Notice2024-25529
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Adopt New NYSE Arca Rule 8.800-E To Provide for the Listing and Trading of Commodity- and Digital Asset-Based Investment Interests and To List and Trade Shares of the Grayscale Digital Large Cap Fund LLC
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 4, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 213 (Monday, November 4, 2024)</title>
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[Federal Register Volume 89, Number 213 (Monday, November 4, 2024)]
[Notices]
[Pages 87681-87706]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-25529]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101470; File No. SR-NYSEARCA-2024-87]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Adopt New NYSE Arca Rule 8.800-E To Provide
for the Listing and Trading of Commodity- and Digital Asset-Based
Investment Interests and To List and Trade Shares of the Grayscale
Digital Large Cap Fund LLC
October 29, 2024.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on October 15, 2024, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt new NYSE Arca Rule 8.800-E to
provide for the listing and trading of Commodity- and Digital Asset-
Based Investment Interests, which are securities issued by a trust,
limited liability company, or other similar entity that holds specified
commodities, digital assets, Derivative Securities Products, and/or
cash. The Exchange also proposes to list and trade shares of the
Grayscale Digital Large Cap Fund LLC (the ``Fund'') under proposed NYSE
Arca Rule 8.800-E. The proposed rule change is available on the
Exchange's website at <a href="http://www.nyse.com">www.nyse.com</a>, 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.
[[Page 87682]]
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 adopt new NYSE Arca Rule 8.800-E to
provide for the listing and trading of Commodity- and Digital Asset-
Based Investment Interests, which are securities issued by a trust,
limited liability company, or other similar entity that holds specified
commodities, digital assets, Derivative Securities Products, and/or
cash. The Exchange also proposes to list and trade shares of the Fund
under proposed NYSE Arca Rule 8.800-E.
Proposed Listing Rules
Proposed Rule 8.800-E(a) provides that the Exchange will consider
for trading, whether by listing or pursuant to unlisted trading
privileges, Commodity- and/or Digital Asset-Based Investment Interests
that meet the criteria of this rule. The Exchange will file separate
proposals under Section 19(b) of the Securities Exchange Act of 1934
before trading, either by listing or pursuant to unlisted trading
privileges, Commodity- and/or Digital Asset-Based Investment Interests.
All statements or representations contained in such rule filing
regarding (a) the description of the index, portfolio, or reference
asset, (b) limitations on index or portfolio holdings or reference
assets, or (c) the applicability of Exchange listing rules specified in
such rule filing will constitute continued listing requirements. An
issuer of such securities must notify the Exchange of any failure to
comply with such continued listing requirements. If an issue of
Commodity- and/or Digital Asset-Based Investment Interests does not
satisfy these requirements, the Exchange may halt trading in the
securities and will initiate delisting proceedings pursuant to Rule
5.5-E(m).
Proposed Rule 8.800-E(b) provides that this rule is applicable only
to Commodity- and/or Digital Asset-Based Investment Interests. Except
to the extent inconsistent with this Rule, or unless the context
otherwise requires, the provisions of the Bylaws and all other rules
and procedures of the Board of Directors shall be applicable to the
trading on the Exchange of such securities. Commodity- and/or Digital
Asset-Based Investment Interests are included within the definition of
``security'' or ``securities'' as such terms are used in the Bylaws and
Rules of the Exchange.
Proposed Rule 8.800-E(c)(1) defines a Commodity- and/or Digital
Asset-Based Investment Interest as a security (a) that is issued by a
trust, limited liability company, or other similar entity (the
``Fund'') that holds (1) specified commodities and/or digital assets
deposited with the Fund, or (2) specified commodities and/or digital
assets and, in addition to such specified commodities and/or digital
assets, Derivative Securities Products (as defined in NYSE Arca Rule
1.1) deposited with the Fund and/or cash; (b) that is issued by such
Fund in a specified aggregate minimum number in return for a deposit of
a quantity of the underlying commodity(ies), digital asset(s),
Derivative Securities Products, and/or cash; and (c) that, when
aggregated in the same specified minimum number, may be redeemed at a
holder's request by such Fund which will deliver to the redeeming
holder the quantity of the underlying commodity(ies), digital asset(s),
Derivative Securities Products, and/or cash.
Proposed Rule 8.800-E(c)(2) provides that the term ``commodity,''
as used in this rule, includes commodities as defined in Section 1a(9)
of the Commodity Exchange Act.
Proposed Rule 8.800-E(c)(3) defines the term ``digital asset,'' for
purposes of this rule, as any digital representation of value recorded
on a cryptographically secured, distributed ledger (i.e., blockchain)
or similar technology.
Proposed Rule 8.800-E(d) provides that the Exchange may trade,
either by listing or pursuant to unlisted trading privileges,
Commodity- and/or Digital Asset-Based Investment Interests based on an
underlying commodity(ies), digital asset(s), and/or Derivative
Securities Products. Each issue of a Commodity- and/or Digital Asset-
Based Investment Interest shall be designated as a separate series and
shall be identified by a unique symbol.
Proposed Rule 8.800-E(e)(1) sets forth initial listing criteria for
Commodity- and/or Digital Asset-Based Investment Interests. Proposed
Rule 8.800-E(e)(1)(i) provides that the Exchange will establish a
minimum number of Commodity- and/or Digital Asset-Based Investment
Interests required to be outstanding at the time of commencement of
trading on the Exchange. Proposed Rule 8.800-E(1)(ii) provides that
there shall be no limitation on the percentage of a Fund's portfolio
that may be invested in commodity and/or digital asset holdings, except
that, in the aggregate, at least 90% of the weight of such holdings
shall, on both an initial and continuing basis, consist of commodities
and/or digital assets concerning which the Exchange is able to obtain
information via the Intermarket Surveillance Group (``ISG'') from other
members of the ISG or via a comprehensive surveillance sharing
agreement (``CSSA'').
Proposed Rule 8.800-E(e)(2) and subparagraphs (i) through (viii)
thereunder set forth continued listing criteria for Commodity- and/or
Digital Asset-Based Investment Interests. Proposed Rule 8.800-E(e)(2)
provides that the Exchange will maintain surveillance procedures for
securities listed under this rule and will consider the suspension of
trading in, and will initiate delisting proceedings under NYSE Arca
Rule 5.5-E(m) of, such series under any of the following circumstances:
<bullet> if, following the initial twelve-month period following
commencement of trading on the Exchange of Commodity- and/or Digital
Asset-Based Investment Interests, the Fund has more than 60 days
remaining until termination and there are fewer than 50 record and/or
beneficial holders of Commodity- and/or Digital Asset-Based Investment
Interests (proposed Rule 8.800-E(e)(2)(i));
<bullet> if, following the initial twelve-month period following
commencement of trading on the Exchange of Commodity- and/or Digital
Asset-Based Investment Interests, the Fund has fewer than 50,000
securities issued and outstanding (proposed Rule 8.800-E(e)(2)(ii));
<bullet> if, following the initial twelve-month period following
commencement of trading on the Exchange of Commodity- and/or Digital
Asset-Based Investment Interests, the market value of all securities
issued and outstanding is less than $1,000,000 (proposed Rule 8.800-
E(e)(2)(iii));
<bullet> if the value of the underlying commodity(ies) and/or
digital asset(s) is no longer calculated or available on at least a 15-
second delayed basis from a source unaffiliated with the sponsor, Fund,
custodian or the Exchange (proposed Rule 8.800-E(e)(2)(iv));
<bullet> if the Intra-Day Fund Value is no longer made available on
at least a 15-second delayed basis (proposed Rule 8.800-E(e)(2)(v));
<bullet> if any of the continued listing requirements set forth in
this Rule 8.800-E are not continuously maintained (proposed Rule 8.800-
E(e)(2)(vi));
[[Page 87683]]
<bullet> if the Exchange submits a rule filing pursuant to Section
19(b) of the Securities Exchange Act of 1934 to permit the listing and
trading of a series of Commodity- and/or Digital Asset-Based Investment
Interests and any of the statements or representations regarding (a)
the description of the index, portfolio, or reference asset, (b)
limitations on index or portfolio holdings or reference assets, or (c)
the applicability of Exchange listing rules specified in such rule
filing are not continuously maintained (proposed Rule 8.800-
E(e)(2)(vii)); or
<bullet> if such other event shall occur or condition exists which
in the opinion of the Exchange makes further dealings on the Exchange
inadvisable (proposed Rule 8.800-E(e)(2)(viii)).
Proposed Rule 8.800-E(e)(3) and the subparagraphs thereunder set
forth certain requirements specific to Commodity- and/or Digital Asset-
Based Investment Interests issued by a trust. Proposed Rule 8.800-
E(e)(3)(i) provides that the stated term of a trust shall be as stated
in the trust prospectus; however, a trust may be terminated under such
earlier circumstances as may be specified in the trust prospectus. In
addition, a trust may terminate in accordance with the provisions of
the trust prospectus, which may provide for termination if the value of
the trust falls below a specified amount. Proposed Rule 8.800-
E(e)(3)(ii) provides for the following requirements on an initial and
continued listing basis: (1) that the trustee of a trust must be a
trust company or banking institution having substantial capital and
surplus and the experience and facilities for handling corporate trust
business, and that, in cases where, for any reason, an individual has
been appointed as trustee, a qualified trust company or banking
institution must be appointed co-trustee; and (2) that no change is to
be made in the trustee of a listed issue without prior notice to and
approval of the Exchange.
Proposed Rule 8.800-E(f) provides that, upon termination of a Fund
issuing securities pursuant to Rule 8.800-E, the Exchange requires that
Commodity- and/or Digital Asset-Based Investment Interests issued in
connection with the Fund be removed from Exchange listing.
Proposed Rule 8.800-E(g) provides that voting rights shall be as
set forth in the applicable prospectus of the Fund issuing Commodity-
and/or Digital Asset-Based Investment Interests.
Proposed Rule 8.800-E(h) provides that neither the Exchange nor any
agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions, or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Fund in connection with issuance of Commodity- and/or Digital
Asset-Based Investment Interests; resulting from any negligent act or
omission by the Exchange, or any agent of the Exchange, or any act,
condition or cause beyond the reasonable control of the Exchange, its
agent, including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike;
accident; action of government; communications or power failure;
equipment or software malfunction; or any error, omission or delay in
the reports of transactions in an underlying commodity.
Proposed Rule 8.800-E(i) provides that an ETP Holder acting as a
registered Market Maker in Commodity- and/or Digital Asset-Based
Investment Units with no exposure to a non-U.S. currency or currencies
must file with the Exchange in a manner prescribed by the Exchange and
keep current a list identifying all accounts for trading that a Market
Maker may have or over which it may exercise investment discretion in
an underlying commodity, related commodity futures or options on
commodity futures, or any other related commodity derivatives; an
underlying digital asset, related digital asset futures or options on
digital assets, or any other related digital asset derivatives; or an
underlying series of Derivative Securities Products, related future or
options on such Derivative Securities Products, or any other related
derivatives of such Derivative Securities Products. An ETP Holder
acting as a registered Market Maker in Commodity- and/or Digital Asset-
Based Investment Interests with exposure to one or more non-U.S.
currencies (``Underlying FX'') also must file with the Exchange, in a
manner prescribed by the Exchange, and keep current a list identifying
all accounts for trading in Underlying FX and derivatives overlying
Underlying FX which the Market Maker may have or over which it may
exercise investment discretion, as well as a list of all commodity and
commodity-related accounts referenced above. No Market Maker in
Commodity- and/or Digital-Asset Based Investment Interests shall trade
in a commodity, Underlying FX, or any related derivative in an account
that the Market Maker (1) directly or indirectly controls trading
activities or has a direct interest in the profits or losses thereof,
(2) is required by this rule to disclose to the Exchange, and (3) has
not reported to the Exchange.
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 Commodity- and/or Digital Asset Based Investment
Interests 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,
applicable Underlying FX, or any other related commodity or applicable
Underlying FX derivatives, as may be requested by the Exchange.
Finally, the Exchange proposes to include the following commentary
to Rule 8.800-E. Proposed Commentary .01 provides that ETP Holders
shall provide to all purchasers of newly issued Commodity- and/or
Digital Asset-Based Investment Interests a prospectus for the series of
Commodity- and/or Digital Asset-Based Investment Interests. Proposed
Commentary .02 provides that transactions in Commodity- and/or Digital-
Asset Based Investment Interests will occur during the trading hours
specified in NYSE Arca Rule 7.34-E.
The Exchange also proposes to amend Rule 5.3-E to include
Commodity- and/or Digital Asset-Based Investment Interests listed
pursuant to proposed Rule 8.800-E among the derivative or special
purpose securities that are subject to a limited set of corporate
governance and disclosure policies and to amend Rule 5.3-E(e) to
include Commodity- and/or Digital Asset-Based Investment Interests
listed pursuant to proposed Rule 8.800-E among the derivative or
special purpose securities to which the requirements concerning
shareholder/annual meetings do not apply.
Commodity- and/or Digital Asset-Based Investment Interests listed
and traded pursuant to proposed Rule 8.800-E would be substantially
similar to Commodity-Based Trust Shares listed and traded pursuant to
current Rule 8.201-E, with two main differences. First, whereas
Commodity-Based Trust Shares are issued by a trust, Commodity- and/or
Digital Asset-Based Investment Interests could be issued, as a
proposed, by a trust, limited liability company, or other similar
entity. Second, whereas Commodity-Based Trust Shares are based on an
underlying commodity only, the Exchange proposes that Commodity- and/or
Digital Asset-Based Investment Interests could be
[[Page 87684]]
based on an underlying commodity or commodities, as well as digital
assets and Derivative Securities Products.\4\ The Exchange believes
this flexibility with respect to the structure of the entity issuing
Commodity- and/or Digital Asset-Based Investment Interests and the
holdings underlying such securities would benefit both issuers and the
investing public and would facilitate the availability of a new type of
exchange-traded product (``ETP'').
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\4\ The Exchange notes that the requirement set forth in
proposed Rule 8.800-E(c)(1) regarding digital asset holdings is
based on a similar provision set forth in current Rule 8.600-E
regarding Managed Fund Shares. See Rule 8.600-E, Commentary
.01(d)(1).
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Grayscale Digital Large Cap Fund
The Exchange proposes to list and trade shares (``Shares'') \5\ of
the Fund pursuant to proposed NYSE Arca Rule 8.800-E.\6\
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\5\ The Shares are expected to be listed under the ticker symbol
``GDLC.''
\6\ On May 13, 2021, the Fund filed its registration statement
on Form 10 under the Securities Act (File No. 000-56284) (the
``Registration Statement on Form 10''). On June 28, 2021, the Fund
filed Amendment No. 1 to the Registration Statement on Form 10. On
August 13, 2021, the Fund filed Amendment No. 2 to the Registration
Statement on Form 10. On November 29, 2021, the Fund filed Amendment
No. 3 to the Registration Statement on Form 10. On January 20, 2022,
the Fund filed Amendment No. 4 to the Registration Statement on Form
10. On February 4, 2022, the Fund filed Amendment No. 5 to the
Registration Statement on Form 10. On July 12, 2021, the
Registration Statement on Form 10 was automatically deemed
effective. On September 27, 2021, September 1, 2022, September 1,
2023, and September 6, 2024, the Fund filed its annual report on
Form 10-K under the Securities Act (File No. 000-56284) (the
``Annual Reports''). On November 5, 2021, February 10, 2022, May 6,
2022, November 4, 2022, February 8, 2023, May 5, 2023, November 3,
2023, February 7, 2024, and May 3, 2024, the Fund filed its
quarterly reports on Form 10-Q under the Securities Act (File No.
000-56284) (the ``Quarterly Reports''). The descriptions of the
Fund, the Shares, and the digital assets contained herein are based,
in part, on the Annual Reports and Quarterly Reports. On February 7,
2018, the Fund submitted to the Commission a Form D as a limited
liability company. Shares of the Fund have been quoted on OTC
Market's OTCQX Best Marketplace under the symbol ``GDLC'' since
October 14, 2019. On October 15, 2019 and September 23, 2020, the
Fund published annual reports for GDLC for the periods ended June
30, 2019 and June 30, 2020, respectively. On November 11, 2019,
February 13, 2020, May 8, 2020, November 6, 2020, February 12, 2021,
and May 13, 2021, the Fund published quarterly reports for GDLC for
the periods ended September 30, 2019, December 31, 2019, March 31,
2020, September 30, 2020, December 31, 2020, and March 31, 2021,
respectively. Reports published before October 5, 2020, the date on
which the Fund's Shares became registered pursuant to Section 12(g)
of the Act, can be found on OTC Market's website (<a href="https://www.otcmarkets.com/stock/GDLC/disclosure">https://www.otcmarkets.com/stock/GDLC/disclosure</a>), and reports published on
or after October 5, 2020 can be found on OTC Market's website and
the Commission's website (<a href="https://www.sec.gov/edgar/browse/?CIK=1729997">https://www.sec.gov/edgar/browse/?CIK=1729997</a> &owner=exclude). The Shares will be of the same class
and will have the same rights as shares of GDLC. According to
Grayscale Investments, LLC, freely tradeable shares of GDLC will
remain freely tradeable Shares on the date of the listing of the
Shares that are unregistered under the Securities Act. Restricted
shares of GDLC will remain subject to private placement restrictions
on such date, and the holders of such restricted shares will
continue to hold those Shares subject to those restrictions until
they become freely tradeable Shares.
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The manager of the Fund is Grayscale Investments, LLC
(``Manager''), a Delaware limited liability company. The Manager is a
wholly owned indirect subsidiary of Digital Currency Group, Inc.
(``Digital Currency Group''). The custodian for the Fund is Coinbase
Custody Trust Company, LLC (``Custodian'').\7\ The administrator and
transfer agent of the Fund will be BNY Mellon Asset Servicing, a
division of The Bank of New York Mellon (the ``Transfer Agent''). The
distribution and marketing agent for the Fund will be Foreside Fund
Services, LLC (the ``Marketing Agent''). The index provider and digital
asset reference rate provider for the Fund is CoinDesk Indices, Inc.
(the ``Index Provider'' and the ``Reference Rate Provider'').
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\7\ According to the Annual Report, Digital Currency Group owns
a minority interest in Coinbase, Inc., which is the parent company
of the Custodian, representing less than 1.0% of its equity.
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The Fund is a Cayman Islands limited liability company, formed on
January 25, 2018, that operates pursuant to a limited liability company
agreement between the Manager and the Shareholders (``LLC Agreement'').
