Document ID: SEC-2023-1108-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2023-10-03T04:00Z

[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68188-68211]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21789]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98564; File No. SR-NYSEARCA-2023-58)]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of a Proposed Rule Change Regarding the Hashdex Bitcoin Futures ETF

September 27, 2023.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given 
that, on September 22, 2023, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the Hashdex 
Bitcoin Futures ETF under NYSE Arca Rule 8.500-E (``Trust Units''). The 
proposed rule change is available on the Exchange's website at 
www.nyse.com, at the principal office of the Exchange, and at the 
Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade shares of the Hashdex 
Bitcoin Futures ETF (the ``Fund'') under NYSE Arca Rule 8.500-E. The 
Commission previously approved the listing and trading of the Shares 
pursuant to NYSE Arca Rule 8.200-E, Commentary .02 as shares of the 
Teucrium Bitcoin Futures Fund.\4\ The Fund's name was subsequently 
changed to the Hashdex Bitcoin Futures ETF pursuant to an April 18, 
2022 amendment to the Fund's registration statement.\5\ In addition to 
the proposed changes to the Fund's investment objective and strategy, 
as further discussed below, the Exchange proposes to update the name of 
the Fund to the Hashdex Bitcoin ETF to reflect the same. This new name 
for the Fund is reflected in the Form S-1 filed by the Tidal 
Commodities Trust I (the ``Trust'') on July 21, 2023.\6\
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    \4\ See Securities Exchange Act Release No. 34-94620 (April 6, 
2022), 87 FR 21676 (April 12, 2022) (SR-NYSEArca-2021-53) (Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 2, To 
List and Trade Shares of the Teucrium Bitcoin Futures Fund Under 
NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts)) (the 
``Approval Order''). The representations herein supersede and 
replace the representations in the Exchange's prior rule filing 
relating to the Teucrium Bitcoin Futures Fund and Partial Amendment 
No. 2 thereto. See Securities Exchange Act Release No. 92573 (August 
5, 2021), 86 FR 44062 (August 11, 2021) (SR-NYSEArca-2021-53) 
(Notice of Filing of a Proposed Rule Change To List and Trade Shares 
of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E) and 
Partial Amendment No. 2, available at: https://www.sec.gov/comments/sr-nysearca-2021-53/srnysearca202153-20118884-271701.pdf.
    \5\ On April 18, 2022, Teucrium Commodity Trust filed with the 
Commission Pre-Effective Amendment No. 2 to the registration 
statement on Form S-1 under the Securities Act of 1933 (the 
``Securities Act'') (File No. 333-256339) changing the name of the 
Fund from Teucrium Bitcoin Futures Fund to Hashdex Bitcoin Futures 
ETF.
    \6\ On July 21, 2023, the Trust filed with the Commission a 
registration statement on Form S-1 under the Securities Act (15 
U.S.C. 77a) (File No. 333-__) (the ``July 21, 2023 Form S-1'') 
reflecting the Trust's assumption of management and control of Fund 
from Teucrium Commodity Trust. The Shares of the Fund were 
originally issued by the Teucrium Commodity Trust pursuant to a 
registration statement on Form S-1 filed with the Commission on May 
20, 2021 (File No. 333-256339). The Exchange will submit a separate 
proposed rule change relating to the transfer of management and 
control of the Fund from Teucrium Commodity Trust to the Trust.
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    The Fund is a series of the Trust, a Delaware statutory trust.\7\ 
The Fund is managed and controlled by Toroso Investments LLC (the 
``Sponsor'').\8\ The

[[Page 68189]]

Sponsor is registered as a commodity pool operator (``CPO'') and a 
commodity trading adviser (``CTA'') with the Commodity Futures Trading 
Commission (``CFTC'') and is a member of the National Futures 
Association (``NFA'').
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    \7\ On August 25, 2023, the Trust confidentially filed a draft 
registration statement under the Securities Act (the ``Registration 
Statement''). The Jumpstart Our Business Startups Act (the ``JOBS 
Act''), enacted on April 5, 2012, added Section 6(e) to the 
Securities Act. Section 6(e) of the Securities Act provides that an 
``emerging growth company'' may confidentially submit to the 
Commission a draft registration statement for confidential, non-
public review by the Commission staff prior to public filing, 
provided that the initial confidential submission and all amendments 
thereto shall be publicly filed not later than 21 days before the 
date on which the issuer conducts a road show, as such term is 
defined in Securities Act Rule 433(h)(4). An emerging growth company 
is defined in Section 2(a)(19) of the Securities Act as an issuer 
with less than $1,000,000,000 total annual gross revenues during its 
most recently completed fiscal year. The Trust meets the definition 
of an emerging growth company and consequently submitted its 
Registration Statement to the Commission on a confidential basis. 
The description of the operation of the Trust and the Fund herein is 
based, in part, on the Registration Statement.
    \8\ The July 21, 2023 Form S-1 also reflects that Toroso 
Investments LLC has assumed role of the Sponsor of the Trust from 
Teucrium Trading, LLC. The Sponsor is not registered as a broker-
dealer or affiliated with a broker-dealer. In the event that (a) the 
Sponsor becomes registered as a broker-dealer or newly affiliated 
with a broker-dealer, or (b) any new sponsor or sub-adviser is 
registered as a broker-dealer or becomes affiliated with a broker-
dealer, it will implement and maintain a fire wall with respect to 
its relevant personnel or personnel of the broker-dealer affiliate, 
as applicable, regarding access to information concerning the 
composition of and/or changes to the portfolio, and will be subject 
to procedures designed to prevent the use and dissemination of 
material non-public information regarding the portfolio.
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The Fund's Investment Objective and Strategy
    According to the Registration Statement, the Chicago Mercantile 
Exchange, Inc. (``CME'') offers two Bitcoin futures contracts, one 
contract representing five (5) Bitcoins (``BTC Contract'') and another 
contract representing one-tenth of one (0.10) Bitcoin (``MBT 
Contract'').\9\ Each BTC Contract and MBT Contract settles daily to the 
BTC Contract volume-weighted average price (``VWAP'') of all trades 
that occur between 2:59 p.m. and 3:00 p.m., Central Time, the 
settlement period, rounded to the nearest tradable tick. BTC Contracts 
and MBT Contracts each expire on the last Friday of the contract month, 
and the final settlement value for each contract is based on the CME CF 
Bitcoin Reference Rate (``CME CF BRR'').\10\
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    \9\ BTC Contracts began trading on the CME Globex (``Globex'') 
trading platform on December 15, 2017, and are cash-settled in U.S. 
dollars. MBT Contracts began trading on the Globex trading platform 
on May 3, 2021, under the ticker symbol ``MBT'' and are also cash-
settled in U.S. dollars.
    \10\ The CME CF BRR aggregates the trade flow of major Bitcoin 
spot platforms during a specific calculation window into a once-a-
day reference rate of the U.S. dollar price of Bitcoin.
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    BTC Contracts and MBT Contracts each trade six consecutive monthly 
contracts plus two additional December contract months (if the 6 
consecutive months include December, only one additional December 
contract month is listed). Because BTC Contracts and MBT Contracts are 
exchange-listed, they allow investors to gain exposure to Bitcoin 
without having to hold the underlying cryptocurrency. Like a futures 
contract on a commodity or stock index, BTC Contracts and MBT Contracts 
allow investors to hedge investment positions or speculate on the 
future price of Bitcoin.
    According to the Registration Statement, the investment objective 
of the Fund is to have the daily changes in the net asset value 
(``NAV'') of the Fund's shares (``Shares'') reflect the daily changes 
in the price of a specified benchmark (the ``Benchmark''). The 
Benchmark will be calculated using the Nasdaq Bitcoin Reference Price--
Settlement (the ``NQBTCS''),\11\ which ultimately tracks the price of 
Bitcoin.\12\ According to the Sponsor, the NQBTCS is designed to allow 
institutional investors to track the price of Bitcoin by applying a 
rigorous methodology to trade data captured from cryptocurrency 
exchanges that meet eligibility criteria of the Nasdaq Crypto Index 
(``NCI''). The NQBTCS is calculated once every trading day through the 
application of a publicly available rules-based pricing methodology to 
a diverse collection of pricing sources to provide an institutional-
grade reference price for Bitcoin.\13\ The pricing methodology is 
designed to account for variances in price across a wide range of 
sources, each of which has been vetted according to criteria identified 
in the methodology. Specifically, the settlement value is the Time 
Weighted Average Price (``TWAP'') calculated across VWAPs for each 
minute in the settlement price window, which is between 2:50:00 and 
3:00:00 p.m. New York time. Where there are no transactions observed in 
any given minute of the settlement price window, that minute is 
excluded from the calculation of the TWAP.
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    \11\ See https://indexes.nasdaqomx.com/Index/Overview/NQBTCS.
    \12\ The Approval Order stated that the Benchmark would be 
calculated using the closing settlement prices of BTC Contracts 
listed on the CME. See Approval Order, 87 FR at 21676.
    \13\ See https://indexes.nasdaqomx.com/docs/methodology_NCI.pdf.
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    According to the Sponsor, the NQBTCS methodology also utilizes 
penalty factors to mitigate the impact of anomalous trading activity 
such as manipulation, illiquidity, large block trading, or operational 
issues that could compromise price representation. Three types of 
penalties are applied: abnormal price penalties, abnormal volatility 
penalties, and abnormal volume penalties. These penalties are defined 
as adjustment factors on the weight of information from each exchange 
that contributes pricing information based on the deviation of an 
exchange's price, volatility, or volume from the median across all 
exchanges. For example, if a core exchange's price is 2.5 standard 
deviations away from the median price, its price penalty factor will be 
a 1/2.5 multiplier.
    Finally, as a means of achieving the highest degrees of confidence 
in the reported volume, data is sourced only from ``core exchanges'' 
that are screened, selected, and approved by the Nasdaq Crypto Index 
Oversight Committee (the ``NCIOC''). Core exchanges must: (1) have 
strong forking controls; (2) have effective anti-money laundering (AML) 
controls; (3) have reliable and transparent application programming 
interface (API) that provides real-time and historical trading data; 
(4) charge fees for trading and structure trading incentives that do 
not interfere with the forces of supply and demand; (5) be licensed by 
a public independent governing body; (6) include surveillance for 
manipulative trading practices and erroneous transactions; (7) evidence 
a robust IT infrastructure; (8) demonstrate active capacity management; 
(9) evidence cooperation with regulators and law enforcement; and (10) 
have a minimum market representation for trading volume. Additionally, 
the NCIOC conducts further diligence to assess an exchange's 
eligibility and will consider additional criteria such as the 
exchange's organizational and ownership structure, security history, 
and reputation; the list of existing core exchanges will be recertified 
by the NCIOC at minimum on an annual basis.
    The Sponsor believes that the NQBTCS is suitable for use in 
calculating the Benchmark because (i) it would provide reliable pricing 
for purposes of tracking the actual performance of spot Bitcoin, (ii) 
it is administered by an independent index administrator, and (iii) its 
methodology is specifically designed to mitigate potential manipulation 
coming from unregulated markets. Specifically, the Sponsor believes 
that (i) by tracking the actual price of spot Bitcoin, which would 
better represent the Fund's strategy, NQBTCS is a Benchmark that will 
be more transparent and adequate for the Fund's investors; (ii) using a 
Benchmark that has its own independent index administrator provides 
investors the best practices in governance and accountability and 
benchmark quality; and (iii) the pricing methodology underlying the 
NQBTCS is designed to be resistant to potential price manipulation by 
applying a robust methodology to trade data captured from NCI core 
exchanges, which have to meet strict criteria created by the NCIOC, 
thereby drawing on a diverse collection of trustworthy pricing sources 
to provide an institutional-grade reference price for Bitcoin that 
accounts for variances in price across a wide range of sources and that 
adjusts to mitigate the impact of anomalous trading activity that could 
compromise the integrity of the NQBTCS price.
    According to the Registration Statement, the Fund seeks to maintain 
its holdings in Bitcoin Futures Contracts with a roughly constant 
expiration profile. Therefore, the Fund's positions will be changed or 
``rolled'' on a regular basis in order to track the changing nature of 
the Benchmark by closing out first to expire contracts prior to

[[Page 68190]]

settlement that are no longer part of the Benchmark, and then entering 
into second to expire contracts. Accordingly, the Fund will never carry 
futures positions all the way to cash settlement--the Fund will price 
only off of the daily settlement prices of the Bitcoin Futures 
Contracts.\14\ To achieve this, the Fund will roll its futures holdings 
prior to cash settlement of the expiring contract.
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    \14\ As discussed in more detail below, the CME determines the 
daily settlements for Bitcoin futures based on trading activity on 
CME Globex between 14:59:00 and 15:00:00 Central Time (CT), which is 
the ``settlement period.''
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    In seeking to achieve the Fund's investment objective, the Sponsor 
will employ a ``neutral'' investment strategy that is intended to track 
the changes in the Benchmark regardless of whether the Benchmark goes 
up or goes down. The Fund will endeavor to trade in Bitcoin Futures 
Contracts and spot Bitcoin so that the Fund's average daily tracking 
error against the Benchmark will be less than 10 percent over any 
period of 30 trading days. The Fund's ``neutral'' investment strategy 
is designed to permit investors generally to purchase and sell the 
Fund's Shares for the purpose of investing in the Bitcoin Futures 
Contracts and spot Bitcoin (as discussed below). Such investors may 
include participants in the Bitcoin market seeking to hedge the risk of 
losses in their Bitcoin-related transactions, as well as investors 
seeking price exposure to the Bitcoin market.
    According to the Registration Statement, one factor determining the 
total return from investing in futures contracts is the price 
relationship between soon to expire contracts and later to expire 
contracts. If the futures market is in a state of backwardation (i.e., 
when the price of BTC Contracts and MBT Contracts in the future is 
expected to be less than the current price), the Fund will buy later to 
expire contracts for a lower price than the sooner to expire contracts 
that it sells. Hypothetically, and assuming no changes to either 
prevailing BTC Contracts and MBT Contracts' prices or the price 
relationship between soon to expire contracts and later to expire 
contracts, the value of a contract will rise as it approaches 
expiration. Over time, if backwardation remained constant, the 
performance of a portfolio would continue to be affected. If the 
futures market is in contango, the Fund will buy later to expire 
contracts for a higher price than the sooner to expire contracts that 
it sells. Hypothetically, and assuming no other changes to either 
prevailing BTC Contracts and MBT Contracts' prices or the price 
relationship between the spot price, soon to expire contracts and later 
to expire contracts, the value of a contract will fall as it approaches 
expiration. Over time, if contango remained constant, the performance 
of a portfolio would continue to be affected. Frequently, whether 
contango or backwardation exists is a function, among other factors, of 
the prevailing market conditions of the underlying market and 
government policy.
    The Fund's investments will be consistent with the Fund's 
investment objective and will not be used to enhance leverage. That is, 
the Fund's investments will not be used to seek performance that is the 
multiple or inverse multiple (e.g., 2Xs, 3Xs, -2Xs, and -3Xs) of the 
Fund's Benchmark.
    According to the Registration Statement, the Fund will seek to 
achieve its investment objective by investing in Bitcoin Futures 
Contracts as well as in physical Bitcoin to the extent allowed by the 
Fund's investment restrictions on spot Bitcoin, using a pricing 
methodology, for purposes of calculating the Fund's NAV, that will 
derive spot Bitcoin prices from Bitcoin Futures Contracts and not from 
unregulated exchanges, as further explained below (``Spot 
Bitcoin'').\15\ In doing so, the Sponsor expects to provide a better 
tracking of Bitcoin exposure to investors, while using Bitcoin Futures 
Contracts in its strategy and relying on the CME as its ``market of 
relevant size.'' In particular, to avoid any exposure to potential 
manipulation from unregulated exchanges, the Fund's NAV will be 
calculated using a spot Bitcoin price derived from CME futures prices, 
as further explained below, and the Fund expects to purchase and sell 
physical Bitcoin via CME's Exchange for Physical Transactions, which 
are subject to CME's market surveillance.
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    \15\ The Approval Order stated that the Fund would only invest 
in BTC Contracts and MBT Contracts and in cash and cash equivalents.
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The Bitcoin and Bitcoin Futures Markets Have Progressed and Matured 
Significantly
    According to the Registration Statement, Bitcoin is a digital asset 
that serves as the unit of account on an open-source, decentralized, 
peer-to-peer computer network. It may be used to pay for goods and 
services, stored for future use, or converted to government-backed 
currency. As of the date of this prospectus, the adoption of bitcoin 
for these purposes has been limited. The value of Bitcoin is not backed 
by any government, corporation, or other identified body.
    The value of Bitcoin depends on its supply (which is limited), and 
demand for bitcoin in the markets for exchange that have been organized 
to facilitate the trading of Bitcoin. By design, the supply of Bitcoin 
is intentionally limited to 21 million Bitcoins. According to the 
Registration Statement, there are approximately 19 million Bitcoins in 
circulation.
    Bitcoin is maintained on the decentralized, open source, peer-to-
peer computer network, the ``Bitcoin Network.'' No single entity owns 
or operates the Bitcoin Network. The Bitcoin Network is accessed 
through software and governs bitcoin's creation and movement. The 
source code for the Bitcoin Network, often referred to as the Bitcoin 
Protocol, is open-source, and anyone can contribute to its development.
    The infrastructure of the Bitcoin Network is collectively 
maintained by various participants in the Bitcoin Network, which 
include miners, developers, and users. Miners validate transactions and 
provide security to the network, and are currently compensated for that 
service in Bitcoin. Developers maintain and contribute updates to the 
Bitcoin Network's source code, often referred to as the Bitcoin 
Protocol. Users access the Bitcoin Network using open-source software. 
Anyone can be a user, developer, or miner.
    Bitcoin is ``stored'' on a digital transaction ledger commonly 
known as a ``blockchain.'' A blockchain is a distributed database that 
is continuously updated and reconciled among certain users and is 
protected by cryptography. The Bitcoin blockchain contains a complete 
record and history for each bitcoin transaction. New Bitcoins are 
created through a process called ``mining.'' Miners use specialized 
computer software and hardware to solve a highly complex mathematical 
problem presented by the Bitcoin Protocol. The first miner to 
successfully solve the problem is permitted to add a block of 
transactions to the Bitcoin blockchain. The new block is then confirmed 
through acceptance by a majority of users who maintain versions of the 
blockchain on their individual computers. Miners that successfully add 
a block to the Bitcoin blockchain are automatically rewarded with a 
fixed amount of Bitcoin for their effort plus any transaction fees paid 
by transferors whose transactions are recorded in the block. This 
reward system is the means by which new Bitcoin enter circulation and 
is the mechanism by which versions of the blockchain held by users

