[Federal Register Volume 89, Number 127 (Tuesday, July 2, 2024)]
[Notices]
[Pages 54868-54878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-14516]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100434; File No. SR-NASDAQ-2024-028]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Proposed Rule Change To List and Trade Shares of
the Hashdex Nasdaq Crypto Index US ETF Under Nasdaq Rule 5711(d)
June 26, 2024.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 17, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. The
[[Page 54869]]
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the Hashdex
Nasdaq Crypto Index US ETF (the ``Trust'') under Nasdaq Rule 5711(d).
The units of the Trust are referred to herein as the ``Shares.''
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade Shares of the Trust under
Nasdaq Rule 5711(d), which governs the listing and trading of
``Commodity-Based Trust Shares.'' The Trust is managed and controlled
by the Hashdex Asset Management Ltd. (``Sponsor'') and administered by
Tidal ETF Services LLC (the ``Administrator''). The Shares will be
registered with the SEC by means of the Trust's registration statement
on Form S-1 (the ``Registration Statement'').\3\
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\3\ The Registration Statement is not yet effective and the
Shares will not trade on the Exchange until such time that the
Registration Statement is effective.
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Description of the Trust
The Shares will be issued by the Trust, a Delaware statutory trust
to be established by the Sponsor. The Trust will operate pursuant to
the rules and guidelines set forth in the Trust agreement (``Trust
Agreement''). The Trust will issue Shares representing fractional
undivided beneficial interests in its net assets. The assets of the
Trust will consist of bitcoin and ether. Under limited circumstances,
the Trust will hold cash to bear its expenses. The Trust will not be an
investment company registered under the Investment Company Act of 1940,
as amended (the ``1940 Act''), and will not be a commodity pool under
the Commodity Exchange Act.
U.S. Bancorp Fund Services, LLC will be the sub-administrator, and
transfer agent for the Trust (``Sub-Administrator'' or ``Transfer
Agent''). U.S. Bank, N.A. will hold the Trust's cash and/or cash
equivalents \4\ (``Cash Custodian''). The Sponsor intends to enter into
an agreement with Coinbase Custody Trust Company, LLC and BitGo Trust
Company, Inc. (``Crypto Custodians'', and together with the Cash
Custodian, the ``Custodians''). The Crypto Custodians will keep custody
of all the Trust's bitcoin and ether.\5\
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\4\ ``Cash equivalents'' include short-term treasury bills (90
days or less to maturity), money market funds, and demand deposit
accounts. The Trust does not hold, invest in, or trade in crypto
assets that are linked to any fiat currency (i.e., stablecoins).
\5\ The Trust may engage additional custodians for its crypto
assets, each of whom may be referred to as a Crypto Custodian. The
Trust may also remove or change current Crypto Custodians, provided
that there is at least one Crypto Custodian at all times.
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The Trust's Investment Objective
The investment objective of the Trust is to have the daily changes
in the net asset value (``NAV'') of the Shares correspond to the daily
changes in the price of the Nasdaq Crypto US Settlement Price Index,\6\
NCIUSS (the ``NCIUSS'' or ``Index''), less expenses and liabilities
from the Trust's operations, by investing in bitcoin and ether.
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\6\ See https://indexes.nasdaqomx.com/docs/Methodology_NCIUS.pdf.
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The Shares are designed to provide a straightforward means of
obtaining investment exposure to bitcoin and ether through the public
securities market, as opposed to direct acquisition, holding, and
trading of spot crypto assets on a peer-to-peer or other basis or via a
crypto asset platform. The Shares have been designed to remove the
obstacles represented by the complexities and operational burdens
involved in a direct investment in bitcoin and ether, while at the same
time having an intrinsic value that reflects, at any given time, the
investment exposure to the assets owned by the Trust at such time, less
the Trust's expenses and liabilities. The Shares provide investors with
an alternative method of achieving exposure to the crypto asset markets
through the public securities market, which may be more familiar to
them.
The Trust will gain exposure to crypto assets by buying spot
bitcoin and spot ether. The Trust will maintain cash balances to the
extent it is necessary for currently due Trust-payable expenses.
If there are no Share redemption orders or currently due Trust-
payable expenses, the Trust's portfolio is expected to consist of
bitcoin and ether. The Trust will not invest in any other spot crypto
asset besides bitcoin and ether. The Trust will not invest in crypto
securities, tokenized assets or stablecoins. As of May 27, 2024, the
crypto asset constituents of the Index (``Index Constituents'') and
their weightings \7\ were as follows:
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\7\ The Index Constituents will be weighted according to their
relative free float market capitalizations, as described in the next
section ``The Trust's Benchmark''.
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Constituents Weight (%)
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Bitcoin (BTC)............................................... 70.54
Ether (ETH)................................................. 29.46
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The Sponsor will employ a passive investment strategy that is
intended to track the changes in the Index regardless of whether the
Index goes up or goes down, meaning that the Sponsor will not try to
``beat'' the Index. The Trust's passive investment strategy is designed
to allow investors to purchase and sell the Shares for the purpose of
investing in the Index, whether to hedge the risk of losses in their
Index-related transactions or gain price exposure to the Index. The
Trust's investments will be consistent with the Trust's investment
objective and will not be used to enhance leverage. That is, given its
passive investment strategy, the Trust'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 Trust's Index.
None of the Trust, the Sponsor, any Crypto Custodian, or any other
person associated with the Trust will, directly or indirectly, engage
in action where any portion of the Trust's ether becomes subject to the
Ethereum proof-of-stake validation or is used to earn additional ether
or generate income or other earnings.
From time to time, the Trust may be entitled to or come into
possession of rights to acquire, or otherwise establish dominion and
control over, any crypto asset (for avoidance of doubt, other than
bitcoin and ether) or other asset or right, which rights are incident
to the Trust's ownership of bitcoin or ether and arise without any
action of the Trust, or of the Sponsor (``Incidental Rights'') and/or
crypto assets, or other assets or rights, acquired by the Trust through
the exercise of any Incidental Right (``IR Virtual Currency'') by
virtue of its
[[Page 54870]]
ownership of bitcoin or ether, generally through a fork in the Bitcoin
or Ethereum blockchain, an airdrop offered to holders of bitcoin or
ether or other similar event.
With respect to a fork, airdrop or similar event, the Sponsor will
cause the Trust to permanently and irrevocably abandon any such
Incidental Rights and IR Virtual Currency and no such Incidental Right
or IR Virtual Currency shall be taken into account for purposes of
determining the NAV of the Trust.
