Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Hashdex Bitcoin ETF Under NYSE Arca Rule 8.500-E (Trust Units), 2443-2468 [2024-00498]

Download as PDF khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices information, in bitcoin is available from major market data vendors and from the trading platforms on which bitcoin are traded. Depth of book information is also available from bitcoin trading platforms. The normal trading hours for bitcoin trading 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. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. In sum, the Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act, that this filing sufficiently demonstrates that the CME Bitcoin Futures market represents a regulated market of significant size, and that on the whole the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by investor protection issues that would be resolved by approving this proposal. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. The investor protection issues for U.S. investors has grown significantly over the last several years, through roll costs for Bitcoin Futures ETFs and premium/ discount volatility and management fees for OTC Bitcoin Funds. As discussed throughout, this growth investor protection concerns need to be reevaluated and rebalanced with the prevention of fraudulent and manipulative acts and practices concerns that previous disapproval orders have relied upon. Finally, the Exchange notes that in addition to all of the arguments herein which it believes sufficiently establish the CME Bitcoin Futures market as a regulated market of significant size, it is logically inconsistent to find that the CME Bitcoin Futures market is a significant market as it relates to the CME Bitcoin Futures market, but not a significant market as it relates to the bitcoin spot market for the numerous reasons laid out above. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of section 6(b)(5) of the Act. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 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, rather will facilitate the listing and trading of an additional exchange-traded product that will enhance competition among both market participants and listing venues, 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 The Exchange neither solicited nor received comments on the proposed rule change. 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 rule-comments@ sec.gov. Please include file number SR– CboeBZX–2023–042 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–CboeBZX–2023–042. 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 Frm 00246 Fmt 4703 Sfmt 4703 Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–CboeBZX–2023–042 and should be submitted on or before February 2, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.76 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–00502 Filed 1–11–24; 8:45 am] III. Solicitation of Comments PO 00000 2443 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99291; File No. SR– NYSEARCA–2023–58] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares of the Hashdex Bitcoin ETF Under NYSE Arca Rule 8.500–E (Trust Units) January 8, 2024. On September 22, 2023, NYSE Arca, Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares of the Hashdex Bitcoin ETF (f/k/a Hashdex Bitcoin Futures ETF) under NYSE Arca Rule 8.500–E (Trust Units). The proposed rule change was published for comment in the Federal Register on October 3, 2023.3 On November 15, 2023, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to 76 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 98564 (Sept. 27, 2023), 88 FR 68188. Comments on the proposed rule change are available at: https:// www.sec.gov/comments/sr-nysearca-2023-58/ srnysearca202358.htm. 4 15 U.S.C. 78s(b)(2). 1 15 E:\FR\FM\12JAN1.SGM 12JAN1 2444 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices disapprove the proposed rule change.5 On November 28, 2023, the Commission instituted proceedings to determine whether to disapprove the proposed rule change.6 On January 5, 2024, the Exchange filed Amendment No. 1 to the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. Amendment No. 1 amended and replaced the proposed rule change in its entirety. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes list and trade shares of the Hashdex Bitcoin ETF under NYSE Arca Rule 8.500–E (‘‘Trust Units’’). This Amendment No. 1 to SR– NYSEARCA–2023–58 replaces SR– NYSEARCA–2023–58 as originally filed and supersedes such filing in its entirety. The proposed rule change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change khammond on DSKJM1Z7X2PROD with NOTICES 1. Purpose The Exchange proposes to list and trade shares (‘‘Shares’’) of the Hashdex Bitcoin ETF (the ‘‘Fund’’) under NYSE Arca Rule 8.500–E. The Commission previously approved the listing and trading of shares of the Teucrium Bitcoin Futures Fund (the 5 See Securities Exchange Act Release No. 98947, 88 FR 81171 (Nov. 21, 2023). 6 See Securities Exchange Act Release No. 99031, 88 FR 84021 (Dec. 1, 2023). VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 ‘‘Predecessor Fund’’) 7 pursuant to NYSE Arca Rule 8.200–E, Commentary .02.8 The Predecessor Fund’s name was subsequently changed to the Hashdex Bitcoin Futures ETF pursuant to an April 18, 2022 amendment to the Predecessor Fund’s registration statement.9 In connection with the launch of the Predecessor Fund, Tidal Investments LLC (f/k/a Toroso Investments LLC, the ‘‘Sponsor’’),10 Teucrium Trading, LLC (the ‘‘Prior Sponsor’’), and Hashdex Asset Management, Ltd. (‘‘Hashdex’’) entered into an agreement pursuant to which the Fund would be the successor and surviving entity from a merger into the Fund of the Predecessor Fund (which is a series of the Predecessor Trust sponsored by the Prior Sponsor).11 7 The Predecessor Fund is a series of the Teucrium Commodity Trust (the ‘‘Predecessor Trust’’). The Commission has noticed for immediate effectiveness a separate proposed rule change relating to the transfer of management and control of the Fund from the Predecessor Trust to the Tidal Commodities Trust I (the ‘‘Trust’’). See Securities Exchange Act Release No. 99164 (December 13, 2023), 88 FR 87825 (December 19, 2023) (SR– NYSEARCA–2023–84) (Notice of Filing and Immediate Effectiveness of Proposed Rule Change to Make Changes to Certain Representations Relating to the Hashdex Bitcoin Futures Fund). 8 See Securities Exchange Act Release No. 34– 94620 (April 6, 2022), 87 FR 21676 (April 12, 2022) (SR–NYSEArca–2021–53) (Order Approving a Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade Shares of the Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200–E, Commentary .02 (Trust Issued Receipts)) (the ‘‘Approval Order’’). The representations herein supersede and replace the representations in the Exchange’s prior rule filing relating to the Teucrium Bitcoin Futures Fund and Partial Amendment No. 2 thereto. See Securities Exchange Act Release No. 92573 (August 5, 2021), 86 FR 44062 (August 11, 2021) (SR–NYSEArca–2021–53) (Notice of Filing of a Proposed Rule Change To List and Trade Shares of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200–E) and Partial Amendment No. 2, available at: https://www.sec.gov/comments/srnysearca-2021-53/srnysearca202153-20118884271701.pdf. 9 On April 18, 2022, Teucrium Commodity Trust filed with the Commission Pre-Effective Amendment No. 2 to the registration statement on Form S–1 under the Securities Act of 1933 (the ‘‘Securities Act’’) (File No. 333–256339) changing the name of the Fund from Teucrium Bitcoin Futures Fund to Hashdex Bitcoin Futures ETF. 10 The Sponsor is not registered as a broker-dealer or affiliated with a broker-dealer. In the event that (a) the Sponsor becomes registered as a brokerdealer or newly affiliated with a broker-dealer, or (b) any new sponsor or sub-adviser is registered as a broker-dealer or becomes affiliated with a brokerdealer, it will implement and maintain a fire wall with respect to its relevant personnel or personnel of the broker-dealer affiliate, as applicable, regarding access to information concerning the composition of and/or changes to the portfolio, and will be subject to procedures designed to prevent the use and dissemination of material non-public information regarding the portfolio. 11 On July 21, 2023, the Trust, on behalf of the Fund, filed with the Commission a registration statement on Form S–1 under the Securities Act (File No. 333–2773364), as amended by a PreEffective Amendment No. 1 filed with the PO 00000 Frm 00247 Fmt 4703 Sfmt 4703 On August 25, 2023, the Trust on behalf of the Fund, submitted a confidential draft registration statement (the ‘‘Draft Registration Statement’’) on Form S–1 (File No. 377–06858) to change the Fund’s name to the Hashdex Bitcoin ETF and to modify the Fund’s investment objective and strategy, as further discussed below.12 On December 22, 2023, the Trust, on behalf of the Fund, filed publicly a registration statement on Form S–1 (File No. 333– 276254) (the ‘‘Registration Statement’’), which supersedes and replaces the Draft Registration Statement.13 The Fund is a series of the Trust, a Delaware statutory trust. The Fund is managed and controlled by the Sponsor and administered by Tidal ETF Services LLC (the ‘‘Administrator’’). The Sponsor is registered as a commodity pool operator (‘‘CPO’’) and a commodity trading adviser with the Commodity Futures Trading Commission (‘‘CFTC’’) and is a member of the National Futures Association (‘‘NFA’’). U.S. Bancorp Fund Services, LLC (doing business as U.S. Bank Global Commission on November 2, 2023 (‘‘Form S–1’’), for the continuous offering and sale of the Fund’s Shares. On October 31, 2023, the Trust filed with the Commission a separate registration statement on Form S–4 (File No. 333–275227) (‘‘Form S–4’’) under the Securities Act to register 50,004 shares of the Fund, which was issued in exchange for the outstanding shares of the Predecessor Fund (the ‘‘Reorganization’’). The Reorganization closed on January 3, 2024. The offering and sale of Fund Shares pursuant to the Form S–1 and the Form S– 4 and the trading in such Shares commenced with the closing of the Reorganization, at which time the registration statements on the Form S–1 and the Form S–4 were declared effective. 12 The Trust, on behalf of the Fund, submitted an Amendment No. 1 to the Registration Statement on November 14, 2023 (‘‘DRS Amendment’’). The Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’), enacted on April 5, 2012, added Section 6(e) to the Securities Act. Section 6(e) of the Securities Act provides that an ‘‘emerging growth company’’ may confidentially submit to the Commission a draft registration statement for confidential, nonpublic review by the Commission staff prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed not later than 15 days before the date on which the issuer conducts a road show, as such term is defined in Securities Act Rule 433(h)(4). An emerging growth company is defined in Section 2(a)(19) of the Securities Act as an issuer with less than $1,000,000,000 total annual gross revenues during its most recently completed fiscal year. The Trust meets the definition of an emerging growth company and consequently submitted its Draft Registration Statement and DRS Amendment to the Commission on a confidential basis. 13 A Pre-Effective Amendment No. 1 to the Registration Statement was filed on December 26, 2023 (the ‘‘Amendment’’). The Amendment was an exhibit-only filing to provide the Fund’s executed bitcoin custodian agreement. The Draft Registration Statement and the DRS Amendment have been made accessible as public filings. The Registration Statement is not yet effective, and the Shares will not trade on the Exchange under the prospectus contained in the Registration Statement until such time that the Registration Statement is effective. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices Fund Services) is the sub-administrator, registrar, and transfer agent for the Fund (‘‘Sub-Administrator’’ or ‘‘Transfer Agent’’). U.S. Bank, N.A. will hold the Fund’s cash and/or cash equivalents 14 (‘‘Cash Custodian’’). BitGo Trust Company, Inc. will keep custody of all the Fund’s bitcoin as the ‘‘Bitcoin Custodian.’’ 15 The Fund’s Investment Objective and Strategy khammond on DSKJM1Z7X2PROD with NOTICES According to the Registration Statement, the investment objective of the Fund is to have the daily changes in the net asset value (‘‘NAV’’) of the Shares reflect the daily changes in the price of its benchmark, less expenses from the Fund’s operations, by investing in both bitcoin and bitcoin futures contracts traded on the Chicago Mercantile Exchange, Inc. (‘‘CME’’).16 In doing so, the Sponsor expects that the Fund will provide investors with bitcoin exposure that is more resistant to fraud and manipulative practices than comparable products that seek to rely on unregulated trading platforms.17 In particular, to avoid any exposure to potential manipulation from actors operating on unregulated trading platforms, although the Fund will hold spot bitcoin, the Fund’s NAV will be calculated using a spot bitcoin price derived from the price of CME Bitcoin Futures Contracts (as defined below), and the Fund expects to purchase and sell bitcoin exclusively via Exchange for Physical (‘‘EFP’’) transactions on the CME’s bitcoin futures market (the ‘‘CME Bitcoin Futures Market’’).18 The Fund 14 ‘‘Cash equivalents’’ include short-term treasury bills (90 days or less to maturity), money market funds, and demand deposit accounts. The Fund does not hold, invest in, or trade in digital assets that are linked to any fiat currency (i.e., stablecoins). 15 The Fund may, in the future, engage additional custodians for its bitcoin, each of whom may be referred to as a Bitcoin Custodian. 16 Consistent with the Approval Order, the Fund currently only invests in BTC Contracts and MBT Contracts (as defined below) and in cash and cash equivalents. 17 As used in this filing, ‘‘unregulated trading platforms’’ refers to trading venues whose trading rules are not subject to regulatory review or approval by the SEC, CFTC or other federal regulator, whose trading operations are not subject to regulatory examination, and that are not required by law to have anti-manipulation practices that federal securities or commodities regulation would require. See, e.g., Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 at 37597 (August 1, 2018) (SR–BatsBZX–2016–30) (the ‘‘Winklevoss Order’’) (describing lack of regulatory oversight for Gemini trading platform). 18 The Fund’s futures-based spot pricing methodology and use of EFP transactions are VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 will not trade or otherwise rely on information or services from unregulated spot bitcoin trading platforms, but will instead buy CME Bitcoin Futures Contracts with the purpose of using them to acquire physical bitcoin through EFP transactions on the regulated CME Bitcoin Futures Market. According to the Registration Statement, CME offers two bitcoin futures contracts, one contract representing five (5) bitcoins (‘‘BTC Contract’’) and another contract representing one-tenth of one (0.10) bitcoin (‘‘MBT Contract’’).19 Each BTC Contract and MBT Contract settles daily to the BTC Contract volume-weighted average price (‘‘VWAP’’) of all trades that occur between 2:59 p.m. and 3:00 p.m., Central Time, the settlement period, rounded to the nearest tradable tick. BTC Contracts and MBT Contracts each expire on the last Friday of the contract month, and the final settlement value for each contract is based on the CME CF Bitcoin Reference Rate (‘‘CME CF BRR’’).20 BTC Contracts and MBT Contracts each trade six consecutive monthly contracts plus two additional December contract months (if the 6 consecutive months include December, only one additional December contract month is listed). Because BTC Contracts and MBT Contracts are exchange-listed, they allow investors to gain exposure to bitcoin without having to hold the underlying cryptocurrency. The Fund’s benchmark, as referenced above, is the Nasdaq Bitcoin Reference Price—Settlement (the ‘‘NQBTCS’’ or ‘‘Benchmark’’),21 which ultimately tracks the price of bitcoin. The Sponsor believes that the spot price performance of bitcoin is best measured through the use of a reputable index provided by an established index provider and has selected the NQBTCS as a trustworthy benchmark of bitcoin pricing. The Sponsor will employ a passive investment strategy that is intended to track the changes in the Benchmark regardless of whether the Benchmark explained in greater detail below in ‘‘Futures-Based Spot Price’’ and ‘‘EFP Transactions,’’ respectively. 19 BTC Contracts began trading on the CME Globex trading platform on December 15, 2017, and are cash-settled in U.S. dollars. MBT Contracts began trading on the CME Globex trading platform on May 3, 2021, under the ticker symbol ‘‘MBT’’ and are also cash-settled in U.S. dollars. For purposes of this filing, BTC Contracts and MBT Contracts may also be referred to, individually or collectively, as ‘‘CME Bitcoin Futures Contracts.’’ 20 The CME CF BRR aggregates the trade flow of major bitcoin spot platforms during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin. 21 See https://indexes.nasdaqomx.com/Index/ Overview/NQBTCS. PO 00000 Frm 00248 Fmt 4703 Sfmt 4703 2445 goes up or goes down, meaning that the Sponsor will not try to ‘‘beat’’ the Benchmark. In order to track the Benchmark as closely as possible, the Fund will aim to maximize its investment in bitcoin. The Fund will gain exposure to physical bitcoin by buying CME Bitcoin Futures Contracts for the primary purpose of using such CME Bitcoin Futures Contracts to acquire physical bitcoin through EFP transactions on the regulated CME Bitcoin Futures Market. The Fund may maintain CME Bitcoin Futures Contracts positions (with related cash reserves to meet applicable margin requirements) if the Sponsor deems it necessary to meet the Fund’s liquidity needs for the cash payment of Share redemption settlements and of other applicable expenses borne by the Fund. The Fund will also maintain cash balances or invest in cash equivalents to the extent it is unable to purchase CME Bitcoin Futures Contracts with available cash. If there are no Share redemption orders or currently due Fund-payable expenses and assuming that the Fund is able to utilize all available cash to purchase CME Bitcoin Futures Contracts, the Fund’s portfolio is expected to be composed of at least 95% in bitcoin and up to 5% in cash, cash equivalents, and/or CME Bitcoin Futures Contracts. The Sponsor expects that the Fund’s average daily tracking error against the Benchmark will be less than 10% over any period of 30 trading days. The Fund’s passive investment strategy is designed to allow investors to purchase and sell the Shares for the purpose of investing in bitcoin, whether to hedge the risk of losses in their bitcoin-related transactions or gain price exposure to the bitcoin market. The Fund’s investments will be consistent with the Fund’s investment objective and will not be used to enhance leverage. That is, given its passive investment strategy, the Fund’s investments will not be used to seek performance that is the multiple or inverse multiple (e.g., 2Xs, 3Xs, –2Xs, and –3Xs) of the Fund’s Benchmark. The Fund’s Benchmark According to the Sponsor, the Fund will use the Benchmark as a reference to track and measure its performance compared to the price performance of spot bitcoin. The Fund will not use the Benchmark for valuation purposes when calculating the Fund’s NAV.22 22 As further explained below, the Administrator will employ a methodology based on the settlement E:\FR\FM\12JAN1.SGM Continued 12JAN1 2446 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES According to the Sponsor, the NQBTCS is designed to allow institutional investors to track the price of bitcoin by applying a rigorous methodology to trade data captured from cryptocurrency trading platforms that meet the eligibility criteria of the Nasdaq Crypto Index (‘‘NCI’’). The NQBTCS is calculated once every trading day by applying a publicly available rules-based pricing methodology to a diverse collection of pricing sources to provide an institutional-grade reference price for bitcoin.23 The NQBTCS is designed to account for variances in price across a wide range of sources, each of which has been vetted according to criteria identified in the methodology. Specifically, the NQBTCS settlement value is the Time Weighted Average Price (‘‘TWAP’’) calculated across the VWAPs for each minute in the settlement price window, which is between 2:50:00 and 3:00:00 p.m. New York time. Where there are no transactions observed in any given minute of the settlement price window, that minute is excluded from the calculation of the TWAP. According to the Sponsor, the NQBTCS also utilizes penalty factors to mitigate the impact of anomalous trading activity such as manipulation, illiquidity, large block trading, or operational issues that could compromise price representation. Three types of penalties are applied: abnormal price penalties, abnormal volatility penalties, and abnormal volume penalties. These penalties are defined as adjustment factors to the weight of information from each trading platform that contributes pricing information based on the deviation of a trading platform’s price, volatility, or volume from the median across all trading platforms. For example, if a core trading platform’s price is 2.5 standard deviations away from the median price, its price penalty factor will be a 1⁄2.5 multiplier. Finally, as a means of achieving the highest degrees of confidence in the reported volume, data is sourced only from ‘‘core trading platforms’’ that are screened, selected, and approved by the Nasdaq Crypto Index Oversight Committee (the ‘‘NCIOC’’). Core trading platforms must: prices of the CME Bitcoin Futures Contracts to determine the price of the Fund’s spot bitcoin holdings for NAV calculation. The Sponsor believes that this approach enables the Fund to effectively track the Benchmark while also mitigating risks to investors stemming from exposure to unregulated trading platforms and the prices derived from them. 23 See https://indexes.nasdaqomx.com/docs/ methodology_NCI.pdf. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 (1) Have strong forking controls; (2) Have effective anti-money laundering controls; (3) Have a reliable and transparent application programming interface that provides real-time and historical trading data; (4) Charge fees for trading and structure trading incentives that do not interfere with the forces of supply and demand; (5) Be licensed by a public independent governing body; (6) Include surveillance for manipulative trading practices and erroneous transactions; (7) Evidence a robust IT infrastructure; (8) Demonstrate active capacity management; 24 (9) Evidence cooperation with regulators and law enforcement; and (10) Have a minimum market representation for trading volume.25 Additionally, the NCIOC conducts further diligence to assess a trading platform’s eligibility and will consider additional criteria such as the trading platform’s organizational and ownership structure, security history, and reputation. The list of existing core trading platforms will be recertified by the NCIOC at a minimum on an annual basis. The Sponsor believes that the NQBTCS is a suitable Benchmark for the Fund for several reasons. First, it would provide reliable pricing for purposes of tracking the actual performance of bitcoin. Second, it is administered by a reputable index administrator that is not affiliated with the Sponsor or Fund,26 24 According to NCI’s methodology, to demonstrate active capacity management, core trading platforms must demonstrate that their platform’s technical infrastructure is designed in such a way that it is capable of accommodating a sudden, significant increase in trade volume without impacting system functionality. See id. at 4. 25 According to NCI’s methodology, to compute a trading platform’s market size, the NCIOC sums the U.S. Dollar (‘‘USD’’) volume of all eligible digital asset—USD pairs for the month of August each year. A core trading platform must have at least 0.05% of the total volume in eligible trading platforms. See id. 26 Nasdaq, Inc. (‘‘Nasdaq’’), the index provider, adheres to the International Organization of Securities Commissions principles for benchmarks (the ‘‘IOSCO Principles’’) for many of its indexes via an internal control and governance framework that is audited by an external, independent auditor on an annual basis. Although NQBTCS is not currently one of the indexes that is required to comply with IOSCO Principles, as a reference rate index, it is administered in a manner that is generally consistent with both the IOSCO Principles and the elements of Nasdaq’s internal control and governance framework pursuant to IOSCO Principles. NQBTCS is administered and governed by the NCIOC in accordance with the publicly available NCI methodology. The NCIOC oversees all aspects of the administration of the NQBTCS, PO 00000 Frm 00249 Fmt 4703 Sfmt 4703 which provides assurances of accountability and independence. Finally, the NQBTCS methodology is designed to resist potential price manipulation from unregulated bitcoin markets by applying the following safeguards: (1) Strict eligibility criteria for the NCI core trading platforms from which the NQBTCS data is drawn; (2) A diverse collection of trustworthy pricing sources to provide an institutional-grade reference price for bitcoin; and (3) The use of adjustment factors to mitigate against the impact of any anomalous trading activity. Futures-Based Spot Price For purposes of calculating the Fund’s NAV, the value of the bitcoin held by the Fund will be determined by the Administrator in good faith based on a ‘‘Futures-Based Spot Price’’ or ‘‘FBSP’’ methodology.27 The Sponsor has selected this pricing approach to value the Fund’s bitcoin because it insulates the calculation of the NAV of the Fund from data from unregulated bitcoin trading platforms. According to the Sponsor, the FBSP methodology allows for the estimation of the spot price of bitcoin by utilizing only market data related to BTC Contracts 28 traded on the CME Bitcoin Futures Market (specifically, settlement prices and time to maturity for such futures contracts). The Administrator is thus able to calculate the Fund’s NAV (as further described in ‘‘Net Asset Value’’ below) without relying on market data from unregulated bitcoin trading platforms. The Administrator will apply the FBSP methodology to estimate the price of spot bitcoin daily by using the daily settlement prices of BTC Contracts. According to the Sponsor, the FBSP methodology is based on wellestablished academic research,29 including the defined processes and controls for the selection and monitoring of third parties such as the core trading platforms and core custodians (see ‘‘Custody of Bitcoin,’’ infra), as well as the validation and reconciliation of index calculations and pricing data. The NCIOC also oversees the identification and mitigation of any potential conflicts of interest, formal complaints, and updates or changes to the index methodology consistent with the IOSCO Principles. 27 The FBSP is based on extensive academic research on forward yield curves and is further described in the Fund’s Registration Statement. 28 For the calculation of FBSP, the Administrator considers all listed BTC Contracts that have a daily settlement price published by the CME Bitcoin Futures Market on a given date. The Sponsor notes that, although BTC and MBT Contracts have the same settlement prices, the Administrator will only consider BTC Contracts when calculating the FBSP. 29 See, e.g., Nelson, Charles R., and Andrew F. Siegel, ‘‘Parsimonious modeling of yield curves.’’ E:\FR\FM\12JAN1.SGM 12JAN1 2447 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices particularly on the topic of term structure of interest rates. As discussed below, the Sponsor has tested the reliability of FBSP-derived prices by comparing them to historical samples of various benchmarks for the prices of physical bitcoin. The Sponsor believes that the FBSP-derived prices very closely adhere to such benchmarks and that the FBSP methodology can fairly price bitcoin while seeking to protect the Fund’s NAV from short-term distortions that may arise due to fraud or manipulation attempts by bad actors trading on unregulated trading platforms. The calculations underlying the FBSP methodology utilize well-understood and simple-to-implement mathematical and statistical techniques, such as multivariate linear regressions and arithmetic operations. The detailed methodology is described in the Fund’s Registration Statement and will also be published on the Fund’s website (https://hashdex-etfs.com/), along with all inputs necessary to replicate the calculation. In the event of any modifications to the FBSP methodology, the Fund will issue a press release notifying the investing public of such change and the date of the change’s effectiveness, which press release will be filed with the Commission under a current report on Form 8–K by the Fund, and, with respect changes to the FBSP methodology as described in this filing, file a proposed rule change under Section 19(b) with the Commission. The FBSP methodology involves calculating a parametric forward curve 30 into prevailing prices for actual BTC Contracts. The parametric forward curve can then be used to derive the spot price of bitcoin by calculating the price to the point of immediate settlement (i.e., setting the BTC Contracts’ time to maturity to zero). This process results in a set of calculated weights that are applied to the price of each actual BTC Contract included in the forward curve. The weights are calculated daily and are dependent solely on the number of calendar days until maturity of each active BTC Contract.31 The spot price for bitcoin derived from FBSP is, in turn, calculated by multiplying each price by its applicable weight and then summing all terms: FBSP = SWi * SPi where Wi is the weight and SPi is the settlement price of each BTC Contract. The chart below visually illustrates the CME Bitcoin Futures Market’s forward curve and how the FBSP is determined for a specific date (October 9, 2023). Each dot represents the settlement price of a specific CME Bitcoin Futures Contract. The line represents the calculated (fitted) forward curve. The dots align closely with the fitted curve line, meaning that the curve accurately tracks the settlement prices of the BTC Contracts. The square is a point on the curve corresponding to a zero-day maturity, representing the spot price for bitcoin for that date. BTC Contracts Forward Curve and FBSP - 10/09/2023 - Fitl8d CUrve • Funns 30,000 . - ~ - - - - - - - - ~ - - - - - - - - - - - - - - - - - - - - - - - 27,000 - - - - - - - - - - - - - - - - - - ~ - - - - - - - - - - - - - - 0 100 200 300 Days lo maturily (calendar days} The table below demonstrates the FBSP calculation for the same specific day. FBSP ON 10/09/2023 khammond on DSKJM1Z7X2PROD with NOTICES Oct23 ......................................................................................................................... Nov23 ......................................................................................................................... Journal of Business (1987), available at: https:// www.researchgate.net/publication/24103017_ Parsimonious_Modeling_of_Yield_Curves; Svensson, Lars E.O., ‘‘Estimating and Interpreting Forward Interest Rates: Sweden 1992–1994.’’ (September 1994), IMF Working Paper No. 94/114, VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 122.10 ¥0.70 available at: https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=883856. 30 The forward curve of bitcoin futures contracts is the plot of the prices of individual futures contracts against their respective time to maturity. A parametric forward curve is a mathematical function that produces a price for a futures contract PO 00000 Frm 00250 Fmt 4703 Sfmt 4703 Settlement price (SP) $27,735.00 27,925.00 Productivity (W x SP) $33,864.44 ¥$195.48 for any maturity, which can be used to generate a theoretical estimate of a futures price for a maturity that does not have contracts negotiated, including a spot price, by setting the time to maturity to zero. 31 The Sponsor will make these weights publicly available on the Fund’s website daily, such that any third party can replicate the calculation. E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.003</GPH> Weight (W) (%) Future 2448 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices FBSP ON 10/09/2023—Continued Weight (W) (%) Future Settlement price (SP) Productivity (W x SP) ......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ......................................................................................................................... ¥6.70 ¥5.9 ¥4.90 ¥3.70 ¥1.50 ¥0.30 0.50 1.10 28,115.00 28,275.00 28,445.00 28,650.00 29,205.00 29,755.00 30,305.00 30,860.00 ¥$1,883.71 ¥$1,668.23 ¥$1,393.81 ¥$1,060.05 ¥$438.08 ¥$89.27 $151.53 $339.46 FBSP .................................................................................................................. NQBTC ............................................................................................................... Divergence (%) ................................................................................................... .............................. .............................. .............................. .............................. .............................. .............................. $27,626.82 $27,619.94 0.02% Dec23 Jan24 Feb24 Mar24 Jun24 Sep24 Dec24 Mar25 Using data available on Bloomberg on July 10, 2023, the Sponsor compared FBSP to NQBTCS and CME CF BRR from December 27, 2022 to July 7, 2023 and concluded that FBSP tracks both indexes with satisfactory accuracy. The following charts show a direct comparison between those two benchmark values and FBSP: 28000 (! 0::24000 m 20000 16000 20000 24000 28000 3200, 16000 I 20000 FBSP khammond on DSKJM1Z7X2PROD with NOTICES In the above charts, each point indicates one day, and their proximity to the line shows how similar FBSP is to each of NQBTCS and CME CF BRR. The correlations between FBSP and each of NQBTCS and CME CF BRR exceed 99.9%, and the mean absolute percentage divergences are 21 basis points (‘‘bps,’’ where 1bp = 0.01%) and 22bps, respectively, while the median absolute percentage divergences are 18bps and 17bps, respectively. The Sponsor believes that this data strongly suggests that FBSP is a suitable choice for NAV calculation purposes. Mitigation of Manipulation Risks Through Use of the FBSP for NAV Calculation While the Commission has raised valid concerns about the potential influence of unregulated bitcoin markets on the daily settlement price of the CME Bitcoin Futures Market, the Sponsor VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 28000 3200 FBSP believes that the proposed use of FBSP to calculate the value of the bitcoin held by the Fund for purposes of NAV calculation provides a significant and sufficient degree of insulation from such influences, for the following reasons: 1. Regulated market influence: The daily settlement price of CME Bitcoin Futures Contracts, which is the basis for the NAV calculation of both futures contracts and bitcoin holdings of the Fund, is primarily influenced by trading activity within the regulated futures market itself. This market is subject to stringent oversight and surveillance mechanisms designed to detect and deter manipulative and fraudulent practices, thus significantly limiting the possible influence of unregulated bitcoin markets on the daily settlement price. 2. High liquidity and volume: The CME Bitcoin Futures Market is characterized by high liquidity and PO 00000 24000 Frm 00251 Fmt 4703 Sfmt 4703 trading volume, such that any attempt to influence the price calculated by the FBSP through trading activity in other, unregulated bitcoin markets would require a significant amount of capital and coordination. The Sponsor thus believes that any such manipulation attempts would be readily detectable by the CME’s market surveillance. 3. Complex pricing methodology: The NAV calculation methodology is comprehensive and accounts for both the tenor and final settlement price of each futures contract. In addition, the FBSP method used in the NAV calculation process incorporates all maturities of BTC Contracts, which exhibit a robust price relationship among themselves. As a result, attempting to manipulate these prices in a coordinated manner to generate a substantial impact on NAV would be very challenging for potential manipulators and likely financially E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.004</GPH> 16000 16000 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES ABP Average 0.39 0.36 0.22 0.17 0.15 0.08 0.01 Coinbase (spot USD) Binance (spot USDT) Kraken (spot USD) Bitstamp (spot USD) Gemini (spot USD) ItBit (spot USD) Binance (oeroetual USDTI 32 The IFV, as further discussed in the ‘‘Indicative Fund Value’’ section below, is based on the prior day’s closing NAV per Share and updated to reflect changes in the Fund’s holdings value during the trading day. 33 This date range represents days with intraday data available on Bloomberg as of July 27, 2023. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 protecting investors and maintaining the integrity of the market. The Sponsor also believes that it is highly unlikely that a person attempting to manipulate the NAV of the Fund could do so successfully by trading on unregulated spot and derivatives markets. Because of direct arbitrage, it is reasonable to assume that the ETP’s market price (in the secondary market) would closely adhere to the Fund’s Indicative Fund Value (‘‘IFV’’),32 given that APs can always create and redeem shares of the Fund hedging with a basket of CME Bitcoin Futures Contracts and the value of the creation basket is determined based on the NAV of the Fund, which in turn is calculated using the FBSP method based on such basket of CME Bitcoin Futures Contracts. Consequently, the likelihood that a potential manipulator of the ETP could succeed by exclusively trading in unregulated bitcoin markets would depend on how much the prices in these markets have an impact over CME Bitcoin Futures Contracts prices. The likelihood that a potential manipulator would undertake such an effort is also low when considering the financial burden of manipulating the unregulated markets and the overall expected profitability of any such manipulation. To further assess such likelihood, the Sponsor carried out the following analysis to investigate the relationship between prices from relevant unregulated bitcoin markets and the prices of CME Bitcoin Futures Contracts, to assess the impact that a manipulation on those markets would have on the CME Bitcoin Futures Market. The Sponsor collected oneminute bars data between January 18, 2023 and July 26, 2023 33 of prices for the nearest CME Bitcoin Futures Contract (‘‘Nearest CME Futures’’) and the following alternative bitcoin prices (‘‘ABP’’): (1) bitcoin (in USD) on each of Estimated Parameters 1st Decile Median 9th Decile 0.21 0.41 0.53 0.15 0.38 0.52 0.03 0.23 0.40 0.03 0.18 0.33 0.16 0.30 -0.01 -0.07 0.07 0.23 -0.07 0.00 0.09 Days with less than 40 observations for a given ABP were excluded from the analysis of such ABP. 34 The core trading platforms as of December 31, 2023 were BitStamp, Coinbase, Gemini, itBit, and Kraken. PO 00000 Frm 00252 Fmt 4703 Sfmt 4725 NQBTCS’s core trading platforms,34 (2) bitcoin (in Tether stablecoin (USDT)), and (3) BTCUSDT USDs-Margined Perpetuals on Binance. For each day and each ABP, a simple regression model was estimated with one-minute Nearest CME Futures log-returns as the dependent variable, and two independent variables: (1) the log Nearest CME Futures closing price of the previous minute (as a control variable) and (2) the difference between the ABP log return and the Nearest CME Futures log return in the previous minute (as the variable of interest). The estimated coefficients associated with the variable of interest are a measure of the expected response from the Nearest CME Futures (as measured by its returns) to a divergence between its own return information and the one from ABP in the near past (one-minute lagged returns). Such divergences are expected to occur in cases of manipulation. A higher coefficient (closer to one) would indicate that Nearest CME Futures are more sensitive to and strongly influenced by the divergence, while a lower coefficient (closer to zero) would suggest that Nearest CME Futures are less responsive and not significantly influenced by the information coming from ABP. The Sponsor believes that these coefficients can be considered a conservative estimate of the real impact that manipulation in an ABP would have over the Nearest CME Futures price because the estimates are calculated under normal circumstances rather than under a manipulative attack, in which some other indicators, such as abnormal volume and volatility, would warn market participants and undermine their perception of the attacked ABP as a reliable price reference. The results of the Sponsor’s analysis are summarized in the table below: 35 Market Deeth +2% Deeth -2%Deeth $10,317,109 $17,320,315 $17,523,531 $42,136,404 $28,189,731 $30,375,259 $5,083,934 $4,831,827 35 The market depth information was obtained from CoinMarketCap on July 19, 2023. The ABPs with blank cells in this table were not included in the July 19, 2023 snapshot. E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.005</GPH> unfeasible. The Sponsor thus believes that the complexity of the methodology provides an additional layer of protection against manipulation, as it would be extremely difficult for a manipulator to influence all these factors in a coordinated way to impact the Fund’s NAV without leaving a detectable trail that would alert market surveillance. 