[Federal Register Volume 86, Number 172 (Thursday, September 9, 2021)]
[Notices]
[Pages 50570-50583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-19420]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92865; File No. SR-NASDAQ-2021-066]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of a Proposed Rule Change, as Modified by Amendment 
No. 1, To List and Trade Shares of the Valkyrie XBTO Bitcoin Futures 
Fund Under Nasdaq Rule 5711(g)

September 2, 2021.
    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 August 23, 2021, 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. 
On August 25, 2021, the Exchange filed Amendment No. 1 to the proposed 
rule change. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the Valkyrie XBTO 
Bitcoin Futures Fund (the ``Trust'') under Nasdaq Rule 5711(g) 
(``Commodity Futures Trust Shares''). The shares of the Trust are 
referred to herein as the ``Shares.''
    The text of the proposed rule change is available on the Exchange's 
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

[[Page 50571]]

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 ETF community has worked for many years to obtain the approval 
of an exchange tradeable product that provides investors with the 
important opportunity to gain exposure to digital currencies such as 
bitcoin. Since March 2017, the Commission has disapproved more than a 
dozen such proposals and failed to act on many others that were filed 
and later withdrawn. During that period, digital assets have gained 
substantial traction in the global and domestic economy; have become a 
sought-after investment tool for a rapidly-expanding number of 
institutional and individual investors; and have spurred significant 
investment and improvement in all aspects of digital currency 
ownership, including storage, security, payments, and exchange.\3\
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    \3\ For example, Coinbase (COIN) alone sports an enterprise 
market capitalization of around $67 billion and it recently reported 
over 68 million individual accounts holding $180 billion of digital 
currencies, and $462 billion in quarterly notional value of trading 
volume.
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    Nasdaq believes that bitcoin and its surrounding ecosystem have 
evolved sufficiently to support the approval of a Bitcoin Futures ETF 
because the concerns the Commission has identified previously have been 
addressed. To that end, Nasdaq believes that its current proposal 
differs from previous filings recently submitted due to significant 
developments in the domestic bitcoin futures market, including:
    (1) In previous disapproval orders, the Commission expressed 
concern over a bitcoin fund holding physical bitcoin, but the Trust 
instead will pursue its investment objective solely by holding CME 
Bitcoin Futures that are cash-settled and traded on the Chicago 
Mercantile Exchange, Inc. (the ``CME''), which was self-certified with 
the Commodity Futures Trading Commission (the ``CFTC'') (aside from 
holding cash and Money Market Instruments, as defined herein);
    (2) The Commission expressed concern in previous disapproval orders 
about self-regulation and the oversight necessary to maintain and 
promote the fair and transparent trading of listed products, including 
bitcoin futures. Specifically, the Commission expressed concern with 
the listing exchange's ability to deter fraud and manipulation in 
compliance with Section 6(b)(5) of the Act. The Commission stated that 
this could be addressed by entering into a surveillance agreement with 
a ``regulated market of significant size.'' Since the previous 
disapproval orders, both the bitcoin and bitcoin futures markets have 
developed to the point that the CME Bitcoin Futures market is a 
``regulated market of significant size,'' for purposes of compliance 
with Section 6(b)(5) of the Act.
    (3) The CME's compliance with the CFTC's Core Principles (detailed 
further herein) also serves to strengthen the Trust's resistance to 
fraud and manipulation and should appropriately address the 
Commission's concerns regarding investor protection. The CME Bitcoin 
Futures contract is cash settled, is not readily subject to 
manipulation or distortion, and is subject to real-time trade 
monitoring and comprehensive and accurate trade reconstruction.
Background
    The Exchange proposes to list and trade Shares of the Trust under 
Nasdaq Rule 5711(g), which governs the listing and trading of Commodity 
Futures Trust Shares on the Exchange.\4\ The Shares will be offered by 
the Trust, which was established as a Delaware statutory trust on May 
18, 2021. According to the Draft Registration Statement (as defined 
below), the Trust will not be registered as an investment company under 
the Investment Company Act of 1940 and is not required to register 
under such act.\5\ The Trust is registered as a commodity pool under 
the Commodity Exchange Act (``CEA'').\6\ The Shares of the Trust will 
be registered with the Commission by means of the Trust's registration 
statement on Form S-1 (the ``Registration Statement'') under the 
Securities Act of 1933, as amended (the ``Securities Act''). The 
Registration Statement will be effective as of the date of any offer 
and sale pursuant to the Registration Statement. A draft registration 
statement (the ``Draft Registration Statement'') was filed 
confidentially with the Commission on May 21, 2021.\7\
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    \4\ Nasdaq Rule 5711(g)(iii) defines Commodity Futures Trust 
Shares as ``a security that (A) is issued by a trust (``Trust'') 
that (1) is a commodity pool as defined in the Commodity Exchange 
Act and regulations thereunder, and that is managed by a commodity 
pool operator registered with the Commodity Futures Trading 
Commission, and (2) holds positions in futures contracts that track 
the performance of a specified commodity, or interests in a 
commodity pool which, in turn, holds such positions; and (B) is 
issued and redeemed daily in specified aggregate amounts at net 
asset value.''
    \5\ 15 U.S.C. 80a-1.
    \6\ 7 U.S.C. 1.
    \7\ See Draft Registration Statement on Form S-1 confidentially 
filed with the Commission on May 21, 2021 (file no. 377-04910). The 
descriptions of the Trust and the Shares contained herein are based, 
in part, on information in the Draft Registration Statement.
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    Valkyrie Funds LLC (the ``Sponsor'') serves as the Trust's sponsor 
and commodity pool operator. Vident Investment Advisory, LLC (the 
``Sub-Advisor'') serves as the Trust's sub-advisor and commodity 
trading advisor. XBTO Trading, LLC is the research provider for the 
Sponsor and the Sub-Advisor. Delaware Trust Company (the ``Trustee'') 
serves as the trustee for the Trust. The Sponsor is currently 
considering third-party service providers for the roles of 
Administrator, Transfer Agent, Custodian and Marketing Agent, as 
described in the Draft Registration Statement.
The Bitcoin Industry and Market
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 Bitcoin Network is decentralized and does not require 
governmental authorities or financial institution intermediaries to 
create, transmit, or determine the value of bitcoin. In addition, no 
party may easily censor transactions on the Bitcoin Network. As a 
result, the Bitcoin Network is often

[[Page 50572]]

referred to as decentralized and censorship resistant.
    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 verify 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 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. 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.
    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 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 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, 2021, approximately 18,587,000 
bitcoin have been mined. It is estimated that more than ninety percent 
of the twenty-one million bitcoin will have been produced by 2022.
Bitcoin Network
    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. Anyone can view the 
blockchain as it is available to observe without restriction. 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 because it is 
extraordinarily unlikely that the Blockchain could be retroactively 
changed.
    When a Bitcoin user wishes to transfer bitcoin to another user, the 
sender must first have the recipient's Bitcoin address. The sender then 
uses his or her Bitcoin wallet software to create a proposed 
transaction to be added to the Blockchain. The proposal would reduce 
the amount of bitcoin allocated to the sender's address and increase 
the amount allocated to the recipient's address, in each case by the 
amount of bitcoin desired to be transferred. The proposal is completely 
digital in nature, similar to a file on a computer, and it can be sent 
to other computers participating in the Bitcoin Network.
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 a type of cryptography known as public-
private key cryptography, represented by the bitcoin addresses and 
digital signature in a transaction's data file. Each Bitcoin Network 
address, or wallet, is associated with a unique ``public key'' and 
``private key'' pair, both of which are lengthy alphanumeric codes, 
derived together and possessing a unique relationship.
    The 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. A user's private key must be kept in 
accordance with appropriate controls and procedures to ensure that it 
is used only for legitimate and intended transactions. If an 
unauthorized third person learns of a user's private key, that third 
person could forge the user's digital signature and send the user's 
bitcoin to any arbitrary bitcoin address, thereby stealing the user's 
bitcoin. Similarly, if a user loses his private key and cannot restore 
such access (e.g., through a backup), the user may permanently lose 
access to the bitcoin contained in the associated address.
    The 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. Thus, the Bitcoin Network provides confirmation 
against double-spending by memorializing every transaction in the 
Blockchain, which is publicly accessible and downloaded in part or in 
whole by all users of the Bitcoin Network software program. 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. Bitcoin Network mining software 
consistent with reference software requirements typically validates 
each such transaction before including it in the Blockchain. This 
cryptographic security ensures that bitcoin transactions may not 
generally be counterfeited, although it does not protect against the 
``real world'' theft or coercion of use of a Bitcoin user's private 
key, including the hacking of a Bitcoin user's computer or a service 
provider's systems.
    A Bitcoin transaction between two parties is settled when recorded 
in a block added to the Blockchain. Validation of a block is achieved 
by confirming the cryptographic hash value included in the block's 
solution and by the block's addition to the longest confirmed 
Blockchain on the Bitcoin Network. For a transaction, inclusion in a 
block on the Blockchain constitutes a ``confirmation'' of a Bitcoin 
transaction. As each block contains a reference to the immediately 
preceding block, additional blocks appended to and incorporated into 
the Blockchain constitute additional confirmations of the transactions 
in such prior blocks, and a transaction included in a block for the 
first time is confirmed once against