The Fund has no fixed termination date.
The Fund is one of the world's largest diversified crypto
investment funds by assets under management as of the date of this
filing. The Fund has approximately $490.8 million in assets under
management,\8\ and its Shares have historically traded in the millions
of dollars in daily volume and are held by more than a quarter of a
million American investor accounts seeking exposure to the Fund's large
cap digital assets (the ``Fund Components'') without the cost and
complexity of purchasing any of the individual assets directly.\9\ As
of the date of this filing, the Fund Component weightings are Bitcoin
(75.46%), Ether (17.90%), Solana (SOL) (4.13%), XRP (1.86%) and
Avalanche (AVAX) (0.65%).\10\ However, because the Fund is not
currently listed as an ETP, the value of the Shares has not been able
to closely track the value of the Fund's underlying Fund Components.
The Manager thus believes that allowing Shares of the Fund to list and
trade on the Exchange as an ETP (i.e., converting the Fund to a spot
ETP) would unlock over $167 million of value \11\ for the Fund's
shareholders and provide other investors with a safe and secure way to
invest in the Fund Components on a regulated national securities
exchange.
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\8\ As of October 4, 2024.
\9\ As of the date of this filing.
\10\ The Manager will ensure that the Fund's holdings are
consistent with the requirements of Rule 8.800-E(c)(1).
\11\ As of October 4, 2024.
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Operation of the Fund
According to the Annual Report, the Fund's assets consist solely of
the Fund Components.\12\
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\12\ The Fund will not obtain exposure to any Fund Component via
futures, options on futures, or any other derivative. The Fund may
from time to time come into possession of Forked Assets (as defined
below) by virtue of its ownership of the Fund Components, generally
through a fork in the respective Fund Component's blockchain, an
airdrop offered to holders of the respective Fund Component or other
similar event. ``Rights to Forked Assets'' are rights to acquire, or
otherwise establish dominion and control over, any virtual currency
or other asset or right, which rights are incident to the Fund's
ownership of the Fund Components and arise without any action of the
Fund, or of the Manager on behalf of the Fund. A ``Forked Asset'' is
any virtual currency token, or other asset or right, acquired by the
Fund through the exercise (subject to the applicable provisions of
the LLC Agreement) of any Rights to Forked Assets. Although the Fund
is permitted to take certain actions with respect to Forked Assets
in accordance with its LLC Agreement, at this time the Fund will
prospectively irrevocably abandon any Forked Assets. In the event
the Fund seeks to change this position, the Exchange would file a
subsequent proposed rule change with the Commission.
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Each Share represents a proportional interest, based on the total
number of Shares outstanding, in each of the digital assets held by the
Fund, as determined by reference to the respective Digital Asset
Reference Rates and weightings of each the Fund's digital asset
holdings,\13\ less the Fund's expenses and other liabilities (which
include accrued but unpaid fees and expenses). The Manager expects that
the market price of the Shares will fluctuate over time in response to
the market prices of the Fund Components. In addition, because the
Shares reflect the estimated accrued but unpaid expenses of the Fund,
except as otherwise affected by a rebalancing of the Fund's portfolio,
the number of Fund Components represented by a Share is generally
expected to gradually decrease
[[Page 87685]]
over time as the Fund Components are used to pay the Fund's expenses.
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\13\ The ``Digital Asset Reference Rates'' are determined by
reference to the Index Price or an Indicative Price. The
``Indicative Price'' is a volume-weighted average price in U.S.
dollars for a Fund Component as of 4:00 p.m., New York time, for the
immediately preceding 60-minute period derived from data collected
from Digital Asset Trading Platforms trading such Fund Component
selected by the Reference Rate Provider. The ``Index Price'' for a
Fund Component would be determined by the Reference Rate Provider by
further cleansing and compiling the trade data used to determine the
Indicative Price in such a manner as to algorithmically reduce the
impact of anomalistic or manipulative trading.
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The activities of the Fund are limited to (i) issuing ``Baskets''
(as defined below) in exchange for Fund Components and cash transferred
to the Fund as consideration in connection with creations, (ii)
transferring or selling Fund Components as necessary to cover the
``Manager's Fee'' \14\ and/or any Additional Fund expenses, (iii)
transferring Fund Components and cash in exchange for Baskets
surrendered for redemption (subject to obtaining regulatory approval
from the Commission and approval of the Manager), (iv) causing the
Manager to sell Fund Components on the termination of the Fund, and (v)
engaging in all administrative and security procedures necessary to
accomplish such activities in accordance with the provisions of the LLC
Agreement, the Custodian Agreement, the Index License Agreement, and
the Participant Agreements (each as defined below).\15\
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\14\ The Manager's Fee means a fee, payable in the Fund
Components then held by the Fund in proportion to such Fund
Components' respective weightings, which accrues daily in U.S.
dollars at an annual rate of currently 2.5%, but which will be
lowered in connection with the Fund becoming an ETP, of the NAV Fee
Basis Amount of the Fund as of 4:00 p.m., New York time, on each
day, provided that for a day that is not a business day, the
calculation of the Manager's Fee will be based on the NAV Fee Basis
Amount from the most recent business day, reduced by the accrued and
unpaid Manager's Fee for such most recent business day and for each
day after such most recent business day and prior to the relevant
calculation date. The ``NAV Fee Basis Amount'' is calculated in the
manner set forth under ``Valuation of Fund Components and
Determination of NAV'' below.
\15\ Neither the Fund, nor the Manager, nor the Custodian, nor
any other person associated with the Fund will, directly or
indirectly, engage in action where any portion of the Fund
Components becomes subject to proof-of-stake validation or is used
to earn additional Fund Components or generate income or other
earnings.
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The Fund will not be actively managed.\16\ The Fund will not take
any actions to take advantage, or mitigate, the impacts of volatility
in the prices of the Fund Components.
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\16\ The Fund is a passive entity that is managed and
administered by the Manager and does not have any officers,
directors or employees. The Manager will retain limited discretion
to exclude digital assets from the Fund Components only in certain
rules-based circumstances, as further discussed below.
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Investment Objective
According to the Annual Report, and as further described below, the
Fund's investment objective is for the value of the Shares (based on
net asset value (``NAV'') per Share) to reflect the value of the Fund
Components held by the Fund, as determined by reference to their
Digital Asset Reference Rates and weightings within the Fund, less the
Fund's expenses and other liabilities.
While an investment in the Shares is not a direct investment in the
Fund Components, the Shares are designed to provide investors with a
cost-effective and convenient way to gain investment exposure to the
digital assets held by the Fund. Generally speaking, a substantial
direct investment in the Fund Components may require expensive and
sometimes complicated arrangements in connection with the acquisition,
security and safekeeping of the Fund Components and may involve the
payment of substantial fees to acquire such Fund Components from third-
party facilitators through cash payments of U.S. dollars. Because the
value of the Shares is correlated with the value of Fund Components
held by the Fund, it is important to understand the investment
attributes of, and the market for, the Fund Components.
The Fund uses the Digital Asset Reference Rate of each Fund
Component to calculate its NAV, which is the aggregate value, expressed
in U.S. dollars, of the Fund's assets, less the U.S. dollar value of
the Fund's expenses and other liabilities calculated in the manner set
forth under ``Valuation of Fund Components and Determination of NAV.''
``NAV per Share'' is calculated by dividing NAV by the number of Shares
then outstanding.
Valuation of the Digital Assets and Determination of NAV
The following is a description of the material terms of the LLC
Agreement as it relates to valuation of the Fund digital assets and the
NAV calculations.\17\
---------------------------------------------------------------------------
\17\ While the Manager uses the terminology ``NAV'' in this
filing, the term used in the LLC Agreement is ``Digital Asset
Holdings.''
---------------------------------------------------------------------------
At 4:00 p.m., New York time, on each business day or as soon
thereafter as practicable, the Manager will evaluate the digital assets
held by the Fund and calculate and publish the NAV of the Fund. To
calculate the NAV, the Manager will:
1. For each Fund Component then held by the Fund:
a. Determine the Digital Asset Reference Rate for the Fund
Component as of such business day;
b. Multiply the Digital Asset Reference Rate by the aggregate
number of tokens of the Fund Component held by the Fund as of 4:00
p.m., New York time, on the immediately preceding business day;
c. Add the U.S. dollar value of the number of tokens of the Fund
Component receivable under pending creation orders, if any, as
calculated by multiplying the applicable Fund Component Basket Amount
\18\ by the applicable Digital Asset Reference Rate, and multiplying
the result by the number of Baskets pending under such pending creation
orders; and
---------------------------------------------------------------------------
\18\ ``Fund Component Basket Amount'' means, as of any trade
date, the amount of tokens of such Fund Component required to be
delivered in connection with each Creation Basket, as determined by
dividing the amount of tokens of such Fund Component held by the
Fund at 4:00 p.m., New York time, on such trade date, after
deducting the applicable Fund Component Aggregate Liability Amount
(defined below), by the number of Shares outstanding at such time
(the quotient so obtained calculated to one one-hundred-millionth
(i.e., carried to the eighth decimal place)) and multiplying the
quotient so obtained for the Fund Component by 100. ``Fund Component
Aggregate Liability Amount'' means for any Fund Component and any
trade date, an amount of tokens of such Fund Component equal to the
sum of (x) all accrued but unpaid Fund Component Fee Amounts for
such Fund Component as of 4:00 p.m., New York time, on such trade
date and (y) the Fund Component Expense Amount as of 4:00 p.m., New
York time, on such trade date.
---------------------------------------------------------------------------
d. Subtract the U.S. dollar value of the number of tokens of the
Fund Component to be distributed under pending redemption orders, if
any, as calculated by multiplying the applicable Fund Component Basket
Amount by the applicable Digital Asset Reference Rate, and multiplying
the result by the number of Baskets pending under such pending
redemption orders; \19\
---------------------------------------------------------------------------
\19\ ``Baskets'' and ``Basket Amount'' have the meanings set
forth in ``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------
2. Calculate the sum of the resulting U.S. dollar values for all
Fund Components then held by the Fund, as determined pursuant to
paragraph 1 above;
3. Add (i) the amount of U.S. dollars then held by the Fund plus
(ii) the amount of any U.S. dollars to be received by the Fund in
connection with any pending creations;
4. Subtract the amount of any U.S. dollars to be distributed under
pending redemption orders;
5. Subtract the U.S. dollar amount of accrued and unpaid Additional
Fund Expenses, if any; \20\
---------------------------------------------------------------------------
\20\ ``Additional Fund Expenses'' are any expenses incurred by
the Fund in addition to the Manager's Fee that are not Manager-paid
expenses, including, but not limited to, (i) taxes and governmental
charges, (ii) expenses and costs of any extraordinary services
performed by the Manager (or any other service provider) on behalf
of the Fund to protect the Fund or the interests of shareholders,
(iii) any indemnification of the Custodian or other agents, service
providers or counterparties of the Fund, (iv) the fees and expenses
related to the listing, quotation or trading of the Shares on any
marketplace or other alternative trading system, as determined by
the Manager, on which the Shares may then be listed, quoted or
traded, including but not limited to, NYSE Arca, Inc. (including
legal, marketing and audit fees and expenses) to the extent
exceeding $600,000 in any given fiscal year and (v) extraordinary
legal fees and expenses, including any legal fees and expenses
incurred in connection with litigation, regulatory enforcement or
investigation matters.
---------------------------------------------------------------------------
[[Page 87686]]
6. Subtract the U.S. dollar value of the accrued and unpaid
Manager's Fee as of 4:00 p.m., New York time on the immediately
preceding business day (the amount derived from steps 1 through 7, the
``NAV Fee Basis Amount''); and
7. Subtract the U.S. dollar value of the accrued and unpaid
Manager's Fee that accrues for such business day, as calculated based
on the NAV Fee Basis Amount for such business day.
Notwithstanding the foregoing, in the event that the Manager
determines that the primary methodology used to determine any of the
Digital Asset Reference Rates is not an appropriate basis for valuation
of the Fund's digital assets, the Manager will utilize the cascading
set of rules as described in ``Fund Valuation of Fund Components''
below.
Background on Fund Components \21\
---------------------------------------------------------------------------
\21\ The description of the Fund Components in this section,
which reflects the Fund Components as of the date of this filing,
was provided by the Manager and is based on the Annual Report.
---------------------------------------------------------------------------
Bitcoin and the Bitcoin Network
Bitcoin is a digital asset that is created and transmitted through
the operations of the peer-to-peer Bitcoin network, a decentralized
network of computers that operates on cryptographic protocols. No
single entity owns or operates the Bitcoin network, the infrastructure
of which is collectively maintained by a decentralized user base. The
Bitcoin network allows people to exchange tokens of value, called
Bitcoin, which are recorded on a public transaction ledger known as a
blockchain. Bitcoin can be used to pay for goods and services, or it
can be converted to fiat currencies, such as the U.S. dollar, at rates
determined on Digital Asset Markets that trade Bitcoin or in individual
end-user-to-end-user transactions under a barter system.
The Bitcoin network was initially contemplated in a white paper
that also described Bitcoin and the operating software to govern the
Bitcoin network. The white paper was purportedly authored by Satoshi
Nakamoto. However, no individual with that name has been reliably
identified as Bitcoin's creator, and the general consensus is that the
name is a pseudonym for the actual inventor or inventors. The first
Bitcoins were created in 2009 after Nakamoto released the Bitcoin
network source code (the software and protocol that created and
launched the Bitcoin network). The Bitcoin network has been under
active development since that time by a group of engineers known as
core developers. 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. The release of updates to the Bitcoin network's
source code does not guarantee that the updates will be automatically
adopted. Users and miners must accept any changes made to the Bitcoin
source code by downloading the proposed modification of the Bitcoin
network's source code. A modification of the Bitcoin network's source
code is effective only with respect to the Bitcoin users and miners
that download it. If a modification is accepted by only a percentage of
users and miners, a division in the Bitcoin network 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.''
Core development of the Bitcoin network source code has
increasingly focused on modifications of the Bitcoin network protocol
to increase speed and scalability and also allow for non-financial,
next generation uses. For example, following the recent activation of
Segregated Witness on the Bitcoin network, an alpha version of the
Lightning network was released. The Lightning network is an open-source
decentralized network that enables instant off-blockchain transfers of
the ownership of Bitcoin without the need of a trusted third party. The
system utilizes bidirectional payment channels that consist of multi-
signature addresses. One on-blockchain transaction is needed to open a
channel and another on-blockchain transaction can close the channel.
Once a channel is open, value can be transferred instantly between
counterparties who are engaging in real Bitcoin transactions without
broadcasting them to the Bitcoin network. New transactions will replace
previous transactions and the counterparties will store everything
locally as long as the channel stays open to increase transaction
throughput and reduce computational burden on the Bitcoin network.
Other efforts include increased use of smart contracts and distributed
registers built into, built atop or pegged alongside the Bitcoin
blockchain. For example, the white paper for Blockstream, an
organization that includes core developer Pieter Wuille, calls for the
use of ``pegged sidechains'' to develop programming environments that
are built within Bitcoin blockchain ledgers that can interact with and
rely on the security of the Bitcoin network and the Bitcoin blockchain,
while remaining independent from them. Open-source projects such as RSK
are a manifestation of this concept and seek to create the first open-
source, smart contract platform built on the Bitcoin blockchain to
enable automated, condition-based payments with increased speed and
scalability. The Fund's activities will not directly relate to such
projects, though such projects may utilize Bitcoin as tokens for the
facilitation of their non-financial uses, thereby potentially
increasing demand for Bitcoin and the utility of the Bitcoin network as
a whole. Conversely, projects that operate and are built within the
blockchain may increase the data flow on the Bitcoin network and could
either ``bloat'' the size of the Bitcoin blockchain or slow
confirmation times. At this time, such projects remain in early stages
and have not been materially integrated into the Bitcoin blockchain or
the Bitcoin network.
The supply of new Bitcoin is mathematically controlled so that the
number of Bitcoin grows at a limited rate pursuant to a pre-set
schedule. The number of Bitcoin awarded for solving a new block is
automatically halved after every 210,000 blocks are added to the
blockchain. Currently, the fixed reward for solving a new block is
3.125 Bitcoin per block and this is expected to decrease by half to
become 1.5625 Bitcoin after the next 210,000 blocks have entered the
Bitcoin Network, which is expected to be mid-2028. This deliberately
controlled rate of Bitcoin creation means that the number of Bitcoin in
existence will increase at a controlled rate until the number of
Bitcoin in existence reaches the pre-determined 21 million Bitcoin. As
of June 30, 2024, approximately 19.7 million Bitcoins were outstanding
and the date when the 21 million Bitcoin limitation will be reached is
estimated to be the year 2140.
Ether and the Ethereum Network
Ether is a digital asset that is created and transmitted through
the operations of the peer-to-peer ``Ethereum Network,'' a
decentralized network of computers that operates on cryptographic
protocols. No single entity owns or operates the Ethereum Network, the
infrastructure of which is collectively maintained by a decentralized
user base. The Ethereum Network allows people to exchange tokens of
value, called Ether, which are recorded on a public transaction ledger
[[Page 87687]]
known as a blockchain. Ether can be used to pay for goods and services,
including computational power on the Ethereum Network, or it can be
converted to fiat currencies, such as the U.S. dollar, at rates
determined on ``Digital Asset Markets'' \22\ or in individual end-user-
to-end-user transactions under a barter system.
---------------------------------------------------------------------------
\22\ A ``Digital Asset Market'' is a ``Brokered Market,''
``Dealer Market,'' ``Principal-to-Principal Market'' or ``Exchange
Market'' (referred to as ``Trading Platform Markets'' in this
proposal), as each such term is defined in the Financial Accounting
Standards Board Accounting Standards Codification Master Glossary.
The ``Digital Asset Trading Platform Market'' is the global trading
platform market for the trading of digital assets, which consists of
transactions on electronic Digital Asset Trading Platforms. A
``Digital Asset Trading Platform'' is an electronic marketplace
where trading platform participants may trade, buy and sell digital
assets based on bid-ask trading. The largest Digital Asset Trading
Platforms are online and typically trade on a 24-hour basis,
publishing transaction price and volume data.
