[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Notices]
[Pages 2443-2468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00498]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99291; File No. SR-NYSEARCA-2023-58]
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 Hashdex Bitcoin ETF Under NYSE Arca Rule 8.500-E (Trust Units)
January 8, 2024.
On September 22, 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 Hashdex Bitcoin
ETF (f/k/a Hashdex Bitcoin Futures ETF) under NYSE Arca Rule 8.500-E
(Trust Units). The proposed rule change was published for comment in
the Federal Register on October 3, 2023.\3\ On November 15, 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
[[Page 2444]]
disapprove the proposed rule change.\5\ On November 28, 2023, the
Commission instituted proceedings to determine whether to disapprove
the proposed rule change.\6\ On January 5, 2024, the Exchange filed
Amendment No. 1 to the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. Amendment No.
1 amended and replaced the proposed rule change in its entirety. The
Commission is publishing this notice to solicit comments on the
proposed rule change, as modified by Amendment No. 1, from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 98564 (Sept. 27,
2023), 88 FR 68188. Comments on the proposed rule change are
available at: https://www.sec.gov/comments/sr-nysearca-2023-58/srnysearca202358.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 98947, 88 FR 81171
(Nov. 21, 2023).
\6\ See Securities Exchange Act Release No. 99031, 88 FR 84021
(Dec. 1, 2023).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes list and trade shares of the Hashdex Bitcoin
ETF under NYSE Arca Rule 8.500-E (``Trust Units''). This Amendment No.
1 to SR-NYSEARCA-2023-58 replaces SR-NYSEARCA-2023-58 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.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
Hashdex Bitcoin ETF (the ``Fund'') under NYSE Arca Rule 8.500-E.
The Commission previously approved the listing and trading of
shares of the Teucrium Bitcoin Futures Fund (the ``Predecessor Fund'')
\7\ pursuant to NYSE Arca Rule 8.200-E, Commentary .02.\8\ The
Predecessor Fund's name was subsequently changed to the Hashdex Bitcoin
Futures ETF pursuant to an April 18, 2022 amendment to the Predecessor
Fund's registration statement.\9\ In connection with the launch of the
Predecessor Fund, Tidal Investments LLC (f/k/a Toroso Investments LLC,
the ``Sponsor''),\10\ Teucrium Trading, LLC (the ``Prior Sponsor''),
and Hashdex Asset Management, Ltd. (``Hashdex'') entered into an
agreement pursuant to which the Fund would be the successor and
surviving entity from a merger into the Fund of the Predecessor Fund
(which is a series of the Predecessor Trust sponsored by the Prior
Sponsor).\11\
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\7\ The Predecessor Fund is a series of the Teucrium Commodity
Trust (the ``Predecessor Trust''). The Commission has noticed for
immediate effectiveness a separate proposed rule change relating to
the transfer of management and control of the Fund from the
Predecessor Trust to the Tidal Commodities Trust I (the ``Trust'').
See Securities Exchange Act Release No. 99164 (December 13, 2023),
88 FR 87825 (December 19, 2023) (SR-NYSEARCA-2023-84) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change to Make
Changes to Certain Representations Relating to the Hashdex Bitcoin
Futures Fund).
\8\ See Securities Exchange Act Release No. 34-94620 (April 6,
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order
Approving 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)) (the
``Approval Order''). The representations herein supersede and
replace the representations in the Exchange's prior rule filing
relating to the Teucrium Bitcoin Futures Fund and Partial Amendment
No. 2 thereto. See Securities Exchange Act Release No. 92573 (August
5, 2021), 86 FR 44062 (August 11, 2021) (SR-NYSEArca-2021-53)
(Notice of Filing of a Proposed Rule Change To List and Trade Shares
of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E) and
Partial Amendment No. 2, available at: https://www.sec.gov/comments/sr-nysearca-2021-53/srnysearca202153-20118884-271701.pdf.
\9\ On April 18, 2022, Teucrium Commodity Trust filed with the
Commission Pre-Effective Amendment No. 2 to the registration
statement on Form S-1 under the Securities Act of 1933 (the
``Securities Act'') (File No. 333-256339) changing the name of the
Fund from Teucrium Bitcoin Futures Fund to Hashdex Bitcoin Futures
ETF.
\10\ The Sponsor is not registered as a broker-dealer or
affiliated with a broker-dealer. In the event that (a) the Sponsor
becomes registered as a broker-dealer or newly affiliated with a
broker-dealer, or (b) any new sponsor or sub-adviser is registered
as a broker-dealer or becomes affiliated with a broker-dealer, it
will implement and maintain a fire wall with respect to its relevant
personnel or personnel of the broker-dealer affiliate, as
applicable, regarding access to information concerning the
composition of and/or changes to the portfolio, and will be subject
to procedures designed to prevent the use and dissemination of
material non-public information regarding the portfolio.
\11\ On July 21, 2023, the Trust, on behalf of the Fund, filed
with the Commission a registration statement on Form S-1 under the
Securities Act (File No. 333-2773364), as amended by a Pre-Effective
Amendment No. 1 filed with the Commission on November 2, 2023
(``Form S-1''), for the continuous offering and sale of the Fund's
Shares. On October 31, 2023, the Trust filed with the Commission a
separate registration statement on Form S-4 (File No. 333-275227)
(``Form S-4'') under the Securities Act to register 50,004 shares of
the Fund, which was issued in exchange for the outstanding shares of
the Predecessor Fund (the ``Reorganization''). The Reorganization
closed on January 3, 2024. The offering and sale of Fund Shares
pursuant to the Form S-1 and the Form S-4 and the trading in such
Shares commenced with the closing of the Reorganization, at which
time the registration statements on the Form S-1 and the Form S-4
were declared effective.
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On August 25, 2023, the Trust on behalf of the Fund, submitted a
confidential draft registration statement (the ``Draft Registration
Statement'') on Form S-1 (File No. 377-06858) to change the Fund's name
to the Hashdex Bitcoin ETF and to modify the Fund's investment
objective and strategy, as further discussed below.\12\ On December 22,
2023, the Trust, on behalf of the Fund, filed publicly a registration
statement on Form S-1 (File No. 333-276254) (the ``Registration
Statement''), which supersedes and replaces the Draft Registration
Statement.\13\
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\12\ The Trust, on behalf of the Fund, submitted an Amendment
No. 1 to the Registration Statement on November 14, 2023 (``DRS
Amendment''). The Jumpstart Our Business Startups Act (the ``JOBS
Act''), enacted on April 5, 2012, added Section 6(e) to the
Securities 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 15 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 and DRS Amendment to the Commission on a
confidential basis.
\13\ A Pre-Effective Amendment No. 1 to the Registration
Statement was filed on December 26, 2023 (the ``Amendment''). The
Amendment was an exhibit-only filing to provide the Fund's executed
bitcoin custodian agreement. The Draft Registration Statement and
the DRS Amendment have been made accessible as public filings. The
Registration Statement is not yet effective, and the Shares will not
trade on the Exchange under the prospectus contained in the
Registration Statement until such time that the Registration
Statement is effective.
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The Fund is a series of the Trust, a Delaware statutory trust. The
Fund is managed and controlled by the Sponsor and administered by Tidal
ETF Services LLC (the ``Administrator''). The Sponsor is registered as
a commodity pool operator (``CPO'') and a commodity trading adviser
with the Commodity Futures Trading Commission (``CFTC'') and is a
member of the National Futures Association (``NFA'').
U.S. Bancorp Fund Services, LLC (doing business as U.S. Bank Global
[[Page 2445]]
Fund Services) is the sub-administrator, registrar, and transfer agent
for the Fund (``Sub-Administrator'' or ``Transfer Agent''). U.S. Bank,
N.A. will hold the Fund's cash and/or cash equivalents \14\ (``Cash
Custodian''). BitGo Trust Company, Inc. will keep custody of all the
Fund's bitcoin as the ``Bitcoin Custodian.'' \15\
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\14\ ``Cash equivalents'' include short-term treasury bills (90
days or less to maturity), money market funds, and demand deposit
accounts. The Fund does not hold, invest in, or trade in digital
assets that are linked to any fiat currency (i.e., stablecoins).
\15\ The Fund may, in the future, engage additional custodians
for its bitcoin, each of whom may be referred to as a Bitcoin
Custodian.
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The Fund's Investment Objective and Strategy
According to the Registration Statement, the investment objective
of the Fund is to have the daily changes in the net asset value
(``NAV'') of the Shares reflect the daily changes in the price of its
benchmark, less expenses from the Fund's operations, by investing in
both bitcoin and bitcoin futures contracts traded on the Chicago
Mercantile Exchange, Inc. (``CME'').\16\ In doing so, the Sponsor
expects that the Fund will provide investors with bitcoin exposure that
is more resistant to fraud and manipulative practices than comparable
products that seek to rely on unregulated trading platforms.\17\ In
particular, to avoid any exposure to potential manipulation from actors
operating on unregulated trading platforms, although the Fund will hold
spot bitcoin, the Fund's NAV will be calculated using a spot bitcoin
price derived from the price of CME Bitcoin Futures Contracts (as
defined below), and the Fund expects to purchase and sell bitcoin
exclusively via Exchange for Physical (``EFP'') transactions on the
CME's bitcoin futures market (the ``CME Bitcoin Futures Market'').\18\
The Fund will not trade or otherwise rely on information or services
from unregulated spot bitcoin trading platforms, but will instead buy
CME Bitcoin Futures Contracts with the purpose of using them to acquire
physical bitcoin through EFP transactions on the regulated CME Bitcoin
Futures Market.
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\16\ Consistent with the Approval Order, the Fund currently only
invests in BTC Contracts and MBT Contracts (as defined below) and in
cash and cash equivalents.
\17\ As used in this filing, ``unregulated trading platforms''
refers to trading venues whose trading rules are not subject to
regulatory review or approval by the SEC, CFTC or other federal
regulator, whose trading operations are not subject to regulatory
examination, and that are not required by law to have anti-
manipulation practices that federal securities or commodities
regulation would require. See, e.g., 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, Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579 at 37597 (August 1, 2018) (SR-BatsBZX-
2016-30) (the ``Winklevoss Order'') (describing lack of regulatory
oversight for Gemini trading platform).
\18\ The Fund's futures-based spot pricing methodology and use
of EFP transactions are explained in greater detail below in
``Futures-Based Spot Price'' and ``EFP Transactions,'' respectively.
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According to the Registration Statement, CME offers two bitcoin
futures contracts, one contract representing five (5) bitcoins (``BTC
Contract'') and another contract representing one-tenth of one (0.10)
bitcoin (``MBT Contract'').\19\ Each BTC Contract and MBT Contract
settles daily to the BTC Contract volume-weighted average price
(``VWAP'') of all trades that occur between 2:59 p.m. and 3:00 p.m.,
Central Time, the settlement period, rounded to the nearest tradable
tick. BTC Contracts and MBT Contracts each expire on the last Friday of
the contract month, and the final settlement value for each contract is
based on the CME CF Bitcoin Reference Rate (``CME CF BRR'').\20\
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\19\ BTC Contracts began trading on the CME Globex trading
platform on December 15, 2017, and are cash-settled in U.S. dollars.
MBT Contracts began trading on the CME Globex trading platform on
May 3, 2021, under the ticker symbol ``MBT'' and are also cash-
settled in U.S. dollars. For purposes of this filing, BTC Contracts
and MBT Contracts may also be referred to, individually or
collectively, as ``CME Bitcoin Futures Contracts.''
\20\ The CME CF BRR aggregates the trade flow of major bitcoin
spot platforms during a specific calculation window into a once-a-
day reference rate of the U.S. dollar price of bitcoin.
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BTC Contracts and MBT Contracts each trade six consecutive monthly
contracts plus two additional December contract months (if the 6
consecutive months include December, only one additional December
contract month is listed). Because BTC Contracts and MBT Contracts are
exchange-listed, they allow investors to gain exposure to bitcoin
without having to hold the underlying cryptocurrency.
The Fund's benchmark, as referenced above, is the Nasdaq Bitcoin
Reference Price--Settlement (the ``NQBTCS'' or ``Benchmark''),\21\
which ultimately tracks the price of bitcoin. The Sponsor believes that
the spot price performance of bitcoin is best measured through the use
of a reputable index provided by an established index provider and has
selected the NQBTCS as a trustworthy benchmark of bitcoin pricing.
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\21\ See https://indexes.nasdaqomx.com/Index/Overview/NQBTCS.
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The Sponsor will employ a passive investment strategy that is
intended to track the changes in the Benchmark regardless of whether
the Benchmark goes up or goes down, meaning that the Sponsor will not
try to ``beat'' the Benchmark. In order to track the Benchmark as
closely as possible, the Fund will aim to maximize its investment in
bitcoin.
The Fund will gain exposure to physical bitcoin by buying CME
Bitcoin Futures Contracts for the primary purpose of using such CME
Bitcoin Futures Contracts to acquire physical bitcoin through EFP
transactions on the regulated CME Bitcoin Futures Market. The Fund may
maintain CME Bitcoin Futures Contracts positions (with related cash
reserves to meet applicable margin requirements) if the Sponsor deems
it necessary to meet the Fund's liquidity needs for the cash payment of
Share redemption settlements and of other applicable expenses borne by
the Fund. The Fund will also maintain cash balances or invest in cash
equivalents to the extent it is unable to purchase CME Bitcoin Futures
Contracts with available cash.
If there are no Share redemption orders or currently due Fund-
payable expenses and assuming that the Fund is able to utilize all
available cash to purchase CME Bitcoin Futures Contracts, the Fund's
portfolio is expected to be composed of at least 95% in bitcoin and up
to 5% in cash, cash equivalents, and/or CME Bitcoin Futures Contracts.
The Sponsor expects that the Fund's average daily tracking error
against the Benchmark will be less than 10% over any period of 30
trading days. The Fund's passive investment strategy is designed to
allow investors to purchase and sell the Shares for the purpose of
investing in bitcoin, whether to hedge the risk of losses in their
bitcoin-related transactions or gain price exposure to the bitcoin
market.
The Fund's investments will be consistent with the Fund's
investment objective and will not be used to enhance leverage. That is,
given its passive investment strategy, the Fund's investments will not
be used to seek performance that is the multiple or inverse multiple
(e.g., 2Xs, 3Xs, -2Xs, and -3Xs) of the Fund's Benchmark.
The Fund's Benchmark
According to the Sponsor, the Fund will use the Benchmark as a
reference to track and measure its performance compared to the price
performance of spot bitcoin. The Fund will not use the Benchmark for
valuation purposes when calculating the Fund's NAV.\22\
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\22\ As further explained below, the Administrator will employ a
methodology based on the settlement prices of the CME Bitcoin
Futures Contracts to determine the price of the Fund's spot bitcoin
holdings for NAV calculation. The Sponsor believes that this
approach enables the Fund to effectively track the Benchmark while
also mitigating risks to investors stemming from exposure to
unregulated trading platforms and the prices derived from them.
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[[Page 2446]]
According to the Sponsor, the NQBTCS is designed to allow
institutional investors to track the price of bitcoin by applying a
rigorous methodology to trade data captured from cryptocurrency trading
platforms that meet the eligibility criteria of the Nasdaq Crypto Index
(``NCI''). The NQBTCS is calculated once every trading day by applying
a publicly available rules-based pricing methodology to a diverse
collection of pricing sources to provide an institutional-grade
reference price for bitcoin.\23\ The NQBTCS is designed to account for
variances in price across a wide range of sources, each of which has
been vetted according to criteria identified in the methodology.
Specifically, the NQBTCS settlement value is the Time Weighted Average
Price (``TWAP'') calculated across the VWAPs for each minute in the
settlement price window, which is between 2:50:00 and 3:00:00 p.m. New
York time. Where there are no transactions observed in any given minute
of the settlement price window, that minute is excluded from the
calculation of the TWAP.
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\23\ See https://indexes.nasdaqomx.com/docs/methodology_NCI.pdf.
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According to the Sponsor, the NQBTCS also utilizes penalty factors
to mitigate the impact of anomalous trading activity such as
manipulation, illiquidity, large block trading, or operational issues
that could compromise price representation. Three types of penalties
are applied: abnormal price penalties, abnormal volatility penalties,
and abnormal volume penalties. These penalties are defined as
adjustment factors to the weight of information from each trading
platform that contributes pricing information based on the deviation of
a trading platform's price, volatility, or volume from the median
across all trading platforms. For example, if a core trading platform's
price is 2.5 standard deviations away from the median price, its price
penalty factor will be a \1/2\.5 multiplier.
Finally, as a means of achieving the highest degrees of confidence
in the reported volume, data is sourced only from ``core trading
platforms'' that are screened, selected, and approved by the Nasdaq
Crypto Index Oversight Committee (the ``NCIOC''). Core trading
platforms must:
(1) Have strong forking controls;
(2) Have effective anti-money laundering controls;
(3) Have a reliable and transparent application programming
interface that provides real-time and historical trading data;
(4) Charge fees for trading and structure trading incentives that
do not interfere with the forces of supply and demand;
(5) Be licensed by a public independent governing body;
(6) Include surveillance for manipulative trading practices and
erroneous transactions;
(7) Evidence a robust IT infrastructure;
(8) Demonstrate active capacity management; \24\
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\24\ According to NCI's methodology, to demonstrate active
capacity management, core trading platforms must demonstrate that
their platform's technical infrastructure is designed in such a way
that it is capable of accommodating a sudden, significant increase
in trade volume without impacting system functionality. See id. at
4.