[[Page 50573]]

double-spending. The layered confirmation process makes changing 
historical blocks (and reversing transactions) exponentially more 
difficult the further back one goes in the Blockchain.
    To undo past transactions in a block recorded on the Blockchain, a 
malicious actor would have to exert tremendous computer power in re-
solving each block in the Blockchain starting with and after the target 
block and broadcasting all such blocks to the Bitcoin Network. The 
Bitcoin Network is generally programmed to consider the longest 
Blockchain containing solved and valid blocks to be the most accurate 
Blockchain. In order to undo multiple layers of confirmation and alter 
the Blockchain, the malicious actor would have to re-solve all of the 
old blocks sought to be regenerated and be able to continuously add new 
blocks to the Blockchain at a speed that would have to outpace that of 
all of the other miners on the Bitcoin Network, who would be 
continuously solving for and adding new blocks to the Blockchain. There 
are no known reports of malicious parties taking control of the Bitcoin 
Network or undoing past transactions in a block recorded on the 
Blockchain.
Bitcoin Futures
    The CME began offering trading in Bitcoin Futures in 2017. Each 
contract represents five bitcoin and is based on the CME CF Bitcoin 
Reference Rate (the ``CME CF BRR'').\8\ The contracts trade and settle 
like other cash-settled commodity futures contracts. Nearly every 
measurable metric related to CME Bitcoin Futures has trended 
consistently up since launch and/or accelerated upward in the past 
year.\9\ For example, there was approximately $2.7 billion in trading 
in Bitcoin Futures in March 2021 compared to $118 million, $70 million, 
and $262 million in total trading in March 2018, March 2019 and March 
2020, respectively. Bitcoin Futures traded over $63 billion in notional 
amount on the CME in March 2021 and represented $2.5 billion in average 
daily open interest compared to $151 million in March 2020. This 
general upward trend in trading volume and open interest is captured in 
the following chart:
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    \8\ According to CME, the CME CF Bitcoin Reference Rate 
aggregates the trade flow of major bitcoin spot exchanges during a 
specific calculation window into a once-a-day reference rate of the 
U.S. dollar price of bitcoin. Calculation rules are geared toward 
maximum transparency and real-time replicability in underlying spot 
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken. 
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
    \9\ The recent launch of a bitcoin futures-based mutual fund 
from ProShares, the Bitcoin Strategy ProFund (BTCFX), has increased 
approximately 14% since its July launch.
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    Prior to listing a new commodity futures contract, a designated 
contract market must either submit a self-certification to the CFTC 
that the contract complies with the CEA and CFTC regulations or 
voluntarily submit the contract for CFTC approval. This process applies 
to all futures contracts and all commodities underlying the futures 
contracts, whether the new futures contracts are related to oil, gold, 
or any other commodity.\10\ On December 1, 2017, it was announced \11\ 
that the CME had self-certified with the CFTC new contracts for bitcoin 
futures products.\12\ The CME Bitcoin Futures \13\ trade and settle 
like any other cash-settled commodity futures contracts.\14\ Like other 
futures products on the CME, Bitcoin Futures are subject to oversight 
by the CFTC, and the CME itself is empowered to enforce its own 
rulebook as it relates to the Bitcoin Futures. Furthermore, the CME has 
a surveillance team that monitors the trading of Bitcoin futures at all 
times along with the underlying bitcoin spot exchanges with which the 
CME has a surveillance agreement.
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    \10\ Section 1a(9) of the CEA defines commodity to include, 
among other things, ``all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.'' The definition of commodity is broad. 7 U.S.C. 1a(9).
    \11\ See ``CFTC Statement on Self-Certification of Bitcoin 
Products by CME, CFE and Cantor Exchange,'' dated December 1, 2017, 
available at http://www.cftc.gov/PressRoom/PressReleases/pr7654-17.
    \12\ Bitcoin is a commodity as defined in Section 1a(9) of the 
CEA. 7 U.S.C. 1a(9). See In re Coinflip, Inc., No. 15-29 (CFTC Sept. 
17, 2015), available at http://www.cftc.gov/ucm/groups/public/@lrenforcementactions/documents/legalpleading/enfcoinfliprorder09172015.pdf.
    \13\ The CME Bitcoin Futures are also cash-settled futures 
contracts based on the CME CF BRR, which is based on an aggregation 
of trade flow from several bitcoin spot exchanges, that will expire 
on a monthly and quarterly basis. CME Futures began trading on 
December 17, 2017.
    \14\ The CME is registered with the CFTC and seek to provide a 
neutral, regulated marketplace for the trading of derivatives 
contracts for commodities, such as futures, options and certain 
swaps. The CME is a member of the Intermarket Surveillance Group.
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    As such, the Exchange is proposing to list and trade Shares of the 
Trust under Nasdaq Rule 5711(g), which governs the listing and trading 
of Commodity Futures Trust Shares on the Exchange.
Investment Objective
    According to the Draft Registration Statement, the investment 
objective of the Trust is for the Shares to reflect the performance of 
bitcoin as represented by the CME CF BRR, less the Trust's liabilities 
and expenses.
Investment Strategy
    The Trust pursues its investment objective primarily by investing 
in Bitcoin Futures. Futures are financial contracts, the value of which 
depends on, or is derived from, the underlying reference asset. In the 
case of Bitcoin Futures, the underlying reference asset is Bitcoin. 
Futures contracts may be cash-settled or physically-settled. When a 
cash-settled future expires, if the value of the underlying asset 
exceeds the futures price, the seller pays to the purchaser cash in the 
amount of that excess, and if the futures price exceeds the value of 
the underlying asset, the purchaser pays to the seller cash in the 
amount of that excess. When a physically-settled future expires, the 
seller is obligated to deliver the underlying asset to the purchaser in 
exchange for the futures price agreed to at the outset of the contract. 
The only Bitcoin Futures in which the Trust invests are cash-settled 
Bitcoin Futures traded on commodity exchanges registered with the CFTC.
    At expiration, the cash settlement amount for the Bitcoin Futures 
held by the Trust will be determined by comparing the price at which 
the Trust purchased the futures contract on the relevant futures 
exchange with the reference rate specified by that exchange on the 
expiration date. For example, the CME has specified that the reference 
rate for its Bitcoin Futures will be a volume-weighted composite of 
Bitcoin prices on multiple Bitcoin exchanges. The Trust does not invest 
in Bitcoin or other digital assets directly.
    The Trust seeks to purchase a number of Bitcoin Futures so that the 
total value of the Bitcoin underlying the Bitcoin Futures held by the 
Trust is as close to 100% of the net assets of the Trust (the ``Target 
Exposure'') as it is reasonably practicable to achieve, although as 
described further in the Draft Registration Statement, there can be no 
assurance that the Trust will be able to achieve or maintain the Target 
Exposure. The Trust intends to execute these purchases on commodity 
exchanges registered with the CFTC through futures commission merchants 
(``FCMs''). An FCM is a brokerage firm that solicits or accepts orders 
to buy or sell futures contracts and accepts money or other assets from 
customers to support such orders. The Trust does not intend to hold 
short positions in any futures, and accordingly, the most an investor 
could lose is the amount of his or her investment in the Trust. 
Although the Trust's Bitcoin Futures will provide leverage to the 
extent that they give the Trust exposure to an amount of underlying 
Bitcoin with a greater value than the amount of collateral the Trust is 
required to post, the Trust does not intend to provide investors with 
exposure to an amount of Bitcoin in excess of the Trust's net assets. 
The Trust will engage in active and frequent trading of Bitcoin Futures 
in seeking to maintain the Target Exposure.
    In addition to the Trust's investments in Bitcoin Futures, the 
Trust expects to have significant holdings of cash and high-quality, 
short-term debt instruments that have terms-to-maturity of less than 
397 days, such as U.S. government securities and repurchase agreements 
(the ``Money Market Instruments''). The Money Market Instruments are 
intended to provide liquidity, to serve as collateral for the Trust's 
Bitcoin Futures and to support the Trust's use of leverage through the 
Trust's Bitcoin Futures. The amount of Money Market Instruments held by 
the Trust may change over time and will be determined primarily by the 
amount needed to seek to achieve or maintain the Target Exposure.
    The Trust will generally hold its investments in Bitcoin Futures 
during periods in which the price of Bitcoin is flat or declining as 
well as during periods in which the price of Bitcoin is rising, and the 
Advisor will generally not seek to change the Trust's Target Exposure 
based on daily price changes. For example, if the Trust's positions in 
Bitcoin Futures are declining in value, the Trust generally will not 
close out its positions except in order to meet redemption requests. As 
a result, any decrease in value of the Bitcoin Futures in which the 
Trust invests will result in a decrease in the Trust's net asset value 
(``NAV'').
Calculation of the Trust's NAV
    According to the Draft Registration Statement, the NAV of the Trust 
will be determined in accordance with Generally Accepted Accounting 
Principles (``GAAP'') as the total value of bitcoin held by the Trust, 
plus any cash or other assets, less any liabilities including accrued 
but unpaid expenses. The NAV per Share will be determined by dividing 
the NAV of the Trust by the number of Shares outstanding.
    The NAV of the Trust is typically determined as of 4:00 p.m. 
(Eastern time) on each day the Shares trade on the Exchange (a 
``Business Day''). The Trust's daily activities are generally not 
reflected in the NAV determined for the Business Day on which the 
transactions are effected (the trade date), but rather on the following 
Business Day.
    Bitcoin Futures traded on a U.S. exchange are generally valued 
using the

