a reward given to the computer that was able to create the latest block on the chain.
Every 14 seconds, on average, a new block was added to the Ethereum Blockchain with the latest transactions processed by the network, and the computer that generated this block was awarded a variable amount of ETH, depending on use of the network at the time.In certain mining scenarios, ETH was sometimes sent to another miner if they were also able to find a solution, but their block was not included.This scenario is referred to as an uncle/aunt reward.Due to the nature of the algorithm for block generation, this process (generating a “proof-of-work”) was guaranteed to be random.The process by which a digital asset was “mined” resulted in new blocks being added to such digital asset’s blockchain and new digital assets being issued to the miners.Prior to the Merge upgrade, described below, computers on the Ethereum Network engaged in a set of prescribed complex mathematical calculations in order to add a block to the Ethereum Blockchain and thereby confirm ETH transactions included in that block’s data.
Proof-of-Stake Process In the second half of 2020, the Ethereum Network began the first of several stages of an upgrade that was initially known as “Ethereum 2.0” and eventually became known as the “Merge” to transition the Ethereum Network from a proof-of-work consensus mechanism to a proof- of-stake consensus mechanism.
The Merge was completed on September 15, 2022, and the Ethereum Network has operated on a proof-of-stake model since such time.Unlike proof-of-work, in which miners expend computational resources to compete to validate transactions and are rewarded coins in proportion to the amount of computational resources expended, in proof- of-stake, miners (sometimes called validators) risk or “stake” coins to compete to be randomly selected to validate transactions and are rewarded coins in proportion to the amount of coins staked.Any malicious activity, such as validating multiple blocks, disagreeing with the eventual consensus, or otherwise violating protocol rules, results in the forfeiture or “slashing” of a portion of the staked coins.Proof-of-stake is viewed as more energy efficient and scalable than proof-of-work and is sometimes referred to as “virtual mining.” As of December 31, 2023, every 12 seconds, approximately, a new block is added to the Ethereum Blockchain with the latest transactions processed by the network, and the validator that generated this block is awarded ETH.Limits on ETH Supply The rate at which new ETH are issued and put into circulation is expected to vary.As of December 31, 2023, following the Merge, approximately 2,400 ETH are issued per day, though the issuance rate varies based on the number of validators on the network.In addition, the issuance of new ETH could be partially or completely offset by the burn mechanism introduced by the EIP-1559 modification, under which ETH are removed from supply at a rate that varies with network usage.
On occasion, the ETH supply has been deflationary over a 24-hour period as a result of the burn mechanism.
The attributes of the new consensus algorithm are subject to change, but in sum, the new consensus algorithm and related modifications reduced total new ETH issuances and could turn the ETH supply deflationary over the long term.As of December 31, 2023, approximately 120 million ETH were outstanding.25 ————————————————————————— 25 CoinMarketCap, “Ethereum,” .————————————————————————— Modifications to the ETH Protocol The Ethereum Network is an open source project with no official developer or group of developers that controls it.
However, the Ethereum Network’s development has historically been overseen by the Ethereum Foundation and other core developers.The Ethereum Foundation and core developers are able to access and alter the Ethereum Network source code and, as a result, they are responsible for quasi-official releases of updates and other changes to the Ethereum Network’s source code.For example, in 2019, the Ethereum Network completed a network upgrade called Metropolis that was designed to enhance the usability of the Ethereum Network and was introduced in two stages.The first stage, called Byzantium, was implemented in October 2017.
The purpose of Byzantium was to increase the network’s privacy, security, and scalability and reduce the block reward from 5.0 ETH to 3.0 ETH.The second stage, called Constantinople, was implemented in February 2019, along with another upgrade, called St.Petersburg.Another network upgrade, called Istanbul, was implemented in December 2019.The purpose of Istanbul was to make the network more resistant to denial of service attacks, enable greater ETH and Zcash interoperability as well as other Equihash-based proof-of-work digital assets, and to increase the scalability and performance for solutions on zero-knowledge privacy technology like SNARKs and STARKs.The purpose of these upgrades was to prepare the Ethereum Network for the introduction of a proof-of-stake algorithm and reduce the block reward from 3.0 ETH to 2.0 ETH.In the second half of 2020, the Ethereum Network began the first of several stages of an upgrade culminating in the Merge.The Merge amended the Ethereum Network’s consensus mechanism to include proof-of-stake.
In April 2023, [[Page 24539]] the Ethereum Network completed a network upgrade called Shapella, which enabled users to unstake their previously-staked ETH and remove it from the relevant smart contract.Forthcoming planned upgrades include Dencun, which will enable “proto-danksharding.” The purpose of proto- danksharding is to increase scalability of the Ethereum Network by allowing easy synchronization with Layer 2 networks capable of processing many more transactions than the Ethereum Blockchain alone.The intended effect would be to increase the rate of transactions that can be processed by the Ethereum Network.In 2021, the Ethereum Network implemented the EIP-1559 upgrade.EIP-1559 changed the methodology used to calculate the fees paid to miners (now validators).This new methodology splits fees into two components: a base cost and priority fee.The base cost is now removed from circulation, or “burnt”, and the priority fee is paid to validators.EIP-1559 has reduced the total net issuance of ETH fees to validators.
The release of updates to the Ethereum Network’s source code does not guarantee that the updates will be automatically adopted.Users and validators must accept any changes made to the Ethereum source code by downloading the proposed modification of the Ethereum Network’s source code.A modification of the Ethereum Network’s source code is effective only with respect to the Ethereum users and validators that download it.If a modification is accepted by only a percentage of users and validators, a division in the Ethereum Network will occur such that one network will run the pre-modification source code and the other network will run the modified source code.Such a division is known as a “fork.” Consequently, as a practical matter, a modification to the source code becomes part of the Ethereum Network only if accepted by participants collectively having most of the validation power on the Ethereum Network.Core development of the Ethereum source code has increasingly focused on modifications of the Ethereum protocol to increase speed and scalability and also allow for financial and non-financial next generation uses.The Trust’s activities will not directly relate to such projects, though such projects may utilize ETH as tokens for the facilitation of their non-financial uses, thereby potentially increasing demand for ETH and the utility of the Ethereum Network as a whole.Conversely, projects that operate and are built within the Ethereum Blockchain may increase the data flow on the Ethereum Network and could either “bloat” the size of the Ethereum Blockchain or slow confirmation times.