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(9) Evidence cooperation with regulators and law enforcement; and
(10) Have a minimum market representation for trading volume.\25\
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\25\ According to NCI's methodology, to compute a trading
platform's market size, the NCIOC sums the U.S. Dollar (``USD'')
volume of all eligible digital asset--USD pairs for the month of
August each year. A core trading platform must have at least 0.05%
of the total volume in eligible trading platforms. See id.
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Additionally, the NCIOC conducts further diligence to assess a
trading platform's eligibility and will consider additional criteria
such as the trading platform's organizational and ownership structure,
security history, and reputation. The list of existing core trading
platforms will be recertified by the NCIOC at a minimum on an annual
basis.
The Sponsor believes that the NQBTCS is a suitable Benchmark for
the Fund for several reasons. First, it would provide reliable pricing
for purposes of tracking the actual performance of bitcoin. Second, it
is administered by a reputable index administrator that is not
affiliated with the Sponsor or Fund,\26\ which provides assurances of
accountability and independence. Finally, the NQBTCS methodology is
designed to resist potential price manipulation from unregulated
bitcoin markets by applying the following safeguards:
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\26\ Nasdaq, Inc. (``Nasdaq''), the index provider, adheres to
the International Organization of Securities Commissions principles
for benchmarks (the ``IOSCO Principles'') for many of its indexes
via an internal control and governance framework that is audited by
an external, independent auditor on an annual basis. Although NQBTCS
is not currently one of the indexes that is required to comply with
IOSCO Principles, as a reference rate index, it is administered in a
manner that is generally consistent with both the IOSCO Principles
and the elements of Nasdaq's internal control and governance
framework pursuant to IOSCO Principles. NQBTCS is administered and
governed by the NCIOC in accordance with the publicly available NCI
methodology. The NCIOC oversees all aspects of the administration of
the NQBTCS, including the defined processes and controls for the
selection and monitoring of third parties such as the core trading
platforms and core custodians (see ``Custody of Bitcoin,'' infra),
as well as the validation and reconciliation of index calculations
and pricing data. The NCIOC also oversees the identification and
mitigation of any potential conflicts of interest, formal
complaints, and updates or changes to the index methodology
consistent with the IOSCO Principles.
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(1) Strict eligibility criteria for the NCI core trading platforms
from which the NQBTCS data is drawn;
(2) A diverse collection of trustworthy pricing sources to provide
an institutional-grade reference price for bitcoin; and
(3) The use of adjustment factors to mitigate against the impact of
any anomalous trading activity.
Futures-Based Spot Price
For purposes of calculating the Fund's NAV, the value of the
bitcoin held by the Fund will be determined by the Administrator in
good faith based on a ``Futures-Based Spot Price'' or ``FBSP''
methodology.\27\ The Sponsor has selected this pricing approach to
value the Fund's bitcoin because it insulates the calculation of the
NAV of the Fund from data from unregulated bitcoin trading platforms.
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\27\ The FBSP is based on extensive academic research on forward
yield curves and is further described in the Fund's Registration
Statement.
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According to the Sponsor, the FBSP methodology allows for the
estimation of the spot price of bitcoin by utilizing only market data
related to BTC Contracts \28\ traded on the CME Bitcoin Futures Market
(specifically, settlement prices and time to maturity for such futures
contracts). The Administrator is thus able to calculate the Fund's NAV
(as further described in ``Net Asset Value'' below) without relying on
market data from unregulated bitcoin trading platforms. The
Administrator will apply the FBSP methodology to estimate the price of
spot bitcoin daily by using the daily settlement prices of BTC
Contracts.
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\28\ For the calculation of FBSP, the Administrator considers
all listed BTC Contracts that have a daily settlement price
published by the CME Bitcoin Futures Market on a given date. The
Sponsor notes that, although BTC and MBT Contracts have the same
settlement prices, the Administrator will only consider BTC
Contracts when calculating the FBSP.
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According to the Sponsor, the FBSP methodology is based on well-
established academic research,\29\
[[Page 2447]]
particularly on the topic of term structure of interest rates. As
discussed below, the Sponsor has tested the reliability of FBSP-derived
prices by comparing them to historical samples of various benchmarks
for the prices of physical bitcoin. The Sponsor believes that the FBSP-
derived prices very closely adhere to such benchmarks and that the FBSP
methodology can fairly price bitcoin while seeking to protect the
Fund's NAV from short-term distortions that may arise due to fraud or
manipulation attempts by bad actors trading on unregulated trading
platforms.
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\29\ See, e.g., Nelson, Charles R., and Andrew F. Siegel,
``Parsimonious modeling of yield curves.'' Journal of Business
(1987), available at: https://www.researchgate.net/publication/24103017_Parsimonious_Modeling_of_Yield_Curves; Svensson, Lars E.O.,
``Estimating and Interpreting Forward Interest Rates: Sweden 1992-
1994.'' (September 1994), IMF Working Paper No. 94/114, available
at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=883856.
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The calculations underlying the FBSP methodology utilize well-
understood and simple-to-implement mathematical and statistical
techniques, such as multivariate linear regressions and arithmetic
operations. The detailed methodology is described in the Fund's
Registration Statement and will also be published on the Fund's website
(https://hashdex-etfs.com/), along with all inputs necessary to
replicate the calculation. In the event of any modifications to the
FBSP methodology, the Fund will issue a press release notifying the
investing public of such change and the date of the change's
effectiveness, which press release will be filed with the Commission
under a current report on Form 8-K by the Fund, and, with respect
changes to the FBSP methodology as described in this filing, file a
proposed rule change under Section 19(b) with the Commission.
The FBSP methodology involves calculating a parametric forward
curve \30\ into prevailing prices for actual BTC Contracts. The
parametric forward curve can then be used to derive the spot price of
bitcoin by calculating the price to the point of immediate settlement
(i.e., setting the BTC Contracts' time to maturity to zero). This
process results in a set of calculated weights that are applied to the
price of each actual BTC Contract included in the forward curve. The
weights are calculated daily and are dependent solely on the number of
calendar days until maturity of each active BTC Contract.\31\ The spot
price for bitcoin derived from FBSP is, in turn, calculated by
multiplying each price by its applicable weight and then summing all
terms:
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\30\ The forward curve of bitcoin futures contracts is the plot
of the prices of individual futures contracts against their
respective time to maturity. A parametric forward curve is a
mathematical function that produces a price for a futures contract
for any maturity, which can be used to generate a theoretical
estimate of a futures price for a maturity that does not have
contracts negotiated, including a spot price, by setting the time to
maturity to zero.
\31\ The Sponsor will make these weights publicly available on
the Fund's website daily, such that any third party can replicate
the calculation.
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FBSP = [Sigma]Wi * SPi
where
Wi is the weight and
SPi is the settlement price of each BTC Contract.
The chart below visually illustrates the CME Bitcoin Futures
Market's forward curve and how the FBSP is determined for a specific
date (October 9, 2023). Each dot represents the settlement price of a
specific CME Bitcoin Futures Contract. The line represents the
calculated (fitted) forward curve. The dots align closely with the
fitted curve line, meaning that the curve accurately tracks the
settlement prices of the BTC Contracts. The square is a point on the
curve corresponding to a zero-day maturity, representing the spot price
for bitcoin for that date.
[GRAPHIC] [TIFF OMITTED] TN12JA24.003
The table below demonstrates the FBSP calculation for the same
specific day.
FBSP on 10/09/2023
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Settlement price Productivity (W x
Future Weight (W) (%) (SP) SP)
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Oct23.................................................. 122.10 $27,735.00 $33,864.44
Nov23.................................................. -0.70 27,925.00 -$195.48
[[Page 2448]]
Dec23.................................................. -6.70 28,115.00 -$1,883.71
Jan24.................................................. -5.9 28,275.00 -$1,668.23
Feb24.................................................. -4.90 28,445.00 -$1,393.81
Mar24.................................................. -3.70 28,650.00 -$1,060.05
Jun24.................................................. -1.50 29,205.00 -$438.08
Sep24.................................................. -0.30 29,755.00 -$89.27
Dec24.................................................. 0.50 30,305.00 $151.53
Mar25.................................................. 1.10 30,860.00 $339.46
--------------------------------------------------------
FBSP............................................... ................. ................. $27,626.82
NQBTC.............................................. ................. ................. $27,619.94
Divergence (%)..................................... ................. ................. 0.02%
----------------------------------------------------------------------------------------------------------------
Using data available on Bloomberg on July 10, 2023, the Sponsor
compared FBSP to NQBTCS and CME CF BRR from December 27, 2022 to July
7, 2023 and concluded that FBSP tracks both indexes with satisfactory
accuracy. The following charts show a direct comparison between those
two benchmark values and FBSP:
[GRAPHIC] [TIFF OMITTED] TN12JA24.004
In the above charts, each point indicates one day, and their
proximity to the line shows how similar FBSP is to each of NQBTCS and
CME CF BRR. The correlations between FBSP and each of NQBTCS and CME CF
BRR exceed 99.9%, and the mean absolute percentage divergences are 21
basis points (``bps,'' where 1bp = 0.01%) and 22bps, respectively,
while the median absolute percentage divergences are 18bps and 17bps,
respectively.
The Sponsor believes that this data strongly suggests that FBSP is
a suitable choice for NAV calculation purposes.
Mitigation of Manipulation Risks Through Use of the FBSP for NAV
Calculation
While the Commission has raised valid concerns about the potential
influence of unregulated bitcoin markets on the daily settlement price
of the CME Bitcoin Futures Market, the Sponsor believes that the
proposed use of FBSP to calculate the value of the bitcoin held by the
Fund for purposes of NAV calculation provides a significant and
sufficient degree of insulation from such influences, for the following
reasons:
1. Regulated market influence: The daily settlement price of CME
Bitcoin Futures Contracts, which is the basis for the NAV calculation
of both futures contracts and bitcoin holdings of the Fund, is
primarily influenced by trading activity within the regulated futures
market itself. This market is subject to stringent oversight and
surveillance mechanisms designed to detect and deter manipulative and
fraudulent practices, thus significantly limiting the possible
influence of unregulated bitcoin markets on the daily settlement price.
2. High liquidity and volume: The CME Bitcoin Futures Market is
characterized by high liquidity and trading volume, such that any
attempt to influence the price calculated by the FBSP through trading
activity in other, unregulated bitcoin markets would require a
significant amount of capital and coordination. The Sponsor thus
believes that any such manipulation attempts would be readily
detectable by the CME's market surveillance.
3. Complex pricing methodology: The NAV calculation methodology is
comprehensive and accounts for both the tenor and final settlement
price of each futures contract. In addition, the FBSP method used in
the NAV calculation process incorporates all maturities of BTC
Contracts, which exhibit a robust price relationship among themselves.
As a result, attempting to manipulate these prices in a coordinated
manner to generate a substantial impact on NAV would be very
challenging for potential manipulators and likely financially
[[Page 2449]]
unfeasible. The Sponsor thus believes that the complexity of the
methodology provides an additional layer of protection against
manipulation, as it would be extremely difficult for a manipulator to
influence all these factors in a coordinated way to impact the Fund's
NAV without leaving a detectable trail that would alert market
surveillance.
4. Focus on near-term contracts: The FBSP methodology gives more
importance to futures contracts that are due for settlement in the near
term because such contracts are more heavily traded, and their prices
are more reliable indicators of the current spot price of bitcoin. The
Sponsor believes that the methodology's focus on near-term contracts
further reduces the potential for manipulation, as these contracts are
less susceptible to manipulation due to their higher trading volumes
and liquidity.
As detailed above, the Sponsor's proposed investment strategy
ensures that no unregulated spot bitcoin trading platform could be
considered a ``market of relevant size'' in relation to the Fund, given
that the Fund does not rely on any information or services coming from
unregulated markets. All of the Fund's operations, including the
purchase and sale of bitcoin and its NAV determination, rely on CME
Bitcoin Futures Contracts on the CME Bitcoin Futures Market. Thus, all
of the Fund's transactions, whether in CME Bitcoin Futures Contracts or
physical bitcoin, are registered and monitored on a regulated exchange,
providing an additional layer of security and transparency. Because any
attempt to manipulate the Fund would require significant trading on the
CME Bitcoin Futures Market, and not on any unregulated bitcoin trading
platform, there is significantly reduced potential for manipulation and
fraud, further protecting investors and maintaining the integrity of
the market.
The Sponsor also believes that it is highly unlikely that a person
attempting to manipulate the NAV of the Fund could do so successfully
by trading on unregulated spot and derivatives markets. Because of
direct arbitrage, it is reasonable to assume that the ETP's market
price (in the secondary market) would closely adhere to the Fund's
Indicative Fund Value (``IFV''),\32\ given that APs can always create
and redeem shares of the Fund hedging with a basket of CME Bitcoin
Futures Contracts and the value of the creation basket is determined
based on the NAV of the Fund, which in turn is calculated using the
FBSP method based on such basket of CME Bitcoin Futures Contracts.
Consequently, the likelihood that a potential manipulator of the ETP
could succeed by exclusively trading in unregulated bitcoin markets
would depend on how much the prices in these markets have an impact
over CME Bitcoin Futures Contracts prices. The likelihood that a
potential manipulator would undertake such an effort is also low when
considering the financial burden of manipulating the unregulated
markets and the overall expected profitability of any such
manipulation.
---------------------------------------------------------------------------
\32\ The IFV, as further discussed in the ``Indicative Fund
Value'' section below, is based on the prior day's closing NAV per
Share and updated to reflect changes in the Fund's holdings value
during the trading day.
---------------------------------------------------------------------------
To further assess such likelihood, the Sponsor carried out the
following analysis to investigate the relationship between prices from
relevant unregulated bitcoin markets and the prices of CME Bitcoin
Futures Contracts, to assess the impact that a manipulation on those
markets would have on the CME Bitcoin Futures Market. The Sponsor
collected one-minute bars data between January 18, 2023 and July 26,
2023 \33\ of prices for the nearest CME Bitcoin Futures Contract
(``Nearest CME Futures'') and the following alternative bitcoin prices
(``ABP''): (1) bitcoin (in USD) on each of NQBTCS's core trading
platforms,\34\ (2) bitcoin (in Tether stablecoin (USDT)), and (3)
BTCUSDT USDs-Margined Perpetuals on Binance. For each day and each ABP,
a simple regression model was estimated with one-minute Nearest CME
Futures log-returns as the dependent variable, and two independent
variables: (1) the log Nearest CME Futures closing price of the
previous minute (as a control variable) and (2) the difference between
the ABP log return and the Nearest CME Futures log return in the
previous minute (as the variable of interest).
---------------------------------------------------------------------------
\33\ This date range represents days with intraday data
available on Bloomberg as of July 27, 2023. Days with less than 40
observations for a given ABP were excluded from the analysis of such
ABP.
\34\ The core trading platforms as of December 31, 2023 were
BitStamp, Coinbase, Gemini, itBit, and Kraken.
---------------------------------------------------------------------------
The estimated coefficients associated with the variable of interest
are a measure of the expected response from the Nearest CME Futures (as
measured by its returns) to a divergence between its own return
information and the one from ABP in the near past (one-minute lagged
returns). Such divergences are expected to occur in cases of
manipulation. A higher coefficient (closer to one) would indicate that
Nearest CME Futures are more sensitive to and strongly influenced by
the divergence, while a lower coefficient (closer to zero) would
suggest that Nearest CME Futures are less responsive and not
significantly influenced by the information coming from ABP. The
Sponsor believes that these coefficients can be considered a
conservative estimate of the real impact that manipulation in an ABP
would have over the Nearest CME Futures price because the estimates are
calculated under normal circumstances rather than under a manipulative
attack, in which some other indicators, such as abnormal volume and
volatility, would warn market participants and undermine their
perception of the attacked ABP as a reliable price reference.
The results of the Sponsor's analysis are summarized in the table
below: \35\
---------------------------------------------------------------------------
\35\ The market depth information was obtained from
CoinMarketCap on July 19, 2023. The ABPs with blank cells in this
table were not included in the July 19, 2023 snapshot.
[GRAPHIC] [TIFF OMITTED] TN12JA24.005
[[Page 2450]]
The Sponsor's analysis suggests that the influence of ABP over the
Nearest CME Futures prices is relatively low. For instance, if a would-
be manipulator chose to attack Coinbase, which is an ABP with higher
coefficients and thus higher potential to impact Nearest CME Futures,
the average coefficient of 0.39 means that in order to manipulate
Nearest CME Futures prices by 1%, the would-be manipulator would have
to distort Coinbase prices by more than 2.5% (i.e., 1% divided by 0.39)
on average. To be successful with 90% confidence (1st Decile), this
manipulator would have to distort Coinbase prices by more than 4.7% (1%
divided by 0.21). The Sponsor believes that its analysis supports that,
even considering these conservative estimates, indirect manipulation
would be extremely inefficient.
