Securities and Exchange Commission
- [Release No. 34-100224; File Nos. SR-NYSEARCA-2023-70; SR-NYSEARCA-2024-31; SR-NASDAQ-2023-045; SR-CboeBZX-2023-069; SR-CboeBZX-2023-070; SR-CboeBZX-2023-087; SR-CboeBZX-2023-095; SR-CboeBZX-2024-018]
I. Introduction
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) [1] and Rule 19b-4 thereunder (“Rule 19b-4”),[2] each of NYSE Arca, Inc. (“NYSE Arca”), The Nasdaq Stock Market LLC (“Nasdaq”), and Cboe BZX Exchange, Inc. (“BZX”, and together with NYSE Arca and Nasdaq, the “Exchanges”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) proposed rule changes to list and trade shares of the following. NYSE Arca proposes to list and trade shares of (1) the Grayscale Ethereum Trust [3] and (2) the Bitwise Ethereum ETF [4] under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares); Nasdaq proposes to list and trade shares of (3) the iShares Ethereum Trust [5] under Nasdaq Rule 5711(d) (Commodity-Based Trust Shares); and BZX proposes to list and trade shares of (4) the VanEck Ethereum Trust,[6] (5) the ARK 21Shares Ethereum ETF,[7] (6) the Invesco Galaxy Ethereum ETF,[8] (7) the Fidelity Ethereum Fund,[9] and (8) the Franklin Ethereum ETF [10] under BZX Rule 14.11(e)(4) (Commodity-Based Trust Shares). Each filing was subject to notice and comment.[11]
Each of the foregoing proposed rule changes, as modified by their respective amendments, is referred to herein as a “Proposal” and collectively as the “Proposals.” Each trust (or series of a trust) described in a Proposal is referred to herein as a “Trust” and collectively as the “Trusts.” As described in more detail in the Proposals' respective amended filings,[12] each Proposal seeks to list and trade shares of a Trust that would hold spot ether,[13] in whole or in part.[14] This order approves the Proposals on an accelerated basis.[15]
II. Discussion and Commission Findings
After careful review, the Commission finds that the Proposals are consistent with the Exchange Act and rules and regulations thereunder applicable to a national securities exchange.[16] In ( printed page 46938) particular, the Commission finds that the Proposals are consistent with Section 6(b)(5) of the Exchange Act,[17] which requires, among other things, that the Exchanges' rules be designed to “prevent fraudulent and manipulative acts and practices” and, “in general, to protect investors and the public interest;” and with Section 11A(a)(1)(C)(iii) of the Exchange Act,[18] which sets forth Congress' finding that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.
A. Exchange Act Section 6(b)(5)
When considering proposals to list bitcoin-based commodity trusts and bitcoin-based trust issued receipts, the Commission has explained that one way an exchange that lists bitcoin-based ETPs can meet the obligation under Exchange Act Section 6(b)(5) that its rules be designed to prevent fraudulent and manipulative acts and practices is by demonstrating that the exchange has a comprehensive surveillance-sharing agreement with a regulated market of significant size related to the underlying or reference assets.[19] Such an agreement would assist in detecting and deterring fraud and manipulation related to that underlying asset.
The Commission has also consistently recognized, however, that this is not the exclusive means by which an ETP listing exchange can meet this statutory obligation.[20] A listing exchange could, alternatively, demonstrate that “other means to prevent fraudulent and manipulative acts and practices will be sufficient” to justify dispensing with a surveillance-sharing agreement with a regulated market of significant size.[21] Applying this same analytical framework to the spot ether to be held by the Trusts, the Commission finds that sufficient “other means” of preventing fraud and manipulation in this context have been demonstrated.
