[Federal Register Volume 89, Number 193 (Friday, October 4, 2024)]
[Notices]
[Pages 80970-80980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22903]
[[Page 80970]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101218; File No. SR-NASDAQ-2024-028]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing of Amendment No. 1 and Order Instituting Proceedings
To Determine Whether To Approve or Disapprove a Proposed Rule Change,
as Modified by Amendment No. 1, To List and Trade Shares of the Hashdex
Nasdaq Crypto Index US ETF Under Nasdaq Rule 5711(d)
September 30, 2024.
I. Introduction
On June 17, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of the Hashdex Nasdaq Crypto Index US ETF (``Trust'')
under Nasdaq Rule 5711(d), Commodity-Based Trust Shares. The proposed
rule change was published for comment in the Federal Register on July
2, 2024.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 100434 (June 26,
2024), 89 FR 54868. The proposed rule change was subject to notice
and comment. The Commission has not received any comments.
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On August 9, 2024, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On September 5, 2024, the Exchange filed
Amendment No. 1 to the proposed rule change, described in Item II
below, which Item has been prepared by the Exchange. \6\ Amendment No.
1 amended and superseded the original proposed rule change in its
entirety. The Commission is publishing this notice and order to solicit
comments on the proposed rule change, as modified by Amendment No. 1,
from interested persons and to institute proceedings under Section
19(b)(2)(B) of the Act \7\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 100681, 89 FR 66470
(Aug. 15, 2024) (designating September 30, 2024, as the date by
which the Commission shall either approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change).
\6\ The full text of Amendment No. 1 is available on the
Commission's website at: https://www.sec.gov/comments/sr-nasdaq-2024-028/srnasdaq2024028-516575-1489102.pdf.
\7\ 15 U.S.C. 78s(b)(2)(B).
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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'').\8\
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\8\ On July 24, 2024, the Trust filed with the Commission an
initial registration statement (the ``Registration Statement'') on
Form S-1 under the Securities Act of 1933 (15 U.S.C. 77a). The
description of the operation of the Trust herein is based, in part,
on the most recent Registration Statement. 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 only of bitcoin and ether. Under limited
circumstances, the Trust will hold cash and/or cash equivalents to pay
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 \9\ (``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.\10\
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\9\ ``Cash equivalents'' are limited to short-term treasury
bills (90 days or less to maturity), money market funds, and demand
deposit accounts.
\10\ The Trust may engage additional custodians for its bitcoin
and ether, 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.
Any such changes to the Trust's Crypto Custodians would require a
rule filing under Rule 19b-4 of the Act.
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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,\11\ NCIUSS (the ``NCIUSS'' or ``Index''), less expenses and
liabilities from the Trust's operations, by investing in bitcoin and
ether.
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\11\ 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 bitcoin and spot ether 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 bitcoin and ether 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 bitcoin
and ether through the public securities market, which may be more
familiar to them.
The Trust will gain exposure to bitcoin and ether by buying spot
bitcoin and spot ether. The Trust will maintain cash and/or cash
equivalent balances to the extent it is necessary for currently due
Trust-payable expenses.
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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 \12\ were as follows:
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\12\ 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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Weight
Constituents (%)
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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 ``Incidental Rights'' and/or ``IR Virtual Currency'' by
virtue of its 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. ``Incidental Rights'' are
rights to acquire, or otherwise establish dominion and control over,
any crypto asset (for the 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. ``IR Virtual Currency'' is any crypto
asset (other than bitcoin or ether), or other assets or rights,
acquired through the exercise of any Incidental Right.
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.
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 to value the bitcoin and ether held by the
Trust for purposes of 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.\13\
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\13\ The closing level of the Index is calculated once a day on
business days at 4:05 p.m. New York Time. See https://indexes.nasdaqomx.com/docs/Methodology_NCIUS.pdf (under ``Index
Calculation and Dissemination'').
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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. Neither the Trust, nor the Sponsor have control over the Index
Rules or the Index administration.
According to the Index Rules, crypto assets are eligible for
inclusion in the Index if they satisfy the criteria set forth under the
Nasdaq Crypto U.S. Index methodology, which includes being listed on a
U.S.-regulated digital asset trading platform at the time of inclusion
\14\ or serving as the underlying asset for a derivative instrument
listed on a U.S.-regulated derivatives platform.\15\ The Index adjusts
its constituents and weightings on a quarterly basis to reflect changes
in the crypto asset markets.