The market depth columns in the above table indicate that
substantial financial resources, running into tens of millions of
dollars, are present on both sides of the order book for the most
influential ABPs (even without including hidden orders, bots, and
arbitrageurs that effectively enhance liquidity). The considerable
financial commitment that would be required makes the manipulation of
these prices an expensive endeavor.
The Sponsor believes that its analysis demonstrates that the low
efficiency of attempts to manipulate ABPs, coupled with the significant
cost involved in influencing impactful ABPs, makes potential
manipulation of spot bitcoin markets an unattractive proposition, and
that it is therefore highly unlikely that a potential manipulator of
the ETP could succeed by exclusively trading in unregulated bitcoin
markets. The combination of the high costs and the inefficiencies
associated with manipulation makes it a daunting and unprofitable
venture.
The Sponsor acknowledges the potential for influence from trades
settled in unregulated bitcoin markets. However, the Sponsor believes
that the NAV calculation methodology, coupled with the inherent
characteristics of the CME Bitcoin Futures Market, provides a
significant degree of protection against such influence being
deliberately used to manipulate the Fund's market price or NAV. The
Sponsor believes that any such attempt at manipulation very likely
would be detected by CME market surveillance.
EFP Transactions
According to the Sponsor, an EFP transaction, also known as an
Exchange for Related Position (``EFRP'') transaction,\36\ is a type of
trade that is available for most CME futures contracts. An EFP trade is
a composite transaction that involves the opening of a position in the
futures market and the execution of an inverse trade in the underlying
physical asset. An EFP trade closes with a physical delivery against a
cash settlement.
---------------------------------------------------------------------------
\36\ See https://www.cmegroup.com/clearing/operations-and-deliveries/accepted-trade-types/efp-efr-eoo-trades.html. The terms
``EFP'' and ``EFRP'' are used interchangeably for purposes of this
filing.
---------------------------------------------------------------------------
Because EFP trades require the parties to the transaction to
simultaneously trade the futures and the physical legs of the
transaction, the futures leg of an EFP trade is not executed at the
CME's central limit order book. Rather, an EFP is a CME-regulated,
bilaterally negotiated block trade, in which both parties engage in
both legs of the composite transaction.
According to the Sponsor, the Fund seeks to use EFP transactions to
gain exposure to spot bitcoin for the following reasons:
(1) EFP transactions are reported through the CME Bitcoin Futures
Market, which is a regulated market and the relevant regulated market
for the Fund for the purposes of the test specified in the Winklevoss
Order.
(2) EFP transactions are subject to the CME's market surveillance
program, which helps deter and investigate fraudulent and manipulative
misconduct.
(3) EFP transactions will allow the Fund to gain efficient and
regular exposure to physical bitcoin without relying on unregulated
bitcoin markets for any purpose, including its creation and redemption
processes.
When the Sponsor intends to increase the Fund's bitcoin holdings,
the Fund will participate in an EFP transaction to sell futures
contracts and buy physical bitcoin, while the liquidity provider
(``LP'') participating in such transaction will buy futures contracts
and sell physical bitcoin.\37\ Similarly, when the Sponsor seeks to
decrease the Fund's bitcoin holdings, the Fund will participate in an
EFP transaction to buy futures contracts and sell physical bitcoin,
while the LP on the other side of the transaction will sell futures
contracts and buy physical bitcoin.
---------------------------------------------------------------------------
\37\ The LPs with which the Fund will engage in bitcoin
transactions are third parties that are not affiliated with the Fund
and Sponsor and are not acting as agents of the Fund, Sponsor, or
AP, and all transactions will be done on an arms-length basis. There
is no contractual relationship between the Fund, the Sponsor, or the
LP. When seeking to sell bitcoin on behalf of the Fund, the Sponsor
will seek to sell bitcoin at commercially reasonable prices and
terms to any of the approved LPs. Once agreed upon, the transaction
will generally occur on an ``over-the-counter'' basis.
---------------------------------------------------------------------------
The most well-established means for buying and selling physical
bitcoin in large quantities is through the use of simple cash-for-asset
OTC transactions with an LP, such as several market makers active in
U.S. capital markets. The Sponsor believes that a key benefit of EFP
transactions is that they allow for an OTC transaction to be conducted
under the regulatory oversight of the CME.
According to the Sponsor, the Fund will exclusively use CME Bitcoin
Futures Market's EFP transactions to purchase and sell its physical
bitcoin. Therefore, all trading of the Fund's non-cash (or cash
equivalents) assets (i.e., CME Bitcoin Futures Contracts and physical
bitcoin) will take place through the CME Bitcoin Futures Market, and
the CME Bitcoin Futures Market will be the relevant regulated market
for the Fund. Because NYSE Arca and CME are both members of the
Intermarket Surveillance Group (``ISG''), information shared by CME
with NYSE Arca can be used to assist in detecting and deterring
fraudulent or manipulative misconduct.
EFP Transactions Through the CME Bitcoin Futures Market
All EFP trades have two legs: a futures leg and a physical leg. In
the futures leg of an EFP Transaction through the CME Bitcoin Futures
Market, party A sells CME Bitcoin Futures Contracts to party B for a
given price.\38\ In the physical leg of the same transaction, party A
buys physical bitcoins sold by party B by delivering cash consideration
for those bitcoins to party B.
---------------------------------------------------------------------------
\38\ In practice, both parties will simply enter open futures
positions on the CME Bitcoin Futures Market (party A will open a
short position and party B will open a long position). Both
positions will have the exact same size and will be opened at the
same price. The CME allows EFP transactions to be executed at a
mutually agreed price, but it requires that such price be
commercially reasonable. CME's EFRP rules establish that if prices
deviate excessively from prevailing market levels, counterparties to
the trade may be required to demonstrate that such deviant prices
are indeed legitimate. See CME Rule 538.F; note 44, infra.
---------------------------------------------------------------------------
When two parties agree to perform a CME Bitcoin Futures Market EFP
trade,\39\ they must agree on the following terms:
---------------------------------------------------------------------------
\39\ See https://www.cmegroup.com/education/articles-and-reports/bitcoin-futures-exchange-for-physical-transactions.html.
---------------------------------------------------------------------------
(1) The contract (maturity) that will be used in the futures leg of
the trade;
(2) The number of futures contracts in the futures leg of the
trade;
(3) The price of the futures contract in the futures leg of the
trade;
[[Page 2451]]
(4) The quantity of physical bitcoins in the physical leg of the
trade (where the amount of bitcoin traded must be approximately
equivalent to the notional amount of the futures contracts traded);
\40\
---------------------------------------------------------------------------
\40\ In practice, the quantity of bitcoins in both the futures
leg and in the physical leg of a CME Bitcoin Futures Market EFP
trade are likely to be exactly the same.
---------------------------------------------------------------------------
(5) The basis spread,\41\ which is used to determine the price per
bitcoin for the cash payment in the physical leg of the EFP trade.
---------------------------------------------------------------------------
\41\ ``Basis spread'' refers to the difference in price between
two related financial instruments. In the context of an EFP
transaction, the basis spread is the difference between the futures
contract price and the spot price of the underlying bitcoin. This
spread is crucial in determining the amount of cash payment in the
physical leg of the EFP transaction, essentially setting the price
per bitcoin based on the prevailing market conditions in the futures
and spot markets.
---------------------------------------------------------------------------
After both parties agree to the terms of an EFP trade, they report
the trade details to the CME. The futures leg of the EFP transaction is
cleared by CME Clearing. The two parties to the EFP trade are
responsible for bilaterally clearing the physical leg of the
transaction.
The Fund's Use of EFP Transactions
According to the Sponsor, the Fund will, under normal market
conditions, frequently increase or decrease its holdings of physical
bitcoin as Shares are created and redeemed. As noted above, the Fund
will acquire and dispose of physical bitcoin only through EFP
transactions through the CME Bitcoin Futures Market, which take place
under the regulatory oversight of the CME, a CFTC-regulated market.
Pursuant to the Fund's investment objectives, when the Sponsor
decides to increase or decrease its holdings of physical bitcoin, it
will cause the Fund to execute an EFP trade with an LP. The Fund and
the LP will simultaneously exchange a futures position for a
corresponding, economically offsetting position in physical bitcoin.
The diagram below illustrates the steps in the execution of a
typical EFP trade by the Fund to acquire spot bitcoin in exchange for
CME Bitcoin Futures Contracts.
[GRAPHIC] [TIFF OMITTED] TN12JA24.006
To provide a more concrete example of an EFP transaction that the
Fund would undertake to acquire spot bitcoin, assume that the Fund
needs to buy 50 bitcoins in exchange for 10 units of the next maturity
of BTC Contracts.\42\ The Sponsor will select \43\ an LP that it
believes will provide the best execution opportunity for the proposed
EFP trade. The LP will provide bid/ask quotes for the EFP transaction
as a basis spread against the settlement price of the BTC Contract to
determine the price of the physical bitcoin that will be exchanged in
the physical leg of the EFP. Then, assume that the Sponsor determines
that the best option for the Fund is a bid of +25 bps. Assuming that
the daily settlement price of the relevant BTC Contract was $26,060,
the price for the physical leg of the EFP transaction agreed upon by
the Fund and the LP is $25,995.01. Upon completion of the EFP
transaction, the Fund and the LP will have different positions, but the
same financial exposure:
---------------------------------------------------------------------------
\42\ As detailed above, one BTC Contract represents five
bitcoins.
\43\ As described in the Fund's Registration Statement, the
Sponsor will conduct a Request-for-Quote auction with one or more
previously identified LPs to determine the best price on the
requested quantity for the proposed EFP transaction. The LPs of the
Fund are screened, selected, and approved by the Sponsor and should
satisfy, at minimum, the following criteria: (1) Be licensed as a
Money Service Business by the Financial Crimes Enforcement Network;
(2) Registered with the CFTC and a member of the NFA or otherwise
comply with applicable CFTC requirements governing eligibility to
transact in bitcoin EFPs; (3) Have anti-money laundering and
combating the financing of terrorism policies in place and be
compliant with Financial Action Task Force guidance; (4) Have
cybersecurity, disaster recovery and business continuity, and third-
party service provider management policies.
---------------------------------------------------------------------------
Before the transaction, the Fund was long 10 BTC
Contracts; after the transaction, it has converted this exposure into
50 physical bitcoins.
[[Page 2452]]
Before the transaction, the LP had 50 bitcoins; after the
transaction, it holds an equivalent position long in 10 BTC Contracts.
The table below illustrates the steps in this EFP transaction:
----------------------------------------------------------------------------------------------------------------
Steps LP Fund
----------------------------------------------------------------------------------------------------------------
1. Starting point................ 50 bitcoin............................ 10 BTC Contracts.
------------------------------------------------------------------------------
2. EFP transaction is negotiated The LP and the Fund agree to terms of the EFP, namely:
between the LP and the Fund. Fund sells/LP buys 10 BTC Contracts at $26,000.
Fund buys/LP sells 50 bitcoins at $25,995.01 (basis spread of
+25bps).
------------------------------------------------------------------------------
3. LP sends bitcoin to the Fund.. -50 bitcoins.......................... +50 bitcoins.
4. The EFP transaction is +10 BTC Contracts..................... -10 BTC Contracts.
reported to CME and the LP
assumes the long position in 10
BTC Contracts.
5. Final position................ 10 BTC Contracts...................... 50 bitcoins.
----------------------------------------------------------------------------------------------------------------
EFP transactions must be submitted to the CME ``as soon as
possible, but no later than the end of the business day on which the
EFRP was executed.'' \44\ The relevant terms reported to the CME are:
\45\
---------------------------------------------------------------------------
\44\ See https://www.cmegroup.com/rulebook/files/cme-group-Rule-538.pdf at FAQ 23.
\45\ See id. at FAQs 23, 24; Section 538.I.
---------------------------------------------------------------------------
(1) The type of the EFRP (which, for the Fund, will be the CME
Bitcoin Futures Market EFP);
(2) The date and time of the trade (i.e., the time when agreement
was reached on the prices and quantities of the transaction);
(3) The price and quantity of the CME contract (which, for the
Fund, will be the CME Bitcoin Futures Contracts); and
(4) The price and quantity of the corresponding related position
(which, for the Fund, will be physical bitcoin).
Mitigation of Manipulation Risks Through Use of EFP Transactions
The Sponsor believes that EFP transactions help protect against
fraud and manipulation because they allow exchanges that share
surveillance information with CME to investigate suspicious behavior by
market participants. In addition, the Sponsor believes that regulatory
requirements pursuant to CME Rule 538 \46\ pertaining to EFP
transactions significantly increase the likelihood that fraud and
manipulation will be detected and deterred. These regulatory
requirements include:
---------------------------------------------------------------------------
\46\ See https://www.cmegroup.com/rulebook/files/cme-group-Rule-538.pdf.
---------------------------------------------------------------------------
Pricing of EFPs: Section 538.F (``Prices and Price
Increments'') states that while parties to an EFP transaction have
discretion to mutually agree on a price, EFPs ``may not be priced to
facilitate the transfer of funds between parties for any purpose other
than as the consequence of legitimate commercial activity.'' \47\
---------------------------------------------------------------------------
\47\ EFRPs ``may not be priced off-market for the purpose of
shifting substantial sums of cash from one party to another, to
allocate gains and losses between the futures or options on futures
and the cash or OTC derivative components of the EFRP, to evade
taxes, to circumvent financial controls by disguising a firm's
financial condition, or to accomplish some other unlawful purpose''
and ``EFRPs executed at off-market prices are more likely to be
reviewed by Market Regulation to determine the purpose for the
pricing.'' See id. at FAQ 11.
---------------------------------------------------------------------------
Reporting: Section 538.I (``Submission to the Clearing
House'') states that parties engaging in an EFP transaction must report
each transaction to CME Clearing within the time period and manner
specified by the CME.\48\ EFP transaction volumes are also required to
be reported to the CME with the daily large trader positions by each
clearing member, omnibus account, and foreign broker.
---------------------------------------------------------------------------
\48\ See id. at FAQs 23, 24; Section 538.I.
---------------------------------------------------------------------------
Recordkeeping: Section 538.H (``Recordkeeping'') states
that ``parties to an [EFP] transaction must maintain all records
relevant to the [futures] contract and the related position
transaction.'' \49\
---------------------------------------------------------------------------
\49\ The types of records that must be maintained by parties to
an EFP include: (1) All order tickets, trade blotters, emails,
instant messages, telephone recordings or other records related to
the order placement, negotiation, execution and/or confirmation of
the EFRP. (2) All cash confirmations and signed contracts
corresponding to the cash or derivative component of the EFRP. The
documentation must contain all of the relevant terms of the
transaction and counterparty information. (3) Third party proof of
payment evidencing settlement and documentation representing the
transfer of ownership of the commodity. (4) Futures account
statement reflecting confirmation of the EFRP. (5) Records
reflecting the booking of the cash or derivative transaction in the
firm's internal bookkeeping systems. See id. at FAQ 19.
---------------------------------------------------------------------------
The FAQs relating to CME Rule 538 also state that parties to an
EFRP, along with their clearing members, are subject to CME
jurisdiction and may be required to produce records and cooperate fully
with any investigation.\50\
---------------------------------------------------------------------------
\50\ See id. at FAQ 20.
---------------------------------------------------------------------------
The Sponsor believes that EFP transactions between the Fund and an
LP to trade physical bitcoin are significantly less susceptible to
fraud or manipulation because they are subject to a range of CME
regulatory requirements regarding pricing, reporting, surveillance, and
recordkeeping, as discussed above. Further, EFP transactions are
entered into only by CFTC-regulated futures commission merchants and
occur through the CME Bitcoin Futures Market, which is a CFTC-regulated
market with processes in place to prevent market manipulation,
including the monitoring of transaction prices and the investigation of
potential manipulations.
According to the Sponsor, the ability of participants to undertake
EFP transactions is determined exclusively by the liquidity of the CME
Bitcoin Futures Market and by the liquidity of OTC markets for physical
bitcoin, both of which are sufficiently large. The Sponsor understands
that a significant number of LPs are prepared to execute bitcoin EFP
transactions. The CME's website lists at least 15 LPs that have agreed
to be listed as contacts for clients interested in executing block
trades and EFP transactions.\51\ The Sponsor has consulted with several
such LPs and believes that those LPs could provide enough liquidity to
support the Fund's demand for bitcoin when it incorporates physical
bitcoin into its strategy. The Sponsor notes that several such LPs
already have an ongoing commercial relationship with the Sponsor and/or
Hashdex and are active participants in trading the CME Bitcoin Futures
Markets, bitcoin, and bitcoin ETPs worldwide.
---------------------------------------------------------------------------
\51\ A list of the LPs is available at: https://www.cmegroup.com/trading/bitcoin-brokers-and-block-liquidity-providers.html.
---------------------------------------------------------------------------
The Bitcoin and Bitcoin Futures Markets
According to the Registration Statement, bitcoin is a digital asset
that serves as the unit of account on an open-source, decentralized,
peer-to-peer
[[Page 2453]]
computer network. It may be used to pay for goods and services, stored
for future use, or converted to government-backed currency. As of the
date of this prospectus, the adoption of bitcoin for these purposes has
been limited. The value of bitcoin is not backed by any government,
corporation, or other identified body.