---------------------------------------------------------------------------
Furthermore, the Ethereum Network also allows users to write and
implement smart contracts--that is, general-purpose code that executes
on every computer in the network and can instruct the transmission of
information and value based on a sophisticated set of logical
conditions. Using smart contracts, users can create markets, store
registries of debts or promises, represent the ownership of property,
move funds in accordance with conditional instructions and create
digital assets other than Ether on the Ethereum Network. Smart contract
operations are executed on the Ethereum blockchain in exchange for
payment of Ether. The Ethereum Network is one of a number of projects
intended to expand blockchain use beyond just a peer-to-peer money
system.
The Ethereum Network went live on July 30, 2015.
Smart Contracts and Development on the Ethereum Network
Smart contracts are programs that run on a blockchain that can
execute automatically when certain conditions are met. Smart contracts
facilitate the exchange of anything representative of value, such as
money, information, property, or voting rights. Using smart contracts,
users can send or receive digital assets, create markets, store
registries of debts or promises, represent ownership of property or a
company, move funds in accordance with conditional instructions and
create new digital assets.
Development on the Ethereum Network involves building more complex
tools on top of smart contracts, such as decentralized apps
(``DApps''); organizations that are autonomous, known as decentralized
autonomous organizations (``DAOs''); and entirely new decentralized
networks. For example, a company that distributes charitable donations
on behalf of users could hold donated funds in smart contracts that are
paid to charities only if the charity satisfies certain pre-defined
conditions.
Moreover, the Ethereum Network has also been used as a platform for
creating new digital assets and conducting their associated initial
coin offerings. As of March 31, 2024, a majority of digital assets were
built on the Ethereum Network, with such assets representing a
significant amount of the total market value of all digital assets.
More recently, the Ethereum Network has been used for decentralized
finance (``DeFi'') or open finance platforms, which seek to democratize
access to financial services, such as borrowing, lending, custody,
trading, derivatives and insurance, by removing third-party
intermediaries. DeFi can allow users to lend and earn interest on their
digital assets, exchange one digital asset for another and create
derivative digital assets such as stablecoins, which are digital assets
pegged to a reserve asset such as fiat currency. Over the course of
2023, between $20 billion and $30 billion worth of digital assets were
locked up as collateral on DeFi platforms on the Ethereum Network.\23\
---------------------------------------------------------------------------
\23\ DeFiLlama, ``Ethereum Total Value Locked,'' <a href="https://defillama.com/chain/Ethereum">https://defillama.com/chain/Ethereum</a>.
---------------------------------------------------------------------------
SOL and the Solana Network
The Solana protocol introduced the Proof-of-History (``PoH'')
consensus mechanism as an alternative to Proof-of-Stake (``PoS'')
blockchains like Ethereum and Proof-of-Work (``PoW'') blockchains like
Bitcoin.\24\ PoH is a consensus mechanism that automatically orders on-
chain transactions by creating a historical record that proves an event
has occurred at a specific moment in time. PoH is intended to provide a
transaction processing speed and capacity advantage over traditional
PoW and PoS networks, which rely on sequential production of blocks and
can lead to delays caused by validator confirmations.
---------------------------------------------------------------------------
\24\ Neither the Fund, nor the Manager, nor the Custodian, nor
any other person associated with the Fund will, directly or
indirectly, engage in action where any portion of the Fund's Fund
Components becomes subject to proof-of-stake validation or is used
to earn additional Fund Components or generate income or other
earnings.
---------------------------------------------------------------------------
The Solana protocol was first conceived by Anatoly Yakovenko in a
2017 whitepaper. Development of the Solana network is overseen by the
Solana Foundation, a Swiss non-profit organization, and Solana Labs,
Inc., a Delaware corporation, which administered the original network
launch and token distribution. Smart contract operations are executed
on the Solana blockchain in exchange for payment of SOL.
XRP and the XRP Network
XRP is a digital asset that was created by Chris Larsen, Jed
McCaleb, Arthur Britto and David Schwartz (the ``XRP Creators'') in
2012. Built out of the frustrations of Bitcoin's utility for payments,
the XRP ledger (the ledger to which XRP is native) is designed to be a
global real-time payment and settlement system. The XRP Creators
developed this unique digital asset to solve the scalability concerns
that they believed were inherent in the structure of Bitcoin. In
particular, XRP was created to improve the efficiency of payments. To
this end, the open source code (available at <a href="https://github.com/ripple/rippled/">https://github.com/ripple/rippled/</a>) was designed to maximize speed, scalability, and stability.
For example, the XRP ledger can accommodate 4,400 transactions per
second. This is, in part, because XRP is not mined like Bitcoin, but is
designed for the ledgers to close in seconds based on a system of
consensus. Further, because of the consensus methodology underlying the
XRP design, network transaction fees are substantially lower than
Bitcoin, typically less than $0.01.
Given the unique qualities of XRP and the natural suitability of
this digital asset to solve the friction experience with payments, the
XRP Creators started a company, calling it Ripple, to further develop
the ecosystem around XRP and build software solutions to address the
friction in sending, processing, and sourcing liquidity for global
payments. Thus, the company, Ripple, began as, and continues to be, a
payments software company. Today, Ripple is focused on designing and
deploying state-of-the-art and industry-leading software to enable
banks and financial institutions to more easily effect cross-border
payments. For maximum efficiency, Ripple's software can integrate XRP
to solve liquidity and value transfer challenges.
AVAX and the Avalanche Network
AVAX is a digital asset that is created and transmitted through the
operations of the peer-to-peer Avalanche network, a decentralized
network of computers that operates on cryptographic protocols. No
single entity owns or operates the Avalanche network, the
infrastructure of which is collectively
[[Page 87688]]
maintained by a decentralized user base. The Avalanche network allows
people to exchange tokens of value, called AVAX, which are recorded on
a public transaction ledger known as a blockchain. AVAX can be used to
pay for goods and services, including computational power on the
Avalanche network, or it can be converted to fiat currencies, such as
the U.S. dollar, at rates determined on digital asset exchanges or in
individual end-user-to-end-user transactions under a barter system.
Furthermore, the Avalanche network was designed to allow users to write
and implement smart contracts--that is, general-purpose code that
executes on every computer in the network and can instruct the
transmission of information and value based on a sophisticated set of
logical conditions. Using smart contracts, users can create markets,
store registries of debts or promises, represent the ownership of
property, move funds in accordance with conditional instructions and
create digital assets other than AVAX on the Avalanche network. Smart
contract operations are executed on the Avalanche blockchain in
exchange for payment of AVAX. Like the Ethereum Network, the Avalanche
network is one of a number of projects intended to expand blockchain
use beyond just a peer-to-peer money system.
The Avalanche network uses a variation of a proof-of-stake
consensus protocol. Unlike with other blockchains, whereby every
validator node validates every transaction, each Avalanche validator is
only required to validate what is known as the ``Primary Network.'' The
Primary Network in turn secures the following three blockchains, which
are each dedicated to a specific use and, together with the Primary
Network, comprise the core Avalanche infrastructure: the Exchange (X)
Chain, on which AVAX and other assets exist and are traded; the
Platform (P) Chain, which coordinates validators and creates subnets
(as defined below); and the Contract (C) Chain, which executes smart
contracts.
Whereas all validators are required to validate the Primary Network
and the three blockchains described above, active validators of the
Primary Network may additionally elect to validate certain non-core
blockchains (i.e., blockchains that are not fundamental to or necessary
for the Avalanche Network to operate) of the Avalanche Platform.
Avalanche uses a dynamic set of validators to validate the non-core
blockchains (each such set of validators, a ``subnet''). This
integration functionality is intended to allow Avalanche users to
tokenize and transact in any digital asset. Avalanche is reportedly one
of the fastest networks when measured by transaction time-to-finality
at relatively low transaction costs. The Avalanche Network was founded
by Professor Emin G[uuml]n Sirer, a professor at Cornell University,
and launched in September 2020.
Custody of the Fund Components
Digital assets and digital asset transactions are recorded and
validated on blockchains, the public transaction ledgers of a digital
asset network. Each digital asset blockchain serves as a record of
ownership for all of the units of such digital asset, even in the case
of certain privacy-preserving digital assets, where the transactions
themselves are not publicly viewable. All digital assets recorded on a
blockchain are associated with a public blockchain address, also
referred to as a digital wallet. Digital assets held at a particular
public blockchain address may be accessed and transferred using a
corresponding private key.
Key Generation
Public addresses and their corresponding private keys are generated
by the Custodian in secret key generation ceremonies at secure
locations inside faraday cages, which are enclosures used to block
electromagnetic fields and thus mitigate against attacks. The Custodian
uses quantum random number generators to generate the public and
private key pairs.
Once generated, private keys are encrypted, separated into
``shards,'' and then further encrypted. After the key generation
ceremony, all materials used to generate private keys, including
computers, are destroyed. All key generation ceremonies are performed
offline. No party other than the Custodian has access to the private
key shards of the Fund, including the Fund itself.
Key Storage
Private key shards are distributed geographically in secure vaults
around the world, including in the United States. The locations of the
secure vaults may change regularly and are kept confidential by the
Custodian for security purposes.
The ``Digital Asset Account'' is a segregated custody account
controlled and secured by the Custodian to store private keys, which
allows for the transfer of ownership or control of the Fund's Fund
Components on the Fund's behalf. The Digital Asset Account uses offline
storage, or ``cold storage,'' mechanisms to secure the Fund's private
keys. The term cold storage refers to a safeguarding method by which
the private keys corresponding to digital assets are disconnected and/
or deleted entirely from the internet. Cold storage of private keys may
involve keeping such keys on a non-networked (or ``air-gapped'')
computer or electronic device or storing the private keys on a storage
device (for example, a USB thumb drive) or printed medium (for example,
papyrus, paper, or a metallic object). A digital wallet may receive
deposits of digital assets but may not send digital assets without use
of the digital assets' corresponding private keys. In order to send
digital assets from a digital wallet in which the private keys are kept
in cold storage, either the private keys must be retrieved from cold
storage and entered into an online, or ``hot,'' digital asset software
program to sign the transaction, or the unsigned transaction must be
transferred to the cold server in which the private keys are held for
signature by the private keys and then transferred back to the online
digital asset software program. At that point, the user of the digital
wallet can transfer its digital assets.
Security Procedures
The Custodian is the custodian of the Fund's private keys (which,
as noted above, facilitate the transfer of ownership or control of the
Fund Components) in accordance with the terms and provisions of the
custodian agreement by and between the Custodian, the Manager and the
Fund (the ``Custodian Agreement''). Transfers from the Digital Asset
Account require certain security procedures, including, but not limited
to, multiple encrypted private key shards, usernames, passwords and 2-
step verification. Multiple private key shards held by the Custodian
must be combined to reconstitute the private key to sign any
transaction in order to transfer the Fund's assets. Private key shards
are distributed geographically in secure vaults around the world,
including in the United States.
[[Page 87689]]
As a result, if any one secure vault is ever compromised, this
event will have no impact on the ability of the Fund to access its
assets, other than a possible delay in operations, while one or more of
the other secure vaults is used instead. These security procedures are
intended to remove single points of failure in the protection of the
Fund's assets.
Transfers of Fund Components to the Digital Asset Account will be
available to the Fund once processed on the relevant blockchain.
Subject to obtaining regulatory approval to operate a redemption
program and authorization of the Manager, the process of accessing and
withdrawing Fund Components from the Fund to redeem a Basket by an
Authorized Participant \25\ will follow the same general procedure as
transferring Fund Components to the Fund to create a Basket by an
Authorized Participant, only in reverse.
---------------------------------------------------------------------------
\25\ ``Authorized Participant'' has the meaning set forth in
``Creation and Redemption of Shares'' below.
---------------------------------------------------------------------------
The Manager will maintain ownership and control of the Fund
Components in a manner consistent with good delivery requirements for
spot commodity transactions.
Fund Component Value
Digital Asset Trading Platform Valuation
According to the Annual Report, the value of digital assets is
determined by the value that various market participants place on
digital assets through their transactions. The most common means of
determining the value of a digital asset is by surveying one or more
Digital Asset Trading Platforms where the digital asset is traded
publicly and transparently (e.g., Coinbase, Kraken, LMAX Digital,
<a href="http://Crypto.com">Crypto.com</a>, and Bitstamp). Additionally, there are over-the-counter
dealers or market makers that transact in digital assets.
Digital Asset Trading Platform Public Market Data
On each online Digital Asset Trading Platform, digital assets are
traded with publicly disclosed valuations for each executed trade,
measured by one or more fiat currencies such as the U.S. dollar or
Euro, or by the digital asset Bitcoin. Over-the-counter dealers or
market makers do not typically disclose their trade data.
As of June 30, 2024, the Digital Asset Trading Platforms included
in the Digital Asset Reference Rates were Coinbase, Kraken, LMAX
Digital, <a href="http://Crypto.com">Crypto.com</a>, and Bitstamp. As further described below, the
Manager and the Fund reasonably believe each of these Digital Asset
Trading Platforms are in material compliance with applicable U.S.
federal and state licensing requirements and maintain practices and
policies designed to comply with know-your-customer (``KYC'') and anti-
money-laundering (``AML'') regulations.
Bitstamp: A U.K.-based trading platform registered as a money
services business (``MSB'') with the U.S. Department of the Treasury's
Financial Crimes Enforcement Network (``FinCEN'') and licensed as a
virtual currency business under the New York State Department of
Financial Services (``NYDFS'') BitLicense, as well as a money
transmitter in various U.S. states.
Coinbase: A U.S.-based trading platform registered as an MSB with
FinCEN and licensed as a virtual currency business under the NYDFS
BitLicense, as well as a money transmitter in various U.S. states.
<a href="http://Crypto.com">Crypto.com</a>: A Singapore-based trading platform registered as an MSB
with FinCEN and licensed as a money transmitter in various U.S. states.
<a href="http://Crypto.com">Crypto.com</a> does not hold a BitLicense.
Kraken: A U.S.-based trading platform registered as an MSB with
FinCEN and licensed as a money transmitter in various U.S. states.
Kraken does not hold a BitLicense.
LMAX Digital: A U.K.-based trading platform registered as a broker
with the Financial Conduct Authority. LMAX Digital does not hold a
BitLicense.
Currently, there are several Digital Asset Trading Platforms
operating worldwide, and online Digital Asset Trading Platforms
represent a substantial percentage of buying and selling activity and
provide the most data with respect to prevailing valuations of the Fund
Components. These trading platforms include established trading
platforms such as those included in the Digital Asset Reference Rates,
which provide a number of options for buying and selling the Fund
Components. The below tables reflect the trading volume in each Fund
Component and market share \26\ of the Fund Component-U.S. dollar
trading pairs of each of the Digital Asset Trading Platforms included
in the Digital Asset Reference Rates as of June 30, 2024 (collectively,
``Constituent Trading Platforms''), using data reported by the
Reference Rate Provider from February 1, 2018 (the inception of the
Fund's operations) to June 30, 2024:
---------------------------------------------------------------------------
\26\ Bitcoin market share is calculated using trading volume (in
Bitcoins) for certain Digital Asset Trading Platforms, including
Coinbase, LMAX Digital and <a href="http://Crypto.com">Crypto.com</a>, as well as certain other
large U.S.-dollar denominated Digital Asset Trading Platforms that
were not included in the Digital Asset Reference Rate as of June 30,
2024, including Binance.US (data included from April 1, 2020 through
July 14, 2023), Bitfinex, Bitflyer (data included from December 24,
2018), Bitstamp, Bittrex (data included from July 31, 2018 through
December 3, 2023), Bullish (data included from March 31,2024), Cboe
Digital (data included from October 1, 2020 through December 31,
2024), FTX.US (data included from April 1, 2022 through November 12,
2022), Gemini, itBit, Kraken, LakeBTC (data included from from
January 27, 2019 through May 6, 2021), HitBTC (data included from
April 1, 2019 through March 31, 2020) and OKCoin (data included
since inception through December 31, 2022). Ether market share is
calculated using trading volume (in Ether) for certain Digital Asset
Trading Platforms, including Coinbase, LMAX Digital and <a href="http://Crypto.com">Crypto.com</a>,
as well as certain other large U.S.-dollar denominated Digital Asset
Trading Platforms that were not included in the Digital Asset
Reference Rate as of June 30, 2024, including Bitstamp, Binance.US
(data included from April 1, 2020 through October 14, 2023), Bittrex
(data included from July 31, 2018 through December 3, 2023),
Bitfinex, Bitflyer (data included from November 13, 2022), Cboe
Digital (data included from October 1, 2020 through December 31,
2023), Gemini, HitBTC (data included from June 13, 2019 through
March 31, 2020), itBit (data included from December 27, 2018),
Kraken, OKCoin (data included from December 25, 2018 through
December 31, 2022) and FTX.US (data included from July 1, 2021
through November 12, 2022). SOL market share is calculated using
trading volume (in SOL) provided by the Reference Rate Provider for
certain Digital Asset Exchanges, including Coinbase, Kraken and LMAX
Digital, as well as certain other large U.S. dollar-denominated
Digital Asset Trading Platforms that were not included in the
Digital Asset Reference Rate as of June 30, 2023, including
Binance.US (data included from October 1, 2021 through June 13,
2023), Bitfinex, Bitstamp (data included from January 1, 2023),
Bittrex (data included from January 1, 2023 through December 3,
2023), <a href="http://Crypto.com">Crypto.com</a> (data included from October 31, 2022), Gate.io
(data included from January 1, 2023 through July 2, 2023), Gemini
(data included from March 1, 2022), itBit (data included from
November 6, 2022), OKCoin (data included from March 22, 2022 through
December 8, 2022), and FTX.US (data included from October 1, 2021
through November 10, 2022).
Bitcoin Trading Platforms Included in the Digital Asset
------------------------------------------------------------------------
Market share
Reference rate as of June 30, 2024 Volume (Bitcoin) (%)
------------------------------------------------------------------------
Coinbase............................. 37,581,691 30.39
[[Page 87690]]
LMAX Digital......................... 9,763,031 7.90
<a href="http://Crypto.com">Crypto.com</a>........................... 1,403,569 1.14
----------------------------------
Total Bitcoin-U.S. Dollar trading 48,748,291 39.43
pair............................
------------------------------------------------------------------------
Ether Trading Platforms Included in the Digital Asset
------------------------------------------------------------------------
Market share
Reference rate as of June 30, 2024 Volume (Ether) (%)
------------------------------------------------------------------------
Coinbase............................. 422,567,767 34.84
LMAX Digital......................... 73,620,833 6.07
<a href="http://Crypto.com">Crypto.com</a>........................... 34,980,599 2.88
----------------------------------
Total Ether-U.S. Dollar trading 531,169,199 43.79
pair............................