Custody of the Trust’s ETH Digital assets and digital asset transactions are recorded and validated on blockchains, the public transaction ledgers of a digital asset network.Each digital asset blockchain serves as a record of ownership for all of the units of such digital asset, even in the case of certain privacy-preserving digital assets, where the transactions themselves are not publicly viewable.
All digital assets recorded on a blockchain are associated with a public blockchain address, also referred to as a digital wallet.
Digital assets held at a particular public blockchain address may be accessed and transferred using a corresponding private key.Key Generation Public addresses and their corresponding private keys are generated by the Custodian in secret key generation ceremonies at secure locations inside faraday cages, which are enclosures used to block electromagnetic fields and thus mitigate against attacks.The Custodian uses quantum random number generators to generate the public and private key pairs.Once generated, private keys are encrypted, separated into “shards,” and then further encrypted.After the key generation ceremony, all materials used to generate private keys, including computers, are destroyed.
All key generation ceremonies are performed offline.No party other than the Custodian has access to the private key shards of the Trust, including the Trust itself.Key Storage Private key shards are distributed geographically in secure vaults around the world, including in the United States.The locations of the secure vaults may change regularly and are kept confidential by the Custodian for security purposes.The “Digital Asset Account” is a segregated custody account controlled and secured by the Custodian to store private keys, which allows for the transfer of ownership or control of the Trust’s ETH on the Trust’s behalf.The Digital Asset Account uses offline storage, or “cold,” mechanisms to secure the Trust’s private keys.The term cold storage refers to a safeguarding method by which the private keys corresponding to digital assets are disconnected and/or deleted entirely from the internet.Cold storage of private keys may involve keeping such keys on a non-networked (or “air-gapped”) computer or electronic device or storing the private keys on a storage device (for example, a USB thumb drive) or printed medium (for example, papyrus, paper, or a metallic object).
A digital wallet may receive deposits of digital assets but may not send digital assets without use of the digital assets’ corresponding private keys.
In order to send digital assets from a digital wallet in which the private keys are kept in cold storage, either the private keys must be retrieved from cold storage and entered into an online, or “hot,” digital asset software program to sign the transaction, or the unsigned transaction must be transferred to the cold server in which the private keys are held for signature by the private keys and then transferred back to the online digital asset software program.At that point, the user of the digital wallet can transfer its digital assets.Security Procedures The Custodian is the custodian of the Trust’s private keys (which, as noted above, facilitate the transfer of ownership or control of the Trust’s ETH) in accordance with the terms and provisions of the custodian agreement by and between the Custodian, the Sponsor and the Trust (the “Custodian Agreement”).Transfers from the Digital Asset Account require certain security procedures, including, but not limited to, multiple encrypted private key shards, usernames, passwords and 2- step verification.Multiple private key shards held by the Custodian must be combined to reconstitute the private key to sign any transaction in order to transfer the Trust’s assets.Private key shards are distributed geographically in secure vaults around the world, including in the United States.As a result, if any one secure vault is ever compromised, this event will have no impact on the ability of the Trust to access its assets, other than a possible delay in operations, while one or more of the other secure vaults is used instead.
These security procedures are intended to remove single points of failure in the protection of the Trust’s assets.Transfers of ETH to the Digital Asset Account will be available to the Trust once processed on the Blockchain.Subject to obtaining regulatory approval to operate a redemption program and authorization of the Sponsor, the process of accessing and withdrawing ETH from the Trust to redeem a Basket by an Authorized [[Page 24540]] Participant 26 will follow the same general procedure as transferring ETH to the Trust to create a Basket by an Authorized Participant, only in reverse.————————————————————————— 26 “Authorized Participant” has the meaning set forth in “Creation and Redemption of Shares” below.————————————————————————— The Sponsor will maintain ownership and control of the Trust’s ETH in a manner consistent with good delivery requirements for spot commodity transactions.
ETH Value Digital Asset Trading Platform Valuation According to the Annual Report, the value of ETH is determined by the value that various market participants place on ETH through their transactions.The most common means of determining the value of an ETH is by surveying one or more Digital Asset Trading Platforms where ETH is traded publicly and transparently (e.g., Coinbase, Kraken, LMAX Digital, and [Crypto.com]).Additionally, there are over-the-counter dealers or market makers that transact in ETH.Digital Asset Trading Platform Public Market Data On each online Digital Asset Trading Platform, ETH is traded with publicly disclosed valuations for each executed trade, measured by one or more fiat currencies such as the U.S.dollar or euro, or by the widely used cryptocurrency Bitcoin.
Over-the-counter dealers or market makers do not typically disclose their trade data.As of December 31, 2023, the Digital Asset Trading Platforms included in the Index were Coinbase, Kraken, LMAX Digital, and [Crypto.com].As further described below, the Sponsor and the Trust reasonably believe each of these Digital Asset Trading Platforms are in material compliance with applicable U.S.federal and state licensing requirements and maintain practices and policies designed to comply with know-your-customer (“KYC”) and anti-money-laundering (“AML”) regulations.Coinbase: A U.S.-based trading platform registered as a money services business (“MSB”) with the U.S.
Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and licensed as a virtual currency business under the New York State Department of Financial Services (“NYDFS”) BitLicense, as well as a money transmitter in various U.S.
states.[Crypto.com]: A Singapore-based trading platform registered as an MSB with FinCEN and licensed as a money transmitter in various U.S.states.[Crypto.com]does not hold a BitLicense.Kraken: A U.S.-based trading platform registered as an MSB with FinCEN and licensed as a money transmitter in various U.S.states.Kraken does not hold a BitLicense.LMAX Digital: A U.K.-based trading platform registered as a broker with the Financial Conduct Authority.