The value of bitcoin depends on its supply (which is limited), and
demand for bitcoin in the markets for exchange that have been organized
to facilitate the trading of bitcoin. By design, the supply of bitcoin
is intentionally limited to 21 million bitcoins. According to the
Registration Statement, there are approximately 19 million bitcoins in
circulation.
Bitcoin is maintained on a decentralized, open source, peer-to-peer
computer network, the ``Bitcoin Network.'' No single entity owns or
operates the Bitcoin Network. The Bitcoin Network is accessed through
software and governs bitcoin's creation and movement. The source code
for the Bitcoin Network, often referred to as the ``Bitcoin Protocol,''
is open-source, and anyone can contribute to its development.
The infrastructure of the Bitcoin Network is collectively
maintained by various participants in the Bitcoin Network, which
include miners, developers, and users. Miners validate transactions and
provide security to the network, and are currently compensated for that
service in bitcoin. Developers maintain and contribute updates to the
Bitcoin Protocol. Users access the Bitcoin Network using open-source
software. Anyone can be a user, developer, or miner.
Bitcoin is ``stored'' on a digital transaction ledger commonly
known as a ``blockchain.'' A blockchain is a distributed database that
is continuously updated and reconciled among certain users and is
protected by cryptography. The bitcoin blockchain contains a complete
record and history for each bitcoin transaction. New bitcoins are
created through a process called ``mining.'' Miners use specialized
computer software and hardware to solve a highly complex mathematical
problem presented by the bitcoin Protocol. The first miner to
successfully solve the problem is permitted to add a block of
transactions to the bitcoin blockchain. The new block is then confirmed
through acceptance by a majority of users who maintain versions of the
blockchain on their individual computers. Miners that successfully add
a block to the bitcoin blockchain are automatically rewarded with a
fixed amount of bitcoin for their effort plus any transaction fees paid
by transferors whose transactions are recorded in the block. This
reward system is the means by which new bitcoin enters circulation and
is the mechanism by which versions of the blockchain held by users on a
decentralized network are kept in consensus.
The Bitcoin Protocol is an open-source project with no official
company or group in control, and anyone can review the underlying code.
There are, however, a number of individual developers that regularly
contribute to a specific distribution of the bitcoin software known as
the ``Bitcoin Core.'' Developers of the Bitcoin Core loosely oversee
the development of the source code. There are many other compatible
versions of the bitcoin software, but Bitcoin Core is the most widely
adopted and currently provides the de facto standard for the Bitcoin
Protocol. The core developers are able to access, and can alter, the
Bitcoin Network source code and, as a result, they are responsible for
quasi-official releases of updates and other changes to the Bitcoin
Network's source code. However, because bitcoin has no central
authority, the release of updates to the Bitcoin Network's source code
by the core developers does not guarantee that the updates will be
automatically adopted by the other purchasers. Users and miners must
accept any changes made to the source code by downloading the proposed
modification and that modification is effective only with respect to
those bitcoin users and miners who choose to download it. As a
practical matter, a modification to the source code becomes part of the
Bitcoin Network only if it is accepted by purchasers that collectively
have a majority of the processing power on the Bitcoin Network. If a
modification is accepted by only a percentage of users and miners, a
division 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.''
The Sponsor notes that individual users, institutional investors
and investment funds that want to provide exposure to bitcoin by
investing directly in bitcoin, and therefore must transact in bitcoin,
must use the Bitcoin Network to download specialized software referred
to as a ``bitcoin wallet.'' This wallet may be used to send and receive
bitcoin through users' unique ``bitcoin addresses.'' The amount of
bitcoin associated with each bitcoin address, as well as each bitcoin
transaction to or from such address, is captured on the blockchain.
Bitcoin transactions are secured by cryptography known as public-
private key cryptography, represented by the bitcoin addresses and
digital signature in a transaction's data file. Each Bitcoin Network
address, or wallet, is associated with a unique ``public key'' and
``private key'' pair, both of which are lengthy alphanumeric codes,
derived together and possessing a unique relationship. The private key
is a secret and must be kept in accordance with appropriate controls
and procedures to ensure it is used only for legitimate and intended
transactions. If an unauthorized third person learns of a user's
private key, that third person could forge the user's digital signature
and send the user's bitcoin to any arbitrary bitcoin address, thereby
stealing the user's bitcoin. Similarly, if a user loses his private key
and cannot restore such access (e.g., through a backup), the user may
permanently lose access to the bitcoin contained in the associated
address.
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\52\ See Winklevoss Order.
\53\ Digital assets that are securities under U.S. law are
referred to throughout this proposal as ``digital asset
securities.'' All other digital assets, including bitcoin, are
referred to interchangeably as ``cryptocurrencies'' or ``virtual
currencies.'' The term ``digital assets'' refers to all digital
assets, including both digital asset securities and
cryptocurrencies, together.
\54\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'')
(CFTC Docket 15-29 (September 17, 2015)) (order instituting
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making
findings and imposing remedial sanctions), in which the CFTC stated:
``Section 1a(9) of the CEA defines `commodity' to include, among
other things, `all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See,
e.g., Board of Trade of City of Chicago v. SEC, 677 F.2d 1137, 1142
(7th Cir. 1982). Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.''
---------------------------------------------------------------------------
The first rule filing proposing to list an exchange-traded product
(``ETP'') to provide exposure to bitcoin in the U.S. was submitted by
the Cboe BZX Exchange, Inc. on June 30, 2016.\52\ At that time,
blockchain technology, and digital assets that utilized it, were
relatively new to the broader public. The market cap of all bitcoin in
existence at that time was approximately $10 billion. No registered
offering of digital asset securities or shares in an investment vehicle
with exposure to bitcoin or any other cryptocurrency had yet been
conducted, and the regulated infrastructure for conducting a digital
asset securities offering had not begun to develop.\53\ Similarly,
regulated U.S. bitcoin futures contracts did not exist. The CFTC had
determined that bitcoin is a commodity,\54\ but had not engaged in
significant enforcement actions in the space. The New York Department
of
[[Page 2454]]
Financial Services (``NYDFS'') adopted its final BitLicense regulatory
framework in 2015, but had only approved four entities to engage in
activities relating to virtual currencies (whether through granting a
BitLicense or a limited-purpose trust charter) as of June 30, 2016.\55\
While the first over-the-counter bitcoin fund launched in 2013, public
trading was limited and the fund had only $60 million in assets.\56\
There were very few, if any, traditional financial institutions engaged
in the space, whether through investment or providing services to
digital asset companies. In January 2018, the Staff of the Commission
noted in a letter to the Investment Company Institute and SIFMA that it
was not aware, at that time, of a single custodian providing fund
custodial services for digital assets.\57\
The digital assets financial ecosystem, including bitcoin, has
progressed and matured significantly. The development of a regulated
market for digital asset securities has significantly evolved, with
market participants having conducted registered public offerings of
both digital asset securities \58\ and shares in investment vehicles
holding bitcoin futures.\59\ Additionally, licensed and regulated
service providers have emerged to provide fund custodial services for
digital assets, among other services. For example, in December 2020,
the Commission issued a statement permitting certain special purpose
broker-dealers to custody digital asset securities under Rule 15c3-3
under the Act.\60\ In September 2020, the Staff of the Commission
released a no-action letter permitting certain broker-dealers to
operate a non-custodial Alternative Trading System (``ATS'') for
digital asset securities, subject to specified conditions.\61\ In
October 2019, the Staff of the Commission granted temporary relief from
the clearing agency registration requirement to an entity seeking to
establish a securities clearance and settlement system based on
distributed ledger technology; \62\ and multiple transfer agents who
provide services for digital asset securities have registered with the
Commission.\63\'
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\55\ A list of virtual currency businesses that are entities
regulated by the NYDFS is available on the NYDFS website. See
https://www.dfs.ny.gov/
virtual_currency_businesses#:~:text=A%20business%20must%20obtain%20a,
business%20in%20New%20York%20State.
\56\ See Bitcoin Investment Trust Form S-1, dated May 27, 2016,
available at: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm (data as of March 31, 2016
according to publicly available filings).
\57\ See Letter from Dalia Blass, Director, Division of
Investment Management, U.S. Securities and Exchange Commission to
Paul Schott Stevens, President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management Group--Head, Securities
Industry and Financial Markets Association (January 18, 2018),
available at: https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
\58\ See Prospectus Supplement filed pursuant to Rule 424(b)(1)
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
\59\ See Prospectus filed by Stone Ridge Trust VI on behalf of
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
\60\ See Securities Exchange Act Release No. 90788, 86 FR 11627
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset
Securities by Special Purpose Broker-Dealers).
\61\ See Letter from Elizabeth Baird, Deputy Director, Division
of Trading and Markets, U.S. Securities and Exchange Commission to
Kris Dailey, Vice President, Risk Oversight & Operational
Regulation, Financial Industry Regulatory Authority (September 25,
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
\62\ See Letter from Jeffrey S. Mooney, Associate Director,
Division of Trading and Markets, U.S. Securities and Exchange
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
\63\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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As noted above, CME began offering trading in BTC Contracts in
2017, and in MBT Contracts in 2021. Each of the contracts' final cash
settlement is based on the CME CF BRR.\64\ The contracts trade and
settle like other cash-settled commodity futures contracts. According
to the Sponsor, trading in CME Bitcoin Futures Contracts has increased
significantly in recent years, in particular with respect to BTC
Contracts. Nearly every measurable metric related to BTC Contracts has
trended consistently up since launch and/or accelerated upward in the
past year, as the market recovered some of the ground lost since
falling from the all-time high activity levels of end 2021. This
general upward trend in trading volume and open interest is captured in
the following chart.
---------------------------------------------------------------------------
\64\ According to the CME, the CME CF BRR aggregates the trade
flow of major bitcoin spot trading platforms during a specific
calculation window into a once-a-day reference rate of the U.S.
dollar price of bitcoin. Calculation rules are geared toward maximum
transparency and real-time replicability in underlying spot markets,
including Bitstamp, Coinbase, Gemini, itBit, and Kraken. For
additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
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[[Page 2455]]
[GRAPHIC] [TIFF OMITTED] TN12JA24.007
Similarly, the number of large open interest holders \65\ has
continued to increase even as the price of bitcoin has risen, as have
the number of unique accounts trading CME Bitcoin Futures Contracts.
---------------------------------------------------------------------------
\65\ A large open interest holder in BTC Contracts is an entity
that holds at least 25 contracts, which is the equivalent of 125
bitcoin. At a price of approximately $26,025 per bitcoin on 9/7/23,
more than 110 firms had outstanding positions of greater than $3.25
million in BTC Contracts. Source: https://www.theblock.co/data/crypto-markets/cme-cots/large-open-interest-holders-of-cme-bitcoin-futures.
---------------------------------------------------------------------------
As it pertains specifically to the CME Bitcoin Futures Contracts
(those in which the Fund will invest), the statistics are equally as
profound. The following table sets forth the approximate daily notional
average volume for the CME Bitcoin Futures Contracts, followed by the
daily average volume for all of the CME Bitcoin Futures Contracts, the
first to expire and the second to expire. With a daily notional average
volume of $1.4 billion in 2023, trading volume in CME Bitcoin Futures
Contracts is almost six times the 2019 volume and almost three times
the volume in 2020. In addition, despite the bear market, the trading
volume in 2023 has been resilient and slightly increasing compared to
2022.
----------------------------------------------------------------------------------------------------------------
Average daily
Daily notional average volume for CME First-to-expire Second-to-expire
volume for CME bitcoin bitcoin futures CME bitcoin CME bitcoin
futures contracts (in $) contracts futures contract futures contract
----------------------------------------------------------------------------------------------------------------
2019..................... $242 million................ 6,365 5,400 700
2020..................... $523 million................ 8,782 7,100 1,300
2021..................... $2,379 million.............. 10,035 7,300 2,100
2022..................... $1,426 million.............. 10,735 8,200 2,100
2023..................... $1,413 million.............. 10,775 8,400 1,900
----------------------------------------------------------------------------------------------------------------
Note: The 2023 data is for the period ending on August 31, 2023. Source: CME; Bloomberg.
Developments in the Bitcoin and Bitcoin Futures Markets
The regulatory landscape for bitcoin and bitcoin markets has
changed significantly since 2016. The market for bitcoin grew
approximately 100 times larger through 2021, reaching a market cap of
$1.3 trillion at its all-time high. Although bitcoin's market cap is
down to $500 billion (as of September 7, 2023), its market cap is
greater than companies \66\ such as Visa, Inc., Exxon Mobil
Corporation, Walmart, Inc., and JP Morgan Chase & Co. The number of
verified users at Coinbase, the largest U.S.-based bitcoin trading
platform, has grown to over 110 million at the end of 2022, compared to
43 million at the end of 2020.\67\ CFTC-regulated bitcoin futures
represented approximately $42 billion in notional trading on the CME
Bitcoin Futures Market in August 2023, compared to $3.9 billion, $28
billion, $60 billion, and $20 billion in total trading in December
2019, December 2020, December 2021, and December 2022 respectively.
CFTC-regulated bitcoin futures represented $2.2 billion in open
interest in August 2023, compared to $115 million, $1.29 billion, $3.27
billion, and $1.31 billion in December 2019, December 2020, December
2021, and December 2022 respectively.\68\ The CFTC has exercised
[[Page 2456]]
its regulatory jurisdiction in bringing a number of enforcement actions
related to bitcoin and against trading platforms that offer
cryptocurrency trading.\69\ The U.S. Office of the Comptroller of the
Currency (the ``OCC'') has made clear that federally-chartered banks
are able to provide custody services for cryptocurrencies and other
digital assets.\70\ NYDFS has granted no fewer than thirty BitLicenses,
including to established public payment companies like PayPal Holdings,
Inc. and Square, Inc., and limited purpose trust charters to entities
providing cryptocurrency custody services. The U.S. Treasury Financial
Crimes Enforcement Network (``FinCEN'') has released extensive guidance
regarding the applicability of the Bank Secrecy Act (``BSA'') and
implementing regulations to virtual currency businesses,\71\ and has
proposed rules imposing requirements on entities subject to the BSA
that are specific to the technological context of virtual
currencies.\72\ In addition, the Treasury's Office of Foreign Assets
Control (``OFAC'') has brought enforcement actions over apparent
violations of the sanctions laws in connection with the provision of
wallet management services for digital assets.\73\
---------------------------------------------------------------------------
\66\ See https://coinmarketcap.com/largest-companies/.
\67\ See Coinbase 2022 10-K, available at: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q4/86fe25e0-342b-40fa-aacc-ea04faf322cb.pdf.
\68\ All statistics and charts included in this proposal with
respect to the CME Bitcoin Futures Market are sourced from https://www.cmegroup.com/trading/bitcoin-futures.html. In addition, as
further discussed below, the Sponsor believes the CME Bitcoin
Futures Market represents a regulated market of significant size for
purposes of addressing the Commission's concerns about potential
manipulation of the bitcoin market.
\69\ The CFTC's annual report for Fiscal Year 2020 (which ended
on September 30, 2020) noted that the CFTC ``continued to
aggressively prosecute misconduct involving digital assets that fit
within the CEA's definition of commodity'' and ``brought a record
setting seven cases involving digital assets.'' See CFTC FY2020
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download.
Additionally, the CFTC filed on October 1, 2020, a civil enforcement
action against the owner/operators of the BitMEX trading platform,
which was one of the largest bitcoin derivative trading platforms.
See CFTC Release No. 8270-20 (October1, 2020), available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
\70\ See OCC News Release 2021-2 (January 4, 2021), available
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html.
\71\ See FinCEN Guidance FIN-2019-G001 (May 9, 2019)
(Application of FinCEN's Regulations to Certain Business Models
Involving Convertible Virtual Currencies), available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
\72\ See U.S. Department of the Treasury Press Release: ``The
Financial Crimes Enforcement Network Proposes Rule Aimed at Closing
Anti-Money Laundering Regulatory Gaps for Certain Convertible
Virtual Currency and Digital Asset Transactions'' (December 18,
2020), available at: https://home.treasury.gov/news/press-releases/sm1216.
\73\ See U.S. Department of the Treasury Enforcement Release:
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent
Violations of Multiple Sanctions Programs Related to Digital
Currency Transactions'' (December 30,2020), available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
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In addition to the regulatory developments noted above, more
traditional financial market participants appear to be embracing
cryptocurrency: large insurance companies,\74\ investment banks,\75\
asset managers,\76\ credit card companies,\77\ university
endowments,\78\ pension funds,\79\ and even historically bitcoin
skeptical fund managers \80\ are allocating to bitcoin. The largest
over-the-counter bitcoin fund previously filed a Form 10 registration
statement, which the Staff of the Commission reviewed and which took
effect automatically, and is now a reporting company.\81\ Established
companies like Tesla, Inc.,\82\ MicroStrategy Incorporated,\83\ and
Square, Inc.,\84\ among others, have recently announced substantial
investments in bitcoin in amounts as large as $1.5 billion (Tesla) and
$425 million (MicroStrategy).