Each Exchange has a comprehensive surveillance-sharing agreement with the Chicago Mercantile Exchange (“CME”) via their common membership in the Intermarket Surveillance Group.[22] This facilitates the sharing of information that is available to the CME through its surveillance of its markets, including its surveillance of the CME ether futures market. Spot ether, however, does not trade on the CME and the CME does not engage in surveillance of spot ether markets. As with the proposals approved in the Spot Bitcoin ETP Approval Order, this raises questions regarding the sufficiency of a surveillance-sharing agreement with the CME in preventing fraud and manipulation when the proposed ETPs hold spot ether.[23] If a would-be manipulator of a spot ether ETP engages in misconduct (such as fraud, manipulation, or other trading abuses) on the CME itself, the CME's surveillance can be reasonably expected to detect such misconduct. But if the would-be manipulator is not transacting on the CME itself, the impacts of its misconduct would not necessarily be surveilled by the CME unless the misconduct also impacts the CME ether futures market. Thus, when assessing the sufficiency of a surveillance-sharing agreement with the CME, it is critical to establish whether, and to what extent, fraud or manipulation that impacts the spot ether market also impacts the CME ether futures market.[24]
In the Spot Bitcoin ETP Approval Order, the Commission concluded that having a comprehensive surveillance-sharing agreement with a U.S.-regulated market that, based on evidence from robust correlation analysis, is consistently highly correlated with the ETPs' underlying assets (spot bitcoin) constituted “other means” sufficient to satisfy the Exchange Act Section 6(b)(5) standard.[25] Specifically, given the consistently high correlation between the CME bitcoin futures market and a sample of spot bitcoin markets—confirmed through robust correlation analysis using data at hourly, five-minute, and one-minute intervals—the Commission was able to conclude that fraud or manipulation that impacts prices in spot bitcoin markets would likely similarly impact CME bitcoin futures prices. And because the CME's surveillance can assist in detecting those impacts on CME bitcoin futures prices, the Exchanges' comprehensive surveillance-sharing agreement with the CME can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of those proposals. The Commission indicated that the “robustness” of its correlation analysis rested on the pre-requisites of (1) the correlations being calculated with respect to bitcoin futures that trade on the CME, a U.S. market regulated by the Commodity Futures Trading Commission (“CFTC”), (2) the lengthy sample period of price returns for both the CME bitcoin futures market and the spot bitcoin market, (3) the frequent intra-day trading data in both the CME bitcoin futures market and the spot bitcoin market over that lengthy sample period, and (4) the consistency of the correlation results throughout the lengthy sample period. 26
( printed page 46939)Several of the Proposals and some commenters offered correlation analyses in the ether context. Some Proposals provided correlation results that used data at a daily frequency. For example, the ARK Amendment finds a correlation between the daily returns of CME ether futures and daily returns on certain spot ether trading platforms of more than 99.89%; [27] the VanEck Amendment, Invesco Amendment, and Franklin Amendment find daily correlation of 99.8%; [28] and the iShares Amendment finds a daily correlation of 99.93%.[29] However, as explained in the Spot Bitcoin ETP Approval Order, calculating correlation using only daily price observations provides no information on how prices in the two markets are associated—if at all— throughout the trading day; and calculating correlation for only the full sample period does not provide evidence of a consistently high correlation over time.[30]
The Fidelity Amendment performed rolling 90-day correlations between daily returns of CME ether futures and six spot ether trading platforms and found correlations ranged between 94% and 99.8%.[31] As indicated above, however, calculating correlations using only daily price observations—even on a rolling basis—provides no information on how prices are associated—if at all— throughout the trading day. The Fidelity Amendment also examined correlation using hourly returns data, and found such correlations for the full sample period to be above 98%.[32] While the filing does not provide rolling correlations using the hourly data, the filing examined the “distribution of hourly returns” and finds that at least 97.9% of the hourly returns of the spot ether platforms and the CME ether futures market are within 50 basis points. The filing stated that “[t]his suggests a high degree of similarity in price movements between the regulated exchange and the spot platforms for most hours.” [33]
The use of hourly data, however, provides no indication of how prices move at finer increments. For example, the results provide no indication of whether price movements—including price manipulations—in ether spot markets that persist for only a few minutes or less are likely to be reflected in CME ether futures prices. While the Fidelity Amendment's results may suggest a high degree of similarity in price movements between the CME ether futures market and the spot ether platforms “ for most hours, ” the results suggest nothing about the degree of similarity in price movements for most minutes within the hours.