LMAX Digital does not hold a BitLicense.
Currently, there are several Digital Asset Trading Platforms operating worldwide, and online Digital Asset Trading Platforms represent a substantial percentage of ETH buying and selling activity and provide the most data with respect to prevailing valuations of ETH.These trading platforms include established trading platforms such as those included in the Index, which provide a number of options for buying and selling ETH.The below table reflects the trading volume in ETH and market share 27 of the ETH-U.S.
dollar trading pairs of each of the Digital Asset Trading Platforms included in the Index as of December 31, 2023 (collectively, “Constituent Trading Platforms”),28 using data reported by the Index Provider from December 14, 2017 to December 31, 2023: ————————————————————————— 27 Market share is calculated using trading volume (in ETH) for certain Digital Asset Trading Platforms, including Coinbase, Kraken, LMAX Digital and [Crypto.com], as well as certain other large U.S.-dollar denominated Digital Asset Trading Platforms that were not included in the Index as of December 31, 2023, including Bitstamp, Binance.US (data included from April 1, 2020), Bittrex (data included from July 31, 2018), Bitfinex, Bitflyer (data included from November 13, 2022), Cboe Digital (data included from October 1, 2020), Gemini, HitBTC (data included from June 13, 2019 through March 31, 2020), itBit (data included from December 27, 2018), OKCoin (data included from December 25, 2018) and FTX.US (data included from July 1, 2021 through November 12, 2022).28 On January 19, 2020, the Index Provider removed itBit due to a lack of trading volume and added LMAX Digital to the Index based on the trading platform meeting the liquidity thresholds as part of its scheduled quarterly review.
On July 23, 2022, the Index Provider removed Bitstamp from the Index due to the trading platform’s failure to meet the minimum liquidity requirement, and added FTX.US as a Constituent Trading Platform based on its satisfaction of the minimum liquidity requirement as part of its scheduled quarterly review.On November 10, 2022, the Index Provider removed FTX.US from the Index due to the trading platform’s announcement that trading on the trading platform would be halted, which would impact FTX.US’s ability to reliably publish trade prices and volume on a real-time basis through APIs, and did not add any Constituent Trading Platforms as part of its review.On January 28, 2023, the Index Provider added Binance.US to the Index due to the trading platform meeting the minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its quarterly review.On June 17, 2023, the Index Provider removed Binance.US from the Index due to Binance.US’s announcement that the trading platform was suspending U.S.dollar (“USD”) deposits and withdrawals and planned to delist its USD trading pairs, and did not add any Constituent Trading Platforms as part of its review.
On October 28, 2023, the Index Provider added [Crypto.com]to the Index due to the trading platform meeting the minimum liquidity requirement, and did not remove any Constituent Trading Platforms as part of its scheduled quarterly review.———————————————————————— Digital Asset Trading Platforms included in the Index as of Volume (ETH) Market share (%) December 31, 2023 ———————————————————————— Coinbase……………………..416,006,668 34.75 Kraken……………………….
135,358,403 11.31 LMAX Digital………………….69,287,707 5.79 [Crypto.com]……………………
14,750,030 1.23 ————————————- Total ETH-U.S.Dollar trading 635,402,808 53.08 pair…………………….———————————————————————— The domicile, regulation, and legal compliance of the Digital Asset Trading Platforms included in the Index varies.Information regarding each Digital Asset Trading Platform may be found, where available, on the websites for such Digital Asset Trading Platforms, among other places.The Index and the Index Price The Index is a U.S.dollar-denominated composite reference rate for the price of ETH.The Index is designed to (i) mitigate the effects of fraud, manipulation and other anomalous trading activity from impacting the ETH reference rate, (ii) provide a real-time, volume-weighted fair value of ETH and (iii) appropriately [[Page 24541]] handle and adjust for non-market related events.The Index Price is determined by the Index Provider through a process in which trade data is cleansed and compiled in such a manner as to algorithmically reduce the impact of anomalistic or manipulative trading.
This is accomplished by adjusting the weight of each data input based on price deviation relative to the observable set, as well as recent and long-term trading volume at each venue relative to the observable set.
The value of the Index is calculated and disseminated on a 24-hour basis and will be available on a continuous basis at .
Constituent Trading Platform Selection According to the Annual Report, the Digital Asset Trading Platforms that are included in the Index are selected by the Index Provider utilizing a methodology that is guided by the International Organization of Securities Commissions (“IOSCO”) principles for financial benchmarks.For a trading platform to become a Constituent Trading Platform, it must satisfy the criteria listed below (the “Inclusion Criteria”): Sufficient USD liquidity relative to the size of the listed assets; No evidence in the past 12 months of trading restrictions on individuals or entities that would otherwise meet the trading platform’s eligibility requirements to trade; No evidence in the past 12 months of undisclosed restrictions on deposits or withdrawals from user accounts; Real-time price discovery; Limited or no capital controls; 29 ————————————————————————— 29 “Capital controls” in this context means governmental sanctions that would limit the movement of capital into, or out of, the jurisdiction in which such Digital Asset Trading Platforms operate.————————————————————————— Transparent ownership including a publicly-owned ownership entity; Publicly available language and policies addressing legal and regulatory compliance in the U.S., including KYC (Know Your Customer), AML (Anti-Money Laundering) and other policies designed to comply with relevant regulations that might apply to it; Be a U.S.-domiciled trading platform or a non-U.S.domiciled trading platform that is able to service U.S.investors; and Offer programmatic spot trading of the trading pair 30 and reliably publish trade prices and volumes on a real-time basis through Rest and Websocket APIs.————————————————————————— 30 Trading platforms with programmatic trading offer traders an application programming interface that permits trading by sending programmed commands to the trading platform.
