Notice2024-28343
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the Bitwise 10 Crypto Index Fund Under Proposed NYSE Arca Rule 8.800-E (Commodity- and Digital Asset-Based Investment Interests)
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
December 3, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 232 (Tuesday, December 3, 2024)</title>
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[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95853-95865]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28343]
[[Page 95853]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101775; File No. SR-NYSEARCA-2024-98]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the Bitwise 10
Crypto Index Fund Under Proposed NYSE Arca Rule 8.800-E (Commodity- and
Digital Asset-Based Investment Interests)
November 27, 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 November 14, 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 list and trade shares of the Bitwise 10
Crypto Index Fund (the ``Trust'') under proposed NYSE Arca Rule 8.800-E
(Commodity- and/or Digital Asset-Based Investment Interests). 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. 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 recently proposed to adopt new NYSE Arca Rule 8.800-E
to provide for the listing and trading of Commodity- and/or 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.\4\ The Exchange now proposes to list and trade shares of
the Trust \5\ under proposed NYSE Arca Rule 8.800-E.
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\4\ See Securities Exchange Act Release No. 101470 (October 29,
2024), 89 FR 87681 (November 4, 2024) (SR-NYSEARCA-2024-87). Shares
of the Trust will not trade on the Exchange until such time that
both the instant proposed rule change and the proposed rule change
to adopt Rule 8.800-E have been approved by the Commission.
\5\ The Trust is a Delaware statutory trust. Shares of the Trust
currently trade under the symbol BITW on OTCQX. On March 1, 2024,
the Trust filed with the Commission an Annual Report on Form 10-K
for the fiscal year ended December 31, 2023 (the ``Annual Report'').
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According to the Annual Report, the Trust will not be registered as
an investment company under the Investment Company Act of 1940,\6\ and
is not required to register thereunder. The Trust is not a commodity
pool for purposes of the Commodity Exchange Act.\7\
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\6\ 15 U.S.C. 80a-1.
\7\ 17 U.S.C. 1.
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The Exchange represents that the Shares satisfy the requirements of
proposed NYSE Arca Rule 8.800-E and thereby qualify for listing on the
Exchange.\8\
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\8\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the Act, the Trust relies on the exemption
contained in Rule 10A-3(c)(7).
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Operation of the Trust \9\
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\9\ The description of the operation of the Trust, the Shares,
and digital asset markets contained herein is based, in part, on the
Annual Report. See note 5, supra.
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The Trust will issue the Shares which, according to the Annual
Report, represent units of undivided beneficial ownership of the Trust.
The Trust is a Delaware statutory trust and will operate pursuant to a
trust agreement (the ``Trust Agreement'') between Bitwise Investment
Advisers, LLC (the ``Sponsor'' or ``Bitwise'') and Delaware Trust
Company, as the Trust's trustee (the ``Trustee''). Coinbase Custody
Trust Company, LLC will maintain custody of the Trust's assets (the
``Custodian''). The Bank of New York Mellon will be the custodian for
the Trust's cash holdings (in such role, the ``Cash Custodian''), as
well as the Trust's administrator (in such role, the ``Administrator'')
and transfer agent (in such role, the ``Transfer Agent'').
According to the Annual Report, the investment objective of the
Trust is to invest in a portfolio of digital assets (each, a
``Portfolio Asset'' and, collectively, ``Portfolio Assets'') that
tracks the Bitwise 10 Large Cap Crypto Index (the ``Index''). The Index
is administered by Bitwise Index Services, LLC, an affiliate of the
Sponsor (the ``Index Provider''). The Trust rebalances monthly
alongside the rebalance of the Index to stay current with any changes
to the Index. As of October 31, 2024, the Trust's Portfolio Assets and
respective weightings are:
------------------------------------------------------------------------
Weight
Portfolio asset Symbol (%)
------------------------------------------------------------------------
Bitcoin................................. BTC 75.10
Ethereum................................ ETH 16.5
Solana.................................. SOL 4.30
XRP..................................... XRP 1.50
Cardano................................. ADA 0.70
Avalanche............................... AVAX 0.60
Chainlink............................... LINK 0.40
Bitcoin Cash............................ BCH 0.40
Polkadot................................ DOT 0.30
Uniswap................................. UNI 0.30
------------------------------------------------------------------------
To determine the Trust's Net Asset Value (``NAV'') at the end of
every Business Day,\10\ the Sponsor will rely on a third-party
valuation vendor, CF Benchmarks Ltd. (the ``Valuation Vendor''), to
calculate and publish the U.S. dollar price for each Portfolio Asset
(each, a ``Reference Price'' and, collectively, the ``Reference
Prices'') as of 4:00 p.m. E.T. using prices from several different
digital asset trading platforms selected by the Valuation Vendor.\11\
Each Reference Price aggregates the trade flow of several major digital
asset trading platforms during an observation window between 3:00 p.m.
and 4:00 p.m. E.T. into the U.S. dollar price of one of each Portfolio
Asset at 4:00 p.m. E.T. The Reference Price calculation is designed
based on the IOSCO Principals for Financial Benchmarks.
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\10\ For purposes of this filing, a ``Business Day'' is defined
as any day on which the New York Stock Exchange is scheduled to be
open for trading.
\11\ Digital asset trading platforms considered by the Valuation
Vendor currently include Bitstamp, Coinbase, Gemini, itBit, LMAX,
and Kraken. The Valuation Vendor's selection of digital asset
trading platforms from which the Reference Prices may be derived is
further discussed below.
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The Trust's only assets will be Portfolio Assets and cash.\12\ The
Trust
[[Page 95854]]
does not seek to hold any digital assets other than Portfolio Assets
and has expressly disclaimed ownership of any such assets in the event
the Trust ever involuntarily comes into possession of such assets.\13\
The Trust will not use derivatives that may subject the Trust to
counterparty and credit risks. The Trust will process creations and
redemptions in cash. The Trust's only recurring ordinary expense is
expected to be the Sponsor's unitary management fee (the ``Management
Fee''), which will accrue daily and will be payable monthly in arrears.
The Administrator will calculate the Management Fee by applying an
annualized rate to the NAV of the Trust's assets at the end of each
month. Financial institutions authorized to create and redeem Shares
(each, an ``Authorized Participant'') will deliver, or cause to be
delivered, cash in exchange for Shares of the Trust, and the Trust will
deliver cash to Authorized Participants when those Authorized
Participants redeem Shares of the Trust.
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\12\ The Trust conducts creations and redemptions of its Shares
for cash. Authorized Participants (defined below) will deliver cash
to the Cash Custodian pursuant to creation orders for Shares and the
Cash Custodian will hold such cash until such time as it can be
converted to Portfolio Assets, which the Trust intends to do on the
same Business Day in which such cash is received by the Cash
Custodian. Additionally, the Trust will sell Portfolio Assets in
exchange for cash pursuant to redemption orders of its Shares. In
connection with such sales, an approved Digital Asset Trading
Counterparty (defined below) will send cash to the Cash Custodian.
The Cash Custodian will hold such cash until it can be distributed
to the redeeming Authorized Participant, which it intends to do on
the same Business Day in which it is received. In connection with
the purchases and sales of Portfolio Assets pursuant to its creation
and redemption activity, it is possible that the Trust may retain de
minimis amounts of cash as a result of rounding differences. The
Trust may also initially hold small amounts of cash to initiate
Trust operations in the immediate aftermath of its Registration
Statement being declared effective. Lastly, the Trust may also sell
Portfolio Assets and temporarily hold cash as part of a liquidation
of the Trust or to pay certain extraordinary expenses not assumed by
the Sponsor. Under the Trust Agreement, the Sponsor has agreed to
assume the normal operating expenses of the Trust, subject to
certain limitations. For example, the Trust will bear any
indemnification or litigation liabilities as extraordinary expenses.
In any event, in the ongoing course of business, the amounts of cash
retained by the Trust are not expected to constitute a material
portion of the Trust's holdings.
