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Notice2021-26860

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade Shares of the Valkyrie XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g)

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Published
December 13, 2021

Issuing agencies

Securities and Exchange Commission

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<title>Federal Register, Volume 86 Issue 236 (Monday, December 13, 2021)</title>
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[Federal Register Volume 86, Number 236 (Monday, December 13, 2021)]
[Notices]
[Pages 70882-70885]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-26860]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93731; File No. SR-NASDAQ-2021-066]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change, as Modified by Amendment No. 1, To List and Trade 
Shares of the Valkyrie XBTO Bitcoin Futures Fund Under Nasdaq Rule 
5711(g)

December 7, 2021.
    On August 23, 2021, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Valkyrie XBTO Bitcoin Futures Fund (``Trust'') under Nasdaq Rule 
5711(g). On August 25, 2021, Nasdaq filed Amendment No. 1 to the 
proposed rule change. The proposed rule change, as modified by 
Amendment No. 1, was published for comment in the Federal Register on 
September 9, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92865 (Sept. 2, 
2021), 86 FR 50570 (Sept. 9, 2021) (``Notice'').
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    On September 29, 2021, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ The Commission has received no comments on the proposed rule 
change. This order institutes proceedings under Section 19(b)(2)(B) of 
the Act \6\ to determine whether to approve or disapprove the proposed 
rule change, as modified by Amendment No. 1.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 93172, 86 FR 55071 
(Oct. 5, 2021). The Commission designated December 8, 2021, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ the Exchange proposes 
to list and trade the Shares of the Trust under Nasdaq Rule 5711(g), 
which governs the listing and trading of Commodity Futures Trust Shares 
on the Exchange.
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    \7\ See Notice, supra note 3.
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    The investment objective of the Trust is for the Shares to reflect 
the performance of bitcoin as represented by the CME CF Bitcoin 
Reference Rate (``CME CF BRR''), less the Trust's liabilities and 
expenses.\8\ The CME CF BRR aggregates the trade flow of major bitcoin 
spot platforms during a specific calculation window into a one-a-day 
reference rate of the U.S. dollar price of bitcoin.\9\ The Trust 
pursues its investment objective primarily by investing in bitcoin 
futures (``Bitcoin Futures'') that are cash-settled and traded on 
commodity exchanges registered with the Commodity Futures Trading 
Commission (``CFTC'').\10\ At

[[Page 70883]]

