FR 2025-04332

Commentary on the Proposed Rule Change by Cboe BZX Exchange

General Summary

The Cboe BZX Exchange, Inc. has proposed a rule change to the Securities and Exchange Commission (SEC) regarding two exchange-traded funds (ETFs) – the Invesco Galaxy Bitcoin ETF and the Invesco Galaxy Ethereum ETF. Currently, these ETFs allow for the creation and redemption of shares strictly using cash. The proposed change seeks to enable these processes to occur either in cash or in-kind, meaning that authorized participants could use actual cryptocurrencies such as bitcoin and ether, respectively, instead of just cash. The SEC has released this proposal for public comment until April 8, 2025.

Significant Issues and Concerns

The document employs complex legal and financial terminology, which may make it difficult for individuals without specialized knowledge to fully grasp the implications. The use of cross-references to previous amendments and releases further complicates understanding unless readers have access to those documents for reference.

Another notable issue is the absence of a clear explanation of the benefits and risks associated with in-kind transactions for these ETFs. While the amendment aims to increase efficiency, there is no discussion on how this change might affect market liquidity or volatility—critical aspects stakeholders typically consider.

Additionally, the document mentions that the exchange neither solicited nor received public comments on the proposed rule change. This lack of stakeholder engagement may raise questions about the transparency and inclusivity of the proposal development process.

Impact on the Public

For the general public, especially investors interested in cryptocurrencies or those already invested in these ETFs, this rule change may imply that transaction processes could become more streamlined and efficient. Using in-kind transactions could potentially make these investments more attractive by reducing transaction costs and mitigating certain market impacts when large volumes of ETFs are traded.

However, the public should also be wary of potential risks, such as increased market volatility, when large quantities of cryptocurrencies are introduced to or withdrawn from the market. Without sufficient discussion on these aspects in the document, individual investors may not fully appreciate the complexities involved in such in-kind transactions.

Impact on Specific Stakeholders

For authorized participants directly involved in the creation and redemption of ETF shares, the proposed change could significantly enhance operational efficiency. The ability to use cryptocurrencies directly opens avenues for quicker and potentially more cost-effective transactions. This operational flexibility can lead to better alignment with market conditions and potentially more competitive pricing strategies.

On the downside, increased operational complexity could arise for those not well-versed in cryptocurrency transactions. Market makers and participants might need to invest in new infrastructure or expertise to handle the added complexity of in-kind creations and redemptions.

In conclusion, while the proposed rule change by Cboe BZX Exchange presents opportunities for increased efficiency in cryptocurrency ETF trading, it also introduces several complexities and potential risks, particularly for those unfamiliar with details of cryptocurrency transactions. It would be prudent for stakeholders to engage in the upcoming commentary period to ensure their perspectives and concerns are adequately considered.