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last traded price before the NAV calculation time on the date with 
respect to which the NAV is being determined. Money Market Instruments 
will generally be valued at their market price using market quotations 
or information provided by a pricing service.
    For more information regarding the valuation of Trust investments 
in calculating the Trust's NAV, see the Draft Registration Statement.
Preventing Fraudulent and Manipulative Practices
Applicable Standard of Review
    In disapproving prior proposals to list and trade shares of various 
bitcoin trusts and bitcoin-based trust issued receipts, the Commission 
noted that such proposals did not adequately demonstrate that they were 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest, consistent with Section 
6(b)(5) of the Act.\15\ The Commission does not apply a ``cannot be 
manipulated'' standard, but instead seeks to examine whether a proposal 
meets the requirements of the Act.\16\ The Commission has explained 
that a proposal could satisfy the requirements of the Act in the first 
instance by demonstrating that the listing exchange has entered into a 
comprehensive surveillance sharing agreement (``CSSA'') with a 
regulated market of significant size relating to the underlying 
assets.\17\ The Commission has also recognized that a listing exchange 
would not necessarily need to enter into a CSSA with a regulated 
significant market if the underlying commodity market inherently 
possessed a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets or if 
the listing exchange could demonstrate that there were sufficient 
``other means to prevent fraudulent and manipulative acts and 
practices.'' \18\ While the earliest of the prior disapproval orders 
applied these standards to a commodity-trust based on bitcoin, the 
Commission has stated its belief that these standards are also 
appropriate for an ETP based on Bitcoin Futures.\19\
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    \15\ See, e.g., Order Disapproving a Proposed Rule Change, as 
Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4), To List 
and Trade Shares Issued by the Winklevoss Bitcoin Trust, Securities 
Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR 14076 (Mar. 
16, 2017) (SR-BatsBZX-2016-30) (``Winklevoss I Order''); Order 
Setting Aside Action by Delegated Authority and Disapproving a 
Proposed Rule Change, as Modified by Amendments No. 1 and 2, to List 
and Trade Shares of the Winklevoss Bitcoin Trust, Securities 
Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (Aug. 1, 
2018) (SR-BatsBZX-2016-30) (``the Winklevoss II Order''); Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin 
ETF Trust Under NYSE Arca Rule 8.201-E, Securities Exchange Act 
Release No. 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019) 
(SR-NYSEArca-2019-01) (the ``Bitwise Order''); Order Disapproving a 
Proposed Rule Change, as Modified by Amendment No. 1, to Amend NYSE 
Arca Rule 8.201-E (Commodity-Based Trust Shares) and to List and 
Trade Shares of the United States Bitcoin and Treasury Investment 
Trust Under NYSE Arca Rule 8.201-E, Securities Exchange Act Release 
No. 88284 (February 26, 2020), 85 FR 12595 (Mar. 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Order''); Order 
Disapproving a Proposed Rule Change to List and Trade the Shares of 
the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83904 (August 22, 2018), 83 FR 
43934 (August 28, 2018) (SR-NYSEArca-2017-139); Order Disapproving a 
Proposed Rule Change Relating to Listing and Trading of the Direxion 
Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull 
Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily 
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares 
Under NYSE Arca Rule 8.200-E, Securities Exchange Act Release No. 
83912 (August 22, 2018), 83 FR 43912 (August 28, 2018) (SR-NYSEArca-
2018-02); Order Disapproving a Proposed Rule Change to List and 
Trade the Shares of the GraniteShares Bitcoin ETF and the 
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No. 
83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-
2018-01) (the ``GraniteShares Order'').
    \16\ See Winklevoss II Order, 84 FR at 37582.
    \17\ See Wilshire Phoenix Order, 85 FR at 12596-97.
    \18\ See Winklevoss II Order, 84 FR at 37580, 37582-91; Bitwise 
Order, 84 FR at 55383, 55385-406; Wilshire Phoenix Order, 85 FR at 
12597.
    \19\ See GraniteShares Order, 83 FR 43925.
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    The Commission has noted that information sharing agreements with 
primary markets trading index components underlying a derivative 
product are an important part of a self-regulatory organization's 
ability to monitor for trading abuses in derivative products.\20\ In 
addition, the Commission's approval orders for commodity-futures ETPs 
note the ability of an ETP listing exchange to share surveillance 
information either through surveillance sharing agreements or through 
membership by the listing exchange and the relevant futures exchanges 
in the Intermarket Surveillance Group (``ISG'').\21\ While the 
Commission in those orders did not explicitly undertake an analysis of 
whether the related futures markets were of ``significant size,'' the 
exchanges proposing commodity-futures ETPs on a single reference asset 
or benchmark generally made representations regarding the trading 
volume of the futures markets, and the Commission was in each of those 
cases dealing with a large futures market that had been trading for a 
number of years before an exchange proposed an ETP based on those 
futures.\22\ And where the Commission has considered a proposed ETP 
based on futures that had only recently begun trading, the Commission 
specifically addressed whether the futures on which the ETP was based--
which were futures on an index of well-established commodity futures--
were illiquid or susceptible to manipulation.\23\
---------------------------------------------------------------------------

    \20\ Id at 43926.
    \21\ Id at 43926, n. 35.
    \22\ Id at 43927.
    \23\ Id.
---------------------------------------------------------------------------

    As described below, the Exchange believes the structure and 
operation of the Trust are designed to prevent fraudulent and 
manipulative acts and practices, to protect investors and the public 
interest, and to respond to the specific concerns that the Commission 
has identified with respect to potential fraud and manipulation in the 
context of a bitcoin ETP. In particular, the Exchange believes that it 
has addressed the Commission's previously stated concern that the 
Exchange must have entered into a surveillance-sharing agreement with a 
regulated market of significant size as evidence of the Trust's 
resistance to manipulation. In addition, the Exchange believes that 
Bitcoin Futures market has sufficiently developed since the prior 
disapproval orders such that the market for Bitcoin Futures now 
resembles the markets for other commodities at the time the related 
commodity futures-based ETP was approved for listing. Finally, the 
Exchange believes it has demonstrated that the Trust possesses other 
means to prevent fraud or manipulation through the CME's use of the CME 
CF BRR as the reference rate for Bitcoin Futures contracts. The 
Exchange also believes that listing of the Trust's Shares on the 
Exchange will provide investors with such an opportunity to obtain 
exposure to bitcoin within a regulated environment.
Surveillance Sharing Agreements With a Market of Significant Size
    In previous orders rejecting the listing of Bitcoin ETFs, the 
Commission noted its concerns that the bitcoin market could be subject 
to manipulation.\24\ In these orders, the Commission cited numerous 
precedents \25\ in which 19b-4 listing applications were approved based 
on findings that the particular market was either inherently resistant 
to manipulation or that the listing exchange had entered into a 
surveillance sharing agreement with a