---------------------------------------------------------------------------
\74\ On December 10, 2020, Massachusetts Mutual Life Insurance
Company (MassMutual) announced that it had purchased $100 million in
bitcoin for its general investment account. See MassMutual Press
Release ``Institutional Bitcoin provider NYDIG announces minority
stake purchase by MassMutual'' (December 10, 2020), available at:
https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2020/12/institutional-bitcoin-provider-nydig-announces-minority-stake-purchase-by-massmutual.
\75\ See, e.g., ``Morgan Stanley to Offer Rich Clients Access to
Bitcoin Funds'' (March 17, 2021) available at: https://www.bloomberg.com/news/articles/2021-03-17/morgan-stanley-to-offer-rich-clients-access-to-bitcoin-funds.
\76\ See, e.g., ``BlackRock's Rick Rieder says the world's
largest asset manager has `started to dabble' in Bitcoin'' (February
17, 2021), available at: https://www.cnbc.com/2021/02/17/blackrock-has-started-to-dabble-in-bitcoin-says-rick-r ieder.html and
``Guggenheim's Scott Minerd Says Bitcoin Should Be Worth $400,000''
(December 16, 2020), available at: https://www.bloomberg.com/news/articles/2020-12-16/guggenheim-s-scott- minerd-says- bitcoin-should-
be-worth-400-000.
\77\ See, e.g., ``Visa Moves to Allow Payment Settlements Using
Cryptocurrency'' (March 29, 2021), available at: https://www.reuters.com/business/autos-transportation/exclusive-visa-moves-allow-payment-settlements-using-cryptocurrency-2021-03-29/.
\78\ See, e.g., ``Harvard and Yale Endowments Among Those
Reportedly Buying Crypto'' (January 25, 2021), available at: https://www.bloomberg.com/news/articles/2021-01-26/harvard-and-yale-endowments-among-those-reportedly-buying-crypto.
\79\ See, e.g., ``Virginia Police Department Reveals Why its
Pension Fund is Betting on Bitcoin'' (February 14, 2019), available
at: https://finance.yahoo.com/news/virginia-police-department-reveals-why-194558505.html.
\80\ See, e.g., ``Bridgewater: Our Thoughts on Bitcoin''
(January 28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones
says he likes bitcoin even more now, rally still in the `first
inning''' (October 22, 2020), available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
\81\ See Letter from Division of Corporation Finance, Office of
Real Estate & Construction to Barry E. Silbert, Chief Executive
Officer, Grayscale Bitcoin Trust (January 31, 2020), available at:
https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
\82\ See Form 10-K submitted by Tesla, Inc. for the fiscal year
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
\83\ See Form 10-Q submitted by MicroStrategy Incorporated for
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
\84\ See Form 10-Q submitted by Square, Inc. for the quarterly
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
---------------------------------------------------------------------------
The Sponsor maintains that despite these developments, access for
U.S. retail investors to gain exposure to bitcoin via a transparent and
regulated exchange-traded vehicle remains limited. As investors and
advisors increasingly utilize ETPs to manage diversified portfolios
(including equities, fixed income securities, commodities, and
currencies) quickly, easily, relatively inexpensively, tax-efficiently,
and without having to hold directly any of the underlying assets;
options for bitcoin exposure for U.S. investors remain limited to: (i)
investing in over-the-counter bitcoin funds (``OTC Bitcoin Funds'')
that are subject to high premium/discount volatility (and high
management fees) to the advantage of more sophisticated investors that
are able to purchase shares at NAV directly with the issuing trust;
(ii) investing in CFTC-regulated bitcoin futures exchange-traded funds
(``ETFs'') that are subject to higher complexity and costs due to need
for rolling the futures contracts; (iii) facing the technical risk,
complexity, and generally high fees associated with buying and storing
bitcoin directly; or (iv) purchasing shares of operating companies that
they believe will provide proxy exposure to bitcoin with limited
disclosure about the associated risks. Meanwhile, investors in many
other countries, including Canada, are able to use more traditional
exchange listed and traded products to gain exposure to bitcoin.\85\
---------------------------------------------------------------------------
\85\ Securities regulators in a number of other countries have
either approved or otherwise allowed the listing and trading of
bitcoin ETPs. Specifically, these funds (with their respective
approximate AUMs as of April 14, 2021) include the Purpose Bitcoin
ETF ($993,000,000), VanEck Vectors Bitcoin ETN ($209,000,000),
WisdomTree Bitcoin ETP ($407,000,000), Bitcoin Tracker One
($1,380,000,000), BTCetc Bitcoin ETP ($1,410,000,000), 21Shares
Bitcoin ETP ($362,000,000), 21Shares Bitcoin Suisse ETP
($30,000,000), CoinShares Physical Bitcoin ETP ($396,000,000).
---------------------------------------------------------------------------
[[Page 2457]]
For example, the Purpose Bitcoin ETF, a retail physical bitcoin ETP
launched in Canada, reportedly reached $421.8 million in assets under
management (``AUM'') in two days, and has achieved $993 million in
assets as of April 14, 2021, demonstrating the demand for a North
American market listed bitcoin ETP. The Sponsor believes that the
demand for the Purpose Bitcoin ETF is driven primarily by investors'
desire to have a regulated and accessible means of exposure to. The
Purpose Bitcoin ETF also offers a class of units that is U.S. dollar
bitcoin denominated, which could appeal to U.S. investors. Without an
approved bitcoin ETP in the U.S. as a viable alternative, the Sponsor
believes U.S. investors will seek to purchase these shares in order to
get access to bitcoin exposure, leaving them without the protections of
U.S. securities laws. Given the separate regulatory regime and the
potential difficulties associated with any international litigation,
such an arrangement would create more risk exposure for U.S. investors
than they would otherwise have with a U.S. exchange listed ETP. With
the addition of more bitcoin ETPs in non-U.S. jurisdictions expected to
grow, the Sponsor anticipates that such risks will only continue to
grow.
In addition, several funds registered under the Investment Company
Act of 1940 (the ``1940 Act'') have effective registration statements
that contemplate bitcoin exposure through a variety of means, including
through investments in bitcoin futures contracts \86\ and through OTC
Bitcoin Funds.\87\ In previous statements, the Staff of the Commission
has acknowledged how such funds can satisfy their concerns regarding
custody, valuation, and manipulation.\88\ The funds that have already
invested in bitcoin instruments have no reported issues regarding
custody, valuation, or manipulation of the instruments held by these
funds. While these funds do offer investors some means of exposure to
bitcoin, the Sponsor believes the current offerings fall short of
giving investors an accessible, regulated product that provides
concentrated exposure to bitcoin and bitcoin prices.
---------------------------------------------------------------------------
\86\ See, e.g., Stone Ridge Trust VI (File No. 333-234055);
BlackRock Global Allocation Fund, Inc. (File No. 33-22462); and
BlackRock Funds V (File No. 333-224371).
\87\ See, e.g., Amplify Transformational Data Sharing ETF (File
No. 333-207937); and ARK Innovation ETF (File No. 333-191019).
\88\ See Dalia Blass, ``Keynote Address--2019 ICI Securities Law
Developments Conference'' (December 3, 2019), available at: https://www.sec.gov/news/speech/blass-keynote-address-2019-ici-securities-law-developments-conference.
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Unregulated Exposure to Bitcoin and Investor Protection Concerns
The Sponsor notes that U.S. investor exposure to bitcoin through
OTC Bitcoin Funds and other unregulated means has grown into the tens
of billions of dollars. With that growth, so too has grown the
potential risk to U.S. investors. Investor protection concerns persist,
as OTC Bitcoin Funds and other unregulated means of exposure to bitcoin
continue to attract investors despite the approval of bitcoin futures-
based ETPs by the Commission. The Sponsor appreciates the Commission's
previously articulated concerns about potential manipulation when an
ETP holds actual bitcoin and believes that the Fund represents an
opportunity for U.S. investors to gain price exposure to CME Bitcoin
Futures Contracts and bitcoin in a regulated and transparent exchange-
traded vehicle that mitigates those concerns through the use of CME
Bitcoin Futures Contracts, applying futures-based pricing for spot
bitcoin, and limiting the Fund's exposure to spot bitcoin to the CFTC-
regulated EFP market. The Sponsor believes that the structure of the
Fund accordingly limits risks by: (i) reducing premium and discount
volatility; (ii) reducing management fees through meaningful
competition; (iii) reducing risks associated with investing in
operating companies that are imperfect proxies for bitcoin exposure;
and (iv) avoiding regulatory concerns regarding valuation posed by ETFs
and ETPs that invest directly in bitcoin rather than in CME Bitcoin
Futures Contracts or bitcoin via EFP transactions on the regulated CME
Bitcoin Futures Market, a CFTC-regulated exchange that meets regulatory
standards that are not met by spot bitcoin trading platforms.
Custody of Bitcoin
According to the Registration Statement, institutional purchasers
of bitcoin, including other bitcoin funds that provide exposure to
bitcoin by investing directly in bitcoin, generally maintain their
bitcoin account with a bitcoin custodian. Bitcoin custodians are
financial institutions that have implemented a series of specialized
security precautions, including holding bitcoin in ``cold storage,'' to
try to ensure the safety of an account holder's bitcoin. These bitcoin
custodians must carefully consider the design of the physical,
operational, and cryptographic systems for secure storage of private
keys in an effort to lower the risk of loss or theft, and many use a
multi-factor security system under which actions by multiple
individuals working together are required to access the private keys
necessary to transfer such digital assets and ensure exclusive
ownership.
The Fund's Bitcoin Custodian(s) will hold the Fund's bitcoin
acquired via EFP transactions through the CME Bitcoin Futures Market
and will be responsible for maintaining custody of the Fund's bitcoin
assets.
The Fund's Bitcoin Custodian(s) must satisfy, at least, the ``core
custodian'' requirements set forth by the NCIOC in the NCI methodology,
including: \89\
---------------------------------------------------------------------------
\89\ See https://indexes.nasdaqomx.com/docs/methodology_nci.pdf.
---------------------------------------------------------------------------
1. Provide custody accounts whose holders are the legal
beneficiaries of the assets held in the account. In case of bankruptcy
or insolvency of a Bitcoin Custodian, creditors or the estate should
have no rights to the Fund's assets.
2. Offer segregated accounts and store the Fund's bitcoin in
separated individual accounts and not in omnibus accounts. The Fund's
bitcoin will be held in segregated wallets and not commingled with the
Bitcoin Custodian's or other customer assets.
3. Generate account-segregated private keys for digital assets
using high entropy random number generation methods and employ advanced
security practices.
4. Utilize technology for storing private keys in offline digital
vaults and apply secure processes, such as private key segmentation,
multi-signature authorization, and geographic distribution of stored
assets, to limit access to private keys. The Bitcoin Custodian will use
security technology for storing private keys aiming to avoid theft or
misappropriation of assets due to online attacks, collusion of agents
managing the storage services, or any other threat.
5. Have a comprehensive risk management policy and formalized
framework of managing operational and custody risks, including a
disaster recovery program that ensures continuity of operations in the
event of a system failure. The Bitcoin Custodian will have a business
continuity plan to help ensure continued access to the Fund's assets.
6. Have an insurance policy that covers, at least partially, risks
such as the loss of Fund assets held in cold storage, including from
employee collusion or fraud, physical loss including theft, damage of
key material, security breach or hack, and fraudulent transfer.
7. Comply with higher standards of government oversight, external
audits,
[[Page 2458]]
and security to safekeep asset ownership. The Bitcoin Custodian must be
licensed or registered as a custodian by a reputable and independent
governing body (e.g., the New York State Department of Financial
Services, or other state, national or international regulators), as can
be ascertained by certain public data sources.
8. Provide third-party audit reports at least annually on
operational and security processes. These audits may be completed by
having a Systems and Organizational Control certification issued and
are intended to provide reasonable assurance that the Bitcoin
Custodian's operational processes and private key management controls
are in accordance with the expected standards.
The Sponsor will cause the Trust to maintain ownership and control
of the Fund's bitcoin in a manner consistent with good delivery
requirements for spot commodity transactions.
The Structure and Operation of the Fund Satisfies Commission
Requirements for Bitcoin-Based Exchange Traded Products
The Sponsor believes that the Fund's holding a combination of CME
Bitcoin Futures Contracts, bitcoin, and cash could significantly
mitigate the risk of market manipulation while still providing the
market with a regulated product that tracks the actual price of
bitcoin, creating a secure way for U.S. investors to gain exposure to
bitcoin without having to rely on unregulated products, offshore
regulated products, or indirect strategies such as investing in
publicly traded companies that hold bitcoin.
In determining whether to approve listing and trading of new ETPs,
the Commission conducts a thorough analysis to ensure the proposal is
consistent with Section 6(b)(5) of the Act. Section 6(b)(5) of the Act
mandates 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. With respect to ETPs, the
Commission often considers how the listing exchange would access
necessary information to detect and deter market manipulation, illegal
trading, and other abuses, which listing exchanges may accomplish by
entering into a comprehensive surveillance-sharing agreement with other
entities, such as the markets trading the ETP's underlying assets.
Historically, for commodity-trust ETPs, there has always been at least
one regulated market of significant size for trading futures on the
underlying commodity--whether gold, silver, platinum, palladium, or
copper. Then, the listing exchange would enter into surveillance-
sharing agreements with, or hold ISG membership in common with, that
regulated market.\90\
---------------------------------------------------------------------------
\90\ See Winklevoss Order; 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, Securities Exchange Act Release No. 87267 (Oct. 9,
2019), 84 FR 55382 at 55383, 55410 (Oct. 16, 2019) (SR-NYSEArca-
2019-01) (the ``Bitwise Order''); 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, Securities Exchange Act Release No. 88284
(February 26, 2020), 85 FR 12595 at 12609 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Order'').
---------------------------------------------------------------------------
In the context of bitcoin, CME Bitcoin Futures Market is currently
the only regulated market in the U.S.
The Commission has previously interpreted the terms ``significant
market'' and ``market of significant size'' to include a market (or
group of markets) where:
(1) There is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
successfully manipulate the ETP, such that a surveillance-sharing
agreement would assist the ETP listing market in detecting and
deterring misconduct; and
(2) It is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\91\
---------------------------------------------------------------------------
\91\ See, e.g., Winklevoss Order, 83 FR at 37594. The Commission
further noted that ``[t]here could be other types of ``significant
markets'' and ``markets of significant size,'' but this definition
is an example that will provide guidance to market participants.''
Id.
---------------------------------------------------------------------------
With respect to the first prong of the Commission's interpretation,
the Commission has previously explained that the lead/lag relationship
between the bitcoin futures market and the spot market is central to
understanding this first prong. With respect to the second prong, the
Commission's prior analysis has focused on the potential size and
liquidity of the ETP compared to the size and liquidity of the market.
The Commission recognized in the Approval Order that ``the CME is a
`significant market' related to CME bitcoin futures contracts,'' and
thus that the Exchange has entered into the requisite surveillance-
sharing agreement with respect to its CME Bitcoin Futures Contracts
holdings.\92\ However, there is still a lack of consensus on whether
the CME is of ``significant size'' in relation to the spot bitcoin
market based on the test historically applied by the Commission.
---------------------------------------------------------------------------
\92\ See Approval Order, 87 FR at 21678 and further discussion
at 21678-81.
---------------------------------------------------------------------------
Interrelationship Between the CME Bitcoin Futures Market and the Fund
The Commission has previously stated that ``the interpretation of
the term market of significant size depends on the interrelationship
between the market with which the listing exchange has a surveillance-
sharing agreement and the proposed ETP.'' \93\ The Sponsor intends to
adopt an innovative approach to mitigate the risks of fraud and
manipulation that are unique to the Fund. The core principle of this
approach would be to structure the operation of the Fund such that the
regulated market of significant size in relation to the Fund is the CME
Bitcoin Futures Market because the Fund trades all of its non-cash
assets through the CME Bitcoin Futures Market. Therefore, the Sponsor's
strategy aims to establish a comprehensive interrelationship between
the CME and the Fund so that the CME Bitcoin Futures Market is the
market of significant size in relation to the Fund. The Sponsor notes
that, although the Fund may, as proposed, hold bitcoin, it does not
rely on any pricing or other information or services from unregulated
bitcoin spot bitcoin trading platforms. Therefore, no spot bitcoin
trading platform could be considered a ``market of relevant size'' in
relation to the Fund.
---------------------------------------------------------------------------
\93\ See Securities Exchange Act Release No. 95180 (June 29,
2022), 87 FR 40299 at 40312 (July 6, 2022) (SR-NYSEArca-2021-90)
(Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)).
---------------------------------------------------------------------------
The Sponsor has designed the Fund to have four novel features that
underscore its significant interrelationship with the CME Bitcoin
Futures Market:
1. Investment strategy: The Fund will only hold bitcoin, CME
Bitcoin Futures Contracts, and cash and cash equivalents. Accordingly,
the CME Bitcoin Futures Market is the only market on which the Fund's
non-cash assets would trade and is therefore the ``significant market''
in relation to the Fund, as proposed.