4. Focus on near-term contracts: The FBSP methodology gives more importance to futures contracts that are due for settlement in the near term because such contracts are more heavily traded, and their prices are more reliable indicators of the current spot price of bitcoin. The Sponsor believes that the methodology’s focus on nearterm contracts further reduces the potential for manipulation, as these contracts are less susceptible to manipulation due to their higher trading volumes and liquidity. As detailed above, the Sponsor’s proposed investment strategy ensures that no unregulated spot bitcoin trading platform could be considered a ‘‘market of relevant size’’ in relation to the Fund, given that the Fund does not rely on any information or services coming from unregulated markets. All of the Fund’s operations, including the purchase and sale of bitcoin and its NAV determination, rely on CME Bitcoin Futures Contracts on the CME Bitcoin Futures Market. Thus, all of the Fund’s transactions, whether in CME Bitcoin Futures Contracts or physical bitcoin, are registered and monitored on a regulated exchange, providing an additional layer of security and transparency. Because any attempt to manipulate the Fund would require significant trading on the CME Bitcoin Futures Market, and not on any unregulated bitcoin trading platform, there is significantly reduced potential for manipulation and fraud, further 2449 khammond on DSKJM1Z7X2PROD with NOTICES 2450 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices The Sponsor’s analysis suggests that the influence of ABP over the Nearest CME Futures prices is relatively low. For instance, if a would-be manipulator chose to attack Coinbase, which is an ABP with higher coefficients and thus higher potential to impact Nearest CME Futures, the average coefficient of 0.39 means that in order to manipulate Nearest CME Futures prices by 1%, the would-be manipulator would have to distort Coinbase prices by more than 2.5% (i.e., 1% divided by 0.39) on average. To be successful with 90% confidence (1st Decile), this manipulator would have to distort Coinbase prices by more than 4.7% (1% divided by 0.21). The Sponsor believes that its analysis supports that, even considering these conservative estimates, indirect manipulation would be extremely inefficient. The market depth columns in the above table indicate that substantial financial resources, running into tens of millions of dollars, are present on both sides of the order book for the most influential ABPs (even without including hidden orders, bots, and arbitrageurs that effectively enhance liquidity). The considerable financial commitment that would be required makes the manipulation of these prices an expensive endeavor. The Sponsor believes that its analysis demonstrates that the low efficiency of attempts to manipulate ABPs, coupled with the significant cost involved in influencing impactful ABPs, makes potential manipulation of spot bitcoin markets an unattractive proposition, and that it is therefore highly unlikely that a potential manipulator of the ETP could succeed by exclusively trading in unregulated bitcoin markets. The combination of the high costs and the inefficiencies associated with manipulation makes it a daunting and unprofitable venture. The Sponsor acknowledges the potential for influence from trades settled in unregulated bitcoin markets. However, the Sponsor believes that the NAV calculation methodology, coupled with the inherent characteristics of the CME Bitcoin Futures Market, provides a significant degree of protection against such influence being deliberately used to manipulate the Fund’s market price or NAV. The Sponsor believes that any such attempt at manipulation very likely would be detected by CME market surveillance. EFP Transactions According to the Sponsor, an EFP transaction, also known as an Exchange for Related Position (‘‘EFRP’’) VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 transaction,36 is a type of trade that is available for most CME futures contracts. An EFP trade is a composite transaction that involves the opening of a position in the futures market and the execution of an inverse trade in the underlying physical asset. An EFP trade closes with a physical delivery against a cash settlement. Because EFP trades require the parties to the transaction to simultaneously trade the futures and the physical legs of the transaction, the futures leg of an EFP trade is not executed at the CME’s central limit order book. Rather, an EFP is a CME-regulated, bilaterally negotiated block trade, in which both parties engage in both legs of the composite transaction. According to the Sponsor, the Fund seeks to use EFP transactions to gain exposure to spot bitcoin for the following reasons: (1) EFP transactions are reported through the CME Bitcoin Futures Market, which is a regulated market and the relevant regulated market for the Fund for the purposes of the test specified in the Winklevoss Order. (2) EFP transactions are subject to the CME’s market surveillance program, which helps deter and investigate fraudulent and manipulative misconduct. (3) EFP transactions will allow the Fund to gain efficient and regular exposure to physical bitcoin without relying on unregulated bitcoin markets for any purpose, including its creation and redemption processes. When the Sponsor intends to increase the Fund’s bitcoin holdings, the Fund will participate in an EFP transaction to sell futures contracts and buy physical bitcoin, while the liquidity provider (‘‘LP’’) participating in such transaction will buy futures contracts and sell physical bitcoin.37 Similarly, when the Sponsor seeks to decrease the Fund’s bitcoin holdings, the Fund will participate in an EFP transaction to buy futures contracts and sell physical bitcoin, while the LP on the other side 36 See https://www.cmegroup.com/clearing/ operations-and-deliveries/accepted-trade-types/efpefr-eoo-trades.html. The terms ‘‘EFP’’ and ‘‘EFRP’’ are used interchangeably for purposes of this filing. 37 The LPs with which the Fund will engage in bitcoin transactions are third parties that are not affiliated with the Fund and Sponsor and are not acting as agents of the Fund, Sponsor, or AP, and all transactions will be done on an arms-length basis. There is no contractual relationship between the Fund, the Sponsor, or the LP. When seeking to sell bitcoin on behalf of the Fund, the Sponsor will seek to sell bitcoin at commercially reasonable prices and terms to any of the approved LPs. Once agreed upon, the transaction will generally occur on an ‘‘over-the-counter’’ basis. PO 00000 Frm 00253 Fmt 4703 Sfmt 4703 of the transaction will sell futures contracts and buy physical bitcoin. The most well-established means for buying and selling physical bitcoin in large quantities is through the use of simple cash-for-asset OTC transactions with an LP, such as several market makers active in U.S. capital markets. The Sponsor believes that a key benefit of EFP transactions is that they allow for an OTC transaction to be conducted under the regulatory oversight of the CME. According to the Sponsor, the Fund will exclusively use CME Bitcoin Futures Market’s EFP transactions to purchase and sell its physical bitcoin. Therefore, all trading of the Fund’s noncash (or cash equivalents) assets (i.e., CME Bitcoin Futures Contracts and physical bitcoin) will take place through the CME Bitcoin Futures Market, and the CME Bitcoin Futures Market will be the relevant regulated market for the Fund. Because NYSE Arca and CME are both members of the Intermarket Surveillance Group (‘‘ISG’’), information shared by CME with NYSE Arca can be used to assist in detecting and deterring fraudulent or manipulative misconduct. EFP Transactions Through the CME Bitcoin Futures Market All EFP trades have two legs: a futures leg and a physical leg. In the futures leg of an EFP Transaction through the CME Bitcoin Futures Market, party A sells CME Bitcoin Futures Contracts to party B for a given price.38 In the physical leg of the same transaction, party A buys physical bitcoins sold by party B by delivering cash consideration for those bitcoins to party B. When two parties agree to perform a CME Bitcoin Futures Market EFP trade,39 they must agree on the following terms: (1) The contract (maturity) that will be used in the futures leg of the trade; (2) The number of futures contracts in the futures leg of the trade; (3) The price of the futures contract in the futures leg of the trade; 38 In practice, both parties will simply enter open futures positions on the CME Bitcoin Futures Market (party A will open a short position and party B will open a long position). Both positions will have the exact same size and will be opened at the same price. The CME allows EFP transactions to be executed at a mutually agreed price, but it requires that such price be commercially reasonable. CME’s EFRP rules establish that if prices deviate excessively from prevailing market levels, counterparties to the trade may be required to demonstrate that such deviant prices are indeed legitimate. See CME Rule 538.F; note 44, infra. 39 See https://www.cmegroup.com/education/ articles-and-reports/bitcoin-futures-exchange-forphysical-transactions.html. E:\FR\FM\12JAN1.SGM 12JAN1 2451 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices (4) The quantity of physical bitcoins in the physical leg of the trade (where the amount of bitcoin traded must be approximately equivalent to the notional amount of the futures contracts traded); 40 (5) The basis spread,41 which is used to determine the price per bitcoin for the cash payment in the physical leg of the EFP trade. After both parties agree to the terms of an EFP trade, they report the trade details to the CME. The futures leg of the EFP transaction is cleared by CME Clearing. The two parties to the EFP trade are responsible for bilaterally . l I I I I I • Fund clearing the physical leg of the transaction. The Fund’s Use of EFP Transactions According to the Sponsor, the Fund will, under normal market conditions, frequently increase or decrease its holdings of physical bitcoin as Shares are created and redeemed. As noted above, the Fund will acquire and dispose of physical bitcoin only through EFP transactions through the CME Bitcoin Futures Market, which take place under the regulatory oversight of the CME, a CFTC-regulated market. Pursuant to the Fund’s investment objectives, when the Sponsor decides to increase or decrease its holdings of physical bitcoin, it will cause the Fund to execute an EFP trade with an LP. The Fund and the LP will simultaneously exchange a futures position for a corresponding, economically offsetting position in physical bitcoin. The diagram below illustrates the steps in the execution of a typical EFP trade by the Fund to acquire spot bitcoin in exchange for CME Bitcoin Futures Contracts. • I I I I I I I ' I I l l I I ' I I I I I I I I I ' 1_ ' I I I ' I I I I I '' I .___ ____ ' I I .,. .,. "" - - - - • Messaglns To provide a more concrete example of an EFP transaction that the Fund would undertake to acquire spot bitcoin, assume that the Fund needs to buy 50 bitcoins in exchange for 10 units of the next maturity of BTC Contracts.42 The Sponsor will select 43 an LP that it believes will provide the best execution opportunity for the proposed EFP trade. The LP will provide bid/ask quotes for the EFP transaction as a basis spread against the settlement price of the BTC Contract to determine the price of the physical bitcoin that will be exchanged in the physical leg of the EFP. Then, assume that the Sponsor determines that the best option for the Fund is a bid of +25 bps. Assuming that the daily settlement price of the relevant BTC Contract was $26,060, the price for the physical leg of the EFP transaction agreed upon by the Fund and the LP is $25,995.01. Upon completion of the EFP transaction, the Fund and the LP will have different positions, but the same financial exposure: • Before the transaction, the Fund was long 10 BTC Contracts; after the transaction, it has converted this exposure into 50 physical bitcoins. 40 In practice, the quantity of bitcoins in both the futures leg and in the physical leg of a CME Bitcoin Futures Market EFP trade are likely to be exactly the same. 41 ‘‘Basis spread’’ refers to the difference in price between two related financial instruments. In the context of an EFP transaction, the basis spread is the difference between the futures contract price and the spot price of the underlying bitcoin. This spread is crucial in determining the amount of cash payment in the physical leg of the EFP transaction, essentially setting the price per bitcoin based on the prevailing market conditions in the futures and spot markets. 42 As detailed above, one BTC Contract represents five bitcoins. 43 As described in the Fund’s Registration Statement, the Sponsor will conduct a Request-forQuote auction with one or more previously identified LPs to determine the best price on the requested quantity for the proposed EFP transaction. The LPs of the Fund are screened, selected, and approved by the Sponsor and should satisfy, at minimum, the following criteria: (1) Be licensed as a Money Service Business by the Financial Crimes Enforcement Network; (2) Registered with the CFTC and a member of the NFA or otherwise comply with applicable CFTC requirements governing eligibility to transact in bitcoin EFPs; (3) Have anti-money laundering and combating the financing of terrorism policies in place and be compliant with Financial Action Task Force guidance; (4) Have cybersecurity, disaster recovery and business continuity, and third-party service provider management policies. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00254 Fmt 4703 Sfmt 4703 E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.006</GPH> khammond on DSKJM1Z7X2PROD with NOTICES .........,_.. Asset Movement 2452 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices • Before the transaction, the LP had 50 bitcoins; after the transaction, it The table below illustrates the steps in this EFP transaction: Steps LP 1. Starting point ............................................................................................................. 50 bitcoin ............................ 2. EFP transaction is negotiated between the LP and the Fund .................................. The LP and the Fund agree to terms of the EFP, namely: • Fund sells/LP buys 10 BTC Contracts at $26,000. • Fund buys/LP sells 50 bitcoins at $25,995.01 (basis spread of +25bps). 3. LP sends bitcoin to the Fund .................................................................................... 4. The EFP transaction is reported to CME and the LP assumes the long position in 10 BTC Contracts. 5. Final position ............................................................................................................. ¥50 bitcoins ...................... +10 BTC Contracts ............ +50 bitcoins. ¥10 BTC Contracts. 10 BTC Contracts .............. 50 bitcoins. EFP transactions must be submitted to the CME ‘‘as soon as possible, but no later than the end of the business day on which the EFRP was executed.’’ 44 The relevant terms reported to the CME are: 45 (1) The type of the EFRP (which, for the Fund, will be the CME Bitcoin Futures Market EFP); (2) The date and time of the trade (i.e., the time when agreement was reached on the prices and quantities of the transaction); (3) The price and quantity of the CME contract (which, for the Fund, will be the CME Bitcoin Futures Contracts); and (4) The price and quantity of the corresponding related position (which, for the Fund, will be physical bitcoin). khammond on DSKJM1Z7X2PROD with NOTICES holds an equivalent position long in 10 BTC Contracts. Mitigation of Manipulation Risks Through Use of EFP Transactions The Sponsor believes that EFP transactions help protect against fraud and manipulation because they allow exchanges that share surveillance information with CME to investigate suspicious behavior by market participants. In addition, the Sponsor believes that regulatory requirements pursuant to CME Rule 538 46 pertaining to EFP transactions significantly increase the likelihood that fraud and manipulation will be detected and deterred. These regulatory requirements include: • Pricing of EFPs: Section 538.F (‘‘Prices and Price Increments’’) states that while parties to an EFP transaction have discretion to mutually agree on a price, EFPs ‘‘may not be priced to facilitate the transfer of funds between parties for any purpose other than as the consequence of legitimate commercial activity.’’ 47 44 See https://www.cmegroup.com/rulebook/files/ cme-group-Rule-538.pdf at FAQ 23. 45 See id. at FAQs 23, 24; Section 538.I. 46 See https://www.cmegroup.com/rulebook/files/ cme-group-Rule-538.pdf. 47 EFRPs ‘‘may not be priced off-market for the purpose of shifting substantial sums of cash from VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 • Reporting: Section 538.I (‘‘Submission to the Clearing House’’) states that parties engaging in an EFP transaction must report each transaction to CME Clearing within the time period and manner specified by the CME.48 EFP transaction volumes are also required to be reported to the CME with the daily large trader positions by each clearing member, omnibus account, and foreign broker. • Recordkeeping: Section 538.H (‘‘Recordkeeping’’) states that ‘‘parties to an [EFP] transaction must maintain all records relevant to the [futures] contract and the related position transaction.’’ 49 The FAQs relating to CME Rule 538 also state that parties to an EFRP, along with their clearing members, are subject to CME jurisdiction and may be required to produce records and cooperate fully with any investigation.50 The Sponsor believes that EFP transactions between the Fund and an LP to trade physical bitcoin are significantly less susceptible to fraud or one party to another, to allocate gains and losses between the futures or options on futures and the cash or OTC derivative components of the EFRP, to evade taxes, to circumvent financial controls by disguising a firm’s financial condition, or to accomplish some other unlawful purpose’’ and ‘‘EFRPs executed at off-market prices are more likely to be reviewed by Market Regulation to determine the purpose for the pricing.’’ See id. at FAQ 11. 48 See id. at FAQs 23, 24; Section 538.I. 49 The types of records that must be maintained by parties to an EFP include: (1) All order tickets, trade blotters, emails, instant messages, telephone recordings or other records related to the order placement, negotiation, execution and/or confirmation of the EFRP. (2) All cash confirmations and signed contracts corresponding to the cash or derivative component of the EFRP. The documentation must contain all of the relevant terms of the transaction and counterparty information. (3) Third party proof of payment evidencing settlement and documentation representing the transfer of ownership of the commodity. (4) Futures account statement reflecting confirmation of the EFRP. (5) Records reflecting the booking of the cash or derivative transaction in the firm’s internal bookkeeping systems. See id. at FAQ 19. 50 See id. at FAQ 20. PO 00000 Frm 00255 Fmt 4703 Sfmt 4703 Fund 10 BTC Contracts. manipulation because they are subject to a range of CME regulatory requirements regarding pricing, reporting, surveillance, and recordkeeping, as discussed above. Further, EFP transactions are entered into only by CFTC-regulated futures commission merchants and occur through the CME Bitcoin Futures Market, which is a CFTC-regulated market with processes in place to prevent market manipulation, including the monitoring of transaction prices and the investigation of potential manipulations. According to the Sponsor, the ability of participants to undertake EFP transactions is determined exclusively by the liquidity of the CME Bitcoin Futures Market and by the liquidity of OTC markets for physical bitcoin, both of which are sufficiently large. The Sponsor understands that a significant number of LPs are prepared to execute bitcoin EFP transactions. The CME’s website lists at least 15 LPs that have agreed to be listed as contacts for clients interested in executing block trades and EFP transactions.51 The Sponsor has consulted with several such LPs and believes that those LPs could provide enough liquidity to support the Fund’s demand for bitcoin when it incorporates physical bitcoin into its strategy. The Sponsor notes that several such LPs already have an ongoing commercial relationship with the Sponsor and/or Hashdex and are active participants in trading the CME Bitcoin Futures Markets, bitcoin, and bitcoin ETPs worldwide. The Bitcoin and Bitcoin Futures Markets According to the Registration Statement, bitcoin is a digital asset that serves as the unit of account on an open-source, decentralized, peer-to-peer 51 A list of the LPs is available at: https:// www.cmegroup.com/trading/bitcoin-brokers-andblock-liquidity-providers.html. E:\FR\FM\12JAN1.SGM 12JAN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices computer network. It may be used to pay for goods and services, stored for future use, or converted to governmentbacked currency. As of the date of this prospectus, the adoption of bitcoin for these purposes has been limited. The value of bitcoin is not backed by any government, corporation, or other identified body. The value of bitcoin depends on its supply (which is limited), and demand for bitcoin in the markets for exchange that have been organized to facilitate the trading of bitcoin. By design, the supply of bitcoin is intentionally limited to 21 million bitcoins. According to the Registration Statement, there are approximately 19 million bitcoins in circulation. Bitcoin is maintained on a decentralized, open source, peer-to-peer computer network, the ‘‘Bitcoin Network.’’ No single entity owns or operates the Bitcoin Network. The Bitcoin Network is accessed through software and governs bitcoin’s creation and movement. The source code for the Bitcoin Network, often referred to as the ‘‘Bitcoin Protocol,’’ is open-source, and anyone can contribute to its development. The infrastructure of the Bitcoin Network is collectively maintained by various participants in the Bitcoin Network, which include miners, developers, and users. Miners validate transactions and provide security to the network, and are currently compensated for that service in bitcoin. Developers maintain and contribute updates to the Bitcoin Protocol. Users access the Bitcoin Network using open-source software. Anyone can be a user, developer, or miner. Bitcoin is ‘‘stored’’ on a digital transaction ledger commonly known as a ‘‘blockchain.’’ A blockchain is a distributed database that is continuously updated and reconciled among certain users and is protected by cryptography. The bitcoin blockchain contains a complete record and history for each bitcoin transaction. New bitcoins are created through a process called ‘‘mining.’’ Miners use specialized computer software and hardware to solve a highly complex mathematical problem presented by the bitcoin Protocol. The first miner to successfully solve the problem is permitted to add a block of transactions to the bitcoin blockchain. The new block is then confirmed through acceptance by a majority of users who maintain versions of the blockchain on their individual computers. Miners that successfully add a block to the bitcoin blockchain are automatically rewarded with a fixed amount of bitcoin for their effort plus VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 any transaction fees paid by transferors whose transactions are recorded in the block. This reward system is the means by which new bitcoin enters circulation and is the mechanism by which versions of the blockchain held by users on a decentralized network are kept in consensus. The Bitcoin Protocol is an opensource project with no official company or group in control, and anyone can review the underlying code. There are, however, a number of individual developers that regularly contribute to a specific distribution of the bitcoin software known as the ‘‘Bitcoin Core.’’ Developers of the Bitcoin Core loosely oversee the development of the source code. There are many other compatible versions of the bitcoin software, but Bitcoin Core is the most widely adopted and currently provides the de facto standard for the Bitcoin Protocol. The core developers are able to access, and can alter, the Bitcoin Network source code and, as a result, they are responsible for quasi-official releases of updates and other changes to the Bitcoin Network’s source code. However, because bitcoin has no central authority, the release of updates to the Bitcoin Network’s source code by the core developers does not guarantee that the updates will be automatically adopted by the other purchasers. Users and miners must accept any changes made to the source code by downloading the proposed modification and that modification is effective only with respect to those bitcoin users and miners who choose to download it. As a practical matter, a modification to the source code becomes part of the Bitcoin Network only if it is accepted by purchasers that collectively have a majority of the processing power on the Bitcoin Network. If a modification is accepted by only a percentage of users and miners, a division will occur such that one network will run the premodification source code and the other network will run the modified source code. Such a division is known as a ‘‘fork.’’ The Sponsor notes that individual users, institutional investors and investment funds that want to provide exposure to bitcoin by investing directly in bitcoin, and therefore must transact in bitcoin, must use the Bitcoin Network to download specialized software referred to as a ‘‘bitcoin wallet.’’ This wallet may be used to send and receive bitcoin through users’ unique ‘‘bitcoin addresses.’’ The amount of bitcoin associated with each bitcoin address, as well as each bitcoin transaction to or from such address, is captured on the blockchain. Bitcoin transactions are PO 00000 Frm 00256 Fmt 4703 Sfmt 4703 2453 secured by cryptography known as public-private key cryptography, represented by the bitcoin addresses and digital signature in a transaction’s data file. Each Bitcoin Network address, or wallet, is associated with a unique ‘‘public key’’ and ‘‘private key’’ pair, both of which are lengthy alphanumeric codes, derived together and possessing a unique relationship. The private key is a secret and must be kept in accordance with appropriate controls and procedures to ensure it is used only for legitimate and intended transactions. If an unauthorized third person learns of a user’s private key, that third person could forge the user’s digital signature and send the user’s bitcoin to any arbitrary bitcoin address, thereby stealing the user’s bitcoin. Similarly, if a user loses his private key and cannot restore such access (e.g., through a backup), the user may permanently lose access to the bitcoin contained in the associated address. The first rule filing proposing to list an exchange-traded product (‘‘ETP’’) to provide exposure to bitcoin in the U.S. was submitted by the Cboe BZX Exchange, Inc. on June 30, 2016.52 At that time, blockchain technology, and digital assets that utilized it, were relatively new to the broader public. The market cap of all bitcoin in existence at that time was approximately $10 billion. No registered offering of digital asset securities or shares in an investment vehicle with exposure to bitcoin or any other cryptocurrency had yet been conducted, and the regulated infrastructure for conducting a digital asset securities offering had not begun to develop.53 Similarly, regulated U.S. bitcoin futures contracts did not exist. The CFTC had determined that bitcoin is a commodity,54 but had not engaged in significant enforcement actions in the space. The New York Department of 52 See Winklevoss Order. assets that are securities under U.S. law are referred to throughout this proposal as ‘‘digital asset securities.’’ All other digital assets, including bitcoin, are referred to interchangeably as ‘‘cryptocurrencies’’ or ‘‘virtual currencies.’’ The term ‘‘digital assets’’ refers to all digital assets, including both digital asset securities and cryptocurrencies, together. 54 See ‘‘In the Matter of Coinflip, Inc.’’ (‘‘Coinflip’’) (CFTC Docket 15–29 (September 17, 2015)) (order instituting proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making findings and imposing remedial sanctions), in which the CFTC stated: ‘‘Section 1a(9) of the CEA defines ‘commodity’ to include, among other things, ‘all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.’ 7 U.S.C. 1a(9). The definition of a ‘commodity’ is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F.2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.’’ 53 Digital E:\FR\FM\12JAN1.SGM 12JAN1 2454 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices Financial Services (‘‘NYDFS’’) adopted its final BitLicense regulatory framework in 2015, but had only approved four entities to engage in activities relating to virtual currencies (whether through granting a BitLicense or a limited-purpose trust charter) as of June 30, 2016.55 While the first over-thecounter bitcoin fund launched in 2013, public trading was limited and the fund had only $60 million in assets.56 There were very few, if any, traditional financial institutions engaged in the space, whether through investment or providing services to digital asset companies. In January 2018, the Staff of the Commission noted in a letter to the Investment Company Institute and SIFMA that it was not aware, at that time, of a single custodian providing fund custodial services for digital assets.57 The digital assets financial ecosystem, including bitcoin, has progressed and matured significantly. The development of a regulated market for digital asset securities has significantly evolved, with market participants having conducted registered public offerings of both digital asset securities 58 and shares khammond on DSKJM1Z7X2PROD with NOTICES 55 A list of virtual currency businesses that are entities regulated by the NYDFS is available on the NYDFS website. See https://www.dfs.ny.gov/ virtual_currency_ businesses#:∼:text=A%20business% 20must%20obtain%20a,business%20in% 20New%20York%20State. 56 See Bitcoin Investment Trust Form S–1, dated May 27, 2016, available at: https://www.sec.gov/ Archives/edgar/data/1588489/0000950123 16017801/filename1.htm (data as of March 31, 2016 according to publicly available filings). 57 See Letter from Dalia Blass, Director, Division of Investment Management, U.S. Securities and Exchange Commission to Paul Schott Stevens, President & CEO, Investment Company Institute and Timothy W. Cameron, Asset Management Group—Head, Securities Industry and Financial Markets Association (January 18, 2018), available VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 in investment vehicles holding bitcoin futures.59 Additionally, licensed and regulated service providers have emerged to provide fund custodial services for digital assets, among other services. For example, in December 2020, the Commission issued a statement permitting certain special purpose broker-dealers to custody digital asset securities under Rule 15c3– 3 under the Act.60 In September 2020, the Staff of the Commission released a no-action letter permitting certain broker-dealers to operate a noncustodial Alternative Trading System (‘‘ATS’’) for digital asset securities, subject to specified conditions.61 In October 2019, the Staff of the Commission granted temporary relief from the clearing agency registration requirement to an entity seeking to establish a securities clearance and settlement system based on distributed at: https://www.sec.gov/divisions/investment/ noaction/2018/cryptocurrency-011818.htm. 58 See Prospectus Supplement filed pursuant to Rule 424(b)(1) for INX Tokens (Registration No. 333–233363), available at: https://www.sec.gov/ Archives/edgar/data/1725882/ 000121390020023202/ea125858-424b1_ inxlimited.htm. 59 See Prospectus filed by Stone Ridge Trust VI on behalf of NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/ Archives/edgar/data/1764894/00011931251 9309942/d693146d497.htm. 60 See Securities Exchange Act Release No. 90788, 86 FR 11627 (February 26, 2021) (File Number S7– 25–20) (Custody of Digital Asset Securities by Special Purpose Broker-Dealers). 61 See Letter from Elizabeth Baird, Deputy Director, Division of Trading and Markets, U.S. Securities and Exchange Commission to Kris Dailey, Vice President, Risk Oversight & Operational Regulation, Financial Industry Regulatory Authority (September 25, 2020), available at: https://www.sec.gov/divisions/ marketreg/mr-noaction/2020/finra-ats-role-insettlement-of-digital-asset-security-trades09252020.pdf. PO 00000 Frm 00257 Fmt 4703 Sfmt 4703 ledger technology; 62 and multiple transfer agents who provide services for digital asset securities have registered with the Commission.63’ As noted above, CME began offering trading in BTC Contracts in 2017, and in MBT Contracts in 2021. Each of the contracts’ final cash settlement is based on the CME CF BRR.64 The contracts trade and settle like other cash-settled commodity futures contracts. According to the Sponsor, trading in CME Bitcoin Futures Contracts has increased significantly in recent years, in particular with respect to BTC Contracts. Nearly every measurable metric related to BTC Contracts has trended consistently up since launch and/or accelerated upward in the past year, as the market recovered some of the ground lost since falling from the all-time high activity levels of end 2021. This general upward trend in trading volume and open interest is captured in the following chart. 62 See Letter from Jeffrey S. Mooney, Associate Director, Division of Trading and Markets, U.S. Securities and Exchange Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mrnoaction/2019/paxos-trust-company-10281917a.pdf. 63 See, e.g., Form TA–1/A filed by Tokensoft Transfer Agent LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/ edgar/data/1794142/000179414219000001/ xslFTA1X01/primary_doc.xml. 64 According to the CME, the CME CF BRR aggregates the trade flow of major bitcoin spot trading platforms during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin. Calculation rules are geared toward maximum transparency and real-time replicability in underlying spot markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken. For additional information, refer to https:// www.cmegroup.com/trading/cryptocurrencyindices/cf-bitcoin-reference-rate.html?redirect=/ trading/cf-bitcoin-reference-rate.html. E:\FR\FM\12JAN1.SGM 12JAN1 2455 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 8lcoln Fulure9 VOiume and Open lntemlt Similarly, the number of large open interest holders 65 has continued to increase even as the price of bitcoin has risen, as have the number of unique accounts trading CME Bitcoin Futures Contracts. As it pertains specifically to the CME Bitcoin Futures Contracts (those in which the Fund will invest), the statistics are equally as profound. The following table sets forth the approximate daily notional average volume for the CME Bitcoin Futures Contracts, followed by the daily average volume for all of the CME Bitcoin Futures Contracts, the first to expire and the second to expire. With a daily Daily notional average volume for CME bitcoin futures contracts (in $) 2019 2020 2021 2022 2023 ....... ....... ....... ....... ....... notional average volume of $1.4 billion in 2023, trading volume in CME Bitcoin Futures Contracts is almost six times the 2019 volume and almost three times the volume in 2020. In addition, despite the bear market, the trading volume in 2023 has been resilient and slightly increasing compared to 2022. Average daily volume for CME bitcoin futures contracts $242 million ........................................................................................... $523 million ........................................................................................... $2,379 million ........................................................................................ $1,426 million ........................................................................................ $1,413 million ........................................................................................ First-to-expire CME bitcoin futures contract 6,365 8,782 10,035 10,735 10,775 5,400 7,100 7,300 8,200 8,400 Second-to-expire CME bitcoin futures contract 700 1,300 2,100 2,100 1,900 khammond on DSKJM1Z7X2PROD with NOTICES Developments in the Bitcoin and Bitcoin Futures Markets The regulatory landscape for bitcoin and bitcoin markets has changed significantly since 2016. The market for bitcoin grew approximately 100 times larger through 2021, reaching a market cap of $1.3 trillion at its all-time high. Although bitcoin’s market cap is down to $500 billion (as of September 7, 2023), its market cap is greater than companies 66 such as Visa, Inc., Exxon 65 A large open interest holder in BTC Contracts is an entity that holds at least 25 contracts, which is the equivalent of 125 bitcoin. At a price of approximately $26,025 per bitcoin on 9/7/23, more than 110 firms had outstanding positions of greater than $3.25 million in BTC Contracts. Source: Mobil Corporation, Walmart, Inc., and JP Morgan Chase & Co. The number of verified users at Coinbase, the largest U.S.-based bitcoin trading platform, has grown to over 110 million at the end of 2022, compared to 43 million at the end of 2020.67 CFTC-regulated bitcoin futures represented approximately $42 billion in notional trading on the CME Bitcoin Futures Market in August 2023, compared to $3.9 billion, $28 billion, $60 billion, and $20 billion in total trading in December 2019, December 2020, December 2021, and December 2022 respectively. CFTC-regulated bitcoin futures represented $2.2 billion in open interest in August 2023, compared to $115 million, $1.29 billion, $3.27 billion, and $1.31 billion in December 2019, December 2020, December 2021, and December 2022 respectively.68 The CFTC has exercised https://www.theblock.co/data/crypto-markets/cmecots/large-open-interest-holders-of-cme-bitcoinfutures. 66 See https://coinmarketcap.com/largestcompanies/. 67 See Coinbase 2022 10–K, available at: https:// s27.q4cdn.com/397450999/files/doc_financials/ 2022/q4/86fe25e0-342b-40fa-aaccea04faf322cb.pdf. 68 All statistics and charts included in this proposal with respect to the CME Bitcoin Futures Continued VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00258 Fmt 4703 Sfmt 4703 E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.007</GPH> Note: The 2023 data is for the period ending on August 31, 2023. Source: CME; Bloomberg. 2456 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES its regulatory jurisdiction in bringing a number of enforcement actions related to bitcoin and against trading platforms that offer cryptocurrency trading.69 The U.S. Office of the Comptroller of the Currency (the ‘‘OCC’’) has made clear that federally-chartered banks are able to provide custody services for cryptocurrencies and other digital assets.70 NYDFS has granted no fewer than thirty BitLicenses, including to established public payment companies like PayPal Holdings, Inc. and Square, Inc., and limited purpose trust charters to entities providing cryptocurrency custody services. The U.S. Treasury Financial Crimes Enforcement Network (‘‘FinCEN’’) has released extensive guidance regarding the applicability of the Bank Secrecy Act (‘‘BSA’’) and implementing regulations to virtual currency businesses,71 and has proposed rules imposing requirements on entities subject to the BSA that are specific to the technological context of virtual currencies.72 In addition, the Treasury’s Office of Foreign Assets Control (‘‘OFAC’’) has brought enforcement actions over apparent violations of the sanctions laws in connection with the provision of wallet management services for digital assets.73 Market are sourced from https:// www.cmegroup.com/trading/bitcoin-futures.html. In addition, as further discussed below, the Sponsor believes the CME Bitcoin Futures Market represents a regulated market of significant size for purposes of addressing the Commission’s concerns about potential manipulation of the bitcoin market. 69 The CFTC’s annual report for Fiscal Year 2020 (which ended on September 30, 2020) noted that the CFTC ‘‘continued to aggressively prosecute misconduct involving digital assets that fit within the CEA’s definition of commodity’’ and ‘‘brought a record setting seven cases involving digital assets.’’ See CFTC FY2020 Division of Enforcement Annual Report, available at: https://www.cftc.gov/ media/5321/DOE_FY2020_AnnualReport_120120/ download. Additionally, the CFTC filed on October 1, 2020, a civil enforcement action against the owner/operators of the BitMEX trading platform, which was one of the largest bitcoin derivative trading platforms. See CFTC Release No. 8270–20 (October1, 2020), available at: https://www.cftc.gov/ PressRoom/PressReleases/8270-20. 70 See OCC News Release 2021–2 (January 4, 2021), available at: https://www.occ.gov/newsissuances/news-releases/2021/nr-occ-2021-2.html. 71 See FinCEN Guidance FIN–2019–G001 (May 9, 2019) (Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies), available at: https:// www.fincen.gov/sites/default/files/2019-05/ FinCEN%20Guidance%20CVC%20 FINAL%20508.pdf. 72 See U.S. Department of the Treasury Press Release: ‘‘The Financial Crimes Enforcement Network Proposes Rule Aimed at Closing AntiMoney Laundering Regulatory Gaps for Certain Convertible Virtual Currency and Digital Asset Transactions’’ (December 18, 2020), available at: https://home.treasury.gov/news/press-releases/ sm1216. 