[[Page 50576]]

market of significant size.\26\ The Commission noted that, for 
commodity-trust ETPs ``there has been in every case at least one 
significant, regulated market for trading futures in the underlying 
commodity--whether gold, silver, platinum, palladium or copper--and the 
ETP listing exchange has entered into surveillance sharing agreements 
with, or held [ISG] membership in common with, that market.'' \27\
---------------------------------------------------------------------------

    \24\ See Winklevoss I Order and Winklevoss II Order.
    \25\ For an extensive listing of such precedents, see Winklevoss 
I Order, at 14083 n. 96.
    \26\ The Exchange to date has not entered into surveillance 
sharing agreements with any cryptocurrency platform. However, the 
CME, which calculates the CME CF BRR, and which has offered 
contracts for bitcoin futures products since 2017, is, as noted 
below, a member of the ISG. In addition, each Constituent Platform 
has entered into a data sharing agreement with CME. See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges+Criteria.pdf.
    \27\ See Winklevoss II Order, at 37594.
---------------------------------------------------------------------------

    The CME \28\ is a member of the ISG, the purpose of which is ``to 
provide a framework for the sharing of information and the coordination 
of regulatory efforts among exchanges trading securities and related 
products to address potential intermarket manipulations and trading 
abuses.'' \29\ Membership of a relevant futures exchange in ISG is 
sufficient to meet the surveillance sharing requirement.\30\
---------------------------------------------------------------------------

    \28\ The CME is regulated by the CFTC, which has broad reaching 
anti-fraud and anti-manipulation authority including with respect to 
the bitcoin market since bitcoin has been designated as a commodity 
by the CFTC. See A CFTC Primer on Virtual Currencies (October 17, 
2017), available at https://www.cftc.gov/sites/default/files/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf (the 
``CFTC Primer on Virtual Currencies'') (``The CFTC's jurisdiction is 
implicated when a virtual currency is used in a derivatives contract 
or if there is fraud or manipulation involving a virtual currency 
traded in interstate commerce.''). See also 7 U.S.C. Sec. 7(d)(3) 
(``The board of trade shall list on the contract market only 
contracts that are not readily susceptible to manipulation.'').
    \29\ See https://isgportal.org/overview.
    \30\ See, e.g., Winklevoss II Order, at 37594.
---------------------------------------------------------------------------

    The Commission has previously noted that the existence of a 
surveillance sharing agreement by itself is not sufficient for purposes 
of meeting the requirements of Section 6(b)(5); the surveillance 
sharing agreement must be with a market of significant size.\31\ The 
Commission has provided an example of how it interprets the terms 
``significant market'' and ``market of significant size,'' though that 
definition is meant to be illustrative and not exclusive: ``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 successfully manipulate the ETP so that 
a surveillance sharing agreement would assist the ETP listing market 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.'' \32\
---------------------------------------------------------------------------

    \31\ See, e.g., Winklevoss II Order, at 37589-90.
    \32\ See, e.g., Winklevoss II Order, at 37594; and see 
GraniteShares Order, n. 85 and accompanying text.
---------------------------------------------------------------------------

    As discussed below, the Exchange maintains that the CME is a 
``market of significant size'' as it satisfies both elements of the 
example provided by the Commission.
Attempts To Manipulate the ETP Could Only Occur on the CME
    The first element of what constitutes a ``significant market'' or 
``market of significant size'' is that there is a reasonable likelihood 
that a person attempting to manipulate the ETP would also have to trade 
on a market (or group of markets) to successfully manipulate the ETP so 
that a surveillance sharing agreement would assist the ETP listing 
market in detecting and deterring misconduct. The Commission has stated 
that establishing a lead-lag relationship (i.e., that price formation 
occurs on the lead market and informs or causes the price on the 
lagging market) between the Bitcoin Futures market and the spot market 
is central to understanding whether it is reasonably likely that a 
would-be manipulator of the ETP would need to trade on the Bitcoin 
Futures market to successfully manipulate prices on those spot 
platforms that feed into the proposed ETP's pricing mechanism.\33\
---------------------------------------------------------------------------

    \33\ See Wilshire Phoenix Order at 12612.
---------------------------------------------------------------------------

    The Exchange believes that a lead-lag relationship between the 
Bitcoin Futures market and the spot market currently exists. There is 
robust evidence of this relationship that has become available since 
the Commission's prior disapproval orders. First, the Bitcoin Futures 
market has grown considerably since the Commission's Wilshire Phoenix 
Disapproval Order, which is evidenced by plentiful empirical data. 
Second, the staff of the Commission has itself acknowledged the 
maturity of the Bitcoin Futures market such that it has indicated its 
comfort with allowing investment companies registered under the 
Investment Company Act of 1940 to invest in Bitcoin Futures in certain 
circumstances. Finally, current academic research builds upon and 
supplements the findings of previous studies reviewed by the Commission 
that a lead-lag relationship can be statistically observed in 
relatively recent data sets of the Bitcoin Futures and spot market 
data.
Growth of the Bitcoin Futures Market
    Since the dates of the GraniteShares Order (the most recent 
disapproval order related to a Bitcoin Futures ETP) and the Wilshire 
Phoenix Order (the most recent disapproval order related to a spot 
bitcoin ETP), there has been steady and robust growth observed on the 
CME Bitcoin Futures market. The following chart displays such 
development in terms of trading volumes and open interest:
---------------------------------------------------------------------------

    \34\ Figures calculated by the Exchange based on data available 
at https://www.cmegroup.com/ftp/bitcoinfutures/. Each Bitcoin 
Futures contract represents 5 bitcoin.
    \35\ Data for February 28, 2020 was not available and thus not 
included in calculating the daily averages.

                                     Trade Data on CME Bitcoin Futures \34\
----------------------------------------------------------------------------------------------------------------
                                                          Daily average   Daily average
                                                            for week        for week
                                                            including       including
                                                           August 24,     February 26,    Daily average for the
                                                          2018 (week of   2020 (week of    week ending May 28,
                                                               the        the Wilshire             2021
                                                          GraniteShares  Phoenix order)
                                                             order)           \35\
----------------------------------------------------------------------------------------------------------------
Trading Volume--Notional Amount........................    $117,000,000    $354,750,000           $2,412,000,000
Trading Volume--Number of Contracts....................           3,629           7,731                   12,610
Open Interest--Notional Amount.........................     $95,400,000    $250,250,000           $1,662,600,000
Open Interest--Number of Contracts.....................           2,956           5,407                    8,677
----------------------------------------------------------------------------------------------------------------


[[Page 50577]]

    The table above unequivocally demonstrates that the Bitcoin Futures 
market has grown at an accelerating pace since the prior disapproval 
orders, likely as a result of the entry of institutional participants 
into both the Bitcoin Futures market and the spot bitcoin market (e.g., 
Tesla, MicroStrategy, etc. have taken substantial bitcoin positions). 
Accordingly, the Exchange maintains that because the Bitcoin Futures 
market has grown to resemble other futures markets, a lead-lag 
relationship that exists in other mature futures markets has also 
likely developed between the Bitcoin Futures market and the bitcoin 
spot market.\36\ Such a relationship is demonstrated through analytical 
models or other methods that show that the activities in one market 
cause the price formation on the other market, and there is an emerging 
consensus among academics that such a lead-lag relationship in fact 
exists.
---------------------------------------------------------------------------

    \36\ While the Exchange believes that the size of the bitcoin 
futures market relative to the spot market has also grown, data on 
the global bitcoin exchanges is difficult to state with certainty.
---------------------------------------------------------------------------

