[Federal Register Volume 88, Number 139 (Friday, July 21, 2023)]
[Notices]
[Pages 47214-47230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15474]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97922; File No. SR-NASDAQ-2023-019]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of a Proposed Rule Change To List and Trade Shares of 
the Valkyrie Bitcoin Fund Under Nasdaq Rule 5711(d), Commodity-Based 
Trust Shares

July 17, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 3, 2023, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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 Valkyrie 
Bitcoin Fund (the ``Trust'') under Nasdaq Rule 5711(d) (``Commodity-
Based Trust Shares''). The shares of the Trust are referred to herein 
as the ``Shares.''

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

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

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

1. Purpose
    The Exchange proposes to list and trade Shares of the Trust under 
Nasdaq Rule 5711(d), which governs the listing and trading of 
Commodity-Based Trust Shares on the Exchange.\3\
---------------------------------------------------------------------------

    \3\ Nasdaq Rule 5711(d)(iv)(A) defines Commodity-Based Trust 
Shares as ``a security (1) that is issued by a trust (``Trust'') 
that holds a specified commodity deposited with the Trust; (2) that 
is issued by such Trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and 
(3) that, when aggregated in the same specified minimum number, may 
be redeemed at a holder's request by such Trust which will deliver 
to the redeeming holder the quantity of the underlying commodity.''
---------------------------------------------------------------------------

Description of the Trust
    The Shares will be issued by the Trust, a Delaware statutory trust. 
The Trust will operate pursuant to a trust agreement (the ``Trust 
Agreement'') between Valkyrie Digital Assets, LLC (the ``Sponsor'') and 
Delaware Trust Company, as the Trust's trustee (the ``Trustee''). The 
Shares will be registered with the Commission by means of the Trust's 
registrations statement on Form S-1 (the ``Registration 
Statement'').\4\ Pursuant to the Trust Agreement, the Sponsor will 
enter into a custodian agreement (the ``Custodian Agreement'') with a 
qualified custodian (the ``Custodian'') to act as custodian for the 
Trust's bitcoins. Pursuant to the Custodian Agreement, the Custodian 
will establish accounts that hold the bitcoins deposited with the 
Custodian on behalf of the Trust. U.S. Bancorp Fund Services, LLC will 
act as the transfer agent for the Trust (the ``Transfer Agent'') and as 
the administrator of the Trust (the ``Administrator'') to perform 
various administrative, accounting and recordkeeping functions on 
behalf of the Trust.
---------------------------------------------------------------------------

    \4\ See Amendment No. 2 to Registration Statement on Form S-1, 
dated May 8, 2023 filed with the Commission by the Sponsor on behalf 
of the Trust (File No. 333-252344). The descriptions of the Trust 
contained herein are based, in part, on information in the 
Registration Statement. The Registration Statement in not yet 
effective and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective.
---------------------------------------------------------------------------

    The investment objective of the Trust is for the Shares to reflect 
the performance of the value of a bitcoin as represented by the CME CF 
Bitcoin Reference Rate--New York Variant (the ``Index''), less the 
Trust's liabilities and expenses. The purpose of the Trust is to 
provide investors with a cost-effective and convenient way to invest in 
bitcoin in a manner that is more efficient and convenient than the 
purchase of a stand-alone bitcoin, while also mitigating some of the 
risk by reducing the volatility typically associated with the purchase 
of stand-alone bitcoin and without the uncertain and often complex 
requirements relating to acquiring and/or holding bitcoin.
    The Trust will only hold bitcoin, and will, from time to time, 
issue Baskets \5\ in exchange for deposits of bitcoins and to 
distribute bitcoins in connection with redemptions of Baskets. The 
Shares of the Trust represent units of fractional undivided beneficial 
interest in, and ownership of, the Trust. The bitcoins held by the 
Custodian on behalf of the Trust will be transferred out of the Bitcoin 
Account only in the following circumstances: transferred to pay the 
Sponsor's Fee, distributed to Authorized Participants or Liquidity 
Providers, as applicable, in connection with the redemption of Baskets, 
transferred to be sold on an as-needed basis to pay Additional Trust 
Expenses, sold on behalf of the Trust in the event the Trust terminates 
and liquidates its assets or as otherwise required by law or 
regulation.
---------------------------------------------------------------------------

    \5\ A Basket equals a block of 50,000 Shares.
---------------------------------------------------------------------------

Custody of the Trust's Bitcoins
    The Trust will engage a Custodian to custody the Trust's bitcoin. 
The Trust will select a Custodian that is a qualified custodian under 
the Investment Advisers Act of 1940. Under the Custodian Agreement, the 
Custodian will be responsible for the safety and security of the 
Trust's Bitcoins as well as overseeing the process of deposit, 
withdrawal, sale and purchase of the Trust's bitcoins. The Custodian 
will custody the bitcoin in accordance with the terms of the Custodian 
Agreement.
    All bitcoins exist and are stored on the Blockchain, the 
decentralized transaction ledger of the Bitcoin Network. The Blockchain 
records most transactions (including mining of new bitcoins) for all 
bitcoins in existence, and in doing so verifies the location of each 
bitcoin (or fraction thereof) in a particular digital wallet. The 
Bitcoin Account will be maintained by the Custodian and cold storage 
\6\ mechanisms will be used for the Vault Account by the Custodian. 
Each digital wallet of the Trust may be accessed

[[Page 47215]]

using its corresponding private key. The Custodian's custodial 
operations will maintain custody of the private keys that have been 
deposited in cold storage at its various vaulting premises which are 
located in geographically dispersed locations across the world, 
including but not limited to the United States, Europe, including 
Switzerland, and South America. The locations of the vaulting premises 
may change regularly and are kept confidential by the Custodian for 
security purposes.
---------------------------------------------------------------------------

    \6\ The term ``cold storage'' refers to a safeguarding method by 
which the private keys corresponding to bitcoins stored on a digital 
wallet are removed from any computers actively connected to the 
internet. Cold storage of private keys may involve keeping such 
wallet on a non-networked computer or electronic device or storing 
the public key and private keys relating to the digital wallet on a 
storage device (for example, a USB thumb drive) or printed medium 
(for example, papyrus or paper) and deleting the digital wallet from 
all computers.
---------------------------------------------------------------------------

    The Custodian is the custodian of the Trust's private keys in 
accordance with the terms and provisions of the Custodian Agreement and 
will utilize the certain security procedures such as algorithms, codes, 
passwords, encryption or telephone call-backs (together, the ``Security 
Procedures'') in the administration and operation of the Trust and the 
safekeeping of its bitcoins and private keys. The Custodian will create 
a Vault Account for the Trust assets in which private keys are placed 
in cold storage. The Custodian will segregate the private keys stored 
with it from any other assets it holds or holds for others. Further, 
multiple distinct private keys must sign any transaction in order to 
transfer the Trust's bitcoins from a multi-signature address to any 
other address on the Bitcoin blockchain. Distinct private keys required 
for multi-signature address transfers reside in geographically 
dispersed vault locations, known as ``signing vaults.'' In addition to 
multiple signing vaults, the Custodian maintains multiple ``back-up 
vaults'' in which backup private keys are stored. In the event that one 
or more of the ``signing vaults'' is compromised, the back-up vaults 
would be activated and used as signing vaults to complete a transaction 
within 72 hours. As such, if any one signing vault is compromised, it 
would have no impact on the ability of the Trust to access its 
bitcoins, other than a possible delay in operations of 72 hours, while 
one or more of the ``backup vaults'' is transitioned to a signing 
vault. These Security Procedures ensure that there is no single point 
of failure in the protection of the Trust's assets.
Calculation of Net Asset Value
    The Trust's net asset value (``NAV'') is calculated by taking the 
current market value of its total assets, less any liabilities of the 
Trust, and dividing that total by the total number of outstanding 
Shares. The bitcoin held by the Trust will be valued based on the price 
set by the Index. The Administrator will calculate the NAV of the Trust 
once each Exchange trading day. The Exchange's Regular Market Session 
closes at 4:00 p.m. EST. The NAV for a normal trading day will be 
released after the end of the Regular Market Session. However, NAVs are 
not officially struck until later in the day (often by 5:30 p.m. EST 
and almost always by 8:00 p.m. EST). The pause between 4:00 p.m. EST 
and 5:30 p.m. EST provides an opportunity to algorithmically detect, 
flag, investigate, and correct unusual pricing should it occur. The NAV 
for the Trust's Shares will be disseminated daily to all market 
participants at the same time. The Sponsor anticipates that the Index 
will be reflective of a reasonable valuation of the average spot price 
of bitcoin. However, in the event the Index is not available or 
determined by the Sponsor to not be reliable, the Sponsor would ``fair 
value'' the Trust's bitcoin holdings. The Sponsor does not anticipate 
that the need to ``fair value'' bitcoin will be a common occurrence. 
The Sponsor will publish the NAV and NAV per Share at https://valkyrieinvest.com/ as soon as practicable after their determination 
and availability.
Intraday Indicative Value
    In order to provide updated information relating to the Trust for 
use by Shareholders and market professionals, the Trust will 
disseminate an updated intraday indicative value (``IIV'') per Share 
updated every 15 seconds by one of more major market data vendors 
during the Exchange's Regular Market Session.\7\ The IIV will be 
calculated by a third-party financial data provider during the 
Exchange's Regular Market Session. The IIV will be calculated by using 
the prior day's closing NAV per Share of the Trust as a base and 
updating that value throughout the trading day to reflect changes in 
the most recently reported price level of the CME CF Bitcoin Real-Time 
Index (``BRTI''), as reported by CME Group, Inc., Bloomberg, L.P. or 
another reporting service. The BRTI is calculated in real time based on 
the Relevant Order Books of all Constituent Bitcoin Exchanges. A 
``Relevant Order Book'' is the universe of the currently unmatched 
limit orders to buy or sell in the BTC/USD pair that is reported and 
disseminated by CF Benchmarks Ltd., as the BRTI calculation agent.
---------------------------------------------------------------------------

    \7\ Several major market data vendors display and/or make widely 
available IIVs taken from the Consolidated Tape Association 
(``CTA'') or other data feeds. In addition, the indicative fund 
value will be available through on-line information services such as 
Bloomberg and Reuters.
---------------------------------------------------------------------------