————————————————————————— A Digital Asset Trading Platform is removed as a Constituent Trading Platform when it no longer satisfies the Inclusion Criteria.The Index Provider does not currently include data from over-the- counter markets or derivatives platforms among the Constituent Trading Platforms.According to the Annual Report, over-the-counter data is not currently included because of the potential for trades to include a significant premium or discount paid for larger liquidity, which creates an uneven comparison relative to more active markets.There is also a higher potential for over-the-counter transactions to not be arms-length, and thus not be representative of a true market price.ETH derivative markets data, including ETH futures markets and perpetuals markets data, are also not currently included.While the Index Provider has no plans to include data from over-the-counter markets or derivative platforms at this time, the Index Provider will consider IOSCO principles for financial benchmarks, the management of trading venues of ETH derivatives and the aforementioned Inclusion Criteria when considering whether to include over-the-counter or derivative platform data in the future.
The Index Provider and the Sponsor have entered into the index license agreement, dated as of February 1, 2022 (as amended, the “Index License Agreement”), governing the Sponsor’s use of the Index Price.31 Pursuant to the terms of the Index License Agreement, the Index Provider may adjust the calculation methodology for the Index Price without notice to, or consent of, the Trust or its shareholders.
The Index Provider may decide to change the calculation methodology to maintain the integrity of the Index Price calculation should it identify or become aware of previously unknown variables or issues with the existing methodology that it believes could materially impact its performance and/or reliability.
The Index Provider has sole discretion over the determination of Index Price and may change the methodologies for determining the Index Price from time to time.Shareholders will be notified of any material changes to the calculation methodology or the Index Price in the Trust’s current reports and will be notified of all other changes that the Sponsor considers significant in the Trust’s periodic or current reports.The Sponsor will determine the materiality of any changes to the Index Price on a case-by-case basis, in consultation with external counsel.————————————————————————— 31 Upon entering into the Index License Agreement, the Sponsor and the Index Provider terminated the license agreement between the parties dated as of February 28, 2019.————————————————————————— The Index Provider may change the trading venues that are used to calculate the Index or otherwise change the way in which the Index is calculated at any time.For example, the Index Provider has scheduled quarterly reviews in which it may add or remove Constituent Trading Platforms that satisfy or fail the Inclusion Criteria.
The Index Provider does not have any obligation to consider the interests of the Sponsor, the Trust, the shareholders, or anyone else in connection with such changes.While the Index Provider is not required to publicize or explain the changes or to alert the Sponsor to such changes, it has historically notified the Trust (and other subscribers to the Index) of any material changes to the Constituent Trading Platforms, including any additions or removals, contemporaneous with its issuance of press releases in connection with the same.The Sponsor will notify investors of any such material event by filing a current report on Form 8-K.Although the Index methodology is designed to operate without any manual intervention, rare events would justify manual intervention.Intervention of this kind would be in response to non-market-related events, such as the halting of deposits or withdrawals of funds on a Digital Asset Trading Platform, the unannounced closure of operations on a Digital Asset Trading Platform, insolvency or the compromise of user funds.In the event that such an intervention is necessary, the Index Provider would issue a public announcement through its website, API and other established communication channels with its clients.Determination of the Index Price The Index applies an algorithm to the price of ETH on the Constituent Trading Platforms calculated on a per second basis over a 24-hour period.
The Index’s algorithm is expected to reflect a four- pronged methodology to calculate the Index Price from the Constituent Trading Platforms: Volume Weighting: Constituent Trading Platforms with greater liquidity receive a higher weighting in the Index, increasing the ability to execute against (i.e., replicate) the Index in the underlying spot markets.Price-Variance Weighting: The Index Price reflects data points that are discretely weighted in proportion to their variance from the rest of the Constituent Trading Platforms.As the price at a particular trading platform diverges from the prices at the rest of [[Page 24542]] the Constituent Trading Platforms, its weight in the Index Price consequently decreases.Inactivity Adjustment: The Index Price algorithm penalizes stale activity from any given Constituent Trading Platform.When a Constituent Trading Platform does not have recent trading data, its weighting in the Index Price is gradually reduced until it is de- weighted entirely.Similarly, once trading activity at a Constituent Trading Platform resumes, the corresponding weighting for that Constituent Trading Platform is gradually increased until it reaches the appropriate level.Manipulation Resistance: In order to mitigate the effects of wash trading and order book spoofing, the Index only includes executed trades in its calculation.
Additionally, the Index only includes Constituent Trading Platforms that charge trading fees to its users in order to attach a real, quantifiable cost to any manipulation attempts.The Index Provider re-evaluates the weighting algorithm on a periodic basis, but maintains discretion to change the way in which an Index Price is calculated based on its periodic review or in extreme circumstances and does not make the exact methodology to calculate the Index Price publicly available.Nonetheless, the Sponsor believes that the Index is designed to limit exposure to trading or price distortion of any individual Digital Asset Trading Platform that experiences periods of unusual activity or limited liquidity by discounting, in real-time, anomalous price movements at individual Digital Asset Trading Platforms.The Sponsor believes the Index Provider’s selection process for Constituent Trading Platforms as well as the methodology of the Index Price’s algorithm provides a more accurate picture of ETH price movements than a simple average of Digital Asset Trading Platform spot prices, and that the weighting of ETH prices on the Constituent Trading Platforms limits the inclusion of data that is influenced by temporary price dislocations that may result from technical problems, limited liquidity or fraudulent activity elsewhere in the ETH spot market.
By referencing multiple trading venues and weighting them based on trade activity, the Sponsor believes that the impact of any potential fraud, manipulation or anomalous trading activity occurring on any single venue is reduced.If the Index Price becomes unavailable, or if the Sponsor determines in good faith that such Index Price does not reflect an accurate price for ETH, then the Sponsor will, on a best efforts basis, contact the Index Provider to obtain the Index Price directly from the Index Provider.