In the event that any other crypto asset is included (other than
bitcoin or ether), or is eligible for inclusion as an Index Constituent
(as defined below), the Sponsor will transition the Trust's investment
strategy from full replication \8\ to sample replication,\9\ with only
bitcoin and ether in the same proportions determined by the Index, and
determine whether a filing with the Commission under Rule 19b-4 of the
Act will be required.
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\8\ Full replication is an investment strategy where the fund
invests in all the components of the index in their exact weights,
providing precise tracking of the index performance.
\9\ Sample replication is a strategy where the fund invests in a
representative sample of the index components, which may not include
all index components, to achieve similar performance. This approach
is typically used to reduce costs or when full replication is
impractical.
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The Trust's Benchmark
The Trust will use the Index as a reference to track and measure
its performance compared to the price performance of the markets for
the Index Constituents and for valuation purposes when calculating the
Trust's NAV.
The Index is designed to measure the performance of a portion of
the overall crypto asset market. The Index does not track the overall
performance of all crypto assets generally, nor the performance of any
specific crypto assets. The Index is owned and administered by Nasdaq,
Inc. (``Index Provider'') and is calculated by CF Benchmarks Limited
(``Calculation Agent''), which is experienced in calculating and
administering crypto assets indices. The Calculation Agent publishes
daily the Index Constituents, the Index Constituents' weightings, the
intraday value of the Index (under the ticker NCIUS), and the daily
settlement value of the Index (under the ticker NCIUSS), which is
effectively the Index's closing value.
The Index is derived from a rules-based methodology (``Index
Rules''), which is overseen by the Nasdaq Cryptocurrency Index
Oversight Committee (``NCIOC''). The NCIOC governs the Index and is
responsible for its implementation, administration, and general
oversight, including assessing crypto assets for eligibility,
adjustments to account for regulatory changes and periodic methodology
reviews. The Index Rules may only be changed by the Index Provider with
the approval of the NCIOC. Neither the Trust, nor the Sponsor have
control over the Index Rules or the Index administration. Changes to
Index Rules may result in adverse effects to the Trust and/or in the
ability of the Sponsor to implement the Trust's investment strategy.
Crypto assets are eligible for inclusion in the Index if they
satisfy the criteria set forth under the Nasdaq Crypto US Index
methodology, which includes being currently listed on a U.S.-regulated
digital asset trading platform or serving as the underlying asset for a
derivative instrument listed on a U.S.-regulated derivatives platform.
The Index adjusts its constituents and weightings on a quarterly basis
to reflect changes in the crypto asset markets.
Pursuant to the Index Rules, to be eligible for inclusion in the
Index, crypto assets must meet the following criteria on a quarterly
basis:
(1) Have active tradable markets listed on at least two Core Crypto
Platforms (as defined below) for the entire period since the previous
Index reconstitution;
(2) Be supported by at least one Core Custodian (as defined below)
for the entire period since the previous Index reconstitution.
(3) To be considered for entry to the Index at any Index
reconstitution, an asset must have a median daily trading volume in the
USD pair conducted across all Core Crypto Platforms that is no less
than 0.5% of the cryptocurrency asset that has the highest median daily
trading volume.
(4) Be currently listed on a U.S.-regulated digital asset trading
platform or serve as the underlying asset for a derivative instrument
listed on a U.S.-regulated derivatives platform.
(5) Have free-floating pricing (i.e., not be pegged to the value of
any asset).
If a crypto asset meets requirements (1) through (5), it will be
considered eligible for Index inclusion.
Notwithstanding inclusion in the eligible list, the NCIOC reserves
the right to further exclude any additional assets based on one or more
factors, including but not limited to its risk of being deemed a
security by United States Securities laws along with its review of
general reputational, fraud, manipulation, or security concerns
connected to the asset. Assets that, in the sole discretion of the
Nasdaq Crypto Index Oversight Committee, do not offer utility, do not
facilitate novel use cases, or that do not exhibit technical,
structural or cryptoeconomic innovation (e.g., assets inspired by memes
or internet jokes) may also be excluded.
The Index will assess any crypto assets resulting from a hard fork
or an airdrop under the same criteria as established digital assets and
will only include a new digital asset if it meets the eligibility
criteria set forth above.
Moreover, notwithstanding the above, the Sponsor will not invest
the Trust's assets in any other crypto assets (i.e., other than bitcoin
and ether), even if such other crypto assets are included in the Index
pursuant to the Index Rules and the eligibility criteria above.
The Index Constituents will be weighted according to their relative
free float market capitalizations. The free float market capitalization
of an Index Constituent on any given day is defined as the product of
an Index Constituent Settlement Price (as defined below) and its
Circulating Supply \10\ as set in the most recent reconstitution.
Weights are calculated by dividing the free float market capitalization
of a digital asset by the total free float market capitalization of all
Index Constituents at the time of rebalancing.
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\10\ The Index will utilize ``Circulating Supply'' of an Index
Constituent for all calculations of free float market capitalization
and the determination of constituent weights. Circulating Supply is
defined as the total supply of all units of a digital asset issued
outside of the codebase since the initial block on a digital asset's
blockchain or since the point of inception of the digital asset on a
cryptographic distributed ledger that can be ``spent'' or moved from
one deposit address to another that is deemed to be likely to be
available for trading as defined by the Calculation Agent and
described by the methods in the CF Cryptocurrency Index Family Multi
Asset Ground Rules (section 4.2.1 to 4.3.1.2.1). Circulating Supply
data will be determined at the block height or ledger number which
is the last confirmed block or ledger number at 16:00:00 UTC on the
day that is eight (8) business days immediately preceding the
relevant Reconstitution Date. Where the Calculation Agent cannot
reliably determine any of the respective inputs for the calculation
of the Circulating Supply for a given crypto asset that is an Index
Constituent then its Circulating Supply shall be approximated. This
will be done by applying the Median Free Float Factor (Circulating
Supply/Total Supply) that has been determined for that
reconstitution of all Index Constituents to the Total Supply
(Circulating Supply = Total Supply X Median Free Float Factor).
During reconstitution, updated Circulating Supply of crypto assets
will be set and will remain fixed until the next reconstitution. The
Index fixes Circulating Supply of Index Constituents between
reconstitutions in order to preserve the investability property of
the Index.
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As set forth in the Index methodology, a ``Core Crypto Platform''
is a crypto asset platform that, in the opinion of the NCIOC, exhibits
at a minimum the following characteristics:
(1) Have strong forking controls;
(2) Have effective anti-money laundering controls;
[[Page 54871]]
(3) Have a reliable and transparent application programming
interface (API) 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; \11\
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\11\ According to the Index methodology, to demonstrate active
capacity management, Core Crypto 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.