Creation and Redemption of Shares
    The Trust will issue Shares on an ongoing basis, but only in one or 
more Baskets. The creation and redemption of a Basket requires the 
delivery to the Trust, or the distribution by the Trust, of the number 
of whole and fractional bitcoins represented by each Basket being 
created or redeemed, the number of which is determined by dividing the 
number of bitcoins owned by the Trust at 4:00 p.m., New York time, on 
the trade date of a creation or redemption order, as adjusted for the 
number of whole and fractional bitcoins constituting accrued but unpaid 
fees and expenses of the Trust, by the number of Shares outstanding at 
such time (the quotient so obtained calculated to one-hundred-millionth 
of one bitcoin), and multiplying such quotient by 50,000 (the ``Basket 
Bitcoin Amount''). The Basket Bitcoin Amount multiplied by the number 
of Baskets being created or redeemed is the ``Total Basket Bitcoin 
Amount.''
    Authorized Participants are the only persons that may place orders 
to crate or redeem Baskets. Each Authorized Participant must (i) be a 
registered broker-dealer, (ii) enter into a Participant Agreement with 
the Sponsor, the Administrator, the Marketing Agent and the Liquidity 
Providers and (iii) in the case of the creation or redemption of 
Baskets that do not use the Conversion Procedures, own a bitcoin wallet 
address that is recognized by the Custodian as belonging to the 
Authorized Participant (an ``Authorized Participant Self-Administered 
Account''). Authorized Participants may act for their own accounts or 
as agents for broker-dealers, custodians and other securities market 
participants that wish to create or redeem Baskets. Shareholders who 
are not Authorized Participants will only be able to redeem their 
Shares through an Authorized Participant.
    Although the Trust will create Baskets only upon the receipt of 
bitcoins, and will redeem Baskets only by distributing bitcoins, an 
Authorized Participant may deposit cash with the Administrator, which 
will facilitate the purchase or sale of bitcoins through a Liquidity 
Provider on behalf of an Authorized Participant (the ``Conversion 
Procedures''). Liquidity Providers must (i) enter into a Participant 
Agreement with the Sponsor, the Administrator, the Marketing Agent and 
each Authorized Participant and (ii) own a Liquidity Provider Account.
    The Conversion Procedures will be facilitated by a single Liquidity 
Provider. On an order-by-order basis, the Sponsor will select the 
Liquidity Provider that it believes will provide the best execution of 
the Conversion Procedures, and will base its decision on factors such 
as the Liquidity

[[Page 47216]]

Provider's creditworthiness, financial stability, the timing and speed 
of execution, liquidity and the likelihood of, and capabilities in, 
execution, clearance and settlement. In the event that an order cannot 
be filled in its entirety by a single Liquidity Provider, additional 
Liquidity Provider(s) will be selected by the Sponsor to fill the 
remaining amount based on the criteria above.
Creation Procedures
    On any Business Day, an Authorized Participant may order one or 
more Creation Baskets from the Trust by placing a creation order with 
the Administrator. Creation orders may be placed either ``in-kind'' or 
``in-cash.'' Creation orders must be placed no later than 3:59:59 p.m., 
New York time, for in-kind creations, and 4:59:59 p.m., New York time, 
for in-cash creations, on each Business Day. Authorized Participants 
may only create Baskets and cannot create any Shares in an amount less 
than a Basket.
In-Kind Creations
    In-kind creations will take place as follows, where ``T'' is the 
trade date and each day in the sequence is a Business Day:
T
     The Authorized Participant places a creation order with 
the Administrator.
     The Marketing Agent accepts (or rejects) the creation 
order, which is communicated to the Authorized Participant by the 
Administrator.
     The Total Basket Bitcoin Amount is determined as soon as 
practicable after 4:00 p.m., New York time.
T + 1
     The Authorized Participant transfers the Total Basket 
Bitcoin Amount from its Authorized Participant Self-Administered 
Account to the Custodian.
     Once the Total Basket Bitcoin Amount is received by the 
Custodian, the Administrator directs the Transfer Agent to credit the 
Creation Baskets to the Authorized Participant's DTC account.
In-Cash Creations
    Upon receiving instruction from the Administrator that a creation 
order has been accepted by the Marketing Agent, the Authorized 
Participant will send 110% of the U.S. Dollar value of the Total Basket 
Bitcoin Amount, as calculated using the most recently published Bitcoin 
Index Price (the ``Cash Collateral Amount''). Once the Cash Collateral 
Amount is received by the Administrator, the Sponsor will notify the 
Liquidity Provider of the creation order. The Liquidity Provider will 
then (i) determine the Cash Exchange Rate, which, in the case of a 
creation order, is the Index spot price at the time at which the Cash 
Collateral Amount is received by the Administrator, plus the 1% 
Liquidity Provider Fee, and (ii) provide a firm quote to the Authorized 
Participant for the Total Basket Bitcoin Amount, determined by using 
the Cash Exchange Rate. If the Liquidity Provider's quote is greater 
than the Cash Collateral Amount received, the Authorized Participant 
will be required to pay the difference on the same day. Under the 
Conversion Procedures, the Authorized Participant does not pay more 
than the firm quote provided by the Liquidity Provider. The Liquidity 
Provider bears the risk of any change in the Total Basket Bitcoin 
Amount and of any change in the price of bitcoin once the Cash Exchange 
Rate has been determined. Provided that payment for the Total Basket 
Bitcoin Amount is received by the Administrator, the Liquidity Provider 
will deliver the bitcoins to the Custodian on the settlement date on 
behalf of the Authorized Participant. After the Custodian receives the 
Total Basket Bitcoin Amount, the Administrator will instruct the 
Transfer Agent to deliver the Creation Baskets to the Authorized 
Participant. The Administrator will then send the Liquidity Provider 
the cash equal to the Cash Exchange Rate times the Total Basket Bitcoin 
Amount, plus the 1% Liquidity Provider Fee. The Administrator will 
return any remaining amount of the Cash Collateral Amount to the 
Authorized Participant.
Redemption Procedures
    The procedures by which an Authorized Participant can redeem one or 
more Baskets mirror the procedures for the creation of Baskets. On any 
Business Day, an Authorized Participant may place a redemption order 
specifying the number of Redemption Baskets to be redeemed. Redemption 
orders may be placed either ``in-kind'' or ``in-cash.'' Redemption 
orders must be placed no later than 3:59:59 p.m., New York time, for 
in-kind redemptions, and 4:59:59 p.m., New York time, for in-cash 
redemption, on each Business Day. Authorized Participants may only 
redeem Baskets and cannot redeem any Shares in an amount less than a 
Basket.
In-Kind Redemptions
    In-kind redemptions will take place as follows, where ``T'' is the 
trade date and each day in the sequence is a Business Day:
T
     The Authorized Participant places a redemption order with 
the Administrator.
     The Marketing Agent accepts (or rejects) the redemption 
order.
     The Total Basket Bitcoin Amount is determined as soon as 
practicable after 4:00 p.m., New York time.
T + 1
     The Authorized Participant delivers to the Transfer Agent 
Redemption Baskets from its DTC account.
     Once the Redemption Baskets are received by the Transfer 
Agent, the Custodian transfers the Total Basket Bitcoin Amount to the 
Authorized Participant and the Transfer Agent cancels the Shares.
In-Cash Redemptions
    To redeem Baskets using the Conversion Procedures, Authorized 
Participants will send the Administrator a redemption order. The 
Marketing Agent will accept or reject the redemption order on that same 
date. A Liquidity Provider will then (i) determine the Cash Exchange 
Rate, which, in the case of a redemption order, is the Index spot price 
minus the 1% Liquidity Provider Fee at the time at which the 
Administrator notifies the Authorized Participant that an order has 
been accepted and (ii) provide a firm quote to an Authorized 
Participant for the Total Basket Bitcoin Amount, determined by using 
the Cash Exchange Rate. Under the Conversion Procedures, the Authorized 
Participant does not receive less than the firm quote provided by the 
Liquidity Provider. The Liquidity Provider bears the risk of any change 
in the Total Basket Bitcoin Amount and of any change in the price of 
bitcoin once the Cash Exchange Rate has been determined. The Liquidity 
Provider will send the Administrator the cash proceeds equal to the 
Cash Exchange Rate times the Total Basket Bitcoin Amount, minus the 1% 
Liquidity Provider Fee. Once the Authorized Participant delivers the 
Redemption Baskets to the Transfer Agent, the Administrator will send 
the cash proceeds to the Authorized Participant and the Transfer Agent 
will cancel the Shares. At the instruction of the Administrator, the 
Custodian will then send the Liquidity Provider the Total Basket 
Bitcoin Amount.

[[Page 47217]]

Overview of the Bitcoin Industry and Market \8\
---------------------------------------------------------------------------

    \8\ For the purpose of this section, Bitcoin with an upper case 
``B'' is used to describe the system as a whole that is involved in 
maintaining the ledger of bitcoin ownership and facilitating the 
transfer of bitcoin among parties. When referring to the digital 
asset within the bitcoin network, bitcoin is written with a lower 
case ``b'' (except, at the beginning of sentences or paragraph 
sections).
---------------------------------------------------------------------------