\13\ The Trust may, from time to time, passively receive, by
virtue of holding Portfolio Assets, certain additional digital
assets (``IR Assets'') or rights to receive IR Assets (``Incidental
Rights'') through a fork of a digital asset network or an airdrop of
assets. The Trust will not seek to acquire such IR Assets or
Incidental Rights. Pursuant to the terms of the Trust Agreement, the
Trust has disclaimed ownership in any such IR Assets and/or
Incidental Rights to make clear that such assets are not and shall
never be considered assets of the Trust and will not be taken into
account for purposes of determining the Trust's NAV or NAV per
Share. Neither the Trust, nor the Sponsor, nor the Custodian, nor
any other person associated with the Trust will, directly or
indirectly, engage in action where any portion of the Trust's
Portfolio Assets becomes subject to any proof-of-stake validation or
is used to earn additional assets or generate income or other
earnings.
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The Index
The Bitwise Crypto Index Committee (the ``Committee''), convened by
the Index Provider, is the governing body of the Index and is
responsible for developing, maintaining, and adjusting the methodology
by which the Index is constructed (the ``Index Methodology'').\14\ The
Index is comprised of ten digital assets (the ``Index Components'') and
is designed to track the performance of the ten largest digital assets
that currently trade publicly on eligible digital asset trading
platforms, as selected and weighted by free-float market
capitalization. The market capitalization of a digital asset is
calculated by multiplying its price \15\ times its free-float-adjusted
or ``circulating'' \16\ supply. The proportion of each digital asset in
the Index is based on this adjusted market capitalization.
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\14\ The full Index Methodology is available at <a href="https://bitwiseinvestments.com/indexes/methodology">https://bitwiseinvestments.com/indexes/methodology</a>.
\15\ Based on the Lukka Prime price.
\16\ According to the Annual Report, circulating supply is the
best approximation of the number of coins available on public
markets. Circulating supply is derived by taking the total number of
existing digital assets native to a specific Blockchain and
subtracting the number of coins verifiably burned, locked, or
reserved (for example, by a foundation).
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The Index will only consider for eligibility as Index Components
digital assets that satisfy the following criteria:
<bullet> The digital asset must be a cryptographically secured
digital bearer instrument;
<bullet> The digital asset must have a price that is not pegged to
another digital asset, fiat currency, group of those currencies, or
hard asset;
<bullet> The digital asset must be freely traded and can be freely
held for the foreseeable future;
<bullet> The digital asset must trade on an Eligible Digital Asset
Trading Platform,\17\ without withdrawal issues specific to that
digital asset;
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\17\ The Committee determines which trading platforms qualify as
Eligible Digital Asset Trading Platforms. To qualify as an Eligible
Digital Asset Trading Platform, a venue must: (1) provide an open
platform for exchanging at least one digital asset for either
another digital asset or for a fiat currency; (2) not be domiciled
in a country, region, or locality that implements meaningful capital
controls on international investors; (3) not be subject to
extraordinary regulatory or legal action that is likely to lead to
unusual pricing, significantly disrupt institutional access to the
market, or disrupt fiat withdrawals; (4) charge fees for trading;
(5) have a functioning, secure, and reliable application programming
interface (API) allowing for the timely ingestion of trade and
volume data; (6) have no significant downtime, withdrawal, or known
security issues; (7) account for more than 1.0% of the combined
trailing 30-day dollar trading volume of all digital assets on
entities that meet the prior listed rules; and (8) in the opinion of
the Committee, have significant real spot trading volume. The list
of Eligible Digital Asset Trading Platforms is reviewed on an annual
basis. As of January 25, 2024, the date that the Committee performed
its 2024 annual review of Eligible Digital Asset Trading Platforms,
the list of Eligible Digital Asset Trading Platforms included
Bitstamp, BitFlyer, Coinbase, Gemini, Kraken, itBit, and LMAX.
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<bullet> The digital asset must be custodied by a third-party
custodian regulated as a federally chartered bank or as a state trust
company, that meets additional security practices, insurance
requirements, and business practice requirements as determined by the
Committee; \18\
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\18\ The list of approved custodians is reviewed and updated on
an annual basis, or at the discretion of the Committee. As of
January 23, 2024, the date that the Committee performed its 2024
annual review of eligible custodians, the list of approved
custodians included Anchorage, Bakkt Warehouse, BitGo, Coinbase
Custody, Fidelity Digital Assets, and Gemini Custody.
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<bullet> The digital asset must have no known security
vulnerabilities, including critical bugs, undue exposure to 51%
attacks, or other factors, as determined by the Committee;
<bullet> The digital asset must not face undue risk of being deemed
a security under U.S. federal securities laws in the opinion of the
Committee, given present knowable facts and circumstances; \19\
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\19\ The Committee conducts a risk-based assessment that
considers whether the digital asset may be deemed a security under
U.S. federal securities laws and whether it is subject to regulatory
action that may imperil the value of the digital asset. Such
assessment does not preclude legal or regulatory action based on the
presence of a security. The Committee does not engage in legal
analysis of any digital assets or perform any analysis of digital
assets based upon any legal standards. The Committee reviews the
following information to make this determination: (1) public
information to determine if the Commission, any other U.S.
regulatory agency, or any court has made any statements regarding
the digital asset; (2) public information regarding how the digital
asset markets view the digital asset, including whether the digital
asset has been listed on entities such as Coinbase or other U.S.
digital asset trading platforms that would have had access to a
reasonable amount of information when making their determinations to
list the digital asset; (3) public information to undertake
reasonable diligence into the structure and technology of the
digital asset, including reviewing the digital asset's whitepaper if
available and speaking with the sponsor of the digital asset; and
(4) any other information gained from reputable sources that may
impact the Committee's view of the digital asset, including a review
of any websites associated with the digital asset's development. If
the Committee adds a digital asset to the Index, but later becomes
aware of new information that causes the Committee to revalue the
risk profile of such digital asset, the Committee will review such
information and determine whether the digital asset should be
removed from the Index.
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<bullet> The digital asset must have traded more than 1% of its
free-float-adjusted market capitalization on eligible trading venues
over the past 30 days; and
[[Page 95855]]
<bullet> The digital asset must have maintained a unit price
greater than $0.01 for the past 30 consecutive days.
The Index is reconstituted on a monthly basis at 4:00 p.m. E.T. on
the last Business Day of each month. As of October 31, 2024, the Index
included the following digital assets, and their weights were as
follows: \20\
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\20\ The weighting of the Trust's Portfolio Assets will differ
slightly from the weightings of the Index Components due to the need
for the Trust to implement actual rebalance transactions, unlike the
Index. The transactions undertaken by the Trust to align the
Portfolio Assets with the Index Components may create transaction
costs, fees, and trading slippage, which may cause the Trust's
performance to deviate slightly from the Index's performance.
------------------------------------------------------------------------
Weight
Digital asset (%)
------------------------------------------------------------------------
Bitcoin...................................................... 75.14
Ethereum..................................................... 16.42
Solana....................................................... 4.30
XRP.......................................................... 1.56
Cardano...................................................... 0.66
Avalanche.................................................... 0.55
Chainlink.................................................... 0.39
Bitcoin Cash................................................. 0.38
Uniswap...................................................... 0.31
Polkadot..................................................... 0.30
------------------------------------------------------------------------
To the extent that a digital asset meets the Index's eligibility
requirements at a future date, it would be considered for inclusion in
the Index in connection with a future rebalancing. Digital assets will
lose eligibility and be removed from the Index at the next monthly
reconstitution event if they violate any of the eligibility
requirements described above for 30 consecutive days.\21\
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\21\ Under extraordinary circumstances, digital assets may lose
eligibility to be Index Components and be removed from the Index on
a same-day basis by a unanimous vote of the quorum of members of the
Committee. Such emergency removals will take place at 4:00 p.m. E.T.
following the conclusion of such decision by the Committee and will
be publicly available on the Sponsor's website.
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The Index is calculated on a daily basis and published on the
Sponsor's website. Should any material change be made to the Index
Methodology that results in a material change to the composition of the
Index and, as part of the Trust's monthly rebalancing process, results
in a material change to the composition of the Trust (which the Sponsor
generally considers to be a change of 10% or more to the Trust or the
Index holdings, but in any event, is also determined at the Trust's
discretion), the Trust will notify shareholders of such material change
by filing a Form 8-K with the Commission.