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(9) Evidence cooperation with regulators and law enforcement; and
(10) Have a minimum market representation for trading volume.\12\
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\12\ According to Index methodology, to compute an exchange's
market size, the NCIOC sums the U.S. Dollar (``USD'') volume of all
eligible crypto asset-USD pairs for the month of August each year. A
Core Crypto Platform must have at least 0.05% of the total volume in
eligible exchanges.
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The list of existing Core Crypto Platforms will be recertified by
the NCIOC at a minimum on an annual basis.
The Core Crypto Platforms as of May 27, 2024 are BitStamp,
Coinbase, Gemini, itBit, and Kraken.
The Index methodology defines a ``Core Custodian'' to be a crypto
assets custodian that, in the opinion of the NCIOC, exhibits the
following characteristics:
(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 Custodian, creditors or the estate should have no
rights to the client's assets.
(2) Offer segregated individual accounts and store crypto assets in
segregated individual accounts and not in omnibus accounts. Custodians
must not allow securities lending against digital 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 Crypto 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) Offers redemption processes for timely and secure transfer of
digital assets and allows account holders to set withdrawal
authorization restrictions such as whitelisting and multi-user account
controls.
(6) Must support the Index's forking policy and allow the split of
assets to be reflected in the Index asset holdings.
(7) Have a comprehensive risk management policy and formalized
framework for managing operational and custody risks, including a
disaster recovery program that ensures continuity of operations in the
event of a system failure. The Crypto Custodian must have a business
continuity plan to help ensure continued customer access to the assets.
(8) Is licensed as a Custodian by a reputable and independent
governing body (e.g., the U.S. Securities and Exchange Commission, the
New York State Department of Financial Services, or other state,
national or international regulators), as can be ascertained by certain
public data sources.
(9) Provides third-party audit reports at least annually on
operational and security processes. This audit may be completed either
by having a full SOC2 certification issued or the third-party auditor
providing an attest report based off the full SOC2 methodology.
(10) Have an insurance policy that covers, at least partially,
third-party theft of private keys, insider theft from internal
employees, and loss of keys.
A Core Custodian might lose eligibility if it does not comply with
the above requirements or with any other NCIOC requirements.
The NCIOC will review new Core Custodian candidates throughout the
year and announce any new additions when approved. The list of existing
Core Custodians will be recertified by the NCIOC at a minimum on an
annual basis. Changes to the list of Core Custodians may be made by the
approval of the NCIOC and announced accordingly in the case of
exceptional events or in order to maintain the integrity of the Index.
The Core Custodians as of May 27, 2024 are BitGo, Coinbase,
Fidelity and Gemini. The Trust's crypto assets must at all times be
drawn only from the Core Custodians.
The Index will be reconstituted and rebalanced quarterly, on the
first Business Day in March, June, September, and December (each a
``Reconstitution Date'').
The settlement price of each Index Constituent (``Index Constituent
Settlement Price'') is calculated once every trading day by applying a
publicly available rules-based pricing methodology (the ``Pricing
Methodology'') to a diverse collection of pricing sources to provide an
institutional-grade reference price for each constituent. The Pricing
Methodology 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 Index Constituent
Settlement Price is the Time Weighted Average Price (``TWAP'')
calculated across the volume weighted average prices (``VWAPs'') for
each minute in the settlement price window, which is between 3:50:00
and 4:00:00 p.m. New York time, on all Core Crypto Platforms. 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.
The Pricing Methodology 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
when three or more contributing Core Crypto Platforms contribute
pricing for a constituent asset: abnormal price penalties, abnormal
volatility penalties, and abnormal volume penalties. These penalties
are defined as adjustment factors to the weight of information from
each platform that contributes pricing information based on the
deviation of a platform's price, volatility, or volume from the median
across all exchanges. For example, if a Core Crypto Platform's price is
2.5 standard deviations away from the median price, its price penalty
factor will be a 1/2.5 multiplier.
The Sponsor believes that the NCIUSS is a suitable Index for the
Trust for several reasons. First, it would provide reliable pricing for
purposes of tracking the actual performance of the crypto asset markets
for the Index Constituents. Second, it is administered by a reputable
index administrator that is not affiliated with the Sponsor or
Trust,\13\
[[Page 54872]]
which provides assurances of accountability and independence. Finally,
its Pricing Methodology is designed to resist potential price
manipulation from unregulated crypto markets by applying the following
safeguards:
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\13\ 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 NCIUSS
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. NCIUSS is administered and
governed by the NCIOC in accordance with the publicly available
NCIUS methodology. The NCIOC oversees all aspects of the
administration of the NCIUSS, including the defined processes and
controls for the selection and monitoring of third parties such as
the Core Crypto Platforms and Core Custodians, 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) Requiring that constituents be listed on a U.S.-regulated
crypto asset trading platform or serve as the underlying asset for a
derivative instrument listed on a U.S.-regulated derivatives platform
(2) Strict eligibility criteria for the Core Crypto Platforms from
which the Index data is drawn;
(3) A diverse collection of trustworthy pricing sources to provide
an institutional-grade reference price for the Index Constituents; and
(4) The use of adjustment factors to mitigate against the impact of
any anomalous trading activity on the Index Constituent Settlement
Prices.
Custody of the Trust's Crypto Assets
An investment in the Shares is backed by assets held by the Trust,
including the bitcoin and ether held by the Crypto Custodians on behalf
of the Trust. The Crypto Custodians must qualify as Core Custodians by
the NCIOC and, thus satisfy at least the requirements set forth by the
NCIOC in the NCIUSS methodology.\14\ The Trust may engage additional
custodians for its crypto assets and may also remove or change current
Crypto Custodians, provided that there is at least one Crypto Custodian
at all times.
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\14\ See https://indexes.nasdaqomx.com/docs/Methodology_NCIUS.pdf.
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The Trust's Crypto Custodians will hold and be responsible for
maintaining custody of the Trust's bitcoin and ether. The Sponsor will
cause the Trust to maintain ownership and control of the Trust's
bitcoin in a manner consistent with good delivery requirements for spot
commodity transactions.
All of the Trust's crypto assets will be held in one or more
accounts in the name of the Trust (each a ``Custody Account'' and
together the ``Custody Accounts''), other than the Trust's assets which
are temporarily maintained in a trading account under limited
circumstances (``Trading Account''), i.e., in connection with creation
and redemption basket activity or sales of crypto assets deducted from
the Trust's holdings in payment of Trust expenses or the Sponsor's fee
(or, in extraordinary circumstances, upon liquidation of the Trust).