If after such contact such Index Price remains unavailable or the Sponsor continues to believe in good faith that such Index Price does not reflect an accurate price for ETH, then the Sponsor will employ a cascading set of rules to determine the Index Price, as described below in “Determination of the Index Price When Index Price is Unavailable.” The Trust values its ETH for operational purposes by reference to the Index Price.The Index Price is the value of an ETH as represented by the Index, calculated at 4:00 p.m., New York time, on each business day.
Illustrative Example For the purposes of illustration, outlined below are examples of how the attributes that impact weighting and adjustments in the aforementioned methodology may be utilized to generate the Index Price for a digital asset.For example, Constituent Trading Platforms used to calculate the Index Price of the digital asset may include trading platforms such as Coinbase, Kraken, LMAX Digital, and [Crypto.com].The Index Price algorithm, as described above, accounts for manipulation at the outset by only including data from executed trades on Constituent Trading Platforms that charge trading fees.Then, the below-listed elements may impact the weighting of the Constituent Trading Platforms on the Index Price as follows: Volume Weighting: Each Constituent Trading Platform will be weighted to appropriately reflect the trading volume share of the Constituent Trading Platform relative to all the Constituent Trading Platforms during this same period.
For example, an average hourly weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase, Kraken, LMAX Digital, and [Crypto.com], respectively, would represent each Constituent Trading Platform’s share of trading volume during the same period.Inactivity Adjustment: Assume that a Constituent Trading Platform represented a 14% weighting on the Index Price of the digital asset, which is based on the per-second calculations of its trading volume and price-variance relative to the cohort of Constituent Trading Platforms included in such Index, and then went offline for approximately two hours.The index algorithm would automatically recognize inactivity and start de-weighting the Constituent Trading Platform at the 3-minute mark and continue to do so over a 7-minute period until its influence was effectively zero, 10 minutes after becoming inactive.As soon as trading activity resumed at the Constituent Trading Platform, the index algorithm would re-weight it to the appropriate weighting based on trading volume and price-variance relative to the cohort of Constituent Trading Platforms included in the Index.
Due to the period of inactivity, it would re-weight the Constituent Trading Platform activity to a weight lower than its original weighting–for example, to 12%.Price-Variance Weighting: The price-variance weighting adjustment is a relative measure of each Constituent Trading Platform versus the cohort of Constituent Trading Platforms.The further the price at a Constituent Trading Platform is from the mean price of the cohort, the less influence that trading platform’s price will have on the algorithm that produces the Index Price, as the trading platform data is discretely weighted in proportion to their variance from the rest of the trading platforms on a per-second basis and there is no minimum threshold the variance must meet for this adjustment to take place.For example, assume that for a one-hour period, the digital asset’s execution prices on one Constituent Trading Platform were trading more than 7% higher than the average execution prices on another Constituent Trading Platform.The algorithm will automatically detect the anomaly (price variance) and reduce that specific Constituent Trading Platform’s weighting during that one-hour period, ensuring a reliable spot reference price that is unaffected by the localized event and that is reflective of broader market activity.
Determination of the Index Price When Index Price Is Unavailable The Sponsor uses the following cascading set of rules to calculate the Index Price when the Index Price is unavailable.32 For the avoidance of doubt, the Sponsor will employ the below rules sequentially and in the order as presented below, should one or more specific rule(s) fail: ————————————————————————— 32 The Sponsor updated these rules on January 11, 2022.————————————————————————— 1.Index Price = The price set by the Index as of 4:00 p.m., New York time, on the valuation date.33 If the Index becomes unavailable, or if the Sponsor determines in good faith that the Index does not reflect an accurate price, then the Sponsor will, on a best efforts basis, [[Page 24543]] contact the Index Provider to obtain the Index Price directly from the Index Provider.
If after such contact the Index remains unavailable or the Sponsor continues to believe in good faith that the Index does not reflect an accurate price, then the Sponsor will employ the next rule to determine the Index Price.There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion.————————————————————————— 33 The valuation date is any day for which the value of the ETH in the Trust may be calculated utilizing the Index Price.————————————————————————— 2.
Index Price = The price set by Coin Metrics Real-Time Rate (the “Secondary Index”) as of 4:00 p.m., New York time, on the valuation date (the “Secondary Index Price”).The Secondary Index Price is a real-time reference rate price, calculated using trade data from constituent markets selected by Coin Metrics, Inc.(the “Secondary Index Provider”).The Secondary Index Price is calculated by applying weighted-median techniques to such trade data where half the weight is derived from the trading volume on each constituent market and half is derived from inverse price variance, where a constituent market with high price variance as a result of outliers or market anomalies compared to other constituent markets is assigned a smaller weight.
If the Secondary Index becomes unavailable, or if the Sponsor determines in good faith that the Secondary Index does not reflect an accurate price, then the Sponsor will, on a best efforts basis, contact the Secondary Index Provider to obtain the Secondary Index Price directly from the Secondary Index Provider.If after such contact the Secondary Index remains unavailable or the Sponsor continues to believe in good faith that the Secondary Index does not reflect an accurate price, then the Sponsor will employ the next rule to determine the Index Price.There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion.
3.Index Price = The price set by the Trust’s principal market (as defined in the Annual Report) (the “Tertiary Pricing Option”) as of 4:00 p.m., New York time, on the valuation date.The Tertiary Pricing Option is a spot price derived from the principal market’s public data feed that is believed to be consistently publishing pricing information as of 4:00 p.m., New York time, and is provided to the Sponsor via an application programming interface.
If the Tertiary Pricing Option becomes unavailable, or if the Sponsor determines in good faith that the Tertiary Pricing Option does not reflect an accurate price, then the Sponsor will, on a best efforts basis, contact the Tertiary Pricing Provider to obtain the Tertiary Pricing Option directly from the Tertiary Pricing Provider.If after such contact the Tertiary Pricing Option remains unavailable after such contact or the Sponsor continues to believe in good faith that the Tertiary Pricing Option does not reflect an accurate price, then the Sponsor will employ the next rule to determine the Index Price.There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion.