The Index will implement a rule that will limit the Index
Components and weightings thereof such that at least 90% of the weight
of the Index Components 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'') at each monthly rebalancing.
This rule will be in effect prior to such time that Shares of the Trust
begin trading on the Exchange.
The Portfolio Assets and Index Components
The Portfolio Assets will consist of the Index Components except
that the Sponsor may determine to exclude a particular Index Component
in its discretion under certain specified circumstances further
described below (including to comply with the proposed requirements of
Rule 8.800-E(e)(1)). The weighting of each Portfolio Asset is generally
expected to be the same as the weighting of the Index Components in the
Index, except when the Sponsor determines to exclude one or more
digital assets from the Portfolio Assets in the rules-based
circumstances set forth below, in which case the weightings of the
Portfolio Assets are generally expected to be calculated proportionally
to the respective Index Components for the remaining Index Components.
The Sponsor will retain discretion to include or exclude individual
digital assets from the Portfolio Assets only in the following
circumstances:
<bullet> The Sponsor may exclude a digital asset or rebalance the
weighting of an existing Portfolio Asset to the extent its inclusion as
a Portfolio Asset or projected weighting would exceed a threshold that
could, in the Sponsor's sole discretion, require the Trust to register
as an investment company under the Investment Company Act or require
the Sponsor to register as an investment adviser under the Investment
Advisers Act;
<bullet> None or few of the Authorized Participants or service
providers has the ability to trade or otherwise support a digital
asset;
<bullet> The Sponsor 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;
<bullet> The digital asset's underlying code contains, or may
contain, significant flaws or vulnerabilities;
<bullet> There is limited or no reliable information regarding, or
concerns over the intentions of, the core developers of the digital
asset; or
<bullet> Any of the existing criteria used by the Index for
inclusion in the Index is found by the Sponsor to prohibit the
inclusion of the digital asset in the Index, in which case, the Sponsor
may, in its sole discretion, cause the Portfolio Assets to deviate from
the Index Components until such time as the Index has taken similar
action.
The Trust does not intend for the Portfolio Assets to deviate from
the Index Components, and the Trust anticipates that such deviation
would likely occur only if the Trust was unable to hold a particular
digital asset included in the Index, if the Trust determined that
holding that particular digital asset would result in significant harm
to shareholders, or if the holding of that digital asset would cause
the Trust's holdings to be inconsistent with the proposed requirements
of Rule 8.800-E(c)(1). The Sponsor will ensure that the Trust's
holdings are consistent with the requirements of Rule 8.800-E(c)(1), as
proposed, by monitoring the weightings of the Portfolio Assets and
Index Components daily and taking any measures as described in the
preceding section to ensure that 90% of the holdings 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 \22\ and by implementing an Index rule that will limit the Index
Components and weightings such that at least 90% of the weight of such
constituents shall, on both an initial and continuing basis, consist of
the same assets.
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\22\ The Sponsor notes that, as of the date of this filing, the
Index Components and Portfolio Assets that meet this standard are
bitcoin and ether, which make up more than 91% of the Trust and
Index.
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Background on Portfolio Assets
Bitcoin
Bitcoin is the most well-recognized digital asset in the world. As
of October 31, 2024, bitcoin is the largest digital asset in the world
by market capitalization. Bitcoin was invented in 2008 by a
pseudonymous software developer, or a group of software developers,
under the name Satoshi Nakamoto. Nakamoto published a white paper
titled ``Bitcoin: A Peer-to-Peer Electronic Cash System'' on October
31, 2008, which provided the technical outline for launching the
bitcoin network. The network went live on January 3, 2009, when
Nakamoto mined
[[Page 95856]]
the first block of transactions, known as the ``Genesis Block.''
The software underlying the Bitcoin Blockchain determines a number
of key and independent parameters. At the heart of the system lies the
algorithm that enforces that all ledgers converge over time (commonly
known as the ``Consensus Algorithm''). Other important portions of the
system include the rules that deem a transaction valid, a programming
language that allows for different types of transactions to be
executed, and the process through which new digital assets are minted
(commonly known as ``Mining''), and others. The network strictly
enforces the total amount of units issued to converge towards 21
million by the year 2140 through a predetermined schedule.
New bitcoin is created when Miners process blocks of transactions.
In the bitcoin network, this occurs roughly every ten minutes. The
Blockchain periodically adjusts the difficulty of settling transactions
to ensure that cadence remains approximately accurate. The amount of
new bitcoin created each time a block of bitcoin transactions is
processed is predetermined by the software underlying the bitcoin
Blockchain. Initially, the Miner that settled a block of transactions
on the bitcoin Blockchain received 50 bitcoin. That reward was and is
programmed to be cut in half roughly every four years; currently,
Miners receive 3.125 bitcoin for each block of settled transactions.
The bitcoin network is known for being extremely decentralized, as
it is maintained by a network of computers that, joined together,
represents the largest supercomputer in the world. Some believe that
this makes bitcoin more secure and resistant to attacks compared to
other Blockchain networks.
Ethereum
Ether is the native digital asset of Ethereum, the second largest
Blockchain network ranked by market capitalization as of October 31,
2024. Ethereum was described in a white paper in late 2013, and an
online crowdsale to fund development took place between July and August
2014. The network went live in July 2015.
Ethereum was specifically designed to power smart contracts, which
are computer programs intended to enforce the performance of a contract
that parties can codify and agree upon with minimal or no need of
trusted intermediaries.
Ethereum's script language, the programming language that
developers use for creating Blockchain applications, is significantly
more flexible than bitcoin's. This allows the creation of programs that
do general computation instead of only the relatively simple
conditional payments that are possible with bitcoin. As such, a whole
ecosystem of different applications including asset issuance,
decentralized financial applications, identity management, and others
are able to be and have been developed on top of the Ethereum network.
However, Ethereum's more permissive programming language makes the
network inherently less secure because it can increase the odds that a
catastrophic bug in one smart contract could affect the whole network.
Due to Ethereum's focus on enabling innovation on its Blockchain
system, events like hard forks are significantly more common in
Ethereum than in bitcoin. For example, on September 15, 2022, Ethereum
transitioned from a proof-of-work network to a proof-of-stake network.
This infrastructure upgrade was known as ``The Merge.'' This was only
one of several hard forks the Ethereum Blockchain has undergone since
inception. Some consider Ethereum's stance as an advantage, while
others perceive it as a risk, especially as the project grows larger
and the cost of potential mistakes rises.
Solana
Solana is a decentralized blockchain network with a focus on
secure, low-fee, high-speed transactions that are paid for using SOL,
which is the Solana Blockchain's native digital asset. By leveraging
proof-of-history and other breakthrough innovations, Solana allows for
greater throughput than many other Blockchains, with the ability to
scale at the rate of Moore's Law. Solana, like Ethereum, is home to
several use cases including gaming, decentralized finance, and non-
fungible token marketplaces.
XRP
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.
Cardano
Cardano is a proof-of-stake Blockchain and smart contract platform
that facilitates secure payments and enables developers to build
decentralized applications. Grounded in research and academia, the
protocol and its token were named after 16th and 19th century
polymaths, and its programming language, Haskell, is commonly used in
the traditional finance and security sectors.
Avalanche
Avalanche is a Blockchain ecosystem that is home to several
applications across a variety of use cases including, but not limited
to, gaming and decentralized finance. Avalanche's design makes it
relatively easy for developers to deploy applications to and from
Ethereum. Avalanche was designed to be a faster and cheaper alternative
to other Blockchains for purposes of a better user and developer
experience. For example, the network leverages its different built-in
Blockchains for enhanced transaction speeds at economically feasible
costs. To that end, some of its built-in Blockchains are dedicated to
specific use cases and/or applications to avoid network congestion the
popularity of other applications can cause.
[[Page 95857]]
Chainlink
Chainlink is a network that connects smart contracts with real
world data. Blockchain networks are unaware of what happens outside of
those networks, and therefore whenever a Blockchain application needs
to interact with external data, it needs a reliable data source to do
so. These data sources are known in the industry as ``Oracles.''