------------------------------------------------------------------------
SOL Trading Platforms Included in the Digital Asset
------------------------------------------------------------------------
Market share
Reference rate as of June 30, 2024 Volume (SOL) (%)
------------------------------------------------------------------------
Coinbase............................. 1,696,262,917 66.32
Kraken............................... 405,019,540 15.83
LMAX Digital......................... 25,673,612 1.00
----------------------------------
Total SOL-U.S. Dollar trading 2,126,956,069 83.15
pair............................
------------------------------------------------------------------------
AVAX Trading Platforms Included in the Digital Asset
------------------------------------------------------------------------
Market share
Reference rate as of June 30, 2024 Volume (AVAX) (%)
------------------------------------------------------------------------
Coinbase............................. 769,187,967 80.19
Kraken............................... 79,459,277 8.28
<a href="http://Crypto.com">Crypto.com</a>........................... 15,247,633 1.59
----------------------------------
Total AVAX-U.S. Dollar trading 863,894,877 90.06
pair............................
------------------------------------------------------------------------
XRP Trading Platforms Included in the Digital Asset
------------------------------------------------------------------------
Market share
Reference rate as of June 30, 2024 Volume (XRP) (%)
------------------------------------------------------------------------
Bitstamp............................. 106,620,277,322 35.85
Coinbase............................. 72,598,818,507 24.41
Kraken............................... 37,254,406,142 12.53
----------------------------------
Total XRP-U.S. Dollar trading 216,473,501,971 72.79
pair............................
------------------------------------------------------------------------
The domicile, regulation, and legal compliance of the Digital Asset
Trading Platforms included in the Digital Asset Reference Rates vary.
Information regarding each Digital Asset Trading Platform may be found,
where available, on the websites for such Digital Asset Trading
Platforms, among other places.
The Index and the Digital Asset Reference Rates
Since July 1, 2022, the digital assets held by the Fund have
consisted of the digital assets that make up the CoinDesk Large Cap
Select Index (the ``DLCS'' or the ``Index''), as rebalanced from time
to time, subject to the Manager's discretion to exclude individual
digital assets in certain rules-based circumstances as further
described in the ``Index Components Compared to Fund Components--
Exclusion Criteria'' below. The DLCS is designed and managed by the
Index Provider.
The digital assets that make up the DLCS (the ``Index Components'')
are drawn from the universe (the ``Index Universe'') of investable
digital assets meeting the following criteria: (i) the digital asset
must be ranked in the top 250 in the Index Provider's Digital Asset
[[Page 87691]]
Classification Standard (``DACS'') report; (ii) custodian services for
the digital asset must be available from Coinbase Custody, a division
of Coinbase Global Inc., and must be accessible to U.S. investors;
(iii) the digital asset must not be a stablecoin or categorized as a
meme coin as determined by the Index Provider; and (iv) the digital
asset must have been listed on a Constituent Trading Platform for a
minimum of 30 days leading up to the Index Rebalancing Period (as
defined below).
The Index Provider applies market capitalization, liquidity and
data availability criteria to the digital assets in the Index Universe
in order to arrive at between five and ten digital assets that, in the
Index Provider's judgment, represent a diversified benchmark for the
largest and most liquid digital assets in the digital asset market (the
``Large Cap sector''), rather than exposure to all digital assets in
the Index Universe. The respective weightings of the Index Components
within the DLCS are determined by the Index Provider based on market
capitalization criteria and are referred to as the ``Index
Weightings.'' The process followed by the Index Provider to determine
the Index Universe, the Index Components and their respective Index
Weightings is referred to as the ``DLCS Methodology.''
The Fund seeks to (i) provide large cap coverage of the digital
asset market; (ii) minimize transaction costs through low turnover of
the Fund's portfolio; and (iii) create a portfolio that could be
replicated through direct purchases in the Digital Asset Market.
Because Index Components target the Large Cap sector and are included
in the DLCS in accordance with market capitalization and liquidity
criteria, as of June 30, 2024, the DLCS covered approximately 83% of
the market capitalization of the entire digital asset market, excluding
stablecoins and meme coins, based on data provided by the Index
Provider calculated using data from <a href="http://CoinMarketCap.com">CoinMarketCap.com</a>. Additionally, as
of June 30, 2024, the DLCS covered approximately 92% of the market
capitalization of the Index Universe.
The Fund Components consist of the Index Components except that the
Manager may determine to exclude a particular Index Component in its
discretion under certain rules-based circumstances (including to comply
with the requirements of Rule 8.800-E). The weightings of each Fund
Component (the ``Weightings'') are generally expected to be the same as
the Index Weightings except when the Manager determines to exclude one
or more digital assets from the Fund Components, in which case the
Weightings are generally expected to be calculated proportionally to
the respective Index Weightings for the remaining Index Components. The
Fund uses the DLCS Methodology, described further below, to construct
its portfolio.
The Manager will ensure that the Fund's holdings are consistent
with the requirements of Rule 8.800-E(c)(1), including by working with
the Reference Rate Provider to modify the DLCS such that at least 90%
of the Weightings will consist of commodities and/or digital assets
concerning which the Exchange may obtain information via the ISG from
other members of the ISG or via CSSA.\27\
---------------------------------------------------------------------------
\27\ The Manager notes that, as of the date of this filing, the
Fund Components that meet this standard are Bitcoin and Ether, which
make up approximately 76% and 18% of the Index, respectively.
---------------------------------------------------------------------------
Eligibility and Weighting
Under the DLCS Methodology and subject to the below, a digital
asset included in the Index Universe will generally be eligible for
inclusion in the DLCS as an Index Component, and thus the Fund's
portfolio as a Fund Component, if it satisfies market capitalization,
liquidity and data availability metrics determined by the Index
Provider. Digital assets will be included in the DLCS on a market
capitalization-weighted basis. For example, a digital asset with a
larger market capitalization will have a higher representation in the
DLCS, and thus the Fund's portfolio (unless the Manager excludes the
digital asset from the Fund). Market capitalization refers to a digital
asset's market value, as determined by multiplying the number of tokens
of such digital asset in circulation by the market price of a token of
such digital asset. The market price per token of a Fund Component will
be determined by reference to the applicable Digital Asset Reference
Rate. The market capitalization of any digital assets not in the DLCS,
and therefore not held by the Fund, will be determined based on data
that the Index Provider obtains directly from trading platforms and
other service providers. Because the Fund creates Shares in exchange
for Fund Components on a daily basis, the market capitalization of each
Fund Component is calculated, and its Weighting therefore fluctuates,
daily in accordance with changes in the market price of such Fund
Components.
The DLCS, and therefore the Fund, is rebalanced on a quarterly
basis according to the DLCS Methodology during a period beginning 14
days before the second business day of each January, April, July, and
October (each such period, an ``Index Rebalancing Period'').
Inclusion of New Fund Components
In order for a new digital asset to qualify for inclusion in the
DLCS, and thus the Fund's portfolio during a period during which the
Manager reviews for rebalancing the Fund's portfolio in accordance with
the policies and procedures set forth in the Annual Report (the ``Fund
Rebalancing Period''), it must be included in the Index Universe and be
among the 20 highest ranked digital assets in the Index Universe by
market capitalization. Such 20 digital assets are referred to as the
``Selection Universe.'' In order for a digital asset in the Selection
Universe to be included in the Fund's portfolio during a Fund
Rebalancing Period, such digital asset must (i) have a current market
capitalization that is at least 1.2 times the median current market
capitalization of the Selection Universe; (ii) have a median daily
value traded (``MDVT'') for the Index Rebalancing Period that is at
least 1.2 times the MDVT of the Selection Universe for the Index
Rebalancing Period; (iii) trade on at least three Constituent Trading
Platforms as of the first day of the Index Rebalancing Period; (iv)
have been included in the Selection Universe during the Index
Rebalancing Period (as defined below) for the prior quarter; (v) the
inclusion of such new digital asset will not result in the Fund holding
more than ten Fund Components; and (vi) such digital asset must have a
minimum weight of 1.0% (collectively, the ``Index Inclusion
Criteria''). In the event that more than ten digital assets meet the
Index Inclusion Criteria, the qualifying digital assets will be ranked
by current market capitalizations. Those ranked below the top ten will
be excluded.
The Index Provider may include a digital asset that does not meet
the Index Inclusion Criteria in the DLCS if the Index Components no
longer collectively meet the five constituent minimum, at which point
the Index Provider would first relax the market capitalization and
liquidity requirements included in the Index Inclusion Criteria to
those included in the ``Removal Criteria'' described below and include
the next largest digital assets by current market capitalization that
met such requirements, until there were five Index Components. If after
relaxing such requirements, there were still fewer than five Index
Components, the Index Provider would further relax the requirements and
include the next largest digital assets by current market
[[Page 87692]]
capitalization until there were five Index Components.\28\
---------------------------------------------------------------------------
\28\ The Manager has not previously sought to include a new Fund
Component that does not meet the Index Inclusion Criteria.
---------------------------------------------------------------------------
Removal of Existing Fund Components
During each Index Rebalancing Period, a digital asset will be
removed as an Index Component from the DLCS, and therefore removed from
the Fund if it is also a Fund Component, if (i) it is not included in
the Selection Universe; (ii) it fails to be listed on at least three
Constituent Trading Platforms; (iii) it has a current market
capitalization that is less than 1.0 times the median current market
capitalization of the Selection Universe; (iv) it has an MDVT for the
Index Rebalancing Period that is less than 1.0 times the MDVT of the
Selection Universe for the Index Rebalancing Period; or (v) such
digital asset has a weight of less than 0.8%, and if its removal would
not result in the DLCS holding less than five Index Components
(collectively, the ``Removal Criteria'').\29\
---------------------------------------------------------------------------
\29\ For example, if a digital asset was not included in the
Selection Universe, failed to meet the thresholds in market
capitalization and liquidity described above, or had a weight in the
Index of less than 0.8%, such digital asset would be removed from
the DLCS. However, if its removal would result in the DLCS holding
less than five Index Components, it would not be removed.
---------------------------------------------------------------------------
Outside of the quarterly Index Rebalancing Period, the Index
Provider may remove a digital asset as an Index Component from the DLCS
under extraordinary circumstances. For example, if an Index Component
is determined to be a ``security'' under the federal securities laws by
the Commission, a federal court or other U.S. government agency, or
under such consideration by any U.S. government oversight agency, it
would be removed from the DLCS at a date determined and announced by
the Index Provider. In the event the Index Provider removes an Index
Component outside of the quarterly rebalancing period, the Manager
expects the Fund would rebalance and the relevant digital asset would
be removed as a Fund Component as soon as practical.
Index Components Compared to Fund Components
The Fund Components consist of the Index Components except when the
Manager determines to exclude a particular Index Component in view of
one or more of the following criteria (the ``Exclusion Criteria''), as
determined in the sole discretion of the Manager:
<bullet> none or few of the Authorized Participants or service
providers has the ability to trade or otherwise support the digital
asset;
<bullet> the Manager believes, based on current guidance, that use
or trading of the digital asset raises or potentially raises
significant governmental, policy or regulatory concerns or is subject
or likely subject to a specialized regulatory regime, such as the U.S.
federal securities or commodities laws or similar laws in other
significant jurisdictions; \30\
---------------------------------------------------------------------------
\30\ The Manager will determine whether a particular digital
asset that is included or eligible for inclusion in the Fund is a
security for purposes of the federal securities laws by considering
a number of factors, including the various definitions of
``security'' under the federal securities laws and federal court
decisions interpreting elements of these definitions, such as the
U.S. Supreme Court's decisions in the Howey and Reves cases, as well
as reports, orders, press releases, public statements and speeches
by the Commission and its staff providing guidance on when a digital
asset may be a security for purposes of the federal securities laws.
The Manager does not intend to permit the Fund to hold any digital
asset that the Manager determines is a security under the federal
securities laws, whether that determination is initially made by the
Manager itself, or because a federal court upholds an allegation
that a digital asset is a security.
---------------------------------------------------------------------------
<bullet> the digital asset's underlying code contains, or may
contain, significant flaws or vulnerabilities; or
<bullet> there is limited or no reliable information regarding, or
concerns over the intentions of, the core developers of the digital
asset.
The Weightings are generally expected to be the same as the Index
Weightings except when one or more digital assets have been excluded
from the Fund Components based on the Exclusion Criteria, in which case
the Weightings are generally expected to be calculated proportionally
to the respective Index Weightings for the remaining Index Components.
The Manager may exclude a digital asset or rebalance the Weighting
of an existing Fund Component to the extent its inclusion as a Fund
Component or projected Weighting would exceed a threshold that could,
in the Manager's sole discretion, require the Fund to register as an
investment company under the Investment Company Act or require the
Manager to register as an investment adviser under the Investment
Advisers Act.
The Manager will retain discretion to include or exclude individual
digital assets from the Fund Components only in certain rules-based
circumstances, as described above. Accordingly, the Manager believes
that the Fund will be in compliance with Rule 10A-3 \31\ under the Act,
as provided by NYSE Arca Rule 5.3-E.
---------------------------------------------------------------------------
\31\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the Act, the Fund relies on the exemption contained
in Rule 10A-3(c)(7).
---------------------------------------------------------------------------
Constituent Trading Platform Selection
According to the Annual Report, the Constituent Trading Platforms
used to derive Digital Asset Reference Rates are selected by the
Reference Rate Provider utilizing a methodology that is guided by the
International Organization of Securities Commissions (``IOSCO'')
principles for financial benchmarks. For a trading platform to become a
Constituent Trading Platform, it must satisfy the criteria listed below
(the ``Inclusion Criteria''):
<bullet> Sufficient USD or USDC liquidity relative to the size of
the listed assets;
<bullet> No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the trading
platform's eligibility requirements to trade;
<bullet> No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
<bullet> Real-time price discovery;
<bullet> Limited or no capital controls; \32\
---------------------------------------------------------------------------
\32\ ``Capital controls'' in this context means governmental
sanctions that would limit the movement of capital into, or out of,
the jurisdiction in which such Digital Asset Trading Platforms
operate.
---------------------------------------------------------------------------
<bullet> Transparent ownership including a publicly-owned ownership
entity;
<bullet> Publicly available language and policies addressing legal
and regulatory compliance in the US, including KYC, AML and other
policies designed to comply with relevant regulations that might apply
to it;
<bullet> Be an exchange that is licensed and able to service
investors in one or more of the following jurisdictions: United States,
United Kingdom; European Union; Hong Kong; or Singapore
<bullet> Offer programmatic spot trading of the trading pair and
reliably publish trade prices and volumes on a real-time basis through
Rest and Websocket APIs.\33\
---------------------------------------------------------------------------
\33\ Trading platforms with programmatic trading offer traders
an application programming interface that permits trading by sending
programmed commands to the trading platform.
---------------------------------------------------------------------------
A Digital Asset Trading Platform is removed from the Constituent
Trading Platform when it no longer satisfies the criteria for
inclusion. The Reference Rate Provider does not currently include data
from over-the-counter markets or derivatives platforms among the
Constituent Trading Platforms. According to the Annual Report, over-
the-counter data is not currently included because of the potential for
trades to include a significant premium or discount paid for larger
liquidity, which creates an uneven comparison
[[Page 87693]]
relative to more active markets. There is also a higher potential for
over-the-counter transactions to not be arms-length, and thus not be
representative of a true market price. Digital asset derivative markets
are also not currently included, as the markets remain relatively thin.
While the Reference Rate Provider has no plans to include data from
over-the-counter markets or derivative platforms at this time, the
Reference Rate Provider will consider IOSCO principles for financial
benchmarks, the management of trading venues of digital asset
derivatives and the aforementioned Inclusion Criteria when considering
whether to include over-the-counter or derivative platform data in the
future.
The Reference Rate Provider and the Manager have entered into the
index license agreement, dated as of February 1, 2022 (as amended, the
``Index License Agreement''), governing the Manager's use of the
Digital Asset Reference Rates that are Index Prices.\34\ Pursuant to
the terms of the Index License Agreement, the Reference Rate Provider
may adjust the calculation methodology for a Digital Asset Reference
Rate without notice to, or consent of, the Fund or its shareholders.
The Reference Rate Provider may decide to change the calculation
methodology to maintain the integrity of the Index Price calculation
should it identify or become aware of previously unknown variables or
issues with the existing methodology that it believes could materially
impact its performance and/or reliability. The Reference Rate Provider
has sole discretion over the determination of Digital Asset Reference
Rates and may change the methodologies for determining the Digital
Asset Reference Rates from time to time. Shareholders will be notified
of any material changes to the calculation methodology or the Digital
Asset Reference Rates in the Fund's current reports and will be
notified of all other changes that the Manager considers significant in
the Fund's periodic or current reports. The Manager will determine the
materiality of any changes to the Digital Asset Reference Rates on a
case-by-case basis, in consultation with external counsel.
---------------------------------------------------------------------------
\34\ Upon entering into the Index License Agreement, the Manager
and the Reference Rate Provider terminated the license agreement
between the parties dated as of February 28, 2019.
---------------------------------------------------------------------------
Reference Rate Provider may change the trading venues that are used
to calculate a Digital Asset Reference Rate or otherwise change the way
in which a Digital Asset Reference Rate is calculated at any time. For
example, the Reference Rate Provider has scheduled quarterly reviews in
which it may add or remove Constituent Trading Platforms that satisfy
or fail the criteria described above. While the Reference Rate Provider
is not required to publicize or explain the changes or to alert the
Manager to such changes, it has historically notified the Fund (and
other subscribers to the Index) of any material changes to the
Constituent Trading Platforms, including any additions or removals of
the Constituent Trading Platforms, in addition to issuing press
releases in connection with the same in accordance with its index
review and index change communication policies. The Manager will notify
investors of any such material event by filing a current report on Form
8-K. Although the Digital Asset Reference Rate methodology is designed
to operate without any manual intervention, rare events would justify
manual intervention. Intervention of this kind would be in response to
non-market-related events, such as the halting of deposits or
withdrawals of funds on a Digital Asset Trading Platform, the
unannounced closure of operations on a Digital Asset Trading Platform,
insolvency or the compromise of user funds. In the event that such an
intervention is necessary, the Reference Rate Provider would issue a
public announcement through its website, API and other established
communication channels with its clients.