Bitcoin
    Bitcoin is the digital asset that is native to, and created and 
transmitted through the operations of, the peer-to-peer Bitcoin 
network, a decentralized network of computers that operates on 
cryptographic protocols. No single entity owns or operates the Bitcoin 
network, the infrastructure of which is collectively maintained by a 
decentralized user base. The Bitcoin network allows people to exchange 
tokens of value, called bitcoin, which are recorded on a public 
transaction ledger known as the Blockchain. Bitcoin can be used to pay 
for goods and services, or it can be converted to fiat currencies, such 
as the U.S. dollar, at rates determined on bitcoin trading platforms or 
in individual end-user-to-end-user transactions under a barter system.
    The value of bitcoin is determined by the supply of and demand for 
bitcoin. New bitcoins are created and rewarded to the parties providing 
the Bitcoin network's infrastructure (``miners'') in exchange for their 
expending computational power to verifying transactions and add them to 
the Blockchain. The Blockchain is effectively a decentralized database 
that includes all blocks that have been solved by miners and it is 
updated to include new blocks as they are solved. Each bitcoin 
transaction is broadcast to the Bitcoin network and, when included in a 
block, recorded in the Blockchain. As each new block records 
outstanding bitcoin transactions, and outstanding transactions are 
settled and validated through such recording, the Blockchain represents 
a complete, transparent and unbroken history of all transactions of the 
Bitcoin network.
Bitcoin Network
    Bitcoin was first described in a white paper released in 2008 and 
published under the pseudonym ``Satoshi Nakamoto.'' The protocol 
underlying Bitcoin was subsequently released in 2009 as open source 
software and currently operates on a worldwide network of computers.
    The first step in directly using the Bitcoin network for 
transactions is to download specialized software referred to as a 
``bitcoin wallet.'' A user's bitcoin wallet can run on a computer or 
smartphone, and can be used both to send and to receive bitcoin. Within 
a bitcoin wallet, a user can generate one or more unique ``bitcoin 
addresses,'' which are conceptually similar to bank account numbers. 
After establishing a bitcoin address, a user can send or receive 
bitcoin from his or her bitcoin address to another user's address. 
Sending bitcoin from one bitcoin address to another is similar in 
concept to sending a bank wire from one person's bank account to 
another person's bank account; provided, however, that such 
transactions are not managed by an intermediary and erroneous 
transactions generally may not be reversed or remedied once sent.
    The amount of bitcoin associated with each bitcoin address, as well 
as each bitcoin transaction to or from such address, is transparently 
reflected in the Blockchain and can be viewed by websites that operate 
as ``blockchain explorers.'' Copies of the Blockchain exist on 
thousands of computers on the Bitcoin network. A user's bitcoin wallet 
will either contain a copy of the blockchain or be able to connect with 
another computer that holds a copy of the blockchain. The innovative 
design of the Bitcoin network protocol allows each Bitcoin user to 
trust that their copy of the Blockchain will generally be updated 
consistent with each other user's copy.
Bitcoin Protocol
    The Bitcoin protocol is open source software, meaning any developer 
can review the underlying code and suggest changes. There is no 
official company or group that is responsible for making modifications 
to Bitcoin. There are, however, a number of individual developers that 
regularly contribute to a specific distribution of Bitcoin software 
known as the ``Bitcoin Core,'' which is maintained in an open-source 
repository on the website Github. There are many other compatible 
versions of Bitcoin software, but Bitcoin Core provides the de-facto 
standard for the Bitcoin protocol, also known as the ``reference 
software.'' The core developers for Bitcoin Core operate under a 
volunteer basis and without strict hierarchical administration.
    Significant changes to the Bitcoin protocol are typically 
accomplished through a so-called ``Bitcoin Improvement Proposal'' or 
BIP. Such proposals are generally posted on websites, and the proposals 
explain technical requirements for the protocol change as well as 
reasons why the change should be accepted. Upon its inclusion in the 
most recent version of Bitcoin Core, a new BIP becomes part of the 
reference software's Bitcoin protocol. Several BIPs have been 
implemented since 2011 and have provided various new features and 
scaling improvements.
    Because Bitcoin has no central authority, updating the reference 
software's Bitcoin protocol will not immediately change the Bitcoin 
network's operations. Instead, the implementation of a change is 
achieved by users and miners downloading and running updated versions 
of Bitcoin Core or other Bitcoin software that abides by the new 
Bitcoin protocol. Users and miners must accept any changes made to the 
Bitcoin source code by downloading a version of their Bitcoin software 
that incorporates the proposed modification of the Bitcoin network's 
source code. A modification of the Bitcoin network's source code is 
only effective with respect to the Bitcoin users and miners that 
download it. If an incompatible modification is accepted only by a 
percentage of users and miners, a division in the Bitcoin network will 
occur such that one network will run the pre-modification source code 
and the other network will run the modified source code. Such a 
division is known as a ``fork'' in the Bitcoin network.
    Such a fork in the Bitcoin network occurred on August 1, 2017, when 
a group of developers and miners accepted certain changes to the 
Bitcoin network software intended to increase transaction capacity. 
Blocks mined on this network now diverge from blocks mined on the 
Bitcoin network, which has resulted in the creation of a new blockchain 
whose digital asset is referred to as ``bitcoin cash.'' Bitcoin and 
bitcoin cash now operate as separate, independent networks, and have 
distinct related assets (bitcoin and bitcoin cash). Additional forks 
have followed the Bitcoin Cash fork, including those for Bitcoin Gold 
and Bitcoin SegWit2X, in the months after the creation of Bitcoin Cash.
Bitcoin Transactions
    A bitcoin transaction contains the sender's bitcoin address, the 
recipient's bitcoin address, the amount of bitcoin to be sent, a 
transaction fee and the sender's digital signature. Bitcoin 
transactions are secured by cryptography known as public-private key 
cryptography, represented by the bitcoin addresses and digital 
signature in a transaction's data file. Each Bitcoin network address, 
or wallet, is associated with a unique ``public key'' and ``private 
key'' pair, both of which are lengthy

[[Page 47218]]

alphanumeric codes, derived together and possessing a unique 
relationship. The public key is visible to the public and analogous to 
the Bitcoin network address. The private key is a secret and may be 
used to digitally sign a transaction in a way that proves the 
transaction has been signed by the holder of the public-private key 
pair, without having to reveal the private key.
    The Bitcoin network incorporates a system to prevent double-
spending of a single bitcoin. To prevent the possibility of double-
spending a single bitcoin, each validated transaction is recorded, time 
stamped and publicly displayed in a ``block'' in the Blockchain, which 
is publicly available. Any user may validate, through their Bitcoin 
wallet or a blockchain explorer, that each transaction in the Bitcoin 
network was authorized by the holder of the applicable private key, and 
Bitcoin network mining software consistent with reference software 
requirements typically validates each such transaction before including 
it in the Blockchain.
Bitcoin Mining--Creation of New Bitcoins
    The process by which bitcoins are created and bitcoin transactions 
are verified is called mining. To begin mining, a user, or ``miner,'' 
can download and run a mining client, which, like regular Bitcoin 
network software, turns the user's computer into a ``node'' on the 
Bitcoin network that validates blocks. Each time transactions are 
validated and bundled into new blocks added to the Blockchain, the 
Bitcoin network awards the miner solving such blocks with newly issued 
bitcoin and any transaction fees paid by bitcoin transaction senders. 
This reward system is the method by which new bitcoins enter into 
circulation to the public.
Mathematically Controlled Supply
    The method for creating new bitcoin is mathematically controlled in 
a manner so that the supply of bitcoin grows at a limited rate pursuant 
to a pre-set schedule. The number of bitcoin awarded for solving a new 
block is automatically halved every 210,000 blocks. Thus, the current 
fixed reward for solving a new block is 6.25 bitcoin per block; the 
reward decreased from twenty-five (25) bitcoin in July 2016 and 12.5 in 
May 2020. It is estimated to halve again at the start of 2024. This 
deliberately controlled rate of bitcoin creation means that the number 
of bitcoin in existence will never exceed twenty-one (21) million and 
that bitcoin cannot be devalued through excessive production unless the 
Bitcoin network's source code (and the underlying protocol for bitcoin 
issuance) is altered. As of January 1, 2023, approximately 19,250,000 
bitcoin have been mined.
Bitcoin Value
    The value of Bitcoin is determined by the value that various market 
participants place on Bitcoin through their transactions. The most 
common means of determining the value of a Bitcoin is by surveying one 
or more Bitcoin Exchanges where Bitcoin is traded publicly and 
transparently (e.g., Bitstamp, Coinbase, Kraken, itBit, Gemini and LMAX 
Digital). Additionally, in parallel to the open bitcoin exchanges, 
informal ``over-the-counter'' or ``OTC markets'' for bitcoin trading 
also exist as a result of the peer-to-peer nature of the Bitcoin 
Network, which allows direct transactions between any seller and buyer.
    On each exchange, bitcoin is traded with publicly disclosed 
valuations for each executed trade, measured by one or more fiat 
currencies such as the U.S. dollar or Euro. OTC markets do not 
typically disclose their trade data. Currently, there are many 
exchanges operating worldwide, and each such exchange represents a 
substantial percentage of bitcoin buying and selling activity.
The Index
    As described in the Registration Statement, the Fund will use the 
Index to calculate the Trust's NAV. The Index is not affiliated with 
the Sponsor and was created and is administered by CF Benchmarks Ltd. 
(the ``Benchmark Administrator''), an independent entity, to facilitate 
financial products based on bitcoin. The Index is designed based on the 
IOSCO Principals for Financial Benchmarks and serves as a once-a-day 
benchmark rate of the U.S. dollar price of bitcoin (USD/BTC), 
calculated as of 4 p.m. Eastern time. The Index is based on materially 
the same methodology (except calculation time) \9\ as the Benchmark 
Administrator's CME CF Bitcoin Reference Rate (the ``BRR''), which was 
first introduced on November 14, 2016 and is the rate on which bitcoin 
futures contracts (``Bitcoin Futures'') are cash-settled in U.S. 
dollars at the CME. The Index aggregates the trade flow of several 
bitcoin exchanges, during an observation window between 3:00 p.m. and 
4:00 p.m. Eastern time into the U.S. dollar price of one bitcoin at 
4:00 p.m. Eastern time. The current constituent bitcoin exchanges of 
the Index are Bitstamp, Coinbase, Gemini, itBit, Kraken and LMAX 
Digital (the ``Constituent Bitcoin Exchanges'').
---------------------------------------------------------------------------

    \9\ The Index is calculated as of 4 p.m. Eastern Time, whereas 
the BRR is calculated as of 4 p.m. London Time.
---------------------------------------------------------------------------

    The Index is calculated based on the ``Relevant Transactions'' \10\ 
of all of its Constituent Bitcoin Exchanges, as follows:
---------------------------------------------------------------------------

    \10\ A ``Relevant Transaction'' is any cryptocurrency versus 
U.S. dollar spot trade that occurs during the observation window 
between 3:00 p.m. and 4:00 p.m. Eastern time on a Constituent 
Bitcoin Exchange in the BTC/USD pair that is reported and 
disseminated by a Constituent Bitcoin Exchange through its publicly 
available API and observed by the Benchmark Administrator, CF 
Benchmarks Ltd.
---------------------------------------------------------------------------

     All Relevant Transactions are added to a joint list, 
recording the time of execution, trade price and size for each 
transaction.
     The list is partitioned by timestamp into 12 equally-sized 
time intervals of 5 (five) minute length.
     For each partition separately, the volume-weighted median 
trade price is calculated from the trade prices and sizes of all 
Relevant Transactions, i.e., across all Constituent Bitcoin Exchanges. 
A volume-weighted median differs from a standard median in that a 
weighting factor, in this case trade size, is factored into the 
calculation.
     The Index is then determined by the arithmetic mean of the 
volume-weighted medians of all partitions.
    By employing the foregoing steps, the Index thereby seeks to ensure 
that transactions in bitcoin conducted at outlying prices do not have 
an undue effect on the value of a specific partition, large trades or 
clusters of trades transacted over a short period of time will not have 
an undue influence on the index level, and the effect of large trades 
at prices that deviate from the prevailing price are mitigated from 
having an undue influence on the benchmark level. In addition, the 
Sponsor notes that an oversight function is implemented by the 
Benchmark Administrator in seeking to ensure that the Index is 
administered through codified policies for Index integrity.
    The Index provides an accurate reference to the average spot price 
of Bitcoin and the methodology employed in constructing the Index, 
specifically its use of medians in filtering out small trades, makes 
the Index more resistant to manipulation than other measurements that 
employ different methodologies. In addition, the Index included over 
$375 billion in bitcoin trades (approximately 12,500 bitcoins) during 
the one-year period ended December 31, 2022. Finally, an oversight 
committee is responsible for regularly reviewing and overseeing the

[[Page 47219]]

methodology, practice, standards and scope of the Index to ensure that 
it continues to accurately track the spot prices of Bitcoin.
Background
    The Commission has historically approved or disapproved exchange 
filings to list and trade series of Trust Issued Receipts, including 
spot-based 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.\11\ Prior orders from the Commission 
have pointed out that in every prior approval order for Commodity-Based 
Trust Shares, there has been a derivatives market that represents the 
regulated market of significant size, generally a Commodity Futures 
Trading Commission regulated futures market.\12\ Further to this point, 
the Commission's prior orders have noted that the spot commodities and 
currency markets for which it has previously approved spot ETPs are 
generally unregulated and that the Commission relied on the underlying 
futures market as the regulated market of significant size that formed 
the basis for approving the series of Currency and Commodity-Based 
Trust Shares, including gold, silver, platinum, palladium, copper, and 
other commodities and currencies. The Commission specifically noted in 
the Winklevoss Order that the First Gold Approval Order ``was based on 
an assumption that the currency market and the spot gold market were 
largely unregulated.'' \13\
---------------------------------------------------------------------------