Recent Statements by the Staff of the Commission
    The Staff of the Commission's Division of Investment Management 
recently issued its Staff Statement on Funds Registered under the 
Investment Company Act Investing in the Bitcoin Futures Market.\37\ In 
that statement, the Staff stated that mutual funds registered under the 
Investment Company Act of 1940 could invest in the Bitcoin Futures 
market so long as the fund had an appropriate investment strategy and 
its prospectus contained full disclosure of material risks. In reaching 
such a determination, the Staff noted that while previously the Bitcoin 
Futures market was in a nascent state with limited trading volume, 
``[t]he Bitcoin futures market has developed since then, with increased 
trading volumes and open-interest positions. In addition, the Bitcoin 
futures market consistently has produced a reportable price for Bitcoin 
futures. The Bitcoin futures market also has not presented the custody 
challenges associated with some cryptocurrency-based investing because 
the futures are cash-settled.'' \38\ In support of this finding, the 
Staff cited to the same CME data cited above regarding trading volumes 
and open-interest.\39\ While the statement did not go so far as to 
reach a conclusion that the Bitcoin Futures market is a significant 
market or market of significant size related to bitcoin in the context 
of the requirements of Exchange Act Section 6(b)(5), the Staff's own 
observations regarding the maturity of the Bitcoin Futures market is 
strong evidence that concerns previously raised regarding price 
manipulation in that market have been significantly reduced.
---------------------------------------------------------------------------

    \37\ See Staff Statement on Funds Registered Under the 
Investment Company Act Investing in the Bitcoin Futures Market (May 
11, 2021), available at https://www.sec.gov/news/public-statement/staff-statement-investing-bitcoin-futures-market#_ftnref5.
    \38\ Id.
    \39\ Id at n. 4.
---------------------------------------------------------------------------

Third-Party Research
    In the most recent denial order, the Commission found that academic 
evidence on whether a lead-lag relationship between the Bitcoin Futures 
market and spot market was ``mixed'' and could not conclude based on 
that research that a would-be manipulator of a proposed ETP would 
transact on the CME Bitcoin Futures market.\40\ The Commission 
critiqued the choices made by the authors of such research regarding 
``time period, futures contracts, spot market platforms, spot market 
prices, and analytic methodologies.'' The Exchange notes that the 
studies cited in that denial order generally analyzed data sets 
covering the first several years of the Bitcoin Futures market's 
existence and therefore may not be indicative of current market 
behavior. While scholarship stating the price discovery takes place in 
the bitcoin spot market continues to be produced,\41\ the majority of 
the academic literature, including more recent studies with more recent 
data sets, supports the proposition that price discovery does take 
place in the Bitcoin Futures market and therefore a lead-lag 
relationship exists between the spot and futures markets.
---------------------------------------------------------------------------

    \40\ See Wilshire Phoenix Order at 12612-13.
    \41\ See, e.g., Jui-Cheng Hung, Hung-Chun Liu, and J. Jimmy 
Yang, ``Trading Activity and Price Discovery in Bitcoin Futures 
Markets'' (March 2021). The Exchange maintains that the vector error 
correction model and the modified information shares model used in 
this study are inferior to the Granger and Hasbrouck models used in 
other studies for determining price-discovery over longer periods. 
Even so, the authors of this study find that ``Bitcoin futures 
contracts launched by the CME exhibit superior competitiveness in 
the price discovery relative to those by CBOE.''
---------------------------------------------------------------------------

    In ``What Role do Futures Markets Play in Bitcoin Pricing? 
Causality, Cointegration and Price Discovery from a Time-Varying 
Perspective?'',\42\ the authors investigated the existence of causal 
relationships, cointegration and price discovery between bitcoin spot 
and futures markets from December 2017 to June/July 2019 from a time-
varying perspective. The study's authors applied both a time-varying 
Granger causality approach and Hasbrouck information share approach to 
explore the causal relationship between bitcoin spot and futures 
markets.\43\ As the authors explain therein, the time-varying approach 
taken for this study is an important distinction from other studies 
that have reached an opposite conclusion, as it is now well known in 
econometrics literature that some possible cointegration relationships 
may be missed if the underlying model formulation is constrained to be 
time invariant.\44\ This study, like others before it, reached the 
conclusion that the CME futures market, apart from some short-period 
exceptions, appears to dominate the underlying spot market under both a 
Granger and Hasbrouck analysis.
---------------------------------------------------------------------------

    \42\ Yang Hu, Yang Greg Hou and Les Oxley, International Review 
of Financial Analysis 72 (September 2020). The Exchange notes that 
while the Commission has reviewed a working draft of this study in a 
previous denial order, the study has since been peer-reviewed and 
published.
    \43\ Id at 3. According to the study, ``Granger causality is 
widely used to formally test for lead-lag relationships (temporal 
ordering) to determine which market (the spot or the futures prices) 
leads the other.'' The time-varying procedures employed in assessing 
the Granger causality allowed the study to determine whether the 
causal relationship varies over the time studied.
    \44\ Id at 2.
---------------------------------------------------------------------------

    In ``Fractional Cointegration in Bitcoin Spot and Futures 
Markets'', the authors concluded that, with the exception of the 
extraordinary market events in early months of the Covid-19 pandemic 
period, ``the futures market dominates in the price discovery for 
bitcoin.'' \45\ The dataset reviewed in that analysis involved 1-min 
intraday data of bitcoin spot and futures prices in the US dollar from 
December 18, 2017 to July 31, 2020. Unlike other research previously 
reviewed by the Commission that used Granger and/or Hasbrouck analysis 
to determine price formation, the authors of this study used a 
fractionally cointegrated vector autoregressive model (``FCVAR'') to 
determine which of the spot and futures price contributes more to price 
discovery. According to the study, the FCVAR model ``is more general 
[than the CVAR model] and less restricted when analyzing the 
relationship between different variables'' in that it allows for 
fractional values for the order of cointegration, whereas a CVAR model 
allows only integers. The study found that while studies using a 
nonfractional CVAR model significantly overestimate the price discovery 
of the futures market, the FCVAR model still

[[Page 50578]]

concurred with the finding that the futures market leads the spot 
market.
---------------------------------------------------------------------------

    \45\ Jinhong Wu et al., ``Fractional Cointegration in Bitcoin 
Spot and Futures Markets'', Journal of Futures Markets, 1-17 (April 
2021).
---------------------------------------------------------------------------

    The research results discussed above build upon the already 
emerging academic consensus,\46\ demonstrated using multiple analytical 
models, that the Bitcoin Futures market does lead the spot market such 
that a would-be manipulator would necessarily conclude that it must 
trade in the futures market to successfully manipulate the spot price 
of bitcoin.
---------------------------------------------------------------------------

    \46\ See, e.g., Burcu Kapar and Jose Olmo, ``An Analysis of 
Price Discovery Between Bitcoin Futures and Spot Markets'', 
Economics Letters 174 (January 2019) (``. . . [T]he Bitcoin futures 
market dominates the price discovery process.''); Erdinc Akyildirim, 
``The Development of Bitcoin Futures: Exploring the Interactions 
Between Cryptocurrency Derivatives'', Finance Research Letters 34 
(May 2020) (``While analysing breakpoints in efficiency, we verify 
the view that Bitcoin futures dominate price discovery relative to 
spot markets.''); Alexander Chang, William Herrmann and William 
Chai, ``Efficient Price Discovery in the Bitcoin Markets'', Wilshire 
Phoenix (October 2020) (``[W]e conclude that the CME bitcoin futures 
contribution to price formation was greater than the contribution 
from the related spot markets made up of the Constituent Exchanges, 
indicating that the futures lead the spot markets and thus 
contribute more to price formation. . . .[T]his analysis was 
performed using a methodology similar to the one employed by the 
Division of Economic and Risk Analysis at the SEC to evaluate the 
IEX exchange's contribution to price formation in the equities 
markets.'') available at https://www.wilshirephoenix.com/efficient-price-discovery-in-the-bitcoin-markets/.
---------------------------------------------------------------------------

The Trust Will Not Be the Predominant Influence on Prices in the 
Bitcoin Spot and Futures Markets
    The second element to determine whether a market or group of 
markets is of ``significant size'' requires that it is unlikely that 
trading in the ETP would be the predominant influence on prices in that 
market. The Exchange also believes 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 significant volume 
in the Bitcoin Futures market, the size of bitcoin's market cap 
(approximately $1 trillion), 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 CoinRoutes from February 2021, the cost to 
buy or sell $5 million worth of bitcoin averages roughly 10 basis 
points with a market impact of 30 basis points.\47\ For a $10 million 
market order, the cost to buy or sell is roughly 20 basis points with a 
market impact of 50 basis points. Stated another way, a market 
participant could enter a market buy or sell order for $10 million of 
bitcoin and only move the market 0.5%. 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,\48\ Tesla \49\ and Square \50\ being 
able to collectively purchase billions of dollars in bitcoin without 
resulting in significant price movements.
---------------------------------------------------------------------------