Determination of Digital Asset Reference Rates
Since July 1, 2022, all of the Digital Asset Reference Rates have
been Indicative Prices. The Indicative Price is calculated by
multiplying the average price on each Constituent Trading Platform by
the trading volume on such Constituent Trading Platform for the prior
60 minutes as of 4:00 p.m., New York time, multiplied by the
Constituent Trading Platform's weighting based on trading volume
relative to the other Constituent Trading Platforms included in the
Reference Rate. Each Constituent Trading Platform is weighted relative
to its share of trading volume to the trading volume of all Constituent
Trading Platform, meaning that price inputs from Constituent Trading
Platforms with higher trading volumes will be weighted more heavily in
calculating the Indicative Price than price inputs from Constituent
Trading Platforms with lower trading volumes. Price and volume inputs
are weighted as received with no further adjustments made to the
weighting of each trading platform based on market anomalies observed
on a Constituent Trading Platform or otherwise.
For purposes of illustration, outlined below is an example using a
limited number of trades.
----------------------------------------------------------------------------------------------------------------
Indicative
Venue Average price Volume Notional Weight (%) price
contribution
----------------------------------------------------------------------------------------------------------------
Trading Platform 1.............. 999.12 800 799,296 53.33 532.60
Trading Platform 2.............. 997.23 500 498,615 33.33 332.25
Trading Platform 3.............. 996.65 200 199,330 13.33 132.82
-------------------------------------------------------------------------------
Indicative Price................ .............. 1,500 1,497,241 .............. 997.67
----------------------------------------------------------------------------------------------------------------
The Index Provider may also use Index Prices as the reference rate
for an Index Component in the future, and if it does so, then the
Manager will use an Index Price for the relevant Fund Component. When a
Digital Asset Reference Rate is an Index Price, the Reference Rate
Provider applies an algorithm to the trade data used to determine the
Indicative Price. Each Digital Asset Reference Rate's algorithm is
expected to reflect a four-pronged methodology to calculate the Index
Price from the Constituent Trading Platforms:
<bullet> Volume Weighting: Constituent Trading Platforms with
greater liquidity receive a higher weighting in each Digital Asset
Reference Rate, increasing the ability to execute against (i.e.,
replicate) such Digital Asset Reference Rate in the underlying spot
markets.
<bullet> Price-Variance Weighting: Each Digital Asset Reference
Rate reflects data points that are discretely weighted in proportion to
their variance from the rest of the Constituent Trading
[[Page 87694]]
Platforms. As the price at a Constituent Trading Platform diverges from
the prices at the rest of the Constituent Trading Platforms, its weight
in the Digital Asset Reference Rate consequently decreases.
<bullet> Inactivity Adjustment: Each Digital Asset Reference Rate
algorithm penalizes stale activity from any given Constituent Trading
Platform. When a Constituent Trading Platform does not have recent
trading data, its weighting in the Reference Rate is gradually reduced
until it is de-weighted entirely. Similarly, once trading activity at a
Constituent Trading Platform resumes, the corresponding weighting for
that Constituent Trading Platform is gradually increased until it
reaches the appropriate level.
<bullet> Manipulation Resistance: In order to mitigate the effects
of wash trading and order book spoofing, the Digital Asset Reference
Rate only includes executed trades in its calculation. Additionally,
each Digital Asset Reference Rate only includes Constituent Trading
Platforms that charge trading fees in order to attach a real,
quantifiable cost to any manipulation attempts.
The Reference Rate Provider re-evaluates the weighting algorithm on
a periodic basis, but maintains discretion to change the way in which
an Index Price is calculated based on its periodic review or in extreme
circumstances. The exact methodology to calculate each Index Price is
not publicly available. Still, each Index is designed to limit exposure
to trading or price distortion of any individual Digital Asset Trading
Platform that experiences periods of unusual activity or limited
liquidity by discounting, in real-time, anomalous price movements at
individual Digital Asset Trading Platforms.
For the purposes of illustration, outlined below are examples of
how the attributes that impact weighting and adjustments in the
aforementioned methodology may be utilized to generate an Index Price
for a digital asset. The Index Price algorithm, as described above,
accounts for manipulation at the outset by only including data from
executed trades on Constituent Trading Platforms that charge trading
fees. Then, the below-listed elements may impact the weighting of the
Constituent Trading Platforms on the Index Price as follows:
<bullet> Volume Weighting: Each Constituent Trading Platform will
be weighted to appropriately reflect the trading volume share of the
Constituent Trading Platform relative to all the Constituent Trading
Platforms during this same period. For example, assume the Constituent
Trading Platforms used to calculate the Index Price of the digital
asset are Coinbase, Kraken, LMAX Digital, and Bitstamp. An average
hourly weighting of 67.06%, 14.57%, 11.88%, and 6.49% for Coinbase,
Kraken, LMAX Digital, and Bitstamp, respectively, would represent each
Constituent Trading Platform's share of trading volume during the same
period.
<bullet> Inactivity Adjustment: Assume that a Constituent Trading
Platform represented a 14% weighting on the Index Price of the digital
asset, which is based on the per-second calculations of its trading
volume and price-variance relative to the cohort of Constituent Trading
Platforms included in such Index, and then went offline for
approximately two hours. The index algorithm would automatically
recognize inactivity and start de-weighting the Constituent Trading
Platform at the 3-minute mark and continue to do so over a 7-minute
period until its influence was effectively zero, 10 minutes after
becoming inactive. As soon as trading activity resumed at the
Constituent Trading Platform, the index algorithm would re-weight it to
the appropriate weighting based on trading volume and price-variance
relative to the cohort of Constituent Trading Platforms included in the
Index. Due to the period of inactivity, it would re-weight the
Constituent Trading Platform activity to a weight lower than its
original weighting--for example, to 12%.
<bullet> Price-Variance Weighting: The price-variance weighting
adjustment is a relative measure of each Constituent Trading Platform
versus the cohort of trading platform. The further the price at a
trading platform is from the mean price of the cohort, the less
influence that trading platform's price will have on the algorithm that
produces the Index Price, as the trading platform data is discretely
weighted in proportion to their variance from the rest of the trading
platforms on a per-second basis and there is no minimum threshold the
variance must meet for this adjustment to take place. For example,
assume that for a one-hour period, the digital asset's execution prices
on one Constituent Trading Platform were trading more than 7% higher
than the average execution prices on another Constituent Trading
Platform. The algorithm will automatically detect the anomaly (price
variance) and reduce that specific Constituent Trading Platform's
weighting during that one-hour period, ensuring a reliable spot
reference price that is unaffected by the localized event and that is
reflective of broader market activity.
Determination of Digital Asset Reference Rates When Indicative Prices
and Index Prices Are Unavailable
If the Digital Asset Reference Rate for a Fund Component becomes
unavailable, or if the Manager determines in good faith that such
Digital Asset Reference Rate does not reflect an accurate price for
such Fund Component, then the Manager will, on a best efforts basis,
contact the Reference Rate Provider to obtain the Digital Asset
Reference Rate directly from the Digital Asset Reference Rate Provider.
If after such contact such Digital Asset Reference Rate remains
unavailable or the Manager continues to believe in good faith that such
Digital Asset Reference Rate does not reflect an accurate price for the
relevant digital asset, the Manager uses the following cascading set of
rules to calculate the Digital Asset Reference Rates for that Fund
Component.\35\ For the avoidance of doubt, the Manager will employ the
below rules sequentially and in the order as presented below, should
one or more specific rule(s) fail:
---------------------------------------------------------------------------
\35\ The Manager updated these rules on January 11, 2022.
---------------------------------------------------------------------------
1. Digital Asset Reference Rate = The price set by the relevant
Indicative Price or Index Price as of 4:00 p.m., New York time, on the
valuation date.\36\ If the relevant Indicative Price or Index Price
becomes unavailable, or if the Manager determines in good faith that
such Indicative Price or Index Price does not reflect an accurate
digital asset price, then the Manager will, on a best efforts basis,
contact the Reference Rate Provider to obtain the Digital Asset
Reference Rate directly from the Reference Rate Provider. If after such
contact such Indicative Price or Index Price remains unavailable or the
Manager continues to believe in good faith that such Indicative Price
or Index Price does not reflect an accurate price for the relevant
digital asset, then the Manager will employ the next rule to determine
the Digital Asset Reference Rate. There are no predefined criteria to
make a good faith assessment and it will be made by the Manager in its
sole discretion.
---------------------------------------------------------------------------
\36\ The valuation date is any day for which the value of the
Fund Components in the Fund may be calculated utilizing the Digital
Asset Reference Rates.
---------------------------------------------------------------------------
2. Digital Asset Reference Rate = The price set by Coin Metrics
Real-Time Rate as of 4:00 p.m., New York time, on the valuation date
(the ``Secondary Digital Asset Reference Rate''). The Secondary
Reference Rate is a real-time reference rate price, calculated using
[[Page 87695]]
trade data from constituent markets selected by Coin Metrics, Inc. (the
``Secondary Reference Rate Provider''). The Secondary Digital Asset
Reference Rate is calculated by applying weighted-median techniques to
such trade data where half the weight is derived from the trading
volume on each constituent market and half is derived from inverse
price variance, where a constituent market with high price variance as
a result of outliers or market anomalies compared to other constituent
markets is assigned a smaller weight. If the Secondary Digital Asset
Reference Rate for the relevant Fund Component becomes unavailable, or
if the Manager determines in good faith that the Secondary Digital
Asset Reference Rate does not reflect an accurate price for such Fund
Component, then the Manager will, on a best efforts basis, contact the
Secondary Reference Rate Provider to obtain the Secondary Digital Asset
Reference Rate directly from the Secondary Reference Rate Provider. If
after such contact the Secondary Digital Asset Reference Rate remains
unavailable or the Manager continues to believe in good faith that the
Secondary Digital Asset Reference Rate does not reflect an accurate
price for such Fund Component, then the Manager will employ the next
rule to determine the Digital Asset Reference Rate. There are no
predefined criteria to make a good faith assessment and it will be made
by the Manager in its sole discretion.
3. Digital Asset Reference Rate = The price set by the Fund's
principal market (as defined in the Annual Report) (the ``Tertiary
Pricing Option'') as of 4:00 p.m., New York time, on the valuation
date. The Tertiary Pricing Option is a spot price derived from the
relevant principal market's public data feed that is believed to be
consistently publishing pricing information as of 4:00 p.m., New York
time, and is provided to the Manager via an application programming
interface. If the Tertiary Pricing Option becomes unavailable, or if
the Manager determines in good faith that the Tertiary Pricing Option
does not reflect an accurate price for such Fund Component, then the
Manager will, on a best efforts basis, contact the Tertiary Pricing
Provider to obtain the Tertiary Pricing Option directly from the
Tertiary Pricing Provider. If after such contact the Tertiary Pricing
Option remains unavailable after such contact or the Manager continues
to believe in good faith that the Tertiary Pricing Option does not
reflect an accurate price for such Fund Component, then the Manager
will employ the next rule to determine the Digital Asset Reference
Rate. There are no predefined criteria to make a good faith assessment
and it will be made by the Manager in its sole discretion.
4. Digital Asset Reference Rate = The Manager will use its best
judgment to determine a good faith estimate of the Digital Asset
Reference Rate. There are no predefined criteria to make a good faith
assessment and it will be made by the Manager in its sole discretion.
In the event of a fork, the Reference Rate Provider may calculate
the Digital Asset Reference Rate based on a digital asset that the
Manager does not believe to be the appropriate asset that is held by
the Fund.\37\ In this event, the Manager has full discretion to use a
different reference rate provider or calculate the Digital Asset
Reference Rate itself using its best judgment.
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\37\ According to the Annual Report, when a modification is
introduced and a substantial majority of users and validators
consent to the modification, the change is implemented and the
network remains uninterrupted. However, if less than a substantial
majority of users and validators consent to the proposed
modification, and the modification is not compatible with the
software prior to its modification, the consequence would be what is
known as a ``hard fork'', with one group running the pre-modified
software and the other running the modified software. The effect of
such a fork would be the existence of two versions of a digital
asset running in parallel, yet lacking interchangeability, such as
in July 2016 when Ether ``forked'' into Ether and a new digital
asset, Ether Classic.
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The Manager may, in its sole discretion, select a different
reference rate provider, select a different indicative or index price
provided by the Reference Rate Provider, or calculate the Indicative
Price or Index Price by using the cascading set of rules set forth
above.\38\
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\38\ The Manager will provide notice of any such changes in the
Fund's periodic or current reports and, if the Manager makes such a
change other than on an ad hoc or temporary basis, the Exchange will
file a proposed rule change under Section 19(b) with the Commission.
---------------------------------------------------------------------------
The Structure and Operation of the Fund Protects Investors and
Satisfies Commission Requirements for Digital Asset-Based Exchange
Traded Products
On January 10, 2024, the Commission approved the listing and
trading of shares of the Grayscale Bitcoin Trust (BTC) and Bitwise
Bitcoin ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares); the Hashdex Bitcoin ETF under NYSE Arca Rule 8.500-E (Trust
Units); the iShares Bitcoin Trust and Valkyrie Bitcoin Fund under
Nasdaq Rule 5711(d) (Commodity-Based Trust Shares); and the ARK
21Shares Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust,
the WisdomTree Bitcoin Fund, Fidelity Wise Origin Bitcoin Fund, and
Franklin Bitcoin ETF under BZX Rule 14.11(e)(4) (Commodity-Based Trust
Shares) (collectively, the ``Bitcoin ETPs'').\39\ In the Bitcoin ETP
Approval Order, the Commission found that the proposed rule changes to
list the Bitcoin ETPs demonstrated that there were ``sufficient `other
means' of preventing fraud and manipulation,'' including that:
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\39\ Securities Exchange Act Release No. 99306 (January 10,
2024), 89 FR 3008 (January 17, 2024) (SR-NYSEARCA-2021-90; SR-
NYSEARCA-2023-44; SR-NYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-
NASDAQ-2023-019; SR-CboeBZX-2023-028; SR-CboeBZX-2023-038; SR-
CboeBZX-2023-040; SR-CboeBZX-2023-042; SR-CboeBZX-2023-044; SR-
CboeBZX-2023-072) (Order Granting Accelerated Approval of Proposed
Rule Changes, as Modified by Amendments Thereto, to List and Trade
Bitcoin-Based Commodity-Based Trust Shares and Trust Units) (the
``Bitcoin ETP Approval Order'').
[B]ased on the record before the Commission and the improved
quality of the correlation analysis in the record, including the
Commission's own analysis, the Commission is able to conclude that
fraud or manipulation that impacts prices in spot bitcoin markets
would likely similarly impact CME bitcoin futures prices. And
because the CME's surveillance can assist in detecting those impacts
on CME bitcoin futures prices, the Exchanges' comprehensive
surveillance-sharing agreement with the CME--a U.S. regulated market
whose bitcoin futures market is consistently highly correlated to
spot bitcoin, albeit not of ``significant size'' related to spot
bitcoin--can be reasonably expected to assist in surveilling for
fraudulent and manipulative acts and practices in the specific
context of the [Bitcoin ETPs].\40\
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\40\ Bitcoin ETP Approval Order, 89 FR 3009-11.
Similarly, on May 23, 2024, the Commission approved the listing and
trading of shares of the Grayscale Ethereum Trust and the Bitwise
Ethereum ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares); the iShares Ethereum Trust under Nasdaq Rule 5711(d)
(Commodity-Based Trust Shares); and the VanEck Ethereum Trust, ARK
21Shares Ethereum ETF, Invesco Galaxy Ethereum ETF, Fidelity Ethereum
Fund, and the Franklin Ethereum ETF under BZX Rule 14.11(e)(4)
(Commodity-Based Trust Shares) (collectively, the ``Ether ETPs'').\41\
In the Ether ETP Approval Order, the Commission found that the proposed
rule changes to list the Ether ETPs demonstrated that there were
[[Page 87696]]
``sufficient `other means' of preventing fraud and manipulation,''
including that:
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\41\ Securities Exchange Act Release No. 100224 (May 23, 2024),
89 FR 46937 (May 30, 2024) (SR-NYSEARCA-2023-70; SR-NYSEARCA-2024-
31; SRNASDAQ-2023-045; SR-CboeBZX-2023-069; SR-CboeBZX-2023-070; SR-
CboeBZX-2023-087; SR-CboeBZX-2023-095; SR-CboeBZX-2024-018) (Order
Granting Accelerated Approval of Proposed Rule Changes, as Modified
by Amendments Thereto, to List and Trade Shares of Ether-Based
Exchange-Traded Products) (the ``Ether ETP Approval Order'').
[B]ased on the record before the Commission and the correlation
analyses in the record, including the Commission's own analysis, the
Commission is able to conclude that fraud or manipulation that
impacts prices in spot ether markets would likely similarly impact
CME ether futures prices. And because the CME's surveillance can
assist in detecting those impacts on CME ether futures prices, the
Exchanges' comprehensive surveillance-sharing agreement with the
CME--a U.S.-regulated market whose ether futures market is
consistently highly correlated to spot ether, albeit not of
``significant size'' related to spot ether--can be reasonably
expected to assist in surveilling for fraudulent and manipulative
acts and practices in the specific context of the [Ether ETPs].\42\
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\42\ Ether ETP Approval Order, 89 FR 46941.
The Fund is structured and will operate in a manner materially the
same as the Bitcoin ETPs and Ether ETPs and the Fund Components
primarily consist of Bitcoin and Ether. Accordingly, the Manager
believes that, for the reasons set forth in the Bitcoin ETP Approval
Order and Ether ETP Approval Order, listing and trading Shares of the
Fund would be consistent with the requirements of the Act.\43\
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\43\ In particular, Grayscale Bitcoin Trust (BTC) (``GBTC'') and
Grayscale Ethereum Trust (ETH) (``ETHE''), affiliates of the Fund
that are structured substantially similarly to the Fund, currently
list their shares on the Exchange under NYSE Arca Rule 8.201-E. The
Fund will have the same service providers as GBTC and ETHE.
---------------------------------------------------------------------------
The Manager acknowledges that the Fund Components currently include
minority positions in digital assets that are not Bitcoin or Ether
(i.e., SOL, XRP, and AVAX). The Manager also represents that,
consistent with proposed Rule 8.800-E(c)(1), no more than 10% of the
weight of its digital asset holdings will consist of digital assets
concerning which the Exchange may not be able to obtain information via
the ISG or via a CSSA. In the context of prior spot digital asset ETP
proposal disapproval orders for Bitcoin and Ether, the Commission
expressed concerns about the underlying Digital Asset Market due to the
potential for fraud and manipulation and has outlined the reasons why
such ETP proposals have been unable to satisfy these concerns.\44\ For
purposes of the Fund's proposal, the Manager anticipates that the
Commission may have the same concerns about the non-Bitcoin and Ether
assets and addresses each of these in turn below.