[[Page 68191]]

on a decentralized network are kept in consensus.
    The Bitcoin Protocol is an open source project with no official 
company or group in control, and anyone can review the underlying code. 
There are, however, a number of individual developers that regularly 
contribute to a specific distribution of Bitcoin software known as the 
``Bitcoin Core.'' Developers of the Bitcoin Core loosely oversee the 
development of the source code. There are many other compatible 
versions of the Bitcoin software, but Bitcoin Core is the most widely 
adopted and currently provides the de facto standard for the Bitcoin 
Protocol. The core developers are able to access, and can alter, the 
Bitcoin Network source code and, as a result, they are responsible for 
quasi-official releases of updates and other changes to the Bitcoin 
Network's source code. However, because Bitcoin has no central 
authority, the release of updates to the Bitcoin Network's source code 
by the core developers does not guarantee that the updates will be 
automatically adopted by the other purchasers. Users and miners must 
accept any changes made to the source code by downloading the proposed 
modification and that modification is effective only with respect to 
those Bitcoin users and miners who choose to download it. As a 
practical matter, a modification to the source code becomes part of the 
Bitcoin Network only if it is accepted by purchasers that collectively 
have a majority of the processing power on the Bitcoin Network. If a 
modification is accepted by only a percentage of users and miners, a 
division will occur such that one network will run the pre-modification 
source code and the other network will run the modified source code. 
Such a division is known as a ``fork.''
    The first rule filing proposing to list an exchange-traded product 
to provide exposure to Bitcoin in the U.S. was submitted by the Cboe 
BZX Exchange, Inc. on June 30, 2016.\16\ At that time, blockchain 
technology, and digital assets that utilized it, were relatively new to 
the broader public. The market cap of all Bitcoin in existence at that 
time was approximately $10 billion. No registered offering of digital 
asset securities or shares in an investment vehicle with exposure to 
Bitcoin or any other cryptocurrency had yet been conducted, and the 
regulated infrastructure for conducting a digital asset securities 
offering had not begun to develop.\17\ Similarly, regulated U.S. 
Bitcoin futures contracts did not exist. The Commodity Futures Trading 
Commission (the ``CFTC'') had determined that Bitcoin is a 
commodity,\18\ but had not engaged in significant enforcement actions 
in the space. The New York Department of Financial Services (``NYDFS'') 
adopted its final BitLicense regulatory framework in 2015, but had only 
approved four entities to engage in activities relating to virtual 
currencies (whether through granting a BitLicense or a limited-purpose 
trust charter) as of June 30, 2016.\19\ While the first over-the-
counter Bitcoin fund launched in 2013, public trading was limited and 
the fund had only $60 million in assets.\20\ There were very few, if 
any, traditional financial institutions engaged in the space, whether 
through investment or providing services to digital asset companies. In 
January 2018, the Staff of the Commission noted in a letter to the 
Investment Company Institute and SIFMA that it was not aware, at that 
time, of a single custodian providing fund custodial services for 
digital assets.\21\
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    \16\ See 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 (August 1, 2018) (the ``Winklevoss II Order''). This proposal 
was subsequently disapproved by the Commission. See id.
    \17\ Digital assets that are securities under U.S. law are 
referred to throughout this proposal as ``digital asset 
securities.'' All other digital assets, including Bitcoin, are 
referred to interchangeably as ``cryptocurrencies'' or ``virtual 
currencies.'' The term ``digital assets'' refers to all digital 
assets, including both digital asset securities and 
cryptocurrencies, together.
    \18\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated: 
``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.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F.2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
    \19\ A list of virtual currency businesses that are entities 
regulated by the NYDFS is available on the NYDFS website. See 
https://www.dfs.ny.gov/
virtual_currency_businesses#:~:text=A%20business%20must%20obtain%20a,
business%20in%20New%20York%20State.
    \20\ See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available at: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm (data as of March 31, 2016 
according to publicly available filings).
    \21\ See Letter from Dalia Blass, Director, Division of 
Investment Management, U.S. Securities and Exchange Commission to 
Paul Schott Stevens, President & CEO, Investment Company Institute 
and Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association (January 18, 2018), 
available at: https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
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    As of the first quarter of 2021, the digital assets financial 
ecosystem, including Bitcoin, has progressed and matured significantly. 
The development of a regulated market for digital asset securities has 
significantly evolved, with market participants having conducted 
registered public offerings of both digital asset securities \22\ and 
shares in investment vehicles holding Bitcoin futures.\23\ 
Additionally, licensed and regulated service providers have emerged to 
provide fund custodial services for digital assets, among other 
services. For example, in December 2020, the Commission adopted a 
conditional no-action position permitting certain special purpose 
broker-dealers to custody digital asset securities under Rule 15c3-3 
under the Exchange Act.\24\ In September 2020, the Staff of the 
Commission released a no-action letter permitting certain broker-
dealers to operate a non-custodial Alternative Trading System (``ATS'') 
for digital asset securities, subject to specified conditions.\25\ In 
October 2019, the Staff of the Commission granted temporary relief from 
the clearing agency registration requirement to an entity seeking to 
establish a securities clearance and settlement system based on 
distributed ledger technology; \26\ and multiple transfer agents who 
provide

[[Page 68192]]

services for digital asset securities have registered with the 
Commission.\27\
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    \22\ See Prospectus Supplement filed pursuant to Rule 424(b)(1) 
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \23\ See Prospectus filed by Stone Ridge Trust VI on behalf of 
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
    \24\ See Securities Exchange Act Release No. 90788, 86 FR 11627 
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset 
Securities by Special Purpose Broker-Dealers).
    \25\ See Letter from Elizabeth Baird, Deputy Director, Division 
of Trading and Markets, U.S. Securities and Exchange Commission to 
Kris Dailey, Vice President, Risk Oversight & Operational 
Regulation, Financial Industry Regulatory Authority (September 25, 
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \26\ See Letter from Jeffrey S. Mooney, Associate Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos 
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \27\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent 
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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    Beyond the Commission's purview, the regulatory landscape has also 
changed significantly since 2016, and cryptocurrency markets have grown 
and evolved as well. The market for Bitcoin grew approximately 100 
times larger through 2021, reaching a market cap of $1.3 trillion at 
its all-time high. Although Bitcoin's market cap is down to $500 
billion (as of September 7, 2023), its market cap is greater than 
companies \28\ such as Visa, Inc., Exxon Mobil Corporation, Walmart, 
Inc., and JP Morgan Chase & Co. The number of verified users at 
Coinbase, the largest U.S.-based Bitcoin exchange, has grown to over 
110 million at the end of 2022, compared to 43 million at the end of 
2020.\29\ CFTC-regulated Bitcoin futures (``Bitcoin Futures'') 
represented approximately $42 billion in notional trading on the CME in 
August 2023, compared to $3.9 billion, $28 billion, $60 billion, and 
$20 billion in total trading in December 2019, December 2020, December 
2021, and December 2022 respectively. Bitcoin Futures represented $2.2 
billion in open interest in August 2023, compared to $115 million, 
$1.29 billion, $3.27 billion, and $1.31 billion in December 2019, 
December 2020, December 2021, and December 2022 respectively.\30\ The 
CFTC has exercised its regulatory jurisdiction in bringing a number of 
enforcement actions related to Bitcoin and against trading platforms 
that offer cryptocurrency trading.\31\ The U.S. Office of the 
Comptroller of the Currency (the ``OCC'') has made clear that 
federally-chartered banks are able to provide custody services for 
cryptocurrencies and other digital assets.\32\ NYDFS has granted no 
fewer than thirty BitLicenses, including to established public payment 
companies like PayPal Holdings, Inc. and Square, Inc., and limited 
purpose trust charters to entities providing cryptocurrency custody 
services. The U.S. Treasury Financial Crimes Enforcement Network 
(``FinCEN'') has released extensive guidance regarding the 
applicability of the Bank Secrecy Act (``BSA'') and implementing 
regulations to virtual currency businesses,\33\ and has proposed rules 
imposing requirements on entities subject to the BSA that are specific 
to the technological context of virtual currencies.\34\ In addition, 
the Treasury's Office of Foreign Assets Control (``OFAC'') has brought 
enforcement actions over apparent violations of the sanctions laws in 
connection with the provision of wallet management services for digital 
assets.\35\
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    \28\ See https://coinmarketcap.com/largest-companies/.
    \29\ See Coinbase 2022 10-K, available at: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q4/86fe25e0-342b-40fa-aacc-ea04faf322cb.pdf.
    \30\ All statistics and charts included in this proposal with 
respect to the CME are sourced from https://www.cmegroup.com/trading/bitcoin-futures.html. In addition, as further discussed 
below, the Sponsor believes the CME represents a regulated market of 
significant size for purposes of addressing the Commission's 
concerns about potential manipulation of the Bitcoin market.
    \31\ The CFTC's annual report for Fiscal Year 2020 (which ended 
on September 30, 2020) noted that the CFTC ``continued to 
aggressively prosecute misconduct involving digital assets that fit 
within the CEA's definition of commodity'' and ``brought a record 
setting seven cases involving digital assets.'' See CFTC FY2020 
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download. 
Additionally, the CFTC filed on October 1, 2020, a civil enforcement 
action against the owner/operators of the BitMEX trading platform, 
which was one of the largest Bitcoin derivative exchanges. See CFTC 
Release No. 8270-20 (October1, 2020), available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
    \32\ See OCC News Release 2021-2 (January 4, 2021), available 
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html.
    \33\ See FinCEN Guidance FIN-2019-G001 (May 9, 2019) 
(Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies), available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
    \34\ See U.S. Department of the Treasury Press Release: ``The 
Financial Crimes Enforcement Network Proposes Rule Aimed at Closing 
Anti-Money Laundering Regulatory Gaps for Certain Convertible 
Virtual Currency and Digital Asset Transactions'' (December 18, 
2020), available at: https://home.treasury.gov/news/press-releases/sm1216.
    \35\ See U.S. Department of the Treasury Enforcement Release: 
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent 
Violations of Multiple Sanctions Programs Related to Digital 
Currency Transactions'' (December 30,2020), available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
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    In addition to the regulatory developments noted above, more 
traditional financial market participants appear to be embracing 
cryptocurrency: large insurance companies,\36\ investment banks,\37\ 
asset managers,\38\credit card companies,\39\university endowments,\40\ 
pension funds,\41\ and even historically Bitcoin skeptical fund 
managers \42\ are allocating to Bitcoin. The largest over-the-counter 
Bitcoin fund previously filed a Form 10 registration statement, which 
the Staff of the Commission reviewed and which took effect 
automatically, and is now a reporting company.\43\ Established 
companies like Tesla, Inc.,\44\ MicroStrategy Incorporated,\45\ and 
Square, Inc.,\46\ among others, have recently announced substantial 
investments in Bitcoin in amounts as large as $1.5 billion (Tesla) and 
$425 million (MicroStrategy).
---------------------------------------------------------------------------

    \36\ On December 10, 2020, Massachusetts Mutual Life Insurance 
Company (MassMutual) announced that it had purchased $100 million in 
Bitcoin for its general investment account. See MassMutual Press 
Release ``Institutional Bitcoin provider NYDIG announces minority 
stake purchase by MassMutual'' (December 10, 2020), available at: 
https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2020/12/institutional-bitcoin-provider-nydig-announces-minority-stake-purchase-by-massmutual.
    \37\ See, e.g., ``Morgan Stanley to Offer Rich Clients Access to 
Bitcoin Funds'' (March 17, 2021) available at: https://www.bloomberg.com/news/articles/2021-03-17/morgan-stanley-to-offer-rich-clients-access-to-bitcoin-funds.
    \38\ See, e.g., ``BlackRock's Rick Rieder says the world's 
largest asset manager has `started to dabble' in Bitcoin'' (February 
17, 2021), available at: https://www.cnbc.com/2021/02/17/blackrock-has-started-to-dabble-in-bitcoin-says-rick-rieder.html and 
``Guggenheim's Scott Minerd Says Bitcoin Should Be Worth $400,000'' 
(December 16, 2020), available at: https://www.bloomberg.com/news/articles/2020-12-16/guggenheim-s-scott-minerd-says-bitcoin-should-be-worth-400-000.
    \39\ See, e.g., ``Visa Moves to Allow Payment Settlements Using 
Cryptocurrency'' (March 29, 2021), available at: https://www.reuters.com/business/autos-transportation/exclusive-visa-moves-allow-payment-settlements-using-cryptocurrency-2021-03-29/.
    \40\ See, e.g., ``Harvard and Yale Endowments Among Those 
Reportedly Buying Crypto'' (January 25, 2021), available at: https://www.bloomberg.com/news/articles/2021-01-26/harvard-and-yale-endowments-among-those-reportedly-buying-crypto.
    \41\ See, e.g., ``Virginia Police Department Reveals Why its 
Pension Fund is Betting on Bitcoin'' (February 14, 2019), available 
at: https://finance.yahoo.com/news/virginia-police-department-reveals-why-194558505.html.
    \42\ See, e.g., ``Bridgewater: Our Thoughts on Bitcoin'' 
(January 28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones 
says he likes bitcoin even more now, rally still in the `first 
inning' '' (October 22, 2020), available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
    \43\ See Letter from Division of Corporation Finance, Office of 
Real Estate & Construction to Barry E. Silbert, Chief Executive 
Officer, Grayscale Bitcoin Trust (January 31, 2020), available at: 
https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
    \44\ 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.
    \45\ 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.
    \46\ 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.
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    The Sponsor maintains that despite these developments, access for 
U.S. retail investors to gain exposure to Bitcoin via a transparent and 
regulated