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\14\ Currently, there are no U.S.-regulated digital asset
trading platforms and therefore, no crypto assets are eligible for
inclusion in the Index based on this criteria today; however, the
Nasdaq Crypto U.S. Index methodology has been written and designed
to be forward-looking to account for any potential future regulatory
changes, including potential changes where digital asset trading
platforms would be regulated by U.S. regulators such as the SEC and
the CFTC .
\15\ Currently, U.S.-regulated derivatives platforms would be
regulated by the CFTC, and therefore crypto assets eligible for
inclusion in the Index based on this criteria includes crypto assets
(i.e., spot bitcoin and spot ether) that are used as a reference
price for futures contracts traded on a CFTC-regulated exchange.
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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 \16\ for the entire period since the previous Index
reconstitution;
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\16\ As discussed above, to be eligible for Index inclusion, a
crypto asset must trade on at least two ``Core Crypto Platforms.''
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 characteristics specified in the Index methodology,
such as having strong forking controls, effective anti-money
laundering controls, including surveillance for manipulative trading
practices and erroneous transactions, demonstrating robust IT
infrastructure and active capacity management, evidencing
cooperation with regulators and law enforcement, and be licensed by
a public independent governing body. Such license could be obtained
today through the New York State Department of Financial Services'
(NYDFS) BitLicense, and Core Crypto Platforms could also be
registered with FinCEN as Money Services Businesses. 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.
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(2) Be supported by at least one Core Custodian \17\ for the entire
period since the previous Index reconstitution.
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\17\ As discussed above, only crypto assets that are supported
by at least one ``Core Custodian'' for the entire period since the
previous Index reconstitution will be considered for inclusion in
the Index. A ``Core Custodian'' is a crypto assets custodian that,
in the opinion of the NCIOC, exhibits the characteristics specified
in the Index methodology. See https://indexes.nasdaqomx.com/docs/Methodology_NCIUS.pdf (under ``Core Custodians''). A Core Custodian
might lose eligibility if it does not comply with the specified
requirements in the Index methodology 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.
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[[Page 80972]]
(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 listed (at the time of inclusion) 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.\18\
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\18\ See supra notes 14-15.
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(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.
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.\19\
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\19\ The Exchange would file an amendment to this rule filing if
any Index change would require a change to the Trust's investment
objective.
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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'' \20\ 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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\20\ 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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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 \21\ 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.
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\21\ All Index Constituent calculations are performed
concurrently with the Index calculation, which takes place at 4:05
p.m. New York time. See supra note 13.
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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 Core Crypto Platforms. 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 pricing the Trust's assets and as an Index that the Trust
tracks. Specifically, it would provide reliable pricing for purposes of
tracking the actual performance of the crypto asset markets for bitcoin
and ether. Second, it is administered by a reputable index
administrator that is not affiliated with the Sponsor or Trust,\22\
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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\22\ 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 recertification 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. As discussed above, the list of existing Core Crypto Platforms
and Core Custodians will be recertified by the NCIOC at a minimum on
an annual basis. 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 (at the time of
inclusion) 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 \23\
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\23\ See supra notes 14-15.
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(2) Strict eligibility criteria for the Core Crypto Platforms from
which the Index data is drawn;
[[Page 80973]]
(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 Bitcoin and Ether
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.\24\ The Trust may engage additional
custodians for its bitcoin and ether and may also remove or change
current Crypto Custodians, provided that there is at least one Crypto
Custodian who is also a Core Custodian at all times.\25\
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\24\ See https://indexes.nasdaqomx.com/docs/Methodology_NCIUS.pdf. As noted above, the Core Custodians as of May
27, 2024 are BitGo, Coinbase, Fidelity and Gemini, and the Trust's
Crypto Custodians are on this list.
\25\ If the Trust determines to do so, the Exchange will submit
a rule filing with the Commission under Rule 19b-4 of the Act.
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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 bitcoin and ether 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 bitcoin and ether 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 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 bitcoin and ether 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 bitcoin and ether 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'' \26\ 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, 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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\26\ Baskets will be offered continuously at NAV per Share for
5,000 Shares. Therefore, a Basket of Shares would be valued at NAV
per Share multiplied by the Basket size and the value of the bitcoin
and ether to be acquired by the Trust as part of the creation of a
Basket would be based on the dollar value of the NAV per Share
multiplied by the Basket size for such creations. Only Authorized
Participants may purchase or redeem Baskets.
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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 bitcoin and ether 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 and ether as part
of the creation or redemption process.