Two commenters and one Proposal examined correlation between the CME ether futures market and spot ether trading platforms at hourly, five-minute, and one-minute intervals. The Coinbase Letter used price returns data from March 1, 2021, through January 31, 2024, for the CME ether futures market and the Coinbase platform.[34] This commenter calculated Pearson correlation statistics [35] for the full sample period as well as for rolling three-month segments within the sample period. The commenter's correlation results for the full sample period are 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.[36] The commenter states that these results “show an even greater correlation than what was reported by the Commission” in the Spot Bitcoin ETP Approval Order with respect to the CME bitcoin futures market and spot bitcoin trading platforms.[37] The commenter also sought to replicate the same correlation analysis of the bitcoin market that the Commission performed for the Spot Bitcoin ETP Approval Order. The commenter's replication results also found greater correlation than what was reported in the Spot Bitcoin ETP Approval Order.[38]
The CF Benchmarks Letters used price returns data from February 2, 2022, through February 2, 2024, for the CME ether futures market and the Coinbase, Kraken, and LMAX Digital platforms.[39] This commenter also calculated Pearson correlation statistics for its full sample period as well as for rolling three-month segments within that sample period. This commenter's correlation results for the full sample period are no less than 98.0% using data at an hourly interval, 91.5% using data at a five-minute interval, and 84.9% using data at a one-minute interval.[40] The commenter states that these results are “on the whole stronger” than those that the Commission reported for the bitcoin market in the Spot Bitcoin ETP Approval Order.[41]
The Bitwise Amendment used price returns data from August 1, 2021, through March 20, 2024, for the CME ether futures market and the Coinbase and Kraken platforms.[42] This filing also calculated Pearson correlation statistics for its full sample period as well as for rolling three-month segments within that sample period. This filing's correlation results for the full sample period are no less than 98.6% using data at an hourly interval, 90.0% using data at a five-minute interval, and 70.9% using data at a one-minute interval.[43]
The Commission undertook to verify the Bitwise Amendment's and these two commenters' correlation results for certain spot ether markets. For robust [44] results, the Commission used stationary time series of price returns data at hourly, five-minute, and one-minute intervals for the spot ETH/USD trading pair on Coinbase and Kraken, as well as for the closest-to-maturity CME ether futures contract, over a similarly lengthy sample period (October 1, 2021, through March 29, 2024).[45] Pearson correlation ( printed page 46940) statistics were calculated for the full sample period as well as for rolling three-month segments within the sample period. The Commission's correlation analysis utilized frequent intra-day trading data over the lengthy sample period on this subset of spot ether platforms [46] and—crucially—on the CME ether futures market as well.[47]
The results of the Commission's analysis confirm that the CME ether futures market has been consistently highly correlated with this subset of the spot ether market throughout the past 2.5 years. The correlation between the CME ether futures market and this subset of spot ether platforms for the full sample period is no less than 96.2 percent using data at an hourly interval, 85.7 percent using data at a five-minute interval, and 67.1 percent using data at a one-minute interval. The rolling three-month correlation results range between 86.4 and 98.4 percent using data at an hourly interval, 75.8 and 90.2 percent using data at a five-minute interval, and 58.6 and 75.9 percent using data at a one-minute interval.
| Coinbase | Kraken | |||||
|---|---|---|---|---|---|---|
| Hourly | 5 Minutes | 1 Minute | Hourly | 5 Minutes | 1 Minute | |
| Full Sample: October 1, 2021, through March 29, 2024 | 96.2 | 85.7 | 67.1 | 96.3 | 86.5 | 69.0 |
| Rolling Three-Month Correlations Over the Full Sample Period: | ||||||
| Maximum | 98.4 | 90.1 | 74.5 | 98.4 | 90.2 | 75.9 |
| Minimum | 86.4 | 75.8 | 58.6 | 86.6 | 77.1 | 61.6 |
| The Commission also examined correlation between the CME ether futures market and the Coinbase and Kraken spot ether trading platforms at hourly, five-minute, and one-minute intervals, using the same data sources and methodology (see note 45), for the period after the Ethereum Network changed from a Proof-of-Work to a Proof-of-Stake consensus mechanism in September 2022 (“post-Merge”). The results indicate that correlation has been similarly high and consistent during just the post-Merge period. | ||||||
| Post-Merge Sample: September 16, 2022, through March 29, 2024 | 94.1 | 84.1 | 68.0 | 94.1 | 85.0 | 69.9 |
| Rolling Three-Month Correlations Over the Post-Merge Sample: | ||||||
| Maximum | 98.4 | 88.3 | 73.1 | 98.4 | 89.3 | 75.9 |
| Minimum | 86.4 | 75.8 | 61.0 | 86.6 | 77.1 | 62.8 |
The Commission further examined correlation between the CME ether futures market and the Coinbase and Kraken spot ether trading platforms at hourly, five-minute, and one-minute intervals in a recent month, March 2024, sourcing CME ether futures market data from Refinitiv.[48] The results indicate similar correlation: no less than 97.6 percent using data at an hourly interval, 86.0 percent using data at a five-minute interval, and 62.5 percent using data at a one-minute interval.