[[Page 68193]]

exchange-traded vehicle remains limited. As investors and advisors 
increasingly utilize Exchange-Traded Products (``ETPs'') to manage 
diversified portfolios (including equities, fixed income securities, 
commodities, and currencies) quickly, easily, relatively inexpensively, 
tax-efficiently, and without having to hold directly any of the 
underlying assets; options for Bitcoin exposure for U.S. investors 
remain limited to: (i) investing in over-the-counter Bitcoin funds 
(``OTC Bitcoin Funds'') that are subject to high premium/discount 
volatility (and high management fees) to the advantage of more 
sophisticated investors that are able to purchase shares at NAV 
directly with the issuing trust; (ii) investing in Bitcoin Futures ETFs 
that are subject to higher complexity and costs due to need for rolling 
the futures contracts; (iii) facing the technical risk, complexity, and 
generally high fees associated with buying and storing Bitcoin 
directly; or (iv) purchasing shares of operating companies that they 
believe will provide proxy exposure to Bitcoin with limited disclosure 
about the associated risks. Meanwhile, investors in many other 
countries, including Canada, are able to use more traditional exchange 
listed and traded products to gain exposure to Bitcoin.\47\
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    \47\ Securities regulators in a number of other countries have 
either approved or otherwise allowed the listing and trading of 
Bitcoin ETPs. Specifically, these funds (with their respective 
approximate AUMs as of April 14, 2021) include the Purpose Bitcoin 
ETF ($993,000,000), VanEck Vectors Bitcoin ETN ($209,000,000), 
WisdomTree Bitcoin ETP ($407,000,000), Bitcoin Tracker One 
($1,380,000,000), BTCetc Bitcoin ETP ($1,410,000,000), 21Shares 
Bitcoin ETP ($362,000,000), 21Shares Bitcoin Suisse ETP 
($30,000,000), CoinShares Physical Bitcoin ETP ($396,000,000).
---------------------------------------------------------------------------

    For example, the Purpose Bitcoin ETF, a retail physical Bitcoin ETP 
launched in Canada, reportedly reached $421.8 million in assets under 
management (``AUM'') in two days, and has achieved $993 million in 
assets as of April 14, 2021, demonstrating the demand for a North 
American market listed Bitcoin ETP. The Sponsor believes that the 
demand for the Purpose Bitcoin ETF is driven primarily by investors' 
desire to have a regulated and accessible means of exposure to. The 
Purpose Bitcoin ETF also offers a class of units that is U.S. dollar 
Bitcoin denominated, which could appeal to U.S. investors. Without an 
approved Bitcoin ETP in the U.S. as a viable alternative, the Sponsor 
believes U.S. investors will seek to purchase these shares in order to 
get access to Bitcoin exposure, leaving them without the protections of 
U.S. securities laws. Given the separate regulatory regime and the 
potential difficulties associated with any international litigation, 
such an arrangement would create more risk exposure for U.S. investors 
than they would otherwise have with a U.S. exchange listed ETP. With 
the addition of more Bitcoin ETPs in non-U.S. jurisdictions expected to 
grow, the Sponsor anticipates that such risks will only continue to 
grow.
    In addition, several funds registered under the Investment Company 
Act of 1940 (the ``1940 Act'') have effective registration statements 
that contemplate Bitcoin exposure through a variety of means, including 
through investments in Bitcoin futures contracts \48\ and through OTC 
Bitcoin Funds.\49\ As of the date of this filing, it is anticipated 
that other 1940 Act funds will soon begin to pursue Bitcoin through 
other means, including through options on Bitcoin futures contracts and 
investments in privately offered pooled investment vehicles that invest 
in Bitcoin.\50\ In previous statements, the Staff of the Commission has 
acknowledged how such funds can satisfy their concerns regarding 
custody, valuation, and manipulation.\51\ The funds that have already 
invested in Bitcoin instruments have no reported issues regarding 
custody, valuation, or manipulation of the instruments held by these 
funds. While these funds do offer investors some means of exposure to 
Bitcoin, the Sponsor believes the current offerings fall short of 
giving investors an accessible, regulated product that provides 
concentrated exposure to Bitcoin and Bitcoin prices.
---------------------------------------------------------------------------

    \48\ See, e.g., Stone Ridge Trust VI (File No. 333-234055); 
BlackRock Global Allocation Fund, Inc. (File No. 33-22462); and 
BlackRock Funds V (File No. 333-224371).
    \49\ See, e.g., Amplify Transformational Data Sharing ETF (File 
No. 333-207937); and ARK Innovation ETF (File No. 333-191019).
    \50\ See Stone Ridge Trust, Post-Effective Amendment No. 74 to 
Registration Statement on Form N-1A (File No. 333-184477), available 
at: https://www.sec.gov/Archives/edgar/data/1559992/000119312521072856/d129263d485apos.htm.
    \51\ See Dalia Blass, ``Keynote Address--2019 ICI Securities Law 
Developments Conference'' (December 3, 2019), available at: https://www.sec.gov/news/speech/blass-keynote-address-2019-ici-securities-law-developments-conference.
---------------------------------------------------------------------------

OTC Bitcoin Funds and Investor Protection
    The Sponsor notes that U.S. investor exposure to Bitcoin through 
OTC Bitcoin Funds has grown into the tens of billions of dollars. With 
that growth, so too has grown the potential risk to U.S. investors. As 
described below, premium and discount volatility, high fees, 
insufficient disclosures, and technical hurdles are exposing U.S. 
investors to risks that could potentially be eliminated through access 
to a Bitcoin futures-based ETP. Investor protection concerns remain and 
are growing related to OTC Bitcoin Funds. The Sponsor understands the 
Commission's previous focus in prior disapproval orders on potential 
manipulation of a Bitcoin ETP holding actual Bitcoin, but believes that 
such concerns have been sufficiently mitigated by the use of futures 
contracts, futures-based pricing for Spot Bitcoin, and EFP transactions 
for Spot Bitcoin in the proposed ETP. Accordingly, the Sponsor believes 
that the Fund represents an opportunity for U.S. investors to gain 
price exposure to Bitcoin futures contracts and Spot Bitcoin in a 
regulated and transparent exchange-traded vehicle that limits risks by: 
(i) reducing premium and discount volatility; (ii) reducing management 
fees through meaningful competition; (iii) reducing risks associated 
with investing in operating companies that are imperfect proxies for 
Bitcoin exposure; and (iv) avoiding regulatory concerns regarding 
valuation posed by ETFs and ETPs that invest directly in Bitcoin rather 
than in Bitcoin futures contracts or Bitcoin via EFP.
OTC Bitcoin Funds and Premium/Discount Volatility
    According to the Sponsor, OTC Bitcoin Funds are generally designed 
to provide exposure to Bitcoin in a manner similar to the Shares. 
However, unlike the Shares, OTC Bitcoin Funds are unable to freely 
offer creation and redemption in a way that incentivizes market 
participants to keep their shares trading in line with their NAV \52\ 
and, as a result, shares of OTC Bitcoin Funds frequently trade at a 
price that is out of line with the value of their assets held. 
Historically, OTC Bitcoin Funds have traded at a significant premium to 
NAV.\53\
---------------------------------------------------------------------------

    \52\ Because OTC Bitcoin Funds are not listed on an exchange, 
they are also not subject to the same transparency and regulatory 
oversight by a listing exchange as the Shares would be. In the case 
of the Fund, the common membership of the Exchange and the CME in 
the Intermarket Surveillance Group (``ISG'') results in increased 
investor protections as compared to OTC Bitcoin Funds.
    \53\ The inability to trade in line with NAV may at some point 
result in OTC Bitcoin Funds trading at a discount to their NAV, 
which has occurred more recently with respect to one prominent OTC 
Bitcoin Fund. While that has not historically been the case, and it 
is not clear whether such discounts will continue, such a prolonged, 
significant discount scenario would give rise to nearly identical 
potential issues related to trading at a premium.
---------------------------------------------------------------------------

    Trading at a premium or a discount is not unique to OTC Bitcoin 
Funds and is not in itself problematic, but the size of such premiums/
discounts and volatility

[[Page 68194]]

thereof highlight the key differences in operations and market 
structure of OTC Bitcoin Funds as compared to ETPs.
    Combined with the significant increase in AUM for OTC Bitcoin Funds 
over the past year, the size and volatility of premiums and discounts 
for OTC Bitcoin Funds have given rise to significant and quantifiable 
investor protection issues, as further described below. In fact, the 
largest OTC Bitcoin Fund has grown to $16.0 billion in AUM as of 
September 6, 2023.\54\ In the past it has traded at a premium of 
between roughly five and forty percent, though it has seen premiums at 
times above one hundred percent.\55\ Recently, however, it has traded 
at a discount, reaching almost 50% discount a few times and trading at 
an average 40% discount to NAV from October 2022 to June 2023. As of 
September 6, 2023, the discount to NAV has narrowed and was 
approximately 19.5%, representing around $3.1 billion less in market 
value than the Bitcoin actually held by the fund. If premium/discount 
numbers move back to the middle of its historical range to a 20% 
premium (which historically could occur), it would represent a swing of 
approximately $6.4 billion in value unrelated to the value of Bitcoin 
held by the fund and if the premium returns to the upper end of its 
typical range, that number increases to $18.9 billion. The Sponsor 
notes that, as these numbers are only associated with a single OTC 
Bitcoin Fund, the potential dollars at risk for the whole industry is 
even higher.
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    \54\ As compared to an AUM of approximately $2.6 billion on 
February 26, 2020. While the price of one Bitcoin has increased 
approximately 193% in the intervening period, the market price of a 
share of the fund has increased by approximately 80%, indicating 
that the price of a share of the fund is attributable to more than 
just price appreciation in Bitcoin.
    \55\ See ``Traders Piling Into Overvalued Crypto Funds Risk a 
Painful Exit'' (February 4, 2021), available at: https://www.bloomberg.com/news/articles/2021-02-04/bitcoin-one-big-risk-when-investing-in-crypto-funds.
---------------------------------------------------------------------------

    The Sponsor believes that the risks associated with volatile 
premiums/discounts for OTC Bitcoin Funds raise significant investor 
protection issues in several ways. First, investors may be buying 
shares of a fund for a price that is not reflective of the per share 
value of the fund's underlying assets. Even operating within the normal 
premium range, it is possible for an investor to buy shares of an OTC 
Bitcoin Fund only to have those shares quickly lose 10% or more in 
dollar value without any movement of the price of Bitcoin. That is to 
say--the price of Bitcoin could have stayed exactly the same from 
market close on one day to market open the next, yet the value of the 
shares held by the investor decreased only because of the fluctuation 
of the premium/discount. As more investment vehicles, including mutual 
funds and ETFs, seek to gain exposure to Bitcoin, the easiest option 
for a buy and hold strategy is often an OTC Bitcoin Fund, meaning that 
even investors that do not directly buy OTC Bitcoin Funds can be 
disadvantaged by extreme premiums (or discounts) and premium 
volatility.
    The second issue is related to the first and explains how the 
premium in OTC Bitcoin Funds essentially creates a transfer of value 
from retail investors to more sophisticated investors. Generally 
speaking, only accredited investors are able to purchase shares from 
the issuing fund, which means that they are able to purchase shares 
directly with the fund at NAV (in exchange for either cash or Bitcoin) 
without having to pay the premium or sell into the discount. While 
there are often minimum holding periods for shares required by law, an 
investor that is allowed to purchase directly from the fund is able to 
hedge their Bitcoin exposure as needed to satisfy the holding 
requirements and collect on the premium or discount opportunity.
    As noted above, the existence of a premium or discount and the 
premium/discount collection opportunity is not unique to OTC Bitcoin 
Funds and does not in itself warrant the approval of an exchange traded 
product.\56\ What is unique is that such significant and persistent 
premiums and discounts can exist in a product with over $16 billion in 
assets under management,\57\ that billions of retail investor dollars 
are constantly under threat of premium/discount volatility,\58\ and 
that premium/discount volatility is generally captured by more 
sophisticated investors on a riskless basis. While the Sponsor 
appreciates the Commission's focus on potential manipulation of a 
Bitcoin ETP in prior disapproval orders and believes those concerns are 
adequately addressed in this filing, the Sponsor believes that the 
Commission should also consider the direct, quantifiable investor 
protection issue in determining whether to approve this proposal, 
particularly when the Trust, as a Bitcoin ETP, is designed to reduce 
the likelihood of significant and prolonged premiums and discounts with 
its open-ended nature as well as the ability of market participants 
(i.e., market makers and authorized participants) to create and redeem 
on a daily basis.
---------------------------------------------------------------------------

    \56\ For example, similar premiums/discounts and premium/
discount volatility exist for other non-Bitcoin cryptocurrency 
related over-the-counter funds, but the size and investor interest 
in those funds does not give rise to the same investor protection 
concerns that exist for OTC Bitcoin Funds.
    \57\ At $16 billion in AUM, the largest OTC Bitcoin Fund would 
be among the top 90 largest out of roughly 2,400 U.S. listed ETPs. 
Source: https://etfdb.com/compare/market-cap/.
    \58\ Over the 12 months, there were 4 occurrences where the 
discount changed overnight by 500 percentage points or more in a 
single day, either narrowing or widening the discount. In two 
incidents, the premium dropped from 28.28% to 12.29% from the close 
on 3/19/20 to the close on 3/20/20 and from 38.40% to 21.05% from 
the close on 5/13/19 to the close on 5/14/19. Similarly, over the 
period of 12/21/20 to 1/21/20, the premium went from 40.18% to 
2.79%. While the price of Bitcoin appreciated significantly during 
this period and NAV per share increased by 41.25%, the price per 
share increased by only 3.58%.
---------------------------------------------------------------------------

The Bitcoin Futures Market Has Developed Alongside the Bitcoin Spot 
Market Into a Strong and Viable Marketplace That Stands on Its Own
    As noted above, CME began offering trading in BTC Contracts in 
2017, and in MBT Contracts in 2021. Each of the contract's final cash 
settlement is based on the CME CF Bitcoin Reference Rate (the ``CME CF 
BRR'').\59\ The contracts trade and settle like other cash-settled 
commodity futures contracts. According to the Sponsor, trading in CME 
Bitcoin futures contracts has increased significantly, in particular 
with respect to BTC Contracts. Nearly every measurable metric related 
to BTC Contracts has trended consistently up since launch and/or 
accelerated upward in the past year, as the market recovered some of 
the ground lost since falling from the all-time high activity levels of 
end 2021. This general upward trend in trading volume and open interest 
is captured in the following chart.
---------------------------------------------------------------------------

    \59\ According to the CME, the CME CF BRR 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.
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BILLING CODE 8011-01-P

[[Page 68195]]

[GRAPHIC] [TIFF OMITTED] TN03OC23.014

BILLING CODE 8011-01-C
    Similarly, the number of large open interest holders \60\ has 
continued to increase even as the price of Bitcoin has risen, as have 
the number of unique accounts trading Bitcoin Futures.
---------------------------------------------------------------------------

    \60\ A large open interest holder in BTC Contracts is an entity 
that holds at least 25 contracts, which is the equivalent of 125 
Bitcoin. At a price of approximately $26,025 per Bitcoin on 9/7/23, 
more than 110 firms had outstanding positions of greater than $3.25 
million in BTC Contracts. Source: https://www.theblock.co/data/crypto-markets/cme-cots/large-open-interest-holders-of-cme-bitcoin-futures.
---------------------------------------------------------------------------

    As it pertains specifically to the Bitcoin Futures Contracts in 
which the Fund will invest, the statistics are equally as profound. The 
following table sets forth the approximate daily notional average 
volume for the Bitcoin Futures Contracts, followed by the daily average 
volume for all of the Bitcoin Futures Contracts, the first to expire 
and the second to expire. With a Daily Notional Average Volume of $1.4 
billion in 2023, that is almost 6 times the 2019 level and almost 3 
times the 2020 ones. Despite the bear market, the trading volume in 
2023 has been resilient and slightly increasing compared to 2022.