4.Index Price = The Sponsor will use its best judgment to determine a good faith estimate of the Index Price.There are no predefined criteria to make a good faith assessment and it will be made by the Sponsor in its sole discretion.
In the event of a fork, the Index Provider may calculate the Index Price based on a digital asset that the Sponsor does not believe to be an appropriate asset of the Trust (i.e., a digital asset other than ETH).34 In this event, the Sponsor has full discretion to use a different index provider or calculate the Index Price itself using its best judgment.In such an event, the Exchange will submit a proposed rule filing to contemplate the assets that would subsequently be held by the Trust.————————————————————————— 34 According to the Annual Report, when a modification is introduced and a substantial majority of users and validators consent to the modification, the change is implemented and the network remains uninterrupted.However, if less than a substantial majority of users and validators consent to the proposed modification, and the modification is not compatible with the software prior to its modification, the consequence would be what is known as a “hard fork” of the Ethereum Network, with one group running the pre-modified software and the other running the modified software.The effect of such a fork would be the existence of two versions of ETH running in parallel, yet lacking interchangeability.For example, in July 2016, Ethereum “forked” into Ethereum and a new digital asset, Ethereum Classic, as a result of the Ethereum Network community’s response to a significant security breach in which an anonymous hacker exploited a smart contract running on the Ethereum Network to syphon approximately $60 million of ETH held by the DAO, a distributed autonomous organization, into a segregated account.
In response to the hack, most participants in the Ethereum community elected to adopt a “fork” that effectively reversed the hack.However, a minority of users continued to develop the original blockchain, with the digital asset on that blockchain now referred to as Ethereum Classic, or ETC.ETC now trades on several Digital Asset Trading Platforms.In the event of a hard fork of the Ethereum Network, the Sponsor will, if permitted by the terms of the Trust Agreement, use its discretion to determine, in good faith, which peer-to-peer network, among a group of incompatible forks of the Ethereum Network, is generally accepted as the Ethereum Network and should therefore be considered the appropriate network for the Trust’s purposes.The Sponsor will base its determination on a variety of then relevant factors, including, but not limited to, the Sponsor’s beliefs regarding expectations of the core developers of ETH, users, services, businesses, miners, and other constituencies, as well as the actual continued acceptance of, validating power on, and community engagement with, the Ethereum Network.There is no guarantee that the Sponsor will choose the digital asset that is ultimately the most valuable fork, and the Sponsor’s decision may adversely affect the value of the Shares as a result.
The Sponsor may also disagree with shareholders, security vendors, and the Index Provider on what is generally accepted as ETH and should therefore be considered “ETH” for the Trust’s purposes, which may also adversely affect the value of the Shares as a result.————————————————————————— The Sponsor may, in its sole discretion, select a different index provider, select a different index price provided by the Index Provider, calculate the Index Price by using the cascading set of rules set forth above, or change the cascading set of rules set forth above at any time.35 ————————————————————————— 35 The Sponsor will provide notice of any such changes in the Trust’s periodic or current reports and, where applicable, will file a proposed rule change with the Commission.————————————————————————— The Impact of the Approval of ETH Futures ETFs on Spot ETH ETPs Like the Trust On October 2, 2023, the first ETH-based exchange-traded funds (“ETFs”) were approved by the Commission for trading.36 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 Digital, 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.————————————————————————— 36 These ETFs included the Bitwise Ethereum Strategy ETF, Bitwise Bitcoin & Ether Equal Weight Strategy ETF, Hashdex Ether Strategy ETF, ProShares Ether Strategy ETF, ProShares Bitcoin & Ether Strategy ETF, ProShares Bitcoin & Ether Equal Weight Strategy ETF, Valkyrie Bitcoin & Ethereum Strategy ETF, VanEck Ethereum Strategy ETF, and Volatility Shares Ethereum Strategy ETF.————————————————————————— In the context of other digital asset-based ETF and ETP proposals for Bitcoin, the Commission has sought to justify treating futures- based ETFs differently from spot-based ETFs because of (i) distinctions between the regulations under which the two products would be registered (the Investment Company Act of 1940 (the “ ’40 Act”) for digital-asset futures ETFs and ’33 Act for spot digital-asset ETPs) and (ii) the existence of regulation and surveillance-sharing over the CME digital-asset futures market through the Intermarket Surveillance Group (“ISG”), [[Page 24544]] as compared to the spot market for those digital assets.37 The Sponsor believes that this reasoning is unsupported for the following reasons.
————————————————————————— 37 See, e.g., Chair Gary Gensler Public Statement, “Remarks Before the Aspen Security Forum,” (August 3, 2021), stating that the Chair looked forward to the Commission’s review of Bitcoin-based ETF proposals registered under the ’40 Act, “particularly if those are limited to [the] CME-traded Bitcoin futures,” noting the “significant investor protection” offered by the ’40 Act, ; Securities Exchange Act Release No.93559 (November 12, 2021), 86 FR 64539 (November 18, 2021) (SR-CboeBZX-2021-019) (Order Disapproving a Proposed Rule Change to List and Trade Shares of the VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares) (“VanEck Order”) (denying the first spot bitcoin ETP registered under the ’33 Act following the first approval of a bitcoin futures ETF registered under the ’40 Act, noting the differences in the standard of review that applies to such products); Securities Exchange Act Release No.94620 (April 6, 2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No.2, to List and Trade Shares of the Teucrium Bitcoin Futures Fund under NYSE ARCA Rule 8.200-E, Commentary .02 (Trust Issued Receipts)) (“Teucrium Order”) (approving the first bitcoin futures ETP registered under the ’33 Act, stating that “With respect to the proposed ETP, the underlying bitcoin assets are CME bitcoin futures contracts.The relevant analysis, therefore, is whether Arca has a comprehensive surveillance sharing agreement with a regulated market of significant size related to CME bitcoin futures contracts.As discussed below, taking into consideration the direct relationship between the regulated market with which Arca has a surveillance-sharing agreement and the assets held by the proposed ETP, as well as developments with respect to the CME bitcoin futures market–including the launch of exchange-traded funds registered under the Investment Company Act of 1940 (“1940 Act”) that hold CME bitcoin futures (“Bitcoin Futures ETFs”)–the Commission concludes that the Exchange has the requisite surveillance-sharing agreement.”).