    \47\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
    \48\ See Form 10-Q submitted by MicroStrategy Incorporated for 
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
    \49\ See Form 10-K submitted by Tesla, Inc. for the fiscal year 
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
    \50\ See Form 10-Q submitted by Square, Inc. for the quarterly 
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
---------------------------------------------------------------------------

    The results from a study conducted by CF Benchmarks simulating to 
determine the extent of ``slippage'' (i.e., the difference between the 
expected price of a trade and the price at which the trade was actually 
executed) offer further evidence that trading in the Shares is unlikely 
to be the predominant influence in either the bitcoin spot or futures 
market.\51\ The CF Benchmarks Analysis simulated the purchase of 50 
bitcoins a day for 686 days (an amount chosen specifically to replicate 
hypothetical trades by a bitcoin ETP) and found that the maximum amount 
of slippage on a particular day was 0.3%, with the remainder of values 
between 0% and 0.15%. Thus, according to CF Benchmarks, the slippage in 
this study could be described as having been largely negligible or, at 
most, minor during the observation period.\52\ While the study focused 
on the impact of a hypothetical ETP in the bitcoin spot market, 
arbitrage mechanisms in the spot and futures market dictate that it 
would be unlikely for a Bitcoin Futures ETP such as the Trust to 
overrun the Bitcoin Futures market without also overrunning the bitcoin 
spot market. Accordingly, the CF Benchmarks analysis further bolsters 
the Exchange's contention that the Trust and other similar ETPs would 
be unlikely to overrun the market.
---------------------------------------------------------------------------

    \51\ See CF Benchmarks, ``An Analysis of the Suitability of the 
CME CF BRR for the Creation of Regulated Financial Products,'' 
December 2020 (the ``CF Benchmarks Analysis''), available at: 
https://docsend.com/view/kizk7rarzaba6jxf.
    \52\ Id.
---------------------------------------------------------------------------

    As such, the combination of 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.
    For these reasons, the Exchange believes that all evidence strongly 
suggests that the CME Bitcoin Futures market has matured to a ``market 
of significant size'' for purposes of the Commission's standard of 
review as (a) a would-be manipulator of either bitcoin or Bitcoin 
Futures would necessarily have to execute its scheme on the CME in 
order to manipulate the ETP; and (b) the proposed ETP is unlikely to be 
the predominant influence on prices in that market as the absolute size 
of both the futures and spot markers have grown tremendously since the 
prior disapproval orders.
Other Means To Prevent Fraudulent and Manipulative Acts and Practices
    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 maintains that 
the CME CF BRR is not readily susceptible to manipulation due to the 
design of the methodology, which adequately protects the Trust from 
potential price manipulation in the Bitcoin Futures and spot bitcoin 
markets.\53\ The use of medians in the methodology reduces the effect 
of outlier prices on one or more constituent exchange.\54\ The volume-
weighting of medians filters out high numbers of small trades that may 
otherwise control the value of a non-volume weighted median.\55\ The 
use of twelve non-weighted partitions assures that price information is 
sourced equally over the entire observation period.\56\ Influencing the 
rate would therefore require trading activity during multiple 
partitions on several exchanges over an extended period, which would 
prove a costly and an operationally intensive undertaking. The 
methodology is designed to remove the reliance on any single 
contributing exchange, where

[[Page 50579]]

delayed or missing data from an exchange does not cause a calculation 
failure.
---------------------------------------------------------------------------

    \53\ See CME CR Cryptocurrency Reference Rates Methodology Guide 
(Version 9.0) (July 31, 2021), available at https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf.
    \54\ Id at 6.
    \55\ Id.
    \56\ Id at 13.
---------------------------------------------------------------------------

    In accordance with the methodology, if for any constituent exchange 
the absolute percentage deviation of the volume-weighted median trade 
price in comparison with the median of the volume-weighted median trade 
prices of all constituent exchanges exceeds a given threshold 
(currently set at 10% and defined in the methodology), all relevant 
transactions of that constituent exchange are flagged as potentially 
erroneous and are disregarded in the calculation of CME CF BRR for that 
calculation day.\57\ Furthermore, for inclusion in the CME CF BRR's 
calculation, a constituent exchange's bitcoin U.S. Dollar spot trading 
volume must meet the minimum threshold (currently, 3% relative 
contribution over two (2) consecutive quarters) as detailed in the 
methodology.\58\ The criteria collectively cause the constituent 
exchanges to deliver transparent and consistent trade and order data to 
CF Benchmarks via an API with sufficient reliability, detail and 
timeliness.\59\
---------------------------------------------------------------------------

    \57\ Id at 11.
    \58\ See CME CF Cryptocurrency Pricing Products Constituent 
Exchange Criteria (Version 5.0) (May 20, 2020) at 4, available at 
https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges+Criteria.pdf.
    \59\ Id.
---------------------------------------------------------------------------

    Furthermore, the constituent exchanges maintain fair and 
transparent market conditions to impede illegal, unfair or manipulative 
trading practices, and comply with applicable law and regulations 
including, capital markets regulations, money transmission regulations, 
client money custody requirements, know-your-client (KYC) requirements, 
and anti-money-laundering (AML) regulations.\60\ The constituent 
exchanges are also required to cooperate with inquiries and 
investigations of the administrator (CF Benchmarks) and execute a data 
sharing agreement with CME.\61\
---------------------------------------------------------------------------

    \60\ Id.
    \61\ Id.
---------------------------------------------------------------------------

Core Principles Certification of CME BTC Futures Contracts
    The CME Bitcoin Futures comply with all Core Principles of the CEA. 
In adhering to the Core Principles \62\ applicable to all Designated 
Contract Markets (``DCM''), the CME certified that the CME Bitcoin 
Futures met specific Core Principles as they apply to futures contracts 
traded on a DCM. This compliance results in the Trust's core asset 
being a well-regulated instrument that is not readily susceptible to 
manipulation. The following Core Principles are of particular relevance 
to the analysis of this filing.
---------------------------------------------------------------------------

    \62\ 17 CFR part 38.
---------------------------------------------------------------------------

Contracts Not Readily Subject to Manipulation
    In certifying the CME BTC Futures Contracts to the CFTC, the CME 
was required to include an analysis describing the contract, a 
discussion of the market research it conducted and note that the 
contract was designed to meet the risk management needs of prospective 
users and promote price discovery of bitcoin. The CME consulted with 
market users to obtain their views and opinions during the contract's 
design process to ensure that the contract's terms and conditions 
reflected the underlying cash market and would perform the intended 
risk management and/or price discovery functions.
    Since the CME BTC Futures Contract is cash settled by reference to 
the CME CF BRR, the CME CF BRR's methodology was provided to the CFTC 
with supporting information showing how the CME CF BRR is reflective of 
the underlying cash market, is not readily subject to manipulation or 
distortion, and is based on a cash price series that is reliable, 
acceptable, publicly available and timely (as defined in paragraphs 
(c)(2) and (c)(3) of Appendix C to part 38 of the CFTC's 
Regulations).\63\
---------------------------------------------------------------------------

    \63\ Id. at Appendix C paragraphs (c)(2) and (c)(3).
---------------------------------------------------------------------------

Prevention of Market Disruption
    The Core Principles also required CME to certify that it has the 
ability to prevent manipulation, price distortion, and disruptions of 
the cash-settlement process through market surveillance, compliance, 
and enforcement practices and procedures. This would include the 
ability to conduct real-time trade monitoring and comprehensive and 
accurate trade reconstruction. Such trade monitoring also allows for 
the detection of developing market anomalies, such as abnormal price 
movements and unusual trading volumes, and position-limit violations. 
CME rules grant exchanges broad powers to intervene to prevent or 
reduce market disruptions. Once a threatened or actual disruption is 
detected, the CME may take steps to prevent the disruption or reduce 
its severity. CME's program includes automated trading alerts to detect 
market anomalies and position-limit violations as they develop and 
before market disruptions occur or become more serious. CFTC guidance 
also requires a DCM to have access to its traders' position and 
transaction data in the underlying reference market. The CME has, 
through an information sharing agreement with CF Benchmarks, the 
ability to access information about trader positions and transactions 
in the underlying spot BTC markets that contribute to the CME CF BRR. 
The CME has also implemented a series of risk controls as outlined in 
the CFTC Regulation's Acceptable Practices.\64\
---------------------------------------------------------------------------