73 See U.S. Department of the Treasury Enforcement Release: ‘‘OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent Violations VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 In addition to the regulatory developments noted above, more traditional financial market participants appear to be embracing cryptocurrency: large insurance companies,74 investment banks,75 asset managers,76 credit card companies,77 university endowments,78 pension funds,79 and even historically bitcoin skeptical fund managers 80 are allocating to bitcoin. The largest over-the-counter bitcoin fund previously filed a Form 10 registration statement, which the Staff of the Commission reviewed and which took effect automatically, and is now a reporting company.81 Established of Multiple Sanctions Programs Related to Digital Currency Transactions’’ (December 30,2020), available at: https://home.treasury.gov/system/files/ 126/20201230_bitgo.pdf. 74 On December 10, 2020, Massachusetts Mutual Life Insurance Company (MassMutual) announced that it had purchased $100 million in bitcoin for its general investment account. See MassMutual Press Release ‘‘Institutional Bitcoin provider NYDIG announces minority stake purchase by MassMutual’’ (December 10, 2020), available at: https://www.massmutual.com/about-us/news-andpress-releases/press-releases/2020/12/institutionalbitcoin-provider-nydig-announces-minority-stakepurchase-by-massmutual. 75 See, e.g., ‘‘Morgan Stanley to Offer Rich Clients Access to Bitcoin Funds’’ (March 17, 2021) available at: https://www.bloomberg.com/news/ articles/2021-03-17/morgan-stanley-to-offer-richclients-access-to-bitcoin-funds. 76 See, e.g., ‘‘BlackRock’s Rick Rieder says the world’s largest asset manager has ‘started to dabble’ in Bitcoin’’ (February 17, 2021), available at: https://www.cnbc.com/2021/02/17/blackrock-hasstarted-to-dabble-in-bitcoin-says-rick-r ieder.html and ‘‘Guggenheim’s Scott Minerd Says Bitcoin Should Be Worth $400,000’’ (December 16, 2020), available at: https://www.bloomberg.com/news/ articles/2020-12-16/guggenheim-s-scott- minerdsays- bitcoin-should-be-worth-400-000. 77 See, e.g., ‘‘Visa Moves to Allow Payment Settlements Using Cryptocurrency’’ (March 29, 2021), available at: https://www.reuters.com/ business/autos-transportation/exclusive-visamoves-allow-payment-settlements-usingcryptocurrency-2021-03-29/. 78 See, e.g., ‘‘Harvard and Yale Endowments Among Those Reportedly Buying Crypto’’ (January 25, 2021), available at: https:// www.bloomberg.com/news/articles/2021-01-26/ harvard-and-yale-endowments-among-thosereportedly-buying-crypto. 79 See, e.g., ‘‘Virginia Police Department Reveals Why its Pension Fund is Betting on Bitcoin’’ (February 14, 2019), available at: https://finance. yahoo.com/news/virginia-police-departmentreveals-why-194558505.html. 80 See, e.g., ‘‘Bridgewater: Our Thoughts on Bitcoin’’ (January 28, 2021) available at: https:// www.bridgewater.com/research-and-insights/ourthoughts-on-bitcoin and ‘‘Paul Tudor Jones says he likes bitcoin even more now, rally still in the ‘first inning’’’ (October 22, 2020), available at: https:// www.cnbc.com/2020/10/22/-paul-tudor-jones-sayshe-likes-bitcoin-even-more-now-rally-still-in-thefirst-inning.html. 81 See Letter from Division of Corporation Finance, Office of Real Estate & Construction to Barry E. Silbert, Chief Executive Officer, Grayscale Bitcoin Trust (January 31, 2020), available at: https://www.sec.gov/Archives/edgar/data/1588489/ 000000000020000953/filename1.pdf. PO 00000 Frm 00259 Fmt 4703 Sfmt 4703 companies like Tesla, Inc.,82 MicroStrategy Incorporated,83 and Square, Inc.,84 among others, have recently announced substantial investments in bitcoin in amounts as large as $1.5 billion (Tesla) and $425 million (MicroStrategy). The Sponsor maintains that despite these developments, access for U.S. retail investors to gain exposure to bitcoin via a transparent and regulated exchange-traded vehicle remains limited. As investors and advisors increasingly utilize ETPs to manage diversified portfolios (including equities, fixed income securities, commodities, and currencies) quickly, easily, relatively inexpensively, taxefficiently, and without having to hold directly any of the underlying assets; options for bitcoin exposure for U.S. investors remain limited to: (i) investing in over-the-counter bitcoin funds (‘‘OTC Bitcoin Funds’’) that are subject to high premium/discount volatility (and high management fees) to the advantage of more sophisticated investors that are able to purchase shares at NAV directly with the issuing trust; (ii) investing in CFTC-regulated bitcoin futures exchange-traded funds (‘‘ETFs’’) that are subject to higher complexity and costs due to need for rolling the futures contracts; (iii) facing the technical risk, complexity, and generally high fees associated with buying and storing bitcoin directly; or (iv) purchasing shares of operating companies that they believe will provide proxy exposure to bitcoin with limited disclosure about the associated risks. Meanwhile, investors in many other countries, including Canada, are able to use more traditional exchange listed and traded products to gain exposure to bitcoin.85 82 See Form 10–K submitted by Tesla, Inc. for the fiscal year ended December 31, 2020 at 23: https:// www.sec.gov/ix?doc=/Archives/edgar/data/ 1318605/000156459021004599/tsla-10k_ 20201231.htm. 83 See Form 10–Q submitted by MicroStrategy Incorporated for the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ ix?doc=/Archives/edgar/data/1050446/000156459 020047995/mstr-10q_20200930.htm. 84 See Form 10–Q submitted by Square, Inc. for the quarterly period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/ data/1512673/000151267320000012/sq20200930.htm. 85 Securities regulators in a number of other countries have either approved or otherwise allowed the listing and trading of bitcoin ETPs. Specifically, these funds (with their respective approximate AUMs as of April 14, 2021) include the Purpose Bitcoin ETF ($993,000,000), VanEck Vectors Bitcoin ETN ($209,000,000), WisdomTree Bitcoin ETP ($407,000,000), Bitcoin Tracker One ($1,380,000,000), BTCetc Bitcoin ETP ($1,410,000,000), 21Shares Bitcoin ETP ($362,000,000), 21Shares Bitcoin Suisse ETP ($30,000,000), CoinShares Physical Bitcoin ETP ($396,000,000). E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES For example, the Purpose Bitcoin ETF, a retail physical bitcoin ETP launched in Canada, reportedly reached $421.8 million in assets under management (‘‘AUM’’) in two days, and has achieved $993 million in assets as of April 14, 2021, demonstrating the demand for a North American market listed bitcoin ETP. The Sponsor believes that the demand for the Purpose Bitcoin ETF is driven primarily by investors’ desire to have a regulated and accessible means of exposure to. The Purpose Bitcoin ETF also offers a class of units that is U.S. dollar bitcoin denominated, which could appeal to U.S. investors. Without an approved bitcoin ETP in the U.S. as a viable alternative, the Sponsor believes U.S. investors will seek to purchase these shares in order to get access to bitcoin exposure, leaving them without the protections of U.S. securities laws. Given the separate regulatory regime and the potential difficulties associated with any international litigation, such an arrangement would create more risk exposure for U.S. investors than they would otherwise have with a U.S. exchange listed ETP. With the addition of more bitcoin ETPs in non-U.S. jurisdictions expected to grow, the Sponsor anticipates that such risks will only continue to grow. In addition, several funds registered under the Investment Company Act of 1940 (the ‘‘1940 Act’’) have effective registration statements that contemplate bitcoin exposure through a variety of means, including through investments in bitcoin futures contracts 86 and through OTC Bitcoin Funds.87 In previous statements, the Staff of the Commission has acknowledged how such funds can satisfy their concerns regarding custody, valuation, and manipulation.88 The funds that have already invested in bitcoin instruments have no reported issues regarding custody, valuation, or manipulation of the instruments held by these funds. While these funds do offer investors some means of exposure to bitcoin, the Sponsor believes the current offerings fall short of giving investors an accessible, regulated product that 86 See, e.g., Stone Ridge Trust VI (File No. 333– 234055); BlackRock Global Allocation Fund, Inc. (File No. 33–22462); and BlackRock Funds V (File No. 333–224371). 87 See, e.g., Amplify Transformational Data Sharing ETF (File No. 333–207937); and ARK Innovation ETF (File No. 333–191019). 88 See Dalia Blass, ‘‘Keynote Address—2019 ICI Securities Law Developments Conference’’ (December 3, 2019), available at: https:// www.sec.gov/news/speech/blass-keynote-address2019-ici-securities-law-developments-conference. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 provides concentrated exposure to bitcoin and bitcoin prices. Unregulated Exposure to Bitcoin and Investor Protection Concerns The Sponsor notes that U.S. investor exposure to bitcoin through OTC Bitcoin Funds and other unregulated means has grown into the tens of billions of dollars. With that growth, so too has grown the potential risk to U.S. investors. Investor protection concerns persist, as OTC Bitcoin Funds and other unregulated means of exposure to bitcoin continue to attract investors despite the approval of bitcoin futuresbased ETPs by the Commission. The Sponsor appreciates the Commission’s previously articulated concerns about potential manipulation when an ETP holds actual bitcoin and believes that the Fund represents an opportunity for U.S. investors to gain price exposure to CME Bitcoin Futures Contracts and bitcoin in a regulated and transparent exchange-traded vehicle that mitigates those concerns through the use of CME Bitcoin Futures Contracts, applying futures-based pricing for spot bitcoin, and limiting the Fund’s exposure to spot bitcoin to the CFTC-regulated EFP market. The Sponsor believes that the structure of the Fund accordingly limits risks by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks associated with investing in operating companies that are imperfect proxies for bitcoin exposure; and (iv) avoiding regulatory concerns regarding valuation posed by ETFs and ETPs that invest directly in bitcoin rather than in CME Bitcoin Futures Contracts or bitcoin via EFP transactions on the regulated CME Bitcoin Futures Market, a CFTCregulated exchange that meets regulatory standards that are not met by spot bitcoin trading platforms. Custody of Bitcoin According to the Registration Statement, institutional purchasers of bitcoin, including other bitcoin funds that provide exposure to bitcoin by investing directly in bitcoin, generally maintain their bitcoin account with a bitcoin custodian. Bitcoin custodians are financial institutions that have implemented a series of specialized security precautions, including holding bitcoin in ‘‘cold storage,’’ to try to ensure the safety of an account holder’s bitcoin. These bitcoin custodians must carefully consider the design of the physical, operational, and cryptographic systems for secure storage of private keys in an effort to lower the risk of loss or theft, and many use a multi-factor PO 00000 Frm 00260 Fmt 4703 Sfmt 4703 2457 security system under which actions by multiple individuals working together are required to access the private keys necessary to transfer such digital assets and ensure exclusive ownership. The Fund’s Bitcoin Custodian(s) will hold the Fund’s bitcoin acquired via EFP transactions through the CME Bitcoin Futures Market and will be responsible for maintaining custody of the Fund’s bitcoin assets. The Fund’s Bitcoin Custodian(s) must satisfy, at least, the ‘‘core custodian’’ requirements set forth by the NCIOC in the NCI methodology, including: 89 1. Provide custody accounts whose holders are the legal beneficiaries of the assets held in the account. In case of bankruptcy or insolvency of a Bitcoin Custodian, creditors or the estate should have no rights to the Fund’s assets. 2. Offer segregated accounts and store the Fund’s bitcoin in separated individual accounts and not in omnibus accounts. The Fund’s bitcoin will be held in segregated wallets and not commingled with the Bitcoin Custodian’s or other customer assets. 3. Generate account-segregated private keys for digital assets using high entropy random number generation methods and employ advanced security practices. 4. Utilize technology for storing private keys in offline digital vaults and apply secure processes, such as private key segmentation, multi-signature authorization, and geographic distribution of stored assets, to limit access to private keys. The Bitcoin Custodian will use security technology for storing private keys aiming to avoid theft or misappropriation of assets due to online attacks, collusion of agents managing the storage services, or any other threat. 5. Have a comprehensive risk management policy and formalized framework of managing operational and custody risks, including a disaster recovery program that ensures continuity of operations in the event of a system failure. The Bitcoin Custodian will have a business continuity plan to help ensure continued access to the Fund’s assets. 6. Have an insurance policy that covers, at least partially, risks such as the loss of Fund assets held in cold storage, including from employee collusion or fraud, physical loss including theft, damage of key material, security breach or hack, and fraudulent transfer. 7. Comply with higher standards of government oversight, external audits, 89 See https://indexes.nasdaqomx.com/docs/ methodology_nci.pdf. E:\FR\FM\12JAN1.SGM 12JAN1 2458 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES and security to safekeep asset ownership. The Bitcoin Custodian must be licensed or registered as a custodian by a reputable and independent governing body (e.g., the New York State Department of Financial Services, or other state, national or international regulators), as can be ascertained by certain public data sources. 8. Provide third-party audit reports at least annually on operational and security processes. These audits may be completed by having a Systems and Organizational Control certification issued and are intended to provide reasonable assurance that the Bitcoin Custodian’s operational processes and private key management controls are in accordance with the expected standards. The Sponsor will cause the Trust to maintain ownership and control of the Fund’s bitcoin in a manner consistent with good delivery requirements for spot commodity transactions. The Structure and Operation of the Fund Satisfies Commission Requirements for Bitcoin-Based Exchange Traded Products The Sponsor believes that the Fund’s holding a combination of CME Bitcoin Futures Contracts, bitcoin, and cash could significantly mitigate the risk of market manipulation while still providing the market with a regulated product that tracks the actual price of bitcoin, creating a secure way for U.S. investors to gain exposure to bitcoin without having to rely on unregulated products, offshore regulated products, or indirect strategies such as investing in publicly traded companies that hold bitcoin. In determining whether to approve listing and trading of new ETPs, the Commission conducts a thorough analysis to ensure the proposal is consistent with Section 6(b)(5) of the Act. Section 6(b)(5) of the Act mandates that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, and to protect investors and the public interest. With respect to ETPs, the Commission often considers how the listing exchange would access necessary information to detect and deter market manipulation, illegal trading, and other abuses, which listing exchanges may accomplish by entering into a comprehensive surveillancesharing agreement with other entities, such as the markets trading the ETP’s underlying assets. Historically, for commodity-trust ETPs, there has always been at least one regulated market of significant size for trading futures on the underlying commodity—whether gold, silver, platinum, palladium, or copper. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Then, the listing exchange would enter into surveillance-sharing agreements with, or hold ISG membership in common with, that regulated market.90 In the context of bitcoin, CME Bitcoin Futures Market is currently the only regulated market in the U.S. The Commission has previously interpreted the terms ‘‘significant market’’ and ‘‘market of significant size’’ to include a market (or group of markets) where: (1) There is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, such that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct; and (2) It is unlikely that trading in the ETP would be the predominant influence on prices in that market.91 With respect to the first prong of the Commission’s interpretation, the Commission has previously explained that the lead/lag relationship between the bitcoin futures market and the spot market is central to understanding this first prong. With respect to the second prong, the Commission’s prior analysis has focused on the potential size and liquidity of the ETP compared to the size and liquidity of the market. The Commission recognized in the Approval Order that ‘‘the CME is a ‘significant market’ related to CME bitcoin futures contracts,’’ and thus that the Exchange has entered into the requisite surveillance-sharing agreement with respect to its CME Bitcoin Futures Contracts holdings.92 However, there is still a lack of consensus on whether the CME is of ‘‘significant size’’ in relation to the spot bitcoin market based on the 90 See Winklevoss Order; Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201–E, Securities Exchange Act Release No. 87267 (Oct. 9, 2019), 84 FR 55382 at 55383, 55410 (Oct. 16, 2019) (SR–NYSEArca–2019–01) (the ‘‘Bitwise Order’’); Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to Amend NYSE Arca Rule 8.201–E (CommodityBased Trust Shares) and to List and Trade Shares of the United States Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201–E, Securities Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 at 12609 (March 3, 2020) (SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix Order’’). 91 See, e.g., Winklevoss Order, 83 FR at 37594. The Commission further noted that ‘‘[t]here could be other types of ‘‘significant markets’’ and ‘‘markets of significant size,’’ but this definition is an example that will provide guidance to market participants.’’ Id. 92 See Approval Order, 87 FR at 21678 and further discussion at 21678–81. PO 00000 Frm 00261 Fmt 4703 Sfmt 4703 test historically applied by the Commission. Interrelationship Between the CME Bitcoin Futures Market and the Fund The Commission has previously stated that ‘‘the interpretation of the term market of significant size depends on the interrelationship between the market with which the listing exchange has a surveillance-sharing agreement and the proposed ETP.’’ 93 The Sponsor intends to adopt an innovative approach to mitigate the risks of fraud and manipulation that are unique to the Fund. The core principle of this approach would be to structure the operation of the Fund such that the regulated market of significant size in relation to the Fund is the CME Bitcoin Futures Market because the Fund trades all of its non-cash assets through the CME Bitcoin Futures Market. Therefore, the Sponsor’s strategy aims to establish a comprehensive interrelationship between the CME and the Fund so that the CME Bitcoin Futures Market is the market of significant size in relation to the Fund. The Sponsor notes that, although the Fund may, as proposed, hold bitcoin, it does not rely on any pricing or other information or services from unregulated bitcoin spot bitcoin trading platforms. Therefore, no spot bitcoin trading platform could be considered a ‘‘market of relevant size’’ in relation to the Fund. The Sponsor has designed the Fund to have four novel features that underscore its significant interrelationship with the CME Bitcoin Futures Market: 1. Investment strategy: The Fund will only hold bitcoin, CME Bitcoin Futures Contracts, and cash and cash equivalents. Accordingly, the CME Bitcoin Futures Market is the only market on which the Fund’s non-cash assets would trade and is therefore the ‘‘significant market’’ in relation to the Fund, as proposed. 2. Futures-based pricing for spot bitcoin: The price determination for bitcoin holdings in the NAV calculation will be derived from the CME’s bitcoin futures curve.94 As a result, the price of bitcoin holdings will depend solely on bitcoin futures settlement prices on the CME Bitcoin Futures Market and will not depend directly on price information from unregulated spot 93 See Securities Exchange Act Release No. 95180 (June 29, 2022), 87 FR 40299 at 40312 (July 6, 2022) (SR–NYSEArca–2021–90) (Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca Rule 8.201–E (CommodityBased Trust Shares)). 94 The ‘‘futures curve’’ is a representation of the relationship between futures contract prices and their respective expiration dates. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES bitcoin markets (as further discussed below). 3. Physical bitcoin purchases through the CME Bitcoin Futures Market: The Fund will solely use the CME Bitcoin Futures Market’s EFP transactions to acquire and dispose of bitcoin, instead of transactions on unregulated spot bitcoin trading platforms. Accordingly, the only non-cash assets held by the Fund (CME Bitcoin Futures Contracts and bitcoin obtained from EFP transactions) would be traded, reported, and cleared through the CME Bitcoin Futures Market, such that CME and NYSE Arca can share information pursuant to their common ISG membership to detect and deter fraudulent or manipulative misconduct related to those assets. 4. Creations and redemptions: The Fund will use cash creations and redemptions 95 to deter intraday Share price manipulation that could originate from in-kind creation or redemption from bitcoin sourced in unregulated spot markets. Investment in bitcoin thus would not be directly related to creation/redemptions, but would instead be adjusted dynamically based on target portfolio exposure.96 Trading for bitcoin could thus be accomplished in smaller sizes and at unpredictable times, reducing the risk of manipulation in the creation or redemption processes. The Sponsor believes that these features of the Fund are designed to provide a robust framework for mitigating the risks of market manipulation, thereby protecting investors and maintaining the integrity of the market. The Sponsor further believes that, given these features of the Fund, the CME Bitcoin Futures Market should be considered the regulated market of significant size in relation to the Fund. The Sponsor further believes that the proposed novel approach is in line with the first prong of the Commission’s interpretation of the definition of ‘‘regulated market of significant size’’ as to the CME Bitcoin Futures Market 95 In a cash creation/redemption format, the Authorized Participant delivers cash to the Fund instead of bitcoin. The Fund’s creation and redemption processes are further discussed below. 96 The portfolio’s exposure to bitcoin will be dynamic because the Sponsor will assess market conditions (e.g., expected level of creation and redemption based on historic trends, the futures curve, market liquidity and volatility) in allocating the Fund’s portfolio among the assets that it may hold (bitcoin, CME Bitcoin Futures Contracts, cash and cash equivalents). The Sponsor will manage the Fund to minimize transaction costs related to the conversion between CME Bitcoin Futures Contracts and bitcoin that would be necessary to process redemptions. The Sponsor will generally aim to maximize the allocation to bitcoin to better track the Fund’s Benchmark. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 because (i) the CME Bitcoin Futures Market is the only market where the Fund trades its non-cash assets,97 and (ii) there is a reasonable likelihood that a person attempting to manipulate the Fund would also have to trade on the CME Bitcoin Futures Market to successfully manipulate the ETP (and, accordingly, CME’s common ISG membership would aid NYSE Arca in detecting and deterring potential misconduct). The Sponsor has designed its approach so that any attempt to manipulate the Fund would require trading on the CME Bitcoin Futures Market, for the following reasons: 1. Futures-based pricing for spot bitcoin: The price of the Fund’s bitcoin holdings would be determined based on settlement prices of CME Bitcoin Futures Contracts for purposes of calculating NAV (as explained in the discussion of FBSP above). Accordingly, any attempt to manipulate the price of the Fund would require influencing the futures curve on the CME Bitcoin Futures Market because the spot price (which could be a target for manipulation) does not directly influence the price of the Fund. There is thus a direct lead/lag relationship in which CME Bitcoin Futures Market prices lead both the spot price used by the Fund to determine its NAV and the Fund’s market price. 2. Spot bitcoin operations via EFP transaction through the CME Bitcoin Futures Market: Because the Fund’s bitcoin operations would take place via CME Bitcoin Futures Market EFP transactions, any attempt to manipulate the Fund’s transactions in bitcoin holdings would require the would-be manipulator to trade on the CME Bitcoin Futures Market. Accordingly, any potential manipulation of the Fund would require extensive operations on the heavily regulated CME Bitcoin Futures Market. 3. Cash creations and redemptions: The Fund’s use of cash creations and redemptions also reduces the potential for manipulation through the creation and redemption processes by eliminating the direct arbitrage between 97 In the Approval Order, the Commission stated that if the proposed ‘‘significant’’ regulated market (in this case, the CME Bitcoin Futures Market) with which the listing exchange has a surveillancesharing agreement is the same market on which the ETP trades its non-cash assets, then (i) it is unnecessary for the listing exchange to establish a reasonable likelihood that the would-be manipulator would have to trade on said listing exchange to manipulate the proposed ETP (thereby satisfying the first prong of the Commission’s standard for ‘‘market of significant size’’), and (ii) it is unnecessary to establish a ‘‘lead-lag’’ relationship between said listing exchange and other markets. 87 FR at 21679 n. 47 & 21680. PO 00000 Frm 00262 Fmt 4703 Sfmt 4703 2459 unregulated spot markets and the Fund’s market price. Any significant creation or redemption activity aimed at manipulating the Fund would likely influence the CME Bitcoin Futures Market, given that the cash received in the creation is used to buy CME Bitcoin Futures Contracts and the cash generated for redemption distribution comes from the sale of CME Bitcoin Futures Contracts. Given these factors, the Sponsor believes that the common membership of NYSE Arca and CME in the ISG would be an effective tool in assisting NYSE Arca in detecting and deterring potential misconduct. The exchanges’ ability to share information would provide the Exchange with access to relevant trading data from the CME Bitcoin Futures Market, which is intrinsically linked to the Fund, allowing for appropriate oversight and facilitating the ability to identify and investigate any suspicious trading activity. The Approval Order stated that the CME ‘‘comprehensively surveils futures market conditions and price movements on a real-time and ongoing basis in order to detect and prevent price distortions, including price distortions caused by manipulative efforts’’ and that the ‘‘CME’s surveillance can reasonably be relied upon to capture the effects on the CME [Bitcoin Futures Market] caused by a person attempting to manipulate the [Fund] by manipulating the price of CME Bitcoin Futures Contracts, whether that attempt is made by directly trading on the CME [Bitcoin Futures Market] or indirectly by trading outside of the CME [Bitcoin Futures Market].’’ 98 The Commission further noted in the Approval Order that, as a result, ‘‘when the CME shares its surveillance information with [NYSE] Arca, the information would assist in detecting and deterring fraudulent or manipulative misconduct related to the non-cash assets held by the [Fund].’’ 99 The Sponsor further believes that, consistent with the Approval Order, CME surveillance can be relied upon to capture any possible manipulation of the CME Bitcoin Futures Market, even when the attempt is made indirectly by trading outside the CME Bitcoin Futures Market in unregulated markets.100 98 See Approval Order, 87 FR at 21679. 99 Id. 100 See id. (‘‘The Commission agrees with [NYSE] Arca that the CME [Bitcoin Futures Market], as a CFTC-regulated futures exchange, has ‘the requisite oversight, controls, and regulatory scrutiny necessary to maintain, promote, and effectuate fair and transparent trading of its listed products, E:\FR\FM\12JAN1.SGM Continued 12JAN1 2460 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices The Sponsor also believes that it is unlikely that trading in the Fund would be the predominant influence on prices on the CME Bitcoin Futures Market. The Approval Order noted that it was unlikely that trading in the Fund would be the predominant influence on price in the CME Bitcoin Futures Market,101 and the Sponsor believes that the addition of bitcoin to the Fund’s holdings, using EFP transactions through the CME Bitcoin Futures Market, does not significantly alter the influence of the Fund’s trading on the CME Bitcoin Futures Market, for the following reasons: 1. The Fund’s limited influence over the market: As the Commission noted in the Approval Order,102 the Commission observed no disruption to the CME Bitcoin Futures Market or evidence that the Fund exerted a dominant influence on CME bitcoin futures prices. The Sponsor therefore believes that it is very unlikely that the Fund’s trading, even with the addition of bitcoin to its holdings, would become the predominant influence on the futures market. 2. Spot bitcoin would be purchased using market-neutral EFP transactions: The bitcoin in the Fund’s portfolio would be purchased by exchanging an equivalent CME Bitcoin Futures Contracts position using EFP transactions through the CME Bitcoin Futures Market. The Fund’s bitcoin trading would thus be directly linked to the futures market and would not introduce a new, independent variable that could significantly influence the futures market. Indeed, because both sides of the trade track the same benchmark, an EFP is market-neutral, and, as such, the pricing of an EFP is quoted in terms of the basis between the price of the futures contract and the level of the underlying index.103 3. The Fund’s investment strategy reduces recurrent trading activity and price pressure on the CME Bitcoin Futures Market as compared to a fund that only holds CME Bitcoin Futures Contracts: Because the Fund will also hold bitcoin, the Sponsor believes that CME Bitcoin Futures Contracts rollover operations would be reduced, as would the trading activity on the CME Bitcoin Futures Market that occurs as a CME Bitcoin Futures Contract nears expiration, thereby significantly reducing its influence on the CME Bitcoin Futures Market. The Sponsor therefore believes that the proposed addition of bitcoin to the Fund’s holdings would not significantly alter the influence of the Fund’s trading on the CME Bitcoin Futures Market and that the proposed design of the Fund’s investment strategy would instead result in potential impact on the CME Bitcoin Futures Market that is the same or less than that of the previous investment strategy (as represented in the Approval Order). The Sponsor notes that, as of April 2021 and as noted in the Fund’s original proposal to list and trade its Shares on the Exchange, the CME Bitcoin Futures Market was already showing a significant increase in size, as per the table below:104 Febnt~ 26. 2020 A12ril 7. 2021 Trading Volume $433 million $4,321 million Open Interest $238 million $2,582 million The Sponsor notes that growth of the CME Bitcoin Futures Market at that time coincided with similar growth in the bitcoin spot market. Moreover, the market for Bitcoin futures was and still is rapidly approaching the size of markets for other commodity interests, including interests in metals, agricultural, and petroleum products. Accordingly, as the CME Bitcoin Futures Market continues to develop and more closely resemble other commodity futures markets, the Sponsor believes that it is reasonable to expect that the relationship between the bitcoin futures market and bitcoin spot market will behave similarly to other future/ spot market relationships, where the spot market may have no relationship to the futures market (although the current proposal does not depend on such similarity). In addition, in the time since the Approval Order was issued, there has been significant growth in bitcoin futures in terms of trading volumes, as reflected in the table below: including the BTC Contracts and MBT Contracts.’ As [NYSE] Arca states, as a Designated Contracts Market (‘DCM’), the CME [Bitcoin Futures Market] ‘comprehensively surveils futures market conditions and price movements on a realtime and ongoing basis in order to detect and prevent price distortions, including price distortions caused by manipulative efforts.’ Thus the CME’s surveillance can reasonably be relied upon to capture the effects on the CME [Bitcoin Futures Market] caused by a person attempting to manipulate the proposed futures ETP by manipulating the price of CME [Bitcoin Futures Contracts], whether that attempt is made by directly trading on the CME [Bitcoin Futures Market] or indirectly by trading outside of the CME [Bitcoin Futures Market]. As such, when the CME shares its surveillance information with [NYSE] Arca, the information would assist in detecting and deterring fraudulent or manipulative misconduct related to the non-cash assets held by the proposed ETP’’) (internal citations omitted). 101 See id. at 21680. 102 See id. at 21681. 103 According to the Fund’s registration statement and as discussed above, the Fund uses EFP transactions to efficiently transition its bitcoin exposure from a physical to a futures position within a regulated environment. 104 See Securities Exchange Act Release No. 92573 (August 5, 2021), 86 FR 44062 at 44073 (August 11, 2021) (SR–NYSEArca–2021–53) (Notice of Filing of a Proposed Rule Change To List and Trade Shares of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200–E). VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00263 Fmt 4703 Sfmt 4703 E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.067</GPH> khammond on DSKJM1Z7X2PROD with NOTICES CME BITCOIN FUTIJRES MARKET Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 2461 CME BITCOIN FUTURES MARKET Agril 6. 2022 Jtme 30= 2023 Trading Volume $1,692 million $3,473 million Open Interest $2,529 million $2,800 million The Sponsor also notes that in the same period during which CME Bitcoin Futures Market open interest remained at roughly at the same level, trading volume and open interest of unregulated bitcoin futures markets had a significant drawdown: 105 UNREGULATED BITCOIN FUTURES MARKETS At2ril 7=2021 Agril 6~ 2022 June 301 2023 Trading Volume $68,333 million $37,333 million $29,693 million Open Interest $20,420 million $13,980 million $11,630 million Furthermore, the Sponsor notes that in the same period the trading volume of spot bitcoin also fell significantly: SPOT BITCOIN Agril 6. 2022 June 1,2023 $698,000 million $297,000 million $116,000 million be the predominant influence on its prices. The Sponsor further notes that the Commission stated in the Approval Order ‘‘that the CME [Bitcoin Futures Market] has sufficiently developed to support ETPs seeking exposure to bitcoin by holding CME Bitcoin Futures Contracts.’’ 106 The Sponsor believes that the CME Bitcoin Futures Market is also sufficiently developed to support ETPs that seek exposure to Bitcoin by holding a mix of CME Bitcoin Futures Contracts and bitcoin through the use of EFP transactions that are traded, reported, and cleared through the CME Bitcoin Futures Market and whose Creations and Redemptions According to the Sponsor (and as discussed further below), the Fund uses cash creations and redemptions.107 An AP delivers cash to the Fund instead of bitcoin or CME Bitcoin Futures Contracts in the creation process. An AP receives cash instead of bitcoin or CME Bitcoin Futures Contracts in the redemption process. The cash received during the creation process is then used by the Sponsor to purchase CME Bitcoin Futures Contracts with an aggregate market value that approximates the amount of cash received upon the 105 Data in this table is sourced from: https:// www.theblock.co/data/crypto-markets/futures. Trading volume data for bitcoin futures in unregulated markets was only available on a monthly frequency. Therefore, the trading volume figures displayed in the table are approximations derived from the daily average trading volumes reported for their respective months. 106 See Approval Order, 87 FR at 21681. 107 In a cash creation/redemption mechanism, APs create or redeem shares of the ETP using cash instead of the underlying assets. This contrasts with in-kind creation/redemption, where APs use a basket of the ETP’s underlying assets for these transactions. In cash creation/redemption, APs provide or receive an equivalent cash value based on the NAV of the ETP’s shares. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00264 Fmt 4703 Sfmt 4703 E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.069</GPH> EN12JA24.070</GPH> conditions and prices are subject to CME oversight. The Sponsor believes that the data above suggests an increase in market appetite for regulated products (e.g., CME Bitcoin Futures Contracts) vis-a-vis a significant decrease in interest for unregulated products (e.g., unregulated futures and spot bitcoin). The Sponsor further believes that an analysis of the data presented above indicates that the CME Bitcoin Futures Market managed to maintain its open interest level despite the price volatility that bitcoin experienced in 2022, demonstrating its resilience and that it is sufficiently developed such that it is unlikely that trading in the Fund would EN12JA24.068</GPH> khammond on DSKJM1Z7X2PROD with NOTICES Trading Volume ARril 7.2021 khammond on DSKJM1Z7X2PROD with NOTICES 2462 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices creation. During a redemption transaction, the reverse process is used, where the Sponsor sells CME Bitcoin Futures Contracts with an aggregate market value that approximates the amount of cash to be paid upon the redemption. On a daily basis, the Sponsor will analyze the current portfolio allocation of the Fund between bitcoin and CME Bitcoin Futures Contracts and, based on market conditions, may decide to engage in an EFP transaction through the CME Bitcoin Futures Market to buy or sell bitcoin for the equivalent position in CME Bitcoin Futures Contracts. The Sponsor believes that the Fund’s use of cash creations and redemptions protects against manipulation in the creation and redemption process and of the Fund’s market price from trading in unregulated spot markets. Investment in bitcoin will not be directly related to creation or redemption of Shares such that trades can be performed in smaller sizes and at unpredictable times, reducing the risk of creation or redemption manipulation. Specifically, the Sponsor believes that cash creations and redemptions serve as a deterrent to manipulation in several ways: 1. Decoupling from spot market: By using cash instead of bitcoin for creations and redemptions, the Fund’s operations are decoupled from the unregulated spot market. The creation and redemption process does not directly influence the unregulated spot market or vice versa, thereby reducing the potential for manipulation through this process. 2. Unpredictable trading times: The Fund’s investment in spot bitcoin is not directly related to creations or redemptions. As a result, trading can be done in smaller sizes and at unpredictable times, making it harder for potential manipulators to time their actions. 3. Reduced impact of large trades: By effecting creations and redemptions in cash, large trades that could potentially influence the unregulated spot market are mitigated. Instead, these trades are absorbed in the CME Bitcoin Futures Market, which is sufficiently liquid and, as a regulated market that is a member of ISG, can reasonably be relied upon to assist the Exchange in detecting and deterring fraudulent or manipulative misconduct. 