The Custody Accounts include all the Trust's assets held at the Crypto
Custodians but do not include the Trust's crypto temporarily maintained
in the Trading Account from time to time. The hardware, software,
systems, and procedures of the Crypto Custodians may not be available
or cost-effective for many investors to access directly.
The Trust's bitcoin, ether and cash holdings from time to time may
temporarily be maintained in the Trading Account. The Sponsor intends
to execute an agreement so Coinbase Inc. can serve as the Trust's
``Prime Execution Agent'' (``Prime Execution Agent Agreement''). In
this capacity, the Prime Execution Agent will facilitate the buying and
selling of crypto assets by the Trust in response to cash creations and
redemptions between the Trust and registered broker-dealers that are
Depositary Trust Company (``DTC'') participants that enter into an
authorized participant agreement with the Sponsor (``Authorized
Participants''), and the sale of crypto assets to pay the Sponsor's
fee, any other Trust expenses not assumed by the Sponsor, to the extent
applicable, and in extraordinary circumstances, in connection with the
liquidation of the Trust's assets.
Creation and Redemption of Shares
The Trust issues and redeems ``Baskets'' \15\ on a continuous
basis. Baskets are issued or redeemed only in exchange for an amount of
cash determined by the Sponsor or the Administrator on each Business
Day. No Shares are issued unless the Cash Custodian has allocated to
the Trust's account the corresponding amount of cash. Baskets may be
created or redeemed only by Authorized Participants. Each Authorized
Participant must be registered as a broker-dealer under the Exchange
Act and regulated by the FINRA, or exempt from being, or otherwise not
required to be, so regulated or registered, and must be qualified to
act as a broker or dealer in the states or other jurisdictions where
the nature of its business so requires.
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\15\ Baskets will be offered continuously at NAV per Share for
10,000 Shares. Therefore, a Basket of Shares would be valued at NAV
per Share multiplied by the Basket size and the crypto asset
required to be delivered in exchange for a creation of a Basket
would equal the dollar value of the NAV per Share multiplied by the
Basket size for such creations. The Trust may change the number of
Shares in a Basket. Only Authorized Participants may purchase or
redeem Baskets. Shares will be offered to the public from time to
time at varying prices that will reflect the price of crypto assets
and the trading price of the Shares on Nasdaq at the time of the
offer.
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The Authorized Participants will deliver only cash to create Shares
and will receive only cash when redeeming Shares. Further, Authorized
Participants will not directly or indirectly purchase, hold, deliver,
or receive a crypto asset 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 crypto assets as part of
the creation or redemption process.
The Trust will create Shares by receiving crypto assets from a
third party that is not the Authorized Participant, and the Trust--not
the Authorized Participant--is responsible for selecting the third
party to deliver the assets. Further, the third party will not be
acting as an agent of the Authorized Participant with respect to the
delivery of the crypto assets to the Trust or acting at the direction
of the Authorized Participant with respect to the delivery of the
crypto assets to the Trust. The Trust will redeem Shares by delivering
crypto assets to a third party that is not the Authorized Participant,
and the Trust--not the Authorized Participant--is responsible for
selecting the third party to receive the assets. Further, the third
party will not be acting as an agent of the Authorized Participant with
respect to the receipt of the crypto assets from the Trust or acting at
the direction of the Authorized Participant with respect to the receipt
of the crypto assets from the Trust. The third-party will be
unaffiliated with the Trust and the Sponsor.
In connection with cash creations and cash redemptions, the
Authorized Participants will submit orders to create or redeem Baskets
\16\ of Shares exclusively in exchange for cash. The Trust will engage
in crypto transactions to convert cash into crypto assets (in
association with creation orders) and crypto assets into cash (in
association with redemption orders). The Trust will conduct its crypto
asset purchase and sale transactions by, in its sole discretion,
choosing to trade directly with designated third parties (each, a
[[Page 54873]]
``Crypto Trading Counterparty''), who are not registered broker-dealers
pursuant to written agreements between each such Crypto Trading
Counterparty and the Trust, or choosing to trade through the Prime
Execution Agent acting in an agency capacity with third parties
pursuant to the Prime Execution Agent Agreement. Crypto Trading
Counterparties settle trades with the Trust using their own accounts at
the Prime Execution Agent when trading with the Trust.
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\16\ The Trust issues and redeems Shares only in blocks or
``Baskets'' of 10,000 or integral multiples thereof. These
transactions take place in exchange for crypto assets.
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For a creation of a Basket of Shares, the Authorized Participant
will be required to submit the creation order by an early order cutoff
(``Creation Early Cutoff Time''). The Creation Early Cutoff Time will
initially be 6:00 p.m. ET on the business day prior to trade date.
On the date of the Creation Early Cutoff Time for a creation order,
the Trust will choose, in its sole discretion, to enter into a
transaction with a Crypto Trading Counterparty (or the Prime Execution
Agent) to buy crypto assets in exchange for the cash proceeds from such
creation order. On the settlement date for a creation, the Trust will
deliver Shares to the Authorized Participant in exchange for cash
received from the Authorized Participant. Also, on or around the
settlement date, the Crypto Trading Counterparty or Prime Execution
Agent, as applicable, will deposit the required assets pursuant to its
trade with the Trust into the Trust's Trading Account in exchange for
cash. In the event the Trust has not been able to successfully execute
and complete settlement of a crypto transaction by the settlement date
of the creation order, the Authorized Participant will be given the
option to (1) cancel the creation order, or (2) accept that the Trust
will continue to attempt to complete the execution, which will delay
the settlement date of the creation order. With respect to a creation
order, as between the Trust and the Authorized Participant, the
Authorized Participant is responsible for the dollar cost of the
difference between the crypto asset price utilized in calculating NAV
per Share on trade date and the price at which the Trust acquires the
asset to the extent the price realized in buying the crypto asset is
higher than the price utilized in the NAV. To the extent the price
realized in buying the crypto asset is lower than the price utilized in
the NAV, the Authorized Participant shall keep the dollar impact of any
such difference.
Because the Trust's Trading Account may not be funded with cash on
trade date for the purchase of crypto assets associated with a cash
creation order, the Trust may borrow trade credits (``Trade Credits'')
in the form of cash from the ``Trade Credit Lender'', under a trade
financing agreement (``Trade Financing Agreement'') or may require the
Authorized Participant to deliver the required cash for the creation
order on trade date. The extension of Trade Credits on trade date
allows the Trust to purchase crypto assets through the Prime Execution
Agent on trade date, with such assets being deposited in the Trust's
Trading Account. On settlement date for a creation order, the Trust
delivers Shares to the Authorized Participant in exchange for cash
received from the Authorized Participant. To the extent Trade Credits
were utilized, the Trust uses the cash to repay the Trade Credits
borrowed from the Trade Credit Lender. On settlement date for a
creation order, the crypto assets purchased are swept from the Trust's
Trading Account to the Custody Account pursuant to a regular end-of-day
sweep process.
