Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust, 23125-23138 [2019-10351]

Download as PDF Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices levels to trade pursuant to the same strike setting regime. This will permit investors to employ similar investment and hedging strategies for each of these options. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 13 and subparagraph (f)(6) of Rule 19b–4 thereunder.14 A proposed rule change filed pursuant to Rule 19b–4(f)(6) under the Act 15 normally does not become operative for 30 days after the date of its filing. However, Rule 19b–4(f)(6)(iii) 16 permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange stated that waiver of this requirement will ensure fair competition among the exchanges by allowing the Exchange to set the interval between strike prices of series of options on ETF shares of QQQ and IWM in a manner consistent with another exchange. Further, the Exchange stated that because the proposed rule change is based on the rules of another SelfRegulatory Organization,17 it does not introduce any new or novel regulatory issues. For these reasons, the Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest. Accordingly, the 13 15 U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). In addition, Rule 19b– 4(f)(6)(iii) requires a self-regulatory organization to give the Commission written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has satisfied this requirement. 15 17 CFR 240.19b–4(f)(6). 16 17 CFR 240.19b–4(f)(6)(iii). 17 See supra note 12. jbell on DSK3GLQ082PROD with NOTICES 14 17 VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 23125 Commission hereby waives the operative delay and designates the proposed rule change operative upon filing.18 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule change should be approved or disapproved. Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–PEARL–2019–18 and should be submitted on or before June 11, 2019. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Eduardo A. Aleman, Deputy Secretary. Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– PEARL–2019–18 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–PEARL–2019–18. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public 18 For purposes only of waiving the 30-day operative delay, the Commission also has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 [FR Doc. 2019–10513 Filed 5–20–19; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–85854; File No. SR– NYSEArca–2019–01] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Amendment No. 1 and Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust May 14, 2019. On January 28, 2019, NYSE Arca, Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares of the Bitwise Bitcoin ETF Trust under NYSE Arca Rule 8.201–E. The proposed rule change was published for comment in the Federal Register on February 15, 2019.3 On March 29, 2019, pursuant to Section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 85093 (Feb. 11, 2019), 84 FR 4589 (Feb. 15, 2019). 4 15 U.S.C. 78s(b)(2). 1 15 E:\FR\FM\21MYN1.SGM 21MYN1 23126 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices determine whether to approve or disapprove the proposed rule change.5 On May 7, 2019, the Exchange filed Amendment No. 1 to the proposed rule change, which replaced and superseded the proposed rule change as originally filed.6 As of May 14, 2019, the Commission has received 25 comment letters on the proposal.7 The Commission is publishing this notice and order to solicit comments on the proposed rule change, as modified by Amendment No. 1, from interested persons and to institute proceedings pursuant to Section 19(b)(2)(B) of the Act 8 to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1. I. Exchange’s Description of the Proposal, as Modified by Amendment No. 1 The Exchange proposes to list and trade shares of the Bitwise Bitcoin ETF Trust under NYSE Arca Rule 8.201–E. This Amendment No. 1 to SR– NYSEArca–2019–01 replaces SR– NYSEArca–2019–01 as originally filed and supersedes such filing in its entirety. The proposed change is available on the Exchange’s website at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change jbell on DSK3GLQ082PROD with NOTICES In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 5 See Securities Exchange Act Release No. 85461 (Mar. 29, 2019), 84 FR 13339 (Apr. 4, 2019). The Commission designated May 16, 2019, as the date by which the Commission shall approve or disapprove, or institute proceedings to determine whether to approve or disapprove, the proposed rule change. 6 Amendment No. 1 is available at: https:// www.sec.gov/comments/sr-nysearca-2019-01/ srnysearca201901-5461982-184967.pdf. 7 Comments on the proposed rule change can be found at: https://www.sec.gov/comments/srnysearca-2019-01/srnysearca201901.htm. 8 15 U.S.C. 78s(b)(2)(B). VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to list and trade shares (‘‘Shares’’) of the Bitwise Bitcoin ETF Trust (the ‘‘Trust’’), under NYSE Arca Rule 8.201–E.9 According to the Registration Statement, the Trust will not be registered as an investment company under the Investment Company Act of 1940, as amended,10 and is not required to register under such act. The Trust is not a commodity pool for purposes of the Commodity Exchange Act, as amended.11 The Trust is managed and controlled by Bitwise Investment Advisers, LLC (the ‘‘Sponsor’’). The Trust will offer Shares of the Trust for sale through the Trust’s Marketing Agent in ‘‘Creation Units,’’ as described below. The Marketing Agent will also assist the Sponsor and the Trust’s administrator with certain functions and duties relating to distribution and marketing. The Exchange represents that the Shares satisfy the