    \11\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order'').
    \12\ See streetTRACKS Gold Shares, Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX 
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares 
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold 
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993, 
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS 
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR 
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS 
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74 
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of 
proposed rule change included NYSE Arca's representation that 
``[t]he most significant palladium futures exchanges are the NYMEX 
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest 
exchange in the world for trading precious metals futures and 
options,'' and that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which NYMEX is a member, 
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act 
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29, 
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included 
NYSE Arca's representation that ``[t]he most significant platinum 
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' 
that ``NYMEX is the largest exchange in the world for trading 
precious metals futures and options,'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9, 
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical 
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of 
proposed rule change included NYSE Arca's representation that the 
COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group, Exchange Act Release No. 
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010));
    Sprott Physical Silver Trust, Exchange Act Release No. 63043 
(Oct. 5, 2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) 
(SR-NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange 
Act Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17, 
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant gold, silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act 
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15, 
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release 
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE 
Arca's representation that ``the most significant gold futures 
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that 
``COMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8, 
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott 
Physical Platinum and Palladium Trust, Exchange Act Release No. 
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012-111) (notice of proposed rule change included NYSE 
Arca's representation that ``[f]utures on platinum and palladium are 
traded on two major exchanges: The New York Mercantile Exchange . . 
. and Tokyo Commodities Exchange'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 68101 (Oct. 24, 
2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX Physical--1 
oz. Gold Redeemable Trust, Exchange Act Release No. 66930 (May 7, 
2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-2012-18) 
(notice of proposed rule change included NYSE Arca's representation 
that NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which COMEX is a member, and that gold 
futures are traded on COMEX and the Tokyo Commodity Exchange, with a 
cross- reference to the proposed rule change to list and trade 
shares of the ETFS Gold Trust, in which NYSE Arca represented that 
COMEX is one of the ``major world gold markets,'' Exchange Act 
Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-43, 17547 
(Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange Act Release 
No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 75485-86 
(Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper Trust, 
Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 13727, 
13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); First 
Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14, 2013), 78 
FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) (notice of 
proposed rule change included NYSE Arca's representation that FINRA, 
on behalf of the exchange, may obtain trading information regarding 
gold futures and options on gold futures from members of the 
Intermarket Surveillance Group, including COMEX, or from markets 
``with which [NYSE Arca] has in place a comprehensive surveillance 
sharing agreement,'' and that gold futures are traded on COMEX and 
the Tokyo Commodity Exchange, with a cross-reference to the proposed 
rule change to list and trade shares of the ETFS Gold Trust, in 
which NYSE Arca represented that COMEX is one of the ``major world 
gold markets,'' Exchange Act Release No. 69847 (June 25, 2013), 78 
FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold Trust, Exchange 
Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 4786-87 (Jan. 29, 
2014) (SR-NYSEArca-2013-137) (notice of proposed rule change 
included NYSE Arca's representation that ``COMEX is the largest gold 
futures and options exchange'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' 
including with respect to transactions occurring on COMEX pursuant 
to CME and NYMEX's membership, or from exchanges ``with which [NYSE 
Arca] has in place a comprehensive surveillance sharing agreement,'' 
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369, 
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release 
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15, 
2016) (SR-NYSEArca-2016-84).
    \13\ See Winklevoss Order at 37592.
---------------------------------------------------------------------------

    As such, the regulated market of significant size test does not 
require that the spot bitcoin market be regulated in order for the 
Commission to approve this proposal, and precedent makes clear that an 
underlying market for a spot commodity or currency being a regulated 
market would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to surveillance 
sharing agreements with the underlying futures market in order to 
determine whether such products were consistent with the Act. With this 
in mind, the Bitcoin Futures market, as defined below, is the proper 
market to consider in determining whether there is a related regulated 
market of significant size.

[[Page 47220]]

    Further to this point, the Exchange notes that the Commission has 
recently approved proposals related to the listing and trading of funds 
that would primarily hold Bitcoin Futures that are registered under the 
Securities Act of 1933 instead of the Investment Company Act of 1940, 
as amended (the ``1940 Act'').\14\ In the Teucrium Approval, the 
Commission found the Bitcoin Futures market to be a regulated market of 
significant size as it relates to Bitcoin Futures, an odd tautological 
truth that is also inconsistent with prior disapproval orders for 
exchange traded products (``ETPs'') that would hold actual bitcoin 
instead of derivatives contracts (``Spot Bitcoin ETPs'') that use the 
exact same pricing methodology as the Bitcoin Futures. As further 
discussed below, both the Exchange and the Sponsor believe that this 
proposal and the included analysis are sufficient to establish that the 
Bitcoin Futures market represents a regulated market of significant 
size as it relates both to the Bitcoin Futures market and to the spot 
bitcoin market and that this proposal should be approved.
---------------------------------------------------------------------------

    \14\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5, 
2022) (collectively, with the Teucrium Approval, the ``Bitcoin 
Futures Approvals'').
---------------------------------------------------------------------------

Bitcoin Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the 
launch of ETFs registered under the 1940 Act and the recent Bitcoin 
Futures Approvals that provide exposure to bitcoin primarily through 
Bitcoin Futures (``Bitcoin Futures ETFs''). Allowing such products to 
list and trade is a productive first step in providing U.S. investors 
and traders with transparent, exchange-listed tools for expressing a 
view on bitcoin. The Bitcoin Futures Approvals, however, have created a 
logical inconsistency in the application of the standard the Commission 
applies when considering bitcoin ETP proposals.
    As discussed further below, the standard applicable to bitcoin ETPs 
is whether the listing exchange has in place a comprehensive 
surveillance sharing agreement with a regulated market of significant 
size in the underlying asset. Previous disapproval orders have made 
clear that a market that constitutes a regulated market of significant 
size is generally a futures and/or options market based on the 
underlying reference asset rather than the spot commodity markets, 
which are often unregulated.\15\ Leaving aside the analysis of that 
standard until later in this proposal,\16\ the Exchange believes that 
the following rationale that the Commission applied to a Bitcoin 
Futures ETF should result in the Commission approving this and other 
Spot Bitcoin ETP proposals:
---------------------------------------------------------------------------

    \15\ See Winklevoss Order at 37593, specifically footnote 202, 
which includes the language from numerous approval orders for which 
the underlying futures markets formed the basis for approving series 
of ETPs that hold physical metals, including gold, silver, 
palladium, platinum, and precious metals more broadly; and 37600, 
specifically where the Commission provides that ``when the spot 
market is unregulated--the requirement of preventing fraudulent and 
manipulative acts may possibly be satisfied by showing that the ETP 
listing market has entered into a surveillance-sharing agreement 
with a regulated market of significant size in derivatives related 
to the underlying asset.'' As noted above, the Exchange believes 
that these citations are particularly helpful in making clear that 
the spot market for a spot commodity ETP need not be ``regulated'' 
in order for a spot commodity ETP to be approved by the Commission, 
and in fact that it's been the common historical practice of the 
Commission to rely on such derivatives markets as the regulated 
market of significant size because such spot commodities markets are 
largely unregulated.
    \16\ As further outlined below, both the Exchange and the 
Sponsor believe that the Bitcoin Futures market represents a 
regulated market of significant size and that this proposal and 
others like it should be approved on this basis.

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably 
be relied upon to capture the effects on the CME bitcoin futures 
market caused by a person attempting to manipulate the proposed 
futures ETP by manipulating the price of CME bitcoin futures 
contracts, whether that attempt is made by directly trading on the 
CME bitcoin futures market or indirectly by trading outside of the 
CME bitcoin futures market. As such, when the CME shares its 
surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct 
related to the non-cash assets held by the proposed ETP.\17\
---------------------------------------------------------------------------

    \17\ See Teucrium Approval at 21679.

    Bitcoin Futures pricing is based on pricing from spot bitcoin 
markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME bitcoin futures market caused by a person attempting to 
manipulate the proposed futures ETP by manipulating the price of CME 
bitcoin futures contracts . . . indirectly by trading outside of the 
CME bitcoin futures market,'' makes clear that the Commission believes 
that CME's surveillance can capture the effects of trading on the 
relevant spot markets on the pricing of Bitcoin Futures. If CME is able 
to detect such attempts at manipulation in the complex and 
interconnected spot bitcoin market, how would such an ability to detect 
attempted manipulation and the utility in sharing that information with 
the listing exchange apply only to Bitcoin Futures ETFs and not Spot 
Bitcoin ETPs? Stated a different way, given that there is significant 
trading volume on numerous bitcoin exchanges that are not part of the 
CME CF Bitcoin Reference Rate and that arbitrage opportunities across 
bitcoin exchanges means that such trading volume will influence spot 
bitcoin prices across the market and, despite this, the Commission 
still believes that CME can detect attempted manipulation of the 
Bitcoin Futures through ``trading outside of the CME bitcoin futures 
market,'' it is clear that such ability would apply equally to both 
Bitcoin Futures ETFs and Spot Bitcoin ETPs. To take it a step further, 
such an ability would also seem to be a strong indication that the CME 
Bitcoin Futures market represents a regulated market of significant 
size. To be clear, the Exchange agrees with the Commission on this 
point (and the implications of their conclusions) and notes that the 
pricing mechanism applicable to the Shares is similar to the CME CF 
Bitcoin Reference Rate, as further discussed below.
    The Exchange also notes that a Bitcoin Futures ETF may also be more 
susceptible to potential manipulation than a Spot Bitcoin ETP that 
offers only in-kind creation and redemption because Bitcoin Futures 
pricing (and thus the value of the underlying holdings of a Bitcoin 
Futures ETF) is based on a single price derived from spot bitcoin 
pricing, while shares of a Spot Bitcoin ETP would represent interest in 
bitcoin directly and authorized participants for a Spot Bitcoin ETP (as 
proposed herein) would be able to source bitcoin from any exchange and 
create or redeem with the applicable trust regardless of the price of 
the underlying index. As such, the Exchange believes that, in addition 
to the CME Bitcoin Futures market representing a regulated market of 
significant size as it relates to the spot bitcoin market, in-kind Spot 
Bitcoin ETPs are likely less susceptible to manipulation than Bitcoin 
Futures ETFs because of the underlying creation and redemption 
arbitrage mechanism that will operate in the same manner as it does for 
all other ETFs.
    In addition to potentially being more susceptible to manipulation 
than a Spot Bitcoin ETP, the structure of Bitcoin Futures ETFs provides 
negative outcomes for buy and hold investors as