For a redemption of a Basket of Shares, the Authorized Participant
will be required to submit a redemption order by an early order cutoff
(the ``Redemption Early Cutoff Time''). The Redemption Early Cutoff
Time will initially be 6:00 p.m. ET on the business day prior to trade
date. On the date of the Redemption Early Cutoff Time for a redemption
order, the Trust may choose, in its sole discretion, to enter into a
transaction with a Crypto Trading Counterparty or the Prime Execution
Agent, to sell crypto assets in exchange for cash. After the Redemption
Early Cutoff Time, the Trust will instruct the Crypto Custodian to
prepare to move the associated assets from the Trust's Custody Account
to the Trading Account. On the settlement date for a redemption order,
the Authorized Participant will deliver the necessary Shares to the
Trust, and on or around settlement date, a Crypto Trading Counterparty
or Prime Execution Agent, as applicable, will deliver the cash
associated with the Trust's sale of crypto assets to the Trust in
exchange for the Trust's crypto assets, and the Trust will deliver cash
to the Authorized Participant. In the event the Trust has not been able
to successfully execute and complete settlement of a crypto transaction
by the settlement date, the Authorized Participant will be given the
option to (1) cancel the redemption order, or (2) accept that the Trust
will continue to attempt to complete the execution, which will delay
the settlement date. With respect to a redemption order, between the
Trust and the Authorized Participant, the Authorized Participant will
be responsible for the dollar cost of the difference between the crypto
asset price utilized in calculating the NAV per Share on trade date and
the price realized in selling the crypto asset to raise the cash needed
for the cash redemption order to the extent the price realized in
selling the asset is lower than the price utilized in the NAV. To the
extent the price realized in selling the crypto asset is higher than
the price utilized in the NAV, the Authorized Participant will keep the
dollar impact of any such difference.
The Trust may use financing in connection with a redemption order
when crypto assets remain in the Custody Account at the point of
intended execution of a sale of a crypto asset. In those circumstances,
the Trust may borrow Trade Credits in the form of crypto assets from
the Trade Credit Lender, which allows the Trust to sell crypto assets
through the Prime Execution Agent on trade date, and the cash proceeds
are deposited in the Trading Account. On settlement date for a
redemption order, the Trust delivers cash to the Authorized Participant
in exchange for Shares received from the Authorized Participant. In the
event financing was used, the Trust will use the crypto assets moved
from the Custody Account to the Trading Account to repay the Trade
Credits borrowed from the Trade Credit Lender.
Net Asset Value
The Trust'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 assets of the Trust
will consist of bitcoin, ether, cash and cash equivalents. The Sponsor
has the exclusive authority to determine the Trust's NAV, which it has
delegated to the Administrator.
The Administrator of the Trust will calculate the NAV once each
Business Day, as of the earlier of the close of the Nasdaq or 4:00 p.m.
New York time. For purposes of making these calculations, a Business
Day means any day other than a day when Nasdaq is closed for regular
trading (``Business Day'').
In determining the Trust's bitcoin and ether holdings, the
Administrator will value the Index Constituents held by the Trust based
on the Index Constituent Settlement Price, unless the prices are not
available or the Administrator, in its sole discretion, determines that
the Index Constituent Settlement Price is unreliable (``Fair Value
Event''). In the instance of a Fair Value Event, the Trust's holdings
may be fair valued on a temporary basis in accordance with the fair
value policies approved by the Administrator.
[[Page 54874]]
In the instance of a Fair Value Event and pursuant to the
Administrator's fair valuation policies and procedures, VWAP or Volume
Weighted Median Prices (``VWMP'') from another index administrator
(``Secondary Index'') will be utilized.
If a Secondary Index is also not available or the Administrator in
its sole discretion determines the Secondary Index is unreliable, the
price set by the Trust's principal market as of 4:00 p.m. ET, on the
valuation date will be utilized. In the event the principal market
price is not available or the Administrator in its sole discretion
determines the principal market valuation is unreliable, the
Administrator will use its best judgment to determine a good faith
estimate of fair value. The Administrator identifies and determines the
Trust's principal market (or in the absence of a principal market, the
most advantageous market) for crypto assets consistent with the
application of fair value measurement framework in FASB ASC 820-10.\17\
The principal market is the market where the reporting entity would
normally enter into a transaction to sell the asset or transfer the
liability. The principal market must be available to and be accessible
by the reporting entity. The reporting entity is the Trust.
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\17\ See FASB (Financial Accounting Standards Board) Accounting
standards codification (ASC) 820-10. For financial reporting
purposes only, the Trustee has adopted a valuation policy that
outlines the methodology for valuing the Trust's assets. The policy
also outlines the methodology for determining the principal market
(or in the absence of a principal market, the most advantageous
market) in accordance with FASB ASC 820-10.
---------------------------------------------------------------------------
If the Index Constituent Settlement Price is not used to determine
the Trust's crypto asset holdings, owners of the beneficial interests
of Shares (the ``Shareholders'') will be notified in a prospectus
supplement or on the Trust's website and, if this index change is on a
permanent basis, a filing with the Commission under Rule 19b-4 of the
Act will be required.
A Fair Value Event value determination will be based upon all
available factors that the Sponsor or the Administrator deems relevant
at the time of the determination and may be based on analytical values
determined by the Sponsor or Administrator using third-party valuation
models. Fair value policies approved by the Administrator will seek to
determine the fair value price that the Trust might reasonably expect
to receive from the current sale of that asset or liability in an
arm's-length transaction on the date on which the asset or liability is
being valued consistent with ``Relevant Transactions''.\18\
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\18\ A ``Relevant Transaction'' is any crypto asset versus U.S.
dollar spot trade that occurs during the observation window between
3:00 p.m. and 4:00 p.m. ET on a ``Core Crypto Platform'' in the BTC/
USD pair that is reported and disseminated by a Core Crypto Platform
through its publicly available application programming interface and
observed by the index administrator.
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Indicative Trust Value
In order to provide updated information relating to the Trust for
use by Shareholders and market professionals, the Sponsor will engage
an independent calculator to calculate an updated Indicative Trust
Value (``ITV'').\19\ The ITV will be calculated by using the prior
day's closing NAV per Share of the Trust as a base and will be updated
throughout the regular market session of 9:30 a.m. E.T. to 4:00 p.m.