----------------------------------------------------------------------------------------------------------------
                                              Daily notional    Average daily
                                              average volume     volume for       First-to-    Second-to- expire
                                               for bitcoin         bitcoin     expire bitcoin    bitcoin futures
                                            futures contracts      futures         futures          contract
                                              (in million $)      contracts       contract
----------------------------------------------------------------------------------------------------------------
2019......................................                242           6,365           5,400                700
2020......................................                523           8,782           7,100              1,300
2021......................................              2,379          10,035           7,300              2,100
2022......................................              1,426          10,735           8,200              2,100
2023......................................              1,413          10,775           8,400              1,900
----------------------------------------------------------------------------------------------------------------

    Note: The 2023 data is for the period ending on August 31, 2023. 
Source: CME; Bloomberg.
    The Sponsor notes that individual users, institutional investors 
and investment funds that want to provide exposure to Bitcoin by 
investing directly in Bitcoin, and therefore must transact in Bitcoin, 
must use the Bitcoin Network to download specialized software referred 
to as a ``Bitcoin wallet.'' This wallet may be used to send and receive 
Bitcoin through users' unique ``Bitcoin addresses.'' The amount of 
Bitcoin associated with each Bitcoin address, as well as each Bitcoin 
transaction to or from such address, is captured on the Blockchain. 
Bitcoin transactions are secured by cryptography known as public-
private key cryptography, represented by the Bitcoin addresses and 
digital signature in a transaction's data file. Each Bitcoin Network 
address, or wallet, is associated with a unique ``public key'' and 
``private key'' pair, both of which are lengthy alphanumeric codes, 
derived together

[[Page 68196]]

and possessing a unique relationship. The private key is a secret and 
must be kept in accordance with appropriate controls and procedures to 
ensure 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.
    According to the Registration Statement, institutional purchasers 
of Bitcoin, including other Bitcoin funds that provide exposure to 
Bitcoin by investing directly in Bitcoin, generally maintain their 
Bitcoin account with a Bitcoin custodian. Bitcoin custodians are 
financial institutions that have implemented a series of specialized 
security precautions, including holding Bitcoin in ``cold storage,'' to 
try to ensure the safety of an account holder's Bitcoin. These Bitcoin 
custodians must carefully consider the design of the physical, 
operational, and cryptographic systems for secure storage of private 
keys in an effort to lower the risk of loss or theft, and many use a 
multi-factor security system under which actions by multiple 
individuals working together are required to access the private keys 
necessary to transfer such digital assets and ensure exclusive 
ownership. Considering that the Fund will be able to hold spot bitcoin 
acquired via EFP transactions made on the CME, the Sponsor will engage 
a third-party custodian to act as the bitcoin custodian for the Fund to 
maintain custody of the Fund's bitcoin assets.
The Structure and Operation of the Trust Satisfies Commission 
Requirements for Bitcoin-Based Exchange Traded Products
    The Sponsor believes that the Fund's holding a combination of 
Bitcoin Futures Contracts, Spot Bitcoin, and cash could significantly 
mitigate the risk of market manipulation while still providing the 
market with a regulated product that tracks the actual price of 
Bitcoin, creating a secure way for U.S. investors to gain exposure to 
spot Bitcoin without having to rely on unregulated products, offshore 
regulated products, or indirect strategies such as investing in 
publicly traded companies that hold Bitcoin.
    In determining whether to approve listing and trading of new 
Exchange-Traded Products (``ETPs''), the Commission conducts a thorough 
analysis to ensure the proposal is consistent with Section 6(b)(5) of 
the Act. Section 6(b)(5) of the Act mandates that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices, and to protect investors and the 
public interest. With respect to ETPs, the Commission often considers 
how the listing exchange would access necessary information to detect 
and deter market manipulation, illegal trading, and other abuses, which 
listing exchanges may accomplish by entering into a comprehensive 
surveillance-sharing agreement with other entities, such as the markets 
trading the ETP's underlying assets. Historically, for commodity-trust 
ETPs, there has always been at least one regulated market of 
significant size for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper. Then, the listing 
exchange would enter into surveillance-sharing agreements with, or hold 
ISG membership in common with, that regulated market.\61\
---------------------------------------------------------------------------

    \61\ See 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 at 37592-94 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (the 
``Winklevoss 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 (Oct. 9, 
2019), 84 FR 55382 at 55383, 55410 (Oct. 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 at 12609 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Order'').
---------------------------------------------------------------------------

    In the context of Bitcoin, the CME Bitcoin Futures Market (the 
``CME Market'') is currently the only regulated market in the U.S.
    The Commission has previously interpreted the terms ``significant 
market'' and ``market of significant size'' to include a market (or 
group of markets) where:

    (1) 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, such that a surveillance-sharing 
agreement would assist the ETP listing market in detecting and 
deterring misconduct; and
    (2) It is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\62\
---------------------------------------------------------------------------

    \62\ See, e.g., Winklevoss Order, 83 FR at 37594. The Commission 
further noted that ``[t]here could be other types of ``significant 
markets'' and ``markets of significant size,'' but this definition 
is an example that will provide guidance to market participants.'' 
Id.

    With respect to the first prong of the Commission's interpretation, 
the Commission has previously explained that the lead/lag relationship 
between the Bitcoin futures market and the spot market is central to 
understanding this first prong. With respect to the second prong, the 
Commission's prior analysis has focused on the potential size and 
liquidity of the ETP compared to the size and liquidity of the market.
    The Commission recognized in the Approval Order that ``the CME 
[Market] is a `significant market' related to CME bitcoin futures 
contracts, and thus that the Exchange has entered into the requisite 
surveillance-sharing agreement with respect to its Bitcoin Futures 
Contracts holdings.\63\ However, there is still a lack of consensus on 
whether the CME Market is of ``significant size'' in relation to the 
spot Bitcoin market based on the test historically applied by the 
Commission.
---------------------------------------------------------------------------

    \63\ See Approval Order, 87 FR at 21678 and further discussion 
at 21678-81.
---------------------------------------------------------------------------

Interrelationship Between the CME and the Fund
    The Commission has previously stated that ``the interpretation of 
the term market of significant size depends on the interrelationship 
between the market with which the listing exchange has a surveillance-
sharing agreement and the proposed ETP.'' \64\ The Sponsor intends to 
adopt an innovative approach to mitigate the risks of fraud and 
manipulation that are unique to the Fund. The core principle of this 
approach would be to structure the operation of the Fund such that the 
regulated market of significant size in relation to the Fund is the CME 
Market because it is the same market on which the Fund trades its non-
cash assets. Therefore, the Sponsor's strategy aims to establish a 
comprehensive interrelationship between the CME Market and the Fund to 
unequivocally classify the CME Market as the market of significant size 
in relation to the ETP. The Sponsor notes that, although the Fund may, 
as proposed, hold physical Bitcoin, it does not rely on any information 
or services from unregulated Bitcoin spot exchanges (such as Binance 
and others). Therefore, no spot Bitcoin exchange could be

[[Page 68197]]

considered a ``market of relevant size'' in relation to the Fund.
---------------------------------------------------------------------------

    \64\ See Securities Exchange Act Release No. 95180 (June 29, 
2022), 87 FR 40299 at 40312 (July 6, 2022) (SR-NYSEArca-2021-90) 
(Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)).
---------------------------------------------------------------------------

    The Sponsor has designed the Fund to have five novel features that 
underscore its significant interrelationship with the CME:

    1. Investment strategy: The Fund will hold a mix of Spot 
Bitcoin, Bitcoin Futures Contracts, and cash and cash equivalents, 
subject to certain investment restrictions (as further discussed 
below).
    2. Futures-based pricing for Spot Bitcoin: The price 
determination for Spot Bitcoin holdings in the NAV calculation will 
be derived from the CME Market's Bitcoin futures curve. As a result, 
the price of Spot Bitcoin holdings will depend solely on Bitcoin 
futures settlement prices on the CME Market and will not depend 
directly on price information from unregulated spot Bitcoin markets 
(as further discussed below).
    3. Investment restrictions on Spot Bitcoin: The Fund will be 
subject to dynamic investment restrictions that are designed to 
mitigate the risk that Shares of the Fund could be manipulated by 
manipulating the Bitcoin spot market and ensuring that the CME 
Market is the only ``market of significant size'' with respect to 
the Fund.
    4. Physical Bitcoin purchases on the CME Market: The Fund will 
use the CME Market's Exchange for Physical (``EFP'') \65\ 
transactions to acquire and dispose of Spot Bitcoin, instead of 
transactions on unregulated spot exchanges. Accordingly, the only 
non-cash assets held by the Fund (Bitcoin Futures Contracts and 
Bitcoin via EFP) would be traded on the CME Market, such that the 
exchanges' ability to share information pursuant to their common ISG 
membership could assist in detecting and deterring fraudulent or 
manipulative misconduct related to those assets.
---------------------------------------------------------------------------

    \65\ See https://www.cmegroup.com/trading/equity-index/exchange-for-physical-efp-transactions.html.
---------------------------------------------------------------------------

    5. Creations and redemptions: The Fund will use cash creations 
and redemptions \66\ to deter intraday Share price manipulation that 
could originate from in kind creation or redemption from physical 
spot Bitcoin sourced in unregulated spot markets. Investment in Spot 
Bitcoin thus would not be directly related to creation/redemptions, 
but instead on target portfolio exposure, as allowed by the 
investment restrictions on spot Bitcoin. Trading for Spot Bitcoin 
could thus be accomplished in smaller sizes and at unpredictable 
times, reducing the risk of manipulation in the creation or 
redemption processes.
---------------------------------------------------------------------------

    \66\ In a cash creation/redemption format, the Authorized 
Participant delivers cash to the fund instead of Spot Bitcoin.

    The Sponsor believes that these features of the Fund are designed 
to provide a robust framework for mitigating the risks of market 
manipulation, thereby protecting investors and maintaining the 
integrity of the market, and further believes that, given these 
features of the Fund, the CME Market would be considered the regulated 
market of significant size in relation to the Fund.
    Additionally, as further discussed below, the Sponsor believes that 
the Fund investment strategy is designed such that it would be highly 
unlikely that a person attempting to manipulate the Fund could be 
successful by trading on unregulated spot and derivatives markets. 
Thus, no market other than CME could be considered as of significant 
size in relation to the Fund.
    The Sponsor further believes that the novel approach proposed is in 
line with the first prong of the Commission's interpretation of the 
definition of ``regulated market of significant size'' as to the CME 
Market and that there is a reasonable likelihood that a person 
attempting to manipulate the Fund would also have to trade on the CME 
Market to successfully manipulate the ETP (and, accordingly, the 
exchange's common ISG membership would aid the Exchange in detecting 
and deterring potential misconduct).
    According to the Sponsor, the Sponsor's approach is designed in 
such a way that any attempt to manipulate the Fund would require 
trading on the CME Market, for the following reasons:

    1. Futures-based pricing for Spot Bitcoin: Because the price 
determination for Spot Bitcoin holdings in the Fund would be derived 
from the CME Market futures curve, any attempt to manipulate the 
price of the Fund would require influencing the futures curve on the 
CME Market because the spot price (which could be a target for 
manipulation) does not directly influence the price of the Fund. 
There is thus a direct and unequivocal lead-lag relationship in 
which CME Market prices lead both the spot price used by the Fund to 
determine its NAV and the Fund's market price.
    2. Investment restrictions on Spot Bitcoin: The dynamic 
investment restrictions in place for the Fund (as discussed in the 
section below entitled ``Investment Restrictions on Spot Bitcoin'') 
ensure that any significant trading activity aimed at manipulating 
the Fund would likely spill over into the CME Market because the 
investment restrictions are designed to prevent the Fund from 
becoming so large in relation to the unregulated spot market that 
the cost-benefit tradeoff is favorable for the potential manipulator 
to execute without influencing the futures market.
    3. Spot Bitcoin operations via EFP on the CME Market: Because 
the Fund's Spot Bitcoin operations would take place via CME Market 
EFP transactions, any attempt to manipulate the Fund's transactions 
in Spot Bitcoin holdings would need to occur on the CME Market. 
Accordingly, any potential manipulation of the Fund is closely tied 
to the CME Market.
    4. Creations and redemptions: The Fund's use of cash creations 
and redemptions also reduces the potential for manipulation through 
the creation and redemption processes. Any significant creation or 
redemption activity aimed at manipulating the Fund would likely 
influence the futures market, given that the investment in spot is 
based on target portfolio exposure and not directly related to 
creations or redemptions.

    Given these factors, the Sponsor believes that the Exchange and CME 
Market's common membership in the ISG would be an effective tool in 
assisting the Exchange in detecting and deterring potential misconduct. 
The agreement would provide the Exchange with access to necessary 
trading data from the CME Market, which is intrinsically linked to the 
Fund, allowing for comprehensive oversight and the ability to quickly 
identify and investigate any suspicious trading activity.
    The Approval Order stated that the CME ``comprehensively surveils 
futures market conditions and price movements on a real-time and 
ongoing basis in order to detect and prevent price distortions, 
including price distortions caused by manipulative efforts'' and that 
the ``CME's surveillance can reasonably be relied upon to capture the 
effects on the CME bitcoin futures market caused by a person attempting 
to manipulate the [Fund] by manipulating the price of CME Bitcoin 
Futures Contracts, whether that attempt is made by directly trading on 
the CME bitcoin futures market or indirectly by trading outside of the 
CME bitcoin futures market.'' \67\ The Commission further noted in the 
Approval Order that, as a result, ``when the CME shares its 
surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct related 
to the non-cash assets held by the [Fund].'' \68\ The Sponsor further 
believes that, consistent with the Approval Order, CME surveillance can 
be relied upon to capture any possible manipulation of the CME Bitcoin 
futures markets, even when the attempt is made indirectly by trading 
outside the CME in unregulated markets.
---------------------------------------------------------------------------

    \67\ See Approval Order, 87 FR at 21679.
    \68\ Id.
---------------------------------------------------------------------------

    The Sponsor also believes that it is unlikely that trading in the 
Fund would be the predominant influence on prices on the CME Market. 
The addition of Spot Bitcoin to the Fund's holdings, using EFP 
transactions on the CME Market, does not significantly alter the 
influence of the Fund's trading on the CME Market, for the following 
reasons:

    1. The Fund's limited influence over the market: As the 
Commission noted in the

[[Page 68198]]

Approval Order,\69\ the Commission observed no disruption to the CME 
or evidence that the Fund exerted a dominant influence on CME 
Bitcoin futures prices. That being the case, the Sponsor believes 
that it is very unlikely that the Fund's trading, even with the 
addition of Spot Bitcoin to its holdings, would become the 
predominant influence on the futures market.
---------------------------------------------------------------------------

    \69\ See id. at 21681.
---------------------------------------------------------------------------

    2. Spot Bitcoin would be purchased using market-neutral EFP 
transactions: The Spot Bitcoin in the Fund's portfolio would be 
converted from futures positions using EFP transactions on the CME 
Market. The Fund's Spot Bitcoin holdings would thus be directly 
linked to the futures market and would not introduce a new, 
independent variable that could significantly influence the futures 
market. Indeed, because both sides of the trade track the same 
benchmark, an EFP is market-neutral and, as such, the pricing of an 
EFP is quoted in terms of the basis between the price of the futures 
contract and the level of the underlying index.
    3. Investment restrictions on Spot Bitcoin and futures-based 
pricing: The dynamic investment restrictions and futures-based 
pricing for Spot Bitcoin would ensure that the Fund's Spot Bitcoin 
holdings remain at a level where they are unlikely to significantly 
impact the futures market and that the futures market continues to 
influence the price of the Fund's Spot Bitcoin holdings (and not the 
other way around).

    The Sponsor therefore believes that the proposed addition of Spot 
Bitcoin to the Fund's holdings would not significantly alter the 
influence of the Fund's trading on the CME Market and that the proposed 
design of the Fund's investment strategy ensures that its potential 
impact on the CME Market is the same or smaller than the previous 
investment strategy (as represented in the Approval Order).
    The Sponsor notes that, as of April 2021 and as noted in the Fund's 
original proposal to list and trade its Shares on the Exchange, the CME 
Market was already showing a significant increase in size, as per the 
table below:\70\
---------------------------------------------------------------------------

    \70\ See Securities Exchange Act Release No. 92573 (August 5, 
2021), 86 FR 44062 at 44073 (August 11, 2021) (SR-NYSEArca-2021-53) 
(Notice of Filing of a Proposed Rule Change To List and Trade Shares 
of Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E).