    \64\ These risk controls include: (1) Dynamic circuit breakers, 
which monitor for significant price movements within a trading 
session by defining an upper and lower limit of how far bitcoin 
futures can move (10%) in any one hour rolling window and, if 
triggered, matching is suspended for 2 minutes; (2) velocity logic, 
which is designed to detect market movement of a predefined number 
of ticks either up or down within a predefined time and, if 
triggered, matching is suspended for 10 seconds; (3) daily price 
limits, which is the maximum daily price range permitted for BTC 
futures (+/- 30% from prior day settlement); and (4) initial margin 
(currently set at 35% of notional value for outright positions) 
charged for all open positions based on expected volatility over a 
two-day close out period.
---------------------------------------------------------------------------

Position Limits
    The CFTC's Core Principles also call for the use of position limits 
or position accountability to reduce the threat of market manipulation 
or congestion. The CME has set a position limit of 2,000 contracts for 
the CME Bitcoin Futures. As a result of this position limit, an attempt 
to manipulate the price of the CME Bitcoin Futures, and consequently 
the shares in the Trust, would yield little benefit due to the limited 
potential profit available from the trading of 2,000 contracts.
Ongoing Coordination With CFTC on CME Bitcoin Futures
    Since the launch of CME Bitcoin Futures, the CME has worked with 
the CFTC on a regular and frequent basis to assess the trading in the 
contract and ensure that the market is free from fraud and 
manipulation. CFTC staff, in the recent past, has actively engaged CME 
in reviewing CME's surveillance program for bitcoin products pursuant 
to part 38 (Designated Contract Markets) of the CFTC's regulations. 
This engagement has concerned CME's analysis of the trading activities 
and strategies of bitcoin futures market participants of significant 
size and outreach to these market participants. It has also concerned 
CME's ability to obtain transactional information from the constituent 
exchanges that contribute data to the bitcoin reference rate in 
addition to CME's continued monitoring of the bitcoin reference rate as 
a price series, particularly during the index's one-hour calculation 
window.
Creation and Redemption of Shares
    According to the Draft Registration Statement, the Trust will issue 
and

[[Page 50580]]

redeem Shares on a continuous basis at the NAV per Share only in large, 
specified blocks each consisting of a certain number of Shares (each 
such block of shares called a ``Creation Unit,'' and collectively, the 
``Creation Units'') in transactions with broker-dealers and large 
institutional investors that have entered into participation agreements 
(``Authorized Participants''). It is currently anticipated that a 
Creation Unit will consist of 50,000 Shares, although this number may 
change from time to time. It is currently expected that the Trust's 
Creation Units will generally be issued and redeemed for cash. Except 
when aggregated in Creation Units, the Shares are not redeemable 
securities. Once created, Shares of the Trust may trade on the 
secondary market in amounts less than a Creation Unit.
    Creation Procedures. On any Business Day, an Authorized Participant 
may place an order to create one or more Creation Units. Purchase 
orders must be placed by 2:00 p.m. (Eastern time). The cut-off time may 
be earlier if, for example, the Exchange or another exchange material 
to the valuation or operation of the Trust closes before the cut-off 
time. If a purchase order is received prior to the applicable cut-off 
time, the day on which the Marketing Agent receives a valid purchase 
order is the purchase order date. If the purchase order is received 
after the applicable cut-off time, the purchase order date will be the 
next Business Day. Purchase orders are irrevocable. By placing a 
purchase order, and prior to delivery of such Creation Units, an 
Authorized Participant's DTC account will be charged the non-refundable 
transaction fee due for the purchase order.
    Redemption Procedures. On any Business Day, an Authorized 
Participant may place an order with the Marketing Agent to redeem one 
or more Creation Units. Redemption orders must be received prior to 
2:00 p.m. (Eastern time), or earlier if, for example, the Exchange or 
another exchange material to the valuation or operation of the Trust 
closes before the cut-off time. If a redemption order is received prior 
to the applicable cut-off time, the day on which the Marketing Agent 
receives a valid redemption order is the redemption order date. If the 
redemption order is received after the applicable cut-off time, the 
redemption order date will be the next day. Redemption orders are 
irrevocable. Individual shareholders may not redeem directly from the 
Trust.
    By placing a redemption order, an Authorized Participant agrees to 
deliver the Creation Units to be redeemed through DTC's book-entry 
system to the applicable Trust not later than noon (Eastern time), on 
the first Business Day immediately following the redemption order date 
(T+1). The Sponsor reserves the right to extend the deadline for the 
Trust to receive the Creation Units required for settlement up to the 
second Business Day following the redemption order date (T+2). By 
placing a redemption order, and prior to receipt of the redemption 
proceeds, an Authorized Participant must wire to the Custodian the non-
refundable transaction fee due for the redemption order or any proceeds 
due will be reduced by the amount of the fee payable. At its sole 
discretion, the Sponsor may agree to a delivery date other than T+2. 
Additional fees may apply for special settlement.
    Upon the request of an Authorized Participant made at the time of a 
redemption order, the Sponsor at its sole discretion may determine, in 
addition to delivering redemption proceeds, to transfer futures 
contracts to the Authorized Participant pursuant to an exchange of a 
futures contract for related position (``EFCRP'') or to a block trade 
sale of futures contracts to the Authorized Participant.
Availability of Information
    The Trust's website (www.valkyriefunds.io) 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 \65\ 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.
---------------------------------------------------------------------------

    \65\ 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 intra-day indicative value 
(``IIV'') per Share updated every 15 seconds, as calculated by the 
Exchange or a third-party financial data provider during the Exchange's 
Regular Market Session (9:30 a.m. to 4:00 p.m. (Eastern time)).\66\ 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.
---------------------------------------------------------------------------

    \66\ 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(g)(vi), which sets 
forth the initial and continued listing criteria applicable to 
Commodity Futures 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(g)(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(g)(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

[[Page 50581]]

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(g). 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(g).
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 futures contracts underlying the Shares; or (2) 
whether other unusual conditions or circumstances detrimental to the 
maintenance of a fair and orderly market are present.
    As indicated in Commentary .03 to Nasdaq Rule 5711(g), 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 futures 
contract persists past the trading day in which it occurred, the 
Exchange will halt trading no later than the beginning of the trading 
day following the interruption. In addition, if the Exchange becomes 
aware that the NAV with respect to the Shares is not disseminated to 
all market participants at the same time, it will halt trading in the 
Shares until such time as the NAV is available to all market 
participants.
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.
    Additionally, the Bitcoin Futures will be subject to the rules and 
surveillance programs of CME and the CFTC.\67\ The Exchange or the 
Financial Industry Regulatory Authority (``FINRA''), on behalf of the 
Exchange, will communicate as needed regarding trading in the Shares 
and the underlying Bitcoin Futures via 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.\68\ The Exchange 
may also obtain information regarding trading in the spot bitcoin 
market from exchanges with which the CME or the Exchange has entered 
into a comprehensive surveillance sharing agreement. In addition, the 
Exchange is able to access, as needed, trade information for certain 
fixed income instruments reported to FINRA's Trade Reporting and 
Compliance Engine (``TRACE'').
---------------------------------------------------------------------------

    \67\ The CFTC issued a press release on December 1, 2017, noting 
the self-certifications from CFE and CME and highlighting the 
rigorous process that the CFTC had undertaken in its engagement with 
CFE and CME prior to the self-certification for the Bitcoin Futures. 
The press release focused on the ongoing surveillances that will 
occur on each listing exchange, including surveillance based on 
information sharing with the underlying cash bitcoin exchanges as 
well as the actions that the CFTC will undertake after the contracts 
are launched, including monitoring and analyzing the size and 
development of the market, positions and changes in positions over 
time, open interest, initial margin requirements, and variation 
margin payments, stress testing positions, conduct reviews of 
designated contract markets, derivatives clearing organizations, 
clearing firms, and individual traders involved in trading and 
clearing bitcoin futures. For more information, see http://www.cftc.gov/PressRoom/PressReleases/pr7654-17.
    \68\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com. The Exchange notes that not all 
components of the Disclosed Portfolio for the Trust may trade on 
markets that are members of ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement. Not more than 
10% of the net assets of the Trust in the aggregate invested in 
Bitcoin Futures shall consist of Bitcoin Futures whose principal 
market is not a member of the ISG or with which the Exchange has in 
place a comprehensive surveillance sharing agreement.
---------------------------------------------------------------------------