Relying on one Oracle creates a single point of failure, and Chainlink
aims to solve this issue by providing a decentralized network of
multiple Oracles that can evaluate the same data. The accuracy of this
data can be important if this data is used to trigger activity on a
smart contract or other Blockchain application. Chainlink provides
price reference data feeds for decentralized finance, and also allows
users to create their own Oracle networks. Larger enterprises can also
use Chainlink to sell their data to smart contracts that need them to
trigger a certain condition. Current use cases for Chainlink include
stable digital assets, decentralized lending and borrowing, and asset
management.
Bitcoin Cash
Bitcoin Cash is a proof-of-work lockchain that was created as a
hard fork of bitcoin on August 1, 2017. At inception, the most
significant difference between Bitcoin Cash's Blockchain design and the
Blockchain design of bitcoin was Bitcoin Cash's adoption of larger
block sizes. Larger block sizes allow the Bitcoin Cash Blockchain to
process more transactions per second than the bitcoin Blockchain.
Uniswap
Uniswap is the governance token of the Uniswap protocol. Over the
past five years, Uniswap has emerged as a leading decentralized
exchange for digital assets. Uniswap's automated platform lets traders
exchange digital assets in the same way they do on centralized trading
venues like Coinbase, but without a company standing in the middle of
the transaction. Additionally, Uniswap's decentralized structure allows
any individual to act as a market maker and provide liquidity on the
platform, earning yield while facing risk.
Polkadot
Polkadot is a proof-of-stake Blockchain that leverages a newer
infrastructure design to that of Solana's and Ethereum's. For purposes
of enhanced performance, Polkadot splits up the workload by hosting
various independent blockchains on top of one central blockchain, known
as the Relay Chain. The purpose of the Relay Chain is to provide
ecosystem support, notably in terms of security and interoperability.
Custody of the Trust's Portfolio Assets
The Custodian will maintain custody of the Portfolio Assets, other
than that which is maintained in a trading account (the ``Trading
Balance'') with Coinbase, Inc. (the ``Prime Execution Agent,'' which is
an affiliate of the Custodian). The Custodian will maintain an account
that holds the Trust's Portfolio Assets (the ``Trust Digital Asset
Account'') and will facilitate the transfer of Portfolio Assets
required for the operation of the Trust. The Trading Balance will only
be used in the limited circumstances in which the Trust is using the
Agent Execution Model (as defined below) to effectuate the purchases
and sales of Portfolio Assets. The Custodian provides safekeeping of
Portfolio Assets using a multi-layer cold storage security platform
designed to provide offline security of the Portfolio Assets held by
the Custodian.
Valuation of the Trust's Portfolio Assets and Determination of NAV
The net assets of the Trust and its Shares are valued on a daily
basis by the Valuation Vendor. The Trust uses the Reference Prices to
calculate its NAV.
The Sponsor, in its sole discretion, may cause the Trust to price
its portfolio based upon an index, benchmark, or standard other than
the Reference Prices at any time, with prior notice to the
shareholders, if investment conditions change or the Sponsor believes
that another index, benchmark, or standard better aligns with the
Trust's investment objective and strategy. The Sponsor may make this
decision for a number of reasons, including, but not limited to, a
determination that the Reference Prices differ materially from the
global market price of the Portfolio Assets and/or that third parties
are able to purchase and sell Portfolio Assets on public or private
markets not included among the Valuation Trading Platforms, and such
transactions may take place at prices materially higher or lower than
the Reference Prices. The Sponsor, however, is under no obligation
whatsoever to make such changes in any circumstance. In the event that
the Sponsor intends to establish the Trust's NAV by reference to an
index, benchmark, or standard other than Reference Prices, it will
provide shareholders with notice in a prospectus supplement and/or
through a current report on Form 8-K or in the Trust's annual or
quarterly reports.\23\
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\23\ The Sponsor will provide notice of any such changes in the
Trust's periodic or current reports and, if the Sponsor makes such a
change other than on an ad hoc or temporary basis, will file a
proposed rule change with the Commission.
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The Trust's only assets will be Portfolio Assets and, under limited
circumstances, cash. The Trust's NAV and NAV per Share will be
determined by the Administrator once each Exchange trading day as of
4:00 p.m. E.T., or as soon thereafter as practicable. The Administrator
will calculate the NAV by multiplying the Portfolio Assets held by the
Trust by their respective Reference Prices for such day, adding any
additional receivables and subtracting the accrued but unpaid
liabilities of the Trust. The NAV per Share is calculated by dividing
the NAV by the number of Shares then outstanding. The Valuation Vendor
will determine the price of the Trust's Portfolio Assets by reference
to the Valuation Trading Platforms.
Intraday Trust Value
The Trust uses the real-time prices published by the Valuation
Vendor for each Portfolio Asset to calculate an Indicative Trust Value
(``ITV''). One or more major market data vendors will disseminate the
ITV, updated every 15 seconds each trading day 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.). The ITV will be
calculated throughout the trading day by using the prior day's holdings
at the close of business and the most recently reported price level of
the real-time prices for each Portfolio Asset published by the
Valuation Vendor. The ITV will be widely disseminated by one or more
major market data vendors during the NYSE Arca Core Trading Session.
Creation and Redemption of Shares
The Trust creates and redeems Shares from time to time, but only in
one or more Creation Units, which will initially consist of at least
10,000 Shares, but may be subject to change (``Creation Unit''). A
Creation Unit is only made in exchange for delivery to the Trust or the
distribution by the Trust of an amount of cash, equivalent to the value
of Portfolio Assets represented by the Creation Unit being created or
redeemed, the amount of which is representative of the combined NAV of
the number of Shares included in the Creation Units being created or
redeemed determined as of 4:00 p.m. E.T. on the day the order to create
or redeem Creation Units is properly
[[Page 95858]]
received. Except when aggregated in Creation Units or under
extraordinary circumstances permitted under the Trust Agreement, the
Shares are not redeemable securities.
Authorized Participants are the only persons that may place orders
to create and redeem Creation Units. Authorized Participants must be
(1) registered broker-dealers or other securities market participants,
such as banks and other financial institutions, that are not required
to register as broker-dealers to engage in securities transactions
described below, and (2) Depository Trust Company (``DTC'')
participants. To become an Authorized Participant, a person must enter
into an Authorized Participant Agreement with the Trust and/or the
Trust's marketing agent (the ``Marketing Agent'').
When purchasing or selling Portfolio Assets in response to the
purchase of Creation Units or the redemption of Creation Units, which
will be processed in cash, the Trust would do so pursuant to either (1)
a ``Trust-Directed Trade Model,'' or (2) an ``Agent Execution Model,''
which are each described in more detail below.
The Trust intends to utilize the Trust-Directed Trade Model for all
purchases and sales of Portfolio Assets and would only utilize the
Agent Execution Model in the event that no digital asset trading
counterparty approved by the Sponsor (a ``Digital Asset Trading
Counterparty'') \24\ is able to effectuate the Trust's purchase or sale
of Portfolio Assets. Under the Trust-Directed Trade Model, in
connection with receipt of a purchase order or redemption order, the
Sponsor, on behalf of the Trust, would be responsible for acquiring
Portfolio Assets from an approved Digital Asset Trading Counterparty in
an amount equal to the Basket Amount. When seeking to purchase
Portfolio Assets on behalf of the Trust, the Sponsor will seek to
purchase Portfolio Assets at commercially reasonable prices and terms
from any of the approved Digital Asset Trading Counterparties.\25\ Once
agreed upon, the transaction will generally occur on an ``over-the-
counter'' basis.
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\24\ The Digital Asset Trading Counterparties with which the
Sponsor will engage in Portfolio Asset transactions are unaffiliated
third parties that are not acting as agents of the Trust, the
Sponsor or the Authorized Participant, and all transactions will be
done on an arms-length basis. There is no contractual relationship
between the Trust, the Sponsor or the Digital Asset Trading
Counterparty.
\25\ The Sponsor will maintain ownership and control of the
Portfolio Assets in a manner consistent with good delivery
requirements for spot commodity transactions.
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Whether utilizing the Trust-Directed Trade Model or the Agent
Execution Model, 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 Portfolio Assets as part of the
creation or redemption process or otherwise direct the Trust or a third
party with respect to purchasing, holding, delivering, or receiving
Portfolio Assets as part of the creation or redemption process.