[[Page 47221]]

compared to a Spot Bitcoin ETP.\18\ Specifically, the cost of rolling 
Bitcoin Futures contracts will cause the Bitcoin Futures ETFs to lag 
the performance of bitcoin itself and, at over a billion dollars in 
assets under management, would cost U.S. investors significant amounts 
of money on an annual basis compared to Spot Bitcoin ETPs. Such rolling 
costs would not be required for Spot Bitcoin ETPs that hold bitcoin. 
Further, Bitcoin Futures ETFs could potentially hit CME position 
limits, which would force a Bitcoin Futures ETF to invest in non-
futures assets for bitcoin exposure and cause potential investor 
confusion and lack of certainty about what such Bitcoin Futures ETFs 
are actually holding to try to get exposure to bitcoin, not to mention 
completely changing the risk profile associated with such an ETF. While 
Bitcoin Futures ETFs represent a useful trading tool, they are clearly 
a sub-optimal structure for U.S. investors that are looking for long-
term exposure to bitcoin that will, based on the calculations above, 
unnecessarily cost U.S. investors significant amounts of money every 
year compared to Spot Bitcoin ETPs and the Exchange believes that any 
proposal to list and trade a Spot Bitcoin ETP should be reviewed by the 
Commission with this important investor protection context in mind.
---------------------------------------------------------------------------

    \18\ See e.g., ``Bitcoin ETF's Success Could Come at 
Fundholders' Expense,'' Wall Street Journal (October 24, 2021), 
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin 
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available 
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&_cf_chl_jschl_tk_=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list Spot Bitcoin ETPs compared to 
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead 
to the conclusion that Spot Bitcoin ETPs should be available to U.S. 
investors and, as such, this proposal and other comparable proposals to 
list and trade Spot Bitcoin ETPs should be approved by the Commission. 
Stated simply, U.S. investors will continue to lose significant amounts 
of money from holding Bitcoin Futures ETFs as compared to Spot Bitcoin 
ETPs, losses which could be prevented by the Commission approving Spot 
Bitcoin ETPs. Additionally, any concerns related to preventing 
fraudulent and manipulative acts and practices related to Spot Bitcoin 
ETPs would apply equally to the spot markets underlying the futures 
contracts held by a Bitcoin Futures ETF. While the 1940 Act does offer 
certain investor protections, those protections do not relate to 
mitigating potential manipulation of the holdings of an ETF in a way 
that warrants distinction between Bitcoin Futures ETFs and Spot Bitcoin 
ETPs. To be clear, both the Exchange and Sponsor believe that the 
Bitcoin Futures market is a regulated market of significant size and 
that such manipulation concerns are mitigated as described throughout 
this proposal. After issuing the Bitcoin Futures Approvals which 
conclude the CME Bitcoin Futures market is a regulated market of 
significant size as it relates to Bitcoin Futures, the only consistent 
outcome would be approving Spot Bitcoin ETPs on the basis that the 
Bitcoin Futures market is also a regulated market of significant size 
as it relates to the bitcoin spot market. Including in the analysis the 
significant and preventable losses to U.S. investors that comes with 
Bitcoin Futures ETFs, disapproving Spot Bitcoin ETPs seems even more 
arbitrary and capricious. Given the current landscape, approving this 
proposal (and others like it) and allowing Spot Bitcoin ETPs to be 
listed and traded alongside Bitcoin Futures ETFs would establish a 
consistent regulatory approach, provide U.S. investors with choice in 
product structures for bitcoin exposure, and offer flexibility in the 
means of gaining exposure to bitcoin through transparent, regulated, 
U.S. exchange-listed vehicles.
Spot and Proxy Exposure to Bitcoin
    Exposure to bitcoin through an ETP also presents certain advantages 
for retail investors compared to buying spot bitcoin directly. The most 
notable advantage from the Sponsor's perspective is the elimination of 
the need for an individual retail investor to either manage their own 
private keys or to hold bitcoin through a cryptocurrency exchange that 
lacks sufficient protections. Typically, retail exchanges hold most, if 
not all, retail investors' bitcoin in ``hot'' (internet-connected) 
storage and do not make any commitments to indemnify retail investors 
or to observe any particular cybersecurity standard. Meanwhile, a 
retail investor holding spot bitcoin directly in a self-hosted wallet 
may suffer from inexperience in private key management (e.g., 
insufficient password protection, lost key, etc.), which could cause 
them to lose some or all of their bitcoin holdings. Thus, with respect 
to custody of the Trust's bitcoin assets, the Trust presents advantages 
from an investment protection standpoint for retail investors compared 
to owning spot bitcoin directly.
    Finally, a number of operating companies largely engaged in 
unrelated businesses--such as Tesla (a car manufacturer) and 
MicroStrategy (an enterprise software company)--have announced 
significant investments in bitcoin. Without access to bitcoin exchange-
traded products, retail investors seeking investment exposure to 
bitcoin may end up purchasing shares in these companies in order to 
gain the exposure to bitcoin that they seek.\19\ In fact, mainstream 
financial news networks have written a number of articles providing 
investors with guidance for obtaining bitcoin exposure through publicly 
traded companies (such as MicroStrategy, Tesla, and bitcoin mining 
companies, among others) instead of dealing with the complications 
associated with buying spot bitcoin in the absence of a bitcoin 
ETP.\20\ Such operating companies, however, are imperfect bitcoin 
proxies and provide investors with partial bitcoin exposure paired with 
a host of additional risks associated with whichever operating company 
they decide to purchase. Additionally, the disclosures provided by the 
aforementioned operating companies with respect to risks relating to 
their bitcoin holdings are generally substantially smaller than the 
registration statement of a bitcoin ETP, including the Registration 
Statement, typically amounting to a few sentences of narrative 
description and a handful of risk factors.\21\ In other words, 
investors seeking bitcoin exposure through publicly traded companies 
are gaining only partial exposure to bitcoin and are not fully 
benefitting from the risk disclosures and associated investor 
protections that come from the securities registration process.
---------------------------------------------------------------------------

    \19\ In August 2017, the Commission's Office of Investor 
Education and Advocacy warned investors about situations where 
companies were publicly announcing events relating to digital coins 
or tokens in an effort to affect the price of the company's publicly 
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
    \20\ See e.g., ``7 public companies with exposure to bitcoin'' 
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want 
to get in the crypto trade without holding bitcoin yourself? Here 
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
    \21\ See, e.g. Tesla 10-K for the year ended December 31, 2020, 
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.

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

[[Page 47222]]

Bitcoin Futures
    CME began offering trading in Bitcoin Futures in 2017. Each 
contract represents five bitcoin and is based on the CME CF Bitcoin 
Reference Rate.\22\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric 
related to Bitcoin Futures has generally trended up since launch, 
although certain notional volume calculations have decreased roughly in 
line with the decrease in the price of bitcoin. For example, there were 
276,542 Bitcoin Futures contracts traded in March 2023 compared to 
165,567, 233,345, and 183,131 contracts traded in March 2020, March 
2021, and March 2023, respectively.
---------------------------------------------------------------------------

    \22\ The CME CF Bitcoin Reference Rate is based on a publicly 
available calculation methodology based on pricing sourced from 
several crypto exchanges and trading platforms, including Bitstamp, 
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN21JY23.001


[[Page 47223]]


BILLING CODE 8011-01-C
    The Sponsor further believes that publicly available research, 
including research done as part of rule filings proposing to list and 
trade shares of Spot Bitcoin ETPs, corroborates the overall trend 
outlined above and supports the thesis that the Bitcoin Futures pricing 
leads the spot market and, thus, a person attempting to manipulate the 
Shares would also have to trade on that market to manipulate the ETP. 
Specifically, the Sponsor believes that such research indicates that 
bitcoin futures lead the bitcoin spot market in price formation.\23\
---------------------------------------------------------------------------

    \23\ See Exchange Act Releases No. 94080 (January 27, 2022), 87 
FR 5527 (April 12, 2022) (specifically ``Amendment No. 1 to the 
Proposed Rule Change To List and Trade Shares of the Wise Origin 
Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity-Based Trust 
Shares''); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844 
(May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28, 
2021), 86 FR 60695 (November 3, 2021). See also Hu, Y., Hou, Y. and 
Oxley, L. (2019). ``What role do futures markets play in Bitcoin 
pricing? Causality, cointegration and price discovery from a time-
varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This academic research paper concludes 
that ``There exist no episodes where the Bitcoin spot markets 
dominates the price discovery processes with regard to Bitcoin 
futures. This points to a conclusion that the price formation 
originates solely in the Bitcoin futures market. We can, therefore, 
conclude that the Bitcoin futures markets dominate the dynamic price 
discovery process based upon time- varying information share 
measures. Overall, price discovery seems to occur in the Bitcoin 
futures markets rather than the underlying spot market based upon a 
time-varying perspective.''
---------------------------------------------------------------------------

Preventing Fraudulent and Manipulative Practices
    In order for any proposed rule change from an exchange to be 
approved, the Commission must determine that, among other things, the 
proposal is consistent with the requirements of section 6(b)(5) of the 
Act, specifically including: (i) the requirement that a national 
securities exchange's rules are designed to prevent fraudulent and 
manipulative acts and practices; \24\ and (ii) the requirement that an 
exchange proposal be designed, in general, to protect investors and the 
public interest. The Exchange believes that this proposal is consistent 
with the requirements of section 6(b)(5) of the Act and that this 
filing sufficiently demonstrates that the Bitcoin Futures market 
represents a regulated market of significant size and that, on the 
whole, the manipulation concerns previously articulated by the 
Commission are sufficiently mitigated to the point that they are 
outweighed by quantifiable investor protection issues that would be 
resolved by approving this proposal.
---------------------------------------------------------------------------

    \24\ The Exchange believes that bitcoin is resistant to price 
manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \25\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\26\ The only remaining 
issue to be addressed is whether the Bitcoin Futures market constitutes 
a market of significant size, which both the Exchange and the Sponsor 
believe that it does. The terms ``significant market'' and ``market of 
significant size'' include a market (or group of markets) as to which: 
(a) there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
manipulate the ETP, so that a surveillance-sharing agreement would 
assist the listing exchange in detecting and deterring misconduct; and 
(b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\27\
---------------------------------------------------------------------------

    \25\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance--sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in the 
Intermarket Surveillance Group (``ISG'') constitutes such a 
surveillance sharing agreement. See Securities Exchange Act Release 
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval'').
    \26\ For a list of the current members and affiliate members of 
ISG, see https://www.isgportal.com/.
    \27\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
section 6(b)(5) of the act, specifically providing 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.\28\
---------------------------------------------------------------------------

    \28\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

(a) Reasonable Likelihood That a Person Attempting To Manipulate the 
ETP Would Also Have To Trade on That Market To Manipulate the ETP
    Bitcoin Futures represent a growing influence on pricing in the 
spot bitcoin market as has been laid out above and in other proposals 
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is 
based on pricing from spot bitcoin markets. As noted above, the 
statement from the Teucrium Approval that ``CME's surveillance can 
reasonably be relied upon to capture the effects on the CME bitcoin 
futures market caused by a person attempting to manipulate the proposed 
futures ETP by manipulating the price of CME bitcoin futures contracts 
. . . indirectly by trading outside of the CME bitcoin futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of Bitcoin Futures. While the Commission makes 
clear in the Teucrium Approval that the analysis only applies to the 
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin 
Futures as its only non-cash or cash equivalent holding, if