4. Reduced influence from unregulated spot bitcoin trading platforms: In-kind creation may create a direct relationship between the Fund’s market price and prices on offshore unregulated trading platforms such as Binance and others by arbitrage, because VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 an AP could buy or sell bitcoin from such markets and receive or deliver bitcoin from the Fund through the creation or redemption process. With creations and redemptions in cash, however, that arbitrage cannot be executed without transacting on the CME Bitcoin Futures Market. Thus, the Sponsor believes that, by removing a direct causal relationship between unregulated markets and the Fund’s market price, it is unlikely that a person attempting to manipulate the ETP would be reasonably successful by trading only on unregulated spot bitcoin trading platforms. A would-be manipulator would have to transact on the CME Bitcoin Futures Market, such that NYSE Arca’s common ISG membership with CME would assist NYSE Arca in detecting and deterring misconduct. The Sponsor believes that the Fund’s creation and redemption process is designed to minimize the potential for market manipulation, thereby protecting investors and maintaining the integrity of the markets. Settlement of CME Bitcoin Futures Contracts According to the Registration Statement, each BTC Contract and MBT Contract settles daily to the BTC Contract VWAP of all trades that occur between 2:59 p.m. and 3:00 p.m. Central Time, the settlement period, rounded to the nearest tradable tick.108 BTC Contracts and MBT Contracts each expire on the last Friday of the contract month and are settled with cash. The final settlement value is based on the CME CF BRR at 4:00 p.m. 108 VWAP is calculated based first on Tier 1 (if there are trades during the settlement period); then Tier 2 (if there are no trades during the settlement period); and then Tier 3 (in the absence of any trade activity or bid/ask in a given contract month during the current trading day, as follows: Tier 1: Each contract month settles to its VWAP of all trades that occur between 14:59:00 and 15:00:00 CT, the settlement period, rounded to the nearest tradable tick. If the VWAP is exactly in the middle of two tradable ticks, then the settlement will be the tradable price that is closer to the contract’s prior day settlement price. Tier 2: If no trades occur on CME Globex between 14:59:00 and 15:00:00 CT, the settlement period, then the last trade (or the contract’s settlement price from the previous day in the absence of a last trade price) is used to determine whether to settle to the bid or the ask during this period. a. If the last trade price is outside of the bid/ask spread, then the contract month settles to the nearest bid or ask price. b. If the last trade price is within the bid/ask spread, or if a bid/ask spread is not available, then the contract month settles to the last trade price. Tier 3: In the absence of any trade activity or bid/ask in a given contract month during the current trading day, the daily settlement price will be determined by applying the net change from the preceding contract month to the given contract month’s prior daily settlement price. PO 00000 Frm 00265 Fmt 4703 Sfmt 4703 London time on the expiration day of the futures contract. As proposed, the Fund will rollover its soon to expire CME Bitcoin Futures Contracts to extend the expiration or maturity of its position forward by closing the initial contract holdings and opening a new longer-term contract holding for the same underlying asset at the then-current market price. The Fund does not intend to hold any bitcoin futures positions into cash settlement. Net Asset Value According to the Registration Statement, the Fund’s NAV per Share will be calculated by taking the current market value of its total assets, subtracting any liabilities, and dividing that total by the number of Shares. The Administrator of the Fund will calculate the NAV once each trading day, as of the earlier of the close of the New York Stock Exchange or 4:00 p.m. Eastern Time (‘‘E.T.’’). According to the Registration Statement, to determine the value of CME Bitcoin Futures Contracts, the Fund’s Administrator will use the CME Bitcoin Futures Contract settlement price on the exchange on which the contract is traded, except that the ‘‘fair value’’ of CME Bitcoin Futures Contracts (as described in more detail below) may be used when CME Bitcoin Futures Contracts close at their price fluctuation limit for the day. The Fund’s Administrator will determine the value of Fund investments as of the earlier of the close of the New York Stock Exchange or 4:00 p.m. E.T. The Fund’s NAV will include any unrealized profit or loss on open CME Bitcoin Futures Contracts and any other credit or debit accruing to the Fund but unpaid or not received by the Fund. According to the Registration Statement, the fair value of the Fund’s holdings will be determined by the Fund’s Sponsor in good faith and in a manner that assesses the future bitcoin market value based on a consideration of all available facts and all available information on the valuation date. When a CME Bitcoin Futures Contract has closed at its price fluctuation limit, the fair value determination will attempt to estimate the price at which such CME Bitcoin Futures Contract would be trading in the absence of the price fluctuation limit (either above such limit when an upward limit has been reached or below such limit when a downward limit has been reached). Typically, this estimate will be made primarily by reference to exchange traded instruments at 4:00 p.m. E.T. on settlement day. The fair value of BTC Contracts and MBT Contracts may not E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices reflect such security’s market value or the amount that the Fund might reasonably expect to receive for the BTC Contracts and MBT Contracts upon its current sale. According to the Registration Statement and as discussed above, the value of spot bitcoin held by the Fund would be determined by the Administrator, when calculating the Fund’s NAV, via the FBSP methodology. As discussed above, the FBSP methodology allows for the determination of a spot price of bitcoin that utilizes market data exclusively from CME Bitcoin Futures Contracts and does not rely on market data obtained from unregulated bitcoin markets to determine the value of bitcoin held by the Fund. Indicative Fund Value According to the Registration Statement, in order to provide updated information relating to the Fund for use by investors and market professionals, ICE Data Indices, LLC will calculate an updated IFV. The IFV will be calculated by using the prior day’s closing NAV per Share of the Fund as a base and will be updated throughout the core trading session of 9:30 a.m. E.T. to 4:00 p.m. E.T. (the ‘‘Core Trading Session’’) to reflect changes in the value of the Fund’s holdings during the trading day. For purposes of calculating the IFV, the Fund’s spot bitcoin holdings will be priced using a real time version of the Benchmark, the Nasdaq Bitcoin Reference Price—Real Time (‘‘NQBTC– RT’’),109 and the Fund’s CME Bitcoin Futures Contracts holdings will be priced using the most recent trading price for each contract. The IFV will be disseminated on a per Share basis every 15 seconds during the Exchange’s Core Trading Session and be widely disseminated by one or more major market data vendors during the Exchange’s Core Trading Session.110 Creation and Redemption of Shares According to the Registration Statement, the Shares issued by the Fund may only be purchased by APs and only in blocks of 10,000 Shares called ‘‘Creation Baskets.’’ The amount of the purchase payment for a Creation khammond on DSKJM1Z7X2PROD with NOTICES 109 The ‘‘Nasdaq Bitcoin Reference Price—Real Time’’ or ‘‘NQBTC–RT’’ is the real-time version of the Benchmark and is calculated every second throughout a 24-hour trading day, seven days per week, using published, real-time bid and ask quotes for bitcoin on the NQBTCS core trading platforms. See https://indexes.nasdaqomx.com/docs/ methodology_nci.pdf. 110 Several major market data vendors display and/or make widely available IFVs taken from the Consolidated Tape Association (‘‘CTA’’) or other data feeds. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Basket is equal to the total NAV of Shares in the Creation Basket. Similarly, only APs may redeem Shares and only in blocks of 10,000 Shares called ‘‘Redemption Baskets.’’ The amount of the redemption proceeds for a Redemption Basket is equal to the total NAV of Shares in the Redemption Basket. The purchase price for Creation Baskets and the redemption price for Redemption Baskets are the actual NAV calculated at the end of the business day when a request for a purchase or redemption is received by the Fund. Shares of the Fund will be created and redeemed in cash.111 APs will be the only persons that may place orders to create and redeem Creation Baskets. APs must be (1) either registered broker-dealers or other securities market participants, such as banks and other financial institutions, that are not required to register as broker-dealers to engage in securities transactions, and (2) Depository Trust Company (‘‘DTC’’) participants. An AP is an entity that has entered into an Authorized Participant agreement with the Sponsor. An AP delivers cash to the Fund in the creation process, and an AP receives cash in the redemption process.112 The 111 The Sponsor notes that Shares of the Fund will only be created and redeemed in cash because of regulatory and other concerns surrounding the ability of broker-dealers, such as the APs, to have custody and/or control over non-security digital assets, such as bitcoin. In 2019, Commission Staff noted that a digital asset security that does not meet the definition of a ‘‘security’’ under the Securities Investor Protection Act (‘‘SIPA’’) would likely not receive protection under SIPA in the event of the failure of a carrying broker-dealer (thus leaving holders of those digital asset securities with only unsecured general creditor claims against the broker-dealer’s estate). See SEC Division of Trading and Markets, FINRA Office of General Counsel, Joint Staff Statement on Broker-Dealer Custody of Digital Asset Securities (July 8, 2019), https:// www.sec.gov/news/public-statement/joint-staffstatement-broker-dealer-custody-digital-assetsecurities. The Staff also noted that uncertainty regarding when and whether a broker-dealer holds a digital asset security in its possession or control creates greater risk for customers that their securities will not be able to be returned in the event of a broker-dealer failure. See id. The Staff concluded that these concerns were likely to be inconsistent with the expectations of persons who would use a broker-dealer to custody their digital asset securities. In light of these concerns, the creation and redemption and processes of the Fund have been structured so that APs are not required to take custody of, or have control over, bitcoin at any stage. 112 The APs will deliver only cash to create Shares and will receive only cash when redeeming Shares. Further, APs will not directly or indirectly purchase, hold, deliver, or receive bitcoin as part of the creation or redemption process or otherwise direct the Trust or a third party with respect to purchasing, holding, delivering, or receiving bitcoin as part of the creation or redemption process. To the extent applicable, the Fund will create shares by receiving bitcoin from a third party that is not the AP and the Fund—not the AP—is responsible for PO 00000 Frm 00266 Fmt 4703 Sfmt 4703 2463 cash delivered or received during the creation or redemption process is then used by the Sponsor to purchase or sell CME Bitcoin Futures Contracts with an aggregate market value that approximates the amount of cash received or paid upon the creation or redemption. On a daily basis, the Sponsor will analyze the current portfolio allocation of the Fund between bitcoin and CME Bitcoin Futures Contracts and decide whether to engage in an EFP transaction through the CME Bitcoin Futures Market to buy or sell bitcoin for the equivalent position in CME Bitcoin Futures Contracts. Creation Procedures According to the Registration Statement, on any ‘‘Business Day,’’ an AP may place an order with the Fund’s Transfer Agent to create one or more Creation Baskets. For purposes of processing both purchase and redemption orders, a ‘‘Business Day’’ means any day other than a day when the CME Bitcoin Futures Market or the New York Stock Exchange is closed for regular trading. Purchase orders for Creation Baskets must be placed by 3:00 p.m. EST or one hour prior to the close of trading on the New York Stock Exchange, whichever is earlier. The day on which the distributor(s) engaged by the Sponsor receives a valid purchase order is referred to as the purchase order date. If the purchase order is received after the applicable cut-off time, the purchase order date will be the next Business Day. Purchase orders are irrevocable. By placing a purchase order, an AP agrees to deposit cash with the Cash Custodian. Determination of Required Deposits According to the Registration Statement, the total deposit required to create each basket (‘‘Creation Basket Deposit’’) is an amount of cash and/or cash equivalents in the same proportion to the total assets of the Fund (net of estimated accrued but unpaid fees, expenses and other liabilities) on the purchase order date as the proportion of the number of Shares to be created under the purchase order to the total selecting the third party to deliver the bitcoin. Further, the third party will not be acting as an agent of the AP with respect to the delivery of the bitcoin to the trust or acting at the direction of the AP with respect to the delivery of the bitcoin to the Fund. The Fund will redeem shares by delivering bitcoin to a third party that is not the AP and the Fund—not the AP—is responsible for selecting the third party to receive the bitcoin. Further, the third party will not be acting as an agent of the AP with respect to the receipt of the bitcoin from the Fund or acting at the direction of the AP with respect to the receipt of the bitcoin from the Fund. E:\FR\FM\12JAN1.SGM 12JAN1 2464 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices number of Shares outstanding on the purchase order date. The Sponsor determines, directly in its sole discretion or in consultation with the Cash Custodian and the SubAdministrator, the requirements for cash and/or cash equivalents, including the remaining maturities of the cash equivalents, which may be included in deposits to create baskets. If cash equivalents are to be included in a Creation Basket Deposit for orders placed on a given business day, the SubAdministrator will publish an estimate of the Creation Basket Deposit requirements at the beginning of such day. khammond on DSKJM1Z7X2PROD with NOTICES Delivery of Required Deposits According to the Registration Statement, an AP who places a purchase order is responsible for transferring to the Fund’s account with the Cash Custodian the required amount of cash and cash equivalents by the end of the next business day following the purchase order date or by the end of such later business day, not to exceed three business days after the purchase order date, as agreed to between the AP and the Cash Custodian when the purchase order is placed (the ‘‘Purchase Settlement Date’’). Upon receipt of the deposit amount, the Cash Custodian directs DTC to credit the number of baskets ordered to the AP’s DTC account on the Purchase Settlement Date. Because orders to purchase baskets must be placed by 3:00 p.m. E.T., but the total payment required to create a basket during the continuous offering period will not be determined until 4:00 p.m. E.T. on the date the purchase order is received, APs will not know the total amount of the payment required to create a basket at the time they submit an irrevocable purchase order for the basket. The Fund’s NAV and the total amount of the payment required to create a basket could rise or fall substantially between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect thereof is determined. Suspension and Rejection of Purchase Orders According to the Registration Statement, the Sponsor has the discretion to suspend purchase orders or delay their settlement in specific situations. These situations may include (1) exchange closures or trading restrictions, (2) emergencies affecting the handling of cash equivalents, (3) shareholder protection needs, (4) potential price limit restrictions on CME Bitcoin Futures Contracts, or (5) circumstances in which it would not be VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 in the best interest of the Fund or its investors to accept purchase orders. Purchase orders must conform to the criteria outlined in the AP agreement and be for whole baskets. The Sponsor may suspend orders that do not meet these criteria. The Sponsor, acting by itself or through the distributor or Transfer Agent, may reject a purchase order or a Creation Basket Deposit if: (a) it determines that, due to position limits or otherwise, investment alternatives that will enable the Fund to meet its investment objective are not available or practicable at that time; (b) it determines that the purchase order or the Creation Basket Deposit is not in proper form; (c) it believes that acceptance of the purchase order or the Creation Basket Deposit would have adverse tax consequences to the Fund or its investors; (d) the acceptance or receipt of the Creation Basket Deposit would, in the opinion of counsel to the Sponsor, be unlawful; (e) circumstances outside the control of the Sponsor make it, for all practical purposes, not feasible to process creations of baskets; (f) there is a possibility that any or all of the CME Bitcoin Futures Contracts of the Fund from which the NAV of the Fund is calculated will be priced at a dynamic price limit restriction; 113 or (g) if, in the sole discretion of the Sponsor, the execution of such an order would not be in the best interest of the Fund or its investors. Redemption Procedures According to the Registration Statement, the procedures by which an AP can redeem one or more Redemption Baskets will mirror the procedures for the creation of Creation Baskets. On any Business Day, an AP may place an order with the Transfer Agent to redeem one or more Redemption Baskets. The redemption procedures allow APs to redeem Redemption Baskets. Individual shareholders may not redeem directly from the Fund. By placing a redemption order, an AP agrees to 113 The CME imposes a maximum permitted price range for futures contracts in each trading session on its futures markets. When markets reach their price limits, the CME may temporarily halt trading until such price limits can be expanded, remain price limited, or suspend trading for the day, based on relevant regulatory provisions. CME Bitcoin Futures Contracts, like other futures contracts on the CME, are subject to price limits on a dynamic basis. At the commencement of each trading day, CME Bitcoin Futures Contracts are assigned a price limit variant, which equals a percentage of the prior day’s settlement price, or a price deemed appropriate by the CME. During the trading day, the price limit variant is applied in rolling 60-minute look-back periods to establish dynamic lower and upper price fluctuation limits. Price limits for CME Bitcoin Futures Contracts are published at https:// www.cmegroup.com/trading/price-limits.html# cryptocurrencies. PO 00000 Frm 00267 Fmt 4703 Sfmt 4703 deliver the Redemption Baskets to be redeemed through DTC’s book entry system to the Fund by the end of the next Business Day following the effective date of the redemption order or by the end of such later business day (‘‘Redemption Settlement Date’’). Determination of Redemption Distribution According to the Registration Statement, the redemption distribution from the Fund will consist of an amount of cash and/or cash equivalents that is in the same proportion to the total assets of the Fund on the date that the order to redeem is properly received as the number of Shares to be redeemed under the redemption order is in proportion to the total number of Shares outstanding on the date the order is received. Delivery of Redemption Distribution The redemption distribution due from a Fund will be delivered to the AP on the Redemption Settlement Date if the Fund’s DTC account has been credited with the baskets to be redeemed. If the Fund’s DTC account has not been credited with all of the baskets to be redeemed by the end of such date, the redemption distribution will be delivered to the extent of whole baskets received. Any remainder of the redemption distribution will be delivered on the next business day after the Redemption Settlement Date to the extent of remaining whole baskets received. Pursuant to information from the Sponsor, the Cash Custodian will also be authorized to deliver the redemption distribution notwithstanding that the baskets to be redeemed are not credited to the Fund’s DTC account by 12:00 p.m. E.T. on the Redemption Settlement Date if the AP has collateralized its obligation to deliver the baskets through DTC’s bookentry system on such terms as the Sponsor may from time to time determine. Availability of Information The NAV for the Fund’s Shares will be calculated and disseminated daily and will be made available to all market participants at the same time. The intraday, closing prices, and settlement prices of the CME Bitcoin Futures Contracts will be readily available from the CME website, automated quotation systems, published or other public sources, or major market data vendors. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the E:\FR\FM\12JAN1.SGM 12JAN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Real-time data for CME Bitcoin Futures Contracts will be available by subscription through on-line information services. ICE Futures U.S. and CME also provide delayed futures and options on futures information on current and past trading sessions and market news free of charge on their respective websites. The specific contract specifications for CME Bitcoin Futures Contracts will also be available on such websites, as well as other financial informational sources. The spot price of bitcoin is available on a 24hour basis from major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in bitcoin will be available from major market data vendors and from the trading platforms on which bitcoin is traded. EFP transaction volumes are reported daily, by instrument, on the CME website.114 Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. Quotation information for cash equivalents and commodity futures may be obtained from brokers and dealers who make markets in such instruments. Intra-day price and closing price level information for the Benchmark will be available from major market data vendors. The real-time version of the Benchmark value, NQBTC–RT, will be disseminated once every 15 seconds during the Core Trading Session. The Benchmark components and methodology will be made publicly available. The IFV will be available through on-line information services. In addition, the Fund’s website, https://hashdex-etfs.com/, will display the applicable end of day closing NAV. The daily holdings of the Fund will be available on the Fund’s website. The Fund’s website will also include a form of the prospectus for the Fund that may be downloaded. The website will include the Shares’ ticker and CUSIP information along with additional quantitative information updated on a daily basis, including: (1) the prior Business Day’s reported NAV and closing price and a calculation of the premium and discount of the closing price or mid-point of the bid/ask spread at the time of NAV calculation (the ‘‘Bid/Ask Price’’) against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily closing price or Bid/Ask Price against the NAV, within appropriate ranges, for at least each of the four previous calendar quarters. The website disclosure of portfolio holdings will be made daily and will include, as applicable, (i) the name, quantity, price, and market value of the Fund’s holdings, (ii) the counterparty to and value of forward contracts and any other financial instruments tracking the Benchmark, and (iii) the total cash and cash equivalents held in the Fund’s portfolio, if applicable. The Fund’s website will be publicly available at the time of the public offering of the Shares and accessible at no charge. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Fund.115 Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Rule 7.12–E have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) the extent to which trading is not occurring in the CME Bitcoin Futures Market 116 and in the securities and/or the financial instruments composing the daily disclosed portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. The Exchange may halt trading during the day in which an interruption to the dissemination of the IFV or the value of the Benchmark occurs. The real-time version of the Benchmark value (NQBTC–RT) will be disseminated once every 15 seconds during the Core Trading Session. The Benchmark components and methodology will be made publicly available. If the interruption to the dissemination of the IFV, or to the value of the Benchmark persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt 115 See NYSE Arca Rule 7.12–E. Sponsor believes that, under normal market conditions, interruptions or trading halts in individual spot bitcoin markets are unlikely to impact trading in the Shares unless trading in the CME Bitcoin Futures Market is also impacted. 116 The 114 Pricing information for EFP transactions in CME Bitcoin Futures Contracts is reported to the CME Bitcoin Futures Market but is not publicly available. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00268 Fmt 4703 Sfmt 4703 2465 trading in the Shares until such time as the NAV is available to all market participants. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. Shares will trade on the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in accordance with NYSE Arca Rule 7.34–E (Early, Core, and Late Trading Sessions). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Rule 7.6–E, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. The Shares will conform to the initial and continued listing criteria under NYSE Arca Rule 8.500–E. The trading of the Shares will be subject to NYSE Arca Rule 8.500E(f), which sets forth certain restrictions on Equity Trading Permit Holders (‘‘ETP Holders’’) acting as registered market makers in Trust Units to facilitate surveillance. Pursuant to NYSE Arca Rule 8.500–E(f), an ETP Holder acting as a registered market maker in Trust Units must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the market maker may have or over which it may exercise investment discretion. No market maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a market maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records, the ETP Holder acting as a market maker in Trust Units shall make available to the Exchange such books, records or other information pertaining to transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity E:\FR\FM\12JAN1.SGM 12JAN1 2466 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices derivatives, as may be requested by the Exchange. For initial and continued listing as proposed herein, the Fund will be in compliance with Rule 10A–3 under the Act, and the Trust will rely on the exception contained in Rule 10A– 3(c)(7).117 A minimum of 50,000 Shares of the Fund will be outstanding at the commencement of trading on the Exchange. khammond on DSKJM1Z7X2PROD with NOTICES Surveillance The Exchange represents that trading in the Shares of the Fund will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.118 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and the Fund’s holdings with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares and the Fund’s holdings from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and the Fund’s holdings from markets and other entities that are members of ISG or with which the Exchange has in place a comprehensive 117 See Rule 10A–3(c)(7), 17 CFR 240.10A–3(c)(7) (stating that a listed issuer is not subject to the requirements of Rule 10A–3 if the issuer is organized as an unincorporated association that does not have a board of directors and the activities of the issuer are limited to passively owning or holding securities or other assets on behalf of or for the benefit of the holders of the listed securities). 118 FINRA conducts cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 surveillance-sharing agreement (‘‘CSSA’’). The Exchange is also able to obtain information regarding trading in the Shares, the underlying bitcoin, CME Bitcoin Futures Contracts, options on bitcoin futures, or any other bitcoin derivative through ETP Holders, in connection with such ETP Holders’ proprietary or customer trades which they effect through ETP Holders on any relevant market. The Exchange can obtain market surveillance information, including customer identity information, with respect to transactions (including transactions in futures contracts) occurring on US futures exchanges, which are members of the ISG. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. Under NYSE Arca Rule 8.500–E(f), an ETP Holder acting as a registered market maker in the Shares is required to provide the Exchange with information relating to its trading in the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives. Commentary .04 of NYSE Arca Rule 11.3–E requires an ETP Holder acting as a registered market maker, and its affiliates, in the Shares to establish, maintain and enforce written policies and procedures reasonably designed to prevent the misuse of any material nonpublic information with respect to such products, any components of the related products, any physical asset or commodity underlying the product, applicable currencies, underlying indexes, related futures or options on futures, and any related derivative instruments (including the Shares). As a general matter, the Exchange has regulatory jurisdiction over its ETP Holders and their associated persons, which include any person or entity controlling an ETP Holder. To the extent the Exchange may be found to lack jurisdiction over a subsidiary or affiliate of an ETP Holder that does business only in commodities or futures contracts, the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. CME Bitcoin Futures Contracts held by the Fund will be listed on an exchange that is a member of the ISG or is a market with which the Exchange has a CSSA.119 119 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Fund may trade on markets that are members of ISG or with which the Exchange has in place a CSSA. PO 00000 Frm 00269 Fmt 4703 Sfmt 4703 All statements and representations made in this filing regarding (a) the description of the portfolio or reference asset, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange listing rules specified in this rule filing shall constitute continued listing requirements for listing the Shares on the Exchange. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Fund to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Fund is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Rule 5.5–E(m). Information Bulletin Prior to the commencement of trading of the Shares, the Exchange will inform its ETP Holders in an information bulletin (‘‘Information Bulletin’’) of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) the risks involved in trading the Shares during the Early and Late Trading Sessions when an updated IFV will not be calculated or publicly disseminated; (2) the procedures for purchases and redemptions of Shares in Creation Baskets and Redemption Baskets (and that Shares are not individually redeemable); (3) NYSE Arca Rule 9.2– E(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (4) how information regarding the IFV is disseminated; (5) how information regarding portfolio holdings is disseminated; (6) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (7) trading information. In addition, the Information Bulletin will advise ETP Holders, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Fund. The Exchange notes that investors purchasing Shares directly from the Fund will receive a prospectus. ETP Holders purchasing Shares from the Fund for resale to investors will deliver a prospectus to such investors. The Information Bulletin will also discuss any exemptive, noaction, and interpretive relief granted by the Commission from any rules under E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES the Act. In addition, the Information Bulletin will reference that the Fund is subject to various fees and expenses described in the Registration Statement. The Information Bulletin will also reference the fact that there is no regulated source of last sale information regarding bitcoin, that the Commission has no jurisdiction over the trading of Bitcoin as a commodity, and that the CFTC has regulatory jurisdiction over the trading of bitcoin futures contracts and options on bitcoin futures contracts. The Information Bulletin will also disclose the trading hours of the Shares and that the NAV for the Shares will be calculated after 4:00 p.m. E.T. each trading day. The Information Bulletin will disclose that information about the Shares will be publicly available on the Fund’s website. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 120 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes the proposed rule change is designed to remove impediments to and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest because it reflects the Fund’s proposed investment strategy, through which the Fund would seek to achieve its investment objectives by investing in both CME Bitcoin Futures Contracts and bitcoin, in addition to being able to hold part of its net assets in cash. The Exchange believes that the Fund’s strategy of holding a mix of bitcoin, CME Bitcoin Futures Contracts, and cash would remove impediments to and perfect the mechanism of a free market and protect investors and the public interest, offering investors exposure to bitcoin without relying on unregulated products or markets. The Exchange also believes that the Sponsor has designed the Fund to include features intended to provide a robust framework for mitigating the risks of market manipulation, such as its proposed use of futures-based pricing for bitcoin in calculating the Fund’s NAV, EFP transactions through the CME Bitcoin Futures Market to acquire and dispose of bitcoin, and cash creations and redemptions, which would remove impediments to and perfect the 120 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 mechanism of a free and open market and promote the protection of investors and the public interest. Finally, the Exchange believes that, given these features of the Fund, the CME Bitcoin Futures Market should be considered the regulated market of significant size in relation to the Fund and that there is a reasonable likelihood that a person attempting to manipulate the Fund would also have to trade on the CME Bitcoin Futures Market to do so, such that information shared between CME and NYSE Arca pursuant their common ISG membership would aid NYSE Arca in detecting and deterring potential misconduct, and that it is unlikely that trading in the Fund would be the predominant influence on the CME Bitcoin Futures Market. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest in that the Shares would be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Rule 8.500–E. The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and the Fund’s holdings with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares and the Fund’s holdings from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares and the Fund’s holdings from markets and other entities that are members of ISG or with which the Exchange has in place a CSSA. The Exchange is also able to obtain information regarding trading in the Shares and the Fund’s holdings through ETP Holders, in connection with such ETP Holders’ proprietary or customer trades which they effect through ETP Holders on any relevant market. The Exchange can obtain market surveillance information, including customer identity information, with respect to transactions (including transactions in CME Bitcoin Futures Contracts) occurring on US futures exchanges, which are members of the ISG. The intraday, closing prices, and settlement prices of CME Bitcoin Futures Contracts and bitcoin will be PO 00000 Frm 00270 Fmt 4703 Sfmt 4703 2467 readily available from the applicable futures exchange websites, automated quotation systems, published or other public sources, or major market data vendors website or on-line information services. Information regarding market price and trading volume of the Shares will be continually available on a realtime basis throughout the day on brokers’ computer screens and other electronic services. Real-time data for CME Bitcoin Futures Contracts will be available by subscription from on-line information services. ICE Futures U.S. and CME also provide delayed futures information on current and past trading sessions and market news free of charge on the Fund’s website. The specific contract specifications for CME Bitcoin Futures Contracts will also be available on such websites, as well as other financial informational sources. The spot price of bitcoin is available on a 24-hour basis from major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in bitcoin will be available from major market data vendors and from the trading platforms on which bitcoin is traded. EFP transaction volumes are reported daily, by instrument, on the CME website. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. The IFV will be disseminated on a per Share basis every 15 seconds during the Exchange’s Core Trading Session and be widely disseminated by one or more major market data vendors during the NYSE Arca Core Trading Session. The Fund’s website will also include a form of the prospectus for the Fund that may be downloaded. The website will include the Share’s ticker and CUSIP information along with additional quantitative information updated on a daily basis, including, for the Fund: (1) the prior business day’s reported NAV and closing price and a calculation of the premium and discount of the closing price or midpoint of the Bid/Ask Price against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily closing price or Bid/Ask Price against the NAV, within appropriate ranges, for at least each of the four previous calendar quarters. The website disclosure of portfolio holdings will be made daily and will include, as applicable, (i) the name, quantity, price, and market value of CME Bitcoin Futures Contracts, (ii) the counterparty to and value of forward contracts, and E:\FR\FM\12JAN1.SGM 12JAN1 2468 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices (iii) other financial instruments, if any, and the characteristics of such instruments and cash equivalents, and amount of cash held in the Fund’s portfolio, if applicable. Trading in Shares of the Fund will be halted if the circuit breaker parameters in NYSE Arca Rule 7.12–E have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) the extent to which trading is not occurring in BTC and/or MBT Contracts and the securities and/or the financial instruments composing the daily disclosed portfolio of the Fund; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of Trust Units based on bitcoin that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of the Shares, which are Trust Units based on bitcoin and that will enhance competition among market participants, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others khammond on DSKJM1Z7X2PROD with NOTICES No written comments were solicited or received with respect to the proposed rule change. III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Electronic Comments SMALL BUSINESS ADMINISTRATION • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– NYSEARCA–2023–58 on the subject line. [Disaster Declaration #20014 and #20015; RHODE ISLAND Disaster Number RI–20000] Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–NYSEARCA–2023–58. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–NYSEARCA–2023–58 and should be submitted on or before February 2, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.121 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–00498 Filed 1–11–24; 8:45 am] BILLING CODE 8011–01–P 121 17 PO 00000 CFR 200.30–3(a)(12). Frm 00271 Fmt 4703 Sfmt 4703 Presidential Declaration of a Major Disaster for the State of Rhode Island U.S. Small Business Administration. ACTION: Notice. AGENCY: This is a Notice of the Presidential declaration of a major disaster for the State of Rhode Island (FEMA–4753–DR), dated 01/07/2024. Incident: Severe Storms, Flooding, and Tornadoes. Incident Period: 09/10/2023 through 09/13/2023. DATES: Issued on 01/07/2024. Physical Loan Application Deadline Date: 03/07/2024. Economic Injury (EIDL) Loan Application Deadline Date: 10/07/2024. ADDRESSES: Visit the MySBA Loan Portal at https://lending.sba.gov to apply for a disaster assistance loan. FOR FURTHER INFORMATION CONTACT: Alan Escobar, Office of Disaster Recovery & Resilience, U.S. Small Business Administration, 409 3rd Street SW, Suite 6050, Washington, DC 20416, (202) 205–6734. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the President’s major disaster declaration on 01/07/2024, applications for disaster loans may be submitted online using the MySBA Loan Portal https:// lending.sba.gov or other locally announced locations. Please contact the SBA disaster assistance customer service center by email at disastercustomerservice@sba.gov or by phone at 1–800–659–2955 for further assistance. The following areas have been determined to be adversely affected by the disaster: Primary Counties (Physical Damage and Economic Injury Loans): Providence. Contiguous Counties (Economic Injury Loans Only): Rhode Island: Bristol, Kent Connecticut: Windham Massachusetts: Worcester, Norfolk, Bristol The Interest Rates are: SUMMARY: Percent For Physical Damage: Homeowners with Credit Available Elsewhere ...................... Homeowners without Credit Available Elsewhere .............. Businesses with Credit Available Elsewhere ...................... E:\FR\FM\12JAN1.SGM 12JAN1 5.000 2.500 8.000