Additionally, under either the Trust-Directed Trade Model or the Agent
Execution Model, the Trust will create Shares by receiving Portfolio
Assets from a third party that is not the Authorized Participant and is
not affiliated with the Sponsor or the Trust, and the Trust--not the
Authorized Participant--is responsible for selecting the third party to
deliver the Portfolio Assets. The third party will not be acting as an
agent of the Authorized Participant with respect to the delivery of the
Portfolio Assets to the Trust or acting at the direction of the
Authorized Participant with respect to the delivery of the Portfolio
Assets to the Trust. Additionally, the Trust will redeem Shares by
delivering Portfolio Assets to a third party that is not the Authorized
Participant and is not affiliated with the Sponsor or the Trust, and
the Trust--not the Authorized Participant--is responsible for selecting
the third party to receive the Portfolio Assets. Finally, the third
party will not be acting as an agent of the Authorized Participant with
respect to the receipt of Portfolio Assets from the Trust or acting at
the direction of the Authorized Participant with respect to the receipt
of Portfolio Assets from the Trust.
Acquiring and Selling Portfolio Assets Pursuant to Creation and
Redemption of Shares Under the Trust-Directed Trade Model
Under the Trust-Directed Trade Model, on any Business Day, an
Authorized Participant may create Shares by placing an order to
purchase one or more Creation Units with the Transfer Agent through the
Marketing Agent. Such orders are subject to approval by the Marketing
Agent and the Transfer Agent. To be processed on the date submitted,
creation orders must be placed before 4:00 p.m. E.T. or the close of
regular trading on the Exchange, whichever is earlier, but may be
required to be placed earlier at the discretion of the Sponsor. A
purchase order will be effective on the date it is received by the
Transfer Agent and approved by the Marketing Agent (``Purchase Order
Date'').
Creation Units are processed in cash. By placing a purchase order,
an Authorized Participant agrees to deposit, or cause to be deposited,
an amount of cash equal to the quantity of Portfolio Assets
attributable to each Share of the Trust (net of accrued but unpaid
expenses and liabilities) multiplied by the number of Shares (10,000)
comprising a Creation Unit (the ``Basket Amount''). The Sponsor will
cause to be published each Business Day, prior to the commencement of
trading on the Exchange, the Basket Amount relating to a Creation Unit
applicable for such Business Day. That amount is derived by multiplying
the Basket Amount by the value of Portfolio Assets ascribed by the
Pricing Index. However, the Authorized Participant is also responsible
for any additional cash required to account for the price at which the
Trust agrees to purchase the requisite amount of Portfolio Assets from
a Digital Asset Trading Counterparty to the extent it is greater than
the Pricing Index price on each Purchase Order Date.
Prior to the delivery of Creation Units, the Authorized Participant
must also have wired to the Transfer Agent the nonrefundable
transaction fee due for the creation order. Authorized Participants may
not withdraw a creation request. If an Authorized Participant fails to
consummate the foregoing, the order may be cancelled.
Following the acceptance of a purchase order, the Authorized
Participant must wire the cash amount described above to the Cash
Custodian, and the Digital Asset Trading Counterparty must deposit the
required amount of Portfolio Assets with the Custodian by the end of
the day E.T. on the Business Day following the Purchase Order Date. The
Portfolio Assets will be purchased from Digital Asset Trading
Counterparties that are not acting as agents of the Trust or agents of
the Authorized Participant. These transactions will be done on an arms-
length basis, and there is no contractual relationship between the
Trust, the Sponsor, or the Digital Asset Trading Counterparty to
acquire such Portfolio Assets. Prior to any movement of cash from the
Cash Custodian to the Digital Asset Trading Counterparty or movement of
Shares from the Transfer Agent to the Authorized Participant's DTC
account to settle the transaction, the Portfolio Assets must be
deposited at the Custodian.
The Digital Asset Trading Counterparty must deposit the required
amount of Portfolio Assets by end of day E.T. on the Business Day
following the Purchase Order Date prior to any movement of cash from
the Cash Custodian or Shares from the Transfer
[[Page 95859]]
Agent. Upon receipt of the deposit amount of Portfolio Assets at the
Custodian from the Digital Asset Trading Counterparty, the Custodian
will notify the Sponsor that the Portfolio Assets have been received.
The Sponsor will then notify the Transfer Agent that the Portfolio
Assets have been received, and the Transfer Agent will direct DTC to
credit the number of Shares ordered to the Authorized Participant's DTC
account and will wire the cash previously sent by the Authorized
Participant to the Digital Asset Trading Counterparty to complete
settlement of the Purchase Order and the acquisition of the Portfolio
Assets by the Trust, as described above.
As between the Trust and the Authorized Participant, the expense
and risk of the difference between the value of Portfolio Assets
calculated by the Administrator for daily valuation using the Pricing
Benchmarks and the price at which the Trust acquires the Portfolio
Assets will be borne solely by the Authorized Participant to the extent
that the Trust pays more for Portfolio Assets than the price used by
the Trust for daily valuation. Any such additional cash amount will be
included in the amount of cash calculated by the Administrator on the
Purchase Order Date, communicated to the Authorized Participant on the
Purchase Order Date, and wired by the Authorized Participant to the
Cash Custodian on the day following the Purchase Order Date. If the
Digital Asset Trading Counterparty fails to deliver the Portfolio
Assets to the Custodian, no cash is sent from the Cash Custodian to the
Digital Asset Trading Counterparty, no Shares are transferred to the
Authorized Participant's DTC account, the cash is returned to the
Authorized Participant, and the Purchase Order is cancelled.
Under the Trust-Directed Trade Model and according to the
Registration Statement, the procedures by which an Authorized
Participant can redeem one or more Creation Units mirror the procedures
for the creation of Creation Units. On any Business Day, an Authorized
Participant may place an order with the Transfer Agent through the
Marketing Agent to redeem one or more Creation Units. To be processed
on the date submitted, redemption orders must be placed before 4:00
p.m. E.T. or the close of regular trading on the Exchange, whichever is
earlier, or earlier as determined by the Sponsor. A redemption order
will be effective on the date it is received by the Transfer Agent and
approved by the Marketing Agent (``Redemption Order Date''). The
redemption procedures allow Authorized Participants to redeem Creation
Units and do not entitle an individual shareholder to redeem any Shares
in an amount less than a Creation Unit, or to redeem Creation Units
other than through an Authorized Participant. In connection with
receipt of a redemption order accepted by the Marketing Agent and
Transfer Agent, the Sponsor, on behalf of the Trust, is responsible for
selling the Portfolio Assets to an approved Digital Asset Trading
Counterparty in an amount equal to the Basket Amount.
The redemption distribution from the Trust will consist of a
transfer to the redeeming Authorized Participant, or its agent, of the
amount of cash the Trust received in connection with a sale of the
Basket Amount of Portfolio Assets to a Digital Asset Trading
Counterparty made pursuant to the redemption order. The Sponsor will
cause to be published each Business Day, prior to the commencement of
trading on the Exchange, the redemption distribution amount relating to
a Creation Unit applicable for such Business Day. The redemption
distribution amount is derived by multiplying the Basket Amount by the
value of Portfolio Assets ascribed by the Pricing Benchmarks. However,
as between the Trust and the Authorized Participant, the expense and
risk of the difference between the value of Portfolio Assets ascribed
by the Pricing Benchmarks and the price at which the Trust sells the
Portfolio Assets will be borne solely by the Authorized Participant to
the extent that the Trust receives less for Portfolio Assets than the
value ascribed by the Pricing Benchmarks. Prior to the delivery of
Creation Units, the Authorized Participant must also have wired to the
Transfer Agent the nonrefundable transaction fee due for the redemption
order.
The redemption distribution due from the Trust will be delivered by
the Transfer Agent to the Authorized Participant once the Cash
Custodian has received the cash from the Digital Asset Trading
Counterparty. The Custodian will not send the Basket Amount of
Portfolio Assets to the Digital Asset Trading Counterparty until the
Cash Custodian has received the cash from the Digital Asset Trading
Counterparty and is instructed by the Sponsor to make such transfer.