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\44\ See Securities Exchange Act Release Nos. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (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 Fund) (the ``Winklevoss
Order''); 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019)
(SR-NYSEArca-2019-01) (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 Fund Under NYSE Arca Rule 8.201-E)
(the ``Bitwise Order''); 88284 (February 26, 2020), 85 FR 12595
(March 3, 2020) (SR-NYSEArca-2019-39) (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) (the ``Wilshire Phoenix Order''); 83904
(August 22, 2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017-
139) (Order Disapproving a Proposed Rule Change to List and Trade
the Shares of the ProShares Bitcoin ETF and the ProShares Short
Bitcoin ETF) (the ``ProShares Order''); 83912 (August 22, 2018), 83
FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02) (Order Disapproving
a Proposed Rule Change Relating to Listing and Trading of the
Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X
Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares
Under NYSE Arca Rule 8.200-E) (the ``Direxion Order''); 83913
(August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-2018-
01) (Order Disapproving a Proposed Rule Change to List and Trade the
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short
Bitcoin ETF) (the ``GraniteShares Order'') (together, the ``Prior
Spot Digital Asset ETP Disapproval Orders'').
---------------------------------------------------------------------------
In the Prior Spot Digital Asset ETP Disapproval Orders, the
Commission outlined that a proposal relating to a digital asset-based
ETP could satisfy its concerns regarding potential for fraud and
manipulation by demonstrating:
(1) Inherent Resistance to Fraud and Manipulation: that the
underlying commodity market is inherently resistant to fraud and
manipulation;
(2) Other Means to Prevent Fraud and Manipulation: that there are
other means to prevent fraudulent and manipulative acts and practices
that are sufficient; or
(3) Surveillance Sharing: that the listing exchange has entered
into a surveillance sharing agreement with a regulated market of
significant size relating to the underlying or reference assets.
As described below, the Manager believes the structure and
operation of the Fund are designed to prevent fraudulent and
manipulative acts and practices, to protect investors and the public
interest, and to respond to concerns that the Commission may have with
respect to potential fraud and manipulation in the context of a Digital
Asset-based ETP.
How the Fund Meets Standards in the Prior Spot Digital Asset ETP
Disapproval Orders
1. Resistance to or Prevention of Fraud and Manipulation
In the Prior Spot Digital Asset ETP Disapproval Orders, the
Commission disagreed with the proposition that a digital asset's
fungibility, transportability and exchange tradability combine to
provide unique protections against, and allow such digital asset to be
uniquely resistant to, attempts at price manipulation. The Commission
reached its conclusion based on concessions by one issuer that 95% of
the reported trading in the digital asset, Bitcoin, is ``fake'' or non-
economic, effectively admitting that the properties of Bitcoin do not
make it inherently resistant to manipulation. Such issuer's concessions
were further compounded by evidence of potential and actual fraud and
manipulation in the historical trading of Bitcoin on certain
marketplaces such as (1) ``wash'' trading, (2) trading based on
material, non-public information, including the dissemination of false
and misleading information, (3) manipulative activity involving Tether,
and (4) fraud and manipulation.\45\
---------------------------------------------------------------------------
\45\ See Bitwise Order, 84 FR 55383 (discussing analysis of the
Bitcoin spot market that asserts that 95% of the spot market is
dominated by fake and non-economic activity, such as wash trades),
55391 (discussing possible sources of fraud and manipulation in the
bitcoin spot market). See also Winklevoss Order, 83 FR 37585-86
(discussing pending litigation against a Bitcoin trading platform
for fraudulent conduct relating to Tether); Bitwise Order, 84 FR
55391 n.140, 55402 & n.331 (same); Winklevoss Order, 83 FR 37584-86
(discussing potential types of manipulation in the Bitcoin spot
market). The Commission has also noted that fraud and manipulation
in the Bitcoin spot market could persist for a significant duration.
See, e.g., Bitwise Order, 84 FR 55405 & n.379.
---------------------------------------------------------------------------
The Manager acknowledges the possibility that fraud and
manipulation may exist in commodity markets and that digital asset
trading, such as certain of the Fund Components, on any given trading
platform may be no more uniquely resistant to fraud and manipulation
than other commodity markets.\46\ However, the Manager believes that
the fundamental features of digital assets, including fungibility,
transportability and exchange tradability offer novel protections
beyond those that exist in traditional commodity markets or equity
markets when combined with other means, as discussed further below.
---------------------------------------------------------------------------
\46\ See generally Bitwise Order.
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[[Page 87697]]
2. Other Means To Prevent Fraud and Manipulation
The Commission has recognized that a listing exchange could
demonstrate that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
requisite surveillance-sharing agreement.\47\ In evaluating the
effectiveness of this type of resistance, the Commission does not apply
a ``cannot be manipulated'' standard. Instead, the Commission requires
that such resistance to fraud and manipulation be novel and beyond
those protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing derivative securities
products.\48\
---------------------------------------------------------------------------
\47\ See Winklevoss Order, 84 FR 37580, 37582-91; Bitwise Order,
84 FR 55383, 55385-406; Wilshire Phoenix Order, 85 FR 12597.
\48\ See Winklevoss Order, 84 FR 37582; Wilshire Phoenix Order,
85 FR 12597.
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The Manager believes the Fund's use of the Index and Digital Asset
Reference Rates represents a novel means to prevent fraud and
manipulation from impacting a reference price for the Fund Components
and that it offers protections beyond those that exist in traditional
commodity markets or equity markets. Specifically, digital assets, such
as the Fund Components, are novel and exist outside traditional
commodity markets. It therefore stands to reason that the methods by
which they trade will be novel and that the market for digital assets
like the Fund Components will have different attributes than
traditional commodity markets. Digital assets like the Fund Components
were only introduced within the past decade, twenty years after the
first U.S. exchange-traded funds (``ETFs'') were offered \49\ and 150
years after the first futures were offered.\50\ In contrast to older
commodities such as gold, silver, platinum, palladium or copper, which
the Commission has noted all had at least one significant, regulated
market for trading futures on the underlying commodity at the time
commodity trust ETPs were approved for listing and trading, the first
trading in digital assets like the Fund Components took place entirely
in an open, transparent and online setting where other commodities
cannot trade.
---------------------------------------------------------------------------
\49\ SEC, ``Investor Bulletin: Exchange-Traded Funds (ETFs),''
August 2012, <a href="https://www.sec.gov/investor/alerts/etfs.pdf">https://www.sec.gov/investor/alerts/etfs.pdf</a>.
\50\ Commodity Futures Trading Commission (``CFTC''), ``History
of the CFTC,'' <a href="https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html">https://www.cftc.gov/About/HistoryoftheCFTC/history_precftc.html</a>.
---------------------------------------------------------------------------
The Fund has priced its Shares consistently for approximately two
years based on the Index and its use of the Digital Asset Reference
Rates. The Manager believes the Fund's use of the Index and Digital
Asset Reference Rates specifically addresses the Commission's concerns
in that they serve as an alternative means to prevent fraud and
manipulation. Specifically, the Index and its use of the Digital Asset
Reference Rates can (i) mitigate the effects of fraud, manipulation and
other anomalous trading activity on the Fund Components' reference
rates, (ii) provide a real-time, volume-weighted fair value of the Fund
Components and (iii) appropriately handle and adjust for non-market
related events.
As described in more detail below, the Manager believes that the
Index and its use of Digital Asset Reference Rates accomplishes those
objectives in the following ways:
1. The Digital Asset Reference Rates track the Digital Asset
Trading Platform Market prices through trading activity at ``U.S.-
Compliant Trading Platforms''; \51\
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\51\ ``U.S.-Compliant Trading Platforms'' are trading platforms
in the Digital Asset Trading Platform Market that are compliant with
applicable U.S. federal and state licensing requirements and
practices regarding AML and KYC regulations. All Constituent Trading
Platforms are U.S.-Compliant Trading Platforms. ``Non-U.S.-Compliant
Trading Platforms'' are all other trading platforms in the Digital
Asset Trading Platform Market. From these U.S.-Compliant Trading
Platforms, the Reference Rate Provider then applies additional
Inclusion Criteria to determine the Constituent Trading Platforms.
As of June 30, 2024, the U.S.-Compliant Trading Platforms that the
Reference Rate Provider considered for inclusion in the Digital
Asset Reference Rates were Coinbase, Kraken, LMAX Digital and
<a href="http://Crypto.com">Crypto.com</a>.
---------------------------------------------------------------------------
2. The Digital Asset Reference Rates are constructed and maintained
by an expert third-party index provider, allowing for prudent handling
of non-market-related events; and
3. The Digital Asset Reference Rates mitigate the impact of
instances of fraud, manipulation and other anomalous trading activity
concentrated on any one specific trading platform through a cross-
trading platform composite reference rate over a 60-minute period.
1. The Digital Asset Reference Rates Track the Digital Asset Trading
Platform Market Price Through Trading Activity at ``U.S.-Compliant
Trading Platforms''
To reduce the risk of fraud, manipulation, and other anomalous
trading activity from impacting the Digital Asset Reference Rates, only
U.S.-Compliant Trading Platforms are eligible to be included in the
Digital Asset Reference Rates.
The Digital Asset Reference Rates maintain a minimum of two and a
maximum of three trading platforms to track the Digital Asset Trading
Platform Market while offering replicability for traders and market
makers.\52\
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\52\ According to the Manager, the more trading platforms
included in the Digital Asset Reference Rate, the more ability there
is for traders and market makers to trade against the Digital Asset
Reference Rate by arbitraging price differences. For example, in the
event of variances between Fund Component prices on Constituent
Trading Platforms and non-Constituent Trading Platforms, arbitrage
trading opportunities would exist. These discrepancies generally
consolidate over time, as price differences across trading platforms
are realized and capitalized upon by traders and market makers.
---------------------------------------------------------------------------
U.S.-Compliant Trading Platforms possess safeguards that protect
against fraud and manipulation. For example, U.S.-Compliant Trading
Platforms regulated by the NYDFS under the BitLicense program have
regulatory requirements to implement measures designed to effectively
detect, prevent, and respond to fraud, attempted fraud, market
manipulation, and similar wrongdoing, and to monitor, control,
investigate and report back to the NYDFS regarding any wrongdoing.\53\
These trading platforms also have the following obligations: \54\
---------------------------------------------------------------------------
\53\ See, e.g., ``DFS Takes Action to Deter Fraud and
Manipulation in Virtual Currency Markets,'' available at: <a href="https://www.dfs.ny.gov/about/press/pr1802071.htm">https://www.dfs.ny.gov/about/press/pr1802071.htm</a>.
\54\ See ``New York's Final ``BitLicense'' Rule: Overview and
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk,
available at: <a href="https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf">https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf</a>.
---------------------------------------------------------------------------
<bullet> Submission of audited financial statements including
income statements, statements of assets/liabilities, insurance, and
banking;
<bullet> Compliance with capitalization requirements set at NYDFS's
discretion;
<bullet> Prohibitions against the sale or encumbrance to protect
full reserves of custodian assets;
<bullet> Fingerprints and photographs of employees with access to
customer funds;
<bullet> Retention of a qualified Chief Information Security
Officer and annual penetration testing/audits;
<bullet> Documented business continuity and disaster recovery plan,
independently tested annually; and
<bullet> Participation in an independent exam by NYDFS.
Other U.S.-Compliant Trading Platforms have voluntarily implemented
measures to protect against common forms of market manipulation.\55\
---------------------------------------------------------------------------
\55\ As of the date of this filing, two of the five Constituent
Trading Platforms, Coinbase, is regulated by NYDFS.
---------------------------------------------------------------------------
Furthermore, all U.S.-Compliant Trading Platforms are considered
MSBs
[[Page 87698]]
that are subject to FinCEN's federal and state reporting requirements
that provide additional safeguards. For example, unscrupulous traders
may be less likely to engage in fraudulent or manipulative acts and
practices on trading platforms that (1) report suspicious activity to
FinCEN as money services businesses, (2) report to state regulators as
money transmitters, and/or (3) require customer identification through
KYC procedures. U.S.-Compliant Trading Platforms are required to: \56\
---------------------------------------------------------------------------
\56\ See BSA Requirements for MSBs, FinCEN website: <a href="https://www.fincen.gov/bsarequirements-msbs">https://www.fincen.gov/bsarequirements-msbs</a>.
---------------------------------------------------------------------------
<bullet> Identify people with ownership stakes or controlling roles
in the MSB;
<bullet> Establish a formal Anti-Money Laundering (AML) policy in
place with documentation, training, independent review, and a named
compliance officer;
<bullet> Implement strict customer identification and verification
policies and procedures;
<bullet> File Suspicious Activity Reports (SARs) for suspicious
customer transactions;
<bullet> File Currency Transaction Reports (CTRs) for cash-in or
cash-out transactions greater than $10,000; and
<bullet> Maintain a five-year record of currency exchanges greater
than $1,000 and money transfers greater than $3,000.
Lastly, because of Bitcoin's and Ether's classifications as
commodities, the CFTC has authority to police fraud and manipulation on
U.S.-Compliant Trading Platforms that trade those digital assets.\57\
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\57\ ``U.S. CFTC Chief Behnam Reinforces View of Ether as
Commodity,'' CoinDesk (Mar. 28, 2023), <a href="https://www.coindesk.com/policy/2023/03/28/us-cftc-chief-behnam-reinforces-view-of-ether-as-commodity/">https://www.coindesk.com/policy/2023/03/28/us-cftc-chief-behnam-reinforces-view-of-ether-as-commodity/</a>; CME Group, <a href="https://www.cmegroup.com/markets/cryptocurrencies/ether/ether.html?gad=1&gclid=EAIaIQobChMI44KBmu7ygAMVavvjBx2P4g5yEAAYASAAEgJSZfD_BwE&gclsrc=aw.ds">https://www.cmegroup.com/markets/cryptocurrencies/ether/ether.html?gad=1&gclid=EAIaIQobChMI44KBmu7ygAMVavvjBx2P4g5yEAAYASAAEgJSZfD_BwE&gclsrc=aw.ds</a>.
---------------------------------------------------------------------------
The Manager acknowledges that there are substantial differences
between FinCEN and New York state regulations and the Commission's
regulation of the national securities exchanges.\58\ The Manager does
not believe the inclusion of U.S.-Compliant Trading Platforms is in and
of itself sufficient to prove that the Digital Asset Reference Rates
are an alternative means to prevent fraud and manipulation such that
surveillance sharing agreements are not required, but does believe that
the inclusion of only U.S.-Compliant Trading Platforms in the Digital
Asset Reference Rates is one significant way in which the Digital Asset
Reference Rates are protected from the potential impacts of fraud and
manipulation.
---------------------------------------------------------------------------
\58\ See Bitwise Order, 84 FR 55392; Wilshire Phoenix Order, 85
FR 12603.
---------------------------------------------------------------------------
2. The Digital Asset Reference Rates Are Constructed and Maintained by
an Expert Third-Party Index Provider, Allowing for Prudent Handling of
Non-Market-Related Events
The Reference Rate Provider reviews and periodically updates which
trading platforms are included in the Digital Asset Reference Rates by
utilizing a methodology that is guided by the IOSCO principles for
financial benchmarks.
According to the Reference Rate Provider's methodology, for a
trading platform to become a Constituent Trading Platform, it must
satisfy the following Inclusion Criteria:
<bullet> Sufficient USD or USDC liquidity relative to the size of
the listed assets;
<bullet> No evidence in the past 12 months of trading restrictions
on individuals or entities that would otherwise meet the trading
platform's eligibility requirements to trade;
<bullet> No evidence in the past 12 months of undisclosed
restrictions on deposits or withdrawals from user accounts;
<bullet> Real-time price discovery;
<bullet> Limited or no capital controls;
<bullet> Transparent ownership including a publicly-owned ownership
entity;
<bullet> Publicly available language and policies addressing legal
and regulatory compliance in the US, including KYC, AML and other
policies designed to comply with relevant regulations that might apply
to it;
<bullet> Be an exchange that is licensed and able to service
investors in one or more of the following jurisdictions: United States,
United Kingdom; European Union; Hong Kong; or Singapore
<bullet> Offer programmatic spot trading of the trading pair and
reliably publish trade prices and volumes on a real-time basis through
Rest and Websocket APIs.
Although the Reference Rate Provider's methodology is designed to
operate without any human interference, rare events would justify
manual intervention. Manual intervention would only be in response to
``non-market-related events'' (e.g., halting of deposits or withdrawals
of funds, unannounced closure of trading platform operations,
insolvency, compromise of user funds, etc.). In the event that such an
intervention is necessary, the Reference Rate Provider would issue a
public announcement through its website, API and other established
communication channels with its clients.\59\
---------------------------------------------------------------------------
\59\ To the extent any such intervention has a material impact
on the Fund, the Manager will also issue a public announcement.
---------------------------------------------------------------------------
3. The Digital Asset References Rates Mitigate the Impact of Instances
of Fraud, Manipulation and Other Anomalous Trading Activity
Concentrated on Any One Specific Trading Platform Through a Cross-
Trading Platform Composite Reference Rate Over a 60-Minute Period
The Digital Asset Reference Rates are based on the price and volume
data of multiple U.S.-Compliant Trading Platforms over a 60-minute
period that satisfy the Reference Rate Provider's Inclusion Criteria.
By referencing multiple trading venues and weighting them based on
trade activity, the impact of any potential fraud, manipulation, or
anomalous trading activity occurring on any single venue is reduced.
Specifically, the effects of fraud, manipulation, or anomalous trading
activity occurring on any single venue are de-weighted and consequently
diluted by non-anomalous trading activity from other Constituent
Trading Platforms.
Although each Digital Asset Reference Rate is designed to
accurately capture the market price of the digital asset it tracks,
third parties may be able to purchase and sell such digital assets on
public or private markets not included among the constituent Digital
Asset Trading Platforms of such Digital Asset Reference Rate, and such
transactions may take place at prices materially higher or lower than
the Digital Asset Reference Rate. Moreover, there may be variances in
the prices of digital assets on the various Digital Asset Trading
Platforms, including as a result of differences in fee structures or
administrative procedures on different Digital Asset Trading Platforms.