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Notices]
[Pages 2443-2468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00498]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99291; File No. SR-NYSEARCA-2023-58]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 1 to a Proposed Rule Change To List and Trade Shares 
of the Hashdex Bitcoin ETF Under NYSE Arca Rule 8.500-E (Trust Units)

January 8, 2024.
    On September 22, 2023, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares of the Hashdex Bitcoin 
ETF (f/k/a Hashdex Bitcoin Futures ETF) under NYSE Arca Rule 8.500-E 
(Trust Units). The proposed rule change was published for comment in 
the Federal Register on October 3, 2023.\3\ On November 15, 2023, 
pursuant to Section 19(b)(2) of the Act,\4\ the Commission designated a 
longer period within which to approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether to

[[Page 2444]]

disapprove the proposed rule change.\5\ On November 28, 2023, the 
Commission instituted proceedings to determine whether to disapprove 
the proposed rule change.\6\ On January 5, 2024, the Exchange filed 
Amendment No. 1 to the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. Amendment No. 
1 amended and replaced the proposed rule change in its entirety. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as modified by Amendment No. 1, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 98564 (Sept. 27, 
2023), 88 FR 68188. Comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-nysearca-2023-58/srnysearca202358.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 98947, 88 FR 81171 
(Nov. 21, 2023).
    \6\ See Securities Exchange Act Release No. 99031, 88 FR 84021 
(Dec. 1, 2023).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes list and trade shares of the Hashdex Bitcoin 
ETF under NYSE Arca Rule 8.500-E (``Trust Units''). This Amendment No. 
1 to SR-NYSEARCA-2023-58 replaces SR-NYSEARCA-2023-58 as originally 
filed and supersedes such filing in its entirety. The proposed rule 
change is available on the Exchange's website at www.nyse.com, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
Hashdex Bitcoin ETF (the ``Fund'') under NYSE Arca Rule 8.500-E.
    The Commission previously approved the listing and trading of 
shares of the Teucrium Bitcoin Futures Fund (the ``Predecessor Fund'') 
\7\ pursuant to NYSE Arca Rule 8.200-E, Commentary .02.\8\ The 
Predecessor Fund's name was subsequently changed to the Hashdex Bitcoin 
Futures ETF pursuant to an April 18, 2022 amendment to the Predecessor 
Fund's registration statement.\9\ In connection with the launch of the 
Predecessor Fund, Tidal Investments LLC (f/k/a Toroso Investments LLC, 
the ``Sponsor''),\10\ Teucrium Trading, LLC (the ``Prior Sponsor''), 
and Hashdex Asset Management, Ltd. (``Hashdex'') entered into an 
agreement pursuant to which the Fund would be the successor and 
surviving entity from a merger into the Fund of the Predecessor Fund 
(which is a series of the Predecessor Trust sponsored by the Prior 
Sponsor).\11\
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    \7\ The Predecessor Fund is a series of the Teucrium Commodity 
Trust (the ``Predecessor Trust''). The Commission has noticed for 
immediate effectiveness a separate proposed rule change relating to 
the transfer of management and control of the Fund from the 
Predecessor Trust to the Tidal Commodities Trust I (the ``Trust''). 
See Securities Exchange Act Release No. 99164 (December 13, 2023), 
88 FR 87825 (December 19, 2023) (SR-NYSEARCA-2023-84) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change to Make 
Changes to Certain Representations Relating to the Hashdex Bitcoin 
Futures Fund).
    \8\ See Securities Exchange Act Release No. 34-94620 (April 6, 
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
List and Trade Shares of the Teucrium Bitcoin Futures Fund Under 
NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts)) (the 
``Approval Order''). The representations herein supersede and 
replace the representations in the Exchange's prior rule filing 
relating to the Teucrium Bitcoin Futures Fund and Partial Amendment 
No. 2 thereto. See Securities Exchange Act Release No. 92573 (August 
5, 2021), 86 FR 44062 (August 11, 2021) (SR-NYSEArca-2021-53) 
(Notice of Filing of a Proposed Rule Change To List and Trade Shares 
of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E) and 
Partial Amendment No. 2, available at: https://www.sec.gov/comments/sr-nysearca-2021-53/srnysearca202153-20118884-271701.pdf.
    \9\ On April 18, 2022, Teucrium Commodity Trust filed with the 
Commission Pre-Effective Amendment No. 2 to the registration 
statement on Form S-1 under the Securities Act of 1933 (the 
``Securities Act'') (File No. 333-256339) changing the name of the 
Fund from Teucrium Bitcoin Futures Fund to Hashdex Bitcoin Futures 
ETF.
    \10\ The Sponsor is not registered as a broker-dealer or 
affiliated with a broker-dealer. In the event that (a) the Sponsor 
becomes registered as a broker-dealer or newly affiliated with a 
broker-dealer, or (b) any new sponsor or sub-adviser is registered 
as a broker-dealer or becomes affiliated with a broker-dealer, it 
will implement and maintain a fire wall with respect to its relevant 
personnel or personnel of the broker-dealer affiliate, as 
applicable, regarding access to information concerning the 
composition of and/or changes to the portfolio, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the portfolio.
    \11\ On July 21, 2023, the Trust, on behalf of the Fund, filed 
with the Commission a registration statement on Form S-1 under the 
Securities Act (File No. 333-2773364), as amended by a Pre-Effective 
Amendment No. 1 filed with the Commission on November 2, 2023 
(``Form S-1''), for the continuous offering and sale of the Fund's 
Shares. On October 31, 2023, the Trust filed with the Commission a 
separate registration statement on Form S-4 (File No. 333-275227) 
(``Form S-4'') under the Securities Act to register 50,004 shares of 
the Fund, which was issued in exchange for the outstanding shares of 
the Predecessor Fund (the ``Reorganization''). The Reorganization 
closed on January 3, 2024. The offering and sale of Fund Shares 
pursuant to the Form S-1 and the Form S-4 and the trading in such 
Shares commenced with the closing of the Reorganization, at which 
time the registration statements on the Form S-1 and the Form S-4 
were declared effective.
---------------------------------------------------------------------------

    On August 25, 2023, the Trust on behalf of the Fund, submitted a 
confidential draft registration statement (the ``Draft Registration 
Statement'') on Form S-1 (File No. 377-06858) to change the Fund's name 
to the Hashdex Bitcoin ETF and to modify the Fund's investment 
objective and strategy, as further discussed below.\12\ On December 22, 
2023, the Trust, on behalf of the Fund, filed publicly a registration 
statement on Form S-1 (File No. 333-276254) (the ``Registration 
Statement''), which supersedes and replaces the Draft Registration 
Statement.\13\
---------------------------------------------------------------------------

    \12\ The Trust, on behalf of the Fund, submitted an Amendment 
No. 1 to the Registration Statement on November 14, 2023 (``DRS 
Amendment''). The Jumpstart Our Business Startups Act (the ``JOBS 
Act''), enacted on April 5, 2012, added Section 6(e) to the 
Securities Act. Section 6(e) of the Securities Act provides that an 
``emerging growth company'' may confidentially submit to the 
Commission a draft registration statement for confidential, non-
public review by the Commission staff prior to public filing, 
provided that the initial confidential submission and all amendments 
thereto shall be publicly filed not later than 15 days before the 
date on which the issuer conducts a road show, as such term is 
defined in Securities Act Rule 433(h)(4). An emerging growth company 
is defined in Section 2(a)(19) of the Securities Act as an issuer 
with less than $1,000,000,000 total annual gross revenues during its 
most recently completed fiscal year. The Trust meets the definition 
of an emerging growth company and consequently submitted its Draft 
Registration Statement and DRS Amendment to the Commission on a 
confidential basis.
    \13\ A Pre-Effective Amendment No. 1 to the Registration 
Statement was filed on December 26, 2023 (the ``Amendment''). The 
Amendment was an exhibit-only filing to provide the Fund's executed 
bitcoin custodian agreement. The Draft Registration Statement and 
the DRS Amendment have been made accessible as public filings. The 
Registration Statement is not yet effective, and the Shares will not 
trade on the Exchange under the prospectus contained in the 
Registration Statement until such time that the Registration 
Statement is effective.
---------------------------------------------------------------------------

    The Fund is a series of the Trust, a Delaware statutory trust. The 
Fund is managed and controlled by the Sponsor and administered by Tidal 
ETF Services LLC (the ``Administrator''). The Sponsor is registered as 
a commodity pool operator (``CPO'') and a commodity trading adviser 
with the Commodity Futures Trading Commission (``CFTC'') and is a 
member of the National Futures Association (``NFA'').
    U.S. Bancorp Fund Services, LLC (doing business as U.S. Bank Global

[[Page 2445]]

Fund Services) is the sub-administrator, registrar, and transfer agent 
for the Fund (``Sub-Administrator'' or ``Transfer Agent''). U.S. Bank, 
N.A. will hold the Fund's cash and/or cash equivalents \14\ (``Cash 
Custodian''). BitGo Trust Company, Inc. will keep custody of all the 
Fund's bitcoin as the ``Bitcoin Custodian.'' \15\
---------------------------------------------------------------------------

    \14\ ``Cash equivalents'' include short-term treasury bills (90 
days or less to maturity), money market funds, and demand deposit 
accounts. The Fund does not hold, invest in, or trade in digital 
assets that are linked to any fiat currency (i.e., stablecoins).
    \15\ The Fund may, in the future, engage additional custodians 
for its bitcoin, each of whom may be referred to as a Bitcoin 
Custodian.
---------------------------------------------------------------------------

The Fund's Investment Objective and Strategy
    According to the Registration Statement, the investment objective 
of the Fund is to have the daily changes in the net asset value 
(``NAV'') of the Shares reflect the daily changes in the price of its 
benchmark, less expenses from the Fund's operations, by investing in 
both bitcoin and bitcoin futures contracts traded on the Chicago 
Mercantile Exchange, Inc. (``CME'').\16\ In doing so, the Sponsor 
expects that the Fund will provide investors with bitcoin exposure that 
is more resistant to fraud and manipulative practices than comparable 
products that seek to rely on unregulated trading platforms.\17\ In 
particular, to avoid any exposure to potential manipulation from actors 
operating on unregulated trading platforms, although the Fund will hold 
spot bitcoin, the Fund's NAV will be calculated using a spot bitcoin 
price derived from the price of CME Bitcoin Futures Contracts (as 
defined below), and the Fund expects to purchase and sell bitcoin 
exclusively via Exchange for Physical (``EFP'') transactions on the 
CME's bitcoin futures market (the ``CME Bitcoin Futures Market'').\18\ 
The Fund will not trade or otherwise rely on information or services 
from unregulated spot bitcoin trading platforms, but will instead buy 
CME Bitcoin Futures Contracts with the purpose of using them to acquire 
physical bitcoin through EFP transactions on the regulated CME Bitcoin 
Futures Market.
---------------------------------------------------------------------------

    \16\ Consistent with the Approval Order, the Fund currently only 
invests in BTC Contracts and MBT Contracts (as defined below) and in 
cash and cash equivalents.
    \17\ As used in this filing, ``unregulated trading platforms'' 
refers to trading venues whose trading rules are not subject to 
regulatory review or approval by the SEC, CFTC or other federal 
regulator, whose trading operations are not subject to regulatory 
examination, and that are not required by law to have anti-
manipulation practices that federal securities or commodities 
regulation would require. See, e.g., Order Setting Aside Action by 
Delegated Authority and Disapproving a Proposed Rule Change, as 
Modified by Amendments No. 1 and 2, To List and Trade Shares of the 
Winklevoss Bitcoin Trust, Securities Exchange Act Release No. 83723 
(July 26, 2018), 83 FR 37579 at 37597 (August 1, 2018) (SR-BatsBZX-
2016-30) (the ``Winklevoss Order'') (describing lack of regulatory 
oversight for Gemini trading platform).
    \18\ The Fund's futures-based spot pricing methodology and use 
of EFP transactions are explained in greater detail below in 
``Futures-Based Spot Price'' and ``EFP Transactions,'' respectively.
---------------------------------------------------------------------------

    According to the Registration Statement, CME offers two bitcoin 
futures contracts, one contract representing five (5) bitcoins (``BTC 
Contract'') and another contract representing one-tenth of one (0.10) 
bitcoin (``MBT Contract'').\19\ Each BTC Contract and MBT Contract 
settles daily to the BTC Contract volume-weighted average price 
(``VWAP'') of all trades that occur between 2:59 p.m. and 3:00 p.m., 
Central Time, the settlement period, rounded to the nearest tradable 
tick. BTC Contracts and MBT Contracts each expire on the last Friday of 
the contract month, and the final settlement value for each contract is 
based on the CME CF Bitcoin Reference Rate (``CME CF BRR'').\20\
---------------------------------------------------------------------------

    \19\ BTC Contracts began trading on the CME Globex trading 
platform on December 15, 2017, and are cash-settled in U.S. dollars. 
MBT Contracts began trading on the CME Globex trading platform on 
May 3, 2021, under the ticker symbol ``MBT'' and are also cash-
settled in U.S. dollars. For purposes of this filing, BTC Contracts 
and MBT Contracts may also be referred to, individually or 
collectively, as ``CME Bitcoin Futures Contracts.''
    \20\ The CME CF BRR aggregates the trade flow of major bitcoin 
spot platforms during a specific calculation window into a once-a-
day reference rate of the U.S. dollar price of bitcoin.
---------------------------------------------------------------------------

    BTC Contracts and MBT Contracts each trade six consecutive monthly 
contracts plus two additional December contract months (if the 6 
consecutive months include December, only one additional December 
contract month is listed). Because BTC Contracts and MBT Contracts are 
exchange-listed, they allow investors to gain exposure to bitcoin 
without having to hold the underlying cryptocurrency.
    The Fund's benchmark, as referenced above, is the Nasdaq Bitcoin 
Reference Price--Settlement (the ``NQBTCS'' or ``Benchmark''),\21\ 
which ultimately tracks the price of bitcoin. The Sponsor believes that 
the spot price performance of bitcoin is best measured through the use 
of a reputable index provided by an established index provider and has 
selected the NQBTCS as a trustworthy benchmark of bitcoin pricing.
---------------------------------------------------------------------------

    \21\ See https://indexes.nasdaqomx.com/Index/Overview/NQBTCS.
---------------------------------------------------------------------------

    The Sponsor will employ a passive investment strategy that is 
intended to track the changes in the Benchmark regardless of whether 
the Benchmark goes up or goes down, meaning that the Sponsor will not 
try to ``beat'' the Benchmark. In order to track the Benchmark as 
closely as possible, the Fund will aim to maximize its investment in 
bitcoin.
    The Fund will gain exposure to physical bitcoin by buying CME 
Bitcoin Futures Contracts for the primary purpose of using such CME 
Bitcoin Futures Contracts to acquire physical bitcoin through EFP 
transactions on the regulated CME Bitcoin Futures Market. The Fund may 
maintain CME Bitcoin Futures Contracts positions (with related cash 
reserves to meet applicable margin requirements) if the Sponsor deems 
it necessary to meet the Fund's liquidity needs for the cash payment of 
Share redemption settlements and of other applicable expenses borne by 
the Fund. The Fund will also maintain cash balances or invest in cash 
equivalents to the extent it is unable to purchase CME Bitcoin Futures 
Contracts with available cash.
    If there are no Share redemption orders or currently due Fund-
payable expenses and assuming that the Fund is able to utilize all 
available cash to purchase CME Bitcoin Futures Contracts, the Fund's 
portfolio is expected to be composed of at least 95% in bitcoin and up 
to 5% in cash, cash equivalents, and/or CME Bitcoin Futures Contracts.
    The Sponsor expects that the Fund's average daily tracking error 
against the Benchmark will be less than 10% over any period of 30 
trading days. The Fund's passive investment strategy is designed to 
allow investors to purchase and sell the Shares for the purpose of 
investing in bitcoin, whether to hedge the risk of losses in their 
bitcoin-related transactions or gain price exposure to the bitcoin 
market.
    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage. That is, 
given its passive investment strategy, the Fund's investments will not 
be used to seek performance that is the multiple or inverse multiple 
(e.g., 2Xs, 3Xs, -2Xs, and -3Xs) of the Fund's Benchmark.
The Fund's Benchmark
    According to the Sponsor, the Fund will use the Benchmark as a 
reference to track and measure its performance compared to the price 
performance of spot bitcoin. The Fund will not use the Benchmark for 
valuation purposes when calculating the Fund's NAV.\22\
---------------------------------------------------------------------------

    \22\ As further explained below, the Administrator will employ a 
methodology based on the settlement prices of the CME Bitcoin 
Futures Contracts to determine the price of the Fund's spot bitcoin 
holdings for NAV calculation. The Sponsor believes that this 
approach enables the Fund to effectively track the Benchmark while 
also mitigating risks to investors stemming from exposure to 
unregulated trading platforms and the prices derived from them.

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[[Page 2446]]

    According to the Sponsor, the NQBTCS is designed to allow 
institutional investors to track the price of bitcoin by applying a 
rigorous methodology to trade data captured from cryptocurrency trading 
platforms that meet the eligibility criteria of the Nasdaq Crypto Index 
(``NCI''). The NQBTCS is calculated once every trading day by applying 
a publicly available rules-based pricing methodology to a diverse 
collection of pricing sources to provide an institutional-grade 
reference price for bitcoin.\23\ The NQBTCS is designed to account for 
variances in price across a wide range of sources, each of which has 
been vetted according to criteria identified in the methodology. 
Specifically, the NQBTCS settlement value is the Time Weighted Average 
Price (``TWAP'') calculated across the VWAPs for each minute in the 
settlement price window, which is between 2:50:00 and 3:00:00 p.m. New 
York time. Where there are no transactions observed in any given minute 
of the settlement price window, that minute is excluded from the 
calculation of the TWAP.
---------------------------------------------------------------------------

    \23\ See https://indexes.nasdaqomx.com/docs/methodology_NCI.pdf.
---------------------------------------------------------------------------

    According to the Sponsor, the NQBTCS also utilizes penalty factors 
to mitigate the impact of anomalous trading activity such as 
manipulation, illiquidity, large block trading, or operational issues 
that could compromise price representation. Three types of penalties 
are applied: abnormal price penalties, abnormal volatility penalties, 
and abnormal volume penalties. These penalties are defined as 
adjustment factors to the weight of information from each trading 
platform that contributes pricing information based on the deviation of 
a trading platform's price, volatility, or volume from the median 
across all trading platforms. For example, if a core trading platform's 
price is 2.5 standard deviations away from the median price, its price 
penalty factor will be a \1/2\.5 multiplier.
    Finally, as a means of achieving the highest degrees of confidence 
in the reported volume, data is sourced only from ``core trading 
platforms'' that are screened, selected, and approved by the Nasdaq 
Crypto Index Oversight Committee (the ``NCIOC''). Core trading 
platforms must:
    (1) Have strong forking controls;
    (2) Have effective anti-money laundering controls;
    (3) Have a reliable and transparent application programming 
interface that provides real-time and historical trading data;
    (4) Charge fees for trading and structure trading incentives that 
do not interfere with the forces of supply and demand;
    (5) Be licensed by a public independent governing body;
    (6) Include surveillance for manipulative trading practices and 
erroneous transactions;
    (7) Evidence a robust IT infrastructure;
    (8) Demonstrate active capacity management; \24\
---------------------------------------------------------------------------

    \24\ According to NCI's methodology, to demonstrate active 
capacity management, core trading platforms must demonstrate that 
their platform's technical infrastructure is designed in such a way 
that it is capable of accommodating a sudden, significant increase 
in trade volume without impacting system functionality. See id. at 
4.
---------------------------------------------------------------------------

    (9) Evidence cooperation with regulators and law enforcement; and
    (10) Have a minimum market representation for trading volume.\25\
---------------------------------------------------------------------------

    \25\ According to NCI's methodology, to compute a trading 
platform's market size, the NCIOC sums the U.S. Dollar (``USD'') 
volume of all eligible digital asset--USD pairs for the month of 
August each year. A core trading platform must have at least 0.05% 
of the total volume in eligible trading platforms. See id.
---------------------------------------------------------------------------

    Additionally, the NCIOC conducts further diligence to assess a 
trading platform's eligibility and will consider additional criteria 
such as the trading platform's organizational and ownership structure, 
security history, and reputation. The list of existing core trading 
platforms will be recertified by the NCIOC at a minimum on an annual 
basis.
    The Sponsor believes that the NQBTCS is a suitable Benchmark for 
the Fund for several reasons. First, it would provide reliable pricing 
for purposes of tracking the actual performance of bitcoin. Second, it 
is administered by a reputable index administrator that is not 
affiliated with the Sponsor or Fund,\26\ which provides assurances of 
accountability and independence. Finally, the NQBTCS methodology is 
designed to resist potential price manipulation from unregulated 
bitcoin markets by applying the following safeguards:
---------------------------------------------------------------------------

    \26\ Nasdaq, Inc. (``Nasdaq''), the index provider, adheres to 
the International Organization of Securities Commissions principles 
for benchmarks (the ``IOSCO Principles'') for many of its indexes 
via an internal control and governance framework that is audited by 
an external, independent auditor on an annual basis. Although NQBTCS 
is not currently one of the indexes that is required to comply with 
IOSCO Principles, as a reference rate index, it is administered in a 
manner that is generally consistent with both the IOSCO Principles 
and the elements of Nasdaq's internal control and governance 
framework pursuant to IOSCO Principles. NQBTCS is administered and 
governed by the NCIOC in accordance with the publicly available NCI 
methodology. The NCIOC oversees all aspects of the administration of 
the NQBTCS, including the defined processes and controls for the 
selection and monitoring of third parties such as the core trading 
platforms and core custodians (see ``Custody of Bitcoin,'' infra), 
as well as the validation and reconciliation of index calculations 
and pricing data. The NCIOC also oversees the identification and 
mitigation of any potential conflicts of interest, formal 
complaints, and updates or changes to the index methodology 
consistent with the IOSCO Principles.
---------------------------------------------------------------------------

    (1) Strict eligibility criteria for the NCI core trading platforms 
from which the NQBTCS data is drawn;
    (2) A diverse collection of trustworthy pricing sources to provide 
an institutional-grade reference price for bitcoin; and
    (3) The use of adjustment factors to mitigate against the impact of 
any anomalous trading activity.
Futures-Based Spot Price
    For purposes of calculating the Fund's NAV, the value of the 
bitcoin held by the Fund will be determined by the Administrator in 
good faith based on a ``Futures-Based Spot Price'' or ``FBSP'' 
methodology.\27\ The Sponsor has selected this pricing approach to 
value the Fund's bitcoin because it insulates the calculation of the 
NAV of the Fund from data from unregulated bitcoin trading platforms.
---------------------------------------------------------------------------

    \27\ The FBSP is based on extensive academic research on forward 
yield curves and is further described in the Fund's Registration 
Statement.
---------------------------------------------------------------------------

    According to the Sponsor, the FBSP methodology allows for the 
estimation of the spot price of bitcoin by utilizing only market data 
related to BTC Contracts \28\ traded on the CME Bitcoin Futures Market 
(specifically, settlement prices and time to maturity for such futures 
contracts). The Administrator is thus able to calculate the Fund's NAV 
(as further described in ``Net Asset Value'' below) without relying on 
market data from unregulated bitcoin trading platforms. The 
Administrator will apply the FBSP methodology to estimate the price of 
spot bitcoin daily by using the daily settlement prices of BTC 
Contracts.
---------------------------------------------------------------------------

    \28\ For the calculation of FBSP, the Administrator considers 
all listed BTC Contracts that have a daily settlement price 
published by the CME Bitcoin Futures Market on a given date. The 
Sponsor notes that, although BTC and MBT Contracts have the same 
settlement prices, the Administrator will only consider BTC 
Contracts when calculating the FBSP.
---------------------------------------------------------------------------

    According to the Sponsor, the FBSP methodology is based on well-
established academic research,\29\

[[Page 2447]]

particularly on the topic of term structure of interest rates. As 
discussed below, the Sponsor has tested the reliability of FBSP-derived 
prices by comparing them to historical samples of various benchmarks 
for the prices of physical bitcoin. The Sponsor believes that the FBSP-
derived prices very closely adhere to such benchmarks and that the FBSP 
methodology can fairly price bitcoin while seeking to protect the 
Fund's NAV from short-term distortions that may arise due to fraud or 
manipulation attempts by bad actors trading on unregulated trading 
platforms.
---------------------------------------------------------------------------

    \29\ See, e.g., Nelson, Charles R., and Andrew F. Siegel, 
``Parsimonious modeling of yield curves.'' Journal of Business 
(1987), available at: https://www.researchgate.net/publication/24103017_Parsimonious_Modeling_of_Yield_Curves; Svensson, Lars E.O., 
``Estimating and Interpreting Forward Interest Rates: Sweden 1992-
1994.'' (September 1994), IMF Working Paper No. 94/114, available 
at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=883856.
---------------------------------------------------------------------------

    The calculations underlying the FBSP methodology utilize well-
understood and simple-to-implement mathematical and statistical 
techniques, such as multivariate linear regressions and arithmetic 
operations. The detailed methodology is described in the Fund's 
Registration Statement and will also be published on the Fund's website 
(https://hashdex-etfs.com/), along with all inputs necessary to 
replicate the calculation. In the event of any modifications to the 
FBSP methodology, the Fund will issue a press release notifying the 
investing public of such change and the date of the change's 
effectiveness, which press release will be filed with the Commission 
under a current report on Form 8-K by the Fund, and, with respect 
changes to the FBSP methodology as described in this filing, file a 
proposed rule change under Section 19(b) with the Commission.
    The FBSP methodology involves calculating a parametric forward 
curve \30\ into prevailing prices for actual BTC Contracts. The 
parametric forward curve can then be used to derive the spot price of 
bitcoin by calculating the price to the point of immediate settlement 
(i.e., setting the BTC Contracts' time to maturity to zero). This 
process results in a set of calculated weights that are applied to the 
price of each actual BTC Contract included in the forward curve. The 
weights are calculated daily and are dependent solely on the number of 
calendar days until maturity of each active BTC Contract.\31\ The spot 
price for bitcoin derived from FBSP is, in turn, calculated by 
multiplying each price by its applicable weight and then summing all 
terms:
---------------------------------------------------------------------------

    \30\ The forward curve of bitcoin futures contracts is the plot 
of the prices of individual futures contracts against their 
respective time to maturity. A parametric forward curve is a 
mathematical function that produces a price for a futures contract 
for any maturity, which can be used to generate a theoretical 
estimate of a futures price for a maturity that does not have 
contracts negotiated, including a spot price, by setting the time to 
maturity to zero.
    \31\ The Sponsor will make these weights publicly available on 
the Fund's website daily, such that any third party can replicate 
the calculation.

---------------------------------------------------------------------------
FBSP = [Sigma]Wi * SPi

where

Wi is the weight and
SPi is the settlement price of each BTC Contract.

    The chart below visually illustrates the CME Bitcoin Futures 
Market's forward curve and how the FBSP is determined for a specific 
date (October 9, 2023). Each dot represents the settlement price of a 
specific CME Bitcoin Futures Contract. The line represents the 
calculated (fitted) forward curve. The dots align closely with the 
fitted curve line, meaning that the curve accurately tracks the 
settlement prices of the BTC Contracts. The square is a point on the 
curve corresponding to a zero-day maturity, representing the spot price 
for bitcoin for that date.
[GRAPHIC] [TIFF OMITTED] TN12JA24.003

    The table below demonstrates the FBSP calculation for the same 
specific day.

                                               FBSP on 10/09/2023
----------------------------------------------------------------------------------------------------------------
                                                                             Settlement price  Productivity (W x
                         Future                            Weight (W) (%)          (SP)               SP)
----------------------------------------------------------------------------------------------------------------
Oct23..................................................             122.10         $27,735.00         $33,864.44
Nov23..................................................              -0.70          27,925.00           -$195.48

[[Page 2448]]

 
Dec23..................................................              -6.70          28,115.00         -$1,883.71
Jan24..................................................               -5.9          28,275.00         -$1,668.23
Feb24..................................................              -4.90          28,445.00         -$1,393.81
Mar24..................................................              -3.70          28,650.00         -$1,060.05
Jun24..................................................              -1.50          29,205.00           -$438.08
Sep24..................................................              -0.30          29,755.00            -$89.27
Dec24..................................................               0.50          30,305.00            $151.53
Mar25..................................................               1.10          30,860.00            $339.46
                                                        --------------------------------------------------------
    FBSP...............................................  .................  .................         $27,626.82
    NQBTC..............................................  .................  .................         $27,619.94
    Divergence (%).....................................  .................  .................              0.02%
----------------------------------------------------------------------------------------------------------------

    Using data available on Bloomberg on July 10, 2023, the Sponsor 
compared FBSP to NQBTCS and CME CF BRR from December 27, 2022 to July 
7, 2023 and concluded that FBSP tracks both indexes with satisfactory 
accuracy. The following charts show a direct comparison between those 
two benchmark values and FBSP:
[GRAPHIC] [TIFF OMITTED] TN12JA24.004

    In the above charts, each point indicates one day, and their 
proximity to the line shows how similar FBSP is to each of NQBTCS and 
CME CF BRR. The correlations between FBSP and each of NQBTCS and CME CF 
BRR exceed 99.9%, and the mean absolute percentage divergences are 21 
basis points (``bps,'' where 1bp = 0.01%) and 22bps, respectively, 
while the median absolute percentage divergences are 18bps and 17bps, 
respectively.
    The Sponsor believes that this data strongly suggests that FBSP is 
a suitable choice for NAV calculation purposes.
Mitigation of Manipulation Risks Through Use of the FBSP for NAV 
Calculation
    While the Commission has raised valid concerns about the potential 
influence of unregulated bitcoin markets on the daily settlement price 
of the CME Bitcoin Futures Market, the Sponsor believes that the 
proposed use of FBSP to calculate the value of the bitcoin held by the 
Fund for purposes of NAV calculation provides a significant and 
sufficient degree of insulation from such influences, for the following 
reasons:
    1. Regulated market influence: The daily settlement price of CME 
Bitcoin Futures Contracts, which is the basis for the NAV calculation 
of both futures contracts and bitcoin holdings of the Fund, is 
primarily influenced by trading activity within the regulated futures 
market itself. This market is subject to stringent oversight and 
surveillance mechanisms designed to detect and deter manipulative and 
fraudulent practices, thus significantly limiting the possible 
influence of unregulated bitcoin markets on the daily settlement price.
    2. High liquidity and volume: The CME Bitcoin Futures Market is 
characterized by high liquidity and trading volume, such that any 
attempt to influence the price calculated by the FBSP through trading 
activity in other, unregulated bitcoin markets would require a 
significant amount of capital and coordination. The Sponsor thus 
believes that any such manipulation attempts would be readily 
detectable by the CME's market surveillance.
    3. Complex pricing methodology: The NAV calculation methodology is 
comprehensive and accounts for both the tenor and final settlement 
price of each futures contract. In addition, the FBSP method used in 
the NAV calculation process incorporates all maturities of BTC 
Contracts, which exhibit a robust price relationship among themselves. 
As a result, attempting to manipulate these prices in a coordinated 
manner to generate a substantial impact on NAV would be very 
challenging for potential manipulators and likely financially

[[Page 2449]]

unfeasible. The Sponsor thus believes that the complexity of the 
methodology provides an additional layer of protection against 
manipulation, as it would be extremely difficult for a manipulator to 
influence all these factors in a coordinated way to impact the Fund's 
NAV without leaving a detectable trail that would alert market 
surveillance.
    4. Focus on near-term contracts: The FBSP methodology gives more 
importance to futures contracts that are due for settlement in the near 
term because such contracts are more heavily traded, and their prices 
are more reliable indicators of the current spot price of bitcoin. The 
Sponsor believes that the methodology's focus on near-term contracts 
further reduces the potential for manipulation, as these contracts are 
less susceptible to manipulation due to their higher trading volumes 
and liquidity.
    As detailed above, the Sponsor's proposed investment strategy 
ensures that no unregulated spot bitcoin trading platform could be 
considered a ``market of relevant size'' in relation to the Fund, given 
that the Fund does not rely on any information or services coming from 
unregulated markets. All of the Fund's operations, including the 
purchase and sale of bitcoin and its NAV determination, rely on CME 
Bitcoin Futures Contracts on the CME Bitcoin Futures Market. Thus, all 
of the Fund's transactions, whether in CME Bitcoin Futures Contracts or 
physical bitcoin, are registered and monitored on a regulated exchange, 
providing an additional layer of security and transparency. Because any 
attempt to manipulate the Fund would require significant trading on the 
CME Bitcoin Futures Market, and not on any unregulated bitcoin trading 
platform, there is significantly reduced potential for manipulation and 
fraud, further protecting investors and maintaining the integrity of 
the market.
    The Sponsor also believes that it is highly unlikely that a person 
attempting to manipulate the NAV of the Fund could do so successfully 
by trading on unregulated spot and derivatives markets. Because of 
direct arbitrage, it is reasonable to assume that the ETP's market 
price (in the secondary market) would closely adhere to the Fund's 
Indicative Fund Value (``IFV''),\32\ given that APs can always create 
and redeem shares of the Fund hedging with a basket of CME Bitcoin 
Futures Contracts and the value of the creation basket is determined 
based on the NAV of the Fund, which in turn is calculated using the 
FBSP method based on such basket of CME Bitcoin Futures Contracts. 
Consequently, the likelihood that a potential manipulator of the ETP 
could succeed by exclusively trading in unregulated bitcoin markets 
would depend on how much the prices in these markets have an impact 
over CME Bitcoin Futures Contracts prices. The likelihood that a 
potential manipulator would undertake such an effort is also low when 
considering the financial burden of manipulating the unregulated 
markets and the overall expected profitability of any such 
manipulation.
---------------------------------------------------------------------------

    \32\ The IFV, as further discussed in the ``Indicative Fund 
Value'' section below, is based on the prior day's closing NAV per 
Share and updated to reflect changes in the Fund's holdings value 
during the trading day.
---------------------------------------------------------------------------

    To further assess such likelihood, the Sponsor carried out the 
following analysis to investigate the relationship between prices from 
relevant unregulated bitcoin markets and the prices of CME Bitcoin 
Futures Contracts, to assess the impact that a manipulation on those 
markets would have on the CME Bitcoin Futures Market. The Sponsor 
collected one-minute bars data between January 18, 2023 and July 26, 
2023 \33\ of prices for the nearest CME Bitcoin Futures Contract 
(``Nearest CME Futures'') and the following alternative bitcoin prices 
(``ABP''): (1) bitcoin (in USD) on each of NQBTCS's core trading 
platforms,\34\ (2) bitcoin (in Tether stablecoin (USDT)), and (3) 
BTCUSDT USDs-Margined Perpetuals on Binance. For each day and each ABP, 
a simple regression model was estimated with one-minute Nearest CME 
Futures log-returns as the dependent variable, and two independent 
variables: (1) the log Nearest CME Futures closing price of the 
previous minute (as a control variable) and (2) the difference between 
the ABP log return and the Nearest CME Futures log return in the 
previous minute (as the variable of interest).
---------------------------------------------------------------------------

    \33\ This date range represents days with intraday data 
available on Bloomberg as of July 27, 2023. Days with less than 40 
observations for a given ABP were excluded from the analysis of such 
ABP.
    \34\ The core trading platforms as of December 31, 2023 were 
BitStamp, Coinbase, Gemini, itBit, and Kraken.
---------------------------------------------------------------------------

    The estimated coefficients associated with the variable of interest 
are a measure of the expected response from the Nearest CME Futures (as 
measured by its returns) to a divergence between its own return 
information and the one from ABP in the near past (one-minute lagged 
returns). Such divergences are expected to occur in cases of 
manipulation. A higher coefficient (closer to one) would indicate that 
Nearest CME Futures are more sensitive to and strongly influenced by 
the divergence, while a lower coefficient (closer to zero) would 
suggest that Nearest CME Futures are less responsive and not 
significantly influenced by the information coming from ABP. The 
Sponsor believes that these coefficients can be considered a 
conservative estimate of the real impact that manipulation in an ABP 
would have over the Nearest CME Futures price because the estimates are 
calculated under normal circumstances rather than under a manipulative 
attack, in which some other indicators, such as abnormal volume and 
volatility, would warn market participants and undermine their 
perception of the attacked ABP as a reliable price reference.
    The results of the Sponsor's analysis are summarized in the table 
below: \35\
---------------------------------------------------------------------------

    \35\ The market depth information was obtained from 
CoinMarketCap on July 19, 2023. The ABPs with blank cells in this 
table were not included in the July 19, 2023 snapshot.
[GRAPHIC] [TIFF OMITTED] TN12JA24.005


[[Page 2450]]


    The Sponsor's analysis suggests that the influence of ABP over the 
Nearest CME Futures prices is relatively low. For instance, if a would-
be manipulator chose to attack Coinbase, which is an ABP with higher 
coefficients and thus higher potential to impact Nearest CME Futures, 
the average coefficient of 0.39 means that in order to manipulate 
Nearest CME Futures prices by 1%, the would-be manipulator would have 
to distort Coinbase prices by more than 2.5% (i.e., 1% divided by 0.39) 
on average. To be successful with 90% confidence (1st Decile), this 
manipulator would have to distort Coinbase prices by more than 4.7% (1% 
divided by 0.21). The Sponsor believes that its analysis supports that, 
even considering these conservative estimates, indirect manipulation 
would be extremely inefficient.
    The market depth columns in the above table indicate that 
substantial financial resources, running into tens of millions of 
dollars, are present on both sides of the order book for the most 
influential ABPs (even without including hidden orders, bots, and 
arbitrageurs that effectively enhance liquidity). The considerable 
financial commitment that would be required makes the manipulation of 
these prices an expensive endeavor.
    The Sponsor believes that its analysis demonstrates that the low 
efficiency of attempts to manipulate ABPs, coupled with the significant 
cost involved in influencing impactful ABPs, makes potential 
manipulation of spot bitcoin markets an unattractive proposition, and 
that it is therefore highly unlikely that a potential manipulator of 
the ETP could succeed by exclusively trading in unregulated bitcoin 
markets. The combination of the high costs and the inefficiencies 
associated with manipulation makes it a daunting and unprofitable 
venture.
    The Sponsor acknowledges the potential for influence from trades 
settled in unregulated bitcoin markets. However, the Sponsor believes 
that the NAV calculation methodology, coupled with the inherent 
characteristics of the CME Bitcoin Futures Market, provides a 
significant degree of protection against such influence being 
deliberately used to manipulate the Fund's market price or NAV. The 
Sponsor believes that any such attempt at manipulation very likely 
would be detected by CME market surveillance.
EFP Transactions
    According to the Sponsor, an EFP transaction, also known as an 
Exchange for Related Position (``EFRP'') transaction,\36\ is a type of 
trade that is available for most CME futures contracts. An EFP trade is 
a composite transaction that involves the opening of a position in the 
futures market and the execution of an inverse trade in the underlying 
physical asset. An EFP trade closes with a physical delivery against a 
cash settlement.
---------------------------------------------------------------------------