[[Page 47224]]

CME's surveillance is sufficient to mitigate concerns related to 
trading in Bitcoin Futures for which the pricing is based directly on 
pricing from spot bitcoin markets, it's not clear how such a conclusion 
could apply only to ETPs based on Bitcoin Futures and not extend to 
Spot Bitcoin ETPs.
    Additionally, a Bitcoin Futures ETF is actually potentially more 
susceptible to manipulation than a Spot Bitcoin ETP where the 
underlying trust offers only in-kind creation and redemption. 
Specifically, the pricing of Bitcoin Futures is based on prices from 
spot bitcoin markets, while shares of a Spot Bitcoin ETP would 
represent an interest in bitcoin directly and authorized participants 
for a Spot Bitcoin ETP would be able to source bitcoin from any 
exchange and create or redeem with the applicable trust regardless of 
the price of the underlying index. Potential manipulation of a Bitcoin 
Futures ETF would require manipulation on the spot markets on which the 
pricing for Bitcoin Futures are based while the in-kind creation and 
redemption process and fungibility of bitcoin means that a would be 
manipulator of a Spot Bitcoin ETP would need to manipulate the price 
across all bitcoin markets or risk simply providing arbitrage 
opportunities for authorized participants. Further to this point, this 
arbitrage opportunity also acts to reduce any incentives to manipulate 
the price of a Spot Bitcoin ETP because the underlying trust will 
create and redeem shares at set rates of bitcoin per share without 
regard to the price that the ETP is trading at in the secondary market 
or the price of the underlying index. As such, the Exchange believes 
that part (a) of the significant market test outlined above is 
satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the Bitcoin Futures 
market or spot market for a number of reasons, including the in-kind 
creation and redemption process, the spot market arbitrage 
opportunities that such in-kind creation and redemption process 
creates, the significant volume in the Bitcoin Futures market, the size 
of bitcoin's market cap, and the significant liquidity available in the 
spot market. In addition to the Bitcoin Futures market data points 
cited above, the spot market for bitcoin is also very liquid. According 
to data from Skew, the cost to buy or sell $5 million worth of bitcoin 
averages roughly 48 basis points with a market impact of $139.08.\29\ 
Stated another way, a market participant could enter a market buy or 
sell order for $5 million of bitcoin and only move the market 0.48%. 
More strategic purchases or sales (such as using limit orders and 
executing through OTC bitcoin trade desks) would likely have less 
obvious impact on the market--which is consistent with MicroStrategy, 
Tesla, and Square being able to collectively purchase billions of 
dollars in bitcoin.
---------------------------------------------------------------------------

    \29\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase, FTX and Kraken during the one year period ending 
May 2022.
---------------------------------------------------------------------------

    As such, the combination of the in-kind creation and redemption 
process, the Bitcoin Futures leading price discovery, the overall size 
of the bitcoin market, and the ability for market participants, 
including authorized participants creating and redeeming in-kind with 
the Trust, to buy or sell large amounts of bitcoin without significant 
market impact will help prevent the Shares from becoming the 
predominant force on pricing in either the bitcoin spot or Bitcoin 
Futures markets, satisfying part (b) of the test outlined above.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
SSA With Bitcoin Spot Market
    The Exchange is also proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares.
    On June 30, 2023, the Exchange executed a term sheet with Coinbase, 
Inc. (``Coinbase'') to enter into a surveillance-sharing agreement 
(``Spot BTC SSA''). Based on this agreement, the Exchange and Coinbase 
will finalize and execute a definitive agreement that the parties 
expect to be executed prior to allowing trading of the Commodity-Based 
Trust Shares. Trading of Bitcoin on Coinbase represents a significant 
portion of US-based Bitcoin trading. According to the Sponsor, the 
Exchange aims to enter into a surveillance-sharing agreement with 
Coinbase, the operator of the largest United States-based spot trading 
platform for Bitcoin representing a majority of global spot BTC trading 
paired with USD. The surveillance-sharing agreement would give the 
Exchange supplemental access to data regarding spot Bitcoin trades 
occurring on Coinbase if it is determined to be a necessary as part of 
its surveillance program for the Commodity-Based Trust Shares. Trading 
on Coinbase consistently accounts for over 50% of market share of BTC-
USD spot trading volume.
    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between Nasdaq and Coinbase that is intended to supplement 
the Exchange's market surveillance program. The Spot BTC SSA is 
expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares. This means 
that the Exchange expects to receive market data for orders and trades 
from Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares. In addition, the Exchange can request 
further information from Coinbase related to spot bitcoin trading 
activity on the Coinbase exchange platform, if the Exchange determines 
that such information would be necessary to detect and investigate 
potential manipulation in the trading of the Commodity-Based Trust 
Shares.
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present. Consistent with prior points 
above, offering only in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Benchmark which it uses to value 
the Trust's bitcoin is itself resistant to manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Benchmark significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not

[[Page 47225]]

particularly important.\30\ When authorized participants are creating 
with the Trust, they need to deliver a certain number of bitcoin per 
share (regardless of the valuation used) and when they're redeeming, 
they can similarly expect to receive a certain number of bitcoin per 
share. As such, even if the price used to value the Trust's bitcoin is 
manipulated (which the Sponsor believes that its methodology is 
resistant to), the ratio of bitcoin per Share does not change and the 
Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Benchmark 
because there is little financial incentive to do so.
---------------------------------------------------------------------------

    \30\ While the Benchmark will not be particularly important for 
the creation and redemption process, it will be used for calculating 
fees.
---------------------------------------------------------------------------

Availability of Information
    The Trust's website (https://valkyrieinvest.com/) 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 and the reported closing price; (ii) the mid-point of the 
bid-ask price \31\ in relation to the NAV as of the time the NAV is 
calculated (``Bid-Ask Price'') and a calculation of the premium or 
discount of such price against such NAV; and (iii) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily Bid-Ask Price against the NAV, within appropriate ranges, for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter). In addition, on each business day the Trust's 
website will provide pricing information for the Shares. Also, an 
estimated value that reflects an estimated intraday value of the 
Trust's portfolio (the ``Intraday Indicative Value''), will be 
disseminated.
---------------------------------------------------------------------------

    \31\ The bid-ask price of the Trust is determined using the 
highest bid and lowest offer on the Consolidated Tape as of the time 
of calculation of the closing day NAV.
---------------------------------------------------------------------------

    The Trust's website will provide an IIV per Share updated every 15 
seconds, as calculated by the Exchange or a third-party financial data 
provider during the Exchange's Regular Market Session (9:30 a.m. to 
4:00 p.m. (Eastern time)).\32\ The IIV will be calculated by using the 
prior day's closing NAV per Share as a base and updating that value 
during the Exchange's Regular Market Session to reflect changes in the 
value of the Trust's NAV during the trading day.
---------------------------------------------------------------------------

    \32\ The IIV on a per Share basis disseminated during the 
Regular Market Session should not be viewed as a real-time update of 
the NAV, which is calculated once a day.
---------------------------------------------------------------------------

    The IIV disseminated during the Exchange's Regular Market Session 
should not be viewed as an actual real-time update of the NAV, which 
will be calculated only once at the end of each trading day. The IIV 
will be widely disseminated on a per Share basis every 15 seconds 
during the Exchange's Regular Market Session by one or more major 
market data vendors. In addition, the IIV will be available through on-
line information services.
    The NAV for the Trust will be calculated by the Sponsor 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'').
Initial and Continued Listing
    The Shares will be subject to Nasdaq Rule 5711(d)(vi), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and will be made 
available to all market participants at the same time. Upon termination 
of the Trust, the Shares will be removed from listing. The Trustee, 
Delaware Trust Company, is a trust company having substantial capital 
and surplus and the experience and facilities for handling corporate 
trust business, as required under Nasdaq Rule 5711(d)(vi)(D) and no 
change will be made to the trustee without prior notice to and approval 
of the Exchange.
    As required in Nasdaq Rule 5711(d)(vii), the Exchange notes that 
any registered market maker (``Market Maker'') in the Shares must file 
with the Exchange, in a manner prescribed by the Exchange, and keep 
current a list identifying all accounts for trading the underlying 
commodity, related futures or options on futures, or any other related 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker in 
the Shares shall trade in the underlying commodity, related futures or 
options on futures, or any other related derivatives, in an account in 
which a registered Market Maker, directly or indirectly, controls 
trading activities, or has a direct interest in the profits or losses 
thereof, which has not been reported to the Exchange as required by 
Nasdaq Rule 5711(d). In addition to the existing obligations under 
Exchange rules regarding the production of books and records, the 
registered Market Maker in the Shares shall make available to the 
Exchange such books, records or other information pertaining to 
transactions by such entity or any limited partner, officer or approved 
person thereof, registered or non-registered employee affiliated with 
such entity for its or their own accounts in the underlying commodity, 
related futures or options on futures, or any other related 
derivatives, as may be requested by the Exchange.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. The Exchange will 
allow trading in the Shares from 4:00 a.m. to 8:00 p.m. (Eastern time). 
The Exchange has appropriate rules to facilitate transactions in the 
Shares during all trading sessions. The Shares of the Trust will 
conform to the initial and continued listing criteria set forth in 
Nasdaq Rule 5711(d).
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in Nasdaq Rules 4120 and 4121, including 
without limitation the conditions specified in Nasdaq Rule 4120(a)(9) 
and the trading pauses under Nasdaq Rules 4120(a)(11) and (12).
    Trading may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) the extent to which trading is not 
occurring in the bitcoin underlying the Shares; or (2) whether other 
unusual conditions or circumstances detrimental to the maintenance of a 
fair and orderly market are present.
    If the IIV or the value of the underlying futures contract is not 
being disseminated as required, the Exchange may halt trading during 
the day in which the interruption to the dissemination of the IIV or 
the value of the underlying futures contract occurs. If the 
interruption to the dissemination of the IIV or the value of the 
underlying bitcoin persists past the trading day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption. In addition, if the Exchange 
becomes aware that the NAV

[[Page 47226]]