For example, based on data provided by the Reference Rate Provider,
on any given day during the twelve months ended June 30, 2024, the
maximum differential between the 4:00 p.m., New York time spot price of
Bitcoin on any single Digital Asset Trading Platform included in the
Digital Asset Reference Rate was 1.47% and the average of the maximum
differentials of the 4:00 p.m., New York time spot price of each
Digital Asset Trading Platform included in the Digital Asset Reference
Rate was 1.33%. During this same period, the average differential
between the 4:00 p.m., New York time spot prices of all the Digital
Asset Trading Platforms included in the Digital Asset Reference Rate
was 0.01%. Further, on any given day during the twelve months ended
June 30, 2024, the maximum differential between the 4:00 p.m., New York
time spot price of Ether on any single Digital Asset Trading Platform
included in the Digital Asset
[[Page 87699]]
Reference Rate was 2.80% and the average of the maximum differentials
of the 4:00 p.m., New York time spot price of each Digital Asset
Trading Platform included in the Digital Asset Reference Rate was
2.46%. During this same period, the average differential between the
4:00 p.m., New York time spot prices of all the Digital Asset Trading
Platforms included in the Digital Asset Reference Rate was 0.02%. All
Digital Asset Trading Platforms that were included in the relevant
Digital Asset Reference Rate throughout the period were considered in
this analysis.\60\
---------------------------------------------------------------------------
\60\ All Digital Asset Trading Platforms that were included in
the Digital Asset Reference Rates throughout the period were
considered in this analysis.
---------------------------------------------------------------------------
For approximately two years, the Fund has consistently priced its
Shares at 4:00 p.m., New York time based on the Index and its use of
the Digital Asset Reference Rates. While that pricing would be known to
the market, the Manager believes that, even if efforts to manipulate
the price of the Fund Components at 4:00 p.m., E.T. were successful on
any trading platform, such activity would have had a limited effect on
the pricing of the Fund, due to the controls embedded in the structure
of the Index and its use of the Digital Asset Reference Rates.
Accordingly, the Manager believes that the Index and it use of the
Digital Asset Reference Rates have proven their ability to (i) mitigate
the effects of fraud, manipulation and other anomalous trading activity
on the Fund Components reference rates, (ii) provide a real-time,
volume-weighted fair value of the Fund Components and (iii)
appropriately handle and adjust for non-market related events. For
these reasons, the Manager believes that the Index represents an
effective alternative means to prevent fraud and manipulation and the
Fund's reliance on the Index and its use of the Digital Asset Reference
Rates addresses the Commission's concerns with respect to potential
fraud and manipulation.
Creation and Redemption of Shares
Authorized Participants may submit orders to create or redeem
Shares under procedures for ``Cash Orders.''
The Authorized Participants will deliver only cash to create Shares
and will receive only cash when redeeming Shares. Further, Authorized
Participants will not directly or indirectly purchase, hold, deliver,
or receive the Fund Components as part of the creation or redemption
process or otherwise direct the Fund or a third party with respect to
purchasing, holding, delivering, or receiving the Fund Components as
part of the creation or redemption process.
The Fund will create Shares by receiving the Fund Components from a
third party that is not the Authorized Participant and the Fund, or an
affiliate of the Fund (and in any event not the Authorized
Participant), is responsible for selecting the third party to deliver
the Fund Components. Further, the third party will not be acting as an
agent of the Authorized Participant with respect to the delivery of the
Fund Components to the Fund or acting at the direction of the
Authorized Participant with respect to the delivery of the Fund
Components to the Fund. The Fund will redeem Shares by delivering the
Fund Components to a third party that is not the Authorized Participant
and the Fund, or an affiliate of the Fund (and in any event not the
Authorized Participant), is responsible for selecting the third party
to receive the Fund Components. Further, the third party will not be
acting as an agent of the Authorized Participant with respect to the
receipt of the Fund Components from the Fund or acting at the direction
of the Authorized Participant with respect to the receipt of the Fund
Components from the Fund.
Cash Orders are made through the participation of a Liquidity
Provider \61\ who obtains or receives the Fund Components in exchange
for cash, and are facilitated by the Transfer Agent and Grayscale
Investments, LLC, acting in its capacity as the Liquidity Engager.
Liquidity Providers are not party to the Participant Agreements (as
defined below) and are engaged separately by the Liquidity Engager.
---------------------------------------------------------------------------
\61\ A ``Liquidity Provider'' means one or more eligible
companies that facilitate the purchase and sale of the Fund
Components in connection with creations or redemptions pursuant to
Cash Orders. The Liquidity Providers with which Grayscale
Investments, LLC, acting other than in its capacity as the Manager
(in such other capacity, the ``Liquidity Engager'') will engage in
Fund Component transactions are third parties that are not
affiliated with the Manager or the Fund and are not acting as agents
of the Fund, the Manager, or any Authorized Participant, and all
transactions will be done on an arms-length basis. Except for the
contractual relationships between each Liquidity Provider and
Grayscale Investments, LLC in its capacity as the Liquidity Engager,
there is no contractual relationship between each Liquidity Provider
and the Fund, the Manager, or any Authorized Participant. When
seeking to buy Fund Components in connection with creations or sell
Fund Components in connection with redemptions, the Liquidity
Engager will seek to obtain commercially reasonable prices and terms
from the approved Liquidity Providers. Once agreed upon, the
transaction will generally occur on an ``over-the-counter'' basis.
---------------------------------------------------------------------------
According to the Registration Statement, the Fund creates Baskets
(as described below) of Shares only upon receipt of the Fund Components
and redeems Shares only by distributing the Fund Components.
``Authorized Participants'' are the only persons that may place orders
to create and redeem Baskets. Each Authorized Participant must (i) be a
registered broker-dealer and (ii) enter into an agreement with the
Manager and Transfer Agent that provides the procedures for the
creation and redemption of Baskets and for the delivery of the Fund
Components required for the creation and redemption of Baskets via a
Liquidity Provider (each, a ``Participant Agreement''). An Authorized
Participant may act for its own account or as agent for broker-dealers,
custodians and other securities market participants that wish to create
or redeem Baskets. Shareholders who are not Authorized Participants
will only be able to create or redeem their Shares through an
Authorized Participant.
The Fund issues Shares to and redeems Shares from Authorized
Participants on an ongoing basis, but only in one or more ``Baskets''
(with a Basket being a block of 10,000 Shares). The Fund will not issue
fractions of a Basket.
The creation and redemption of Baskets will be made only in
exchange for the delivery to the Fund, or the distribution by the Fund,
of the number of whole and fractional Fund Components represented by
each Basket being created or redeemed, which is determined by dividing
(x) the number of the Fund Components owned by the Fund at 4:00 p.m.,
New York time, on the trade date of a creation or redemption order,
after deducting the number of Fund Components representing the U.S.
dollar value of accrued but unpaid fees and expenses of the Fund
(converted using the Digital Asset Reference Rates at such time, and
carried to the eighth decimal place), by (y) the number of Shares
outstanding at such time (with the quotient so obtained calculated to
one one-hundred-millionth of the Fund Components (i.e., carried to the
eighth decimal place)), and multiplying such quotient by 10,000 (the
``Basket Amount''). The U.S. dollar value of a Basket is calculated by
multiplying the Basket Amount by the Digital Asset Reference Rates as
of the trade date (the ``Basket NAV''). The Basket NAV multiplied by
the number of Baskets being created or redeemed is referred to as the
``Total Basket NAV.'' All questions as to the calculation of the Basket
Amount will be conclusively determined by the Manager and will be final
and binding on all persons interested in the Fund. The number the Fund
Components represented by a Share will gradually decrease over time
[[Page 87700]]
as the Fund Components are used to pay the Fund's expenses. Each Share
represented approximately 0.0004 of one Bitcoin, 0.0023 of one Ether,
0.0085 of one SOL, 0.0072 of one AVAX, and 1.0537 of one XRP as of June
30, 2024.
The creation of Baskets requires the delivery to the Fund of the
Total Basket Amount and the redemption of Baskets requires the
distribution by the Fund of the Total Basket Amount.
Although the Fund creates Baskets only upon the receipt of the Fund
Components, and redeems Baskets only by distributing the Fund
Components, an Authorized Participant will submit Cash Orders, pursuant
to which the Authorized Participant will deposit cash with, or accept
cash from, the Transfer Agent in connection with the creation and
redemption of Baskets.
Cash Orders will be facilitated by the Transfer Agent and Liquidity
Engager, acting other than in its capacity as Manager. On an order-by-
order basis, the Liquidity Engager will engage one or more Liquidity
Providers to obtain or receive the Fund Components in exchange for cash
in connection with such order, as described in more detail below.
Unless the Manager requires that a Cash Order be effected at actual
execution prices (an ``Actual Execution Cash Order''),\62\ each
Authorized Participant that submits a Cash Order to create or redeem
Baskets (a ``Variable Fee Cash Order'') \63\ will pay a fee (the
``Variable Fee'') based on the Total Basket NAV, and any price
differential of the Fund Components between the trade date and the
settlement date will be borne solely by the Liquidity Provider until
such Fund Components have been received or liquidated by the Fund. The
Variable Fee is intended to cover all of a Liquidity Provider's
expenses in connection with the creation or redemption order, including
any trading platform fees that the Liquidity Provider incurs in
connection with buying or selling the Fund Components. The amount may
be changed by the Manager in its sole discretion at any time, and
Liquidity Providers will communicate to the Manager in advance the
Variable Fee they would be willing to accept in connection with a
Variable Fee Cash Order, based on market conditions and other factors
existing at the time of such Variable Fee Cash Order.
---------------------------------------------------------------------------
\62\ With respect to a creation or redemption pursuant to an
Actual Execution Cash Order, as between the Fund and an Authorized
Participant, the Authorized Participant is responsible for the
dollar cost of the difference between the Fund Components' price
utilized in calculating Total Basket NAV on the trade date and the
price at which the Fund acquires or disposes of the Fund Components
on the settlement date. If the price realized in acquiring or
disposing of the corresponding Total Basket Amount is higher than
the Total Basket NAV, the Authorized Participant will bear the
dollar cost of such difference, in the case of a creation, by
delivering cash in the amount of such shortfall (the ``Additional
Creation Cash'') to the Cash Account or, in the case of a
redemption, with the amount of cash to be delivered to the
Authorized Participant being reduced by the amount of such
difference (the ``Redemption Cash Shortfall''). If the price
realized in acquiring the corresponding Total Basket Amount is lower
than the Total Basket NAV, the Authorized Participant will benefit
from such difference, with the Fund promptly returning cash in the
amount of such excess (the ``Excess Creation Cash'') to the
Authorized Participant.
\63\ Unless the Manager determines otherwise in its sole
discretion based on market conditions and other factors existing at
the time of such Cash Order, all creations and redemptions pursuant
to Cash Orders are expected to be executed as Variable Fee Cash
Orders, and any price differential of Fund Components between the
trade date and the settlement date will be borne solely by the
Liquidity Provider until such Fund Components have been received by
the Fund.
---------------------------------------------------------------------------
Alternatively, the Manager may require that a Cash Order be
effected as an Actual Execution Cash Order, in its sole discretion
based on market conditions and other factors existing at the time of
such Cash Order, and under such circumstances, any price differential
of the Fund Components between the trade date and the settlement date
will be borne solely by the Authorized Participant until such Fund
Components have been received or liquidated by the Fund.
In the case of creations, to transfer the Total Basket Amount to
the Fund's Digital Asset Account, the Liquidity Provider will transfer
the Fund Components to one of the public key addresses associated with
the Digital Asset Account and as provided by the Manager. In the case
of redemptions, the same procedure is conducted, but in reverse, using
the public key addresses associated with the wallet of the Liquidity
Provider and as provided by such party. All such transactions will be
conducted on the blockchain and parties acknowledge and agree that such
transfers may be irreversible if done incorrectly.
Authorized Participants do not pay a transaction fee to the Fund in
connection with the creation or redemption of Baskets, but there may be
transaction fees associated with the validation of the transfer of the
Fund Components by the online, end-user-to-end-user network hosting a
public transaction ledger, known as a Blockchain, and the source code
comprising the basis for the cryptographic and algorithmic protocols
governing such network, which will be paid by the Custodian in the case
of redemptions and the Authorized Participant or the Liquidity Provider
in the case of creations. Service providers may charge Authorized
Participants administrative fees for order placement and other services
related to creation of Baskets. As discussed above, Authorized
Participants will also pay the Variable Fee in connection with Variable
Fee Cash Orders. Under certain circumstances Authorized Participants
may also be required to deposit additional cash in the Cash Account, or
be entitled to receive excess cash from the Cash Account, in connection
with creations and redemptions pursuant to Actual Execution Cash
Orders. Authorized Participants will receive no fees, commissions or
other form of compensation or inducement of any kind from either the
Manager or the Fund and no such person has any obligation or
responsibility to the Manager or the Fund to effect any sale or resale
of Shares.
Creation Procedures
On any business day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Baskets.
Cash Orders for creation must be placed with the Transfer Agent no
later than 1:59:59 p.m., New York time.
The Manager may in its sole discretion limit the number of Shares
created pursuant to Cash Orders on any specified day without notice to
the Authorized Participants and may direct the Marketing Agent to
reject any Cash Orders in excess of such capped amount. In exercising
its discretion to limit the number of Shares created pursuant to Cash
Orders, the Manager expects to take into consideration a number of
factors, including the availability of Liquidity Providers to
facilitate Cash Orders and the cost of processing Cash Orders.
Creations under Cash Orders will take place as follows, where ``T''
is the trade date and each day in the sequence must be a business day.
Before a creation order is placed, the Manager determines if such
creation order will be a Variable Fee Cash Order or an Actual Execution
Cash Order, which determination is communicated to the Authorized
Participant.
[[Page 87701]]
----------------------------------------------------------------------------------------------------------------
Settlement date (T+1, or T+2, as established at the
Trade date (T) time of order placement)
----------------------------------------------------------------------------------------------------------------
<bullet> The Authorized Participant places a creation <bullet> The Authorized Participant delivers to the
order with the Transfer Agent. Cash Account: *
(x) in the case of a Variable Fee Cash Order, the Total
Basket NAV, plus any Variable Fee; or
(y) in the case of an Actual Execution Cash Order, the
Total Basket NAV, plus any Additional Creation Cash,
less any Excess Creation Cash, if applicable (such
amount, as applicable, the ``Required Creation
Cash'').
<bullet> The Marketing Agent accepts (or rejects) the <bullet> The Liquidity Provider transfers the Total
creation order, which is communicated to the Basket Amount to the Fund's Vault Balance.
Authorized Participant by the Transfer Agent.
<bullet> The Manager notifies the Liquidity Provider of <bullet> Once the Fund is in simultaneous possession of
the creation order. (x) the Total Basket Amount and (y) the Required
Creation Cash, the Fund issues the aggregate number of
Shares corresponding to the Baskets ordered by the
Authorized Participant, which the Transfer Agent holds
for the benefit of the Authorized Participant.
<bullet> The Manager determines the Total Basket NAV <bullet> Cash equal to the Required Creation Cash is
and any Variable Fee and Additional Creation Cash as delivered to the Liquidity Provider from the Cash
soon as practicable after 4:00 p.m., New York time. Account.
<bullet> The Transfer Agent delivers Shares to the
Authorized Participant by crediting the number of
Baskets created to the Authorized Participant's DTC
account.
----------------------------------------------------------------------------------------------------------------
* The ``Cash Account'' means the account maintained by the Transfer Agent for purposes of receiving cash from,
and distributing cash to, Authorized Participants in connection with creations and redemptions pursuant to
Cash Orders. For the avoidance of doubt, the Fund shall have no interest (beneficial, equitable or otherwise)
in the Cash Account or any cash held therein.
Redemption Procedures
The procedures by which an Authorized Participant can redeem one or
more Baskets mirror the procedures for the creation of Baskets. On any
business day, an Authorized Participant may place a redemption order
specifying the number of Baskets to be redeemed.
The redemption of Shares pursuant to Cash Orders will only take
place if approved by the Manager in writing, in its sole discretion and
on a case-by-case basis. In exercising its discretion to approve the
redemption of Shares pursuant to Cash Orders, the Manager expects to
take into consideration a number of factors, including the availability
of Liquidity Providers to facilitate Cash Orders and the cost of
processing Cash Orders.
Cash Orders for redemption must be placed no later than 1:59:59
p.m., New York time on each business day. The Authorized Participants
may only redeem Baskets and cannot redeem any Shares in an amount less
than a Basket.
Redemptions under Cash Orders will take place as follows, where
``T'' is the trade date and each day in the sequence must be a business
day. Before a redemption order is placed, the Manager determines if
such redemption order will be a Variable Fee Cash Order or an Actual
Execution Cash Order, which determination is communicated to the
Authorized Participant.
----------------------------------------------------------------------------------------------------------------
Settlement date (T+1 (or T+2 on case[dash]by[dash]case
Trade date (T) basis, as approved by Manager))
----------------------------------------------------------------------------------------------------------------
<bullet> The Authorized Participant places a redemption <bullet> The Authorized Participant delivers Baskets to
order with the Transfer Agent. be redeemed from its DTC account to the Transfer
Agent.
<bullet> The Marketing Agent accepts (or rejects) the <bullet> The Liquidity Provider delivers to the Cash
redemption order, which is communicated to the Account:
Authorized Participant by the Transfer Agent. (x) in the case of a Variable Fee Cash Order, the Total
Basket NAV less any Variable Fee; or
(y) in the case of an Actual Execution Cash Order, the
actual proceeds to the Fund from the liquidation of
the Total Basket Amount (such amount, as applicable,
the ``Required Redemption Cash'').
<bullet> The Manager notifies the Liquidity Provider of <bullet> Once the Fund is in simultaneous possession of
the redemption order. (x) the Total Basket Amount and (y) the Required
Redemption Cash, the Transfer Agent cancels the Shares
comprising the number of Baskets redeemed by the
Authorized Participant.
<bullet> The Manager determines the Total Basket NAV <bullet> The Custodian sends the Liquidity Provider the
and, in the case of a Variable Fee Cash Order, any Total Basket Amount, and cash equal to the Required
Variable Fee, as soon as practicable after 4:00 p.m., Redemption Cash is delivered to the Authorized
New York time. Participant from the Cash Account.