    \36\ See https://www.cmegroup.com/clearing/operations-and-deliveries/accepted-trade-types/efp-efr-eoo-trades.html. The terms 
``EFP'' and ``EFRP'' are used interchangeably for purposes of this 
filing.
---------------------------------------------------------------------------

    Because EFP trades require the parties to the transaction to 
simultaneously trade the futures and the physical legs of the 
transaction, the futures leg of an EFP trade is not executed at the 
CME's central limit order book. Rather, an EFP is a CME-regulated, 
bilaterally negotiated block trade, in which both parties engage in 
both legs of the composite transaction.
    According to the Sponsor, the Fund seeks to use EFP transactions to 
gain exposure to spot bitcoin for the following reasons:
    (1) EFP transactions are reported through the CME Bitcoin Futures 
Market, which is a regulated market and the relevant regulated market 
for the Fund for the purposes of the test specified in the Winklevoss 
Order.
    (2) EFP transactions are subject to the CME's market surveillance 
program, which helps deter and investigate fraudulent and manipulative 
misconduct.
    (3) EFP transactions will allow the Fund to gain efficient and 
regular exposure to physical bitcoin without relying on unregulated 
bitcoin markets for any purpose, including its creation and redemption 
processes.
    When the Sponsor intends to increase the Fund's bitcoin holdings, 
the Fund will participate in an EFP transaction to sell futures 
contracts and buy physical bitcoin, while the liquidity provider 
(``LP'') participating in such transaction will buy futures contracts 
and sell physical bitcoin.\37\ Similarly, when the Sponsor seeks to 
decrease the Fund's bitcoin holdings, the Fund will participate in an 
EFP transaction to buy futures contracts and sell physical bitcoin, 
while the LP on the other side of the transaction will sell futures 
contracts and buy physical bitcoin.
---------------------------------------------------------------------------

    \37\ The LPs with which the Fund will engage in bitcoin 
transactions are third parties that are not affiliated with the Fund 
and Sponsor and are not acting as agents of the Fund, Sponsor, or 
AP, and all transactions will be done on an arms-length basis. There 
is no contractual relationship between the Fund, the Sponsor, or the 
LP. When seeking to sell bitcoin on behalf of the Fund, the Sponsor 
will seek to sell bitcoin at commercially reasonable prices and 
terms to any of the approved LPs. Once agreed upon, the transaction 
will generally occur on an ``over-the-counter'' basis.
---------------------------------------------------------------------------

    The most well-established means for buying and selling physical 
bitcoin in large quantities is through the use of simple cash-for-asset 
OTC transactions with an LP, such as several market makers active in 
U.S. capital markets. The Sponsor believes that a key benefit of EFP 
transactions is that they allow for an OTC transaction to be conducted 
under the regulatory oversight of the CME.
    According to the Sponsor, the Fund will exclusively use CME Bitcoin 
Futures Market's EFP transactions to purchase and sell its physical 
bitcoin. Therefore, all trading of the Fund's non-cash (or cash 
equivalents) assets (i.e., CME Bitcoin Futures Contracts and physical 
bitcoin) will take place through the CME Bitcoin Futures Market, and 
the CME Bitcoin Futures Market will be the relevant regulated market 
for the Fund. Because NYSE Arca and CME are both members of the 
Intermarket Surveillance Group (``ISG''), information shared by CME 
with NYSE Arca can be used to assist in detecting and deterring 
fraudulent or manipulative misconduct.
EFP Transactions Through the CME Bitcoin Futures Market
    All EFP trades have two legs: a futures leg and a physical leg. In 
the futures leg of an EFP Transaction through the CME Bitcoin Futures 
Market, party A sells CME Bitcoin Futures Contracts to party B for a 
given price.\38\ In the physical leg of the same transaction, party A 
buys physical bitcoins sold by party B by delivering cash consideration 
for those bitcoins to party B.
---------------------------------------------------------------------------

    \38\ In practice, both parties will simply enter open futures 
positions on the CME Bitcoin Futures Market (party A will open a 
short position and party B will open a long position). Both 
positions will have the exact same size and will be opened at the 
same price. The CME allows EFP transactions to be executed at a 
mutually agreed price, but it requires that such price be 
commercially reasonable. CME's EFRP rules establish that if prices 
deviate excessively from prevailing market levels, counterparties to 
the trade may be required to demonstrate that such deviant prices 
are indeed legitimate. See CME Rule 538.F; note 44, infra.
---------------------------------------------------------------------------

    When two parties agree to perform a CME Bitcoin Futures Market EFP 
trade,\39\ they must agree on the following terms:
---------------------------------------------------------------------------

    \39\ See https://www.cmegroup.com/education/articles-and-reports/bitcoin-futures-exchange-for-physical-transactions.html.
---------------------------------------------------------------------------

    (1) The contract (maturity) that will be used in the futures leg of 
the trade;
    (2) The number of futures contracts in the futures leg of the 
trade;
    (3) The price of the futures contract in the futures leg of the 
trade;

[[Page 2451]]

    (4) The quantity of physical bitcoins in the physical leg of the 
trade (where the amount of bitcoin traded must be approximately 
equivalent to the notional amount of the futures contracts traded); 
\40\
---------------------------------------------------------------------------

    \40\ In practice, the quantity of bitcoins in both the futures 
leg and in the physical leg of a CME Bitcoin Futures Market EFP 
trade are likely to be exactly the same.
---------------------------------------------------------------------------

    (5) The basis spread,\41\ which is used to determine the price per 
bitcoin for the cash payment in the physical leg of the EFP trade.
---------------------------------------------------------------------------

    \41\ ``Basis spread'' refers to the difference in price between 
two related financial instruments. In the context of an EFP 
transaction, the basis spread is the difference between the futures 
contract price and the spot price of the underlying bitcoin. This 
spread is crucial in determining the amount of cash payment in the 
physical leg of the EFP transaction, essentially setting the price 
per bitcoin based on the prevailing market conditions in the futures 
and spot markets.
---------------------------------------------------------------------------

    After both parties agree to the terms of an EFP trade, they report 
the trade details to the CME. The futures leg of the EFP transaction is 
cleared by CME Clearing. The two parties to the EFP trade are 
responsible for bilaterally clearing the physical leg of the 
transaction.
The Fund's Use of EFP Transactions
    According to the Sponsor, the Fund will, under normal market 
conditions, frequently increase or decrease its holdings of physical 
bitcoin as Shares are created and redeemed. As noted above, the Fund 
will acquire and dispose of physical bitcoin only through EFP 
transactions through the CME Bitcoin Futures Market, which take place 
under the regulatory oversight of the CME, a CFTC-regulated market.
    Pursuant to the Fund's investment objectives, when the Sponsor 
decides to increase or decrease its holdings of physical bitcoin, it 
will cause the Fund to execute an EFP trade with an LP. The Fund and 
the LP will simultaneously exchange a futures position for a 
corresponding, economically offsetting position in physical bitcoin.
    The diagram below illustrates the steps in the execution of a 
typical EFP trade by the Fund to acquire spot bitcoin in exchange for 
CME Bitcoin Futures Contracts.
[GRAPHIC] [TIFF OMITTED] TN12JA24.006

    To provide a more concrete example of an EFP transaction that the 
Fund would undertake to acquire spot bitcoin, assume that the Fund 
needs to buy 50 bitcoins in exchange for 10 units of the next maturity 
of BTC Contracts.\42\ The Sponsor will select \43\ an LP that it 
believes will provide the best execution opportunity for the proposed 
EFP trade. The LP will provide bid/ask quotes for the EFP transaction 
as a basis spread against the settlement price of the BTC Contract to 
determine the price of the physical bitcoin that will be exchanged in 
the physical leg of the EFP. Then, assume that the Sponsor determines 
that the best option for the Fund is a bid of +25 bps. Assuming that 
the daily settlement price of the relevant BTC Contract was $26,060, 
the price for the physical leg of the EFP transaction agreed upon by 
the Fund and the LP is $25,995.01. Upon completion of the EFP 
transaction, the Fund and the LP will have different positions, but the 
same financial exposure:
---------------------------------------------------------------------------

    \42\ As detailed above, one BTC Contract represents five 
bitcoins.
    \43\ As described in the Fund's Registration Statement, the 
Sponsor will conduct a Request-for-Quote auction with one or more 
previously identified LPs to determine the best price on the 
requested quantity for the proposed EFP transaction. The LPs of the 
Fund are screened, selected, and approved by the Sponsor and should 
satisfy, at minimum, the following criteria: (1) Be licensed as a 
Money Service Business by the Financial Crimes Enforcement Network; 
(2) Registered with the CFTC and a member of the NFA or otherwise 
comply with applicable CFTC requirements governing eligibility to 
transact in bitcoin EFPs; (3) Have anti-money laundering and 
combating the financing of terrorism policies in place and be 
compliant with Financial Action Task Force guidance; (4) Have 
cybersecurity, disaster recovery and business continuity, and third-
party service provider management policies.
---------------------------------------------------------------------------

     Before the transaction, the Fund was long 10 BTC 
Contracts; after the transaction, it has converted this exposure into 
50 physical bitcoins.

[[Page 2452]]

     Before the transaction, the LP had 50 bitcoins; after the 
transaction, it holds an equivalent position long in 10 BTC Contracts.
    The table below illustrates the steps in this EFP transaction:

----------------------------------------------------------------------------------------------------------------
              Steps                                  LP                                     Fund
----------------------------------------------------------------------------------------------------------------
1. Starting point................  50 bitcoin............................  10 BTC Contracts.
                                  ------------------------------------------------------------------------------
2. EFP transaction is negotiated   The LP and the Fund agree to terms of the EFP, namely:
 between the LP and the Fund.       Fund sells/LP buys 10 BTC Contracts at $26,000.
                                    Fund buys/LP sells 50 bitcoins at $25,995.01 (basis spread of
                                    +25bps).
                                  ------------------------------------------------------------------------------
3. LP sends bitcoin to the Fund..  -50 bitcoins..........................  +50 bitcoins.
4. The EFP transaction is          +10 BTC Contracts.....................  -10 BTC Contracts.
 reported to CME and the LP
 assumes the long position in 10
 BTC Contracts.
5. Final position................  10 BTC Contracts......................  50 bitcoins.
----------------------------------------------------------------------------------------------------------------

    EFP transactions must be submitted to the CME ``as soon as 
possible, but no later than the end of the business day on which the 
EFRP was executed.'' \44\ The relevant terms reported to the CME are: 
\45\
---------------------------------------------------------------------------

    \44\ See https://www.cmegroup.com/rulebook/files/cme-group-Rule-538.pdf at FAQ 23.
    \45\ See id. at FAQs 23, 24; Section 538.I.
---------------------------------------------------------------------------

    (1) The type of the EFRP (which, for the Fund, will be the CME 
Bitcoin Futures Market EFP);
    (2) The date and time of the trade (i.e., the time when agreement 
was reached on the prices and quantities of the transaction);
    (3) The price and quantity of the CME contract (which, for the 
Fund, will be the CME Bitcoin Futures Contracts); and
    (4) The price and quantity of the corresponding related position 
(which, for the Fund, will be physical bitcoin).
Mitigation of Manipulation Risks Through Use of EFP Transactions
    The Sponsor believes that EFP transactions help protect against 
fraud and manipulation because they allow exchanges that share 
surveillance information with CME to investigate suspicious behavior by 
market participants. In addition, the Sponsor believes that regulatory 
requirements pursuant to CME Rule 538 \46\ pertaining to EFP 
transactions significantly increase the likelihood that fraud and 
manipulation will be detected and deterred. These regulatory 
requirements include:
---------------------------------------------------------------------------

    \46\ See https://www.cmegroup.com/rulebook/files/cme-group-Rule-538.pdf.
---------------------------------------------------------------------------

     Pricing of EFPs: Section 538.F (``Prices and Price 
Increments'') states that while parties to an EFP transaction have 
discretion to mutually agree on a price, EFPs ``may not be priced to 
facilitate the transfer of funds between parties for any purpose other 
than as the consequence of legitimate commercial activity.'' \47\
---------------------------------------------------------------------------

    \47\ EFRPs ``may not be priced off-market for the purpose of 
shifting substantial sums of cash from one party to another, to 
allocate gains and losses between the futures or options on futures 
and the cash or OTC derivative components of the EFRP, to evade 
taxes, to circumvent financial controls by disguising a firm's 
financial condition, or to accomplish some other unlawful purpose'' 
and ``EFRPs executed at off-market prices are more likely to be 
reviewed by Market Regulation to determine the purpose for the 
pricing.'' See id. at FAQ 11.
---------------------------------------------------------------------------

     Reporting: Section 538.I (``Submission to the Clearing 
House'') states that parties engaging in an EFP transaction must report 
each transaction to CME Clearing within the time period and manner 
specified by the CME.\48\ EFP transaction volumes are also required to 
be reported to the CME with the daily large trader positions by each 
clearing member, omnibus account, and foreign broker.
---------------------------------------------------------------------------

    \48\ See id. at FAQs 23, 24; Section 538.I.
---------------------------------------------------------------------------

     Recordkeeping: Section 538.H (``Recordkeeping'') states 
that ``parties to an [EFP] transaction must maintain all records 
relevant to the [futures] contract and the related position 
transaction.'' \49\
---------------------------------------------------------------------------

    \49\ The types of records that must be maintained by parties to 
an EFP include: (1) All order tickets, trade blotters, emails, 
instant messages, telephone recordings or other records related to 
the order placement, negotiation, execution and/or confirmation of 
the EFRP. (2) All cash confirmations and signed contracts 
corresponding to the cash or derivative component of the EFRP. The 
documentation must contain all of the relevant terms of the 
transaction and counterparty information. (3) Third party proof of 
payment evidencing settlement and documentation representing the 
transfer of ownership of the commodity. (4) Futures account 
statement reflecting confirmation of the EFRP. (5) Records 
reflecting the booking of the cash or derivative transaction in the 
firm's internal bookkeeping systems. See id. at FAQ 19.
---------------------------------------------------------------------------

    The FAQs relating to CME Rule 538 also state that parties to an 
EFRP, along with their clearing members, are subject to CME 
jurisdiction and may be required to produce records and cooperate fully 
with any investigation.\50\
---------------------------------------------------------------------------

    \50\ See id. at FAQ 20.
---------------------------------------------------------------------------

    The Sponsor believes that EFP transactions between the Fund and an 
LP to trade physical bitcoin are significantly less susceptible to 
fraud or manipulation because they are subject to a range of CME 
regulatory requirements regarding pricing, reporting, surveillance, and 
recordkeeping, as discussed above. Further, EFP transactions are 
entered into only by CFTC-regulated futures commission merchants and 
occur through the CME Bitcoin Futures Market, which is a CFTC-regulated 
market with processes in place to prevent market manipulation, 
including the monitoring of transaction prices and the investigation of 
potential manipulations.
    According to the Sponsor, the ability of participants to undertake 
EFP transactions is determined exclusively by the liquidity of the CME 
Bitcoin Futures Market and by the liquidity of OTC markets for physical 
bitcoin, both of which are sufficiently large. The Sponsor understands 
that a significant number of LPs are prepared to execute bitcoin EFP 
transactions. The CME's website lists at least 15 LPs that have agreed 
to be listed as contacts for clients interested in executing block 
trades and EFP transactions.\51\ The Sponsor has consulted with several 
such LPs and believes that those LPs could provide enough liquidity to 
support the Fund's demand for bitcoin when it incorporates physical 
bitcoin into its strategy. The Sponsor notes that several such LPs 
already have an ongoing commercial relationship with the Sponsor and/or 
Hashdex and are active participants in trading the CME Bitcoin Futures 
Markets, bitcoin, and bitcoin ETPs worldwide.
---------------------------------------------------------------------------

    \51\ A list of the LPs is available at: https://www.cmegroup.com/trading/bitcoin-brokers-and-block-liquidity-providers.html.
---------------------------------------------------------------------------

The Bitcoin and Bitcoin Futures Markets
    According to the Registration Statement, bitcoin is a digital asset 
that serves as the unit of account on an open-source, decentralized, 
peer-to-peer

[[Page 2453]]

computer network. It may be used to pay for goods and services, stored 
for future use, or converted to government-backed currency. As of the 
date of this prospectus, the adoption of bitcoin for these purposes has 
been limited. The value of bitcoin is not backed by any government, 
corporation, or other identified body.
    The value of bitcoin depends on its supply (which is limited), and 
demand for bitcoin in the markets for exchange that have been organized 
to facilitate the trading of bitcoin. By design, the supply of bitcoin 
is intentionally limited to 21 million bitcoins. According to the 
Registration Statement, there are approximately 19 million bitcoins in 
circulation.
    Bitcoin is maintained on a decentralized, open source, peer-to-peer 
computer network, the ``Bitcoin Network.'' No single entity owns or 
operates the Bitcoin Network. The Bitcoin Network is accessed through 
software and governs bitcoin's creation and movement. The source code 
for the Bitcoin Network, often referred to as the ``Bitcoin Protocol,'' 
is open-source, and anyone can contribute to its development.
    The infrastructure of the Bitcoin Network is collectively 
maintained by various participants in the Bitcoin Network, which 
include miners, developers, and users. Miners validate transactions and 
provide security to the network, and are currently compensated for that 
service in bitcoin. Developers maintain and contribute updates to the 
Bitcoin Protocol. Users access the Bitcoin Network using open-source 
software. Anyone can be a user, developer, or miner.
    Bitcoin is ``stored'' on a digital transaction ledger commonly 
known as a ``blockchain.'' A blockchain is a distributed database that 
is continuously updated and reconciled among certain users and is 
protected by cryptography. The bitcoin blockchain contains a complete 
record and history for each bitcoin transaction. New bitcoins are 
created through a process called ``mining.'' Miners use specialized 
computer software and hardware to solve a highly complex mathematical 
problem presented by the bitcoin Protocol. The first miner to 
successfully solve the problem is permitted to add a block of 
transactions to the bitcoin blockchain. The new block is then confirmed 
through acceptance by a majority of users who maintain versions of the 
blockchain on their individual computers. Miners that successfully add 
a block to the bitcoin blockchain are automatically rewarded with a 
fixed amount of bitcoin for their effort plus any transaction fees paid 
by transferors whose transactions are recorded in the block. This 
reward system is the means by which new bitcoin enters circulation and 
is the mechanism by which versions of the blockchain held by users on a 
decentralized network are kept in consensus.
    The Bitcoin Protocol is an open-source project with no official 
company or group in control, and anyone can review the underlying code. 
There are, however, a number of individual developers that regularly 
contribute to a specific distribution of the bitcoin software known as 
the ``Bitcoin Core.'' Developers of the Bitcoin Core loosely oversee 
the development of the source code. There are many other compatible 
versions of the bitcoin software, but Bitcoin Core is the most widely 
adopted and currently provides the de facto standard for the Bitcoin 
Protocol. The core developers are able to access, and can alter, the 
Bitcoin Network source code and, as a result, they are responsible for 
quasi-official releases of updates and other changes to the Bitcoin 
Network's source code. However, because bitcoin has no central 
authority, the release of updates to the Bitcoin Network's source code 
by the core developers does not guarantee that the updates will be 
automatically adopted by the other purchasers. Users and miners must 
accept any changes made to the source code by downloading the proposed 
modification and that modification is effective only with respect to 
those bitcoin users and miners who choose to download it. As a 
practical matter, a modification to the source code becomes part of the 
Bitcoin Network only if it is accepted by purchasers that collectively 
have a majority of the processing power on the Bitcoin Network. If a 
modification is accepted by only a percentage of users and miners, a 
division will occur such that one network will run the pre-modification 
source code and the other network will run the modified source code. 
Such a division is known as a ``fork.''
    The Sponsor notes that individual users, institutional investors 
and investment funds that want to provide exposure to bitcoin by 
investing directly in bitcoin, and therefore must transact in bitcoin, 
must use the Bitcoin Network to download specialized software referred 
to as a ``bitcoin wallet.'' This wallet may be used to send and receive 
bitcoin through users' unique ``bitcoin addresses.'' The amount of 
bitcoin associated with each bitcoin address, as well as each bitcoin 
transaction to or from such address, is captured on the blockchain. 
Bitcoin transactions are secured by cryptography known as public-
private key cryptography, represented by the bitcoin addresses and 
digital signature in a transaction's data file. Each Bitcoin Network 
address, or wallet, is associated with a unique ``public key'' and 
``private key'' pair, both of which are lengthy alphanumeric codes, 
derived together and possessing a unique relationship. The private key 
is a secret and must be kept in accordance with appropriate controls 
and procedures to ensure it is used only for legitimate and intended 
transactions. If an unauthorized third person learns of a user's 
private key, that third person could forge the user's digital signature 
and send the user's bitcoin to any arbitrary bitcoin address, thereby 
stealing the user's bitcoin. Similarly, if a user loses his private key 
and cannot restore such access (e.g., through a backup), the user may 
permanently lose access to the bitcoin contained in the associated 
address.
---------------------------------------------------------------------------

    \52\ See Winklevoss Order.
    \53\ Digital assets that are securities under U.S. law are 
referred to throughout this proposal as ``digital asset 
securities.'' All other digital assets, including bitcoin, are 
referred to interchangeably as ``cryptocurrencies'' or ``virtual 
currencies.'' The term ``digital assets'' refers to all digital 
assets, including both digital asset securities and 
cryptocurrencies, together.
    \54\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated: 
``Section 1a(9) of the CEA defines `commodity' to include, among 
other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F.2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
---------------------------------------------------------------------------

    The first rule filing proposing to list an exchange-traded product 
(``ETP'') to provide exposure to bitcoin in the U.S. was submitted by 
the Cboe BZX Exchange, Inc. on June 30, 2016.\52\ At that time, 
blockchain technology, and digital assets that utilized it, were 
relatively new to the broader public. The market cap of all bitcoin in 
existence at that time was approximately $10 billion. No registered 
offering of digital asset securities or shares in an investment vehicle 
with exposure to bitcoin or any other cryptocurrency had yet been 
conducted, and the regulated infrastructure for conducting a digital 
asset securities offering had not begun to develop.\53\ Similarly, 
regulated U.S. bitcoin futures contracts did not exist. The CFTC had 
determined that bitcoin is a commodity,\54\ but had not engaged in 
significant enforcement actions in the space. The New York Department 
of

[[Page 2454]]

Financial Services (``NYDFS'') adopted its final BitLicense regulatory 
framework in 2015, but had only approved four entities to engage in 
activities relating to virtual currencies (whether through granting a 
BitLicense or a limited-purpose trust charter) as of June 30, 2016.\55\ 
While the first over-the-counter bitcoin fund launched in 2013, public 
trading was limited and the fund had only $60 million in assets.\56\ 
There were very few, if any, traditional financial institutions engaged 
in the space, whether through investment or providing services to 
digital asset companies. In January 2018, the Staff of the Commission 
noted in a letter to the Investment Company Institute and SIFMA that it 
was not aware, at that time, of a single custodian providing fund 
custodial services for digital assets.\57\
    The digital assets financial ecosystem, including bitcoin, has 
progressed and matured significantly. The development of a regulated 
market for digital asset securities has significantly evolved, with 
market participants having conducted registered public offerings of 
both digital asset securities \58\ and shares in investment vehicles 
holding bitcoin futures.\59\ Additionally, licensed and regulated 
service providers have emerged to provide fund custodial services for 
digital assets, among other services. For example, in December 2020, 
the Commission issued a statement permitting certain special purpose 
broker-dealers to custody digital asset securities under Rule 15c3-3 
under the Act.\60\ In September 2020, the Staff of the Commission 
released a no-action letter permitting certain broker-dealers to 
operate a non-custodial Alternative Trading System (``ATS'') for 
digital asset securities, subject to specified conditions.\61\ In 
October 2019, the Staff of the Commission granted temporary relief from 
the clearing agency registration requirement to an entity seeking to 
establish a securities clearance and settlement system based on 
distributed ledger technology; \62\ and multiple transfer agents who 
provide services for digital asset securities have registered with the 
Commission.\63\'
---------------------------------------------------------------------------

    \55\ A list of virtual currency businesses that are entities 
regulated by the NYDFS is available on the NYDFS website. See 
https://www.dfs.ny.gov/
virtual_currency_businesses#:~:text=A%20business%20must%20obtain%20a,
business%20in%20New%20York%20State.
    \56\ See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available at: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm (data as of March 31, 2016 
according to publicly available filings).
    \57\ See Letter from Dalia Blass, Director, Division of 
Investment Management, U.S. Securities and Exchange Commission to 
Paul Schott Stevens, President & CEO, Investment Company Institute 
and Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association (January 18, 2018), 
available at: https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
    \58\ See Prospectus Supplement filed pursuant to Rule 424(b)(1) 
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \59\ See Prospectus filed by Stone Ridge Trust VI on behalf of 
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
    \60\ See Securities Exchange Act Release No. 90788, 86 FR 11627 
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset 
Securities by Special Purpose Broker-Dealers).
    \61\ See Letter from Elizabeth Baird, Deputy Director, Division 
of Trading and Markets, U.S. Securities and Exchange Commission to 
Kris Dailey, Vice President, Risk Oversight & Operational 
Regulation, Financial Industry Regulatory Authority (September 25, 
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \62\ See Letter from Jeffrey S. Mooney, Associate Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos 
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \63\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent 
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
---------------------------------------------------------------------------

    As noted above, CME began offering trading in BTC Contracts in 
2017, and in MBT Contracts in 2021. Each of the contracts' final cash 
settlement is based on the CME CF BRR.\64\ The contracts trade and 
settle like other cash-settled commodity futures contracts. According 
to the Sponsor, trading in CME Bitcoin Futures Contracts has increased 
significantly in recent years, in particular with respect to BTC 
Contracts. Nearly every measurable metric related to BTC Contracts has 
trended consistently up since launch and/or accelerated upward in the 
past year, as the market recovered some of the ground lost since 
falling from the all-time high activity levels of end 2021. This 
general upward trend in trading volume and open interest is captured in 
the following chart.
---------------------------------------------------------------------------

    \64\ According to the CME, the CME CF BRR aggregates the trade 
flow of major bitcoin spot trading platforms during a specific 
calculation window into a once-a-day reference rate of the U.S. 
dollar price of bitcoin. Calculation rules are geared toward maximum 
transparency and real-time replicability in underlying spot markets, 
including Bitstamp, Coinbase, Gemini, itBit, and Kraken. For 
additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.

---------------------------------------------------------------------------

[[Page 2455]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.007

    Similarly, the number of large open interest holders \65\ has 
continued to increase even as the price of bitcoin has risen, as have 
the number of unique accounts trading CME Bitcoin Futures Contracts.
---------------------------------------------------------------------------

    \65\ A large open interest holder in BTC Contracts is an entity 
that holds at least 25 contracts, which is the equivalent of 125 
bitcoin. At a price of approximately $26,025 per bitcoin on 9/7/23, 
more than 110 firms had outstanding positions of greater than $3.25 
million in BTC Contracts. Source: https://www.theblock.co/data/crypto-markets/cme-cots/large-open-interest-holders-of-cme-bitcoin-futures.
---------------------------------------------------------------------------

    As it pertains specifically to the CME Bitcoin Futures Contracts 
(those in which the Fund will invest), the statistics are equally as 
profound. The following table sets forth the approximate daily notional 
average volume for the CME Bitcoin Futures Contracts, followed by the 
daily average volume for all of the CME Bitcoin Futures Contracts, the 
first to expire and the second to expire. With a daily notional average 
volume of $1.4 billion in 2023, trading volume in CME Bitcoin Futures 
Contracts is almost six times the 2019 volume and almost three times 
the volume in 2020. In addition, despite the bear market, the trading 
volume in 2023 has been resilient and slightly increasing compared to 
2022.

----------------------------------------------------------------------------------------------------------------
                                                           Average daily
                              Daily notional average       volume for CME    First-to-expire    Second-to-expire
                              volume for CME bitcoin      bitcoin futures      CME bitcoin        CME bitcoin
                             futures contracts (in $)        contracts       futures contract   futures contract
----------------------------------------------------------------------------------------------------------------
2019.....................  $242 million................              6,365              5,400                700
2020.....................  $523 million................              8,782              7,100              1,300
2021.....................  $2,379 million..............             10,035              7,300              2,100
2022.....................  $1,426 million..............             10,735              8,200              2,100
2023.....................  $1,413 million..............             10,775              8,400              1,900
----------------------------------------------------------------------------------------------------------------
Note: The 2023 data is for the period ending on August 31, 2023. Source: CME; Bloomberg.

Developments in the Bitcoin and Bitcoin Futures Markets
    The regulatory landscape for bitcoin and bitcoin markets has 
changed significantly since 2016. The market for bitcoin grew 
approximately 100 times larger through 2021, reaching a market cap of 
$1.3 trillion at its all-time high. Although bitcoin's market cap is 
down to $500 billion (as of September 7, 2023), its market cap is 
greater than companies \66\ such as Visa, Inc., Exxon Mobil 
Corporation, Walmart, Inc., and JP Morgan Chase & Co. The number of 
verified users at Coinbase, the largest U.S.-based bitcoin trading 
platform, has grown to over 110 million at the end of 2022, compared to 
43 million at the end of 2020.\67\ CFTC-regulated bitcoin futures 
represented approximately $42 billion in notional trading on the CME 
Bitcoin Futures Market in August 2023, compared to $3.9 billion, $28 
billion, $60 billion, and $20 billion in total trading in December 
2019, December 2020, December 2021, and December 2022 respectively. 
CFTC-regulated bitcoin futures represented $2.2 billion in open 
interest in August 2023, compared to $115 million, $1.29 billion, $3.27 
billion, and $1.31 billion in December 2019, December 2020, December 
2021, and December 2022 respectively.\68\ The CFTC has exercised

[[Page 2456]]

its regulatory jurisdiction in bringing a number of enforcement actions 
related to bitcoin and against trading platforms that offer 
cryptocurrency trading.\69\ The U.S. Office of the Comptroller of the 
Currency (the ``OCC'') has made clear that federally-chartered banks 
are able to provide custody services for cryptocurrencies and other 
digital assets.\70\ NYDFS has granted no fewer than thirty BitLicenses, 
including to established public payment companies like PayPal Holdings, 
Inc. and Square, Inc., and limited purpose trust charters to entities 
providing cryptocurrency custody services. The U.S. Treasury Financial 
Crimes Enforcement Network (``FinCEN'') has released extensive guidance 
regarding the applicability of the Bank Secrecy Act (``BSA'') and 
implementing regulations to virtual currency businesses,\71\ and has 
proposed rules imposing requirements on entities subject to the BSA 
that are specific to the technological context of virtual 
currencies.\72\ In addition, the Treasury's Office of Foreign Assets 
Control (``OFAC'') has brought enforcement actions over apparent 
violations of the sanctions laws in connection with the provision of 
wallet management services for digital assets.\73\
---------------------------------------------------------------------------

    \66\ See https://coinmarketcap.com/largest-companies/.
    \67\ See Coinbase 2022 10-K, available at: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q4/86fe25e0-342b-40fa-aacc-ea04faf322cb.pdf.
    \68\ All statistics and charts included in this proposal with 
respect to the CME Bitcoin Futures Market are sourced from https://www.cmegroup.com/trading/bitcoin-futures.html. In addition, as 
further discussed below, the Sponsor believes the CME Bitcoin 
Futures Market represents a regulated market of significant size for 
purposes of addressing the Commission's concerns about potential 
manipulation of the bitcoin market.
    \69\ The CFTC's annual report for Fiscal Year 2020 (which ended 
on September 30, 2020) noted that the CFTC ``continued to 
aggressively prosecute misconduct involving digital assets that fit 
within the CEA's definition of commodity'' and ``brought a record 
setting seven cases involving digital assets.'' See CFTC FY2020 
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download. 
Additionally, the CFTC filed on October 1, 2020, a civil enforcement 
action against the owner/operators of the BitMEX trading platform, 
which was one of the largest bitcoin derivative trading platforms. 
See CFTC Release No. 8270-20 (October1, 2020), available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
    \70\ See OCC News Release 2021-2 (January 4, 2021), available 
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html.
    \71\ See FinCEN Guidance FIN-2019-G001 (May 9, 2019) 
(Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies), available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
    \72\ See U.S. Department of the Treasury Press Release: ``The 
Financial Crimes Enforcement Network Proposes Rule Aimed at Closing 
Anti-Money Laundering Regulatory Gaps for Certain Convertible 
Virtual Currency and Digital Asset Transactions'' (December 18, 
2020), available at: https://home.treasury.gov/news/press-releases/sm1216.
    \73\ See U.S. Department of the Treasury Enforcement Release: 
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent 
Violations of Multiple Sanctions Programs Related to Digital 
Currency Transactions'' (December 30,2020), available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
---------------------------------------------------------------------------

    In addition to the regulatory developments noted above, more 
traditional financial market participants appear to be embracing 
cryptocurrency: large insurance companies,\74\ investment banks,\75\ 
asset managers,\76\ credit card companies,\77\ university 
endowments,\78\ pension funds,\79\ and even historically bitcoin 
skeptical fund managers \80\ are allocating to bitcoin. The largest 
over-the-counter bitcoin fund previously filed a Form 10 registration 
statement, which the Staff of the Commission reviewed and which took 
effect automatically, and is now a reporting company.\81\ Established 
companies like Tesla, Inc.,\82\ MicroStrategy Incorporated,\83\ and 
Square, Inc.,\84\ among others, have recently announced substantial 
investments in bitcoin in amounts as large as $1.5 billion (Tesla) and 
$425 million (MicroStrategy).
---------------------------------------------------------------------------

    \74\ On December 10, 2020, Massachusetts Mutual Life Insurance 
Company (MassMutual) announced that it had purchased $100 million in 
bitcoin for its general investment account. See MassMutual Press 
Release ``Institutional Bitcoin provider NYDIG announces minority 
stake purchase by MassMutual'' (December 10, 2020), available at: 
https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2020/12/institutional-bitcoin-provider-nydig-announces-minority-stake-purchase-by-massmutual.
    \75\ See, e.g., ``Morgan Stanley to Offer Rich Clients Access to 
Bitcoin Funds'' (March 17, 2021) available at: https://www.bloomberg.com/news/articles/2021-03-17/morgan-stanley-to-offer-rich-clients-access-to-bitcoin-funds.
    \76\ See, e.g., ``BlackRock's Rick Rieder says the world's 
largest asset manager has `started to dabble' in Bitcoin'' (February 
17, 2021), available at: https://www.cnbc.com/2021/02/17/blackrock-has-started-to-dabble-in-bitcoin-says-rick-r ieder.html and 
``Guggenheim's Scott Minerd Says Bitcoin Should Be Worth $400,000'' 
(December 16, 2020), available at: https://www.bloomberg.com/news/articles/2020-12-16/guggenheim-s-scott- minerd-says- bitcoin-should-
be-worth-400-000.
    \77\ See, e.g., ``Visa Moves to Allow Payment Settlements Using 
Cryptocurrency'' (March 29, 2021), available at: https://www.reuters.com/business/autos-transportation/exclusive-visa-moves-allow-payment-settlements-using-cryptocurrency-2021-03-29/.
    \78\ See, e.g., ``Harvard and Yale Endowments Among Those 
Reportedly Buying Crypto'' (January 25, 2021), available at: https://www.bloomberg.com/news/articles/2021-01-26/harvard-and-yale-endowments-among-those-reportedly-buying-crypto.
    \79\ See, e.g., ``Virginia Police Department Reveals Why its 
Pension Fund is Betting on Bitcoin'' (February 14, 2019), available 
at: https://finance.yahoo.com/news/virginia-police-department-reveals-why-194558505.html.
    \80\ See, e.g., ``Bridgewater: Our Thoughts on Bitcoin'' 
(January 28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones 
says he likes bitcoin even more now, rally still in the `first 
inning''' (October 22, 2020), available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
    \81\ See Letter from Division of Corporation Finance, Office of 
Real Estate & Construction to Barry E. Silbert, Chief Executive 
Officer, Grayscale Bitcoin Trust (January 31, 2020), available at: 
https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
    \82\ See Form 10-K submitted by Tesla, Inc. for the fiscal year 
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
    \83\ See Form 10-Q submitted by MicroStrategy Incorporated for 
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
    \84\ See Form 10-Q submitted by Square, Inc. for the quarterly 
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
---------------------------------------------------------------------------

    The Sponsor maintains that despite these developments, access for 
U.S. retail investors to gain exposure to bitcoin via a transparent and 
regulated exchange-traded vehicle remains limited. As investors and 
advisors increasingly utilize ETPs to manage diversified portfolios 
(including equities, fixed income securities, commodities, and 
currencies) quickly, easily, relatively inexpensively, tax-efficiently, 
and without having to hold directly any of the underlying assets; 
options for bitcoin exposure for U.S. investors remain limited to: (i) 
investing in over-the-counter bitcoin funds (``OTC Bitcoin Funds'') 
that are subject to high premium/discount volatility (and high 
management fees) to the advantage of more sophisticated investors that 
are able to purchase shares at NAV directly with the issuing trust; 
(ii) investing in CFTC-regulated bitcoin futures exchange-traded funds 
(``ETFs'') that are subject to higher complexity and costs due to need 
for rolling the futures contracts; (iii) facing the technical risk, 
complexity, and generally high fees associated with buying and storing 
bitcoin directly; or (iv) purchasing shares of operating companies that 
they believe will provide proxy exposure to bitcoin with limited 
disclosure about the associated risks. Meanwhile, investors in many 
other countries, including Canada, are able to use more traditional 
exchange listed and traded products to gain exposure to bitcoin.\85\
---------------------------------------------------------------------------

    \85\ Securities regulators in a number of other countries have 
either approved or otherwise allowed the listing and trading of 
bitcoin ETPs. Specifically, these funds (with their respective 
approximate AUMs as of April 14, 2021) include the Purpose Bitcoin 
ETF ($993,000,000), VanEck Vectors Bitcoin ETN ($209,000,000), 
WisdomTree Bitcoin ETP ($407,000,000), Bitcoin Tracker One 
($1,380,000,000), BTCetc Bitcoin ETP ($1,410,000,000), 21Shares 
Bitcoin ETP ($362,000,000), 21Shares Bitcoin Suisse ETP 
($30,000,000), CoinShares Physical Bitcoin ETP ($396,000,000).