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.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of Shares on 
the Exchange will be subject to the Exchange's surveillance procedures 
for derivative products. The Exchange will require the Trust to 
represent to the Exchange that it will advise the Exchange of any 
failure by the Trust to comply with the continued listing requirements, 
and, pursuant to its obligations under section 19(g)(1) of the Exchange 
Act, the Exchange will surveil for compliance with the continued 
listing requirements. If the Trust is not in compliance with the 
applicable listing requirements, the Exchange will commence delisting 
procedures under the Nasdaq 5800 Series. In addition, the Exchange also 
has a general policy prohibiting the distribution of material, non-
public information by its employees.
    On June 30, 2023, the Exchange executed a term sheet with Coinbase 
to enter into a Spot BTC SSA. Based on this agreement, the Exchange and 
Coinbase will finalize and execute a definitive agreement that the 
parties expect to be executed prior to allowing trading of the 
Commodity-Based Trust Shares. Trading of Bitcoin on Coinbase represents 
a significant portion of US-based Bitcoin trading. According to the 
Sponsor, the Exchange aims to enter into a surveillance-sharing 
agreement with Coinbase, the operator of the largest United States-
based spot trading platform for Bitcoin representing a majority of 
global spot BTC trading paired with USD. The surveillance-sharing 
agreement would give the Exchange supplemental access to data regarding 
spot Bitcoin trades occurring on Coinbase if it is determined to be a 
necessary as part of its surveillance program for the Commodity-Based 
Trust Shares. Trading on Coinbase consistently accounts for over 50% of 
market share of BTC-USD spot trading volume.
    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between Nasdaq and Coinbase that is intended to supplement 
the Exchange's market surveillance program. The Spot BTC SSA is 
expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares. This means 
that the Exchange expects to receive market data for orders and trades 
from Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares. In addition, the Exchange can request 
further information from Coinbase related to spot bitcoin trading 
activity on the Coinbase exchange platform, if the Exchange determines 
that such information would be necessary to detect and investigate 
potential manipulation in the trading of the Commodity-Based Trust 
Shares.
Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (1) the procedures for purchases 
and redemptions of Shares in Creation Units (and that Shares are not 
individually redeemable); (2) Section 10 of Nasdaq General Rule 9, 
which imposes suitability obligations on Nasdaq members with respect to 
recommending transactions in the Shares to customers; (3) how 
information regarding the IIV is disseminated; (4) the risks involved 
in trading the Shares during the Pre-Market and Post-Market Sessions 
when an updated IIV will not be calculated or publicly disseminated; 
(5) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (6) trading information. The 
Information Circular will also discuss any exemptive, no-action and 
interpretive relief granted by the Commission from any rules under the 
Act.
    Additionally, the Information Circular will reference that the 
Trust is subject to various fees and expenses described in the Draft 
Registration Statement. The Information Circular will also disclose the 
trading hours of the Shares. The Information Circular will disclose 
that information about the Shares will be publicly available on the 
Trust's website.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act \33\ in general and section 6(b)(5) of the Act \34\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f.
    \34\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\35\ including Commodity-Based Trust Shares,\36\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; and 
(ii) the requirement that an exchange proposal be designed, in general, 
to protect investors and the public interest. The Exchange believes 
that this proposal is consistent with the requirements of section 
6(b)(5) of the Act because this filing sufficiently demonstrates that 
the standard that has previously been articulated by the Commission 
applicable to Commodity-Based Trust Shares has been met as outlined 
below.
---------------------------------------------------------------------------

    \35\ See Exchange Rule 5720.
    \36\ Commodity-Based Trust Shares, as described in Exchange Rule 
5711(d), are a type of Trust Issued Receipt.
---------------------------------------------------------------------------

Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, the Commission 
requires that an exchange demonstrate that there is a comprehensive 
surveillance-sharing agreement in place with a regulated market of 
significant size. Both the Exchange and CME are members of ISG.\37\ As 
such, the only remaining issue to be addressed is whether the Bitcoin 
Futures market constitutes a market of significant size, which the 
Exchange believes that it does. The terms ``significant market'' and 
``market of significant size'' include a market (or group of markets) 
as to which: (a) there is a reasonable likelihood that a person

[[Page 47227]]

attempting to manipulate the ETP would also have to trade on that 
market to manipulate the ETP, so that a surveillance-sharing agreement 
would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\38\
---------------------------------------------------------------------------

    \37\ For a list of the current members and affiliate members of 
ISG, see https://www.isgportal.com/.
    \38\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
section 6(b)(5) of the act, specifically providing 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.\39\
---------------------------------------------------------------------------

    \39\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
---------------------------------------------------------------------------

(a) Reasonable Likelihood That a Person Attempting To Manipulate the 
ETP Would Also Have To Trade on That Market To Manipulate the ETP
    Bitcoin Futures represent a growing influence on pricing in the 
spot bitcoin market as has been laid out above and in other proposals 
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is 
based on pricing from spot bitcoin markets. As noted above, the 
statement from the Teucrium Approval that ``CME's surveillance can 
reasonably be relied upon to capture the effects on the CME bitcoin 
futures market caused by a person attempting to manipulate the proposed 
futures ETP by manipulating the price of CME bitcoin futures contracts 
. . . indirectly by trading outside of the CME bitcoin futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of Bitcoin Futures. While the Commission makes 
clear in the Teucrium Approval that the analysis only applies to the 
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin 
Futures as its only non-cash or cash equivalent holding, if CME's 
surveillance is sufficient to mitigate concerns related to trading in 
Bitcoin Futures for which the pricing is based directly on pricing from 
spot bitcoin markets, it's not clear how such a conclusion could apply 
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin 
ETPs.
    Additionally, a Bitcoin Futures ETF is actually potentially more 
susceptible to manipulation than a Spot Bitcoin ETP where the 
underlying trust offers only in-kind creation and redemption. 
Specifically, the pricing of Bitcoin Futures is based on prices from 
spot bitcoin markets, while shares of a Spot Bitcoin ETP would 
represent an interest in bitcoin directly and authorized participants 
for a Spot Bitcoin ETP would be able to source bitcoin from any 
exchange and create or redeem with the applicable trust regardless of 
the price of the underlying index. Potential manipulation of a Bitcoin 
Futures ETF would require manipulation on the spot markets on which the 
pricing for Bitcoin Futures are based while the in-kind creation and 
redemption process and fungibility of bitcoin means that a would be 
manipulator of a Spot Bitcoin ETP would need to manipulate the price 
across all bitcoin markets or risk simply providing arbitrage 
opportunities for authorized participants. Further to this point, this 
arbitrage opportunity also acts to reduce any incentives to manipulate 
the price of a Spot Bitcoin ETP because the underlying trust will 
create and redeem shares at set rates of bitcoin per share without 
regard to the price that the ETP is trading at in the secondary market 
or the price of the underlying index. As such, the Exchange believes 
that part (a) of the significant market test outlined above is 
satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the Bitcoin Futures 
market or spot market for a number of reasons, including the in-kind 
creation and redemption process, the spot market arbitrage 
opportunities that such in-kind creation and redemption process 
creates, the significant volume in the Bitcoin Futures market, the size 
of bitcoin's market cap, and the significant liquidity available in the 
spot market. In addition to the Bitcoin Futures market data points 
cited above, the spot market for bitcoin is also very liquid. According 
to data from Skew, the cost to buy or sell $5 million worth of bitcoin 
averages roughly 48 basis points with a market impact of $139.08.\40\ 
Stated another way, a market participant could enter a market buy or 
sell order for $5 million of bitcoin and only move the market 0.48%. 
More strategic purchases or sales (such as using limit orders and 
executing through OTC bitcoin trade desks) would likely have less 
obvious impact on the market--which is consistent with MicroStrategy, 
Tesla, and Square being able to collectively purchase billions of 
dollars in bitcoin.
---------------------------------------------------------------------------

    \40\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase, FTX and Kraken during the one year period ending 
May 2022.
---------------------------------------------------------------------------

    As such, the combination of the in-kind creation and redemption 
process, the Bitcoin Futures leading price discovery, the overall size 
of the bitcoin market, and the ability for market participants, 
including authorized participants creating and redeeming in-kind with 
the Trust, to buy or sell large amounts of bitcoin without significant 
market impact will help prevent the Shares from becoming the 
predominant force on pricing in either the bitcoin spot or Bitcoin 
Futures markets, satisfying part (b) of the test outlined above.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
SSA With Bitcoin Spot Market
    The Exchange is also proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares.
    On June 30, 2023, the Exchange executed a term sheet with Coinbase 
to enter into a Spot BTC SSA. Based on this agreement, the Exchange and 
Coinbase will finalize and execute a definitive agreement that the 
parties expect to be executed prior to allowing trading of the 
Commodity-Based Trust Shares. Trading of Bitcoin on Coinbase represents 
a significant portion of U.S.-based Bitcoin trading. According to the 
Sponsor, the Exchange aims to enter into a surveillance-sharing 
agreement with Coinbase, the operator of the largest United States-
based spot trading platform for Bitcoin representing a majority of 
global spot BTC trading paired with USD. The surveillance-sharing 
agreement would give the Exchange supplemental access to data regarding 
spot Bitcoin trades occurring on Coinbase if it is determined to be a 
necessary as part of its surveillance program for the Commodity-Based 
Trust Shares. Trading on Coinbase

[[Page 47228]]

consistently accounts for over 50% of market share of BTC-USD spot 
trading volume.
    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between Nasdaq and Coinbase that is intended to supplement 
the Exchange's market surveillance program. The Spot BTC SSA is 
expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares. This means 
that the Exchange expects to receive market data for orders and trades 
from Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares. In addition, the Exchange can request 
further information from Coinbase related to spot bitcoin trading 
activity on the Coinbase exchange platform, if the Exchange determines 
that such information would be necessary to detect and investigate 
potential manipulation in the trading of the Commodity-Based Trust 
Shares.
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present. Consistent with prior points 
above, offering only in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Benchmark which it uses to value 
the Trust's bitcoin is itself resistant to manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Benchmark significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\41\ When authorized participants are 
creating with the Trust, they need to deliver a certain number of 
bitcoin per share (regardless of the valuation used) and when they're 
redeeming, they can similarly expect to receive a certain number of 
bitcoin per share. As such, even if the price used to value the Trust's 
bitcoin is manipulated (which the Sponsor believes that its methodology 
is resistant to), the ratio of bitcoin per Share does not change and 
the Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Benchmark 
because there is little financial incentive to do so.
---------------------------------------------------------------------------

    \41\ While the Benchmark will not be particularly important for 
the creation and redemption process, it will be used for calculating 
fees.
---------------------------------------------------------------------------

    The Exchange also believes that reviewing this proposal through the 
lens of the Bitcoin Futures Approvals would also lead the Commission to 
approving this proposal. Previous disapproval orders have made clear 
that a market that constitutes a regulated market of significant size 
is generally a futures and/or options market based on the underlying 
reference asset rather than the spot commodity markets, which are often 
unregulated.\42\ The Exchange believes that the following excerpt from 
the Teucrium Approval is particular informative:
---------------------------------------------------------------------------

    \42\ See Winklevoss Order at 37593, specifically footnote 202, 
which includes the language from numerous approval orders for which 
the underlying futures markets formed the basis for approving series 
of ETPs that hold physical metals, including gold, silver, 
palladium, platinum, and precious metals more broadly; and 37600, 
specifically where the Commission provides that ``when the spot 
market is unregulated--the requirement of preventing fraudulent and 
manipulative acts may possibly be satisfied by showing that the ETP 
listing market has entered into a surveillance-sharing agreement 
with a regulated market of significant size in derivatives related 
to the underlying asset.'' As noted above, the Exchange believes 
that these citations are particularly helpful in making clear that 
the spot market for a spot commodity ETP need not be ``regulated'' 
in order for a spot commodity ETP to be approved by the Commission, 
and in fact that it's been the common historical practice of the 
Commission to rely on such derivatives markets as the regulated 
market of significant size because such spot commodities markets are 
largely unregulated.

