FR 2024-29469

General Summary

The Securities and Exchange Commission (SEC) has issued a notice detailing a proposal by NYSE Arca, Inc. to list a new financial product known as the Bitwise Bitcoin and Ethereum ETF. This exchange-traded fund (ETF) will involve shares that represent holdings of bitcoin and ether, the two leading cryptocurrencies. The proposal aims to enable investors to gain exposure to these digital currencies without actually owning them, thereby providing an avenue for investment that might appeal to those interested in cryptocurrency but hesitant about direct ownership challenges. The document outlines the technical and operational specifics of how the ETF intends to function, including details about pricing benchmarks, asset custody arrangements, and the regulatory framework under which it will operate.

Significant Issues or Concerns

The document is dense with technical financial jargon, acronyms, and complex concepts which might be daunting for the average reader. The use of terms such as NAV (Net Asset Value), CME (Chicago Mercantile Exchange), and ETP (exchange-traded product) without adequate simplification or explanation could lead to confusion or misunderstanding among those not well-versed in finance.

Moreover, the document fails to thoroughly address the potential risks associated with the introduction of this ETF. For example, while it discusses processes like the Trust-Directed Trade Model and the Agent Execution Model, it does not provide clear reasoning for their selection or detailed analysis of their impact, which is essential for full transparency. Additionally, there are potential conflicts of interest regarding the selected trading partners that are not explicitly clarified.

Impact on the Public Broadly

If approved, this ETF could make investing in cryptocurrencies more accessible to the general public. It could potentially lower the barrier for entry, allowing individuals to invest in bitcoin and ether without needing to understand the intricacies of digital wallet management or cryptocurrency exchanges. However, without a clear understanding of the involved risks, investors might engage without full awareness of potential financial exposures or market volatility.

While offering a simplified mode of investment, the intricacies hidden within the ETF's operations, the underlying financial models, or potential market manipulations could impact investors, especially the less experienced. Thus, the need for public education on financial literacy is paramount to prevent uninformed decision-making.

Impact on Specific Stakeholders

Positive Impacts:

For institutional investors and traditional market players, the introduction of this ETF may be considered highly beneficial. It could offer a legitimate and regulated means to engage with the cryptocurrency market directly through a recognized financial institution, potentially spurring further innovation and investment.

For regulatory bodies, the move towards approving such ETFs might signal the maturation of cryptocurrency markets and their increasing integration with traditional finance, bringing about broader economic engagement.

Negative Impacts:

On the contrary, individuals unfamiliar with the cryptic language of finance and cryptocurrency might risk investments without fully appreciating the nuances and potential market fluctuations inherent in cryptocurrencies. This lack of understanding could potentially result in financial loss, if due caution is not exercised. Additionally, small cryptocurrency exchanges might feel the competitive crunch as institutional accessibility through ETFs could channel trading volume away from smaller, less-established platforms.

In conclusion, while the Bitwise Bitcoin and Ethereum ETF could mark a significant step toward mainstream cryptocurrency investments, the document presents challenges in terms of readability and lack of clarity on risks, necessitating a more accessible and comprehensive communication strategy to ensure all stakeholders are adequately informed and protected.

The document primarily focuses on the proposed rule change by NYSE Arca, Inc. to list and trade shares of the Bitwise Bitcoin and Ethereum ETF. This involves various financial concepts, evaluations, and references, particularly connected to the valuation and trading of digital assets like bitcoin and ether.

Valuation of Digital Assets

The trust's net assets and its shares are valued daily based on predetermined standards, known as Pricing Benchmarks. These benchmarks represent standardized reference rates that reflect the performance of bitcoin and ether in U.S. dollars. These benchmarks help provide transparency and consistency in assessing the value of these digital assets for financial products and transactions. The Bitcoin Pricing Benchmark and the Ether Pricing Benchmark each calculate once per day to fix market prices in U.S. dollars, particularly marking them at 4:00 p.m. Eastern Time.

Futures Contracts and Financial Activity

The document provides extensive details on the trading activities and outstanding values associated with bitcoin and ether futures. For instance, there were 348,635 bitcoin futures contracts with a total approximate value of $110.6 billion traded in September 2024. This information not only provides insight into the volume of trading but also the significant financial commitment involved in these futures markets. Moreover, the open interest — which measures the total number of outstanding derivative contracts — reached 39,590 bitcoin futures contracts, equating to $12.6 billion in September 2024.

Similarly, for ether, there were 95,261 CME ether futures contracts traded in September 2024, with their total value approximating $12.4 billion. This demonstrates the growth in trading activities and interest among traders, highlighting the economic footprint and influence of these digital currencies in the futures market.

Market Comparisons and Standardizations

Pricing mechanisms like the CME CF Real Time Index contribute to transparency by providing a continuous measure of the dollar price for bitcoin and ether, calculated once every second. This aligns with practices familiar to participants of traditional financial markets, facilitating easier integration and understanding among investors and traders.

The document also mentions pricing differences observed at specific times, such as the BRR measuring the bitcoin price at 4:00 p.m. London time, providing an alternative standardized reference that may be used by international markets.

Price Variation and Market Operations

The NYSE Arca sets a minimum price variation (MPV) for orders and quotations, with a standard of $0.01. This is reduced to $0.0001 for securities priced below $1.00. These measures are essential in maintaining orderly and fair market operations, potentially affecting trading strategies and financial decisions made by participants.

Conclusions on Financial Presentation

Overall, the financial components in this document indicate a sophisticated structure governing the valuation and trading of highly volatile digital assets like bitcoin and ether. The financial allocations relate to the issues identified by providing a structured approach to mitigate potential risks and address transparency in valuing these assets, which is critical for regulatory compliance and investor confidence. However, the complexity and technical language of these components may pose challenges for those without a background in financial markets, emphasizing the need for clear explanations to ensure public understanding.