Once the Digital Asset Trading Counterparty has sent the cash to the
Cash Custodian in an agreed upon amount to settle the agreed upon sale
of the Basket Amount of Portfolio Assets, the Transfer Agent will
notify the Sponsor. The Sponsor will then notify the Custodian to
transfer the Portfolio Assets to the Digital Asset Trading
Counterparty, and the Transfer Agent will wire the cash proceeds to the
Authorized Participant once the Trust's DTC account has been credited
with the Shares represented by the Creation Unit from the redeeming
Authorized Participant. Once the Authorized Participant has delivered
the Shares represented by the Creation Unit to be redeemed to the
Trust's DTC account, the Cash Custodian will wire the requisite amount
of cash to the Authorized Participant. If the Trust's DTC account has
not been credited with all of the Shares of the Creation Unit to be
redeemed, the redemption distribution will be delayed until such time
as the Transfer Agent confirms receipt of all such Shares. If the
Digital Asset Trading Counterparty fails to deliver the cash to the
Cash Custodian, the transaction will be cancelled, and no transfer of
Portfolio Assets or Shares will occur.
Acquiring and Selling Portfolio Assets Pursuant to Creation and
Redemption of Shares Under the Agent Execution Model
Under the Agent Execution Model, the Prime Execution Agent, acting
in an agency capacity, would conduct Portfolio Assets purchases and
sales on behalf of the Trust with third parties through its Coinbase
Prime service pursuant to the Prime Execution Agent Agreement. To
utilize the Agent Execution Model, the Trust may maintain some
Portfolio Assets or cash in the Trading Balance with the Prime
Execution Agent. The Prime Execution Agent Agreement provides that the
Trust does not have an identifiable claim to any particular Portfolio
Assets (and cash); rather, the Trust's Trading Balance represents an
entitlement to a pro rata share of the Portfolio Assets (and cash) the
Prime Execution Agent holds on behalf of customers who hold similar
entitlements against the Prime Execution Agent. In this way, the
Trust's Trading Balance represents an omnibus claim on the Prime
Execution Agent's Portfolio Assets (and cash) held on behalf of the
Prime Execution Agent's customers.
To avoid having to pre-fund purchases or sales of Portfolio Assets
in connection with cash creations and redemptions and sales of
Portfolio Assets to pay Trust expenses not assumed by the Sponsor, to
the extent applicable, the Trust may borrow Portfolio Assets or cash as
trade credit (``Trade Credit'') from Coinbase Credit, Inc. (the ``Trade
Credit Lender'') on a short-term basis pursuant to the Coinbase Credit
Committed Trade Financing Agreement (the ``Trade Financing
Agreement'').
[[Page 95860]]
On the day of the Purchase Order Date, the Trust would enter into a
transaction to buy Portfolio Assets through the Prime Execution Agent
for cash. Because the Trust's Trading Balance may not be funded with
cash on the Purchase Order Date for the purchase of Portfolio Assets in
connection with the Purchase Order under the Agent Execution Model, the
Trust may borrow Trade Credits in the form of cash from the Trade
Credit Lender pursuant to the Trade Financing Agreement or may require
the Authorized Participant to deliver the required cash for the
Purchase Order on the Purchase Order Date. The extension of Trade
Credits on the Purchase Order Date allows the Trust to purchase
Portfolio Assets through the Prime Execution Agent on the Purchase
Order Date, with such Portfolio Assets being deposited in the Trust's
Trading Balance.
On the day following the Purchase Order Date (the ``Purchase Order
Settlement Date''), the Trust would deliver Shares to the Authorized
Participant in exchange for cash received from the Authorized
Participant. Where applicable, the Trust would use the cash to repay
the Trade Credits borrowed from the Trade Credit Lender. On the
Purchase Order Settlement Date for a Purchase Order utilizing the Agent
Execution Model, the Portfolio Assets associated with the Purchase
Order and purchased on the Purchase Order Date is swept from the
Trust's Trading Balance with the Prime Execution Agent to the Trust
Digital Asset Account with the Custodian pursuant to a regular end-of-
day sweep process. Transfers of Portfolio Assets into the Trust's
Trading Balance are off-chain transactions and transfers from the
Trust's Trading Balance to the Trust Digital Asset Account are ``on-
chain'' transactions represented on the Portfolio Assets blockchains,
as applicable. Any financing fee owed to the Trade Credit Lender is
deemed part of trade execution costs and embedded in the trade price
for each transaction.
For a Redemption Order utilizing the Agent Execution Model, on the
day of the Redemption Order Date the Trust would enter into a
transaction to sell Portfolio Assets through the Prime Execution Agent
for cash. The Trust's Trading Balance with the Prime Execution Agent
may not be funded with Portfolio Assets on trade date for the sale of
Portfolio Assets in connection with the redemption order under the
Agent Execution Model, when Portfolio Assets remains in the Trust
Digital Asset Account with the Custodian at the point of intended
execution of a sale of Portfolio Assets. In those circumstances the
Trust may borrow Trade Credits in the form of Portfolio Assets from the
Trade Credit Lender, which allows the Trust to sell Portfolio Assets
through the Prime Execution Agent on the Redemption Order Date, and the
cash proceeds are deposited in the Trust's Trading Balance with the
Prime Execution Agent. On the business day following the Redemption
Order Date (the ``Redemption Order Settlement Date'') for a redemption
order utilizing the Agent Execution Model where Trade Credits were
utilized, the Trust delivers cash to the Authorized Participant in
exchange for Shares received from the Authorized Participant. In the
event Trade Credits were used, the Trust will use the Portfolio Assets
that are moved from the Trust Digital Asset Account with the Custodian
to the Trading Balance with the Prime Execution Agent to repay the
Trade Credits borrowed from the Trade Credit Lender.
For a redemption of Creation Units utilizing the Agent Execution
Model, the Sponsor would instruct the Custodian to prepare to transfer
the Portfolio Assets associated with the redemption order from the
Trust Digital Asset Account with the Custodian to the Trust's Trading
Balance with the Prime Execution Agent. On the Redemption Order
Settlement Date, the Trust would enter into a transaction to sell
Portfolio Assets through the Prime Execution Agent for cash, and the
Prime Execution Agent credits the Trust's Trading Balance with the
cash. On the same day, the Authorized Participant would deliver the
necessary Shares to the Trust and the Trust delivers cash to the
Authorized Participant.
Applicable Standard
The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot, Commodity-Based Trust Shares, on the basis of whether the listing
exchange has in place a comprehensive surveillance sharing agreement
with a regulated market of significant size related to the underlying
commodity to be held.\26\ However, the Commission recently approved the
listing and trading of shares of spot bitcoin exchange-traded products
(``Spot Bitcoin ETPs'') and spot ether exchange-traded products (``Spot
Ether ETPs''), finding that there were sufficient ``other means'' of
preventing fraud and manipulation sufficient to satisfy the
requirements of Section 6(b)(5) of the Exchange Act.\27\ In each of the
Spot Bitcoin ETP Approval Order and Spot Ether Approval Order, the
Commission concluded, through a robust correlation analysis, that fraud
or manipulation that impacts prices in spot bitcoin markets or spot
ether markets would likely similarly impact CME bitcoin futures prices
and CME ether futures prices, respectively.\28\ The Commission further
found that, because the CME's surveillance can assist in detecting
those impacts on CME bitcoin futures prices and CME ether futures
prices, a listing exchange's CSSA with the CME can be reasonably
expected to assist in surveilling for fraudulent and manipulative acts
and practices in the context of the Spot Bitcoin ETPs and Spot Ether
ETPs.\29\
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\26\ See Securities Exchange Act Release No. 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 Trust) (``Winklevoss
Order''). In the Winklevoss Order, the Commission set forth both the
importance and definition of a surveilled, regulated market of
significant size, explaining that, for approved commodity-trust
ETPs, ``there has been in every case at least one significant,
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP
listing exchange has entered into surveillance-sharing agreements
with, or held Intermarket Surveillance Group membership in common
with, that market.'' Winklevoss Order, 83 FR at 37594.