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably 
be relied upon to capture the effects on the CME bitcoin futures 
market caused by a person attempting to manipulate the proposed 
futures ETP by manipulating the price of CME bitcoin futures 
contracts, whether that attempt is made by directly trading on the 
CME bitcoin futures market or indirectly by trading outside of the 
CME bitcoin futures market. As such, when the CME shares its 
surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct 
---------------------------------------------------------------------------
related to the non-cash assets held by the proposed ETP.43

    Bitcoin Futures pricing is based on pricing from spot bitcoin 
markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME bitcoin futures market caused by a person attempting to 
manipulate the proposed futures ETP by manipulating the price of CME 
bitcoin futures contracts . . . indirectly by trading outside of the 
CME bitcoin futures market,'' makes clear that the Commission believes 
that CME's surveillance can capture the effects of trading on the 
relevant spot markets on the pricing of Bitcoin Futures. If CME is able 
to detect such attempts at manipulation in the complex and 
interconnected spot bitcoin market, how would such an ability to detect 
attempted manipulation and the utility in sharing that information with 
the listing exchange apply only to Bitcoin Futures ETFs and not Spot 
Bitcoin ETPs? Stated a different way, given that there is significant 
trading volume on numerous bitcoin exchanges that are not part of the 
CME CF Bitcoin Reference Rate and that arbitrage opportunities across 
bitcoin exchanges means that such trading volume will influence spot 
bitcoin prices across the market and, despite this, the Commission 
still believes that CME can detect attempted manipulation of the 
Bitcoin Futures through ``trading outside of the CME bitcoin futures 
market,'' it is clear that such ability would apply equally to both 
Bitcoin Futures ETFs and Spot Bitcoin ETPs To take it a step further, 
such an ability would also seem to be a strong indication that the CME 
Bitcoin Futures market represents a regulated market of significant 
size. To be clear, the Exchange agrees with the Commission on this 
point (and the implications of their conclusions) and notes that the 
pricing mechanism applicable to the Shares is similar to the CME CF 
Bitcoin Reference Rate, as further discussed below.
    The Exchange also notes that a Bitcoin Futures ETF may also be more 
susceptible to potential manipulation than a Spot Bitcoin ETP that 
offers only in-kind creation and redemption because Bitcoin Futures 
pricing (and thus the value of the underlying holdings of a Bitcoin 
Futures ETF) is based on a single price derived from spot bitcoin 
pricing, while shares of a Spot Bitcoin ETP would represent

[[Page 47229]]

interest in bitcoin directly and authorized participants for a Spot 
Bitcoin ETP (as proposed herein) would be able to source bitcoin from 
any exchange and create or redeem with the applicable trust regardless 
of the price of the underlying index. As such, the Exchange believes 
that, in addition to the CME Bitcoin Futures market representing a 
regulated market of significant size as it relates to the spot bitcoin 
market, in-kind Spot Bitcoin ETPs are likely less susceptible to 
manipulation than Bitcoin Futures ETFs because of the underlying 
creation and redemption arbitrage mechanism that will operate in the 
same manner as it does for all other ETFs.
    In addition to potentially being more susceptible to manipulation 
than a Spot Bitcoin ETP, the structure of Bitcoin Futures ETFs provides 
negative outcomes for buy and hold investors as compared to a Spot 
Bitcoin ETP.\44\ Specifically, the cost of rolling Bitcoin Futures 
contracts will cause the Bitcoin Futures ETFs to lag the performance of 
bitcoin itself and, at over a billion dollars in assets under 
management, would cost U.S. investors significant amounts of money on 
an annual basis compared to Spot Bitcoin ETPs. Such rolling costs would 
not be required for Spot Bitcoin ETPs that hold bitcoin. Further, 
Bitcoin Futures ETFs could potentially hit CME position limits, which 
would force a Bitcoin Futures ETF to invest in non-futures assets for 
bitcoin exposure and cause potential investor confusion and lack of 
certainty about what such Bitcoin Futures ETFs are actually holding to 
try to get exposure to bitcoin, not to mention completely changing the 
risk profile associated with such an ETF. While Bitcoin Futures ETFs 
represent a useful trading tool, they are clearly a sub-optimal 
structure for U.S. investors that are looking for long-term exposure to 
bitcoin that will, based on the calculations above, unnecessarily cost 
U.S. investors significant amounts of money every year compared to Spot 
Bitcoin ETPs and the Exchange believes that any proposal to list and 
trade a Spot Bitcoin ETP should be reviewed by the Commission with this 
important investor protection context in mind.
---------------------------------------------------------------------------

    \44\ See e.g., ``Bitcoin ETF's Success Could Come at 
Fundholders' Expense,'' Wall Street Journal (October 24, 2021), 
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin 
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available 
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&_cf_chl_jschl_tk_=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list Spot Bitcoin ETPs compared to 
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead 
to the conclusion that Spot Bitcoin ETPs should be available to U.S. 
investors and, as such, this proposal and other comparable proposals to 
list and trade Spot Bitcoin ETPs should be approved by the Commission. 
Stated simply, U.S. investors will continue to lose significant amounts 
of money from holding Bitcoin Futures ETFs as compared to Spot Bitcoin 
ETPs, losses which could be prevented by the Commission approving Spot 
Bitcoin ETPs. Additionally, any concerns related to preventing 
fraudulent and manipulative acts and practices related to Spot Bitcoin 
ETPs would apply equally to the spot markets underlying the futures 
contracts held by a Bitcoin Futures ETF. While the 1940 Act does offer 
certain investor protections, those protections do not relate to 
mitigating potential manipulation of the holdings of an ETF in a way 
that warrants distinction between Bitcoin Futures ETFs and Spot Bitcoin 
ETPs. To be clear, both the Exchange and Sponsor believe that the 
Bitcoin Futures market is a regulated market of significant size and 
that such manipulation concerns are mitigated as described throughout 
this proposal. After issuing the Bitcoin Futures Approvals which 
conclude the CME Bitcoin Futures market is a regulated market of 
significant size as it relates to Bitcoin Futures, the only consistent 
outcome would be approving Spot Bitcoin ETPs on the basis that the 
Bitcoin Futures market is also a regulated market of significant size 
as it relates to the bitcoin spot market. Including in the analysis the 
significant and preventable losses to U.S. investors that comes with 
Bitcoin Futures ETFs, disapproving Spot Bitcoin ETPs seems even more 
arbitrary and capricious. Given the current landscape, approving this 
proposal (and others like it) and allowing Spot Bitcoin ETPs to be 
listed and traded alongside Bitcoin Futures ETFs would establish a 
consistent regulatory approach, provide U.S. investors with choice in 
product structures for bitcoin exposure, and offer flexibility in the 
means of gaining exposure to bitcoin through transparent, regulated, 
U.S. exchange-listed vehicles.
Spot and Proxy Exposure to Bitcoin
    Exposure to bitcoin through an ETP also presents certain advantages 
for retail investors compared to buying spot bitcoin directly. The most 
notable advantage from the Sponsor's perspective is the elimination of 
the need for an individual retail investor to either manage their own 
private keys or to hold bitcoin through a cryptocurrency exchange that 
lacks sufficient protections. Typically, retail exchanges hold most, if 
not all, retail investors' bitcoin in ``hot'' (internet-connected) 
storage and do not make any commitments to indemnify retail investors 
or to observe any particular cybersecurity standard. Meanwhile, a 
retail investor holding spot bitcoin directly in a self-hosted wallet 
may suffer from inexperience in private key management (e.g., 
insufficient password protection, lost key, etc.), which could cause 
them to lose some or all of their bitcoin holdings. Thus, with respect 
to custody of the Trust's bitcoin assets, the Trust presents advantages 
from an investment protection standpoint for retail investors compared 
to owning spot bitcoin directly.
    Finally, a number of operating companies largely engaged in 
unrelated businesses--such as Tesla (a car manufacturer) and 
MicroStrategy (an enterprise software company)--have announced 
significant investments in bitcoin. Without access to bitcoin exchange-
traded products, retail investors seeking investment exposure to 
bitcoin may end up purchasing shares in these companies in order to 
gain the exposure to bitcoin that they seek.\45\ In fact, mainstream 
financial news networks have written a number of articles providing 
investors with guidance for obtaining bitcoin exposure through publicly 
traded companies (such as MicroStrategy, Tesla, and bitcoin mining 
companies, among others) instead of dealing with the complications 
associated with buying spot bitcoin in the absence of a bitcoin 
ETP.\46\ Such operating companies, however, are imperfect bitcoin 
proxies and provide investors with partial bitcoin exposure paired with 
a host of additional risks associated with whichever operating company 
they

[[Page 47230]]

decide to purchase. Additionally, the disclosures provided by the 
aforementioned operating companies with respect to risks relating to 
their bitcoin holdings are generally substantially smaller than the 
registration statement of a bitcoin ETP, including the Registration 
Statement, typically amounting to a few sentences of narrative 
description and a handful of risk factors.\47\ In other words, 
investors seeking bitcoin exposure through publicly traded companies 
are gaining only partial exposure to bitcoin and are not fully 
benefitting from the risk disclosures and associated investor 
protections that come from the securities registration process.
---------------------------------------------------------------------------

    \45\ In August 2017, the Commission's Office of Investor 
Education and Advocacy warned investors about situations where 
companies were publicly announcing events relating to digital coins 
or tokens in an effort to affect the price of the company's publicly 
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
    \46\ See e.g., ``7 public companies with exposure to bitcoin'' 
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want 
to get in the crypto trade without holding bitcoin yourself? Here 
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
    \47\ See, e.g., Tesla 10-K for the year ended December 31, 2020, 
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
---------------------------------------------------------------------------

Commodity-Based Trust Shares
    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 on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 5711(d). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 5800 and following. 
The Exchange may obtain information regarding trading in the Shares and 
listed bitcoin derivatives via the ISG, from other exchanges who are 
members or affiliates of the ISG, or with which the Exchange has 
entered into a comprehensive surveillance sharing agreement.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change, rather will facilitate the listing and trading of 
additional actively-managed exchange-traded products that will enhance 
competition among both market participants and listing venues, to the 
benefit of investors and the marketplace.

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

    No written comments were either solicited or received.

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 Exchange consents, the Commission will: (a) by order approve 
or disapprove such 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

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NASDAQ-2023-019 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-NASDAQ-2023-019. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-NASDAQ-2023-019 and should 
be submitted on or before August 11, 2023.
---------------------------------------------------------------------------

    \48\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\48\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15474 Filed 7-20-23; 8:45 am]
BILLING CODE 8011-01-P