----------------------------------------------------------------------------------------------------------------
Suspension or Rejection of Orders and Total Basket Amount
The creation or redemption of Shares may be suspended
generally,\64\ or refused with respect to particular requested
creations or redemptions, during any period when the transfer books of
the Transfer Agent are closed or if circumstances outside the control
of the Manager or its delegates make it for all practicable purposes
not feasible to process creation orders or redemption orders or for any
other reason at any time or from time to time.\65\ The
[[Page 87702]]
Transfer Agent may reject an order or, after accepting an order, may
cancel such order if: (i) such order is not presented in proper form as
described in the Participant Agreement, (ii) the transfer of the Total
Basket Amount comes from an account other than a wallet address that is
known to the Custodian as belonging to a Liquidity Provider or (iii)
the fulfillment of the order, in the opinion of counsel, might be
unlawful, among other reasons. None of the Manager or its delegates
will be liable for the suspension, rejection or acceptance of any
creation order or redemption order.
---------------------------------------------------------------------------
\64\ The Manager will notify the Exchange in the event that the
creation or redemption of Shares will be suspended generally and
will follow the Exchange's ``Immediate Release Policy.''
\65\ Extenuating circumstances outside of the control of the
Manager and its delegates or that could cause the transfer books of
the Transfer Agent to be closed are outlined in the Participant
Agreement and include, for example, public service or utility
problems, power outages resulting in telephone, telecopy and
computer failures, acts of God such as fires, floods or extreme
weather conditions, market conditions or activities causing trading
halts, systems failures involving computer or other information
systems, including any failures or outages of the Ethereum Network,
affecting the Authorized Participant, the Manager, the Fund, the
Transfer Agent, the Marketing Agent and the Custodian and similar
extraordinary events.
---------------------------------------------------------------------------
Availability of Information
The Fund's website (<a href="https://grayscale.com/crypto-products/grayscale-digital-large-cap-fund/">https://grayscale.com/crypto-products/grayscale-digital-large-cap-fund/</a>) will include quantitative
information on a per Share basis updated on a daily basis, including,
(i) the current NAV per Share daily and the prior business day's NAV
per Share and the reported closing price of the Shares; (ii) the mid-
point of the bid-ask price \66\ as of the time the NAV per Share is
calculated (``Bid-Ask Price'') and a calculation of the premium or
discount of such price against such NAV per Share; and (iii) data in
chart format displaying the frequency distribution of discounts and
premiums of the daily Bid-Ask Price against the NAV per Share, within
appropriate ranges, for each of the four previous calendar quarters (or
for as long as the Fund has been trading as an ETP if shorter). In
addition, on each business day the Fund's website will provide pricing
information for the Shares and disclosed the Fund's holdings,
including: (i) the name of each Fund Component; (ii) the quantify of
each Fund Component; and (iii) the weighting of each Fund Component.
---------------------------------------------------------------------------
\66\ The bid-ask price of the Fund is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day NAV.
---------------------------------------------------------------------------
One or more major market data vendors will provide the Intra-Day
Fund Value (``IFV'') per Share updated every 15 seconds, as calculated
by the Exchange or a third party financial data provider during the
Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m., E.T.).\67\ The
IFV will be calculated using the same methodology as the NAV per Share
of the Fund (as described above), specifically by using the prior day's
closing NAV per Share as a base and updating that value during the NYSE
Arca Core Trading Session to reflect changes in the value of the Fund's
NAV during the trading day.
---------------------------------------------------------------------------
\67\ The IFV on a per Share basis disseminated during the NYSE
Arca Core Trading Session should not be viewed as a real-time update
of the NAV, which is calculated once a day.
---------------------------------------------------------------------------
The IFV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real-time update of the NAV per
Share, which will be calculated only once at the end of each trading
day. The IFV will be widely disseminated on a per Share basis every 15
seconds during the NYSE Arca Core Trading Session by one or more major
market data vendors. In addition, the IFV will be available through on-
line information services.
The NAV for the Fund will be calculated by the Manager once a day
and will be disseminated daily to all market participants at the same
time. To the extent that the Manager has utilized the cascading set of
rules described in ``Index Price'' above, the Fund's website will note
the valuation methodology used and the price per Fund Components
resulting from such calculation. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA'').
Quotation and last sale information for the Fund Components will be
widely disseminated through a variety of major market data vendors,
including Bloomberg and Reuters. In addition, real-time price (and
volume) data for the Fund Components is available by subscription from
Reuters and Bloomberg. The spot price of the Fund Components 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, will be available from major market data
vendors and from the trading platforms on which the Fund Components are
traded. The normal trading hours for Digital Asset Trading Platforms
are 24-hours per day, 365-days per year.
On each business day, the Manager will publish the Digital Asset
Reference Rates, the Fund's NAV, and the NAV per Share on the Fund's
website as soon as practicable after its determination. If the NAV and
NAV per Share have been calculated using a price per Fund Components
other than the Digital Asset Reference Rates for such Evaluation Time,
the publication on the Fund's website will note the valuation
methodology used and the price per Fund Components resulting from such
calculation.
The Fund will provide website disclosure of its NAV daily. The
website disclosure of the Fund's NAV will occur at the same time as the
disclosure by the Manager of the NAV to Authorized Participants so that
all market participants are provided such portfolio information at the
same time. Therefore, the same portfolio information will be provided
on the public website as well as in electronic files provided to
Authorized Participants. Accordingly, each investor will have access to
the current NAV of the Fund through the Fund's website, as well as from
one or more major market data vendors.
The value of the Index, as well as additional information regarding
the Index such as the DLCS Methodology, is publicly available on a
continuous basis.
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 8.800-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.800-E(i), which sets forth certain
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting
as registered Market Makers in Commodity-Based Trust Shares to
facilitate surveillance. The Exchange represents that, for initial and
continued listing, the Fund will be in compliance with Rule 10A-3 \68\
under the Act, as provided by NYSE Arca Rule 5.3-E. A minimum of
100,000 Shares of the Fund will be outstanding at the commencement of
trading on the Exchange.
---------------------------------------------------------------------------
\68\ 17 CFR 240.10A-3.
---------------------------------------------------------------------------
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
[[Page 87703]]
the Fund.\69\ 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.
---------------------------------------------------------------------------
\69\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
The Exchange may halt trading during the day in which an
interruption to the dissemination of the IFV or the value of the Index
occurs. If the interruption to the dissemination of the IFV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the NYSE
Arca Core Trading Session on the trading day following the
interruption. In addition, if the Exchange becomes aware that the NAV
per Share is not disseminated to all market participants at the same
time, it will halt trading in the Shares until such time as the NAV per
Share is available to all market participants.
Surveillance
The Exchange 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.\70\ 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.
---------------------------------------------------------------------------
\70\ 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.
---------------------------------------------------------------------------
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 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 from such markets
and other entities. In addition, the Exchange may obtain information
regarding trading in the Shares from markets and other entities that
are members of ISG or with which the Exchange has in place a CSSA.\71\
The Exchange is also able to obtain information regarding trading in
the Shares in connection with such ETP Holders' proprietary or customer
trades which they effect through ETP Holders on any relevant market.
---------------------------------------------------------------------------
\71\ For a list of the current members of ISG, see
<a href="http://www.isgportal.org">www.isgportal.org</a>. The Exchange notes that not all Fund Components
may trade on markets that are members of ISG or with which the
Exchange has in place a CSSA, but that, consistent with proposed
Rule 8.800-E(c)(1), at least 90% of the Fund's commodity and/or
digital asset holdings will consist of commodities and/or digital
assets for which the Exchange may obtain information via the ISG
from other members or affiliates of the ISG or for which the
principal market is a market with which the Exchange has a CSSA.
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Under proposed Rule 8.800-E(i), an ETP Holder acting as a
registered Market Maker in the Shares is required to provide the
Exchange with information relating to its accounts for trading in any
underlying commodity, related futures or options on futures, or any
other related 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 and that subsidiary or affiliate is a
member of another regulatory organization, the Exchange could obtain
information regarding the activities of such subsidiary or affiliate
through a surveillance sharing agreement with that regulatory
organization.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolios of the Fund, (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 Manager 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, the Exchange will inform its
ETP Holders in an ``Information Bulletin'' of the special
characteristics and risks associated with trading the Shares.
Specifically, the Information Bulletin will discuss the following: (1)
the procedures for creations of Shares in Baskets; (2) 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; (3) information regarding how the value of the Digital
Asset Reference Rates and the IFV are disseminated; (4) the possibility
that trading spreads and the resulting premium or discount on the
Shares may widen during the Opening and Late Trading Sessions, when an
updated IFV will not be calculated or publicly disseminated; and (5)
trading information. The Exchange notes that investors purchasing
Shares directly from the Fund will receive a prospectus.
In addition, the Information Bulletin will reference that the Fund
is subject to various fees and expenses as described in the Annual
Report. The Information Bulletin will disclose that information about
the Shares of the Fund is publicly available on the Fund's website.
The Information Bulletin will also discuss any relief, if granted,
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\72\ in general, and furthers the
objectives of Section 6(b)(5)
[[Page 87704]]
of the Act,\73\ in particular, in that it is 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 a national market system, and,
in general, to protect investors and the public interest.
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\72\ 15 U.S.C. 78f(b).
\73\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that proposed Rule 8.800-E is designed to
prevent fraudulent and manipulative acts and practices in that the
proposed rules relating to listing and trading of Commodity- and/or
Digital Asset-Based Investment Interests provide specific initial and
continued listing criteria required to be met by such securities.
Proposed Rule 8.800-E(a) provides that the Exchange will file
separate proposals under Rule 19(b) of the Act before the listing and
trading of Commodity- and/or Digital Asset-Based Investment Interests.
All statements or representations contained in such rule filing
regarding (a) the description of the index, portfolio, or reference
asset, (b) limitations on index or portfolio holdings or reference
assets, or (c) the applicability of Exchange listing rules specified in
such rule filing will constitute continued listing requirements. An
issuer of such securities must notify the Exchange of any failure to
comply with such continued listing requirements. If an issue of
Commodity- and/or Digital Asset-Based Investment Interests does not
satisfy these requirements, the Exchange may halt trading in the
securities and will initiate delisting proceedings pursuant to Rule
5.5-E(m).
Proposed Rule 8.800-E(e) sets forth initial and continued listing
criteria applicable to Commodity- and/or Digital Asset-Based Investment
Interests. Proposed Rule 8.800-E(e)(1)(i) provides that, for each
series of Commodity- and/or Digital Asset-Based Investment Interests,
the Exchange will establish a minimum number of Commodity- and/or
Digital Asset-Based Investment Interests required to be outstanding at
the time of commencement of trading on the Exchange. Proposed Rule
8.800-E(e)(1)(ii) provides that in the aggregate, at least 90% of the
weight of the commodity and/or digital asset holdings of a series of
Commodity- and/or Digital Asset-Based Investment Interests shall, on
both an initial and continuing basis, consist of commodities and/or
digital assets for which the Exchange may obtain information pursuant
to its ISG membership or for which the principal market is a market
with which the Exchange has a CSSA. In addition, proposed Rule 8.800-
E(e)(2) provides that the Exchange will maintain surveillance
procedures for securities listed under proposed Rule 8.800-E and sets
forth the circumstances under which the Exchange would consider the
suspension of trading in and delisting under Rule 5.5-E(m) of a series
of Commodity- and/or Digital Asset-Based Investment Interests.
With respect to proposed Rule 8.800-E, the Exchange believes that
the proposed rule change is designed to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest
because Commodity- and/or Digital Asset-Based Investment Interests
listed and traded pursuant to proposed Rule 8.800-E would be
substantially similar to Commodity-Based Trust Shares listed and traded
pursuant to current Rule 8.201-E. Commodity- and/or Digital Asset-Based
Investment Interests differ from Commodity-Based Trust Shares only in
that Commodity- and/or Digital Asset-Based Investment Interests could
be issued, as a proposed, by a trust, limited liability company, or
other similar entity (rather than only by a trust), and in that
Commodity- and/or Digital Asset-Based Investment Interests could be
based, as proposed, on underlying commodities, digital assets (provided
that at least 90% of commodity and/or digital asset holdings are those
concerning which the Exchange may obtain information via the ISG from
other members of the ISG or via CSSA), and/or Derivative Securities
Products. The Exchange believes this additional flexibility with
respect to the structure of the entity issuing Commodity- and/or
Digital Asset-Based Investment Interests and the holdings underlying
such securities would remove impediments to and perfect the mechanism
of a free and open market, as well as promote competition, by promoting
the listing and trading of a new type of ETP, to the benefit of all
market participants. The Exchange further believes that the proposed
requirement that at least 90% of any commodity and/or digital asset
holdings are those concerning which the Exchange may obtain information
via the ISG from other members of the ISG or via a CSSA would remove
impediments to and perfect the mechanism of a free and open market, as
well as protect investors and the public interest, because it would
offer flexibility to issuers of series of Commodity- and/or Digital
Asset-Based Investment Interests, to the benefit of investors, while
facilitating information sharing among market participants regarding
the vast majority of any commodities and/or digital assets underlying
series of Commodity- and/or Digital Asset-Based Investment Interests.
As noted above, this requirement is based on a similar provision
approved by the Commission in Commentary .01(d)(1) to Rule 8.600-E
regarding Managed Fund Shares.
The Exchange also believes that the proposed addition of Commodity-
and/or Digital Asset-Based Investment Interests to the enumerated
derivative and special purpose securities that are subject to the
provisions of Rule 5.3-E (Corporate Governance and Disclosure Policies)
and Rule 5.3-E(e) (Shareholder/Annual Meetings) would promote just and
equitable principles of trade and remove impediments to and perfect the
mechanism of a free and open market and a national market system by
holding Commodity- and/or Digital Asset-Based Investment Interests to
the same requirements currently applicable to other similar derivative
and special purpose securities such as those listed pursuant to Rule
8.201-E.
With respect to the proposed listing and trading of Shares of the
Fund, the Exchange believes that the proposed rule change is designed
to prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in NYSE Arca Rule 8.800-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 with
other markets 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 Fund Component derivatives from
such markets. In addition, the Exchange may obtain information
regarding trading in the Shares and Fund Component derivatives from
markets that are members of ISG or with which the Exchange has in place
a CSSA. Also, pursuant to NYSE Arca Rule 8.800-E(i), the Exchange is
able to obtain information regarding Market Maker accounts for trading
in the Shares and the underlying Fund Components or any Fund Component
derivatives through ETP Holders acting as registered Market Makers, in
connection with such ETP Holders' proprietary or
[[Page 87705]]
customer trades through ETP Holders which they effect on any relevant
market.
The proposed rule change is also designed to prevent fraudulent and
manipulative acts and practices because, although the Digital Asset
Trading Platform Market is not inherently resistant to fraud and
manipulation, the Index and its use of the Digital Asset Reference
Rates serves as a means sufficient to mitigate the impact of instances
of fraud and manipulation on a reference price for the Fund Components.
Specifically, the Index and its use of the Digital Asset Reference
Rates provides a better benchmark for the price of the Fund Components
than the Digital Asset Trading Platform Market price because (1) the
Digital Asset Reference Rates track the Digital Asset Trading Platform
Market price through trading activity at U.S.-Compliant Trading
Platforms; (2) is the Digital Asset Reference Rates are constructed and
maintained by an expert third-party index provider, allowing for
prudent handling of non-market-related events; and (3) the Digital
Asset Reference Rates mitigate the impact of instances of fraud,
manipulation and other anomalous trading activity concentrated on any
one specific trading platform through a cross-trading platform
composite reference rate over a 60-minute period. The Fund has relied
on the Index and its use of the Digital Asset Reference Rates to price
the Shares for approximately two years, and the Index and its use of
the Digital Asset Reference Rates has proven its ability to (i)
mitigate the effects of fraud, manipulation and other anomalous trading
activity from impacting the Fund Components' reference rates, (ii)
provide a real-time, volume-weighted fair value of the Fund Components
and (iii) appropriately handle and adjust for non-market related
events, such that efforts to manipulate the price of the Fund
Components would have had a negligible effect on the pricing of the
Fund, due to the controls embedded in the structure of the Index. In
addition, certain of the Digital Asset Reference Rates' Constituent
Trading Platforms also have or have begun to implement market
surveillance infrastructure to further detect, prevent, and respond to
fraud, attempted fraud, and similar wrongdoing, including market
manipulation. The proposed rule change is also designed to prevent
fraudulent and manipulative acts and practices because, as noted above,
fraud or manipulation that impacts prices in spot Bitcoin markets or
spot Ether markets would likely similarly impact CME Bitcoin futures
and CME Ether futures prices, and the Exchange could obtain information
from the CME to assist in detecting and deterring potential fraud or
manipulation with respect to certain Fund Components.
The proposed rule change is designed to promote just and equitable
principles of trade and to protect investors and the public interest in
that there is a considerable amount of price and market information
available on public websites and through professional and subscription
services for the Fund Components. Investors may obtain, on a 24-hour
basis, Fund Component pricing information based on the spot price for
the Fund Components from various financial information service
providers. The closing price and settlement prices of the Fund
Components are readily available from the Digital Asset Trading
Platforms and other publicly available websites. In addition, such
prices are published in public sources, or on-line information services
such as Bloomberg and Reuters. The NAV per Share will be calculated
daily and made available to all market participants at the same time.
The Fund will provide website disclosure of its NAV daily. One or more
major market data vendors will disseminate for the Fund on a daily
basis information with respect to the most recent NAV per Share and
Shares outstanding. In addition, if the Exchange becomes aware that the
NAV per Share 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. Quotation and last-sale
information regarding the Shares will be disseminated through the
facilities of the CTA. The IFV will be widely disseminated on a per
Share basis every 15 seconds during the NYSE Arca Core Trading Session
(normally 9:30 a.m., E.T., to 4:00 p.m., E.T.) by one or more major
market data vendors. The Exchange represents that the Exchange may halt
trading during the day in which an interruption to the dissemination of
the IFV or the value of the Index occurs. If the interruption to the
dissemination of the IFV or the value of the Index persists past the
trading day in which it occurred, the Exchange will halt trading no
later than the beginning of the NYSE Arca Core Trading Session on the
trading day following the interruption.
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
an additional type of exchange-traded product 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 relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA for at least 90% of the Fund's
commodity and/or digital asset holdings. In addition, as noted above,
investors will have ready access to information regarding the Fund's
NAV, IFV, and quotation and last sale information for the Shares.
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 purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product which 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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 87706]]
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6210170e074f010d0f0f070c1611221107014c050d14"><span class="__cf_email__" data-cfemail="7e0c0b121b531d1113131b100
[…truncated; see source link]Indexed from Federal Register on November 4, 2024.
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