\27\ See Securities Exchange Act Release No. 34-99306 (January
10, 2024), 89 FR 3008 (January 17, 2024) (SR-NYSEARCA-2021-90; SR-
NYSEARCA-2023-44; SRNYSEARCA-2023-58; SR-NASDAQ-2023-016; SR-NASDAQ-
2023-019; SR-CboeBZX-2023028; SR-CboeBZX-2023-038; SR-CboeBZX-2023-
040; SR-CboeBZX-2023-042; SRCboeBZX-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 ``Spot Bitcoin
ETP Approval Order''); Securities Exchange Act Release No. 100224
(May 23, 2024), 89 FR 46937 (May 30, 2024) (SR-NYSEARCA-2023-70; SR-
NYSEARCA-2024-31; SR-NASDAQ-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 ``Spot Ether
ETP Approval Order'').
\28\ See Spot Bitcoin ETP Approval Order, 89 FR at 3010; Spot
Ether ETP Approval Order, 89 FR at 46938.
\29\ See Spot Bitcoin ETP Approval Order, 89 FR at 3010; Spot
Ether ETP Approval Order, 89 FR at 46938-39.
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The Trust is structured and will operate in a manner materially the
same as the Spot Bitcoin ETPs and Spot Ether ETPs.\30\ The Sponsor
believes that the Exchange's ability to obtain information
[[Page 95861]]
regarding trading in bitcoin futures and ether futures from the CME,
which, like the Exchange, is a member of the ISG, would assist the
Exchange in detecting potential fraud or manipulation with respect to
trading in the Shares. The Sponsor thus believes that, for reasons
similar to those set forth in the Spot Bitcoin ETP Approval Order and
Spot Ether ETP Approval Order, listing and trading Shares of the Trust
would be consistent with the requirements of the Act.
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\30\ The Sponsor is also the sponsor of the Bitwise Bitcoin ETF
and the Bitwise Ethereum ETF, which were approved pursuant to the
Spot Bitcoin ETP Approval Order and Spot Ether ETP Approval,
respectively, and which are both currently listed and traded on NYSE
Arca.
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The Sponsor acknowledges that the Portfolio Assets currently
include minority positions in digital assets that are not bitcoin or
ether. The Sponsor 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.\31\ For purposes of the Trust's
proposal, the Sponsor anticipates that the Commission may have the same
concerns about digital assets other than bitcoin and ether.
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\31\ 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); 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);
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).
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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.\32\ 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.\33\ The Sponsor believes the Trust's use of the Reference
Prices provided by the Valuation Vendor to value the Trust's holdings
and to determine NAV and ITV for the Trust, in tandem with the Trust's
cash create and redeem structure represents a novel means to prevent
fraud and manipulation from impacting the price of the Shares, by
offering protections beyond those that exist in traditional commodity
markets and consistent with those that exist in equity markets.
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\32\ See Winklevoss Order, 84 FR 37580, 37582-91; Bitwise Order,
84 FR 55383, 55385-406; Wilshire Phoenix Order, 85 FR 12597.
\33\ See Winklevoss Order, 84 FR 37582; Wilshire Phoenix Order,
85 FR 12597.
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As described in more detail below, the Sponsor believes that its
use of Reference Prices accomplishes these objectives in the following
ways:
1. The Valuation Vendor calculates the Reference Prices for the
Portfolio Assets exclusively through trading activity on spot digital
asset trading platforms that are ``CME CF Constituent Trading
Platforms.''
CME CF Constituent Trading Platforms are identified by the
Valuation Vendor and must meet the following eligibility criteria, as
determined by the Valuation Vendor:
<bullet> The average daily volume of the venue's Relevant Pair \34\
spot trading contributed during the observation window for the
Reference Price (i.e., 3:00 p.m. to 4:00 p.m. E.T.) must exceed 3% for
two consecutive calendar quarters.
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\34\ Relevant Pair is defined as each Portfolio Asset versus the
quote for that asset in U.S. Dollar terms.
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<bullet> The venue has policies to ensure fair and transparent
market conditions at all times and has processes in place to identify
and impede illegal, unfair, or manipulative trading practices.
<bullet> The venue does not impose undue barriers to entry or
restrictions on market participants, and utilizing the venue does not
expose market participants to undue credit risk, operational risk,
legal risk, or other risks.
<bullet> The venue complies with applicable laws and regulations,
including, but not limited to capital markets regulations, money
transmission regulations, client money custody regulations, know-your-
client (KYC) regulations, and anti-money laundering (AML) regulations.
<bullet> The venue cooperates with inquiries and investigations of
regulators and the Administrator upon request and must execute data
sharing agreements with the CME Group.
Continued compliance with these criteria is reviewed on an annual
basis by an independent committee, the CME CF Oversight Committee, and
the Valuation Vendor's trading platform selection process has been
continuously audited since 2020.\35\ As of the date of this filing, the
CME CF Constituent Trading Platforms are Bitstamp, Coinbase, Gemini,
Kraken, itBit and LMAX Digital.\36\ The Sponsor believes that the
Valuation Vendor's enforcement of the rigorous criteria applicable to
the CME CF Constituent Trading Platforms effectively acts as a first
line of defense against manipulation of the Shares by ensuring that
only data from spot trading platforms equipped to detect and impede
market manipulation is included in the calculation of the Reference
Prices that will determine the Trust's NAV and ITV.
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\35\ The latest IASE 300 Reasonable Assurance Auditors Report by
KPMG is publicly available on the Valuation Vendor's website:
<a href="https://www.cfbenchmarks.com/legal/audit">https://www.cfbenchmarks.com/legal/audit</a>.
\36\ The Sponsor notes that, given the rigorous application of
the selection criteria described above, the list of CME CF
Constituent Exchanges has never included <a href="http://FTX.com">FTX.com</a>, FTX.US,
<a href="http://Binance.com">Binance.com</a>, or Binance.US.
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2. The Reference Prices are administered and provided by the
Valuation Vendor, which is an Administrator of Benchmarks under the UK
Benchmarks Regime (``BMR'').
The Valuation Vendor received its regulatory authorization in 2019
and has held this regulatory authorization continuously since then. The
Valuation Vendor's compliance with the BMR's comprehensive regulation
of financial benchmarks has been audited since 2020.\37\ The Sponsor
believes that the Valuation Vendor is the leading provider of
benchmarks and indices for regulated financial products that reference
digital assets in the US and
[[Page 95862]]
internationally. Reference prices provided by the Valuation Vendor
underpin derivatives contracts regulated by the Commodity Futures
Trading Commission and listed by CME Group, as well as exchange-traded
funds offered by BlackRock, Franklin Templeton, and the Sponsor under
the regulatory purview of the Commission. In addition, to ensure
compliance with BMR Article 14, the Valuation Vendor conducts
surveillance of its benchmarks. When a surveillance alert is triggered,
the Valuation Vendor conducts an investigation, including seeking
further information from CME CF Constituent Trading Platforms. Each
such investigation is memorialized in a report shared with the CME CF
Cryptocurrency Committee. The UK Financial Conduct Authority (``FCA'')
has regulatory oversight of this process, which is also subject to
audit. The Sponsor believes that the Valuation Vendor's robust
surveillance efforts would allow it to promptly address manipulation or
attempted manipulation of Reference Prices through a regulatory filing
with the UK FCA and, accordingly, that this surveillance of the
underlying spot trading platforms constitutes a second line of defense
against manipulation in the Shares.
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\37\ See note 35, supra.
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3. The Valuation Vendor has in place information sharing agreements
with the CME CF Constituent Trading Platforms, from which it draws
pricing data to construct its benchmarks.
These agreements allow the Valuation Vendor to the obtain
identifying information of any perpetrators of actual or attempted
benchmark manipulation of any Reference Prices from the CME CF
Constituent Trading Platforms. This identifying information can then be
shared with the UK FCA for potential enforcement action under the
provisions of the Market Abuse Regime (MAR), which specifically
proscribes benchmark manipulation as a criminal offense in the UK. The
Sponsor believes that the availability of this information to the
Valuation Vendor supports enforcement and sanction efforts in response
to actual or attempted manipulation in digital asset markets, and
provides a third line of defense against any potential manipulation in
the Shares.