E.T. (the ``Regular Market Session'') to reflect changes in the value
of the Trust's holdings during the trading day. For purposes of
calculating the ITV, the Trust's spot bitcoin and ether holdings will
be priced using a real time version of the Index, the Nasdaq Crypto US
Index (``NCIUS'').\20\
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\19\ The ITV is based on the prior day's closing NAV per Share
and updated to reflect changes in the Trust's holdings value during
the trading day.
\20\ The Nasdaq Crypto US Index (Index symbol NCIUS) is
calculated every second throughout a 24-hour trading day, seven days
per week, using published, real-time bid and ask quotes for Index
constituents observed on Core Crypto Platforms through the publicly
available API. See https://indexes.nasdaqomx.com/Index/Overview/NCIUS.
---------------------------------------------------------------------------
The ITV will be disseminated on a per Share basis every 15 seconds
during the Exchange's Regular Market Session and be widely disseminated
by one or more major market data vendors during the Regular Market
Session.\21\
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\21\ Several major market data vendors display and/or make
widely available ITVs taken from the Consolidated Tape Association
(``CTA'') or other data feeds.
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Background--Spot Crypto Asset ETFs
The Commission has recently permitted exchange-traded products
(``ETPs'') to directly hold bitcoin and ether. The Exchange and the
Sponsor applaud the Commission as these approvals mark a significant
step forward in offering U.S. investors and traders transparent,
exchange-listed products for expressing views on crypto assets.
The Exchange and the Sponsor believe that the proposed rule change
does not introduce any elements that the Commission has not previously
approved, and therefore, it will not impose any inappropriate
consequences on the market. Although using previously approved crypto
assets, the Trust employs a new strategy of investing in the crypto
asset market, as it will hold both spot bitcoin and spot ether in
accordance with the Index methodology, and its approval will add value
to the U.S. market.
The Trust will hold spot bitcoin and spot ether, commodities for
which proposals to list and trade ETPs have recently been approved by
the Commission. As the Trust will invest in crypto assets for which
proposals to list and trade ETPs have been recently approved by the
Commission, and because the Exchange will utilize the same surveillance
mechanisms that were deployed pursuant to the proposals to list and
trade those approved ETPs, the Sponsor and the Exchange understand that
the proposed rule change does not introduce any novel regulatory issues
and believe that the Commission should approve this proposal.
Spot Bitcoin ETF
On January 10, 2024, the Commission issued an order granting
approval for proposals to list bitcoin-based commodity trust and
bitcoin-based trust units (``Spot Bitcoin ETPs'').\22\ In considering
the Spot Bitcoin ETPs, the Commission determined in the Spot Bitcoin
ETP Approval Order that the Exchanges' comprehensive surveillance-
sharing agreement with the Chicago Mercantile Exchange (``CME'')--a
U.S. regulated market whose bitcoin futures market is consistently
highly correlated to spot bitcoin--could be reasonably expected to
assist in surveilling for fraudulent and manipulative acts and
practices in the specific context of the proposals. The exchanges have
comprehensive surveillance-sharing agreements with the CME via their
common membership in the Intermarket Surveillance Group (``ISG''),
which facilitates the sharing of information that is available to the
CME through its surveillance of its markets.
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\22\ See Exchange Act Release No. 99306 (January 10, 2024), 89
FR 3008 (January 17, 2024) (Self-Regulatory Organizations; NYSE
Arca, Inc.; The Nasdaq Stock Market LLC; Cboe BZX Exchange, Inc.;
Order Granting Accelerated Approval of Proposed Rule Changes, as
Modified by Amendments Thereto, To List and Trade Bitcoin-Based
Commodity-Based Trust Shares and Trust Units) (the ``Spot Bitcoin
ETP Approval Order'').
---------------------------------------------------------------------------
After reviewing the proposals for the Spot Bitcoin ETPs, the
Commission found that they were consistent with the Act, including with
section 6(b)(5), and rules and regulations thereunder applicable to a
national securities exchange, including the Exchange. The
abovementioned section 6(b)(5) requires, among other things, that the
investment product is designed to
[[Page 54875]]
``prevent fraudulent and manipulative acts and practices'' and, ``in
general, to protect investors and the public interest;'' and with
section 11A(a)(1)(C)(iii) of the Act, which sets forth Congress'
finding that it is in the public interest and appropriate for the
protection of investors and the maintenance of fair and orderly markets
to assure the availability to brokers, dealers, and investors of
information with respect to quotations for and transactions in
securities.
The Commission's analysis \23\ in the Spot Bitcoin ETP Approval
Order also demonstrated that prices typically move in close, though not
perfect, correlation \24\ between the spot bitcoin market and the CME
bitcoin futures market. Therefore, the Commission concluded that fraud
or manipulation affecting spot bitcoin market prices would likely also
impact CME bitcoin futures prices. Since the CME's surveillance can
help detect these impacts on CME bitcoin futures prices, such
surveillance can be reasonably expected to assist in monitoring for
fraudulent and manipulative acts and practices in the specific context
of the Spot Bitcoin ETPs proposals.
---------------------------------------------------------------------------
\23\ The robustness of the Commission's correlation analysis
rests on the pre-requisites of (1) the correlations being calculated
with respect to bitcoin futures that trade on the CME, a U.S. market
regulated by the CFTC, (2) the lengthy sample period of price
returns for both the CME bitcoin futures market and the spot bitcoin
market, (3) the frequent intra-day trading data in both the CME
bitcoin futures market and the spot bitcoin market over that lengthy
sample period, and (4) the consistency of the correlation results
throughout the lengthy sample period.
\24\ Correlation should not be interpreted as an indicator of a
causal relationship or whether one variable leads or lags the other.
---------------------------------------------------------------------------
In the Spot Bitcoin ETP Approval Order, the Commission also stated
that the Spot Bitcoin ETP proposals, similar to other spot commodity
ETPs it has approved, are reasonably designed to ensure fair disclosure
of information necessary for accurate share pricing, to prevent trading
in the absence of sufficient transparency, to protect material
nonpublic information related to the products' portfolios, and to
maintain fair and orderly markets for the shares of the Spot Bitcoin
ETPs.
Spot Ether ETF
A few months after the issuance of its Spot Bitcoin ETP Approval
Order, the Commission issued on May 23, 2024 an approval order for
proposals to list ether-based trusts (``Spot Ether ETPs'').\25\ The
Commission also concluded in the Spot Ether ETP Approval Order that the
exchanges' comprehensive surveillance-sharing agreement with the CME,
which is consistently highly correlated with spot ether, can be
reasonably expected to prevent fraudulent and manipulative acts and
practices within the context of the mentioned proposals.