| Coinbase | Kraken | |||||
|---|---|---|---|---|---|---|
| Hourly | 5 Minutes | 1 Minute | Hourly | 5 Minutes | 1 Minute | |
| March 2024 | 97.6 | 86.0 | 62.5 | 97.7 | 87.5 | 67.0 |
The results of the Commission's robust correlation analysis [49] provide empirical evidence that prices generally move in close (although not perfect) alignment between the spot ether market and the CME ether futures market.[50] As such, based on the record before the Commission and the correlation analyses in the record, including the Commission's own analysis, the Commission is able to conclude that fraud or manipulation that impacts prices in spot ether markets would likely similarly impact CME ether futures prices. And because the CME's surveillance can assist in detecting those impacts on CME ether futures prices, the Exchanges' comprehensive surveillance-sharing agreement with the CME—a U.S.-regulated market whose ether futures market is consistently highly correlated to spot ether, albeit not of “significant size” related to spot ether—can be reasonably expected to assist in surveilling for fraudulent and manipulative acts and practices in the specific context of the Proposals.[51]
B. Exchange Act Section 11A(a)(1)(C)(iii)
Each Proposal sets forth aspects of its proposed ETP, including the availability of pricing information, transparency of portfolio holdings, and types of surveillance procedures, that are consistent with other ETPs that the Commission has approved.[52] This includes commitments regarding: the availability via the relevant securities information processor of quotation and last-sale information for the shares of each Trust; the availability on the websites of each Trust of certain information related to the Trusts' intra-day indicative values (“IIV”) and net asset values; the dissemination of IIV by one or more major market data vendors, updated every 15 seconds throughout the Exchanges' regular trading hours; the Exchanges' surveillance procedures and ability to obtain information regarding trading in the shares of the Trusts; the conditions under which the Exchanges would implement trading halts and suspensions; and the requirements of registered market makers in the shares of each Trust.[53] In addition, in each Proposal, the applicable Exchange deems the shares of the applicable Trust to be equity securities, thus rendering trading in such shares subject to that Exchange's existing rules governing the trading of equity securities.[54] Further, the applicable listing rules of each Exchange require that all statements and representations made in its filing regarding, among others, the description of the applicable Trust's holdings, limitations on such holdings, and the applicability of that Exchange's listing rules specified in the filing, will constitute continued listing requirements.[55] Moreover, each Proposal states that: its issuer has represented to the applicable Exchange that it will advise that Exchange of any failure to comply with the applicable continued listing requirements; pursuant to obligations under Section 19(g)(1) of the Exchange Act, that Exchange will monitor for compliance with the continued listing requirements; and if the applicable Trust is not in compliance with the applicable listing requirements, that Exchange will commence delisting procedures.[56]
( printed page 46942)The Commission therefore finds that the Proposals, as with other ETPs that the Commission has approved,[57] are reasonably designed to promote fair disclosure of information that may be necessary to price the shares of the Trusts appropriately, to prevent trading when a reasonable degree of transparency cannot be assured, to safeguard material non-public information relating to the Trusts' portfolios, and to ensure fair and orderly markets for the shares of the Trusts.
C. Other Comments
One commenter asserts that the Commission should approve the Proposals because CME ether futures exchange-traded funds (“ETFs”) registered under the Investment Company Act of 1940 (“1940 Act”) are already trading on national securities exchanges “and possess much more potential for manipulation of the underlying asset.” [58] Another commenter states that the Commission should approve the Proposals because “[t]here is no difference between the [spot bitcoin ETP] approval and the [spot ether ETPs] at this point.” [59]
The Commission has considered and, for the reasons described above, is approving the Proposals on their own merits and under the standards applicable to them; namely, the standards provided by Section 6(b)(5) and Section 11A(a)(1)(C)(iii) of the Exchange Act.[60] As described above, based on the record before the Commission and the Commission's own correlation analysis, the Commission concludes that fraud or manipulation that impacts prices in spot ether markets would likely similarly impact CME ether futures prices, such that a surveillance-sharing agreement with the CME can be reasonably expected to assist in surveilling for fraud and manipulation that may impact the proposed spot ether ETPs.
Some commenters state that the Commission should approve the Proposals for a variety of investor protection reasons, including that spot ether ETPs would be a less costly and more efficient,[61] more convenient and secure,[62] and more regulated [63] way to gain exposure to spot ether. The Exchanges make similar investor protection arguments in support of approval.[64]
Another commenter disagrees that the ETP investment vehicle would protect investors, stating that the value of an investment in a spot ether ETP would be subject to the same risks of fraud and manipulation in the spot ether market as holding ether directly, and that ETPs are not subject to the Commission's examination authority, custody requirements, or conflicts of interest rules of ETFs registered under the 1940 Act.[65] This commenter further states that any purported investor protections from an ETP compared to an “even-worse over-the-counter market” do not neutralize concerns about fraud and manipulation.[66]
This commenter also states that the price volatility of ether means that spot ether ETPs would threaten retail investors by exposing them to an unstable asset.[67] The commenter further states that approving spot ether ETPs “would threaten not just investors but also the broader financial system” by “further entangl[ing] the crypto industry with traditional finance and aggravat[ing]” risks similar to risks that the commenter claims are posed by spot bitcoin ETPs, such as bitcoin price volatility and dislocations between the price of a spot bitcoin ETP and bitcoin that can “cause stress for institutions heavily exposed to” or reliant on spot bitcoin ETPs.[68]
The Commission has considered these potential benefits and concerns in the broader context of whether the Proposals meet the applicable requirements of the Exchange Act,[69] including the requirement in Section 6(b)(5) [70] that the Exchanges' rules be designed to “prevent fraudulent and manipulative acts and practices.” For the reasons described above, the Commission has determined that the Proposals meet such requirements.