* * * * *
Finally, the Sponsor believes that the cash creation and redemption
structure of the Trust also underscores the protections that the
Reference Prices afford to the Trust. The Trust's Shares will have
their NAV and ITV determined by the Reference Prices and because all
shares in the Trust will be created and redeemed and secondary traded
with cash (not physical digital assets), any attempts to manipulate
Shares would have to involve transactions on the spot trading platforms
that are CME CF Constituent Trading Platforms to be able to influence
the price of the Shares. The Sponsor believes that the Valuation
Vendor's surveillance of the CME CF Constituent Trading Platforms to
detect such activity and the information sharing mechanisms in place
between the Valuation Vendor and the CME CF Constituent Trading
Platforms would both deter such activity and facilitate enforcement
action should it occur.
Availability of Information
The Trust's website (<a href="https://www.bitwiseinvestments.com/">https://www.bitwiseinvestments.com/</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 \38\ 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 Trust has been trading as an
ETP if shorter). In addition, on each business day the Trust's website
will provide pricing information for the Shares and disclosed the
Trust's holdings, including: (i) the name of each Portfolio Asset; (ii)
the quantity of each Portfolio Asset; and (iii) the weighting of each
Portfolio Asset.
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\38\ 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.
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One or more major market data vendors will provide the ITV 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.).\39\ The ITV will be calculated
using the same methodology as the NAV per Share of the Trust (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 Trust's NAV
during the trading day.
---------------------------------------------------------------------------
\39\ 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 ITV 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 ITV 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 ITV will be available through on-
line information services.
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for the Portfolio Assets will
be widely disseminated through a variety of major market data vendors.
In addition, real-time price (and volume) data for the Portfolio Assets
is available by subscription major market data vendors. The spot price
of the Portfolio Assets is available on a 24-hour basis from major
market data vendors. 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 Portfolio Assets
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 Sponsor will publish the Reference
Prices, the Trust's NAV, and the NAV per Share on the Trust's website
as soon as practicable after its determination. If the NAV and NAV per
Share have been calculated using a price per Portfolio other than the
Reference Prices, the publication on the Trust's website will note the
valuation methodology used and the price per Portfolio Asset resulting
from such calculation.
The Trust will provide website disclosure of its NAV daily. The
website disclosure of the Trust's NAV will occur at the same time as
the disclosure by the Administrator 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 Trust through the
Trust's website, as well as from one or more major market data vendors.
[[Page 95863]]
The value of the Index, as well as additional information regarding
the Index such as the Index Methodology, is publicly available on a
continuous basis on the Index Provider's website.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Trust.\40\ Trading in Shares of the Trust
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.
---------------------------------------------------------------------------
\40\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
The Exchange may halt trading during the day in which an
interruption to the dissemination of the ITV or Index occurs.\41\ If
the interruption to the dissemination of the ITV or Index persists past
the trading day in which it occurred, the Exchange will halt trading no
later than the beginning of the Core Trading Session following the
interruption. In addition, if the Exchange becomes aware that the NAV
with respect to the Shares is not disseminated to all market
participants at the same time, it will halt trading in the Shares until
such time as the NAV is available to all market participants.
---------------------------------------------------------------------------
\41\ A limit up/limit down condition in the futures market would
not be considered an interruption requiring the Trust to be halted.
---------------------------------------------------------------------------
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, as proposed. The trading of the
Shares will be subject to proposed 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.\42\ The Exchange represents that,
for initial and continued listing, the Trust will be in compliance with
Rule 10A-3 under the Act,\43\ as provided by NYSE Arca Rule 5.3-E. A
minimum of 100,000 Shares of the Trust will be outstanding at the
commencement of trading on the Exchange.
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\42\ Under NYSE Arca Rule 8.201-E(g), 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
the 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,
the Exchange could obtain information regarding the activities of
such subsidiary or affiliate through surveillance sharing agreements
with regulatory organizations of which such subsidiary or affiliate
is a member.
\43\ 17 CFR 240.10A-3. See note 8, supra.
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Surveillance
The Exchange represents that trading in the Shares of the Trust
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.\44\ 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.
---------------------------------------------------------------------------
\44\ 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.\45\
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.
---------------------------------------------------------------------------
\45\ 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 Portfolio Assets
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 Trust's commodity and/or
digital asset holdings 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 a CSSA.
---------------------------------------------------------------------------
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
[[Page 95864]]
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 Trust, (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 Sponsor has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under 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 Creation Units; (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 ITV
and NAV is 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 ITV will not be
calculated or publicly disseminated; (5) the requirement that members
deliver a prospectus to investors purchasing newly issued Shares prior
to or concurrently with the confirmation of a transaction and (6)
trading information.
In addition, the Information Bulletin will reference that the Trust
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 Trust is publicly available on the Trust'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 basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \46\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed and traded on the Exchange pursuant to the
initial and continued listing criteria in proposed 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 Portfolio Asset
derivatives from such markets. In addition, the Exchange may obtain
information regarding trading in the Shares and Portfolio Asset
derivatives from markets that are members of ISG or with which the
Exchange has in place a CSSA. Also, pursuant to proposed 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 Portfolio
Assets or any Portfolio Asset derivatives through ETP Holders acting as
registered Market Makers, in connection with such ETP Holders'
proprietary or 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 the Trust is structured
similarly to and will operate in materially the same manner as the Spot
Bitcoin ETPs and Spot Ether ETPs previously approved by the Commission.
The Exchange further believes that the proposed rule change is designed
to prevent fraudulent and manipulative acts and practices because, as
noted by the Commission in the Bitcoin ETP Approval Order and Ether ETP
Approval Order, the Exchange's ability to obtain information regarding
trading in the Shares and futures from other markets that are members
of the ISG (including the CME) would assist the Exchange in detecting
and deterring misconduct. In particular, the CME bitcoin futures market
and CME ether futures market are large, surveilled, and regulated
markets that are closely connected with the spot markets for bitcoin
and ether, respectively, through which the Exchange could obtain
information to assist in detecting and deterring potential fraud or
manipulation.
The proposed rule change is also designed to prevent fraudulent and
manipulative acts and practices because the Trust's use of Reference
Prices to calculate its NAV serves as a means sufficient to mitigate
the impact of instances of fraud and manipulation on a reference price
for the Portfolio Assets. As noted above, the Reference Prices for the
Portfolio Assets are calculated by the Valuation Vendor based
exclusively on trading activity at the CME CF Constituent Trading
Platforms, each of which must meet robust eligibility criteria designed
to protect the Reference Prices against fraud and manipulation. In
addition, the Valuation Vendor is an Administrator of Benchmarks under
the BMR that, among other things, conducts surveillance of its
benchmarks to detect and investigate potential manipulation. The
Valuation Vendor also has information sharing agreements with each of
the CME CF Constituent Trading Platforms that support access to
identifying information for perpetrators of actual or attempted
manipulation to aid in pursuing regulatory action against those actors.
The layers of defense provided by the Trust's use of Reference Prices
to calculate NAV, in conjunction with the Trust's use of cash creations
and redemptions, constitute a novel means to detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing, including
market manipulation, consistent with the requirements of the Act.
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 Portfolio Assets. Investors may obtain, on a 24-hour
basis, Portfolio Asset pricing information based on the spot price for
the Portfolio Assets from various financial information service
providers. The closing price and settlement prices of the Portfolio
Assets are readily available from the Valuation Trading
[[Page 95865]]
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 Trust will provide website disclosure of its NAV daily. One or more
major market data vendors will disseminate for the Trust 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 ITV 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 ITV or the value of the Index occurs. If the interruption to the
dissemination of the ITV or the value of the Index persists past the
trading day in which it occurred, the Exchange will halt trading no
later than the beginning of the 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 Trust's
commodity and/or digital asset holdings. In addition, as noted above,
investors will have ready access to information regarding the Trust's
NAV, ITV, 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 that would 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:
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#4f3d3a232a622c2022222a213b3c0f3c2a2c61282039"><span class="__cf_email__" data-cfemail="5624233a337b35393b3b333822251625333578313920">[email protected]</span></a>. Please include
file number SR-NYSEARCA-2024-98 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-NYSEARCA-2024-98. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-NYSEARCA-2024-98 and should
be submitted on or before December 24, 2024.
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\47\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\47\
Stephanie J. Fouse,
Assistant Secretary.
[FR Doc. 2024-28343 Filed 12-2-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on December 3, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.