The Trust will create Shares by receiving bitcoin and ether 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 bitcoin and ether to the Trust or acting at the
direction of the Authorized Participant with respect to the delivery of
the bitcoin and ether to the Trust. The Trust will redeem Shares by
delivering bitcoin and ether 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 bitcoin and
ether. Further, the third party will not be acting as an agent of the
Authorized Participant with respect to the receipt of the bitcoin and
ether from the Trust or acting at the direction of the Authorized
Participant with respect to the receipt of the bitcoin and ether 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
\27\ of Shares exclusively in exchange for cash. The Trust will engage
in transactions to convert cash into bitcoin and ether (in association
with creation orders) and bitcoin and ether into cash (in association
with redemption orders). The Trust will conduct its bitcoin and ether
purchase and sale transactions by choosing, in its sole discretion,
either to trade directly with designated third parties (each, a
``Crypto Trading Counterparty''), who are not registered broker-dealers
pursuant to written agreements between each such Crypto Trading
Counterparty and the Trust, or 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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\27\ The Trust issues and redeems Shares only in blocks or
``Baskets'' of 5,000 or integral multiples thereof.
---------------------------------------------------------------------------
For a creation of a Basket of Shares, the Authorized Participant
will be required to submit the creation order by 2:00 p.m. ET, or the
close of regular trading on the Exchange, whichever is earlier (the
``Order Cutoff Time''). The Order Cutoff Time may be modified by the
Sponsor in its sole discretion.
On the date of the Order Cutoff Time for a creation order, the
Trust will enter into a transaction by choosing, in its sole
discretion, to trade directly with a Crypto Trading Counterparty or the
Prime Execution Agent, to buy bitcoin and ether in exchange for the
cash proceeds from such creation order. The Authorized Participant is
responsible for the dollar cost of the difference between the bitcoin
and ether price utilized in calculating the NAV per Share on the
Creation Order Date (as described below) and the price at which the
Trust acquires the bitcoin and ether to the extent the price amount for
buying the bitcoin and ether is higher than the price utilized in
calculating the
[[Page 80974]]
NAV. In the case the price amount for buying the bitcoin and ether is
lower than the price utilized in calculating the NAV, the Authorized
Participant shall keep the dollar impact of any such difference.
Creation orders will take place as follows, where ``T'' is the date
of the creation order and each day in the sequence must be a business
day in the U.S.
------------------------------------------------------------------------
Creation order date (T) Settlement date (T+1)
------------------------------------------------------------------------
Authorized Participant places a The Authorized
creation order. Participant delivers the
The Transfer Agent accepts (or Basket cash component to
rejects) the creation order. the Trust's cash account
The Trust will enter into a that is maintained with the
transaction with the Crypto Trading Cash Custodian.
Counterparty or the Prime Execution Agent The Crypto Trading
to purchase the corresponding bitcoin and Counterparty or the Prime
ether. Execution Agent deposits
As soon as practicable after 4:00 the bitcoin and ether into
p.m. ET, the Sponsor determines the the Trust's Trading Account
Basket cash component, including any related to the purchase
dollar cost difference between the transaction.
bitcoin and ether price utilized in Once the Trust is
calculating NAV per Share and the price in simultaneous possession
at which the Trust acquires the bitcoin of the Basket cash
and ether. component and the bitcoin
and ether, the Trust
delivers the corresponding
Shares to the Authorized
Participant.
The Trust transfers
the cash related to the
purchase transaction from
the Trust cash account
maintained with the Cash
Custodian to the Crypto
Trading Counterparty or the
Prime Execution Agent.
------------------------------------------------------------------------
When the Trust chooses to enter into a transaction with the Prime
Execution Agent, because the Trust's Trading Account may not be funded
with cash on the Creation Order Date for the purchase of bitcoin and
ether 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 the Creation Order Date. The
extension of Trade Credits on the Creation Order Date allows the Trust
to purchase bitcoin and ether through the Prime Execution Agent on the
Creation Order Date, with such bitcoin and ether 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 the Settlement Date
for a creation order, the bitcoin and ether 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 the Order Cutoff Time.
On the date of the Order Cutoff Time for a redemption order, the Trust
will enter into a transaction by choosing, in its sole discretion, to
trade directly with a Crypto Trading Counterparty or the Prime
Execution Agent, to sell bitcoin and ether in exchange for cash. The
Authorized Participant will bear the difference between the bitcoin and
ether price utilized in calculating the NAV per Share on the Redemption
Order Date and the price realized in selling the bitcoin and ether to
raise the cash needed for the cash redemption order to the extent the
price realized in selling the bitcoin and ether is lower than the price
utilized in the NAV. To the extent the price realized in selling the
bitcoin and ether is higher than the price utilized in the NAV, the
Trust will deliver the dollar impact of any such difference to the
Authorized Participant.
