[Federal Register Volume 89, Number 29 (Monday, February 12, 2024)]
[Notices]
[Pages 9880-9882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02752]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99479; File No. SR-CboeBZX-2023-087]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To List and Trade Shares of the Invesco Galaxy 
Ethereum ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares

February 6, 2024.
    On October 20, 2023, Cboe BZX Exchange, Inc. (``BZX'' 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 (``Shares'') of the 
Invesco Galaxy Ethereum ETF (``Trust'') under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares. The proposed rule change was published 
for comment in the Federal Register on November 8, 2023.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98846 (Nov. 2, 
2023), 88 FR 77116 (``Notice''). Comments on the proposed rule 
change are available at: https://www.sec.gov/comments/sr-cboebzx-2023-087/srcboebzx2023087.htm.
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    On December 13, 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\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine whether to approve or disapprove the 
proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 99151, 88 FR 87822 
(Dec. 19, 2023). The Commission designated February 6, 2024, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ the Exchange proposes 
to list and trade the Shares of the Trust under BZX Rule 14.11(e)(4), 
which governs the listing and trading of Commodity-Based Trust Shares 
on the Exchange.
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    \7\ See Notice, supra note 3.
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    The investment objective of the Trust is for the Shares to reflect 
the the spot price of ether as measured by using the Lukka Prime 
Reference Rate (``Benchmark'') less the Trust's expenses and other 
liabilities.\8\ The Trust's assets will consist of ether held by the 
Trust's custodian on behalf of the Trust.\9\ The Trust will value its 
Shares daily based on the reported Benchmark.\10\ The administrator of 
the Trust will determine the net asset value (``NAV'') of the Trust on 
each day that the Exchange is open for regular trading, as promptly as 
practicable after 4:00 p.m. ET.\11\ In determining the Trust's NAV, the 
administrator values the ether held by the Trust based on the price set 
by the Benchmark as of 4:00 p.m. ET.\12\ When the Trust sells or 
redeems its Shares, it will do so in ``in-kind'' transactions with 
authorized participants in large blocks of Shares.\13\
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    \8\ See id. at 77118. Invesco Capital Management (``Sponsor'') 
is the sponsor of the Trust. See id. at 77116.
    \9\ See id. at 77116. The Trust generally does not intend to 
hold cash or cash equivalents; however, there may be situations 
where the Trust would unexpectedly hold cash on a temporary basis. 
See id. at 77116-17.
    \10\ See id. at 77118.
    \11\ See id. at 77119.
    \12\ See id.
    \13\ See id. at 77117.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2023-087 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \14\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \14\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\15\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \16\
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    \15\ Id.
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice, in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
    1. Given the nature of the underlying assets held by the Trust, has 
the Exchange properly filed its proposal to list and trade the Shares 
under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares? \17\
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    \17\ BZX Rule 14.11(e)(4)(C)(i) defines the term ``Commodity-
Based Trust Shares'' as a security (a) that is issued by a trust 
that holds (1) a specified commodity deposited with the trust, or 
(2) a specified commodity and, in addition to such specified 
commodity, cash; (b) that is issued by such trust in a specified 
aggregate minimum number in return for a deposit of a quantity of 
the underlying commodity and/or cash; and (c) that, when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request by such trust which will deliver to the redeeming holder the 
quantity of the underlying commodity and/or cash.

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[[Page 9881]]