               Chicago Mercantile Exchange Bitcoin Futures
------------------------------------------------------------------------
                                           February 26,    April 7, 2021
                                          2020 (million)     (million)
------------------------------------------------------------------------
Trading Volume..........................            $433          $4,321
Open Interest...........................             238           2,582
------------------------------------------------------------------------

    The Sponsor notes that growth of the CME Market at that time 
coincided with similar growth in the Bitcoin spot market. Moreover, the 
market for Bitcoin futures was and still is rapidly approaching the 
size of markets for other commodity interests, including interests in 
metals, agricultural, and petroleum products.
    Accordingly, as the CME Market continues to develop and more 
closely resemble other commodity futures markets, the Sponsor believes 
that it is reasonable to expect that the relationship between the 
Bitcoin futures market and Bitcoin spot market will behave similarly to 
other future/spot market relationships, where the spot market may have 
no relationship to the futures market (although the current proposal 
does not depend on such similarity).
    In addition, in the time since the Approval Order was issued, there 
has been significant growth in Bitcoin futures in terms of trading 
volumes, as reflected in the table below:

               Chicago Mercantile Exchange Bitcoin Futures
------------------------------------------------------------------------
                                           April 6, 2022   June 30, 2023
                                             (million)       (million)
------------------------------------------------------------------------
Trading Volume..........................          $1,692          $3,473
Open Interest...........................           2,529           2,800
------------------------------------------------------------------------

    The Sponsor also notes that in the same period during which CME 
Market open interest remained at roughly at the same level, trading 
volume and open interest of unregulated Bitcoin futures markets had a 
significant drawdown: \71\
---------------------------------------------------------------------------

    \71\ Data in this table is sourced from: https://www.theblock.co/data/crypto-markets/futures. Trading volume data for 
Bitcoin futures in unregulated markets was only available on a 
monthly frequency. Therefore, the trading volume figures displayed 
in the table are approximations derived from the daily average 
trading volumes reported for their respective months.

                                           Unregulated Futures Market
----------------------------------------------------------------------------------------------------------------
                                                                   April 7, 2021   April 6, 2022   June 30, 2023
                                                                     (million)       (million)       (million)
----------------------------------------------------------------------------------------------------------------
Trading Volume..................................................         $68,333         $37,333         $29,693
Open Interest...................................................          20,420          13,980          11,630
----------------------------------------------------------------------------------------------------------------

    Furthermore, the Sponsor notes that in the same period the trading 
volume of spot Bitcoin also fell significantly:

                                                  Spot Bitcoin
----------------------------------------------------------------------------------------------------------------
                                                                April 7, 2021    April 6, 2022     June 1, 2023
                                                                  (million)        (million)        (million)
----------------------------------------------------------------------------------------------------------------
Trading Volume...............................................        $698,000         $297,000         $116,000
----------------------------------------------------------------------------------------------------------------

    The Sponsor believes that the data above suggests an increase in 
market appetite for regulated products (e.g., CME Market Bitcoin 
futures) vis-a-vis a significant decrease in interest for unregulated 
products (e.g., unregulated futures and spot Bitcoin).
    The Sponsor further believes that an analysis of the data presented 
above indicates that the CME Market managed to maintain its open 
interest level despite the price volatility that Bitcoin experienced in 
2022, demonstrating its resilience and that it is sufficiently 
developed such that it is unlikely that trading in the Fund would be 
the predominant influence on its prices.
    The Sponsor further notes that the Commission stated in the 
Approval Order ``that the CME bitcoin futures market has sufficiently 
developed to support ETPs seeking exposure to bitcoin by holding CME 
Bitcoin Futures

[[Page 68199]]

Contracts.'' \72\ The Sponsor believes that the CME Market is also 
sufficiently developed to support ETPs that seek exposure to Bitcoin by 
holding a mix of CME Market Bitcoin Futures Contracts and physical 
Bitcoin through the use of CME Market EFP transactions, because the CME 
Market is the only market on which the Fund's only proposed non-cash 
assets would trade. Thus, the CME Market remains the ``significant 
market'' in relation to the Fund, as proposed.
---------------------------------------------------------------------------

    \72\ See Approval Order at 21681.
---------------------------------------------------------------------------

    Moreover, as detailed above, the Sponsor's proposed investment 
strategy ensures that no unregulated spot exchange could be considered 
a ``market of relevant size'' in relation to the Fund, given that the 
Fund does not rely on any information or services coming from 
unregulated markets. All of the Fund's operations, including the 
purchase and sale of spot Bitcoin and its NAV determination, are 
conducted through the CME Market. Thus, all transactions are registered 
and monitored on a regulated exchange, providing an additional layer of 
security and transparency. Because any attempt to manipulate the Fund 
would require significant trading on the CME Market, and not on any 
unregulated spot Bitcoin exchange, there is significantly reduced 
potential for manipulation and fraud, further protecting investors and 
maintaining the integrity of the market.
Futures-Based Spot Price (``FBSP'')
    The value of Spot Bitcoin held by the Fund would be determined by 
the Sponsor and by Hashdex Asset Management Ltd. (the ``Digital Asset 
Adviser'') in good faith based on a methodology that is entirely 
derived from the settlement prices of Bitcoin Futures Contracts on the 
CME Market and that considers all available facts and all available 
information on the valuation date.
    The method involves a calculation that is sensitive to both the 
length of time (the ``tenor'') until each Bitcoin Futures Contract is 
due for settlement and the final settlement price for each contract. 
The calculation takes into account each contract's tenor and the tenor 
squared. This approach is designed to give more importance to contracts 
that are due for settlement in the near term, considering that the 
prices of these near-term contracts are more reliable indicators of the 
current spot price of Bitcoin and are also more heavily traded. The 
calculation produces a set of weighting factors, with each factor 
indicating the contribution of the corresponding Bitcoin Futures 
Contract to the estimated current spot price of Bitcoin. The estimated 
spot price is the component of the result corresponding to a tenor of 
zero days. The Sponsor and Digital Asset Advisor do not use data from 
Bitcoin exchanges or directly from spot Bitcoin trading activity in 
determining the value of Spot Bitcoin held by the Fund.
    As an example, the table below demonstrates how the weights of each 
hypothetical Bitcoin Futures Contract change over time as the first 
contract gets closer to maturity.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN03OC23.015

    The Sponsor believes that the accuracy of the proposed pricing 
methodology can be measured by comparing its pricing results to the 
real time version of Bitcoin price benchmarks such as CME CF BRR and 
NQBTCS. FBSP is derived from futures settlement prices, which are 
usually VWAPs from all contracts traded on Globex between 14:59:00 and 
15:00:00 Central Time. Accordingly, for purposes of developing a useful 
proxy, the Sponsor's analysis uses the arithmetic average of the 
Benchmark closing prices at 14:59:00 and 15:00:00 CT, which is not 
sensitive to the fluctuations that occur within this minute. By design, 
this difference in the price metric introduces an artificial distortion 
in the comparison, resulting in figures that are less adherent than in 
reality. Therefore, the figures set forth below represent a 
conservative estimation of the true adherence between FBSP and the 
Benchmark, considering that the actual adherence to the Benchmark is 
higher than these results can indicate.\73\
---------------------------------------------------------------------------

    \73\ The difference in the price metrics introduces an 
artificial distortion in the comparison. Indeed, a regression 
analysis shows that the ratio between the maximum and minimum spot 
prices within the Bitcoin Futures VWAP window is a significant 
variable that explains the absolute divergences between FBSP and the 
spot prices. The higher the ratio between the maximum and minimum 
spot prices, the higher expected absolute divergence between FBSP 
and the spot prices. The correlation of these two metrics in the 
case of the real time version of NQBTCS is approximately 30%, 
suggesting that the actual adherence between FBSP and the spot 
benchmarks is even higher than the figures discussed herein 
indicate.

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

[[Page 68200]]

    Using data available on Bloomberg on July 10, 2023, the Sponsor 
compared FBSP to NQBTCS and CME CF BRR from December 27, 2022 to July 
7, 2023 and determined that FBSP behaves very similarly to both 
indexes. The following charts show a direct comparison between those 
two benchmark values and FBSP:
[GRAPHIC] [TIFF OMITTED] TN03OC23.016

    In the above charts, each black point indicates one day, and their 
proximity to the red line shows how similar FBSP is to each of NQBTCS 
and CME CF BRR. The correlations between FBSP and each of NQBTCS and 
CME CF BRR exceed 99.9%, and the mean absolute percentage divergences 
are 21 basis points (``bps'') and 22 bps, respectively, while the 
median absolute percentage divergences are 18 bps and 17 bps, 
respectively.
    The charts below provide another visualization of the results of 
this comparison, as time series of the percentage divergences:
[GRAPHIC] [TIFF OMITTED] TN03OC23.017

[[Page 68201]]

[GRAPHIC] [TIFF OMITTED] TN03OC23.018

BILLING CODE 8011-01-C
    These charts show that there are no clusters of abnormal 
divergences. In both cases, more than 90% of the days exhibit 
percentage divergences between -50 bps and +50 bps. The highest 
percentage divergence in absolute terms, with 81 bps for the NQBTCS and 
76 bps for the CME CF BRR, was observed on March 9, 2023, and coincided 
with significant volatility in the Bitcoin markets; on that day, NQBTCS 
dropped 5.34% from $22,003.92 to $20,827.67 and the FBSP, which settles 
one hour later, dropped by 9.3%, from $22,055.85 to $20,012.10. The 
Sponsor notes that, even on the day with the highest percentage 
divergence between FBSP and the other two benchmarks, that percentage 
divergence was insignificant in comparison to the intraday volatility 
of Bitcoin itself and could be attributable to the different market 
structures of the regulated CME Market and the unregulated spot 
markets.
    The Sponsor believes that this data strongly suggests that FBSP is 
a suitable choice for the NAV calculation, both for the settlement and 
the real time proxy, and that the following additional considerations 
further support the soundness of the FBSP methodology:
     Bitcoin is a highly volatile asset traded in multiple 
venues across the world, and divergences of the magnitude found in this 
analysis are not unusual across different price sources or exchanges.
     Although it is not a consensus, academic research \74\ has 
found evidence that CME Bitcoin futures lead spot in the price 
discovery process, so the divergences presented here are impacted by 
the possibility that spot prices are delayed.
---------------------------------------------------------------------------

    \74\ See, e.g., Wu, Jinghong; Xu, Ke. Fractional cointegration 
in bitcoin spot and futures markets. The Journal of Futures Markets. 
Vol. 41, Is. 9 (September 2021), available at: https://onlinelibrary.wiley.com/doi/epdf/10.1002/fut.22216#pane-pcw-references; Chang, Alexander and Herrmann, William and Cai, William. 
Efficient Price Discovery in the Bitcoin Markets (October 14, 2020), 
available at SSRN: https://ssrn.com/abstract=3733924; Kapar, Burcu; 
Olmo, Jose. An analysis of price discovery between Bitcoin futures 
and spot markets. Economics Letters, Vol. 174 (January 2019), 
available at: https://www.sciencedirect.com/science/article/abs/pii/S0165176518304440.
---------------------------------------------------------------------------

     As noted above, the mean absolute percentage divergences 
are 21 bps and 22 bps respectively, the median absolute percentage 
divergences are 18 bps and 17 bps, and March 9, 2023 was the day with 
the highest percentage divergence in absolute terms, with 81 bps for 
the NQBTCS and -76 bps for CME CF BRR. The Sponsor believes that these 
divergences between FBSP and the underlying benchmarks are in a 
reasonable range and support that FBSP closely tracks NQBTCS and CME CF 
BRR.
    Finally, the Sponsor notes that, even considering that FBSP could 
create some level of uncertainty due to the potential divergences 
between the FBSP and the spot prices observed in unregulated markets, 
the Authorized Purchasers are able to hedge potential exposure by 
buying the basket of futures that represents FBSP and selling it during 
the futures settlement window. In doing so, APs can emulate a situation 
where they know ex ante the value of the creation basket. The opposite 
trade can have the same effect for the case of redemptions. Thus, the 
APs providing liquidity on the secondary market during the day will 
always be in a position to hedge their exposure using exclusively the 
CME Market, which will make them more likely to provide liquidity to 
the Fund thus making its market price converge to its NAV.
Preventing Manipulation
    While the Commission has raised valid concerns about the potential 
influence of unregulated Bitcoin markets on the daily settlement price 
on CME Market, the Sponsor believes that the proposed methodology 
described above provides a significant and sufficient degree of 
insulation from such influences, for the following reasons:

    1. Regulated market influence: The daily settlement price of 
Bitcoin Futures Contracts on the CME Market, which is the basis for 
the NAV calculation of both futures contracts and physical holdings 
of the Fund, is primarily influenced by trading activity within the 
regulated futures market itself. This market is subject to stringent 
oversight and surveillance mechanisms designed to detect and deter 
manipulative and fraudulent practices, thus significantly limiting 
the possible influence of unregulated Bitcoin markets on the daily 
settlement price.
    2. High liquidity and volume: The CME Market is characterized by 
high liquidity and trading volume, such that any attempt to 
influence the daily settlement price through trading activity in 
other, unregulated Bitcoin markets would require a significant 
amount of capital and coordination. The Sponsor thus believes that 
any such manipulation attempts would be highly detectable by the CME 
Market's market surveillance.
    3. Complex pricing methodology: The NAV calculation methodology 
is comprehensive and accounts for both the tenor and final 
settlement price of each futures contract. In addition, the FBSP 
used in the NAV calculation methodology incorporates all maturities 
of Bitcoin Futures Contracts, which exhibit a robust price 
relationship among themselves. As a result, attempting to manipulate 
these prices in a coordinated manner to generate a substantial 
impact on NAV would be very challenging for potential manipulators 
and likely financially unfeasible. The Sponsor thus believes that 
the complexity of the methodology provides an additional layer of 
protection against manipulation, as it would be extremely

[[Page 68202]]

difficult for a manipulator to influence all these factors in a 
coordinated way to impact the Fund's NAV without leaving a 
detectable trail that would alert market surveillance.
    4. Focus on near-term contracts: The Fund's methodology gives 
more importance to futures contracts that are due for settlement in 
the near term because such contracts are more heavily traded, and 
their prices are more reliable indicators of the current spot price 
of Bitcoin. The Sponsor believes that the methodology's focus on 
near-term contracts further reduces the potential for manipulation, 
as these contracts are less susceptible to manipulation due to their 
higher trading volumes and liquidity.

    The Sponsor also believes that it is highly unlikely that a person 
attempting to manipulate the NAV of the Fund could do so successfully 
by trading on unregulated spot and derivatives markets. Because of 
direct arbitrage, it is reasonable to assume that the ETP's market 
price (in the secondary market) would be highly adherent to the Fund's 
Intraday Net Asset Value, since APs can always create and redeem shares 
of the Fund hedging with a basket of Bitcoin Futures Contracts and the 
value of the creation basket is determined based on the NAV of the 
Fund, which is calculated using the FBSP prices that is based on such 
basket of Bitcoin Futures Contracts. Consequently, the likelihood of a 
potential manipulator of the ETP to succeed by exclusively trading in 
unregulated Bitcoin markets would depend on how much the prices in 
these markets have an impact over the CME Bitcoin Futures Contracts 
prices. The likelihood that a potential manipulator would undertake 
such an effort is also decreased when considering the financial burden 
of manipulating the unregulated markets and the overall expected 
profitability of any such manipulation.
    To further assess such likelihood, the Sponsor carried out the 
following analysis to investigate the relationship between prices from 
relevant unregulated Bitcoin markets and the prices of the CME Bitcoin 
Futures Contracts, to assess the impact that a manipulation on those 
markets would have on CME. The Sponsor collected one-minute bars data 
between January 18, 2023 and July 26, 2023 \75\ of prices for the 
nearest CME Bitcoin Futures Contract (``CME Futures'') and the 
following alternative Bitcoin prices (``ABP''): spot Bitcoin (in USD) 
on each of NQBTCS's Core Exchanges,\76\ spot Bitcoin (in USDT), and 
BTCUSDT USDs-Margined Perpetuals on Binance. For each day and each ABP, 
a simple regression model was estimated with one-minute CME Futures 
log-returns as the dependent variable, and two independent variables: 
(1) the log CME Futures closing price of the previous minute (as a 
control variable) and (2) the difference between the ABP log return and 
the CME Futures log return in the previous minute (as the variable of 
interest).
---------------------------------------------------------------------------

    \75\ This date range represents days with intraday data 
available on Bloomberg as of July 27, 2023. Days with less than 40 
observations for a given ABP were excluded from the analysis of such 
ABP.
    \76\ The core exchanges as of December 31, 2022 were BitStamp, 
Coinbase, Gemini, itBit, and Kraken.
---------------------------------------------------------------------------