————————————————————————— The ’40 Act Offers No More Investor Protections Than the ’33 Act in the Context of ETH-Based ETF and ETP Proposals While the ’40 Act has certain added investor protections that the ’33 Act does not require, these protections do not seek to allay harms arising from underlying assets or markets of assets that ETFs hold, such as the potential for fraud or manipulation in such markets.In other words, the Sponsor does not believe that the application of the ’40 Act supports the purported justifications the Commission has made in denying other spot digital asset ETPs.Instead, the ’40 Act seeks to remedy certain abusive practices in the management of investment companies such as ETFs, and thus places certain restrictions on ETFs and ETF sponsors.The ’40 Act explicitly lists out the types of abuses it seeks to prevent, and places certain restrictions related to accounting, borrowing, custody, fees, and independent boards, among others.
Notably, none of these restrictions address an ETF’s underlying assets, whether 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 ’40 Act and the registration of spot ETH ETPs under the ’33 Act is one without a difference in the context of ETH-based ETP proposals.Surveillance-Sharing With the CME ETH Futures Market Is Sufficient To Protect Against Fraud and Manipulation in the Underlying Spot ETH Market 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.38 The Sponsor also believes that a correlation analysis conducted by Coinbase, Inc.further corroborates this conclusion.
Coinbase, Inc.’s analysis found that the CME ETH futures market has been consistently and highly correlated with the spot ETH market throughout the past (nearly) three years, with an even greater correlation than that cited by the Commission with respect to the CME Bitcoin futures and spot Bitcoin market in approving proposed rule changes to list and trade spot Bitcoin-based ETPs.39 ————————————————————————— 38 See Grayscale Investments, LLC v.
Securities and Exchange Commission (“Grayscale v.SEC”), No.22-1142, Brief of Petitioner Grayscale Investments, LLC (October 11, 2022) (advancing the same argument regarding CME Bitcoin futures and the underlying spot Bitcoin market).
39 See Comment Letter from Paul Grewal, Chief Legal Officer, Coinbase, Inc.(February 21, 2024), available at: (noting that “the correlation between the CME ETH futures market and the spot ETH market for the full sample period is 99.3% using data at an hourly interval, 96.2% using data at a five- minute interval, and 84.7% using data at a one-minute interval”); Securities Exchange Act Release No.34-99306 (January 10, 2024), 89 FR 3008 at 3010-11 (January 17, 2024) (SR-NYSEARCA-2021-90; SR- NYSEARCA-2023-44; SRNYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ- 2023-019; SR-CboeBZX-2023028; SR-CboeBZX-2023-038; SR-CboeBZX-2023- 040; SR-CboeBZX-2023-042; SRCboeBZX-2023-044; SR-CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed Rule Changes, as Modified by Amendments Thereto, to List and Trade Bitcoin-Based Commodity-Based Trust Shares and Trust Units).————————————————————————— Given the similarity between an ETP holding spot ETH and an ETF holding ETH futures, the Sponsor believes that it must be the case that CME surveillance can either detect spot-market fraud that affects both futures ETFs and spot ETPs, or that such surveillance cannot do so for either type of product.
Having approved 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, the Sponsor believes that the distinctions between the ’40 Act and the ’33 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.The Structure and Operation of the Trust Protects Investors and Satisfies Commission Requirements for ETH-Based Exchange Traded Products Even if the Commission had not approved ETH futures ETFs, the Sponsor still believes the Commission should approve the listing and trading of Shares of the Trust.In the context of prior spot digital asset ETP proposal disapproval orders for Bitcoin, the Commission expressed concerns about the underlying Digital Asset Market due to the potential for fraud and manipulation and has outlined the reasons why such ETP proposals have been unable to satisfy these concerns.40 [[Page 24545]] For purposes of the Trust’s ETH-based ETP proposal, the Sponsor anticipates that the Commission may have the same concerns and addresses each of these in turn below.————————————————————————— 40 See Securities Exchange Act Release Nos.83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No.1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust) (the “Winklevoss Order”); 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019) (SR-NYSEArca-2019-01) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No.
1, Relating to the Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201- E) (the “Bitwise Order”); 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-NYSEArca-2019-39) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No.1, to Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares) and to List and Trade Shares of the United States Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201-E) (the “Wilshire Phoenix Order”); 83904 (August 22, 2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017- 139) (Order Disapproving a Proposed Rule Change to List and Trade the Shares of the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF) (the “ProShares Order”); 83912 (August 22, 2018), 83 FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02) (Order Disapproving a Proposed Rule Change Relating to Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200-E) (the “Direxion Order”); 83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-2018- 01) (Order Disapproving a Proposed Rule Change to List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF) (the “GraniteShares Order”) (together, the “Prior Spot Digital Asset ETP Disapproval Orders”).————————————————————————— In the Prior Spot Digital Asset ETP Disapproval Orders, the Commission outlined that a proposal relating to a digital asset-based ETP could satisfy its concerns regarding potential for fraud and manipulation by demonstrating: (1) Inherent Resistance to Fraud and Manipulation: that the underlying commodity market is inherently resistant to fraud and manipulation; (2) Other Means to Prevent Fraud and Manipulation: that there are other means to prevent fraudulent and manipulative acts and practices that are sufficient; or (3) Surveillance Sharing: that the listing exchange has entered into a surveillance sharing agreement with a regulated market of significant size relating to the underlying or reference assets.As described below, the Sponsor believes the structure and operation of the Trust are designed to prevent fraudulent and manipulative acts and practices, to protect investors and the public interest, and to respond to the specific concerns that the Commission may have with respect to potential fraud and manipulation in the context of an ETH-based ETP.How the Trust Meets Standards in the Prior Spot Digital Asset ETP Disapproval Orders 1.Resistance to or Prevention of Fraud and Manipulation In the Prior Spot Digital Asset ETP Disapproval Orders, the Commission disagreed with the proposition that a digital asset’s fungibility, transportability and exchange tradability combine to provide unique protections against, and allow such digital asset to be uniquely resistant to, attempts at price manipulation.