---------------------------------------------------------------------------
\25\ See Exchange Act Release No. 100224 (May 23, 2024) (Self-
Regulatory Organizations; NYSE Arca, Inc.; The Nasdaq Stock Market
LLC; Cboe BZX Exchange, Inc.; Order Granting Accelerated Approval of
Proposed Rule Changes, as Modified by Amendments Thereto, to List
and Trade Shares of Ether-Based Exchange-Traded Products) (the
``Spot Ether ETP Approval Order'').
---------------------------------------------------------------------------
As in the case of the Spot Bitcoin ETP Approval Order, in the Spot
Ether ETP Approval Order, the Commission determined that the exchanges'
comprehensive surveillance-sharing agreement with the CME ether futures
market, which exhibits a consistent high correlation with spot ether,
is likely to effectively deter fraudulent and manipulative practices
within the framework of the Spot Ether ETP proposals. Therefore, based
on similar reasons to the Spot Bitcoin ETP Approval, the Commission
approved the Spot Ether ETPs, stating that the proposals to list and
trade Spot Ether ETPs were also consistent with the requirements of the
Act and the regulations applicable to a national securities exchange,
in particular with section 6(b)(5) and section 11A(a)(1)(C)(iii) of the
Act.
Availability of Information
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the prior Business
Day's NAV per Share; (b) the prior Business Day's Nasdaq official
closing price; (c) calculation of the premium or discount of such
Nasdaq official closing price against such NAV per Share; (d) data in
chart form displaying the frequency distribution of discounts and
premiums of the Nasdaq official closing price against the NAV per
Share, within appropriate ranges for each of the four previous calendar
quarters (or for the life of the Trust, if shorter); (e) the
prospectus; and (f) other applicable quantitative information. The
Administrator will also disseminate the Trust's holdings on a daily
basis on the Trust's website. The NAV per Share for the Trust will be
calculated by the Administrator once a day and will be disseminated
daily to all market participants at the same time. Quotation and last
sale information regarding the Shares will be disseminated through the
facilities of the relevant securities information processor.
Also, an estimated value that reflects an estimated ITV will be
disseminated. For more information on the ITV, including the
calculation methodology, see ``Indicative Trust Value'' above. The ITV
disseminated during the Regular Market Session should not be viewed as
an actual real time update of the NAV per Share, which will be
calculated only once at the end of each trading day. The ITV will be
widely disseminated on a per Share basis every 15 seconds during the
Regular Market Session by one or more major market data vendors. In
addition, the ITV will be available through online information
services.
Quotation and last sale information for crypto assets is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. Information relating to trading, including price
and volume information, is available from major market data vendors and
from the platforms on which crypto assets are traded. Depth of book
information is also available from crypto platforms. The normal trading
hours for the crypto assets platforms are 24 hours per day, 365 days
per year.
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 previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers.
Initial and Continued Listing
The Shares will be subject to Nasdaq Rule 5711(d)(vi), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV per Share will be calculated daily and will be
made available to all market participants at the same time. A minimum
of 80,000 Shares, or the equivalent of eight Baskets, will be required
to be outstanding at the time of commencement of trading on the
Exchange. Upon termination of the Trust, the Shares will be removed
from listing.
As required in Nasdaq Rule 5711(d)(viii), the Exchange notes that
any registered market maker (``Market Maker'') in the Shares must file
with the Exchange, in a manner prescribed by the Exchange, and keep
current a list identifying all accounts for trading the underlying
commodity, related futures or options on futures, or any other related
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker in
the
[[Page 54876]]
Shares shall trade in the underlying commodity, related futures or
options on futures, or any other related derivatives, in an account in
which a registered Market Maker, directly or indirectly, controls
trading activities, or has a direct interest in the profits or losses
thereof, which has not been reported to the Exchange as required by
Nasdaq Rule 5711(d). In addition to the existing obligations under
Exchange rules regarding the production of books and records, the
registered Market Maker in the Shares shall make available to the
Exchange such books, records or other information pertaining to
transactions by such entity or any limited partner, officer or approved
person thereof, registered or non-registered employee affiliated with
such entity for its or their own accounts in the underlying commodity,
related futures or options on futures, or any other related
derivatives, as may be requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying bitcoin and ether, or any CME-traded crypto
derivatives through members acting as registered Market Makers, in
connection with their proprietary or customer trades.
As a general matter, the Exchange has regulatory jurisdiction over
its members, and their associated persons. The Exchange also has
regulatory jurisdiction over any person or entity controlling a member,
as well as a subsidiary or affiliate of a member that is in the
securities business. A subsidiary or affiliate of a member organization
that does business only in commodities would not be subject to Exchange
jurisdiction, but the Exchange could obtain information regarding the
activities of such subsidiary or affiliate through surveillance sharing
agreements with regulatory or self-regulatory organizations of which
such subsidiary or affiliate is a member.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. The Exchange will
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. ET. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. The Shares of the Trust will conform to
the initial and continued listing criteria set forth in Nasdaq Rule
5711(d).
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in Nasdaq Rules 4120 and 4121, including
without limitation the conditions specified in Nasdaq Rule 4120(a)(9)
and (10) and the trading pauses under Nasdaq Rules 4120(a)(11) and
(12).
Trading may be halted because of market conditions or for reasons
that, in the view of the Exchange, make trading in the Shares
inadvisable. These may include: (1) the extent to which trading is not
occurring in the Index Constituents underlying the Shares; or (2)
whether other unusual conditions or circumstances detrimental to the
maintenance of a fair and orderly market are present.
If the ITV or the value of the Index is not being disseminated as
required, the Exchange may halt trading during the day in which the
interruption to the dissemination of the ITV or the value of the Index
occurs. If the interruption to the dissemination of the ITV or the
value of the Index 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 per Share
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 per Share is available to all market participants.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. The surveillance
program includes real-time patterns for price and volume movements and
post-trade surveillance patterns (e.g., spoofing, marking the close,
pinging, phishing). In addition to the Exchange's existing
surveillance, a new pattern will be added to surveil for significant
deviation in the Shares' price from the underlying asset's price. The
Exchange will use the trade data from an external vendor that
consolidates the real-time data from multiple crypto assets platforms.
Trading of Shares on the Exchange will be subject to the Exchange's
surveillance program for derivative products, as well as cross-market
surveillances administered by FINRA, on behalf of the Exchange pursuant
to a regulatory services agreement, which are also designed to detect
violations of Exchange rules and applicable federal securities laws.
The Exchange is responsible for FINRA's performance under this
regulatory services agreement.
