FR 2025-03887

Summary

The document in question pertains to a proposed rule change submitted by NYSE Arca to the Securities and Exchange Commission (SEC). This proposal seeks approval to list and trade shares of a new exchange-traded fund (ETF) called the Bitwise Bitcoin and Ethereum ETF. This ETF is designed to offer exposure to the two most prominent cryptocurrencies: Bitcoin and Ethereum. Managed by Bitwise Investment Advisers, the ETF allocates its assets based on the relative market capitalization of these cryptocurrencies. The SEC will now evaluate whether this ETF complies with existing regulations and ensures adequate protections against fraud and manipulation.

Significant Issues and Concerns

The document presents several complex financial and regulatory concepts that may challenge readers unfamiliar with these areas. The intricate details of the ETF’s creation and redemption processes, which involve the Trust-Directed Trade Model and Agent Execution Model, are particularly complicated. Without step-by-step explanations or examples, these processes might confuse potential investors or authorized market participants.

Additionally, the mention of nonrefundable transaction fees and potential extra cash requirements for authorized participants could raise concerns about financial barriers. Prospective participants might worry about unforeseen expenses or complexities related to engaging with the ETF.

The document also heavily references legal and regulatory frameworks, such as various sections of the Securities Exchange Act and NYSE Arca rules. This frequent use of regulatory jargon might alienate or confuse readers who do not possess a background in finance law. Likewise, the section on how the ETF will value Bitcoin and Ethereum is laden with technical details that might be inaccessible to the average reader.

Broad Public Impact

Cryptocurrency enthusiasts and retail investors could find the availability of this ETF on a major exchange like NYSE Arca appealing. It offers them a regulated means to gain exposure to Bitcoin and Ethereum without directly purchasing and storing the cryptocurrencies. If approved, this ETF could also signify a growing acceptance of digital assets within traditional financial markets, potentially merging these once separate investment worlds.

On a broader scale, the introduction of more cryptocurrency-related financial products could spur public interest in digital assets, possibly impacting investment trends and cultural perceptions of cryptocurrencies. By providing a traditional investment vehicle that is rooted in cryptocurrencies, it might encourage a broader demographic to consider digital currencies as part of a diversified investment strategy.

Impact on Specific Stakeholders

Retail Investors: Retail investors stand to benefit from the transparency and regulatory oversight that an ETF provides. It could offer them a convenient and somewhat less risky way to invest in cryptocurrencies, as the ETF would likely be subject to regular audits and regulatory scrutiny.

Institutional Investors: These stakeholders traditionally exercise caution in dealing with digital currencies due to volatility and regulation concerns. This ETF could provide them with a solidified framework within which they feel confident to participate, thus injecting more capital into the cryptocurrency markets.

Regulatory Bodies: For agencies like the SEC, the approval or disapproval of such ETFs sets significant precedents. Approving the fund would mean recognizing cryptocurrency-based financial products as legitimate vehicles, thus requiring the development of comprehensive regulatory frameworks.

Cryptocurrency Enthusiasts: For those committed to the use and expansion of digital currencies, this ETF could enhance legitimacy, supporting broader acceptance and integration of cryptocurrencies within global financial systems.

While this document offers a specialized introduction to a regulatory proposal, it is ultimately part of a larger dialogue about cryptographic currency's role in modern finance. By examining these proposed changes, stakeholders can gauge emerging trends and consider their participation in the evolving landscape of digital assets.

The Federal Register document provides notice of a proposed rule change by NYSE Arca, Inc., related to the listing and trading of shares in the Bitwise Bitcoin and Ethereum ETF. This involves various financial references throughout the proposed rule change, particularly concerning the valuation and trading of bitcoin and ether.

Valuation and Pricing of Bitcoin and Ether

The document highlights how the net assets of the Trust, including its shares, are valued using standardized reference rates published by a Benchmark Provider. These rates, designed to reflect the performance of bitcoin and ether in U.S. dollars, establish a daily benchmark rate and serve as the foundation for various financial products. Specifically, the Bitcoin Pricing Benchmark provides a daily reference rate for the U.S. dollar price of one bitcoin, while the Ether Pricing Benchmark does the same for ether. Both Rates are calculated with precision as of 4:00 p.m. E.T.

This process ensures that the Trust's valuation is based on a consistent and transparent methodology, facilitating clear financial reporting and investor understanding. However, the complexity of the valuation process, involving multiple benchmarks and real-time indexes, may lead to confusion among those not familiar with financial markets and instruments, as highlighted in the identified issues.

Trading Volumes and Market Activity

The document mentions significant trading volumes and market activities on the CME Group for both bitcoin and ether futures. For instance, in September 2024, 348,635 bitcoin futures contracts were traded, valued at approximately $110.6 billion. Similarly, a notable volume of ether futures contracts was traded during the same period. This illustrates the substantial financial stakes and activity surrounding these digital assets.

These large trading volumes represent a significant engagement from market participants, reflecting the high liquidity and interest in these futures markets. While the data indicates robust market participation, the sheer scale of these figures can appear daunting to the general audience, making it a critical point in evaluating the complexity of the financial landscape discussed in the document.

Transaction Details and Fees

Further financial references relate to the transaction fees and additional cash requirements Authorized Participants must meet when engaging with the Trust. Transaction procedures, such as creating and redeeming shares, are detailed and include potential nonrefundable fees. Such financial barriers could pose difficulties for participants, raising concerns about the accessibility and costs associated with the Trust.

The mention of these fees without a detailed explanation of their context or potential impact might lead participants to question the financial burdens involved. This lack of clarity ties into one of the document's issues, emphasizing the need for straightforward explanations of financial obligations associated with the ETF.

Overall, the financial references in the document are considerable, underscoring the magnitude of cryptocurrency transactions and the structured approach to ensuring value transparency and integrity. Yet, these references also highlight the complexities and potential barriers involved, necessitating clear guidance for a general audience to navigate these intricate financial waters effectively.