The Commission reached its conclusion based on concessions by one issuer that 95% of the reported trading in the digital asset, Bitcoin, is “fake” or non- economic, effectively admitting that the properties of Bitcoin do not make it inherently resistant to manipulation.Such issuer’s concessions were further compounded by evidence of potential and actual fraud and manipulation in the historical trading of Bitcoin on certain marketplaces such as (1) “wash” trading, (2) trading based on material, non-public information, including the dissemination of false and misleading information, (3) manipulative activity involving Tether, and (4) fraud and manipulation.41 ————————————————————————— 41 See Bitwise Order, 84 FR at 55383 (discussing analysis of the Bitcoin spot market that asserts that 95% of the spot market is dominated by fake and non-economic activity, such as wash trades), 55391 (discussing possible sources of fraud and manipulation in the bitcoin spot market).
See also Winklevoss Order, 83 FR at 37585-86 (discussing pending litigation against a Bitcoin trading platform for fraudulent conduct relating to Tether); Bitwise Order, 84 FR at 55391 n.140, 55402 & n.331 (same); Winklevoss Order, 83 FR at 37584- 86 (discussing potential types of manipulation in the Bitcoin spot market).The Commission has also noted that fraud and manipulation in the Bitcoin spot market could persist for a significant duration.See, e.g., Bitwise Order, 84 FR at 55405 & n.379.————————————————————————— The Sponsor acknowledges the possibility that fraud and manipulation may exist in commodity markets and that digital asset trading, such as ETH, on any given exchange may be no more uniquely resistant to fraud and manipulation than other commodity markets.42 However, the Sponsor believes that the fundamental features of digital assets, including fungibility, transportability and exchange tradability offer novel protections beyond those that exist in traditional commodity markets or equity markets when combined with other means, as discussed further below.————————————————————————— 42 See generally Bitwise Order.————————————————————————— 2.Other Means To Prevent Fraud and Manipulation The Commission has recognized that a listing exchange could demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement.43 In evaluating the effectiveness of this type of resistance, the Commission does not apply a “cannot be manipulated” standard.Instead, the Commission requires that such resistance to fraud and manipulation be novel and beyond those protections that exist in traditional commodity markets or equity markets for which the Commission has long required surveillance-sharing agreements in the context of listing derivative securities products.44 ————————————————————————— 43 See Winklevoss Order, 84 FR at 37580, 37582-91; Bitwise Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at 12597.
44 See Winklevoss Order, 84 FR at 37582; Wilshire Phoenix Order, 85 FR at 12597.————————————————————————— The Sponsor believes the Index represents a novel means to prevent fraud and manipulation from impacting a reference price for ETH and that it offers protections beyond those that exist in traditional commodity markets or equity markets.The Index operates materially similarly to CoinDesk Bitcoin Price Index (XBX).Specifically, digital assets, such as ETH, are novel and exist outside traditional commodity markets.
It therefore stands to reason that the methods by which they trade will be novel and that the market for digital assets like ETH will have different attributes than traditional commodity markets.Digital assets like ETH were only introduced within the past decade, twenty years after the first U.S.ETFs were offered 45 and 150 years after the first futures were offered.46 In contrast to older commodities such as gold, silver, platinum, palladium or copper, which the Commission has noted all had at least one significant, regulated market for trading futures on the underlying commodity at the time commodity trust ETPs were approved for listing and trading, the first trading in digital assets like ETH took place entirely in an open, transparent and online setting where other commodities cannot trade.————————————————————————— 45 SEC, “Investor Bulletin: Exchange-Traded Funds (ETFs),” August 2012, .
46 Commodity Futures Trading Commission (“CFTC”), “History of the CFTC,” .————————————————————————— The Trust has priced its Shares consistently for more than six years based on the Index.The Sponsor believes the Trust’s use of the Index specifically addresses the Commission’s concerns in that the Index serves as an alternative means to prevent fraud and manipulation.Specifically, the Index can (i) mitigate the effects of fraud, manipulation and other anomalous trading activity on the ETH reference rate, (ii) provide a real-time, volume-weighted fair value of ETH and (iii) appropriately handle and adjust for non-market related events.As described in more detail below, the Sponsor believes that the Index accomplishes those objectives in the following ways: 1.
The Index tracks the Digital Asset Trading Platform Market price through [[Page 24546]] trading activity at “U.S.-Compliant Trading Platform”; 47 ————————————————————————— 47 “U.S.-Compliant Trading Platforms” are trading platforms in the Digital Asset Trading Platform Market that are compliant with applicable U.S.
federal and state licensing requirements and practices regarding AML and KYC regulations.All Constituent Trading Platforms are U.S.-Compliant Trading Platforms.“Non-U.S.-Compliant Trading Platforms” are all other trading platforms in the Digital Asset Trading Platform Market.As of December 31, 2023, the U.S.- Compliant Trading Platforms that the Index Provider considered for inclusion in the Index were Coinbase, Kraken, LMAX Digital and [Crypto.com].
From these U.S.-Compliant Trading Platforms, the Index Provider then applies additional Inclusion Criteria to determine the Constituent Trading Platform.On January 19, 2020, the Index Provider removed itBit due to a lack of trading volume and added LMAX Digital to the Index based on the trading platform meeting the liquidity thresholds as part of its scheduled quarterly review.On July 23, 2022, the Index Provider removed Bitstamp from the Index due to the trading platform’s failure to meet the minimum li.