    2. The Exchange raises substantially similar arguments to support 
the listing and trading of the Shares as those made in proposals to 
list and trade spot bitcoin exchange-traded products (``Bitcoin 
ETPs''). Do commenters agree that arguments to support the listing of 
Bitcoin ETPs apply equally to the Shares? Are there particular features 
related to ether and its ecosystem, including its proof of stake 
consensus mechanism and concentration of control or influence by a few 
individuals or entities, that raise unique concerns about ether's 
susceptibility to fraud and manipulation?
    3. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
ether markets and the ether markets' susceptibility to manipulation?
    4. Based on data and analysis provided by the Exchange,\18\ do 
commenters agree with the Exchange that the Chicago Mercantile Exchange 
(``CME''), on which CME ether futures trade, represents a regulated 
market of significant size related to spot ether? \19\ What are 
commenters' views on whether there is a reasonable likelihood that a 
person attempting to manipulate the Shares would also have to trade on 
the CME to manipulate the Shares? \20\ Do commenters agree with the 
Exchange that trading in the Shares would not be the predominant 
influence on prices in the CME ether futures market? \21\
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    \18\ See Notice, 88 FR at 77120-25.
    \19\ See id. at 77120-23.
    \20\ See id. at 77123.
    \21\ See id.
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    5. The Exchange states that ether is resistant to price 
manipulation and that other means to prevent fraudulent and 
manipulative acts and practices ``exist to justify dispensing with the 
requisite surveillance sharing agreement'' with a regulated market of 
significant size related to spot ether.\22\ In support, the Exchange 
states, among other things, that the geographically diverse and 
continuous nature of ether trading make it difficult and prohibitively 
costly to manipulate the price of ether, and that the fragmentation 
across ether platforms, the relatively slow speed of transactions, and 
the capital necessary to maintain a significant presence on each 
trading platform make manipulation of ether prices through continuous 
trading activity challenging.\23\ Do commenters agree with the 
Exchange's statements regarding the ether market's resistance to price 
manipulation?
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    \22\ See id. at 77122 n.29.
    \23\ See id.
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    6. The Exchange also states that it will execute a surveillance-
sharing agreement with Coinbase, Inc. (``Coinbase'') that is intended 
to supplement the Exchange's market surveillance program.\24\ According 
to the Exchange, the agreement is ``expected to have the hallmarks of a 
surveillance-sharing agreement between two members of the [Intermarket 
Surveillance Group], which would give the Exchange supplemental access 
to data regarding spot [ether] trades on Coinbase where the Exchange 
determines it is necessary as part of its surveillance program for the 
Commodity-Based Trust Shares.'' \25\ Based on the description of the 
surveillance-sharing agreement as provided by the Exchange, what are 
commenters' views of such an agreement if finalized and executed? Do 
commenters agree with the Exchange that such an agreement with Coinbase 
would be ``helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares''? \26\
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    \24\ See id. at 77124.
    \25\ See id. The Exchange states that ``[t]his means that the 
Exchange expects to receive market data for orders and trades from 
Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares.'' Id.
    \26\ See id.
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    7. The Exchange states that the ``Sponsor's research indicates 
daily correlation between the spot [ether] and the CME [ether] 
[f]utures is 0.998.'' \27\ The Exchange further states that this ``high 
correlation'' indicates that there is a reasonable likelihood that a 
person attempting to manipulate the Trust would also have to trade on 
the CME ether futures market.\28\ What are commenters' views on the 
correlation between the ether spot market and the CME ether futures 
market? What are commenters' views on the extent to which a 
surveillance-sharing agreement with the CME would assist in detecting 
and deterring fraud and manipulation that impacts an exchange-traded 
product (``ETP'') that holds spot ether, and on whether the Sponsor's 
daily price correlation analysis provides any evidence to this effect? 
What are commenters' views generally on whether an ETP that holds CME 
ether futures and an ETP that holds spot ether are similar products?
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    \27\ See id. at 77121. The Exchange states that this is based on 
data from September 1, 2022, through September 1, 2023. See id.
    \28\ See id. at 77123.
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\29\
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    \29\ Section 19(b)(2) of the Act, as amended by the Securities 
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Senate Comm. 
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by March 4, 2024. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 18, 2024.
    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c3b1b6afa6eea0acaeaea6adb7b083b0a6a0eda4acb5"><span class="__cf_email__" data-cfemail="a6d4d3cac38bc5c9cbcbc3c8d2d5e6d5c3c588c1c9d0">[email protected]</span></a>. Please include 
file number SR-CboeBZX-2023-087 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-CboeBZX-2023-087. This

[[Page 9882]]

file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-CboeBZX-2023-087 and should 
be submitted on or before March 4, 2024. Rebuttal comments should be 
submitted by March 18, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(57).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02752 Filed 2-9-24; 8:45 am]
BILLING CODE 8011-01-P


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