expiration, the cash settlement amount for the Bitcoin Futures held by 
the Trust will be determined by comparing the price at which the Trust 
purchased the futures contract on the relevant futures exchange with 
the reference rate specified by that exchange on the expiration 
date.\11\ The Trust does not invest in bitcoin or other digital assets 
directly. In addition to the Trust's investments in Bitcoin Futures, 
the Trust expects to have significant holdings of cash and high-
quality, short-term debt instruments that have terms-to-maturity of 
less than 397 days, such as U.S. government securities and repurchase 
agreements (``Money Market Instruments'').\12\
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    \8\ See id. at 50574. Valkyrie Funds LLC (``Sponsor'') serves as 
the Trust's sponsor and commodity pool operator; Vident Investment 
Advisory, LLC (``Sub-Advisor'') serves as the Trust's sub-advisor 
and commodity trading advisor; and XBTO Trading, LLC is the research 
provider for the Sponsor and the Sub-Advisor. Delaware Trust Company 
serves as the trustee for the Trust. The Sponsor is currently 
considering third-party service providers for the roles of 
administrator, transfer agent, custodian, and marketing agent. See 
id. at 50571.
    \9\ See id. at 50573 n.8. According to the Exchange, calculation 
rules are geared toward maximum transparency and real-time 
replicability in underlying spot markets, including Bitstamp, 
Coinbase, Gemini, itBit, and Kraken. See id.
    \10\ See id. at 50574. The Exchange also represents that it will 
pursue its investment objective solely by holding Bitcoin Futures 
that are cash-settled and traded on the Chicago Mercantile Exchange, 
Inc. (``CME''). See id. at 50571.
    \11\ For example, the CME has specified that the reference rate 
for its Bitcoin Futures will be a volume-weighted composite of 
Bitcoin prices on multiple bitcoin platforms. See id. at 50574.
    \12\ See id.
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    The net asset value (``NAV'') of the Trust will be determined in 
accordance with Generally Accepted Accounting Principles as the total 
value of bitcoin held by the Trust, plus any cash or other assets, less 
any liabilities including accrued but unpaid expenses. The NAV per 
Share will be determined by dividing the NAV of the Trust by the number 
of Shares outstanding. The NAV of the Trust is typically determined as 
of 4:00 p.m. E.T., on each day the Shares trade on the Exchange 
(``Business Day''). The Trust's daily activities are generally not 
reflected in the NAV determined for the Business Day on which the 
transactions are effected (the trade date), but rather on the following 
Business Day. Bitcoin Futures traded on a U.S. exchange are generally 
valued using the last traded price before the NAV calculation time on 
the date with respect to which the NAV is being determined. Money 
Market Instruments will generally be valued at their market price using 
market quotations or information provided by a pricing service.\13\
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    \13\ See id. at 50574-75.
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    On each Business Day, before commencement of trading in Shares 
during regular trading hours, the Trust will disclose on its website 
the portfolio that will form the basis for the Trust's calculation of 
NAV at the end of the Business Day.\14\ The Trust's website will 
provide an intra-day indicative value (``IIV'') per Share updated every 
15 seconds, as calculated by the Exchange or a third-party financial 
data provider during the Exchange's Regular Market Session (9:30 a.m. 
to 4:00 p.m. E.T.). The IIV will be calculated by using the prior day's 
closing NAV per Share as a base and updating that value during the 
Exchange's Regular Market Session to reflect changes in the value of 
the Trust's NAV during the trading day.\15\ Intraday price information 
for Bitcoin Futures is available directly from the applicable listing 
venue and through subscription services, such as Bloomberg and Thomson 
Reuters, which can be accessed by authorized participants (as defined 
herein) and other investors. Intraday price quotations on Money Market 
Instruments of the type held by the Trust are available from major 
broker-dealer firms and from third-parties, and pricing information 
related to Money Market Instruments will also be available through 
issuer websites and publicly available quotation services such as 
Bloomberg, Markit, and Thomson Reuters.\16\
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    \14\ See id. at 50582.
    \15\ See id. at 50580.
    \16\ See id. at 50583.
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    The Trust would issue and redeem Shares on a continuous basis at 
NAV per Share in large, specified blocks of Shares (``Creation Units'') 
in transactions with broker-dealers and large institutional investors 
that have entered into participation agreements (``Authorized 
Participants''). The Exchange currently anticipates that a Creation 
Unit will consist of 50,000 Shares, although this number may change 
from time to time. In addition, the Exchange currently expects that the 
Trust's Creation Units will generally be issued and redeemed for 
cash.\17\
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    \17\ See id. at 50579-80. Upon the request of an Authorized 
Participant made at the time of a redemption order, the Sponsor at 
its sole discretion may determine, in addition to delivering 
redemption proceeds, to transfer futures contracts to the Authorized 
Participant pursuant to an exchange of a futures contract for 
related position or to a block trade sale of futures contracts to 
the Authorized Participant. See id. at 50580.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2021-066 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \18\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \18\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\19\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \20\
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    \19\ Id.
    \20\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\21\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
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    \21\ See Notice, supra note 3.
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    1. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices?
    2. The Exchange asserts that ``bitcoin and its surrounding 
ecosystem have evolved sufficiently to support the approval of a 
Bitcoin Futures ETF because the concerns the Commission has identified 
previously have been addressed.'' \22\ The Exchange also asserts that 
``the Bitcoin Futures market has sufficiently developed since the prior 
disapproval orders such that the market for Bitcoin Futures now 
resembles the market for other commodities at the time the related 
commodity futures-based ETP was approved for listing.'' \23\ What are 
commenters' views regarding such assertions? Are the developments that 
the Exchange identifies sufficient to support a determination that the 
proposal to list and trade the Shares is designed to protect investors 
and the public interest and is consistent with the other applicable 
requirements of Section 6(b)(5) of the Act?
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    \22\ See id. at 50571.
    \23\ See id. at 50575.
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    3. According to the Exchange, ``[n]early every measurable metric 
related to CME Bitcoin Futures has trended consistently up since launch