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

[[Page 50582]]

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 \69\ in general and Section 6(b)(5) of the Act \70\ 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.
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78f.
    \70\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
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. Additionally, the Bitcoin 
Futures will be subject to the rules and surveillance programs of CME 
and the CFTC. Trading of the Shares through the Exchange will be 
subject to the Exchange's surveillance procedures for derivative 
products, including Commodity Futures Trust Shares. The Exchange or 
FINRA, on behalf of the Exchange, will communicate as needed regarding 
trading in the Shares and the underlying Bitcoin Futures via 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. The Exchange may also obtain information regarding trading 
in the spot bitcoin market via the ISG, from other exchanges who are 
members or affiliates of the ISG, or from other exchanges with which 
the Exchange has entered into a comprehensive surveillance sharing 
agreement. In addition, the Exchange is able to access, as needed, 
trade information for certain fixed income instruments reported to 
TRACE. The Exchange prohibits the distribution of material non-public 
information by its employees.
    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. The Exchange further 
believes that the proposal is designed to prevent fraudulent and 
manipulative acts and practices in that the Exchange expects that the 
market for Bitcoin Futures will be sufficiently liquid to support 
numerous ETPs shortly after launch. This belief is based on numerous 
conversations with market participants, issuers, and discussions with 
personnel of CFE. As such, the Exchange believes that the expected 
liquidity in the market for Bitcoin Futures, combined with the Exchange 
surveillance procedures related to the Shares, and the broader 
regulatory structure will prevent trading in the Shares from being 
susceptible to manipulation.
    Because of its innovative features as a cryptoasset, bitcoin has 
gained wide acceptance as a secure means of exchange in the commercial 
marketplace and has generated significant interest among investors. In 
less than a decade since its creation in 2008, bitcoin has achieved 
significant market penetration, with payments giant PayPal and 
thousands of merchants and businesses accepting it as a form of 
commercial payment, as well as receiving official recognition from 
several governments, including Japan and Australia. Accordingly, 
investor interest in gaining exposure to bitcoin is increasing 
exponentially as well. As expected, the total volume of bitcoin 
transactions in the market continues to grow exponentially.
    Despite the growing investor interest in bitcoin, the primary means 
for investors to gain access to bitcoin exposure remains either through 
the Bitcoin Futures or direct investment through bitcoin exchanges or 
over-the-counter trading. For regular investors simply wishing to 
express an investment viewpoint in bitcoin, investment through the 
Bitcoin Futures is complex and requires active management, and direct 
investment in bitcoin brings with it significant inconvenience, 
complexity, expense and risk. The Shares would therefore represent a 
significant innovation in the bitcoin market by providing an 
inexpensive and simple vehicle for investors to gain exposure to 
bitcoin in a secure and easily accessible product that is familiar and 
transparent to investors. Such an innovation would help to perfect the 
mechanism of a free and open market and, in general, to protect 
investors and the public interest by improving investor access to 
bitcoin exposure through efficient and transparent exchange-traded 
derivative products.
    In addition to improved convenience, efficiency and transparency, 
the Trust will also help to prevent fraudulent and manipulative acts 
and practices by enhancing the security afforded to investors as 
compared to a direct investment in bitcoin. Despite the extensive 
security mechanisms built into the Bitcoin network, a remaining risk to 
owning bitcoin directly is the need for the holder to retain and 
protect the ``private key'' required to spend or sell bitcoin after 
purchase. If a holder's private key is compromised or simply lost, 
their bitcoin can be rendered unavailable--i.e., effectively lost to 
the investor. Investment vehicles that invest directly in bitcoin or 
investors that hold their bitcoin through digital wallets or other 
storage mechanisms must take extraordinary steps in order to protect 
their bitcoin, such as placing their bitcoin in ``cold storage.'' This 
risk will be eliminated for the Trust because the exposure to bitcoin 
is gained through cash-settled Bitcoin Futures that do not present any 
of the security issues that exist with direct investment in bitcoin.
    The Trust expects that it will generally seek to remain fully 
exposed to Bitcoin Futures even during times of adverse market 
conditions. Under Normal Market Conditions, the Trust will generally 
hold only Bitcoin Futures and Money Market Instruments (which are used 
to collateralize the Bitcoin Futures).
    The proposed rule change is designed to promote just and equitable 
principles of trade and to protect investors and the public interest in 
that the Exchange will obtain a representation from the issuer of the 
Shares that the NAV will be calculated daily and that the NAV and the 
Disclosed Portfolio will be made available to all market participants 
at the same time. In addition, a large amount of information is 
publicly available regarding the Trust and the Shares, thereby 
promoting market transparency. Moreover, the Intraday Indicative Value 
will be disseminated by one or more major market data vendors at least 
every 15 seconds during Regular Trading Hours. On each business day, 
before commencement of trading in Shares during Regular Trading Hours, 
the Trust will disclose on its website the Disclosed Portfolio that 
will form the basis for the Trust's calculation of NAV at the end of 
the business day. Pricing information will be available on the Trust's 
website including: (1) The prior business day's reported NAV, the Bid/
Ask Price of the Trust, and a calculation of the premium and discount 
of the Bid/Ask Price against the NAV; and (2) data in chart format 
displaying the frequency distribution of discounts and premiums of the 
daily Bid/Ask Price against the

[[Page 50583]]

NAV, within appropriate ranges, for each of the four previous calendar 
quarters.
    Additionally, information regarding market price and trading of the 
Shares will be continually available on a real-time basis throughout 
the day on brokers' computer screens and other electronic services, and 
quotation and last sale information for the Shares will be available on 
the facilities of the CTA. The Trust's website will include a form of 
the prospectus for the Trust and additional data relating to NAV and 
other applicable quantitative information. Trading in Shares of the 
Trust will be halted under the conditions specified in Nasdaq Rule 
4120(b). Trading may also be halted because of market conditions or for 
reasons that, in the view of the Exchange, make trading in the Shares 
inadvisable. Finally, trading in the Shares will be subject to Nasdaq 
Rule 4120(a)(9), which sets forth circumstances under which Shares of 
the Trust may be halted and delisting proceedings commenced. In 
addition, as noted above, investors will have ready access to 
information regarding the Trust's holdings, the Intraday Indicative 
Value, the Disclosed Portfolio, and quotation and last sale information 
for the Shares.
    Intraday price quotations on Money Market Instruments of the type 
held by the Trust are available from major broker-dealer firms and from 
third-parties, which may provide prices free with a time delay, or 
``live'' with a paid fee. For Bitcoin Futures, such intraday 
information is available directly from the applicable listing venue. 
Intraday price information is also available through subscription 
services, such as Bloomberg and Thomson Reuters, which can be accessed 
by authorized participants and other investors. Pricing information 
related to Money Market Instruments will be available through issuer 
websites and publicly available quotation services such as Bloomberg, 
Markit and Thomson Reuters.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of 
additional types of actively-managed exchange-traded products that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures relating to trading in the Shares and may 
obtain information via ISG from other exchanges that are members of ISG 
or with which the Exchange has entered into a comprehensive 
surveillance sharing agreement as well as trade information for certain 
fixed income instruments as reported to FINRA's TRACE. Not more than 
10% of the net assets of the Trust in the aggregate invested in Bitcoin 
Futures shall consist of Bitcoin Futures whose principal market is not 
a member of the ISG or with which the Exchange has in place a 
comprehensive surveillance sharing agreement. In addition, as noted 
above, investors will have ready access to information regarding the 
Trust's holdings, the Intraday Indicative Value, the Disclosed 
Portfolio, and quotation and last sale information for the Shares.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#e496918881c9878b8989818a9097a4978187ca838b92"><span class="__cf_email__" data-cfemail="deacabb2bbf3bdb1b3b3bbb0aaad9eadbbbdf0b9b1a8">[email protected]</span></a>. Please include 
File Number SR-NASDAQ-2021-066 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2021-066. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2021-066 and should be submitted 
on or before September 30, 2021.
---------------------------------------------------------------------------

    \71\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\71\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19420 Filed 9-8-21; 8:45 am]
BILLING CODE 8011-01-P


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