FR 2025-02495

Commentary on the Nasdaq Stock Market LLC Proposed Rule Change

General Summary

The document at hand is a notice from the Securities and Exchange Commission (SEC) detailing a proposed rule change by the Nasdaq Stock Market LLC regarding the iShares Bitcoin Trust. The primary objective of this proposal is to enable "in-kind" transfers of bitcoin, which would serve as an alternative to the existing cash-based process for the creation and redemption of shares in the trust. This change aims to increase efficiency by allowing authorized participants to source bitcoin themselves rather than relying on the trust to manage cash conversions into bitcoin.

Significant Issues or Concerns

The document raises several issues worth considering:

• Complex Terminology: The proposal is rife with financial jargon and regulatory language, which may not be easily understandable to a layperson. Terms such as "Prime Execution Agent," "Trading Account," "Custody Account," "Basket," and "NAV" are used extensively without explicit definitions that might assist those not familiar with financial instruments or the mechanics of bitcoin trusts.

• Potential Impact on Investors: There is a lack of detailed analysis concerning how individual investors might be affected by the proposed changes, especially in terms of costs that could arise from discrepancies between bitcoin pricing during net asset value (NAV) calculations and actual transaction prices.

• Access to References: The notice makes several references to SEC releases and Nasdaq rules, which might be challenging for individuals to access or comprehend, leading to potential confusion regarding the specifics of the proposal.

• Rationale and Transparency: While the document outlines the benefits of in-kind transfers, such as increased efficiency and reduced market impact, it does not thoroughly discuss potential drawbacks or provide a comprehensive rationale about why specific changes are necessary.

Impact on the Public

Broadly speaking, the proposal could lead to more efficient trading by potentially lowering transaction costs and minimizing market disruptions. However, without a straightforward explanation of the technical processes involved, the general public may find it challenging to understand how these benefits are realized and whether there are any associated risks.

Impact on Specific Stakeholders

• Investors: The proposed changes may offer advantages to investors through potentially improved efficiency and reduced market impact. However, investors who are not well-versed in financial processes might require additional support to understand the implications of the changes, especially any cost implications due to pricing discrepancies.

• Authorized Participants: These participants could benefit significantly, as they would gain more control over sourcing bitcoin, potentially improving their trading strategies and operational efficiency.

• Regulatory and Financial Oversight: The proposal represents a shift in operational practices that may necessitate close monitoring to ensure compliance and protect investors. The lack of public comment might signal either approval or a need for greater stakeholder engagement, which could help refine and optimize the implementation of these changes.

Conclusion

Overall, while the proposed rule change has the potential to enhance trading efficiency, it requires clearer communication to ensure all stakeholders understand the modifications and their implications. Educating stakeholders, especially less financially savvy investors, is crucial to fostering confidence and ensuring informed participation in the evolving bitcoin trust market.

The document discusses processes related to the creation and redemption of shares in the iShares Bitcoin Trust, with a particular focus on how bitcoin and cash are used in these transactions. The financial references in this document include several key points regarding the responsibilities and potential impacts on the parties involved, especially regarding price differences during the creation and redemption processes.

Cash and In-Kind Creation and Redemption

The document outlines two main processes for creating and redeeming trust shares: cash transactions and in-kind transactions. For cash transactions, Authorized Participants provide cash to the trust, which is then used to buy bitcoin. Conversely, in in-kind transactions, these participants provide bitcoin directly.

Financial Responsibilities and Impacts

A critical financial aspect mentioned is the responsibility for price differences. In both cash and in-kind creation orders, the Authorized Participant is responsible for any dollar cost difference when the bitcoin price used to calculate the Net Asset Value (NAV) per share on the trade date differs from the price at which the trust acquires the bitcoin. Specifically, if the price at acquisition is higher, the Authorized Participant must cover the additional cost. However, if the acquisition price is lower, the Authorized Participant benefits by retaining the difference.

Similarly, during cash redemption orders, the same principle applies. If the sale of bitcoin to raise cash yields a lower price than that used for NAV calculations, the Authorized Participant bears the cost. If the sale price is higher, the participant again keeps the difference. These financial references emphasize the trust's use of current market prices to settle creations and redemptions and place financial risks and opportunities on the Authorized Participants based on price volatility.

Complexity and Jargon

The issues identified in the document center around the complexity and potential misunderstanding of terms like "NAV," "Prime Execution Agent," and "Trade Credits." More clarity is needed, especially for high school-educated readers, about how these financial concepts affect both the trust and its participants.

These financial mechanics' potential impacts or risks to individual investors are not explicitly addressed. The document assumes familiarity with financial instruments and bitcoin trusts, potentially complicating comprehension for readers without such backgrounds. Specifics regarding how these processes might directly affect trade efficiency or market operations remain somewhat ambiguous.

Overall, the financial references highlight important dynamics in managing bitcoin assets and liabilities within the trust framework, particularly focusing on how fluctuations in bitcoin prices can influence financial liabilities or gains for those involved in creating or redeeming shares.