    The estimated coefficients associated with the variable of interest 
are a measure of the expected response from the CME Futures (as 
measured by its returns) to a divergence between its own return 
information and the one from ABP in the near past (one-minute lagged 
returns). Such divergences are expected to occur in cases of 
manipulation. A higher coefficient (closer to one) would indicate that 
CME Futures are more sensitive to and strongly influenced by the 
divergence, while a lower coefficient (closer to zero) would suggest 
that CME Futures are less responsive and not significantly influenced 
by the information coming from ABP. The Sponsor believes that these 
coefficients can be considered a conservative estimation of the real 
impact that manipulation in an ABP would have over the CME Futures 
price because the estimations are calculated under normal circumstances 
rather than under a manipulative attack, in which some other 
indicators, such as abnormal volume and volatility, would warn market 
participants and undermine their perception of the attacked ABP as a 
reliable price reference.
    The results of the Sponsor's analysis are summarized in the table 
below: \77\
---------------------------------------------------------------------------

    \77\ The market depth information was obtained from 
CoinMarketCap on July 19, 2023. The ABPs with blank cells in this 
table were not included in the July 19, 2023 snapshot.
[GRAPHIC] [TIFF OMITTED] TN03OC23.019

    The Sponsor's analysis suggests that the influence of ABP over the 
CME Futures prices is relatively low. For instance, if a would-be 
manipulator chose to attack Coinbase, which is an ABP with higher 
coefficients and thus higher potential to impact CME futures, the 
average coefficient of 0.39 means that in order to manipulate CME 
Futures prices by 1%, the would-be manipulator would have to distort 
Coinbase prices by more than 2.5% (1% divided by 0.39) on average. To 
be successful with 90% confidence (1st Decile) this manipulator would 
have to distort Coinbase prices by more than 4.7% (1% divided by 0.21). 
The Sponsor believes that its analysis supports that, even considering 
these conservative estimations, indirect manipulation would be 
extremely inefficient.
    The market depth columns in the above table indicate that 
substantial financial resources, running into tens of millions of 
dollars, are present on both sides of the order book for the most 
influential ABPs (even without including hidden orders, bots, and 
arbitrageurs that effectively enhance liquidity). The considerable 
financial commitment that would be required makes the manipulation of 
these prices an expensive endeavor.
    The Sponsor believes that its analysis demonstrates that the low 
efficiency of attempts to manipulate ABPs, coupled with the significant 
cost involved in influencing impactful ABPs, makes potential 
manipulation of spot Bitcoin markets an unattractive proposition, and 
that it is therefore highly unlikely that a potential manipulator of 
the ETP

[[Page 68203]]

could succeed by exclusively trading in unregulated Bitcoin markets. 
The combination of the high costs and the inefficiencies associated 
with manipulation makes it a daunting and unprofitable venture.
    In summary, while the Sponsor acknowledges the potential for 
influence from trades settled in unregulated Bitcoin markets, the 
Sponsor believes that the NAV calculation methodology, coupled with the 
inherent characteristics of the CME, provides a significant degree of 
protection against such influence being deliberately used to manipulate 
the Fund's market price or NAV without it being subject to detection by 
CME market surveillance.
Investment Strategy
    The Sponsor believes that the investment strategy of the Fund is 
designed to mitigate the risk of manipulation by diversifying its 
holdings and is responsive to the Commission's concerns with respect to 
an ETP that holds spot Bitcoin. Instead of holding 100% spot Bitcoin, 
which could make it more susceptible to price manipulation in the spot 
market, the Fund will hold a mix of Spot Bitcoin, Bitcoin Futures 
Contracts, and cash. This diversified portfolio is subject to 
investment restrictions, which further reduces the potential for 
manipulation, as explained below:

    1. Diversification: By holding a combination of Spot Bitcoin, 
Bitcoin Futures Contracts, and cash, the Fund reduces its exposure 
to any single asset class. This diversification also makes it more 
difficult for a would-be manipulator to influence the NAV of the 
Fund by manipulating the price of spot Bitcoin alone; for instance, 
even if a manipulator were able to influence the spot price of 
Bitcoin, their actions would only affect a portion of the Fund's 
portfolio, thereby limiting the overall impact of such manipulation 
on the Fund's NAV.
    2. Investment restrictions: The Fund's holdings of Spot Bitcoin 
would be subject to investment restrictions, which are further 
discussed below. These restrictions cap the amount of Spot Bitcoin 
that the Fund can hold, further reducing the potential for 
manipulation by, for example, preventing the Fund from becoming so 
large in relation to the spot market that it could be manipulated 
without influencing the futures market. The Sponsor believes that 
these investment restrictions ensure that any significant trading 
activity aimed at manipulating the Fund would likely spill over into 
the CME Market, a regulated market with robust surveillance 
mechanisms in place to detect and deter manipulation, and with which 
the Exchange could receive information pursuant to common ISG 
membership.
    3. Reduced dependence on spot market: By holding Bitcoin Futures 
Contracts and cash in addition to Spot Bitcoin, the Fund reduces its 
dependence on the spot market, thereby mitigating concerns about 
potential manipulation in unregulated Bitcoin spot exchanges. 
Instead, the Fund will rely on Bitcoin Futures Contracts and Bitcoin 
futures EFPs that are traded on the CME Market, a regulated 
exchange, which provides a higher level of transparency and 
oversight compared to unregulated spot exchanges.
    4. Dynamic adjustment: The mix of Spot Bitcoin, Bitcoin Futures 
Contracts, and cash in the Fund's portfolio can be dynamically 
adjusted based on market conditions and regulatory developments. 
This flexibility allows the Fund to respond quickly to any signs of 
potential manipulation or other market abuses, further enhancing its 
resilience against manipulation.

    In summary, by diversifying its holdings and imposing investment 
restrictions, the Fund reduces its vulnerability to manipulation in any 
single market, thereby protecting investors and maintaining the 
integrity of the Fund.
Investment Restrictions on Spot Bitcoin
    According to the Sponsor, the Fund will be subject to investment 
restrictions on Spot Bitcoin (the ``Investment Restrictions'') that are 
specific constraints on its exposure to Bitcoin, particularly with 
respect to spot holdings. These investment restrictions are designed to 
mitigate the risk of manipulation of the Fund's Shares by insulating 
the Fund from events impacting the Bitcoin spot market, are not fixed, 
and may be adjusted based on factors such as the Commission's 
recognition of the CME as a regulated market of significant size 
related to spot Bitcoin, the NAV of the Fund, and the prevailing 
trading conditions on the core exchanges of the Benchmark.
    The Sponsor believes that the Investment Restrictions are intended 
to ensure that the Fund's notional exposure to Bitcoin will be 
restricted to a set proportion and are currently set at 100% of the 30-
day Average Daily Traded Volume (``ADTV'') on the core exchanges of the 
NQBTCS that are subject to regulatory and reporting rules in the United 
States, including companies that are publicly traded in the United 
States.\78\ The Sponsor believes that the Investment Restrictions serve 
two main purposes:
---------------------------------------------------------------------------

    \78\ The Sponsor believes that the methodology could 
significantly reduce the potential influence of malicious agents 
targeting the Fund by only accepting data from sources subject to 
regulatory regimes that obligate them to ensure the integrity of 
data reported. As of the date of this filing, Coinbase Inc. is the 
only Bitcoin Exchange to satisfy this criterion.

    1. They deter potential manipulative actions directed towards 
the Fund's Shares by making the cost-benefit tradeoff highly 
unfavorable for the manipulator. To manipulate the Fund's price 
using an unregulated spot market, a manipulator would need to 
transact a volume that surpasses the Fund's total exposure in spot 
Bitcoin, making the potential costs of manipulation outweigh the 
benefits.
    2. They ensure that the Fund's trading activities do not become 
the primary driving force behind price variations in the Bitcoin 
spot market. By restricting the Fund's notional exposure to a 
proportion of the ADTV, this constraint ensures that the Fund's 
trading activities are always a fraction of the overall market 
activity, thereby reducing the potential for the Fund to unduly 
influence market prices.

    As an example, in the 30-day period ending on August 31, 2023, the 
ADTV of spot Bitcoin on Coinbase was $293 million. Thus, the Fund's 
notional exposure to Bitcoin is restricted to up to $293 million, 
meaning that if the Fund's AUM is, for example, $250 million, it could 
have up to 100% allocation to Spot Bitcoin. However, if the Fund's AUM 
is, for example, $1 billion, it could still only have up to $293 
million of notional exposure to Spot Bitcoin, which would be the 
equivalent of up to 29% of the Fund's NAV, and the rest of the 
portfolio would need to be allocated to Bitcoin Futures Contracts, 
cash, or cash equivalents.
    To ensure that the Fund's trading activities do not become the 
primary driving force of the Spot Bitcoin price, the Sponsor intends to 
keep its notional allocation to spot Bitcoin as a small proportion of 
the overall trading activity of spot bitcoin.
    The Sponsor intends to do so by restricting the maximum notional 
exposure to Spot Bitcoin to a proportion of the 30-day ADTV, with the 
ADTV data based on the most trusted exchanges (meeting the double 
requirements of being a core exchange per the NQBTCS methodology and 
being subject to regulatory and reporting rules in the United States, 
which make them liable for any false volume data reporting).
    Currently, only one exchange meets those requirements, and over the 
last three months, it accounted for 4.30% to 5.70% of all Bitcoin 
trading, whereas the largest unregulated spot Bitcoin exchange 
accounted for over 50% of the spot Bitcoin volume.\79\
---------------------------------------------------------------------------

    \79\ Source: https://www.theblock.co/data/crypto-markets/spot/the-block-legitimate-volume-index-btc-only.

[[Page 68204]]

                                          Spot Bitcoin 30-Day ADTV \80\
----------------------------------------------------------------------------------------------------------------
                                            June 30, 2023            July 31, 2023           August 31, 2023
----------------------------------------------------------------------------------------------------------------
Top 10 Exchanges.....................  $7,646.21 million......  $5,569.71 million......  $6,853.92 million.
Single Core Exchange meeting           $419.60 million........  317.43 million.........  $293.84 million.
 Sponsor's requirement.
Single Core Exchange's market share..  5.5%...................  5.7%...................  4.3%.
All 5 Core Exchanges.................  $624.74 million........  $438.04 million........  $411.51 million.
All 5 Core Exchanges' market share...  8.2%...................  7.9%...................  6.0%.
----------------------------------------------------------------------------------------------------------------

    The Sponsor believes that it is therefore unlikely that the single 
exchange on which the Sponsor bases the ADTV data on will be the 
primary driver of spot Bitcoin price given its rather small market 
share. As a result, even with the Fund's notional Spot Bitcoin exposure 
limited at 100% of the ADTV on that single exchange, the Fund's Spot 
Bitcoin holdings would likely represent only 4.30% to 5.79% of the 
daily liquidity of the spot Bitcoin market and thus is unlikely to 
become the primary driver of the spot market price formation.
---------------------------------------------------------------------------

    \80\ Source: Messari, volume data is for USD, USDT and USDC 
traded against Bitcoin Core Exchanges.
---------------------------------------------------------------------------

    Additionally, with the spot Bitcoin notional exposure at 4.30% to 
5.70% of ADTV, a would-be manipulator would need to trade on exchanges 
that account for most of the liquidity and, in particular, the largest 
one. The Sponsor believes that the cost benefit analysis of attempting 
to distort the price on the largest exchange, which accounts for 
approximately 50% of the liquidity (or approximately 9 times the size 
of the Fund), to manipulate the price of the Fund would not be 
compelling.
    In summary, the Sponsor believes that the Investment Restrictions 
are a key tool in the Fund's strategy to prevent manipulation. By 
limiting the Fund's exposure to the spot market and ensuring that the 
Fund's trading activities do not become the predominant influence on 
market prices, these restrictions provide a robust defense against 
potential manipulation attempts.
Creations and Redemptions
    According to the Sponsor (and as discussed further below), the Fund 
uses cash creations and redemptions. With respect to Spot Bitcoin, an 
Authorized Purchaser delivers cash to the Fund instead of Spot Bitcoin 
in the creation process, and an Authorized Purchaser receives cash 
instead of Spot Bitcoin in the redemption process. The cash delivered 
or received during the creation or redemption process is then used by 
the Sponsor to purchase or sell Bitcoin Futures Contracts with an 
aggregate market value that approximates the amount of cash received or 
paid upon the creation or redemption. On a daily basis, the Sponsor 
will analyze the current portfolio allocation of the Fund between Spot 
Bitcoin and Bitcoin Futures Contracts and, based on the Investment 
Restrictions and target portfolio exposure, may decide to engage in an 
EFP transaction on CME to buy or sell Spot Bitcoin for the equivalent 
position in Bitcoin Futures Contracts.
    The Sponsor believes that this method protects against manipulation 
in the creation and redemption process and of the Fund's market price 
from trading in unregulated spot markets. Investment in spot Bitcoin 
will not be directly related to creation or redemption of Fund Shares, 
but instead on target portfolio exposure, such that trades can be 
performed in smaller sizes and at unpredictable times, reducing the 
risk of creation or redemption manipulation.
    The Sponsor believes that the use of cash creations and redemptions 
in the Fund serves as a deterrent to manipulation in several ways:

    1. Decoupling from spot market: By using cash instead of Spot 
Bitcoin for creations and redemptions, the Fund's operations are 
decoupled from the unregulated spot market. The creation and 
redemption process does not directly influence the unregulated spot 
market or vice versa, thereby reducing the potential for 
manipulation through this process.
    2. Unpredictable trading times: The Fund's investment in Spot 
Bitcoin is not directly related to creations or redemptions, but 
instead on target portfolio exposure. As a result, trading can be 
done in smaller sizes and at unpredictable times, making it harder 
for potential manipulators to time their actions.
    3. Reduced impact of large trades: By effecting creations and 
redemptions in cash, large trades that could potentially influence 
the unregulated spot market are mitigated. Instead, these trades are 
absorbed in the CME Market, which is sufficiently liquid and can 
reasonably be relied upon to assist in detecting and deterring 
fraudulent or manipulative misconduct.
    4. Reduced influence from unregulated spot exchanges: In-kind 
creation may create a direct relationship between the Fund's market 
price and prices on unregulated exchanges such as Binance by 
arbitrage, because an AP could buy or sell Bitcoin from Binance and 
receive or deliver Bitcoin from the Fund through the creation or 
redemption process. With creations and redemptions in cash, however, 
that arbitrage cannot be executed without going through pricing and 
trading on the CME Market. Thus, the Sponsor believes that, by 
removing this direct causal relationship between unregulated markets 
and the Fund's market price, it is unlikely that a person attempting 
to manipulate the ETP would be reasonably successful by trading only 
on unregulated spot exchanges, such that the Exchange's common ISG 
membership with the CME Market would assist NYSE Arca in detecting 
and deterring misconduct.