2. Futures-based pricing for spot bitcoin: The price determination
for bitcoin holdings in the NAV calculation will be derived from the
CME's bitcoin futures curve.\94\ As a result, the price of bitcoin
holdings will depend solely on bitcoin futures settlement prices on the
CME Bitcoin Futures Market and will not depend directly on price
information from unregulated spot
[[Page 2459]]
bitcoin markets (as further discussed below).
---------------------------------------------------------------------------
\94\ The ``futures curve'' is a representation of the
relationship between futures contract prices and their respective
expiration dates.
---------------------------------------------------------------------------
3. Physical bitcoin purchases through the CME Bitcoin Futures
Market: The Fund will solely use the CME Bitcoin Futures Market's EFP
transactions to acquire and dispose of bitcoin, instead of transactions
on unregulated spot bitcoin trading platforms. Accordingly, the only
non-cash assets held by the Fund (CME Bitcoin Futures Contracts and
bitcoin obtained from EFP transactions) would be traded, reported, and
cleared through the CME Bitcoin Futures Market, such that CME and NYSE
Arca can share information pursuant to their common ISG membership to
detect and deter fraudulent or manipulative misconduct related to those
assets.
4. Creations and redemptions: The Fund will use cash creations and
redemptions \95\ to deter intraday Share price manipulation that could
originate from in-kind creation or redemption from bitcoin sourced in
unregulated spot markets. Investment in bitcoin thus would not be
directly related to creation/redemptions, but would instead be adjusted
dynamically based on target portfolio exposure.\96\ Trading for bitcoin
could thus be accomplished in smaller sizes and at unpredictable times,
reducing the risk of manipulation in the creation or redemption
processes.
---------------------------------------------------------------------------
\95\ In a cash creation/redemption format, the Authorized
Participant delivers cash to the Fund instead of bitcoin. The Fund's
creation and redemption processes are further discussed below.
\96\ The portfolio's exposure to bitcoin will be dynamic because
the Sponsor will assess market conditions (e.g., expected level of
creation and redemption based on historic trends, the futures curve,
market liquidity and volatility) in allocating the Fund's portfolio
among the assets that it may hold (bitcoin, CME Bitcoin Futures
Contracts, cash and cash equivalents). The Sponsor will manage the
Fund to minimize transaction costs related to the conversion between
CME Bitcoin Futures Contracts and bitcoin that would be necessary to
process redemptions. The Sponsor will generally aim to maximize the
allocation to bitcoin to better track the Fund's Benchmark.
---------------------------------------------------------------------------
The Sponsor believes that these features of the Fund are designed
to provide a robust framework for mitigating the risks of market
manipulation, thereby protecting investors and maintaining the
integrity of the market. The Sponsor further believes that, given these
features of the Fund, the CME Bitcoin Futures Market should be
considered the regulated market of significant size in relation to the
Fund.
The Sponsor further believes that the proposed novel approach is in
line with the first prong of the Commission's interpretation of the
definition of ``regulated market of significant size'' as to the CME
Bitcoin Futures Market because (i) the CME Bitcoin Futures Market is
the only market where the Fund trades its non-cash assets,\97\ and (ii)
there is a reasonable likelihood that a person attempting to manipulate
the Fund would also have to trade on the CME Bitcoin Futures Market to
successfully manipulate the ETP (and, accordingly, CME's common ISG
membership would aid NYSE Arca in detecting and deterring potential
misconduct).
---------------------------------------------------------------------------
\97\ In the Approval Order, the Commission stated that if the
proposed ``significant'' regulated market (in this case, the CME
Bitcoin Futures Market) with which the listing exchange has a
surveillance-sharing agreement is the same market on which the ETP
trades its non-cash assets, then (i) it is unnecessary for the
listing exchange to establish a reasonable likelihood that the
would-be manipulator would have to trade on said listing exchange to
manipulate the proposed ETP (thereby satisfying the first prong of
the Commission's standard for ``market of significant size''), and
(ii) it is unnecessary to establish a ``lead-lag'' relationship
between said listing exchange and other markets. 87 FR at 21679 n.
47 & 21680.
---------------------------------------------------------------------------
The Sponsor has designed its approach so that any attempt to
manipulate the Fund would require trading on the CME Bitcoin Futures
Market, for the following reasons:
1. Futures-based pricing for spot bitcoin: The price of the Fund's
bitcoin holdings would be determined based on settlement prices of CME
Bitcoin Futures Contracts for purposes of calculating NAV (as explained
in the discussion of FBSP above). Accordingly, any attempt to
manipulate the price of the Fund would require influencing the futures
curve on the CME Bitcoin Futures Market because the spot price (which
could be a target for manipulation) does not directly influence the
price of the Fund. There is thus a direct lead/lag relationship in
which CME Bitcoin Futures Market prices lead both the spot price used
by the Fund to determine its NAV and the Fund's market price.
2. Spot bitcoin operations via EFP transaction through the CME
Bitcoin Futures Market: Because the Fund's bitcoin operations would
take place via CME Bitcoin Futures Market EFP transactions, any attempt
to manipulate the Fund's transactions in bitcoin holdings would require
the would-be manipulator to trade on the CME Bitcoin Futures Market.
Accordingly, any potential manipulation of the Fund would require
extensive operations on the heavily regulated CME Bitcoin Futures
Market.
3. Cash creations and redemptions: The Fund's use of cash creations
and redemptions also reduces the potential for manipulation through the
creation and redemption processes by eliminating the direct arbitrage
between unregulated spot markets and the Fund's market price. Any
significant creation or redemption activity aimed at manipulating the
Fund would likely influence the CME Bitcoin Futures Market, given that
the cash received in the creation is used to buy CME Bitcoin Futures
Contracts and the cash generated for redemption distribution comes from
the sale of CME Bitcoin Futures Contracts.
Given these factors, the Sponsor believes that the common
membership of NYSE Arca and CME in the ISG would be an effective tool
in assisting NYSE Arca in detecting and deterring potential misconduct.
The exchanges' ability to share information would provide the Exchange
with access to relevant trading data from the CME Bitcoin Futures
Market, which is intrinsically linked to the Fund, allowing for
appropriate oversight and facilitating the ability to identify and
investigate any suspicious trading activity.
The Approval Order stated that the CME ``comprehensively surveils
futures market conditions and price movements on a real-time and
ongoing basis in order to detect and prevent price distortions,
including price distortions caused by manipulative efforts'' and that
the ``CME's surveillance can reasonably be relied upon to capture the
effects on the CME [Bitcoin Futures Market] caused by a person
attempting to manipulate the [Fund] by manipulating the price of CME
Bitcoin Futures Contracts, whether that attempt is made by directly
trading on the CME [Bitcoin Futures Market] or indirectly by trading
outside of the CME [Bitcoin Futures Market].'' \98\ The Commission
further noted in the Approval Order that, as a result, ``when the CME
shares its surveillance information with [NYSE] Arca, the information
would assist in detecting and deterring fraudulent or manipulative
misconduct related to the non-cash assets held by the [Fund].'' \99\
The Sponsor further believes that, consistent with the Approval Order,
CME surveillance can be relied upon to capture any possible
manipulation of the CME Bitcoin Futures Market, even when the attempt
is made indirectly by trading outside the CME Bitcoin Futures Market in
unregulated markets.\100\
---------------------------------------------------------------------------
\98\ See Approval Order, 87 FR at 21679.
\99\ Id.
\100\ See id. (``The Commission agrees with [NYSE] Arca that the
CME [Bitcoin Futures Market], as a CFTC-regulated futures exchange,
has `the requisite oversight, controls, and regulatory scrutiny
necessary to maintain, promote, and effectuate fair and transparent
trading of its listed products, including the BTC Contracts and MBT
Contracts.' As [NYSE] Arca states, as a Designated Contracts Market
(`DCM'), the CME [Bitcoin Futures Market] `comprehensively surveils
futures market conditions and price movements on a realtime and
ongoing basis in order to detect and prevent price distortions,
including price distortions caused by manipulative efforts.' Thus
the CME's surveillance can reasonably be relied upon to capture the
effects on the CME [Bitcoin Futures Market] caused by a person
attempting to manipulate the proposed futures ETP by manipulating
the price of CME [Bitcoin Futures Contracts], whether that attempt
is made by directly trading on the CME [Bitcoin Futures Market] or
indirectly by trading outside of the CME [Bitcoin Futures Market].
As such, when the CME shares its surveillance information with
[NYSE] Arca, the information would assist in detecting and deterring
fraudulent or manipulative misconduct related to the non-cash assets
held by the proposed ETP'') (internal citations omitted).
---------------------------------------------------------------------------
[[Page 2460]]
The Sponsor also believes that it is unlikely that trading in the
Fund would be the predominant influence on prices on the CME Bitcoin
Futures Market. The Approval Order noted that it was unlikely that
trading in the Fund would be the predominant influence on price in the
CME Bitcoin Futures Market,\101\ and the Sponsor believes that the
addition of bitcoin to the Fund's holdings, using EFP transactions
through the CME Bitcoin Futures Market, does not significantly alter
the influence of the Fund's trading on the CME Bitcoin Futures Market,
for the following reasons:
---------------------------------------------------------------------------
\101\ See id. at 21680.
---------------------------------------------------------------------------
1. The Fund's limited influence over the market: As the Commission
noted in the Approval Order,\102\ the Commission observed no disruption
to the CME Bitcoin Futures Market or evidence that the Fund exerted a
dominant influence on CME bitcoin futures prices. The Sponsor therefore
believes that it is very unlikely that the Fund's trading, even with
the addition of bitcoin to its holdings, would become the predominant
influence on the futures market.
---------------------------------------------------------------------------
\102\ See id. at 21681.
---------------------------------------------------------------------------
2. Spot bitcoin would be purchased using market-neutral EFP
transactions: The bitcoin in the Fund's portfolio would be purchased by
exchanging an equivalent CME Bitcoin Futures Contracts position using
EFP transactions through the CME Bitcoin Futures Market. The Fund's
bitcoin trading would thus be directly linked to the futures market and
would not introduce a new, independent variable that could
significantly influence the futures market. Indeed, because both sides
of the trade track the same benchmark, an EFP is market-neutral, and,
as such, the pricing of an EFP is quoted in terms of the basis between
the price of the futures contract and the level of the underlying
index.\103\
---------------------------------------------------------------------------
\103\ According to the Fund's registration statement and as
discussed above, the Fund uses EFP transactions to efficiently
transition its bitcoin exposure from a physical to a futures
position within a regulated environment.
---------------------------------------------------------------------------
3. The Fund's investment strategy reduces recurrent trading
activity and price pressure on the CME Bitcoin Futures Market as
compared to a fund that only holds CME Bitcoin Futures Contracts:
Because the Fund will also hold bitcoin, the Sponsor believes that CME
Bitcoin Futures Contracts rollover operations would be reduced, as
would the trading activity on the CME Bitcoin Futures Market that
occurs as a CME Bitcoin Futures Contract nears expiration, thereby
significantly reducing its influence on the CME Bitcoin Futures Market.
The Sponsor therefore believes that the proposed addition of
bitcoin to the Fund's holdings would not significantly alter the
influence of the Fund's trading on the CME Bitcoin Futures Market and
that the proposed design of the Fund's investment strategy would
instead result in potential impact on the CME Bitcoin Futures Market
that is the same or less than that of the previous investment strategy
(as represented in the Approval Order).
The Sponsor notes that, as of April 2021 and as noted in the Fund's
original proposal to list and trade its Shares on the Exchange, the CME
Bitcoin Futures Market was already showing a significant increase in
size, as per the table below:\104\
---------------------------------------------------------------------------
\104\ See Securities Exchange Act Release No. 92573 (August 5,
2021), 86 FR 44062 at 44073 (August 11, 2021) (SR-NYSEArca-2021-53)
(Notice of Filing of a Proposed Rule Change To List and Trade Shares
of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E).
[GRAPHIC] [TIFF OMITTED] TN12JA24.067
The Sponsor notes that growth of the CME Bitcoin Futures Market at
that time coincided with similar growth in the bitcoin spot market.
Moreover, the market for Bitcoin futures was and still is rapidly
approaching the size of markets for other commodity interests,
including interests in metals, agricultural, and petroleum products.
Accordingly, as the CME Bitcoin Futures Market continues to develop
and more closely resemble other commodity futures markets, the Sponsor
believes that it is reasonable to expect that the relationship between
the bitcoin futures market and bitcoin spot market will behave
similarly to other future/spot market relationships, where the spot
market may have no relationship to the futures market (although the
current proposal does not depend on such similarity).
In addition, in the time since the Approval Order was issued, there
has been significant growth in bitcoin futures in terms of trading
volumes, as reflected in the table below:
[[Page 2461]]
[GRAPHIC] [TIFF OMITTED] TN12JA24.068
The Sponsor also notes that in the same period during which CME
Bitcoin Futures Market open interest remained at roughly at the same
level, trading volume and open interest of unregulated bitcoin futures
markets had a significant drawdown: \105\
---------------------------------------------------------------------------
\105\ Data in this table is sourced from: https://www.theblock.co/data/crypto-markets/futures. Trading volume data for
bitcoin futures in unregulated markets was only available on a
monthly frequency. Therefore, the trading volume figures displayed
in the table are approximations derived from the daily average
trading volumes reported for their respective months.
[GRAPHIC] [TIFF OMITTED] TN12JA24.069
Furthermore, the Sponsor notes that in the same period the trading
volume of spot bitcoin also fell significantly:
[GRAPHIC] [TIFF OMITTED] TN12JA24.070
The Sponsor believes that the data above suggests an increase in
market appetite for regulated products (e.g., CME Bitcoin Futures
Contracts) vis-a-vis a significant decrease in interest for unregulated
products (e.g., unregulated futures and spot bitcoin).
The Sponsor further believes that an analysis of the data presented
above indicates that the CME Bitcoin Futures Market managed to maintain
its open interest level despite the price volatility that bitcoin
experienced in 2022, demonstrating its resilience and that it is
sufficiently developed such that it is unlikely that trading in the
Fund would be the predominant influence on its prices.
The Sponsor further notes that the Commission stated in the
Approval Order ``that the CME [Bitcoin Futures Market] has sufficiently
developed to support ETPs seeking exposure to bitcoin by holding CME
Bitcoin Futures Contracts.'' \106\ The Sponsor believes that the CME
Bitcoin Futures Market is also sufficiently developed to support ETPs
that seek exposure to Bitcoin by holding a mix of CME Bitcoin Futures
Contracts and bitcoin through the use of EFP transactions that are
traded, reported, and cleared through the CME Bitcoin Futures Market
and whose conditions and prices are subject to CME oversight.
---------------------------------------------------------------------------
\106\ See Approval Order, 87 FR at 21681.
---------------------------------------------------------------------------
Creations and Redemptions
According to the Sponsor (and as discussed further below), the Fund
uses cash creations and redemptions.\107\ An AP delivers cash to the
Fund instead of bitcoin or CME Bitcoin Futures Contracts in the
creation process. An AP receives cash instead of bitcoin or CME Bitcoin
Futures Contracts in the redemption process. The cash received during
the creation process is then used by the Sponsor to purchase CME
Bitcoin Futures Contracts with an aggregate market value that
approximates the amount of cash received upon the
[[Page 2462]]
creation. During a redemption transaction, the reverse process is used,
where the Sponsor sells CME Bitcoin Futures Contracts with an aggregate
market value that approximates the amount of cash to be paid upon the
redemption. On a daily basis, the Sponsor will analyze the current
portfolio allocation of the Fund between bitcoin and CME Bitcoin
Futures Contracts and, based on market conditions, may decide to engage
in an EFP transaction through the CME Bitcoin Futures Market to buy or
sell bitcoin for the equivalent position in CME Bitcoin Futures
Contracts.
---------------------------------------------------------------------------
\107\ In a cash creation/redemption mechanism, APs create or
redeem shares of the ETP using cash instead of the underlying
assets. This contrasts with in-kind creation/redemption, where APs
use a basket of the ETP's underlying assets for these transactions.
In cash creation/redemption, APs provide or receive an equivalent
cash value based on the NAV of the ETP's shares.
---------------------------------------------------------------------------
The Sponsor believes that the Fund's use of cash creations and
redemptions protects against manipulation in the creation and
redemption process and of the Fund's market price from trading in
unregulated spot markets. Investment in bitcoin will not be directly
related to creation or redemption of Shares such that trades can be
performed in smaller sizes and at unpredictable times, reducing the
risk of creation or redemption manipulation.
Specifically, the Sponsor believes that cash creations and
redemptions serve as a deterrent to manipulation in several ways:
1. Decoupling from spot market: By using cash instead of bitcoin
for creations and redemptions, the Fund's operations are decoupled from
the unregulated spot market. The creation and redemption process does
not directly influence the unregulated spot market or vice versa,
thereby reducing the potential for manipulation through this process.
2. Unpredictable trading times: The Fund's investment in spot
bitcoin is not directly related to creations or redemptions. As a
result, trading can be done in smaller sizes and at unpredictable
times, making it harder for potential manipulators to time their
actions.
3. Reduced impact of large trades: By effecting creations and
redemptions in cash, large trades that could potentially influence the
unregulated spot market are mitigated. Instead, these trades are
absorbed in the CME Bitcoin Futures Market, which is sufficiently
liquid and, as a regulated market that is a member of ISG, can
reasonably be relied upon to assist the Exchange in detecting and
deterring fraudulent or manipulative misconduct.