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[[Page 2457]]

    For example, the Purpose Bitcoin ETF, a retail physical bitcoin ETP 
launched in Canada, reportedly reached $421.8 million in assets under 
management (``AUM'') in two days, and has achieved $993 million in 
assets as of April 14, 2021, demonstrating the demand for a North 
American market listed bitcoin ETP. The Sponsor believes that the 
demand for the Purpose Bitcoin ETF is driven primarily by investors' 
desire to have a regulated and accessible means of exposure to. The 
Purpose Bitcoin ETF also offers a class of units that is U.S. dollar 
bitcoin denominated, which could appeal to U.S. investors. Without an 
approved bitcoin ETP in the U.S. as a viable alternative, the Sponsor 
believes U.S. investors will seek to purchase these shares in order to 
get access to bitcoin exposure, leaving them without the protections of 
U.S. securities laws. Given the separate regulatory regime and the 
potential difficulties associated with any international litigation, 
such an arrangement would create more risk exposure for U.S. investors 
than they would otherwise have with a U.S. exchange listed ETP. With 
the addition of more bitcoin ETPs in non-U.S. jurisdictions expected to 
grow, the Sponsor anticipates that such risks will only continue to 
grow.
    In addition, several funds registered under the Investment Company 
Act of 1940 (the ``1940 Act'') have effective registration statements 
that contemplate bitcoin exposure through a variety of means, including 
through investments in bitcoin futures contracts \86\ and through OTC 
Bitcoin Funds.\87\ In previous statements, the Staff of the Commission 
has acknowledged how such funds can satisfy their concerns regarding 
custody, valuation, and manipulation.\88\ The funds that have already 
invested in bitcoin instruments have no reported issues regarding 
custody, valuation, or manipulation of the instruments held by these 
funds. While these funds do offer investors some means of exposure to 
bitcoin, the Sponsor believes the current offerings fall short of 
giving investors an accessible, regulated product that provides 
concentrated exposure to bitcoin and bitcoin prices.
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    \86\ See, e.g., Stone Ridge Trust VI (File No. 333-234055); 
BlackRock Global Allocation Fund, Inc. (File No. 33-22462); and 
BlackRock Funds V (File No. 333-224371).
    \87\ See, e.g., Amplify Transformational Data Sharing ETF (File 
No. 333-207937); and ARK Innovation ETF (File No. 333-191019).
    \88\ See Dalia Blass, ``Keynote Address--2019 ICI Securities Law 
Developments Conference'' (December 3, 2019), available at: https://www.sec.gov/news/speech/blass-keynote-address-2019-ici-securities-law-developments-conference.
---------------------------------------------------------------------------

Unregulated Exposure to Bitcoin and Investor Protection Concerns
    The Sponsor notes that U.S. investor exposure to bitcoin through 
OTC Bitcoin Funds and other unregulated means has grown into the tens 
of billions of dollars. With that growth, so too has grown the 
potential risk to U.S. investors. Investor protection concerns persist, 
as OTC Bitcoin Funds and other unregulated means of exposure to bitcoin 
continue to attract investors despite the approval of bitcoin futures-
based ETPs by the Commission. The Sponsor appreciates the Commission's 
previously articulated concerns about potential manipulation when an 
ETP holds actual bitcoin and believes that the Fund represents an 
opportunity for U.S. investors to gain price exposure to CME Bitcoin 
Futures Contracts and bitcoin in a regulated and transparent exchange-
traded vehicle that mitigates those concerns through the use of CME 
Bitcoin Futures Contracts, applying futures-based pricing for spot 
bitcoin, and limiting the Fund's exposure to spot bitcoin to the CFTC-
regulated EFP market. The Sponsor believes that the structure of the 
Fund accordingly limits risks by: (i) reducing premium and discount 
volatility; (ii) reducing management fees through meaningful 
competition; (iii) reducing risks associated with investing in 
operating companies that are imperfect proxies for bitcoin exposure; 
and (iv) avoiding regulatory concerns regarding valuation posed by ETFs 
and ETPs that invest directly in bitcoin rather than in CME Bitcoin 
Futures Contracts or bitcoin via EFP transactions on the regulated CME 
Bitcoin Futures Market, a CFTC-regulated exchange that meets regulatory 
standards that are not met by spot bitcoin trading platforms.
Custody of Bitcoin
    According to the Registration Statement, institutional purchasers 
of bitcoin, including other bitcoin funds that provide exposure to 
bitcoin by investing directly in bitcoin, generally maintain their 
bitcoin account with a bitcoin custodian. Bitcoin custodians are 
financial institutions that have implemented a series of specialized 
security precautions, including holding bitcoin in ``cold storage,'' to 
try to ensure the safety of an account holder's bitcoin. These bitcoin 
custodians must carefully consider the design of the physical, 
operational, and cryptographic systems for secure storage of private 
keys in an effort to lower the risk of loss or theft, and many use a 
multi-factor security system under which actions by multiple 
individuals working together are required to access the private keys 
necessary to transfer such digital assets and ensure exclusive 
ownership.
    The Fund's Bitcoin Custodian(s) will hold the Fund's bitcoin 
acquired via EFP transactions through the CME Bitcoin Futures Market 
and will be responsible for maintaining custody of the Fund's bitcoin 
assets.
    The Fund's Bitcoin Custodian(s) must satisfy, at least, the ``core 
custodian'' requirements set forth by the NCIOC in the NCI methodology, 
including: \89\
---------------------------------------------------------------------------

    \89\ See https://indexes.nasdaqomx.com/docs/methodology_nci.pdf.
---------------------------------------------------------------------------

    1. Provide custody accounts whose holders are the legal 
beneficiaries of the assets held in the account. In case of bankruptcy 
or insolvency of a Bitcoin Custodian, creditors or the estate should 
have no rights to the Fund's assets.
    2. Offer segregated accounts and store the Fund's bitcoin in 
separated individual accounts and not in omnibus accounts. The Fund's 
bitcoin will be held in segregated wallets and not commingled with the 
Bitcoin Custodian's or other customer assets.
    3. Generate account-segregated private keys for digital assets 
using high entropy random number generation methods and employ advanced 
security practices.
    4. Utilize technology for storing private keys in offline digital 
vaults and apply secure processes, such as private key segmentation, 
multi-signature authorization, and geographic distribution of stored 
assets, to limit access to private keys. The Bitcoin Custodian will use 
security technology for storing private keys aiming to avoid theft or 
misappropriation of assets due to online attacks, collusion of agents 
managing the storage services, or any other threat.
    5. Have a comprehensive risk management policy and formalized 
framework of managing operational and custody risks, including a 
disaster recovery program that ensures continuity of operations in the 
event of a system failure. The Bitcoin Custodian will have a business 
continuity plan to help ensure continued access to the Fund's assets.
    6. Have an insurance policy that covers, at least partially, risks 
such as the loss of Fund assets held in cold storage, including from 
employee collusion or fraud, physical loss including theft, damage of 
key material, security breach or hack, and fraudulent transfer.
    7. Comply with higher standards of government oversight, external 
audits,

[[Page 2458]]

and security to safekeep asset ownership. The Bitcoin Custodian must be 
licensed or registered as a custodian by a reputable and independent 
governing body (e.g., the New York State Department of Financial 
Services, or other state, national or international regulators), as can 
be ascertained by certain public data sources.
    8. Provide third-party audit reports at least annually on 
operational and security processes. These audits may be completed by 
having a Systems and Organizational Control certification issued and 
are intended to provide reasonable assurance that the Bitcoin 
Custodian's operational processes and private key management controls 
are in accordance with the expected standards.
    The Sponsor will cause the Trust to maintain ownership and control 
of the Fund's bitcoin in a manner consistent with good delivery 
requirements for spot commodity transactions.
The Structure and Operation of the Fund Satisfies Commission 
Requirements for Bitcoin-Based Exchange Traded Products
    The Sponsor believes that the Fund's holding a combination of CME 
Bitcoin Futures Contracts, bitcoin, and cash could significantly 
mitigate the risk of market manipulation while still providing the 
market with a regulated product that tracks the actual price of 
bitcoin, creating a secure way for U.S. investors to gain exposure to 
bitcoin without having to rely on unregulated products, offshore 
regulated products, or indirect strategies such as investing in 
publicly traded companies that hold bitcoin.
    In determining whether to approve listing and trading of new ETPs, 
the Commission conducts a thorough analysis to ensure the proposal is 
consistent with Section 6(b)(5) of the Act. Section 6(b)(5) of the Act 
mandates that the rules of a national securities exchange be designed 
to prevent fraudulent and manipulative acts and practices, and to 
protect investors and the public interest. With respect to ETPs, the 
Commission often considers how the listing exchange would access 
necessary information to detect and deter market manipulation, illegal 
trading, and other abuses, which listing exchanges may accomplish by 
entering into a comprehensive surveillance-sharing agreement with other 
entities, such as the markets trading the ETP's underlying assets. 
Historically, for commodity-trust ETPs, there has always been at least 
one regulated market of significant size for trading futures on the 
underlying commodity--whether gold, silver, platinum, palladium, or 
copper. Then, the listing exchange would enter into surveillance-
sharing agreements with, or hold ISG membership in common with, that 
regulated market.\90\
---------------------------------------------------------------------------

    \90\ See Winklevoss Order; Order Disapproving a Proposed Rule 
Change, as Modified by Amendment No. 1, Relating to the Listing and 
Trading of Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca 
Rule 8.201-E, Securities Exchange Act Release No. 87267 (Oct. 9, 
2019), 84 FR 55382 at 55383, 55410 (Oct. 16, 2019) (SR-NYSEArca-
2019-01) (the ``Bitwise Order''); Order Disapproving a Proposed Rule 
Change, as Modified by Amendment No. 1, to Amend NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares) and to List and Trade Shares 
of the United States Bitcoin and Treasury Investment Trust Under 
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 88284 
(February 26, 2020), 85 FR 12595 at 12609 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Order'').
---------------------------------------------------------------------------

    In the context of bitcoin, CME Bitcoin Futures Market is currently 
the only regulated market in the U.S.
    The Commission has previously interpreted the terms ``significant 
market'' and ``market of significant size'' to include a market (or 
group of markets) where:
    (1) There is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
successfully manipulate the ETP, such that a surveillance-sharing 
agreement would assist the ETP listing market in detecting and 
deterring misconduct; and
    (2) It is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\91\
---------------------------------------------------------------------------

    \91\ See, e.g., Winklevoss Order, 83 FR at 37594. The Commission 
further noted that ``[t]here could be other types of ``significant 
markets'' and ``markets of significant size,'' but this definition 
is an example that will provide guidance to market participants.'' 
Id.
---------------------------------------------------------------------------

    With respect to the first prong of the Commission's interpretation, 
the Commission has previously explained that the lead/lag relationship 
between the bitcoin futures market and the spot market is central to 
understanding this first prong. With respect to the second prong, the 
Commission's prior analysis has focused on the potential size and 
liquidity of the ETP compared to the size and liquidity of the market.
    The Commission recognized in the Approval Order that ``the CME is a 
`significant market' related to CME bitcoin futures contracts,'' and 
thus that the Exchange has entered into the requisite surveillance-
sharing agreement with respect to its CME Bitcoin Futures Contracts 
holdings.\92\ However, there is still a lack of consensus on whether 
the CME is of ``significant size'' in relation to the spot bitcoin 
market based on the test historically applied by the Commission.
---------------------------------------------------------------------------

    \92\ See Approval Order, 87 FR at 21678 and further discussion 
at 21678-81.
---------------------------------------------------------------------------

Interrelationship Between the CME Bitcoin Futures Market and the Fund
    The Commission has previously stated that ``the interpretation of 
the term market of significant size depends on the interrelationship 
between the market with which the listing exchange has a surveillance-
sharing agreement and the proposed ETP.'' \93\ The Sponsor intends to 
adopt an innovative approach to mitigate the risks of fraud and 
manipulation that are unique to the Fund. The core principle of this 
approach would be to structure the operation of the Fund such that the 
regulated market of significant size in relation to the Fund is the CME 
Bitcoin Futures Market because the Fund trades all of its non-cash 
assets through the CME Bitcoin Futures Market. Therefore, the Sponsor's 
strategy aims to establish a comprehensive interrelationship between 
the CME and the Fund so that the CME Bitcoin Futures Market is the 
market of significant size in relation to the Fund. The Sponsor notes 
that, although the Fund may, as proposed, hold bitcoin, it does not 
rely on any pricing or other information or services from unregulated 
bitcoin spot bitcoin trading platforms. Therefore, no spot bitcoin 
trading platform could be considered a ``market of relevant size'' in 
relation to the Fund.
---------------------------------------------------------------------------

    \93\ See Securities Exchange Act Release No. 95180 (June 29, 
2022), 87 FR 40299 at 40312 (July 6, 2022) (SR-NYSEArca-2021-90) 
(Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)).
---------------------------------------------------------------------------

    The Sponsor has designed the Fund to have four novel features that 
underscore its significant interrelationship with the CME Bitcoin 
Futures Market:
    1. Investment strategy: The Fund will only hold bitcoin, CME 
Bitcoin Futures Contracts, and cash and cash equivalents. Accordingly, 
the CME Bitcoin Futures Market is the only market on which the Fund's 
non-cash assets would trade and is therefore the ``significant market'' 
in relation to the Fund, as proposed.
    2. Futures-based pricing for spot bitcoin: The price determination 
for bitcoin holdings in the NAV calculation will be derived from the 
CME's bitcoin futures curve.\94\ As a result, the price of bitcoin 
holdings will depend solely on bitcoin futures settlement prices on the 
CME Bitcoin Futures Market and will not depend directly on price 
information from unregulated spot

[[Page 2459]]

bitcoin markets (as further discussed below).
---------------------------------------------------------------------------

    \94\ The ``futures curve'' is a representation of the 
relationship between futures contract prices and their respective 
expiration dates.
---------------------------------------------------------------------------

    3. Physical bitcoin purchases through the CME Bitcoin Futures 
Market: The Fund will solely use the CME Bitcoin Futures Market's EFP 
transactions to acquire and dispose of bitcoin, instead of transactions 
on unregulated spot bitcoin trading platforms. Accordingly, the only 
non-cash assets held by the Fund (CME Bitcoin Futures Contracts and 
bitcoin obtained from EFP transactions) would be traded, reported, and 
cleared through the CME Bitcoin Futures Market, such that CME and NYSE 
Arca can share information pursuant to their common ISG membership to 
detect and deter fraudulent or manipulative misconduct related to those 
assets.
    4. Creations and redemptions: The Fund will use cash creations and 
redemptions \95\ to deter intraday Share price manipulation that could 
originate from in-kind creation or redemption from bitcoin sourced in 
unregulated spot markets. Investment in bitcoin thus would not be 
directly related to creation/redemptions, but would instead be adjusted 
dynamically based on target portfolio exposure.\96\ Trading for bitcoin 
could thus be accomplished in smaller sizes and at unpredictable times, 
reducing the risk of manipulation in the creation or redemption 
processes.
---------------------------------------------------------------------------

    \95\ In a cash creation/redemption format, the Authorized 
Participant delivers cash to the Fund instead of bitcoin. The Fund's 
creation and redemption processes are further discussed below.
    \96\ The portfolio's exposure to bitcoin will be dynamic because 
the Sponsor will assess market conditions (e.g., expected level of 
creation and redemption based on historic trends, the futures curve, 
market liquidity and volatility) in allocating the Fund's portfolio 
among the assets that it may hold (bitcoin, CME Bitcoin Futures 
Contracts, cash and cash equivalents). The Sponsor will manage the 
Fund to minimize transaction costs related to the conversion between 
CME Bitcoin Futures Contracts and bitcoin that would be necessary to 
process redemptions. The Sponsor will generally aim to maximize the 
allocation to bitcoin to better track the Fund's Benchmark.
---------------------------------------------------------------------------

    The Sponsor believes that these features of the Fund are designed 
to provide a robust framework for mitigating the risks of market 
manipulation, thereby protecting investors and maintaining the 
integrity of the market. The Sponsor further believes that, given these 
features of the Fund, the CME Bitcoin Futures Market should be 
considered the regulated market of significant size in relation to the 
Fund.
    The Sponsor further believes that the proposed novel approach is in 
line with the first prong of the Commission's interpretation of the 
definition of ``regulated market of significant size'' as to the CME 
Bitcoin Futures Market because (i) the CME Bitcoin Futures Market is 
the only market where the Fund trades its non-cash assets,\97\ and (ii) 
there is a reasonable likelihood that a person attempting to manipulate 
the Fund would also have to trade on the CME Bitcoin Futures Market to 
successfully manipulate the ETP (and, accordingly, CME's common ISG 
membership would aid NYSE Arca in detecting and deterring potential 
misconduct).
---------------------------------------------------------------------------

    \97\ In the Approval Order, the Commission stated that if the 
proposed ``significant'' regulated market (in this case, the CME 
Bitcoin Futures Market) with which the listing exchange has a 
surveillance-sharing agreement is the same market on which the ETP 
trades its non-cash assets, then (i) it is unnecessary for the 
listing exchange to establish a reasonable likelihood that the 
would-be manipulator would have to trade on said listing exchange to 
manipulate the proposed ETP (thereby satisfying the first prong of 
the Commission's standard for ``market of significant size''), and 
(ii) it is unnecessary to establish a ``lead-lag'' relationship 
between said listing exchange and other markets. 87 FR at 21679 n. 
47 & 21680.
---------------------------------------------------------------------------

    The Sponsor has designed its approach so that any attempt to 
manipulate the Fund would require trading on the CME Bitcoin Futures 
Market, for the following reasons:
    1. Futures-based pricing for spot bitcoin: The price of the Fund's 
bitcoin holdings would be determined based on settlement prices of CME 
Bitcoin Futures Contracts for purposes of calculating NAV (as explained 
in the discussion of FBSP above). Accordingly, any attempt to 
manipulate the price of the Fund would require influencing the futures 
curve on the CME Bitcoin Futures Market because the spot price (which 
could be a target for manipulation) does not directly influence the 
price of the Fund. There is thus a direct lead/lag relationship in 
which CME Bitcoin Futures Market prices lead both the spot price used 
by the Fund to determine its NAV and the Fund's market price.
    2. Spot bitcoin operations via EFP transaction through the CME 
Bitcoin Futures Market: Because the Fund's bitcoin operations would 
take place via CME Bitcoin Futures Market EFP transactions, any attempt 
to manipulate the Fund's transactions in bitcoin holdings would require 
the would-be manipulator to trade on the CME Bitcoin Futures Market. 
Accordingly, any potential manipulation of the Fund would require 
extensive operations on the heavily regulated CME Bitcoin Futures 
Market.
    3. Cash creations and redemptions: The Fund's use of cash creations 
and redemptions also reduces the potential for manipulation through the 
creation and redemption processes by eliminating the direct arbitrage 
between unregulated spot markets and the Fund's market price. Any 
significant creation or redemption activity aimed at manipulating the 
Fund would likely influence the CME Bitcoin Futures Market, given that 
the cash received in the creation is used to buy CME Bitcoin Futures 
Contracts and the cash generated for redemption distribution comes from 
the sale of CME Bitcoin Futures Contracts.
    Given these factors, the Sponsor believes that the common 
membership of NYSE Arca and CME in the ISG would be an effective tool 
in assisting NYSE Arca in detecting and deterring potential misconduct. 
The exchanges' ability to share information would provide the Exchange 
with access to relevant trading data from the CME Bitcoin Futures 
Market, which is intrinsically linked to the Fund, allowing for 
appropriate oversight and facilitating the ability to identify and 
investigate any suspicious trading activity.
    The Approval Order stated that the CME ``comprehensively surveils 
futures market conditions and price movements on a real-time and 
ongoing basis in order to detect and prevent price distortions, 
including price distortions caused by manipulative efforts'' and that 
the ``CME's surveillance can reasonably be relied upon to capture the 
effects on the CME [Bitcoin Futures Market] caused by a person 
attempting to manipulate the [Fund] by manipulating the price of CME 
Bitcoin Futures Contracts, whether that attempt is made by directly 
trading on the CME [Bitcoin Futures Market] or indirectly by trading 
outside of the CME [Bitcoin Futures Market].'' \98\ The Commission 
further noted in the Approval Order that, as a result, ``when the CME 
shares its surveillance information with [NYSE] Arca, the information 
would assist in detecting and deterring fraudulent or manipulative 
misconduct related to the non-cash assets held by the [Fund].'' \99\ 
The Sponsor further believes that, consistent with the Approval Order, 
CME surveillance can be relied upon to capture any possible 
manipulation of the CME Bitcoin Futures Market, even when the attempt 
is made indirectly by trading outside the CME Bitcoin Futures Market in 
unregulated markets.\100\
---------------------------------------------------------------------------

    \98\ See Approval Order, 87 FR at 21679.
    \99\ Id.
    \100\ See id. (``The Commission agrees with [NYSE] Arca that the 
CME [Bitcoin Futures Market], as a CFTC-regulated futures exchange, 
has `the requisite oversight, controls, and regulatory scrutiny 
necessary to maintain, promote, and effectuate fair and transparent 
trading of its listed products, including the BTC Contracts and MBT 
Contracts.' As [NYSE] Arca states, as a Designated Contracts Market 
(`DCM'), the CME [Bitcoin Futures Market] `comprehensively surveils 
futures market conditions and price movements on a realtime and 
ongoing basis in order to detect and prevent price distortions, 
including price distortions caused by manipulative efforts.' Thus 
the CME's surveillance can reasonably be relied upon to capture the 
effects on the CME [Bitcoin Futures Market] caused by a person 
attempting to manipulate the proposed futures ETP by manipulating 
the price of CME [Bitcoin Futures Contracts], whether that attempt 
is made by directly trading on the CME [Bitcoin Futures Market] or 
indirectly by trading outside of the CME [Bitcoin Futures Market]. 
As such, when the CME shares its surveillance information with 
[NYSE] Arca, the information would assist in detecting and deterring 
fraudulent or manipulative misconduct related to the non-cash assets 
held by the proposed ETP'') (internal citations omitted).

---------------------------------------------------------------------------

[[Page 2460]]

    The Sponsor also believes that it is unlikely that trading in the 
Fund would be the predominant influence on prices on the CME Bitcoin 
Futures Market. The Approval Order noted that it was unlikely that 
trading in the Fund would be the predominant influence on price in the 
CME Bitcoin Futures Market,\101\ and the Sponsor believes that the 
addition of bitcoin to the Fund's holdings, using EFP transactions 
through the CME Bitcoin Futures Market, does not significantly alter 
the influence of the Fund's trading on the CME Bitcoin Futures Market, 
for the following reasons:
---------------------------------------------------------------------------

    \101\ See id. at 21680.
---------------------------------------------------------------------------

    1. The Fund's limited influence over the market: As the Commission 
noted in the Approval Order,\102\ the Commission observed no disruption 
to the CME Bitcoin Futures Market or evidence that the Fund exerted a 
dominant influence on CME bitcoin futures prices. The Sponsor therefore 
believes that it is very unlikely that the Fund's trading, even with 
the addition of bitcoin to its holdings, would become the predominant 
influence on the futures market.
---------------------------------------------------------------------------

    \102\ See id. at 21681.
---------------------------------------------------------------------------

    2. Spot bitcoin would be purchased using market-neutral EFP 
transactions: The bitcoin in the Fund's portfolio would be purchased by 
exchanging an equivalent CME Bitcoin Futures Contracts position using 
EFP transactions through the CME Bitcoin Futures Market. The Fund's 
bitcoin trading would thus be directly linked to the futures market and 
would not introduce a new, independent variable that could 
significantly influence the futures market. Indeed, because both sides 
of the trade track the same benchmark, an EFP is market-neutral, and, 
as such, the pricing of an EFP is quoted in terms of the basis between 
the price of the futures contract and the level of the underlying 
index.\103\
---------------------------------------------------------------------------

    \103\ According to the Fund's registration statement and as 
discussed above, the Fund uses EFP transactions to efficiently 
transition its bitcoin exposure from a physical to a futures 
position within a regulated environment.
---------------------------------------------------------------------------

    3. The Fund's investment strategy reduces recurrent trading 
activity and price pressure on the CME Bitcoin Futures Market as 
compared to a fund that only holds CME Bitcoin Futures Contracts: 
Because the Fund will also hold bitcoin, the Sponsor believes that CME 
Bitcoin Futures Contracts rollover operations would be reduced, as 
would the trading activity on the CME Bitcoin Futures Market that 
occurs as a CME Bitcoin Futures Contract nears expiration, thereby 
significantly reducing its influence on the CME Bitcoin Futures Market.
    The Sponsor therefore believes that the proposed addition of 
bitcoin to the Fund's holdings would not significantly alter the 
influence of the Fund's trading on the CME Bitcoin Futures Market and 
that the proposed design of the Fund's investment strategy would 
instead result in potential impact on the CME Bitcoin Futures Market 
that is the same or less than that of the previous investment strategy 
(as represented in the Approval Order).
    The Sponsor notes that, as of April 2021 and as noted in the Fund's 
original proposal to list and trade its Shares on the Exchange, the CME 
Bitcoin Futures Market was already showing a significant increase in 
size, as per the table below:\104\
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    \104\ See Securities Exchange Act Release No. 92573 (August 5, 
2021), 86 FR 44062 at 44073 (August 11, 2021) (SR-NYSEArca-2021-53) 
(Notice of Filing of a Proposed Rule Change To List and Trade Shares 
of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E).
[GRAPHIC] [TIFF OMITTED] TN12JA24.067

    The Sponsor notes that growth of the CME Bitcoin Futures Market at 
that time coincided with similar growth in the bitcoin spot market. 
Moreover, the market for Bitcoin futures was and still is rapidly 
approaching the size of markets for other commodity interests, 
including interests in metals, agricultural, and petroleum products.
    Accordingly, as the CME Bitcoin Futures Market continues to develop 
and more closely resemble other commodity futures markets, the Sponsor 
believes that it is reasonable to expect that the relationship between 
the bitcoin futures market and bitcoin spot market will behave 
similarly to other future/spot market relationships, where the spot 
market may have no relationship to the futures market (although the 
current proposal does not depend on such similarity).
    In addition, in the time since the Approval Order was issued, there 
has been significant growth in bitcoin futures in terms of trading 
volumes, as reflected in the table below:

[[Page 2461]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.068

    The Sponsor also notes that in the same period during which CME 
Bitcoin Futures Market open interest remained at roughly at the same 
level, trading volume and open interest of unregulated bitcoin futures 
markets had a significant drawdown: \105\
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    \105\ Data in this table is sourced from: https://www.theblock.co/data/crypto-markets/futures. Trading volume data for 
bitcoin futures in unregulated markets was only available on a 
monthly frequency. Therefore, the trading volume figures displayed 
in the table are approximations derived from the daily average 
trading volumes reported for their respective months.
[GRAPHIC] [TIFF OMITTED] TN12JA24.069

    Furthermore, the Sponsor notes that in the same period the trading 
volume of spot bitcoin also fell significantly:
[GRAPHIC] [TIFF OMITTED] TN12JA24.070

    The Sponsor believes that the data above suggests an increase in 
market appetite for regulated products (e.g., CME Bitcoin Futures 
Contracts) vis-a-vis a significant decrease in interest for unregulated 
products (e.g., unregulated futures and spot bitcoin).
    The Sponsor further believes that an analysis of the data presented 
above indicates that the CME Bitcoin Futures Market managed to maintain 
its open interest level despite the price volatility that bitcoin 
experienced in 2022, demonstrating its resilience and that it is 
sufficiently developed such that it is unlikely that trading in the 
Fund would be the predominant influence on its prices.
    The Sponsor further notes that the Commission stated in the 
Approval Order ``that the CME [Bitcoin Futures Market] has sufficiently 
developed to support ETPs seeking exposure to bitcoin by holding CME 
Bitcoin Futures Contracts.'' \106\ The Sponsor believes that the CME 
Bitcoin Futures Market is also sufficiently developed to support ETPs 
that seek exposure to Bitcoin by holding a mix of CME Bitcoin Futures 
Contracts and bitcoin through the use of EFP transactions that are 
traded, reported, and cleared through the CME Bitcoin Futures Market 
and whose conditions and prices are subject to CME oversight.
---------------------------------------------------------------------------

    \106\ See Approval Order, 87 FR at 21681.
---------------------------------------------------------------------------

Creations and Redemptions
    According to the Sponsor (and as discussed further below), the Fund 
uses cash creations and redemptions.\107\ An AP delivers cash to the 
Fund instead of bitcoin or CME Bitcoin Futures Contracts in the 
creation process. An AP receives cash instead of bitcoin or CME Bitcoin 
Futures Contracts in the redemption process. The cash received during 
the creation process is then used by the Sponsor to purchase CME 
Bitcoin Futures Contracts with an aggregate market value that 
approximates the amount of cash received upon the

[[Page 2462]]

creation. During a redemption transaction, the reverse process is used, 
where the Sponsor sells CME Bitcoin Futures Contracts with an aggregate 
market value that approximates the amount of cash to be paid upon the 
redemption. On a daily basis, the Sponsor will analyze the current 
portfolio allocation of the Fund between bitcoin and CME Bitcoin 
Futures Contracts and, based on market conditions, may decide to engage 
in an EFP transaction through the CME Bitcoin Futures Market to buy or 
sell bitcoin for the equivalent position in CME Bitcoin Futures 
Contracts.
---------------------------------------------------------------------------

    \107\ In a cash creation/redemption mechanism, APs create or 
redeem shares of the ETP using cash instead of the underlying 
assets. This contrasts with in-kind creation/redemption, where APs 
use a basket of the ETP's underlying assets for these transactions. 
In cash creation/redemption, APs provide or receive an equivalent 
cash value based on the NAV of the ETP's shares.
---------------------------------------------------------------------------

    The Sponsor believes that the Fund's use of cash creations and 
redemptions protects against manipulation in the creation and 
redemption process and of the Fund's market price from trading in 
unregulated spot markets. Investment in bitcoin will not be directly 
related to creation or redemption of Shares such that trades can be 
performed in smaller sizes and at unpredictable times, reducing the 
risk of creation or redemption manipulation.
    Specifically, the Sponsor believes that cash creations and 
redemptions serve as a deterrent to manipulation in several ways:
    1. Decoupling from spot market: By using cash instead of bitcoin 
for creations and redemptions, the Fund's operations are decoupled from 
the unregulated spot market. The creation and redemption process does 
not directly influence the unregulated spot market or vice versa, 
thereby reducing the potential for manipulation through this process.
    2. Unpredictable trading times: The Fund's investment in spot 
bitcoin is not directly related to creations or redemptions. As a 
result, trading can be done in smaller sizes and at unpredictable 
times, making it harder for potential manipulators to time their 
actions.
    3. Reduced impact of large trades: By effecting creations and 
redemptions in cash, large trades that could potentially influence the 
unregulated spot market are mitigated. Instead, these trades are 
absorbed in the CME Bitcoin Futures Market, which is sufficiently 
liquid and, as a regulated market that is a member of ISG, can 
reasonably be relied upon to assist the Exchange in detecting and 
deterring fraudulent or manipulative misconduct.
    4. Reduced influence from unregulated spot bitcoin trading 
platforms: In-kind creation may create a direct relationship between 
the Fund's market price and prices on offshore unregulated trading 
platforms such as Binance and others by arbitrage, because an AP could 
buy or sell bitcoin from such markets and receive or deliver bitcoin 
from the Fund through the creation or redemption process. With 
creations and redemptions in cash, however, that arbitrage cannot be 
executed without transacting on the CME Bitcoin Futures Market. Thus, 
the Sponsor believes that, by removing a direct causal relationship 
between unregulated markets and the Fund's market price, it is unlikely 
that a person attempting to manipulate the ETP would be reasonably 
successful by trading only on unregulated spot bitcoin trading 
platforms. A would-be manipulator would have to transact on the CME 
Bitcoin Futures Market, such that NYSE Arca's common ISG membership 
with CME would assist NYSE Arca in detecting and deterring misconduct.
    The Sponsor believes that the Fund's creation and redemption 
process is designed to minimize the potential for market manipulation, 
thereby protecting investors and maintaining the integrity of the 
markets.
Settlement of CME Bitcoin Futures Contracts
    According to the Registration Statement, each BTC Contract and MBT 
Contract settles daily to the BTC Contract VWAP of all trades that 
occur between 2:59 p.m. and 3:00 p.m. Central Time, the settlement 
period, rounded to the nearest tradable tick.\108\
---------------------------------------------------------------------------