Redemption orders will take place as follows, where ``T'' is the
date of the redemption order and each day in the sequence must be a
business day.
------------------------------------------------------------------------
Redemption order date (T) Settlement date (T+1)
------------------------------------------------------------------------
Authorized Participant places a The Authorized
redemption order. Participant delivers the
The Transfer Agent accepts (or Baskets of Shares to be
rejects) the redemption order. redeemed to the Trust.
The Trust instructs the Crypto The Crypto Trading
Custodian to prepare to move the Counterparty or the Prime
corresponding bitcoin and ether from the Execution Agent delivers
Trust's Custody Account to the Trading cash to the Trust's cash
Account. account that is maintained
The Trust enters into a with the Cash Custodian
transaction with the Crypto Trading related to the sell
Counterparty or the Prime Execution Agent transaction.
to sell the corresponding bitcoin and Once the Trust is
ether. in simultaneous possession
As soon as practicable after 4:00 of the Basket of Shares and
p.m. ET, the Sponsor determines the the respective Basket cash
Basket cash component, including any component, the Trust
dollar cost difference between the cancels the Shares
bitcoin and ether price utilized in comprising the number of
calculating NAV per Share and the price Baskets redeemed by the
at which the Trust sells the bitcoin and Authorized Participant.
ether. The Trust instructs
the Crypto Custodian to
transfer the corresponding
bitcoin and ether agreed on
the sell transaction from
the Trust's Trading Account
to the Crypto Trading
Counterparty or Prime
Execution Agent.
The Trust transfers
the Basket cash component
from the cash account
maintained with the Cash
Custodian to the Authorized
Participant.
------------------------------------------------------------------------
The Trust may use financing in connection with a redemption order
when bitcoin and ether remain in the Custody Account at the point of
intended execution of a sale of bitcoin and ether. In those
circumstances, the Trust may borrow Trade Credits in the form of
bitcoin and ether from the Trade Credit Lender, which allows the Trust
to sell bitcoin and ether through the Prime Execution Agent on the
Redemption Order Date, and the cash proceeds are deposited in the
Trading Account. On the 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
[[Page 80975]]
used, the Trust will use the bitcoin and ether 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
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'').
The Administrator will value the bitcoin and ether 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.
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 bitcoin and ether consistent with the
application of fair value measurement framework in FASB ASC 820-10.\28\
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.
---------------------------------------------------------------------------
\28\ 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 bitcoin and ether 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''.\29\
---------------------------------------------------------------------------
\29\ 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 and ETH/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.
---------------------------------------------------------------------------
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''). 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'').\30\
---------------------------------------------------------------------------
\30\ 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.\31\
---------------------------------------------------------------------------
\31\ Several major market data vendors display and/or make
widely available ITVs taken from the Consolidated Tape Association
(``CTA'') or other data feeds.
---------------------------------------------------------------------------
Background--Spot Bitcoin and Ether ETPs
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 building on previously approved
ETP proposals, the Trust employs a new strategy of investing in bitcoin
and ether, 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 bitcoin and ether 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 ETP
On January 10, 2024, the Commission issued an order granting
approval for proposals to list certain bitcoin-based commodity trust
and bitcoin-based trust units (``Spot Bitcoin ETPs'').\32\ In
[[Page 80976]]
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.
---------------------------------------------------------------------------
\32\ 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 ``prevent fraudulent and manipulative
acts and practices'' and, ``in general, to protect investors and the
public interest.''
The Commission's analysis \33\ in the Spot Bitcoin ETP Approval
Order also demonstrated that prices typically move in close, though not
perfect, correlation \34\ 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
similarly 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
surveilling for fraudulent and manipulative acts and practices in the
specific context of the Spot Bitcoin ETPs proposals.
---------------------------------------------------------------------------
\33\ 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.
\34\ 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 ETP
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 certain ether-based trusts (``Spot Ether ETPs'').\35\
The Commission also concluded in the Spot Ether ETP Approval Order that
the exchanges' comprehensive surveillance-sharing agreement with the
CME, a U.S.-regulated market whose ether futures market is consistently
highly correlated with spot ether, can be reasonably expected to assist
in surveilling for fraudulent and manipulative acts and practices
within the context of the mentioned proposals.