4. Reduced influence from unregulated spot bitcoin trading
platforms: In-kind creation may create a direct relationship between
the Fund's market price and prices on offshore unregulated trading
platforms such as Binance and others by arbitrage, because an AP could
buy or sell bitcoin from such markets and receive or deliver bitcoin
from the Fund through the creation or redemption process. With
creations and redemptions in cash, however, that arbitrage cannot be
executed without transacting on the CME Bitcoin Futures Market. Thus,
the Sponsor believes that, by removing a direct causal relationship
between unregulated markets and the Fund's market price, it is unlikely
that a person attempting to manipulate the ETP would be reasonably
successful by trading only on unregulated spot bitcoin trading
platforms. A would-be manipulator would have to transact on the CME
Bitcoin Futures Market, such that NYSE Arca's common ISG membership
with CME would assist NYSE Arca in detecting and deterring misconduct.
The Sponsor believes that the Fund's creation and redemption
process is designed to minimize the potential for market manipulation,
thereby protecting investors and maintaining the integrity of the
markets.
Settlement of CME Bitcoin Futures Contracts
According to the Registration Statement, each BTC Contract and MBT
Contract settles daily to the BTC Contract VWAP of all trades that
occur between 2:59 p.m. and 3:00 p.m. Central Time, the settlement
period, rounded to the nearest tradable tick.\108\
---------------------------------------------------------------------------
\108\ VWAP is calculated based first on Tier 1 (if there are
trades during the settlement period); then Tier 2 (if there are no
trades during the settlement period); and then Tier 3 (in the
absence of any trade activity or bid/ask in a given contract month
during the current trading day, as follows: Tier 1: Each contract
month settles to its VWAP of all trades that occur between 14:59:00
and 15:00:00 CT, the settlement period, rounded to the nearest
tradable tick. If the VWAP is exactly in the middle of two tradable
ticks, then the settlement will be the tradable price that is closer
to the contract's prior day settlement price. Tier 2: If no trades
occur on CME Globex between 14:59:00 and 15:00:00 CT, the settlement
period, then the last trade (or the contract's settlement price from
the previous day in the absence of a last trade price) is used to
determine whether to settle to the bid or the ask during this
period. a. If the last trade price is outside of the bid/ask spread,
then the contract month settles to the nearest bid or ask price. b.
If the last trade price is within the bid/ask spread, or if a bid/
ask spread is not available, then the contract month settles to the
last trade price. Tier 3: In the absence of any trade activity or
bid/ask in a given contract month during the current trading day,
the daily settlement price will be determined by applying the net
change from the preceding contract month to the given contract
month's prior daily settlement price.
---------------------------------------------------------------------------
BTC Contracts and MBT Contracts each expire on the last Friday of
the contract month and are settled with cash. The final settlement
value is based on the CME CF BRR at 4:00 p.m. London time on the
expiration day of the futures contract.
As proposed, the Fund will rollover its soon to expire CME Bitcoin
Futures Contracts to extend the expiration or maturity of its position
forward by closing the initial contract holdings and opening a new
longer-term contract holding for the same underlying asset at the then-
current market price. The Fund does not intend to hold any bitcoin
futures positions into cash settlement.
Net Asset Value
According to the Registration Statement, the Fund's NAV per Share
will be calculated by taking the current market value of its total
assets, subtracting any liabilities, and dividing that total by the
number of Shares.
The Administrator of the Fund will calculate the NAV once each
trading day, as of the earlier of the close of the New York Stock
Exchange or 4:00 p.m. Eastern Time (``E.T.'').
According to the Registration Statement, to determine the value of
CME Bitcoin Futures Contracts, the Fund's Administrator will use the
CME Bitcoin Futures Contract settlement price on the exchange on which
the contract is traded, except that the ``fair value'' of CME Bitcoin
Futures Contracts (as described in more detail below) may be used when
CME Bitcoin Futures Contracts close at their price fluctuation limit
for the day. The Fund's Administrator will determine the value of Fund
investments as of the earlier of the close of the New York Stock
Exchange or 4:00 p.m. E.T. The Fund's NAV will include any unrealized
profit or loss on open CME Bitcoin Futures Contracts and any other
credit or debit accruing to the Fund but unpaid or not received by the
Fund.
According to the Registration Statement, the fair value of the
Fund's holdings will be determined by the Fund's Sponsor in good faith
and in a manner that assesses the future bitcoin market value based on
a consideration of all available facts and all available information on
the valuation date. When a CME Bitcoin Futures Contract has closed at
its price fluctuation limit, the fair value determination will attempt
to estimate the price at which such CME Bitcoin Futures Contract would
be trading in the absence of the price fluctuation limit (either above
such limit when an upward limit has been reached or below such limit
when a downward limit has been reached). Typically, this estimate will
be made primarily by reference to exchange traded instruments at 4:00
p.m. E.T. on settlement day. The fair value of BTC Contracts and MBT
Contracts may not
[[Page 2463]]
reflect such security's market value or the amount that the Fund might
reasonably expect to receive for the BTC Contracts and MBT Contracts
upon its current sale.
According to the Registration Statement and as discussed above, the
value of spot bitcoin held by the Fund would be determined by the
Administrator, when calculating the Fund's NAV, via the FBSP
methodology. As discussed above, the FBSP methodology allows for the
determination of a spot price of bitcoin that utilizes market data
exclusively from CME Bitcoin Futures Contracts and does not rely on
market data obtained from unregulated bitcoin markets to determine the
value of bitcoin held by the Fund.
Indicative Fund Value
According to the Registration Statement, in order to provide
updated information relating to the Fund for use by investors and
market professionals, ICE Data Indices, LLC will calculate an updated
IFV. The IFV will be calculated by using the prior day's closing NAV
per Share of the Fund as a base and will be updated throughout the core
trading session of 9:30 a.m. E.T. to 4:00 p.m. E.T. (the ``Core Trading
Session'') to reflect changes in the value of the Fund's holdings
during the trading day. For purposes of calculating the IFV, the Fund's
spot bitcoin holdings will be priced using a real time version of the
Benchmark, the Nasdaq Bitcoin Reference Price--Real Time (``NQBTC-
RT''),\109\ and the Fund's CME Bitcoin Futures Contracts holdings will
be priced using the most recent trading price for each contract.
---------------------------------------------------------------------------
\109\ The ``Nasdaq Bitcoin Reference Price--Real Time'' or
``NQBTC-RT'' is the real-time version of the Benchmark and is
calculated every second throughout a 24-hour trading day, seven days
per week, using published, real-time bid and ask quotes for bitcoin
on the NQBTCS core trading platforms. See https://
indexes.nasdaqomx.com/docs/methodology_nci.pdf.
---------------------------------------------------------------------------
The IFV will be disseminated on a per Share basis every 15 seconds
during the Exchange's Core Trading Session and be widely disseminated
by one or more major market data vendors during the Exchange's Core
Trading Session.\110\
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\110\ Several major market data vendors display and/or make
widely available IFVs taken from the Consolidated Tape Association
(``CTA'') or other data feeds.
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Creation and Redemption of Shares
According to the Registration Statement, the Shares issued by the
Fund may only be purchased by APs and only in blocks of 10,000 Shares
called ``Creation Baskets.'' The amount of the purchase payment for a
Creation Basket is equal to the total NAV of Shares in the Creation
Basket. Similarly, only APs may redeem Shares and only in blocks of
10,000 Shares called ``Redemption Baskets.'' The amount of the
redemption proceeds for a Redemption Basket is equal to the total NAV
of Shares in the Redemption Basket. The purchase price for Creation
Baskets and the redemption price for Redemption Baskets are the actual
NAV calculated at the end of the business day when a request for a
purchase or redemption is received by the Fund. Shares of the Fund will
be created and redeemed in cash.\111\
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\111\ The Sponsor notes that Shares of the Fund will only be
created and redeemed in cash because of regulatory and other
concerns surrounding the ability of broker-dealers, such as the APs,
to have custody and/or control over non-security digital assets,
such as bitcoin. In 2019, Commission Staff noted that a digital
asset security that does not meet the definition of a ``security''
under the Securities Investor Protection Act (``SIPA'') would likely
not receive protection under SIPA in the event of the failure of a
carrying broker-dealer (thus leaving holders of those digital asset
securities with only unsecured general creditor claims against the
broker-dealer's estate). See SEC Division of Trading and Markets,
FINRA Office of General Counsel, Joint Staff Statement on Broker-
Dealer Custody of Digital Asset Securities (July 8, 2019), https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities. The Staff also noted that
uncertainty regarding when and whether a broker-dealer holds a
digital asset security in its possession or control creates greater
risk for customers that their securities will not be able to be
returned in the event of a broker-dealer failure. See id. The Staff
concluded that these concerns were likely to be inconsistent with
the expectations of persons who would use a broker-dealer to custody
their digital asset securities. In light of these concerns, the
creation and redemption and processes of the Fund have been
structured so that APs are not required to take custody of, or have
control over, bitcoin at any stage.
---------------------------------------------------------------------------
APs will be the only persons that may place orders to create and
redeem Creation Baskets. APs must be (1) either registered broker-
dealers or other securities market participants, such as banks and
other financial institutions, that are not required to register as
broker-dealers to engage in securities transactions, and (2) Depository
Trust Company (``DTC'') participants. An AP is an entity that has
entered into an Authorized Participant agreement with the Sponsor.
An AP delivers cash to the Fund in the creation process, and an AP
receives cash in the redemption process.\112\ The cash delivered or
received during the creation or redemption process is then used by the
Sponsor to purchase or sell CME Bitcoin Futures Contracts with an
aggregate market value that approximates the amount of cash received or
paid upon the creation or redemption. On a daily basis, the Sponsor
will analyze the current portfolio allocation of the Fund between
bitcoin and CME Bitcoin Futures Contracts and decide whether to engage
in an EFP transaction through the CME Bitcoin Futures Market to buy or
sell bitcoin for the equivalent position in CME Bitcoin Futures
Contracts.
---------------------------------------------------------------------------
\112\ The APs will deliver only cash to create Shares and will
receive only cash when redeeming Shares. Further, APs will not
directly or indirectly purchase, hold, deliver, or receive bitcoin
as part of the creation or redemption process or otherwise direct
the Trust or a third party with respect to purchasing, holding,
delivering, or receiving bitcoin as part of the creation or
redemption process. To the extent applicable, the Fund will create
shares by receiving bitcoin from a third party that is not the AP
and the Fund--not the AP--is responsible for selecting the third
party to deliver the bitcoin. Further, the third party will not be
acting as an agent of the AP with respect to the delivery of the
bitcoin to the trust or acting at the direction of the AP with
respect to the delivery of the bitcoin to the Fund. The Fund will
redeem shares by delivering bitcoin to a third party that is not the
AP and the Fund--not the AP--is responsible for selecting the third
party to receive the bitcoin. Further, the third party will not be
acting as an agent of the AP with respect to the receipt of the
bitcoin from the Fund or acting at the direction of the AP with
respect to the receipt of the bitcoin from the Fund.
---------------------------------------------------------------------------
Creation Procedures
According to the Registration Statement, on any ``Business Day,''
an AP may place an order with the Fund's Transfer Agent to create one
or more Creation Baskets. For purposes of processing both purchase and
redemption orders, a ``Business Day'' means any day other than a day
when the CME Bitcoin Futures Market or the New York Stock Exchange is
closed for regular trading. Purchase orders for Creation Baskets must
be placed by 3:00 p.m. EST or one hour prior to the close of trading on
the New York Stock Exchange, whichever is earlier. The day on which the
distributor(s) engaged by the Sponsor receives a valid purchase order
is referred to as the purchase order date. If the purchase order is
received after the applicable cut-off time, the purchase order date
will be the next Business Day. Purchase orders are irrevocable.
By placing a purchase order, an AP agrees to deposit cash with the
Cash Custodian.
Determination of Required Deposits
According to the Registration Statement, the total deposit required
to create each basket (``Creation Basket Deposit'') is an amount of
cash and/or cash equivalents in the same proportion to the total assets
of the Fund (net of estimated accrued but unpaid fees, expenses and
other liabilities) on the purchase order date as the proportion of the
number of Shares to be created under the purchase order to the total
[[Page 2464]]
number of Shares outstanding on the purchase order date. The Sponsor
determines, directly in its sole discretion or in consultation with the
Cash Custodian and the Sub-Administrator, the requirements for cash
and/or cash equivalents, including the remaining maturities of the cash
equivalents, which may be included in deposits to create baskets. If
cash equivalents are to be included in a Creation Basket Deposit for
orders placed on a given business day, the Sub-Administrator will
publish an estimate of the Creation Basket Deposit requirements at the
beginning of such day.
Delivery of Required Deposits
According to the Registration Statement, an AP who places a
purchase order is responsible for transferring to the Fund's account
with the Cash Custodian the required amount of cash and cash
equivalents by the end of the next business day following the purchase
order date or by the end of such later business day, not to exceed
three business days after the purchase order date, as agreed to between
the AP and the Cash Custodian when the purchase order is placed (the
``Purchase Settlement Date''). Upon receipt of the deposit amount, the
Cash Custodian directs DTC to credit the number of baskets ordered to
the AP's DTC account on the Purchase Settlement Date. Because orders to
purchase baskets must be placed by 3:00 p.m. E.T., but the total
payment required to create a basket during the continuous offering
period will not be determined until 4:00 p.m. E.T. on the date the
purchase order is received, APs will not know the total amount of the
payment required to create a basket at the time they submit an
irrevocable purchase order for the basket. The Fund's NAV and the total
amount of the payment required to create a basket could rise or fall
substantially between the time an irrevocable purchase order is
submitted and the time the amount of the purchase price in respect
thereof is determined.
Suspension and Rejection of Purchase Orders
According to the Registration Statement, the Sponsor has the
discretion to suspend purchase orders or delay their settlement in
specific situations. These situations may include (1) exchange closures
or trading restrictions, (2) emergencies affecting the handling of cash
equivalents, (3) shareholder protection needs, (4) potential price
limit restrictions on CME Bitcoin Futures Contracts, or (5)
circumstances in which it would not be in the best interest of the Fund
or its investors to accept purchase orders. Purchase orders must
conform to the criteria outlined in the AP agreement and be for whole
baskets. The Sponsor may suspend orders that do not meet these
criteria. The Sponsor, acting by itself or through the distributor or
Transfer Agent, may reject a purchase order or a Creation Basket
Deposit if: (a) it determines that, due to position limits or
otherwise, investment alternatives that will enable the Fund to meet
its investment objective are not available or practicable at that time;
(b) it determines that the purchase order or the Creation Basket
Deposit is not in proper form; (c) it believes that acceptance of the
purchase order or the Creation Basket Deposit would have adverse tax
consequences to the Fund or its investors; (d) the acceptance or
receipt of the Creation Basket Deposit would, in the opinion of counsel
to the Sponsor, be unlawful; (e) circumstances outside the control of
the Sponsor make it, for all practical purposes, not feasible to
process creations of baskets; (f) there is a possibility that any or
all of the CME Bitcoin Futures Contracts of the Fund from which the NAV
of the Fund is calculated will be priced at a dynamic price limit
restriction; \113\ or (g) if, in the sole discretion of the Sponsor,
the execution of such an order would not be in the best interest of the
Fund or its investors.
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\113\ The CME imposes a maximum permitted price range for
futures contracts in each trading session on its futures markets.
When markets reach their price limits, the CME may temporarily halt
trading until such price limits can be expanded, remain price
limited, or suspend trading for the day, based on relevant
regulatory provisions. CME Bitcoin Futures Contracts, like other
futures contracts on the CME, are subject to price limits on a
dynamic basis. At the commencement of each trading day, CME Bitcoin
Futures Contracts are assigned a price limit variant, which equals a
percentage of the prior day's settlement price, or a price deemed
appropriate by the CME. During the trading day, the price limit
variant is applied in rolling 60-minute look-back periods to
establish dynamic lower and upper price fluctuation limits. Price
limits for CME Bitcoin Futures Contracts are published at https://www.cmegroup.com/trading/price-limits.html#cryptocurrencies.
---------------------------------------------------------------------------
Redemption Procedures
According to the Registration Statement, the procedures by which an
AP can redeem one or more Redemption Baskets will mirror the procedures
for the creation of Creation Baskets. On any Business Day, an AP may
place an order with the Transfer Agent to redeem one or more Redemption
Baskets.
The redemption procedures allow APs to redeem Redemption Baskets.
Individual shareholders may not redeem directly from the Fund. By
placing a redemption order, an AP agrees to deliver the Redemption
Baskets to be redeemed through DTC's book entry system to the Fund by
the end of the next Business Day following the effective date of the
redemption order or by the end of such later business day (``Redemption
Settlement Date'').
Determination of Redemption Distribution
According to the Registration Statement, the redemption
distribution from the Fund will consist of an amount of cash and/or
cash equivalents that is in the same proportion to the total assets of
the Fund on the date that the order to redeem is properly received as
the number of Shares to be redeemed under the redemption order is in
proportion to the total number of Shares outstanding on the date the
order is received.