[[Page 70884]]

and/or accelerated upward in the past year.'' \24\ The Exchange asserts 
that ``both the bitcoin and bitcoin futures markets have developed to 
the point that the CME Bitcoin Futures market is a `regulated market of 
significant size.' '' \25\ Based on data provided and the academic 
research cited by the Exchange, do commenters agree that the CME 
Bitcoin Futures market now represents a regulated market of significant 
size? \26\ What are commenters' views on whether there is a reasonable 
likelihood that a person attempting to manipulate the Shares would also 
have to trade on the CME to manipulate the Shares?
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    \24\ See id. at 50573.
    \25\ See id. at 50571.
    \26\ See id. at 50576-78.
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    4. The Exchange states it believes that ``trading in the Shares 
would not be the predominant force on prices in the Bitcoin Futures 
market'' because of the significant volume in the Bitcoin Futures 
market, the size of bitcoin's market cap, and the significant liquidity 
available in the spot market.\27\ What are commenters' views on the 
Exchange's assertion and the data provided by the Exchange to support 
such assertion?
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    \27\ See id. at 50578.
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    5. The Exchange asserts that the CME CF BRR is not readily 
susceptible to manipulation due to the design of its methodology, which 
the Exchange believes adequately protects the Trust from potential 
price manipulation.\28\ What are commenters' views on these assertions?
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    \28\ See id. at 50578-79.
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    6. The Exchange asserts the CME's compliance with the CFTC's Core 
Principles for Designated Contract Markets as set forth in the 
Commodity Exchange Act means that the Trust's core asset (i.e., CME 
Bitcoin Futures) is ``a well-regulated instrument that is not readily 
susceptible to manipulation.'' \29\ The Exchange further asserts that 
CME Bitcoin Futures are not readily subject to manipulation or 
distortion because they are cash-settled and subject to real-time trade 
monitoring and comprehensive and accurate trade reconstruction.\30\ 
What are commenters' views regarding the Exchange's assertions? Are the 
Exchange's assertions sufficient to support the determination that the 
proposal to list and trade the Shares is designed to prevent fraudulent 
and manipulative acts and practices and is consistent with the other 
applicable requirements of Section 6(b)(5) of the Act?
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    \29\ See id. at 50579.
    \30\ See id.
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    7. What are commenters' views of the claim that the similarities of 
the operational characteristics and regulatory requirements applicable 
to bitcoin futures-based exchange-traded funds (``ETFs'') that both 
register the sale of their shares under the Securities Act of 1933 
(``1933 Act'') and are regulated under the Investment Company Act of 
1940 (``1940 Act'') and bitcoin futures-based exchange-traded products 
(``ETPs'') that register the sale of their shares under the 1933 Act 
but are not regulated under the 1940 Act are such that these types of 
products should not be treated differently by the Commission? \31\
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    \31\ The Commission previously made a similar request for 
comment in connection with statements made by a sponsor of a 
proposed bitcoin futures-based ETP similar to the Trust. See 
Securities Exchange Act Release No. 93534 (Nov. 8, 2021), 86 FR 
63082, 63084 (Nov. 15, 2021) (SR-NYSEArca-2021-53) (Order 
Instituting Proceedings to Determine Whether to Approve or 
Disapprove a Proposed Rule Change To List and Trade Shares of the 
Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E, 
Commentary .02) (Trust Issued Receipts) (citing to Letter from W. 
Thomas Conner, Vedder Price, on behalf of the sponsor, dated 
September 1, 2021, available at <a href="https://www.sec.gov/comments/sr-nysearca-2021-53/srnysearca202153-9197848-249688.pdf">https://www.sec.gov/comments/sr-nysearca-2021-53/srnysearca202153-9197848-249688.pdf</a>.)).
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\32\
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    \32\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by January 3, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
January 18, 2022.
    Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#057770696028666a6868606b7176457660662b626a73"><span class="__cf_email__" data-cfemail="98eaedf4fdb5fbf7f5f5fdf6ecebd8ebfdfbb6fff7ee">[email&#160;protected]</span></a>. Please include 
File Number SR-NASDAQ-2021-066 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2021-066. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>). 
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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2021-066 and should be submitted 
by January 3, 2022. Rebuttal comments should be submitted by January 
18, 2022.


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26860 Filed 12-10-21; 8:45 am]
BILLING CODE 8011-01-P


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