---------------------------------------------------------------------------
\35\ See Exchange Act Release No. 100224 (May 23, 2024), 89 FR
46937 (May 30, 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,
can reasonably be expected to assist in surveilling for fraudulent and
manipulative practices in the specific context of the Spot Ether ETP
proposals. Therefore, based on similar reasons to the Spot Bitcoin ETP
Approval Order, the Commission approved the Spot Ether ETPs, stating
that the proposals to list and trade those 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 bitcoin and ether is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. Information relating to trading, including price
and volume information for bitcoin and ether, is available from major
market data vendors and from the platforms on which such bitcoin and
ether are traded. Depth of book information is also available from such
crypto platforms. The normal trading hours for the ether and bitcoin
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.
[[Page 80977]]
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. A minimum of 40,000 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 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 other bitcoin or
ether derivative 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) and will comply with the requirements of Rule 10A-3 of the Act.
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 bitcoin and ether 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 and bitcoin and
ether derivatives with other markets and other entities that are
members of the ISG,\36\ and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain trading information regarding trading in
the Shares and bitcoin and ether derivatives from such markets and
other entities. The Exchange also may obtain information regarding
trading in the Shares and listed bitcoin and ether derivatives via the
ISG, from other
[[Page 80978]]
exchanges who are members or affiliates of the ISG, or with which the
Exchange has entered into a comprehensive surveillance sharing
agreement.
---------------------------------------------------------------------------
\36\ 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 Members, in connection with such Members' 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.
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 and NAV 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 bitcoin and
ether, that the Commission has no jurisdiction over the trading of
bitcoin and ether 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) \37\ 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.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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 bitcoin and
ether derivatives 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 bitcoin and ether derivatives from such markets and
other entities. In addition, the Exchange may obtain information
regarding trading in the Shares and listed bitcoin and ether
derivatives via the ISG, from other exchanges that are members or
affiliates of ISG, or with which the Exchange has in place a
comprehensive surveillance sharing agreement. The Exchange is also able
to obtain information regarding trading in the Shares and bitcoin and
ether derivatives through Members, in connection with such Members'
proprietary or customer trades which they effect 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 bitcoin and ether
products to be listed on U.S. national securities exchanges.\38\ 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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\38\ See ``Background--Spot Bitcoin and Ether ETPs'' above.
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To list and trade the commodity-trust ETPs, one way that an
exchange can meet the obligation under Exchange Act
[[Page 80979]]
Section 6(b)(5) that its rules be designed to prevent fraudulent and
manipulative acts and practices is by demonstrating that the exchange
has a comprehensive surveillance-sharing agreement with a regulated
market of significant size related to the underlying or reference
assets. The Exchange and CME are members of the ISG, satisfying the
comprehensive surveillance sharing agreement portion.
In the Spot Bitcoin ETP Approval Order and the Spot Ether ETP
Approval Order, the Commission 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, cash and/or cash equivalents. CME's bitcoin futures
market and ether futures market are highly, though not perfectly
correlated with the spot bitcoin market and the spot ether market
respectively, so that surveillance of CME's bitcoin futures market and
CME's ether futures market can be reasonably expected to assist in
surveilling for fraudulent and manipulative acts and practices in the
specific context of this proposal.
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. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2024-028, as Modified by Amendment No. 1, and Grounds for
Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \39\ to determine whether the proposed rule
change, as modified by Amendment No. 1, should be approved or
disapproved. Institution of proceedings is appropriate at this time in
view of the legal and policy issues raised by the proposed rule change,
as modified by Amendment No. 1, as discussed below. Institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described below, the Commission seeks and encourages interested persons
to provide comments on the proposed rule change, as modified by
Amendment No. 1.
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\39\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\40\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \41\
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\40\ Id.
\41\ 15 U.S.C. 78f(b)(5).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in Item II above, in addition to any other comments they may wish to
submit about the proposed rule change, as modified by Amendment No. 1.
In particular, the Commission seeks comment on whether the proposed
Trust, which would hold both spot bitcoin and spot ether, and Shares
would be susceptible to manipulation and whether the Exchange's
proposal, as modified by Amendment No. 1, is designed to prevent
fraudulent and manipulative acts and practices. Namely, as the Trust
would hold both spot bitcoin and spot ether, the Commission seeks
comment on whether the Trust raises any new or novel concerns not
previously contemplated by the Commission.
IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, and
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\42\
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\42\ Section 19(b)(2) of the Act, as amended by the Securities
Acts Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Acts Amendments of 1975, Senate Comm.
on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change, as modified by
Amendment No. 1, should be approved or disapproved by October 25, 2024.
Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by November 8, 2024.
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
[[Page 80980]]
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 October 25, 2024. Rebuttal comments should be submitted by
November 8, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22903 Filed 10-3-24; 8:45 am]
BILLING CODE 8011-01-P