    The Sponsor believes that the Fund's creation and redemption 
process is designed to minimize the potential for market manipulation, 
thereby protecting investors and maintaining the integrity of the 
markets.
Exchange for Physical Transactions
    EFP transactions, also known as Exchange for Related Position or 
EFRP transactions,\81\ are a type of private agreement between two 
parties to trade a futures position for the underlying asset. In the 
context of the Fund, these transactions will be used to purchase and 
sell Spot Bitcoin by delivering or receiving the equivalent futures 
position.
---------------------------------------------------------------------------

    \81\ See https://www.cmegroup.com/clearing/operations-and-deliveries/accepted-trade-types/efp-efr-eoo-trades.html.
---------------------------------------------------------------------------

    In an EFP transaction, two parties exchange equivalent but 
offsetting positions in a Bitcoin Futures Contract and the underlying 
physical Bitcoin. One party is the buyer of futures and the seller of 
the physical Bitcoin, and the other party takes the opposite position 
(seller of futures and buyer of physical). While the EFP is a 
privately-negotiated transaction between the two parties to the trade, 
the consummated transaction must be reported to CME Market and its 
conditions and prices are subject to CME Market's market regulation 
oversight.
    EFPs may be transacted at such commercially reasonable prices as 
are mutually agreed upon by the parties to the transaction, provided 
that the price conforms to the applicable futures price increments set 
forth for the relevant Futures contract. The Sponsor believes that EFPs 
executed at off-market prices

[[Page 68205]]

are more likely to be reviewed by CME's Market Regulation. CME's Rule 
538 establishes that ``EFPs may not be priced off-market for the 
purpose of shifting substantial sums of cash from one party to another, 
to allocate gains and losses between the futures or options on futures 
and the cash or OTC derivative components of the EFRP, to evade taxes, 
to circumvent financial controls by disguising a firm's financial 
condition, or to accomplish some other unlawful purpose.''
    Because both sides of the trade track the same benchmark (Bitcoin), 
an EFP is market-neutral. As such, the pricing of an EFP is quoted in 
terms of the basis between the price of the futures contract and the 
level of the underlying Bitcoin. Because the Fund proposes to use EFP 
transactions to purchase and sell Spot Bitcoin, the only non-cash 
assets held by the Fund (Bitcoin Futures Contracts and Bitcoin) are 
traded on CME Market. Because the Exchange and the CME Market are both 
ISG members, information shared by the CME Market with the Exchange can 
be used to assist in detecting and deterring fraudulent or manipulative 
misconduct related to those assets.
    In the proposed strategy for the operation of the Fund, every time 
the Fund is required to purchase or sell Bitcoin, the Sponsor will 
perform a request for quotation auction (``RFQ Auction'') with multiple 
market makers using the settlement price as the reference for the 
futures contracts. Market makers present their quotes in terms of basis 
points (``bps''), where 1bp = 0.01% between the futures contract price 
and the spot price. The Sponsor will then confirm the trade with the 
best offer and report the EFP transaction to the CME Market. The 
Sponsor believes that performing an RFQ Auction with multiple market 
makers is an efficient price formation mechanism that generates enough 
competition and attracts sufficient liquidity to minimize the 
transaction costs for the ETP.
    As an example, assume that the Fund needs to buy 50 bitcoins (BTC) 
in exchange for 10 units of the next maturity of Bitcoin Futures 
Contracts (``BTCA''). The Sponsor will perform an RFQ Auction by 
requesting 3 market makers to provide their best price for buying BTCA 
versus BTC. The Market Makers provide a bid/ask quote in terms of basis 
between the futures and spot. Market Maker 1 (MM1) bids +22bps, Market 
Maker 2 (MM2) bids +20bps, and Market Maker 3 (MM3) bids +25bps. The 
Sponsor will then agree to pay the best bid of +25bps from MM3. 
Assuming BTCA is at $26,060, the price for the spot transaction is 
fixed at $25,995.01. The transaction is then reported within the time 
period and in the manner specified by the CME Market. Upon completion 
of the EFP, the Fund and MM3 would have different positions but same 
exposure:
     The Fund was long 10 Bitcoin Futures Contracts and now has 
converted this exposure into 50 Bitcoins.
     MM3 had 50 Bitcoins and now holds an equal position long 
10 Bitcoin Futures Contracts.
    The table below illustrates the steps in this EFP transaction:

------------------------------------------------------------------------
              Steps                       MM3                Fund
------------------------------------------------------------------------
1. Starting position............  50 BTC............  10 BTCA.
                                 ---------------------------------------
2. EFP is privately negotiated..  MM3 and the Fund agree to terms of the
                                   EFP:
                                   Fund sells/MM3 buys 10 BTCA
                                   at $26,060.
                                   Fund buys/MM3 sells 50 BTC at
                                   25,995.01 (+25bps).
                                 ---------------------------------------
3. MM3 sends bitcoin to the Fund  -50 BTC...........  +50 BTC.
4. EFP reported to CME..........  +10 BTCA..........  -10 BTCA.
5. Final position...............  10 BTCA...........  50 BTC.
------------------------------------------------------------------------

    As required by CME Market's regulation, the Fund and all other 
parties related to the transaction will maintain all records relevant 
to this transaction, including order tickets, RFQ Auction message 
history, and custody transaction records, and provide them to CME upon 
request for surveillance purposes pursuant to CFTC Regulation 1.35.
    EFP volumes are reported daily on the CME Group website. 
Historically, trading activity in EFP transactions is sporadic as it 
depends on the demand for a regulated conversion between futures and 
spot positions. Nonetheless, the Sponsor believes that a large number 
of liquidity providers are ready to execute this type of transaction 
and can provide enough liquidity to support the proposed ETP's demand. 
A subset of firms that are ready to provide liquidity on EFP Bitcoin 
transactions is available on CME's website.\82\
---------------------------------------------------------------------------

    \82\ See https://www.cmegroup.com/trading/bitcoin-brokers-and-block-liquidity-providers.html.
---------------------------------------------------------------------------

    The Sponsor believes that EFP transactions are a powerful tool in 
preventing market manipulation for several reasons:

    1. Regulated environment: EFP transactions occur on the CME 
Market, which is a regulated exchange with processes in place to 
prevent market manipulation, including monitoring transaction prices 
and investigating potential manipulations, as outlined in CME Rule 
538.\83\ All transactions are monitored and subject to rules and 
regulations designed to prevent market manipulation. Moreover, all 
parties to an EFP transaction are required to maintain all records 
relevant to the transaction pursuant to CFTC Regulation 1.35, thus 
providing the ability for CME and the CFTC to conduct surveillance 
inquiries and investigations in an efficient and effective manner 
for the protection of customers and ensuring market integrity. 
Furthermore, as an additional protection measure, to enforce the 
highest standard on the sourcing of such underlying physical 
Bitcoin, the Sponsor represents that it will only participate in EFP 
transactions with broker-dealers that are FINRA regulated or part of 
corporate groups that are, which would provide another layer of 
regulatory oversight in how Bitcoin exposures are sourced, as those 
counterparties already have an ongoing commercial relationship with 
the Sponsor and are active participants in trading Bitcoin regulated 
products worldwide.
---------------------------------------------------------------------------

    \83\ See https://www.cmegroup.com/rulebook/files/cme-group-Rule-538.pdf.
---------------------------------------------------------------------------

    2. Surveillance-sharing agreement: NYSE Arca and the CME Market 
are both members of the ISG, which allows for the sharing of 
information and cooperation in investigations, which can help detect 
and deter market manipulation.
    3. Transparency: EFP transactions must be reported to the CME 
Market, which is a regulated exchange, providing transparency and 
making it more difficult for manipulative practices to go unnoticed. 
Parties to EFP transactions must maintain all records relevant to 
the CME futures contract and the related position transaction, 
pursuant to CFTC Regulation 1.35, adding another layer of regulatory 
scrutiny and transparency. In addition, EFP transactions volumes are 
required to be reported with the daily large trader positions by 
each clearing member, omnibus account, and foreign broker.
    4. Market-neutrality: Because EFP transactions involve 
exchanging equivalent

[[Page 68206]]

but offsetting positions, they are market-neutral. As a result, EFP 
transactions do not create imbalances in the market that could be 
exploited for manipulative purposes.
    5. Unpredictability: EFP transactions are privately negotiated 
between the fund and other parties, making them less predictable and 
therefore more difficult to manipulate.

    The Sponsor believes that, by using EFP transactions to purchase 
and sell spot Bitcoin, the Fund would ensure that its operations are 
conducted in a regulated, transparent, and market-neutral manner, 
significantly reducing the dependency on and the risk of manipulation 
from unregulated spot exchanges.
Settlement of BTC Contracts and MBT Contracts
    According to the Registration Statement, each BTC Contract and MBT 
Contract settles daily to the BTC Contract volume-weighted average 
price (``VWAP'') of all trades that occur between 2:59 p.m. and 3:00 
p.m. Central Time, the settlement period, rounded to the nearest 
tradable tick.\84\
---------------------------------------------------------------------------

    \84\ VWAP is calculated based first on Tier 1 (if there are 
trades during the settlement period); then Tier 2 (if there are no 
trades during the settlement period); and then Tier 3 (in the 
absence of any trade activity or bid/ask in a given contract month 
during the current trading day, as follows: Tier 1: Each contract 
month settles to its VWAP of all trades that occur between 14:59:00 
and 15:00:00 CT, the settlement period, rounded to the nearest 
tradable tick. If the VWAP is exactly in the middle of two tradable 
ticks, then the settlement will be the tradable price that is closer 
to the contract's prior day settlement price. Tier 2: If no trades 
occur on CME Globex between 14:59:00 and 15:00:00 CT, the settlement 
period, then the last trade (or the contract's settlement price from 
the previous day in the absence of a last trade price) is used to 
determine whether to settle to the bid or the ask during this 
period. a. If the last trade price is outside of the bid/ask spread, 
then the contract month settles to the nearest bid or ask price. b. 
If the last trade price is within the bid/ask spread, or if a bid/
ask spread is not available, then the contract month settles to the 
last trade price. Tier 3: In the absence of any trade activity or 
bid/ask in a given contract month during the current trading day, 
the daily settlement price will be determined by applying the net 
change from the preceding contract month to the given contract 
month's prior daily settlement price.
---------------------------------------------------------------------------

    BTC Contracts and MBT Contracts each expire on the last Friday of 
the contract month and are settled with cash. The final settlement 
value is based on the CME CF BRR at 4:00 p.m. London time on the 
expiration day of the futures contract.
    As proposed, the Fund will rollover its soon to expire Bitcoin 
Futures Contracts to extend the expiration or maturity of its position 
forward by closing the initial contract holdings and opening a new 
longer-term contract holding for the same underlying asset at the then-
current market price. The Fund does not intend to hold any Bitcoin 
futures positions into cash settlement.
Net Asset Value
    According to the Registration Statement, the Fund's NAV per Share 
will be calculated by taking the current market value of its total 
assets, subtracting any liabilities, and dividing that total by the 
number of Shares.
    The Administrator of the Fund will calculate the NAV once each 
trading day, as of the earlier of the close of the New York Stock 
Exchange or 4:00 p.m. Eastern Standard Time (EST).
    According to the Registration Statement, to determine the value of 
Bitcoin Futures Contracts, the Fund's Administrator will use the 
Bitcoin Futures Contract settlement price on the exchange on which the 
contract is traded, except that the ``fair value'' of Bitcoin Futures 
Contracts (as described in more detail below) may be used when Bitcoin 
Futures Contracts close at their price fluctuation limit for the day. 
The Fund's Administrator will determine the value of Fund investments 
as of the earlier of the close of the New York Stock Exchange or 4:00 
p.m. EST. The Fund's NAV will include any unrealized profit or loss on 
open Bitcoin futures contacts and any other credit or debit accruing to 
the Fund but unpaid or not received by the Fund.
    According to the Registration Statement, the fair value of the 
Fund's holdings will be determined by the Fund's Sponsor in good faith 
and in a manner that assesses the future Bitcoin market value based on 
a consideration of all available facts and all available information on 
the valuation date. When a Bitcoin Futures Contract has closed at its 
price fluctuation limit, the fair value determination will attempt to 
estimate the price at which such Bitcoin Futures Contract would be 
trading in the absence of the price fluctuation limit (either above 
such limit when an upward limit has been reached or below such limit 
when a downward limit has been reached). Typically, this estimate will 
be made primarily by reference to exchange traded instruments at 4:00 
p.m. EST on settlement day. The fair value of BTC Contracts and MBT 
Contracts may not reflect such security's market value or the amount 
that the Fund might reasonably expect to receive for the BTC Contracts 
and MBT Contracts upon its current sale.
    According to the Registration Statement and as discussed above, the 
value of Spot Bitcoin held by the Fund would be determined by the 
Sponsor and by Hashdex Asset Management Ltd. (the ``Digital Asset 
Adviser'') via an FBSP methodology that is sensitive to both the tenor 
of a Bitcoin Futures Contract and the final settlement price for such 
contract. The calculation produces a set of weighting factors, with 
each factor indicating the contribution of the corresponding Bitcoin 
Futures Contract to the estimated current spot price of Bitcoin. The 
estimated spot price is the component of the result corresponding to a 
tenor of zero days. The Sponsor and Digital Asset Advisor will not use 
data from Bitcoin exchanges or directly from spot Bitcoin trading 
activity in determining the value of Spot Bitcoin held by the Fund.
Indicative Fund Value
    According to the Registration Statement, in order to provide 
updated information relating to the Fund for use by investors and 
market professionals, ICE Data Indices, LLC will calculate an updated 
Indicative Fund Value (``IFV''). The IFV will be calculated by using 
the prior day's closing NAV per Share of the Fund as a base and will be 
updated throughout the Core Trading Session of 9:30 a.m. E.T. to 4:00 
p.m. E.T. to reflect changes in the value of the Fund's holdings during 
the trading day.
    The IFV will be disseminated on a per Share basis every 15 seconds 
during the Exchange's Core Trading Session and be widely disseminated 
by one or more major market data vendors during the Exchange's Core 
Trading Session.\85\
---------------------------------------------------------------------------

    \85\ Several major market data vendors display and/or make 
widely available IFVs taken from the Consolidated Tape Association 
(``CTA'') or other data feeds.
---------------------------------------------------------------------------

Creation and Redemption of Shares
    According to the Registration Statement, the Shares issued by the 
Fund may only be purchased by Authorized Purchasers and only in blocks 
of 12,500 Shares called ``Creation Baskets.'' The amount of the 
purchase payment for a Creation Basket is equal to the total NAV of 
Shares in the Creation Basket. Similarly, only Authorized Purchasers 
may redeem Shares and only in blocks of 12,500 Shares called 
``Redemption Baskets.'' The amount of the redemption proceeds for a 
Redemption Basket is equal to the total NAV of Shares in the Redemption 
Basket. The purchase price for Creation Baskets and the redemption 
price for Redemption Baskets are the actual NAV calculated at the end 
of the business day when a request for a purchase or redemption is 
received by the Fund. Shares of the Fund will be created and redeemed 
in cash.
    Authorized Purchasers will be the only persons that may place 
orders to create and redeem Creation Baskets. Authorized Purchasers 
must be (1) either registered broker-dealers or other securities market 
participants, such as

[[Page 68207]]

banks and other financial institutions, that are not required to 
register as broker-dealers to engage in securities transactions, and 
(2) DTC Participants. An Authorized Purchaser is an entity that has 
entered into an Authorized Purchaser Agreement with the Sponsor.
    An Authorized Purchaser delivers cash to the Fund in the creation 
process, and an AP receives cash in the redemption process. The cash 
delivered or received during the creation or redemption process is then 
used by the Sponsor to purchase or sell Bitcoin Futures Contracts with 
an aggregate market value that approximates the amount of cash received 
or paid upon the creation or redemption. On a daily basis, the Sponsor 
will analyze the current portfolio allocation of the Fund between Spot 
Bitcoin and Bitcoin Futures Contracts and, based on the Investment 
Restrictions, may decide to engage in an EFP transaction on CME to buy 
or sell Spot Bitcoin for the equivalent position in Bitcoin Futures 
Contracts.
Creation Procedures
    According to the Registration Statement, on any ``Business Day,'' 
an Authorized Purchaser may place an order with the Transfer Agent to 
create one or more Creation Baskets. For purposes of processing both 
purchase and redemption orders, a ``Business Day'' means any day other 
than a day when the CME or the New York Stock Exchange is closed for 
regular trading. Purchase orders for Creation Baskets must be placed by 
3:00 p.m. EST or one hour prior to the close of trading on the New York 
Stock Exchange, whichever is earlier. The day on which the Distributor 
receives a valid purchase order is referred to as 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, an Authorized Purchaser agrees to 
deposit cash with the Custodian.
Redemption Procedures
    According to the Registration Statement, the procedures by which an 
Authorized Purchaser can redeem one or more Creation Baskets will 
mirror the procedures for the creation of Creation Baskets. On any 
Business Day, an Authorized Purchaser may place an order with the 
Transfer Agent to redeem one or more Creation Baskets.
    The redemption procedures allow Authorized Purchasers to redeem 
Creation Baskets. Individual shareholders may not redeem directly from 
the Fund. By placing a redemption order, an Authorized Purchaser agrees 
to deliver the Creation Baskets to be redeemed through DTC's book entry 
system to the Fund by the end of the next Business Day following the 
effective date of the redemption order or by the end of such later 
business day.
Determination of Redemption Distribution
    According to the Registration Statement, the redemption 
distribution from the Fund will consist of an amount of cash and/or 
cash equivalents that is in the same proportion to the total assets of 
the Fund on the date that the order to redeem is properly received as 
the number of Shares to be redeemed under the redemption order is in 
proportion to the total number of Shares outstanding on the date the 
order is received.
Delivery of Redemption Distribution
    According to the Registration Statement, an Authorized Purchaser 
who places a purchase order will transfer to the Custodian the required 
amount of cash and/or cash equivalents by the end of the next business 
day following the purchase order date or by the end of such later 
business day, not to exceed three business days after the purchase 
order date, as agreed to between the Authorized Purchaser and the 
Custodian when the purchase order is placed (the ``Purchase Settlement 
Date''). Upon receipt of the deposit amount, the Custodian will direct 
DTC to credit the number of Creation Baskets ordered to the Authorized 
Purchaser's DTC account on the Purchase Settlement Date.
Availability of Information
    The NAV for the Fund's Shares will be calculated and disseminated 
daily and will be made available to all market participants at the same 
time. The intraday, closing prices, and settlement prices of the 
Bitcoin Futures Contracts will be readily available from the applicable 
futures exchange websites, automated quotation systems, published or 
other public sources, or major market data vendors. Information 
regarding market price and trading volume of the Shares will be 
continually available on a real-time basis throughout the day on 
brokers' computer screens and other electronic services.
    Complete real-time data for the Bitcoin Futures Contracts will be 
available by subscription through on-line information services. ICE 
Futures U.S. and CME also provide delayed futures and options on 
futures information on current and past trading sessions and market 
news free of charge on their respective websites. The specific contract 
specifications for Bitcoin Futures Contracts will also be available on 
such websites, as well as other financial informational sources. 
Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. Quotation information 
for cash equivalents and commodity futures may be obtained from brokers 
and dealers who make markets in such instruments. Intra-day price and 
closing price level information for the Benchmark will be available 
from major market data vendors. The Benchmark value will be 
disseminated once every 15 seconds during the Core Trading Session. The 
Benchmark components and methodology will be made publicly available. 
The IFV will be available through on-line information services.
    In addition, the Fund's website, https://hashdex-etfs.com/, will 
display the applicable end of day closing NAV. The daily holdings of 
the Fund will be available on the Fund's website. The Fund's website 
will also include a form of the prospectus for the Fund that may be 
downloaded. The website will include the Shares' ticker and CUSIP 
information along with additional quantitative information updated on a 
daily basis, including: (1) the prior Business Day's reported NAV and 
closing price and a calculation of the premium and discount of the 
closing price or mid-point of the bid/ask spread at the time of NAV 
calculation (the ``Bid/Ask Price'') against the NAV; and (2) data in 
chart format displaying the frequency distribution of discounts and 
premiums of the daily closing price or Bid/Ask Price against the NAV, 
within appropriate ranges, for at least each of the four previous 
calendar quarters. The website disclosure of portfolio holdings will be 
made daily and will include, as applicable, (i) the name, quantity, 
price, and market value of the Fund's holdings, (ii) the counterparty 
to and value of forward contracts and any other financial instruments 
tracking the Benchmark, and (iii) the total cash and cash equivalents 
held in the Fund's portfolio, if applicable.
    The Fund's website will be publicly available at the time of the 
public offering of the Shares and accessible at no charge.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of