    \108\ VWAP is calculated based first on Tier 1 (if there are 
trades during the settlement period); then Tier 2 (if there are no 
trades during the settlement period); and then Tier 3 (in the 
absence of any trade activity or bid/ask in a given contract month 
during the current trading day, as follows: Tier 1: Each contract 
month settles to its VWAP of all trades that occur between 14:59:00 
and 15:00:00 CT, the settlement period, rounded to the nearest 
tradable tick. If the VWAP is exactly in the middle of two tradable 
ticks, then the settlement will be the tradable price that is closer 
to the contract's prior day settlement price. Tier 2: If no trades 
occur on CME Globex between 14:59:00 and 15:00:00 CT, the settlement 
period, then the last trade (or the contract's settlement price from 
the previous day in the absence of a last trade price) is used to 
determine whether to settle to the bid or the ask during this 
period. a. If the last trade price is outside of the bid/ask spread, 
then the contract month settles to the nearest bid or ask price. b. 
If the last trade price is within the bid/ask spread, or if a bid/
ask spread is not available, then the contract month settles to the 
last trade price. Tier 3: In the absence of any trade activity or 
bid/ask in a given contract month during the current trading day, 
the daily settlement price will be determined by applying the net 
change from the preceding contract month to the given contract 
month's prior daily settlement price.
---------------------------------------------------------------------------

    BTC Contracts and MBT Contracts each expire on the last Friday of 
the contract month and are settled with cash. The final settlement 
value is based on the CME CF BRR at 4:00 p.m. London time on the 
expiration day of the futures contract.
    As proposed, the Fund will rollover its soon to expire CME Bitcoin 
Futures Contracts to extend the expiration or maturity of its position 
forward by closing the initial contract holdings and opening a new 
longer-term contract holding for the same underlying asset at the then-
current market price. The Fund does not intend to hold any bitcoin 
futures positions into cash settlement.
Net Asset Value
    According to the Registration Statement, the Fund's NAV per Share 
will be calculated by taking the current market value of its total 
assets, subtracting any liabilities, and dividing that total by the 
number of Shares.
    The Administrator of the Fund will calculate the NAV once each 
trading day, as of the earlier of the close of the New York Stock 
Exchange or 4:00 p.m. Eastern Time (``E.T.'').
    According to the Registration Statement, to determine the value of 
CME Bitcoin Futures Contracts, the Fund's Administrator will use the 
CME Bitcoin Futures Contract settlement price on the exchange on which 
the contract is traded, except that the ``fair value'' of CME Bitcoin 
Futures Contracts (as described in more detail below) may be used when 
CME Bitcoin Futures Contracts close at their price fluctuation limit 
for the day. The Fund's Administrator will determine the value of Fund 
investments as of the earlier of the close of the New York Stock 
Exchange or 4:00 p.m. E.T. The Fund's NAV will include any unrealized 
profit or loss on open CME Bitcoin Futures Contracts and any other 
credit or debit accruing to the Fund but unpaid or not received by the 
Fund.
    According to the Registration Statement, the fair value of the 
Fund's holdings will be determined by the Fund's Sponsor in good faith 
and in a manner that assesses the future bitcoin market value based on 
a consideration of all available facts and all available information on 
the valuation date. When a CME Bitcoin Futures Contract has closed at 
its price fluctuation limit, the fair value determination will attempt 
to estimate the price at which such CME Bitcoin Futures Contract would 
be trading in the absence of the price fluctuation limit (either above 
such limit when an upward limit has been reached or below such limit 
when a downward limit has been reached). Typically, this estimate will 
be made primarily by reference to exchange traded instruments at 4:00 
p.m. E.T. on settlement day. The fair value of BTC Contracts and MBT 
Contracts may not

[[Page 2463]]

reflect such security's market value or the amount that the Fund might 
reasonably expect to receive for the BTC Contracts and MBT Contracts 
upon its current sale.
    According to the Registration Statement and as discussed above, the 
value of spot bitcoin held by the Fund would be determined by the 
Administrator, when calculating the Fund's NAV, via the FBSP 
methodology. As discussed above, the FBSP methodology allows for the 
determination of a spot price of bitcoin that utilizes market data 
exclusively from CME Bitcoin Futures Contracts and does not rely on 
market data obtained from unregulated bitcoin markets to determine the 
value of bitcoin held by the Fund.
Indicative Fund Value
    According to the Registration Statement, in order to provide 
updated information relating to the Fund for use by investors and 
market professionals, ICE Data Indices, LLC will calculate an updated 
IFV. The IFV will be calculated by using the prior day's closing NAV 
per Share of the Fund as a base and will be updated throughout the core 
trading session of 9:30 a.m. E.T. to 4:00 p.m. E.T. (the ``Core Trading 
Session'') to reflect changes in the value of the Fund's holdings 
during the trading day. For purposes of calculating the IFV, the Fund's 
spot bitcoin holdings will be priced using a real time version of the 
Benchmark, the Nasdaq Bitcoin Reference Price--Real Time (``NQBTC-
RT''),\109\ and the Fund's CME Bitcoin Futures Contracts holdings will 
be priced using the most recent trading price for each contract.
---------------------------------------------------------------------------

    \109\ The ``Nasdaq Bitcoin Reference Price--Real Time'' or 
``NQBTC-RT'' is the real-time version of the Benchmark and is 
calculated every second throughout a 24-hour trading day, seven days 
per week, using published, real-time bid and ask quotes for bitcoin 
on the NQBTCS core trading platforms. See https://
indexes.nasdaqomx.com/docs/methodology_nci.pdf.
---------------------------------------------------------------------------

    The IFV will be disseminated on a per Share basis every 15 seconds 
during the Exchange's Core Trading Session and be widely disseminated 
by one or more major market data vendors during the Exchange's Core 
Trading Session.\110\
---------------------------------------------------------------------------

    \110\ Several major market data vendors display and/or make 
widely available IFVs taken from the Consolidated Tape Association 
(``CTA'') or other data feeds.
---------------------------------------------------------------------------

Creation and Redemption of Shares
    According to the Registration Statement, the Shares issued by the 
Fund may only be purchased by APs and only in blocks of 10,000 Shares 
called ``Creation Baskets.'' The amount of the purchase payment for a 
Creation Basket is equal to the total NAV of Shares in the Creation 
Basket. Similarly, only APs may redeem Shares and only in blocks of 
10,000 Shares called ``Redemption Baskets.'' The amount of the 
redemption proceeds for a Redemption Basket is equal to the total NAV 
of Shares in the Redemption Basket. The purchase price for Creation 
Baskets and the redemption price for Redemption Baskets are the actual 
NAV calculated at the end of the business day when a request for a 
purchase or redemption is received by the Fund. Shares of the Fund will 
be created and redeemed in cash.\111\
---------------------------------------------------------------------------

    \111\ The Sponsor notes that Shares of the Fund will only be 
created and redeemed in cash because of regulatory and other 
concerns surrounding the ability of broker-dealers, such as the APs, 
to have custody and/or control over non-security digital assets, 
such as bitcoin. In 2019, Commission Staff noted that a digital 
asset security that does not meet the definition of a ``security'' 
under the Securities Investor Protection Act (``SIPA'') would likely 
not receive protection under SIPA in the event of the failure of a 
carrying broker-dealer (thus leaving holders of those digital asset 
securities with only unsecured general creditor claims against the 
broker-dealer's estate). See SEC Division of Trading and Markets, 
FINRA Office of General Counsel, Joint Staff Statement on Broker-
Dealer Custody of Digital Asset Securities (July 8, 2019), https://www.sec.gov/news/public-statement/joint-staff-statement-broker-dealer-custody-digital-asset-securities. The Staff also noted that 
uncertainty regarding when and whether a broker-dealer holds a 
digital asset security in its possession or control creates greater 
risk for customers that their securities will not be able to be 
returned in the event of a broker-dealer failure. See id. The Staff 
concluded that these concerns were likely to be inconsistent with 
the expectations of persons who would use a broker-dealer to custody 
their digital asset securities. In light of these concerns, the 
creation and redemption and processes of the Fund have been 
structured so that APs are not required to take custody of, or have 
control over, bitcoin at any stage.
---------------------------------------------------------------------------

    APs will be the only persons that may place orders to create and 
redeem Creation Baskets. APs must be (1) either registered broker-
dealers or other securities market participants, such as banks and 
other financial institutions, that are not required to register as 
broker-dealers to engage in securities transactions, and (2) Depository 
Trust Company (``DTC'') participants. An AP is an entity that has 
entered into an Authorized Participant agreement with the Sponsor.
    An AP delivers cash to the Fund in the creation process, and an AP 
receives cash in the redemption process.\112\ The cash delivered or 
received during the creation or redemption process is then used by the 
Sponsor to purchase or sell CME Bitcoin Futures Contracts with an 
aggregate market value that approximates the amount of cash received or 
paid upon the creation or redemption. On a daily basis, the Sponsor 
will analyze the current portfolio allocation of the Fund between 
bitcoin and CME Bitcoin Futures Contracts and decide whether to engage 
in an EFP transaction through the CME Bitcoin Futures Market to buy or 
sell bitcoin for the equivalent position in CME Bitcoin Futures 
Contracts.
---------------------------------------------------------------------------

    \112\ The APs will deliver only cash to create Shares and will 
receive only cash when redeeming Shares. Further, APs will not 
directly or indirectly purchase, hold, deliver, or receive bitcoin 
as part of the creation or redemption process or otherwise direct 
the Trust or a third party with respect to purchasing, holding, 
delivering, or receiving bitcoin as part of the creation or 
redemption process. To the extent applicable, the Fund will create 
shares by receiving bitcoin from a third party that is not the AP 
and the Fund--not the AP--is responsible for selecting the third 
party to deliver the bitcoin. Further, the third party will not be 
acting as an agent of the AP with respect to the delivery of the 
bitcoin to the trust or acting at the direction of the AP with 
respect to the delivery of the bitcoin to the Fund. The Fund will 
redeem shares by delivering bitcoin to a third party that is not the 
AP and the Fund--not the AP--is responsible for selecting the third 
party to receive the bitcoin. Further, the third party will not be 
acting as an agent of the AP with respect to the receipt of the 
bitcoin from the Fund or acting at the direction of the AP with 
respect to the receipt of the bitcoin from the Fund.
---------------------------------------------------------------------------

Creation Procedures
    According to the Registration Statement, on any ``Business Day,'' 
an AP may place an order with the Fund's Transfer Agent to create one 
or more Creation Baskets. For purposes of processing both purchase and 
redemption orders, a ``Business Day'' means any day other than a day 
when the CME Bitcoin Futures Market or the New York Stock Exchange is 
closed for regular trading. Purchase orders for Creation Baskets must 
be placed by 3:00 p.m. EST or one hour prior to the close of trading on 
the New York Stock Exchange, whichever is earlier. The day on which the 
distributor(s) engaged by the Sponsor receives a valid purchase order 
is referred to as the purchase order date. If the purchase order is 
received after the applicable cut-off time, the purchase order date 
will be the next Business Day. Purchase orders are irrevocable.
    By placing a purchase order, an AP agrees to deposit cash with the 
Cash Custodian.
Determination of Required Deposits
    According to the Registration Statement, the total deposit required 
to create each basket (``Creation Basket Deposit'') is an amount of 
cash and/or cash equivalents in the same proportion to the total assets 
of the Fund (net of estimated accrued but unpaid fees, expenses and 
other liabilities) on the purchase order date as the proportion of the 
number of Shares to be created under the purchase order to the total

[[Page 2464]]

number of Shares outstanding on the purchase order date. The Sponsor 
determines, directly in its sole discretion or in consultation with the 
Cash Custodian and the Sub-Administrator, the requirements for cash 
and/or cash equivalents, including the remaining maturities of the cash 
equivalents, which may be included in deposits to create baskets. If 
cash equivalents are to be included in a Creation Basket Deposit for 
orders placed on a given business day, the Sub-Administrator will 
publish an estimate of the Creation Basket Deposit requirements at the 
beginning of such day.
Delivery of Required Deposits
    According to the Registration Statement, an AP who places a 
purchase order is responsible for transferring to the Fund's account 
with the Cash Custodian the required amount of cash and cash 
equivalents by the end of the next business day following the purchase 
order date or by the end of such later business day, not to exceed 
three business days after the purchase order date, as agreed to between 
the AP and the Cash Custodian when the purchase order is placed (the 
``Purchase Settlement Date''). Upon receipt of the deposit amount, the 
Cash Custodian directs DTC to credit the number of baskets ordered to 
the AP's DTC account on the Purchase Settlement Date. Because orders to 
purchase baskets must be placed by 3:00 p.m. E.T., but the total 
payment required to create a basket during the continuous offering 
period will not be determined until 4:00 p.m. E.T. on the date the 
purchase order is received, APs will not know the total amount of the 
payment required to create a basket at the time they submit an 
irrevocable purchase order for the basket. The Fund's NAV and the total 
amount of the payment required to create a basket could rise or fall 
substantially between the time an irrevocable purchase order is 
submitted and the time the amount of the purchase price in respect 
thereof is determined.
Suspension and Rejection of Purchase Orders
    According to the Registration Statement, the Sponsor has the 
discretion to suspend purchase orders or delay their settlement in 
specific situations. These situations may include (1) exchange closures 
or trading restrictions, (2) emergencies affecting the handling of cash 
equivalents, (3) shareholder protection needs, (4) potential price 
limit restrictions on CME Bitcoin Futures Contracts, or (5) 
circumstances in which it would not be in the best interest of the Fund 
or its investors to accept purchase orders. Purchase orders must 
conform to the criteria outlined in the AP agreement and be for whole 
baskets. The Sponsor may suspend orders that do not meet these 
criteria. The Sponsor, acting by itself or through the distributor or 
Transfer Agent, may reject a purchase order or a Creation Basket 
Deposit if: (a) it determines that, due to position limits or 
otherwise, investment alternatives that will enable the Fund to meet 
its investment objective are not available or practicable at that time; 
(b) it determines that the purchase order or the Creation Basket 
Deposit is not in proper form; (c) it believes that acceptance of the 
purchase order or the Creation Basket Deposit would have adverse tax 
consequences to the Fund or its investors; (d) the acceptance or 
receipt of the Creation Basket Deposit would, in the opinion of counsel 
to the Sponsor, be unlawful; (e) circumstances outside the control of 
the Sponsor make it, for all practical purposes, not feasible to 
process creations of baskets; (f) there is a possibility that any or 
all of the CME Bitcoin Futures Contracts of the Fund from which the NAV 
of the Fund is calculated will be priced at a dynamic price limit 
restriction; \113\ or (g) if, in the sole discretion of the Sponsor, 
the execution of such an order would not be in the best interest of the 
Fund or its investors.
---------------------------------------------------------------------------

    \113\ The CME imposes a maximum permitted price range for 
futures contracts in each trading session on its futures markets. 
When markets reach their price limits, the CME may temporarily halt 
trading until such price limits can be expanded, remain price 
limited, or suspend trading for the day, based on relevant 
regulatory provisions. CME Bitcoin Futures Contracts, like other 
futures contracts on the CME, are subject to price limits on a 
dynamic basis. At the commencement of each trading day, CME Bitcoin 
Futures Contracts are assigned a price limit variant, which equals a 
percentage of the prior day's settlement price, or a price deemed 
appropriate by the CME. During the trading day, the price limit 
variant is applied in rolling 60-minute look-back periods to 
establish dynamic lower and upper price fluctuation limits. Price 
limits for CME Bitcoin Futures Contracts are published at https://www.cmegroup.com/trading/price-limits.html#cryptocurrencies.
---------------------------------------------------------------------------

Redemption Procedures
    According to the Registration Statement, the procedures by which an 
AP can redeem one or more Redemption Baskets will mirror the procedures 
for the creation of Creation Baskets. On any Business Day, an AP may 
place an order with the Transfer Agent to redeem one or more Redemption 
Baskets.
    The redemption procedures allow APs to redeem Redemption Baskets. 
Individual shareholders may not redeem directly from the Fund. By 
placing a redemption order, an AP agrees to deliver the Redemption 
Baskets to be redeemed through DTC's book entry system to the Fund by 
the end of the next Business Day following the effective date of the 
redemption order or by the end of such later business day (``Redemption 
Settlement Date'').
Determination of Redemption Distribution
    According to the Registration Statement, the redemption 
distribution from the Fund will consist of an amount of cash and/or 
cash equivalents that is in the same proportion to the total assets of 
the Fund on the date that the order to redeem is properly received as 
the number of Shares to be redeemed under the redemption order is in 
proportion to the total number of Shares outstanding on the date the 
order is received.
Delivery of Redemption Distribution
    The redemption distribution due from a Fund will be delivered to 
the AP on the Redemption Settlement Date if the Fund's DTC account has 
been credited with the baskets to be redeemed. If the Fund's DTC 
account has not been credited with all of the baskets to be redeemed by 
the end of such date, the redemption distribution will be delivered to 
the extent of whole baskets received. Any remainder of the redemption 
distribution will be delivered on the next business day after the 
Redemption Settlement Date to the extent of remaining whole baskets 
received. Pursuant to information from the Sponsor, the Cash Custodian 
will also be authorized to deliver the redemption distribution 
notwithstanding that the baskets to be redeemed are not credited to the 
Fund's DTC account by 12:00 p.m. E.T. on the Redemption Settlement Date 
if the AP has collateralized its obligation to deliver the baskets 
through DTC's book-entry system on such terms as the Sponsor may from 
time to time determine.
Availability of Information
    The NAV for the Fund's Shares will be calculated and disseminated 
daily and will be made available to all market participants at the same 
time. The intraday, closing prices, and settlement prices of the CME 
Bitcoin Futures Contracts will be readily available from the CME 
website, automated quotation systems, published or other public 
sources, or major market data vendors. Information regarding market 
price and trading volume of the Shares will be continually available on 
a real-time basis throughout the day on brokers' computer screens and 
other electronic services. Information regarding the

[[Page 2465]]

previous day's closing price and trading volume information for the 
Shares will be published daily in the financial section of newspapers.
    Real-time data for CME Bitcoin Futures Contracts will be available 
by subscription through on-line information services. ICE Futures U.S. 
and CME also provide delayed futures and options on futures information 
on current and past trading sessions and market news free of charge on 
their respective websites. The specific contract specifications for CME 
Bitcoin Futures Contracts will also be available on such websites, as 
well as other financial informational sources. The spot price of 
bitcoin is available on a 24-hour basis from major market data vendors, 
including Bloomberg and Reuters. Information relating to trading, 
including price and volume information, in bitcoin will be available 
from major market data vendors and from the trading platforms on which 
bitcoin is traded. EFP transaction volumes are reported daily, by 
instrument, on the CME website.\114\
---------------------------------------------------------------------------

    \114\ Pricing information for EFP transactions in CME Bitcoin 
Futures Contracts is reported to the CME Bitcoin Futures Market but 
is not publicly available.
---------------------------------------------------------------------------

    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. Quotation information 
for cash equivalents and commodity futures may be obtained from brokers 
and dealers who make markets in such instruments. Intra-day price and 
closing price level information for the Benchmark will be available 
from major market data vendors. The real-time version of the Benchmark 
value, NQBTC-RT, will be disseminated once every 15 seconds during the 
Core Trading Session. The Benchmark components and methodology will be 
made publicly available. The IFV will be available through on-line 
information services.
    In addition, the Fund's website, https://hashdex-etfs.com/, will 
display the applicable end of day closing NAV. The daily holdings of 
the Fund will be available on the Fund's website. The Fund's website 
will also include a form of the prospectus for the Fund that may be 
downloaded. The website will include the Shares' ticker and CUSIP 
information along with additional quantitative information updated on a 
daily basis, including: (1) the prior Business Day's reported NAV and 
closing price and a calculation of the premium and discount of the 
closing price or mid-point of the bid/ask spread at the time of NAV 
calculation (the ``Bid/Ask Price'') against the NAV; and (2) data in 
chart format displaying the frequency distribution of discounts and 
premiums of the daily closing price or Bid/Ask Price against the NAV, 
within appropriate ranges, for at least each of the four previous 
calendar quarters. The website disclosure of portfolio holdings will be 
made daily and will include, as applicable, (i) the name, quantity, 
price, and market value of the Fund's holdings, (ii) the counterparty 
to and value of forward contracts and any other financial instruments 
tracking the Benchmark, and (iii) the total cash and cash equivalents 
held in the Fund's portfolio, if applicable.
    The Fund's website will be publicly available at the time of the 
public offering of the Shares and accessible at no charge.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Fund.\115\ Trading in Shares of the Fund 
will be halted if the circuit breaker parameters in NYSE Arca Rule 
7.12-E have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable. These may include: (1) the extent to 
which trading is not occurring in the CME Bitcoin Futures Market \116\ 
and in the securities and/or the financial instruments composing the 
daily disclosed portfolio of the Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
---------------------------------------------------------------------------

    \115\ See NYSE Arca Rule 7.12-E.
    \116\ The Sponsor believes that, under normal market conditions, 
interruptions or trading halts in individual spot bitcoin markets 
are unlikely to impact trading in the Shares unless trading in the 
CME Bitcoin Futures Market is also impacted.
---------------------------------------------------------------------------

    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the IFV or the value of the 
Benchmark occurs. The real-time version of the Benchmark value (NQBTC-
RT) will be disseminated once every 15 seconds during the Core Trading 
Session. The Benchmark components and methodology will be made publicly 
available. If the interruption to the dissemination of the IFV, or to 
the value of the Benchmark persists past the trading day in which it 
occurred, the Exchange will halt trading no later than the beginning of 
the trading day following the interruption. In addition, if the 
Exchange becomes aware that the NAV with respect to the Shares is not 
disseminated to all market participants at the same time, it will halt 
trading in the Shares until such time as the NAV is available to all 
market participants.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in 
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading 
Sessions). The Exchange has appropriate rules to facilitate 
transactions in the Shares during all trading sessions. As provided in 
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting 
and entry of orders in equity securities traded on the NYSE Arca 
Marketplace is $0.01, with the exception of securities that are priced 
less than $1.00 for which the MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Rule 8.500-E. The trading of the Shares will 
be subject to NYSE Arca Rule 8.500E(f), which sets forth certain 
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting 
as registered market makers in Trust Units to facilitate surveillance. 
Pursuant to NYSE Arca Rule 8.500-E(f), an ETP Holder acting as a 
registered market maker in Trust Units must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the market maker may have or over which it may 
exercise investment discretion. No market maker shall trade in an 
underlying commodity, related commodity futures or options on commodity 
futures, or any other related commodity derivatives, in an account in 
which a market maker, directly or indirectly, controls trading 
activities, or has a direct interest in the profits or losses thereof, 
which has not been reported to the Exchange as required by this Rule. 
In addition to the existing obligations under Exchange rules regarding 
the production of books and records, the ETP Holder acting as a market 
maker in Trust Units shall make available to the Exchange such books, 
records or other information pertaining to transactions by such entity 
or registered or non-registered employee affiliated with such entity 
for its or their own accounts for trading the underlying physical 
commodity, related commodity futures or options on commodity futures, 
or any other related commodity

[[Page 2466]]

derivatives, as may be requested by the Exchange.
    For initial and continued listing as proposed herein, the Fund will 
be in compliance with Rule 10A-3 under the Act, and the Trust will rely 
on the exception contained in Rule 10A-3(c)(7).\117\ A minimum of 
50,000 Shares of the Fund will be outstanding at the commencement of 
trading on the Exchange.
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    \117\ See Rule 10A-3(c)(7), 17 CFR 240.10A-3(c)(7) (stating that 
a listed issuer is not subject to the requirements of Rule 10A-3 if 
the issuer is organized as an unincorporated association that does 
not have a board of directors and the activities of the issuer are 
limited to passively owning or holding securities or other assets on 
behalf of or for the benefit of the holders of the listed 
securities).
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Surveillance
    The Exchange represents that trading in the Shares of the Fund will 
be subject to the existing trading surveillances administered by the 
Exchange, as well as cross-market surveillances administered by FINRA 
on behalf of the Exchange, which are designed to detect violations of 
Exchange rules and applicable federal securities laws.\118\ The 
Exchange represents that these procedures are adequate to properly 
monitor Exchange trading of the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and federal securities 
laws applicable to trading on the Exchange.
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    \118\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
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    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and the Fund's 
holdings with other markets and other entities that are members of the 
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may 
obtain trading information regarding trading in the Shares and the 
Fund's holdings from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares and the 
Fund's holdings from markets and other entities that are members of ISG 
or with which the Exchange has in place a comprehensive surveillance-
sharing agreement (``CSSA''). The Exchange is also able to obtain 
information regarding trading in the Shares, the underlying bitcoin, 
CME Bitcoin Futures Contracts, options on bitcoin futures, or any other 
bitcoin derivative through ETP Holders, in connection with such ETP 
Holders' proprietary or customer trades which they effect through ETP 
Holders on any relevant market. The Exchange can obtain market 
surveillance information, including customer identity information, with 
respect to transactions (including transactions in futures contracts) 
occurring on US futures exchanges, which are members of the ISG. In 
addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    Under NYSE Arca Rule 8.500-E(f), an ETP Holder acting as a 
registered market maker in the Shares is required to provide the 
Exchange with information relating to its trading in the underlying 
physical commodity, related commodity futures or options on commodity 
futures, or any other related commodity derivatives. Commentary .04 of 
NYSE Arca Rule 11.3-E requires an ETP Holder acting as a registered 
market maker, and its affiliates, in the Shares to establish, maintain 
and enforce written policies and procedures reasonably designed to 
prevent the misuse of any material nonpublic information with respect 
to such products, any components of the related products, any physical 
asset or commodity underlying the product, applicable currencies, 
underlying indexes, related futures or options on futures, and any 
related derivative instruments (including the Shares). As a general 
matter, the Exchange has regulatory jurisdiction over its ETP Holders 
and their associated persons, which include any person or entity 
controlling an ETP Holder. To the extent the Exchange may be found to 
lack jurisdiction over a subsidiary or affiliate of an ETP Holder that 
does business only in commodities or futures contracts, the Exchange 
could obtain information regarding the activities of such subsidiary or 
affiliate through surveillance sharing agreements with regulatory 
organizations of which such subsidiary or affiliate is a member.
    CME Bitcoin Futures Contracts held by the Fund will be listed on an 
exchange that is a member of the ISG or is a market with which the 
Exchange has a CSSA.\119\
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    \119\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Fund may trade on markets that are members of ISG or with which the 
Exchange has in place a CSSA.
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    All statements and representations made in this filing regarding 
(a) the description of the portfolio or reference asset, (b) 
limitations on portfolio holdings or reference assets, or (c) the 
applicability of Exchange listing rules specified in this rule filing 
shall constitute continued listing requirements for listing the Shares 
on the Exchange.
    The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by the Fund to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Fund is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
    Prior to the commencement of trading of the Shares, the Exchange 
will inform its ETP Holders in an information bulletin (``Information 
Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Information Bulletin will discuss 
the following: (1) the risks involved in trading the Shares during the 
Early and Late Trading Sessions when an updated IFV will not be 
calculated or publicly disseminated; (2) the procedures for purchases 
and redemptions of Shares in Creation Baskets and Redemption Baskets 
(and that Shares are not individually redeemable); (3) NYSE Arca Rule 
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to 
learn the essential facts relating to every customer prior to trading 
the Shares; (4) how information regarding the IFV is disseminated; (5) 
how information regarding portfolio holdings is disseminated; (6) the 
requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (7) trading information.
    In addition, the Information Bulletin will advise ETP Holders, 
prior to the commencement of trading, of the prospectus delivery 
requirements applicable to the Fund. The Exchange notes that investors 
purchasing Shares directly from the Fund will receive a prospectus. ETP 
Holders purchasing Shares from the Fund for resale to investors will 
deliver a prospectus to such investors. The Information Bulletin will 
also discuss any exemptive, no-action, and interpretive relief granted 
by the Commission from any rules under

[[Page 2467]]

the Act. In addition, the Information Bulletin will reference that the 
Fund is subject to various fees and expenses described in the 
Registration Statement.
    The Information Bulletin will also reference the fact that there is 
no regulated source of last sale information regarding bitcoin, that 
the Commission has no jurisdiction over the trading of Bitcoin as a 
commodity, and that the CFTC has regulatory jurisdiction over the 
trading of bitcoin futures contracts and options on bitcoin futures 
contracts.
    The Information Bulletin will also disclose the trading hours of 
the Shares and that the NAV for the Shares will be calculated after 
4:00 p.m. E.T. each trading day. The Information Bulletin will disclose 
that information about the Shares will be publicly available on the 
Fund's website.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \120\ that an exchange have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \120\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest 
because it reflects the Fund's proposed investment strategy, through 
which the Fund would seek to achieve its investment objectives by 
investing in both CME Bitcoin Futures Contracts and bitcoin, in 
addition to being able to hold part of its net assets in cash. The 
Exchange believes that the Fund's strategy of holding a mix of bitcoin, 
CME Bitcoin Futures Contracts, and cash would remove impediments to and 
perfect the mechanism of a free market and protect investors and the 
public interest, offering investors exposure to bitcoin without relying 
on unregulated products or markets. The Exchange also believes that the 
Sponsor has designed the Fund to include features intended to provide a 
robust framework for mitigating the risks of market manipulation, such 
as its proposed use of futures-based pricing for bitcoin in calculating 
the Fund's NAV, EFP transactions through the CME Bitcoin Futures Market 
to acquire and dispose of bitcoin, and cash creations and redemptions, 
which would remove impediments to and perfect the mechanism of a free 
and open market and promote the protection of investors and the public 
interest. Finally, the Exchange believes that, given these features of 
the Fund, the CME Bitcoin Futures Market should be considered the 
regulated market of significant size in relation to the Fund and that 
there is a reasonable likelihood that a person attempting to manipulate 
the Fund would also have to trade on the CME Bitcoin Futures Market to 
do so, such that information shared between CME and NYSE Arca pursuant 
their common ISG membership would aid NYSE Arca in detecting and 
deterring potential misconduct, and that it is unlikely that trading in 
the Fund would be the predominant influence on the CME Bitcoin Futures 
Market.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices and to protect 
investors and the public interest in that the Shares would be listed 
and traded on the Exchange pursuant to the initial and continued 
listing criteria in NYSE Arca Rule 8.500-E. The Exchange has in place 
surveillance procedures that are adequate to properly monitor trading 
in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws. 
The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and the Fund's 
holdings with other markets and other entities that are members of the 
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may 
obtain trading information regarding trading in the Shares and the 
Fund's holdings from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares and the 
Fund's holdings from markets and other entities that are members of ISG 
or with which the Exchange has in place a CSSA. The Exchange is also 
able to obtain information regarding trading in the Shares and the 
Fund's holdings through ETP Holders, in connection with such ETP 
Holders' proprietary or customer trades which they effect through ETP 
Holders on any relevant market. The Exchange can obtain market 
surveillance information, including customer identity information, with 
respect to transactions (including transactions in CME Bitcoin Futures 
Contracts) occurring on US futures exchanges, which are members of the 
ISG. The intraday, closing prices, and settlement prices of CME Bitcoin 
Futures Contracts and bitcoin will be readily available from the 
applicable futures exchange websites, automated quotation systems, 
published or other public sources, or major market data vendors website 
or on-line information services. Information regarding market price and 
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other 
electronic services.
    Real-time data for CME Bitcoin Futures Contracts will be available 
by subscription from on-line information services. ICE Futures U.S. and 
CME also provide delayed futures information on current and past 
trading sessions and market news free of charge on the Fund's website. 
The specific contract specifications for CME Bitcoin Futures Contracts 
will also be available on such websites, as well as other financial 
informational sources. The spot price of bitcoin is available on a 24-
hour basis from major market data vendors, including Bloomberg and 
Reuters. Information relating to trading, including price and volume 
information, in bitcoin will be available from major market data 
vendors and from the trading platforms on which bitcoin is traded. EFP 
transaction volumes are reported daily, by instrument, on the CME 
website. Quotation and last-sale information regarding the Shares will 
be disseminated through the facilities of the CTA. The IFV will be 
disseminated on a per Share basis every 15 seconds during the 
Exchange's Core Trading Session and be widely disseminated by one or 
more major market data vendors during the NYSE Arca Core Trading 
Session. The Fund's website will also include a form of the prospectus 
for the Fund that may be downloaded. The website will include the 
Share's ticker and CUSIP information along with additional quantitative 
information updated on a daily basis, including, for the Fund: (1) the 
prior business day's reported NAV and closing price and a calculation 
of the premium and discount of the closing price or mid-point of the 
Bid/Ask Price against the NAV; and (2) data in chart format displaying 
the frequency distribution of discounts and premiums of the daily 
closing price or Bid/Ask Price against the NAV, within appropriate 
ranges, for at least each of the four previous calendar quarters. The 
website disclosure of portfolio holdings will be made daily and will 
include, as applicable, (i) the name, quantity, price, and market value 
of CME Bitcoin Futures Contracts, (ii) the counterparty to and value of 
forward contracts, and

[[Page 2468]]

(iii) other financial instruments, if any, and the characteristics of 
such instruments and cash equivalents, and amount of cash held in the 
Fund's portfolio, if applicable.
    Trading in Shares of the Fund will be halted if the circuit breaker 
parameters in NYSE Arca Rule 7.12-E have been reached or because of 
market conditions or for reasons that, in the view of the Exchange, 
make trading in the Shares inadvisable. These may include: (1) the 
extent to which trading is not occurring in BTC and/or MBT Contracts 
and the securities and/or the financial instruments composing the daily 
disclosed portfolio of the Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
Trust Units based on bitcoin that will enhance competition among market 
participants, to the benefit of investors and the marketplace. As noted 
above, the Exchange has in place surveillance procedures that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of the 
Shares, which are Trust Units based on bitcoin and that will enhance 
competition among market participants, to the benefit of investors and 
the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NYSEARCA-2023-58 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-NYSEARCA-2023-58. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NYSEARCA-2023-58 and should 
be submitted on or before February 2, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\121\
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    \121\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00498 Filed 1-11-24; 8:45 am]
BILLING CODE 8011-01-P

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