The Exchange will require the Trust to represent to the Exchange
that it will advise the Exchange of any failure by the Trust to comply
with the continued listing requirements, and, pursuant to its
obligations under section 19(g)(1) of the Exchange Act, the Exchange
will surveil for compliance with the continued listing requirements. If
the Trust is not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under the
Nasdaq 5800 Series. In addition, the Exchange also has a general policy
prohibiting the distribution of material, non-public information by its
employees.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the ISG,\26\ and the
Exchange or FINRA, on behalf of the Exchange, or both, may obtain
trading information regarding trading in the Shares from such markets
and other entities. The Exchange also may obtain information regarding
trading in the Shares and listed crypto asset derivatives via the ISG,
from other exchanges who are members or affiliates of the ISG, or with
which the Exchange has entered into a comprehensive surveillance
sharing agreement.
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\26\ For a list of the current members and affiliate members of
ISG, see https://www.isgportal.com/.
---------------------------------------------------------------------------
The Exchange's current trading surveillance focuses on detecting
securities trading outside their normal patterns. 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 is able to
obtain information regarding trading in the Shares, the physical
commodities included in, or options, futures or options on futures on,
Shares through Equity Trading Permit Holders (``ETP Holders''), in
connection with such ETP Holders' proprietary or customer trades which
they effect on any relevant market. The Exchange can obtain market
surveillance information, including customer identity information, with
respect to transactions occurring on the exchanges that are members of
the ISG.
[[Page 54877]]
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 applicable
federal securities laws.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an information circular (``Information Circular'') of the
special characteristics and risks associated with trading the Shares.
Specifically, the Information Circular will discuss the following: (1)
the procedures for creations and redemptions of Shares in Baskets (and
that Shares are not individually redeemable); (2) Section 10 of Nasdaq
General Rule 9, which imposes suitability obligations on Nasdaq members
with respect to recommending transactions in the Shares to customers;
(3) how information regarding the ITV is disseminated; (4) the risks
involved in trading the Shares during the pre-market and postmarket
sessions when an updated ITV will not be calculated or publicly
disseminated; (5) the requirement that members deliver a prospectus to
investors purchasing newly issued Shares prior to or concurrently with
the confirmation of a transaction; and (6) trading information. The
Information Circular will also discuss any exemptive, no action and
interpretive relief granted by the Commission from any rules under the
Act.
The Information Circular will also reference the fact that there is
no regulated source of last sale information regarding crypto assets,
that the Commission has no jurisdiction over the trading of the Index
Constituents as a commodity.
Additionally, the Information Circular will reference that the
Trust is subject to various fees and expenses described in the
Registration Statement. The Information Circular will also disclose the
trading hours of the Shares. The Information Circular will disclose
that information about the Shares will be publicly available on the
Trust's website.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under section 6(b)(5) \27\ that an exchange has 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.
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\27\ 15 U.S.C. 78f(b)(5).
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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 will be listed and
traded on the Exchange pursuant to the initial and continued listing
criteria set forth in Nasdaq Rule 5711(d). 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 Trust'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
Trust's holdings from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares and the
Trust'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
Trust'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 will require the Trust to
represent to the Exchange that it will advise the Exchange of any
failure by the Trust to comply with the continued listing requirements,
and, pursuant to its obligations under section 19(g)(1) of the Exchange
Act, the Exchange will surveil for compliance with the continued
listing requirements. If the Trust is not in compliance with the
applicable listing requirements, the Exchange will commence delisting
procedures under the Nasdaq 5800 Series.
Trading in Shares of the Trust will be halted if the circuit
breaker parameters 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 unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market.
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
Shares 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.
The Commission has approved numerous spot-based crypto asset
products to be listed on U.S. national securities exchanges.\28\ In
order for any proposed rule change from an exchange to be approved, the
Commission must determine that, among other things, the proposal is
consistent with the requirements of section 6(b)(5) of the Act,
specifically including: (i) the requirement that a national securities
exchange's rules are designed to prevent fraudulent and manipulative
acts and practices; and (ii) the requirement that an exchange proposal
be designed, in general, to protect investors and the public interest.
The Exchange believes that this proposal is consistent with the
requirements of section 6(b)(5) of the Act because this filing
sufficiently demonstrates that the applicable standard that has
previously been articulated by the Commission with respect to proposals
to list and trade units of commodity-based trusts has been met as
outlined below.
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\28\ See ``Background--Spot Crypto Asset ETFs'' above.
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To list and trade the commodity-trust ETPs, the Commission requires
a comprehensive surveillance-sharing agreement with a regulated market
of significant size. The Exchange and CME are members of the ISG,
meeting this requirement. The remaining issue is whether the CME
constitutes a regulated market of significant size in relation to
bitcoin futures and ether futures in the context of the proposed ETP,
which the Exchange believes it does. The Commission has provided an
illustrative definition for ``market of significant size'' to include a
market (or group of markets) as to which (a) there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to successfully manipulate the ETP, so
that a surveillance-sharing agreement would assist in detecting and
deterring misconduct, and (b) it is unlikely that trading in the ETP
would be the predominant influence on prices in that market.\29\ In the
Spot Bitcoin ETP
[[Page 54878]]
Approval Order and the Spot Ether ETP Approval Order, the Commission
concluded that CME was indeed a market of significant size with respect
to bitcoin futures and ether futures.
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\29\ See 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, 37594 (Aug. 1, 2018) (SR-BatsBZX-2016-30).
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In the Spot Bitcoin ETP Approval Order and the Spot Ether Approval
Order, the Commission also concluded that the proposing exchanges'
comprehensive surveillance-sharing agreement with the CME--a U.S.
regulated market--whose bitcoin and ether futures market is
consistently highly correlated to spot bitcoin and spot ether,
respectively--could be reasonably expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific context
of the proposals.
Consequently, this Trust, which invests solely in bitcoin and
ether, is similar to these approved products, since its only holdings
are bitcoin, ether, and cash. As such, by analogy, in this specific
context, the CME can also be considered the market of significant size
in relation to bitcoin futures and ether futures. This market of
significant size is highly, though not perfectly correlated with the
spot bitcoin market and the spot ether market respectively, so that
surveillance of the bitcoin futures market and the ether futures market
can be reasonably expected to assist in monitoring for fraudulent and
manipulative acts and practices in the spot bitcoin market and the spot
ether market, respectively.
For all the above reasons, the Exchange believes that the proposed
rule change is consistent with the requirements of section 6(b)(5) of
the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of the
Shares, which are Commodity-Based Trust Shares 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 either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) by order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-NASDAQ-2024-028 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NASDAQ-2024-028. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NASDAQ-2024-028 and should
be submitted on or before July 23, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-14516 Filed 7-1-24; 8:45 am]
BILLING CODE 8011-01-P