The Commission also finds that the Proposals are consistent with the Section 6(b)(5) requirement that the Exchanges' rules be designed to protect investors and the public interest because, in addition to the factors discussed in Section II.A and II.B above, existing rules and standards of conduct would apply to recommending and advising investments in the shares of the Trusts. For example, when broker-dealers recommend ETPs to retail customers, Regulation Best Interest (“Reg BI”) would apply.[71] Reg BI requires broker-dealers to, among other things, exercise reasonable diligence, care, and skill when making a recommendation to a retail customer to: (1) understand potential risks, rewards, and costs associated with the recommendation and have a reasonable basis to believe that the recommendation could be in the best interest of at least some retail customers; and (2) have a reasonable basis to believe the recommendation is in the best interest of a particular retail customer based on that retail customer's investment profile.[72] In addition, investment advisers have a fiduciary duty under the 1940 Act comprised of a duty of care and a duty of loyalty. These obligations require the adviser to act in the best interest of its client and ( printed page 46943) not subordinate its client's interest to its own.[73]
Some commenters contend that the Commission should disapprove the Proposals because the nature of ether and the Ethereum Network makes them inherently susceptible to fraud and manipulation.[74] Other commenters argue that the nature of ether and the Ethereum Network makes them inherently resistant to fraud and manipulation.[75] The Commission acknowledges commenters' concerns regarding fraud and manipulation. Pursuant to Section 19(b)(2) of the Exchange Act, however, the Commission must approve a proposed rule change filed by a national securities exchange if it finds that the proposed rule change is consistent with the applicable requirements of the Exchange Act.[76] For the reasons described above, the Commission finds that the Proposals satisfy the requirements of the Exchange Act, including the requirement in Section 6(b)(5) [77] that the Exchanges' rules be designed to “prevent fraudulent and manipulative acts and practices.”
Commenters also address, among other things: investor demand for spot ether ETPs; [78] environmental considerations of Ethereum's proof-of-stake consensus mechanism; [79] whether to permit a Trust to stake its ether; [80] and the potential disadvantage from Commission disapproval of spot ether ETPs to U.S. innovation [81] and to U.S. investors compared to those in other countries.[82] Ultimately, however, for the reasons described above, the Commission is approving the Proposals because it finds that the Proposals satisfy the requirements of the Exchange Act, including the requirement in Section 6(b)(5) [83] that the Exchanges' rules be designed to “prevent fraudulent and manipulative acts and practices.”
III. Accelerated Approval of the Proposals
The Commission finds good cause to approve the Proposals prior to the 30th day after the date of publication of notice of the Exchanges' amended filings [84] in the Federal Register . The amended filings clarified the descriptions of the Trusts; further described the terms of the Trusts; and conformed various representations in the amended filings to the applicable Exchange's listing standards and to representations that the Exchanges have made for other ETPs that the Commission has approved.[85] These changes do not raise any novel regulatory issues. Further, the changes assist the Commission in evaluating the Proposals and in determining that they are consistent with the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange, as discussed above. Accordingly, the Commission finds good cause, pursuant to Section 19(b)(2) of the Exchange Act,[86] to approve the Proposals on an accelerated basis.
IV. Conclusion
This approval order is based on all of the Exchanges' representations and descriptions in their respective amended filings, which the Commission has carefully evaluated as discussed ( printed page 46944) above.[87] For the reasons set forth above, including the Commission's correlation analysis, the Commission finds, pursuant to Section 19(b)(2) of the Exchange Act,[88] that the Proposals are consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with Section 6(b)(5) and Section 11A(a)(1)(C)(iii) of the Exchange Act.[89]
It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act,[90] that the Proposals (SR-NYSEARCA-2023-70; SR-NYSEARCA-2024-31; SR-NASDAQ-2023-045; SR-CboeBZX-2023-069; SR-CboeBZX-2023-070; SR-CboeBZX-2023-087; SR-CboeBZX-2023-095; SR-CboeBZX-2024-018) be, and hereby are, approved on an accelerated basis.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.[91]
J. Matthew DeLesDernier,
Deputy Secretary.