On 19 December 2024, the United States Securities and Exchange Commission (US SEC) has granted approval for rule changes proposed by the Nasdaq Stock Market LLC and Cboe BZX Exchange, Inc. to list and trade shares of two new cryptocurrency-based exchange-traded funds (ETFs): the Hashdex Nasdaq Crypto Index ETF and the Franklin Crypto Index ETF. The Hashdex Nasdaq Crypto Index ETF and the Franklin Crypto Index ETF represent commodity-based trust shares designed to hold spot bitcoin and ether, with proportions determined by their respective market capitalisations. The Nasdaq proposal for the Hashdex ETF and the Cboe proposal for the Franklin ETF both underwent amendments and public consultations to refine their operational structures and ensure alignment with applicable trading rules.
The SEC’s decision follows previous approvals of cryptocurrency-based ETFs that focused on either spot bitcoin or ether, building on the regulatory framework established in 2024. Both ETFs aim to provide investors with diversified exposure to cryptocurrencies while operating under rigorous oversight mechanisms.
The US SEC approved amendments to the listing standards of Nasdaq Stock Market LLC and Cboe BZX Exchange, Inc. to accommodate the trading of the Hashdex Nasdaq Crypto Index ETF and Franklin Crypto Index ETF. These rule changes establish a robust regulatory framework for these commodity-based trust shares, ensuring investor protection, market integrity, and transparency.
Nasdaq modified its Rule 5711(d), while Cboe amended its Rule 14.11(e)(4), to enable the listing and trading of the respective crypto ETFs which includes detailed requirements for the listing of commodity-based trust shares, such as operational guidelines, compliance standards, and governance measures. Both ETFs will hold a mix of spot bitcoin and ether, with asset weightings determined by their respective market capitalisations.
In accordance with the surveillance-sharing agreements with the Chicago Mercantile Exchange (CME), which allow for close monitoring of market activity, addressing potential risks of market manipulation. The rule changes mandate real-time updates of net asset values and detailed portfolio disclosures for both ETFs. During trading hours, intraday indicative values will be disseminated every 15 seconds, ensuring investors have access to accurate and timely pricing information. The rule amendments include provisions ensuring that assets held by the ETFs are stored securely in institutional-grade custody solutions. Both bitcoin and ether will be safeguarded against risks such as hacking or theft, with detailed reporting requirements on custody arrangements. The US SEC also requires disclosures on how the ETFs manage private key security and insurance coverage.
The ETFs are subject to ongoing compliance with equity trading rules and exchange listing standards. The rules include conditions for delisting in case of non-compliance, ensuring that the ETFs operate within the parameters established by the US SEC. To further mitigate risks, the rule changes impose restrictions on how the ETFs may engage with counterparties in spot markets. The US SEC reviewed the operational procedures for acquiring and disposing of bitcoin and ether.
The approval includes provisions for monitoring market activity and enforcing rules against insider trading and market manipulation. The exchanges will leverage their surveillance mechanisms in collaboration with the CME to detect irregularities in both futures and spot markets that could impact the ETFs. The US SEC approved pricing methodologies based on CME futures market data and additional pricing inputs from globally recognised spot market indices.
The rule changes apply specifically to the listing and trading of the Hashdex Nasdaq Crypto Index ETF and the Franklin Crypto Index ETF. However, the US SEC’s decision sets a precedent for future filings of similar commodity-based trust ETFs, signalling a broader acceptance of cryptocurrency ETFs within the US financial markets.
The Franklin ETF proposal was granted accelerated approval due to amendments aligning its operational structure with prior US SEC-approved filings. Both ETFs are expected to begin trading in early 2025, following final preparations by their respective exchanges.
(Source: https://www.sec.gov/files/rules/sro/nasdaq/2024/34-101998.pdf)