Delivery of Redemption Distribution
The redemption distribution due from a Fund will be delivered to
the AP on the Redemption Settlement Date if the Fund's DTC account has
been credited with the baskets to be redeemed. If the Fund's DTC
account has not been credited with all of the baskets to be redeemed by
the end of such date, the redemption distribution will be delivered to
the extent of whole baskets received. Any remainder of the redemption
distribution will be delivered on the next business day after the
Redemption Settlement Date to the extent of remaining whole baskets
received. Pursuant to information from the Sponsor, the Cash Custodian
will also be authorized to deliver the redemption distribution
notwithstanding that the baskets to be redeemed are not credited to the
Fund's DTC account by 12:00 p.m. E.T. on the Redemption Settlement Date
if the AP has collateralized its obligation to deliver the baskets
through DTC's book-entry system on such terms as the Sponsor may from
time to time determine.
Availability of Information
The NAV for the Fund's Shares will be calculated and disseminated
daily and will be made available to all market participants at the same
time. The intraday, closing prices, and settlement prices of the CME
Bitcoin Futures Contracts will be readily available from the CME
website, automated quotation systems, published or other public
sources, or major market data vendors. Information regarding market
price and trading volume of the Shares will be continually available on
a real-time basis throughout the day on brokers' computer screens and
other electronic services. Information regarding the
[[Page 2465]]
previous day's closing price and trading volume information for the
Shares will be published daily in the financial section of newspapers.
Real-time data for CME Bitcoin Futures Contracts will be available
by subscription through on-line information services. ICE Futures U.S.
and CME also provide delayed futures and options on futures information
on current and past trading sessions and market news free of charge on
their respective websites. The specific contract specifications for CME
Bitcoin Futures Contracts will also be available on such websites, as
well as other financial informational sources. The spot price of
bitcoin is available on a 24-hour basis from major market data vendors,
including Bloomberg and Reuters. Information relating to trading,
including price and volume information, in bitcoin will be available
from major market data vendors and from the trading platforms on which
bitcoin is traded. EFP transaction volumes are reported daily, by
instrument, on the CME website.\114\
---------------------------------------------------------------------------
\114\ Pricing information for EFP transactions in CME Bitcoin
Futures Contracts is reported to the CME Bitcoin Futures Market but
is not publicly available.
---------------------------------------------------------------------------
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the CTA. Quotation information
for cash equivalents and commodity futures may be obtained from brokers
and dealers who make markets in such instruments. Intra-day price and
closing price level information for the Benchmark will be available
from major market data vendors. The real-time version of the Benchmark
value, NQBTC-RT, will be disseminated once every 15 seconds during the
Core Trading Session. The Benchmark components and methodology will be
made publicly available. The IFV will be available through on-line
information services.
In addition, the Fund's website, https://hashdex-etfs.com/, will
display the applicable end of day closing NAV. The daily holdings of
the Fund will be available on the Fund's website. The Fund's website
will also include a form of the prospectus for the Fund that may be
downloaded. The website will include the Shares' ticker and CUSIP
information along with additional quantitative information updated on a
daily basis, including: (1) the prior Business Day's reported NAV and
closing price and a calculation of the premium and discount of the
closing price or mid-point of the bid/ask spread at the time of NAV
calculation (the ``Bid/Ask Price'') against the NAV; and (2) data in
chart format displaying the frequency distribution of discounts and
premiums of the daily closing price or Bid/Ask Price against the NAV,
within appropriate ranges, for at least each of the four previous
calendar quarters. The website disclosure of portfolio holdings will be
made daily and will include, as applicable, (i) the name, quantity,
price, and market value of the Fund's holdings, (ii) the counterparty
to and value of forward contracts and any other financial instruments
tracking the Benchmark, and (iii) the total cash and cash equivalents
held in the Fund's portfolio, if applicable.
The Fund's website will be publicly available at the time of the
public offering of the Shares and accessible at no charge.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Fund.\115\ Trading in Shares of the Fund
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable. These may include: (1) the extent to
which trading is not occurring in the CME Bitcoin Futures Market \116\
and in the securities and/or the financial instruments composing the
daily disclosed portfolio of the Fund; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present.
---------------------------------------------------------------------------
\115\ See NYSE Arca Rule 7.12-E.
\116\ The Sponsor believes that, under normal market conditions,
interruptions or trading halts in individual spot bitcoin markets
are unlikely to impact trading in the Shares unless trading in the
CME Bitcoin Futures Market is also impacted.
---------------------------------------------------------------------------
The Exchange may halt trading during the day in which an
interruption to the dissemination of the IFV or the value of the
Benchmark occurs. The real-time version of the Benchmark value (NQBTC-
RT) will be disseminated once every 15 seconds during the Core Trading
Session. The Benchmark components and methodology will be made publicly
available. If the interruption to the dissemination of the IFV, or to
the value of the Benchmark persists past the trading day in which it
occurred, the Exchange will halt trading no later than the beginning of
the trading day following the interruption. In addition, if the
Exchange becomes aware that the NAV with respect to the Shares is not
disseminated to all market participants at the same time, it will halt
trading in the Shares until such time as the NAV is available to all
market participants.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting
and entry of orders in equity securities traded on the NYSE Arca
Marketplace is $0.01, with the exception of securities that are priced
less than $1.00 for which the MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.500-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.500E(f), which sets forth certain
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting
as registered market makers in Trust Units to facilitate surveillance.
Pursuant to NYSE Arca Rule 8.500-E(f), an ETP Holder acting as a
registered market maker in Trust Units must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the market maker may have or over which it may
exercise investment discretion. No market maker shall trade in an
underlying commodity, related commodity futures or options on commodity
futures, or any other related commodity derivatives, in an account in
which a market maker, directly or indirectly, controls trading
activities, or has a direct interest in the profits or losses thereof,
which has not been reported to the Exchange as required by this Rule.
In addition to the existing obligations under Exchange rules regarding
the production of books and records, the ETP Holder acting as a market
maker in Trust Units shall make available to the Exchange such books,
records or other information pertaining to transactions by such entity
or registered or non-registered employee affiliated with such entity
for its or their own accounts for trading the underlying physical
commodity, related commodity futures or options on commodity futures,
or any other related commodity
[[Page 2466]]
derivatives, as may be requested by the Exchange.
For initial and continued listing as proposed herein, the Fund will
be in compliance with Rule 10A-3 under the Act, and the Trust will rely
on the exception contained in Rule 10A-3(c)(7).\117\ A minimum of
50,000 Shares of the Fund will be outstanding at the commencement of
trading on the Exchange.
---------------------------------------------------------------------------
\117\ See Rule 10A-3(c)(7), 17 CFR 240.10A-3(c)(7) (stating that
a listed issuer is not subject to the requirements of Rule 10A-3 if
the issuer is organized as an unincorporated association that does
not have a board of directors and the activities of the issuer are
limited to passively owning or holding securities or other assets on
behalf of or for the benefit of the holders of the listed
securities).
---------------------------------------------------------------------------
Surveillance
The Exchange represents that trading in the Shares of the Fund will
be subject to the existing trading surveillances administered by the
Exchange, as well as cross-market surveillances administered by FINRA
on behalf of the Exchange, which are designed to detect violations of
Exchange rules and applicable federal securities laws.\118\ The
Exchange represents that these procedures are adequate to properly
monitor Exchange trading of the Shares in all trading sessions and to
deter and detect violations of Exchange rules and federal securities
laws applicable to trading on the Exchange.
---------------------------------------------------------------------------
\118\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and the Fund's
holdings with other markets and other entities that are members of the
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may
obtain trading information regarding trading in the Shares and the
Fund's holdings from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares and the
Fund's holdings from markets and other entities that are members of ISG
or with which the Exchange has in place a comprehensive surveillance-
sharing agreement (``CSSA''). The Exchange is also able to obtain
information regarding trading in the Shares, the underlying bitcoin,
CME Bitcoin Futures Contracts, options on bitcoin futures, or any other
bitcoin derivative through ETP Holders, in connection with such ETP
Holders' proprietary or customer trades which they effect through ETP
Holders on any relevant market. The Exchange can obtain market
surveillance information, including customer identity information, with
respect to transactions (including transactions in futures contracts)
occurring on US futures exchanges, which are members of the ISG. In
addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
Under NYSE Arca Rule 8.500-E(f), an ETP Holder acting as a
registered market maker in the Shares is required to provide the
Exchange with information relating to its trading in the underlying
physical commodity, related commodity futures or options on commodity
futures, or any other related commodity derivatives. Commentary .04 of
NYSE Arca Rule 11.3-E requires an ETP Holder acting as a registered
market maker, and its affiliates, in the Shares to establish, maintain
and enforce written policies and procedures reasonably designed to
prevent the misuse of any material nonpublic information with respect
to such products, any components of the related products, any physical
asset or commodity underlying the product, applicable currencies,
underlying indexes, related futures or options on futures, and any
related derivative instruments (including the Shares). As a general
matter, the Exchange has regulatory jurisdiction over its ETP Holders
and their associated persons, which include any person or entity
controlling an ETP Holder. To the extent the Exchange may be found to
lack jurisdiction over a subsidiary or affiliate of an ETP Holder that
does business only in commodities or futures contracts, the Exchange
could obtain information regarding the activities of such subsidiary or
affiliate through surveillance sharing agreements with regulatory
organizations of which such subsidiary or affiliate is a member.
CME Bitcoin Futures Contracts held by the Fund will be listed on an
exchange that is a member of the ISG or is a market with which the
Exchange has a CSSA.\119\
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\119\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Fund may trade on markets that are members of ISG or with which the
Exchange has in place a CSSA.
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All statements and representations made in this filing regarding
(a) the description of the portfolio or reference asset, (b)
limitations on portfolio holdings or reference assets, or (c) the
applicability of Exchange listing rules specified in this rule filing
shall constitute continued listing requirements for listing the Shares
on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Fund to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Fund is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading of the Shares, the Exchange
will inform its ETP Holders in an information bulletin (``Information
Bulletin'') of the special characteristics and risks associated with
trading the Shares. Specifically, the Information Bulletin will discuss
the following: (1) the risks involved in trading the Shares during the
Early and Late Trading Sessions when an updated IFV will not be
calculated or publicly disseminated; (2) the procedures for purchases
and redemptions of Shares in Creation Baskets and Redemption Baskets
(and that Shares are not individually redeemable); (3) NYSE Arca Rule
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to
learn the essential facts relating to every customer prior to trading
the Shares; (4) how information regarding the IFV is disseminated; (5)
how information regarding portfolio holdings is disseminated; (6) the
requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (7) trading information.
In addition, the Information Bulletin will advise ETP Holders,
prior to the commencement of trading, of the prospectus delivery
requirements applicable to the Fund. The Exchange notes that investors
purchasing Shares directly from the Fund will receive a prospectus. ETP
Holders purchasing Shares from the Fund for resale to investors will
deliver a prospectus to such investors. The Information Bulletin will
also discuss any exemptive, no-action, and interpretive relief granted
by the Commission from any rules under
[[Page 2467]]
the Act. In addition, the Information Bulletin will reference that the
Fund is subject to various fees and expenses described in the
Registration Statement.
The Information Bulletin will also reference the fact that there is
no regulated source of last sale information regarding bitcoin, that
the Commission has no jurisdiction over the trading of Bitcoin as a
commodity, and that the CFTC has regulatory jurisdiction over the
trading of bitcoin futures contracts and options on bitcoin futures
contracts.
The Information Bulletin will also disclose the trading hours of
the Shares and that the NAV for the Shares will be calculated after
4:00 p.m. E.T. each trading day. The Information Bulletin will disclose
that information about the Shares will be publicly available on the
Fund's website.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \120\ that an exchange have rules
that are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\120\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes the proposed rule change is designed to
remove impediments to and perfect the mechanism of a free and open
market and, in general, to protect investors and the public interest
because it reflects the Fund's proposed investment strategy, through
which the Fund would seek to achieve its investment objectives by
investing in both CME Bitcoin Futures Contracts and bitcoin, in
addition to being able to hold part of its net assets in cash. The
Exchange believes that the Fund's strategy of holding a mix of bitcoin,
CME Bitcoin Futures Contracts, and cash would remove impediments to and
perfect the mechanism of a free market and protect investors and the
public interest, offering investors exposure to bitcoin without relying
on unregulated products or markets. The Exchange also believes that the
Sponsor has designed the Fund to include features intended to provide a
robust framework for mitigating the risks of market manipulation, such
as its proposed use of futures-based pricing for bitcoin in calculating
the Fund's NAV, EFP transactions through the CME Bitcoin Futures Market
to acquire and dispose of bitcoin, and cash creations and redemptions,
which would remove impediments to and perfect the mechanism of a free
and open market and promote the protection of investors and the public
interest. Finally, the Exchange believes that, given these features of
the Fund, the CME Bitcoin Futures Market should be considered the
regulated market of significant size in relation to the Fund and that
there is a reasonable likelihood that a person attempting to manipulate
the Fund would also have to trade on the CME Bitcoin Futures Market to
do so, such that information shared between CME and NYSE Arca pursuant
their common ISG membership would aid NYSE Arca in detecting and
deterring potential misconduct, and that it is unlikely that trading in
the Fund would be the predominant influence on the CME Bitcoin Futures
Market.
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices and to protect
investors and the public interest in that the Shares would be listed
and traded on the Exchange pursuant to the initial and continued
listing criteria in NYSE Arca Rule 8.500-E. The Exchange has in place
surveillance procedures that are adequate to properly monitor trading
in the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and the Fund's
holdings with other markets and other entities that are members of the
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may
obtain trading information regarding trading in the Shares and the
Fund's holdings from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares and the
Fund's holdings from markets and other entities that are members of ISG
or with which the Exchange has in place a CSSA. The Exchange is also
able to obtain information regarding trading in the Shares and the
Fund's holdings through ETP Holders, in connection with such ETP
Holders' proprietary or customer trades which they effect through ETP
Holders on any relevant market. The Exchange can obtain market
surveillance information, including customer identity information, with
respect to transactions (including transactions in CME Bitcoin Futures
Contracts) occurring on US futures exchanges, which are members of the
ISG. The intraday, closing prices, and settlement prices of CME Bitcoin
Futures Contracts and bitcoin will be readily available from the
applicable futures exchange websites, automated quotation systems,
published or other public sources, or major market data vendors website
or on-line information services. Information regarding market price and
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other
electronic services.
Real-time data for CME Bitcoin Futures Contracts will be available
by subscription from on-line information services. ICE Futures U.S. and
CME also provide delayed futures information on current and past
trading sessions and market news free of charge on the Fund's website.
The specific contract specifications for CME Bitcoin Futures Contracts
will also be available on such websites, as well as other financial
informational sources. The spot price of bitcoin is available on a 24-
hour basis from major market data vendors, including Bloomberg and
Reuters. Information relating to trading, including price and volume
information, in bitcoin will be available from major market data
vendors and from the trading platforms on which bitcoin is traded. EFP
transaction volumes are reported daily, by instrument, on the CME
website. Quotation and last-sale information regarding the Shares will
be disseminated through the facilities of the CTA. The IFV will be
disseminated on a per Share basis every 15 seconds during the
Exchange's Core Trading Session and be widely disseminated by one or
more major market data vendors during the NYSE Arca Core Trading
Session. The Fund's website will also include a form of the prospectus
for the Fund that may be downloaded. The website will include the
Share's ticker and CUSIP information along with additional quantitative
information updated on a daily basis, including, for the Fund: (1) the
prior business day's reported NAV and closing price and a calculation
of the premium and discount of the closing price or mid-point of the
Bid/Ask Price against the NAV; and (2) data in chart format displaying
the frequency distribution of discounts and premiums of the daily
closing price or Bid/Ask Price against the NAV, within appropriate
ranges, for at least each of the four previous calendar quarters. The
website disclosure of portfolio holdings will be made daily and will
include, as applicable, (i) the name, quantity, price, and market value
of CME Bitcoin Futures Contracts, (ii) the counterparty to and value of
forward contracts, and
[[Page 2468]]
(iii) other financial instruments, if any, and the characteristics of
such instruments and cash equivalents, and amount of cash held in the
Fund's portfolio, if applicable.
Trading in Shares of the Fund will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12-E have been reached or because of
market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) the
extent to which trading is not occurring in BTC and/or MBT Contracts
and the securities and/or the financial instruments composing the daily
disclosed portfolio of the Fund; or (2) whether other unusual
conditions or circumstances detrimental to the maintenance of a fair
and orderly market are present.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
Trust Units based on bitcoin that will enhance competition among market
participants, to the benefit of investors and the marketplace. As noted
above, the Exchange has in place surveillance procedures that are
adequate to properly monitor trading in the Shares in all trading
sessions and to deter and detect violations of Exchange rules and
applicable federal securities laws.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of the
Shares, which are Trust Units based on bitcoin and that will enhance
competition among market participants, to the benefit of investors and
the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NYSEARCA-2023-58 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NYSEARCA-2023-58. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NYSEARCA-2023-58 and should
be submitted on or before February 2, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\121\
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\121\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00498 Filed 1-11-24; 8:45 am]
BILLING CODE 8011-01-P