[[Page 68208]]

the Fund.\86\ Trading in Shares of the Fund will be halted if the 
circuit breaker parameters in NYSE Arca Rule 7.12-E have been reached. 
Trading also may be halted because of market conditions or for reasons 
that, in the view of the Exchange, make trading in the Shares 
inadvisable. These may include: (1) the extent to which trading is not 
occurring in BTC and/or MBT Contracts and the securities and/or the 
financial instruments composing the daily disclosed portfolio of the 
Fund; or (2) whether other unusual conditions or circumstances 
detrimental to the maintenance of a fair and orderly market are 
present.
---------------------------------------------------------------------------

    \86\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------

    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the IFV or the value of the 
Benchmark occurs. The Benchmark value will be disseminated once every 
15 seconds during the Core Trading Session. The Benchmark components 
and methodology will be made publicly available. If the interruption to 
the dissemination of the IFV, or to the value of the Benchmark 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.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with 
NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions). The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in NYSE Arca Rule 7.6-E, the 
minimum price variation (``MPV'') for quoting and entry of orders in 
equity securities traded on the NYSE Arca Marketplace is $0.01, with 
the exception of securities that are priced less than $1.00 for which 
the MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Rule 8.500-E. The trading of the Shares will 
be subject to NYSE Arca Rule 8.500-E(g), which sets forth certain 
restrictions on Equity Trading Permit Holders (``ETP Holders'') acting 
as registered Market Makers in Trust Issued Receipts [sic] to 
facilitate surveillance. Pursuant to NYSE Arca Rule 8.500-E(f), an ETP 
Holder acting as a registered Market Maker in Trust Units must file 
with the Exchange in a manner prescribed by the Exchange and keep 
current a list identifying all accounts for trading in an underlying 
commodity, related commodity futures or options on commodity futures, 
or any other related commodity derivatives, which the Market Maker may 
have or over which it may exercise investment discretion. No Market 
Maker shall trade in an underlying commodity, related commodity futures 
or options on commodity futures, or any other related commodity 
derivatives, in an account in which a 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 this Rule. In addition to the existing 
obligations under Exchange rules regarding the production of books and 
records, the ETP Holder acting as a Market Maker in Trust Units shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
    For initial and continued listing, the Fund will be in compliance 
with Rule 10A-3 under the Act, the Trust will rely on the exception 
contained in Rule 10A-3(c)(7).\87\ A minimum of 50,000 Shares of the 
Fund will be outstanding at the commencement of trading on the 
Exchange.
---------------------------------------------------------------------------

    \87\ See Rule 10A-3(c)(7), 17 CFR 240.10A-3(c)(7) (stating that 
a listed issuer is not subject to the requirements of Rule 10A-3 if 
the issuer is organized as an unincorporated association that does 
not have a board of directors and the activities of the issuer are 
limited to passively owning or holding securities or other assets on 
behalf of or for the benefit of the holders of the listed 
securities).
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares of the Fund will 
be subject to the existing trading surveillances administered by the 
Exchange, as well as cross-market surveillances administered by the 
Financial Industry Regulatory Authority (``FINRA'') on behalf of the 
Exchange, which are designed to detect violations of Exchange rules and 
applicable federal securities laws.\88\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and federal securities laws applicable to trading on 
the Exchange.
---------------------------------------------------------------------------

    \88\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
---------------------------------------------------------------------------

    The surveillances referred to above generally focus on detecting 
securities trading outside their normal patterns, which could be 
indicative of manipulative or other violative activity. When such 
situations are detected, surveillance analysis follows and 
investigations are opened, where appropriate, to review the behavior of 
all relevant parties for all relevant trading violations.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and the Fund's 
holdings with other markets and other entities that are members of the 
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may 
obtain trading information regarding trading in the Shares and the 
Fund's holdings from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares and the 
Fund's holdings from markets and other entities that are members of ISG 
or with which the Exchange has in place a CSSA. The Exchange is also 
able to obtain information regarding trading in the Shares, the 
physical commodities underlying the futures contracts through ETP 
Holders, in connection with such ETP Holders' proprietary or customer 
trades which they effect through ETP Holders on any relevant market. 
The Exchange can obtain market surveillance information, including 
customer identity information, with respect to transactions (including 
transactions in futures contracts) occurring on US futures exchanges, 
which are members of the ISG. In addition, the Exchange also has a 
general policy prohibiting the distribution of material, non-public 
information by its employees.
    Bitcoin Futures Contracts held by the Fund will be listed on an 
exchange that is a member of the ISG or is a market with which the 
Exchange has a CSSA.\89\
---------------------------------------------------------------------------

    \89\ For a list of the current members of ISG, see 
www.isgportal.org. The Exchange notes that not all components of the 
Fund may trade on markets that are members of ISG or with which the 
Exchange has in place a CSSA.
---------------------------------------------------------------------------

    All statements and representations made in this filing regarding 
(a) the description of the portfolios of the Fund

[[Page 68209]]

or Benchmark, (b) limitations on portfolio holdings or the Benchmark, 
or (c) the applicability of Exchange listing rules specified in this 
rule filing shall constitute continued listing requirements for listing 
the Shares on the Exchange.
    The issuer has represented to the Exchange that it will advise the 
Exchange of any failure by the Fund to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Fund is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
    Prior to the commencement of trading of the Shares, the Exchange 
will inform its ETP Holders in an information bulletin (``Information 
Bulletin'') of the special characteristics and risks associated with 
trading the Shares. Specifically, the Information Bulletin will discuss 
the following: (1) the risks involved in trading the Shares during the 
Early and Late Trading Sessions when an updated IFV will not be 
calculated or publicly disseminated; (2) the procedures for purchases 
and redemptions of Shares in Creation Baskets and Redemption Baskets 
(and that Shares are not individually redeemable); (3) NYSE Arca Rule 
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to 
learn the essential facts relating to every customer prior to trading 
the Shares; (4) how information regarding the IFV is disseminated; (5) 
how information regarding portfolio holdings is disseminated; (6) the 
requirement that ETP Holders deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (7) trading information.
    In addition, the Information Bulletin will advise ETP Holders, 
prior to the commencement of trading, of the prospectus delivery 
requirements applicable to the Fund. The Exchange notes that investors 
purchasing Shares directly from the Fund will receive a prospectus. ETP 
Holders purchasing Shares from the Fund for resale to investors will 
deliver a prospectus to such investors. The Information Bulletin will 
also discuss any exemptive, no-action, and interpretive relief granted 
by the Commission from any rules under the Act. In addition, the 
Information Bulletin will reference that the Fund is subject to various 
fees and expenses described in the Registration Statement.
    The Information Bulletin will also disclose the trading hours of 
the Shares and that the NAV for the Shares will be calculated after 
4:00 p.m. E.T. each trading day. The Information Bulletin will disclose 
that information about the Shares will be publicly available on the 
Fund's website.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \90\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest 
because it would reflect the change in the Fund's name, as set forth in 
the Registration Statement. Specifically, the proposed rule change 
would reflect a change in the Fund's name from the Hashdex Bitcoin 
Futures ETF to the Hashdex Bitcoin ETF. The proposed change is also 
designed to remove impediments to and perfect the mechanism of a free 
and open market, promote just and equitable principles of trade, and 
protect investors and the public interest by ensuring that the Fund's 
name is consistent with the Registration Statement and reflects the 
Fund's proposed updated investment strategy.
    The Exchange believes that the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market and, in general to protect investors and the public interest 
because the NQBTCS would provide reliable pricing on which to base the 
Benchmark because it is administered by an independent index 
administrator, it is intended to provide an institutional-grade 
reference price for Bitcoin, and the pricing methodology underlying the 
NQBTCS is reasonably designed to be resistant to potential price 
manipulation. Specifically, NQBTCS is calculated via a rigorous and 
publicly available methodology that incorporates trade data captured 
from cryptocurrency exchanges that meet eligibility criteria of the NCI 
and that is designed to adjust for variances in price, volume and 
volatility across a wide range of sources, as well as to protect 
against the impact of anomalous trading activity that could impact the 
NQBTCS price. Accordingly, the proposed use of NQBTCS would remove 
impediments to and perfect the mechanism of a free and open market and, 
in general to protect investors and the public interest by allowing the 
Fund to calculate a Benchmark that would track Bitcoin pricing broadly, 
consistent with the proposed change regarding the Fund's investment 
strategy as discussed above.
    The Exchange believes the proposed rule change is designed to 
remove impediments to and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest 
because it reflects the Fund's proposed investment strategy, through 
which the Fund would seek to achieve its investment objectives by 
investing in both Bitcoin futures and Spot Bitcoin, in addition to 
being able to hold part of its net assets in cash. The Exchange 
believes that the Fund's strategy of holding a mix of Spot Bitcoin, 
Bitcoin futures and cash would remove impediments to and perfect the 
mechanism of a free market and protect investors and the public 
interest because it would allow the Fund to limit its exposure to any 
single asset class, while offering investors exposure to Spot Bitcoin 
without relying on unregulated products or markets. The Exchange also 
believes that the Sponsor has designed the Fund to includes features 
intended to provide a robust framework for mitigating the risks of 
market manipulation, such as its proposed investment strategy, its use 
of futures-based pricing for Spot Bitcoin, the proposed Investment 
Restrictions, the use of EFP transactions on the CME Market for Spot 
Bitcoin, and the use of cash creations and redemptions, which would 
remove impediments to and perfect the mechanism of a free and open 
market and promote the protection of investors and the public interest. 
The Exchange also believes that, given these features of the Fund, the 
CME Market could be considered the regulated market of significant size 
in relation to the Fund and that there is a reasonable likelihood that 
a person attempting to manipulate the Fund would also have to trade on 
the CME Market to do so, such that information shared pursuant to NYSE 
Arca and the CME Market's common ISG membership would aid the Exchange 
in detecting and deterring potential misconduct.
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices and to protect 
investors and the public interest in that

[[Page 68210]]

the Shares would be listed and traded on the Exchange pursuant to the 
initial and continued listing criteria in NYSE Arca Rule 8.500-E. The 
Exchange has in place surveillance procedures that are adequate to 
properly monitor trading in the Shares in all trading sessions and to 
deter and detect violations of Exchange rules and applicable federal 
securities laws. The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares and 
the Fund's holdings with other markets and other entities that are 
members of the ISG, and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding trading in 
the Shares and the Fund's holdings from such markets and other 
entities. In addition, the Exchange may obtain information regarding 
trading in the Shares and the Fund's holdings from markets and other 
entities that are members of ISG or with which the Exchange has in 
place a CSSA. The Exchange is also able to obtain information regarding 
trading in the Shares and the Fund's holdings through ETP Holders, in 
connection with such ETP Holders' proprietary or customer trades which 
they effect through ETP Holders on any relevant market. The Exchange 
can obtain market surveillance information, including customer identity 
information, with respect to transactions (including transactions in 
Bitcoin Futures Contracts) occurring on US futures exchanges, which are 
members of the ISG. The intraday, closing prices, and settlement prices 
of the Bitcoin Futures Contracts will be readily available from the 
applicable futures exchange websites, automated quotation systems, 
published or other public sources, or major market data vendors website 
or on-line information services. Information regarding market price and 
trading volume of the Shares will be continually available on a real-
time basis throughout the day on brokers' computer screens and other 
electronic services.
    Complete real-time data for the Bitcoin Futures Contracts will be 
available by subscription from on-line information services. ICE 
Futures U.S. and CME also provide delayed futures information on 
current and past trading sessions and market news free of charge on the 
Fund's website. The specific contract specifications for Bitcoin 
Futures Contracts will also be available on such websites, as well as 
other financial informational sources. Quotation and last-sale 
information regarding the Shares will be disseminated through the 
facilities of the CTA. The IFV will be disseminated on a per Share 
basis every 15 seconds during the Exchange's Core Trading Session and 
be widely disseminated by one or more major market data vendors during 
the NYSE Arca Core Trading Session. The Fund's website will also 
include a form of the prospectus for the Fund that may be downloaded. 
The website will include the Share's ticker and CUSIP information along 
with additional quantitative information updated on a daily basis, 
including, for the Fund: (1) the prior business day's reported NAV and 
closing price and a calculation of the premium and discount of the 
closing price or mid-point 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 closing price or Bid/Ask Price 
against the NAV, within appropriate ranges, for at least each of the 
four previous calendar quarters. The website disclosure of portfolio 
holdings will be made daily and will include, as applicable, (i) the 
name, quantity, price, and market value of Bitcoin Futures Contracts, 
(ii) the counterparty to and value of forward contracts, and (iii) 
other financial instruments, if any, and the characteristics of such 
instruments and cash equivalents, and amount of cash held in the Fund's 
portfolio, if applicable.
    Trading in Shares of the Fund will be halted if the circuit breaker 
parameters in NYSE Arca Rule 7.12-E have been reached or 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 BTC and/or MBT Contracts 
and the securities and/or the financial instruments composing the daily 
disclosed portfolio of the Fund; or (2) whether other unusual 
conditions or circumstances detrimental to the maintenance of a fair 
and orderly market are present.
    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 
Trust Units based on Bitcoin 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 that are 
adequate to properly monitor trading in the Shares in all trading 
sessions and to deter and detect violations of Exchange rules and 
applicable federal securities laws.

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 will facilitate the listing and trading of Trust 
Units based on Bitcoin and that will enhance competition among market 
participants, to the benefit of investors and the marketplace.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number
    SR-NYSEARCA-2023-58 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-NYSEARCA-2023-58. 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

[[Page 68211]]

only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Exchange. Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to file number SR-NYSEARCA-2023-58 and should be submitted 
on or before October 24, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\91\
---------------------------------------------------------------------------

    \91\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21789 Filed 10-2-23; 8:45 am]
BILLING CODE 8011-01-P