requirements of NYSE Arca Rule 8.201–E and thereby qualify for listing on the Exchange.12 Operation of the Trust 13 According to the Registration Statement, the investment objective of the Trust is to provide exposure to bitcoin that is reflective of the actual bitcoin market where investors can purchase and sell bitcoin, less the expenses of the Trust’s operation. In seeking to achieve its investment objective, the Trust will hold bitcoin, and in seeking to ensure that the price of the Trust’s shares is reflective of the actual bitcoin market, the Trust will value its shares daily based on prices drawn from ten bitcoin exchanges that 9 The Trust is a Delaware statutory trust. On January 10, 2019, the Trust filed with the Commission an initial registration statement on Form S–1 under the Securities Act of 1933 (15 U.S.C. 77a) (the ‘‘Securities Act’’) (File No. 333– 229180). On April 6, 2019, the Trust filed with the Commission Pre-Effective Amendment No. 1 to the initial registration statement (the initial registration statement, as amended by Pre-Effective Amendment No. 1, the ‘‘Registration Statement’’). The description of the operation of the Trust herein is based, in part, on the Registration Statement. 10 15 U.S.C. 80a–1. 11 17 U.S.C. 1. 12 With respect to the application of Rule 10A– 3 (17 CFR 240.10A–3) under the Act, the Trust relies on the exemption contained in Rule 10A– 3(c)(7). 13 The description of the operation of the Trust, the Shares and the bitcoin market contained herein are based, in part, on the Registration Statement. See note 9, supra. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 the Sponsor and its affiliate, Bitwise Index Services, LLC (‘‘Bitwise Index Services’’) believe, based on their research and analysis (discussed below), represent substantially all of the economically significant spot trading volume on bitcoin exchanges around the world (the ‘‘Bitwise Daily Bitcoin Reference Price’’ or ‘‘Bitcoin Price’’).14 The Trust will store its bitcoin in custody at a regulated third-party custodian, and will not use derivatives that may subject the Trust to counterparty and credit risks. The Trust will process all creations and redemptions in-kind, and accrue all fees in bitcoin (rather than cash), as a way of ensuring that the Trust holds the desired amount of bitcoin-per-share under all scenarios. The Trust will not buy or sell bitcoin under any situation other than if the Trust is required to liquidate. The Sponsor believes that the design of the Trust will enable certain investors to more effectively and efficiently implement strategic and tactical asset allocation strategies that use bitcoin by investing in the Trust’s Shares rather than purchasing, holding and trading bitcoin directly, while protecting the Trust from potential concerns around market manipulation and other factors, as explained below. Bitcoin, Bitcoin Market, Bitcoin Exchanges and Regulation of Bitcoin The following sections describe bitcoin, including the historical development of bitcoin and the bitcoin network, how a person holds bitcoin, how to use bitcoin in transactions, the ‘‘exchange’’ market where bitcoin can be bought, held and sold, and the bitcoin ‘‘over-the-counter’’ (‘‘OTC’’) market. 14 Bitwise Index Services conducts research upon and provides pricing and indexing data related to the bitcoin market for use by the Trust and other unaffiliated parties. Bitwise Index Services manages the process for collection and dissemination of the Bitcoin Price with input from its Bitwise Crypto Index Committee, which has ultimate responsibility and authority for developing, maintaining and adjusting the Bitcoin Price as well as other cryptoasset data products and indexes. The Committee is composed of three members of the Bitwise leadership team selected for seniority and expertise in indexing, cryptoassets and data engineering. The Committee is advised in this effort by the Bitwise Crypto Index Advisory Board (the ‘‘Advisory Board’’), an independent group of leading experts in the fields of both traditional asset indexing and crypto assets with members both internal and external to Bitwise. Advisory Board suggestions are not binding to the Committee. Bitwise Index Services and the Sponsor are referred to herein as ‘‘Bitwise’’ throughout unless the explicit clarification of a particular role of either affiliate is required to describe the operations of the Trust. Both Bitwise Index Services and the Sponsor are affiliates of Bitwise Asset Management, Inc. E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices Bitcoin According to the Registration Statement, bitcoin is a digital asset that can be transferred among parties via the internet. Unlike other means of electronic payments such as credit card transactions, one of the advantages of bitcoin is that it can be transferred without the use of a central administrator or clearing agency. Because a central party is not necessary to administer bitcoin transactions or maintain the bitcoin ledger, the term decentralized is often used in descriptions of bitcoin. jbell on DSK3GLQ082PROD with NOTICES Bitcoin Network Bitcoin was first described in a white paper released in 2008 and published under the name ‘‘Satoshi Nakamoto.’’ The protocol underlying Bitcoin was subsequently released in 2009 as open source software and currently operates on a worldwide network of computers. For persons that want to use bitcoins to pay for goods and services in actual transactions, the first step is to download specialized software referred to as a ‘‘bitcoin wallet.’’ A user’s bitcoin wallet can run on a computer or smartphone, and can be used both to send and to receive bitcoin. Within a bitcoin wallet, a user can generate one or more unique ‘‘bitcoin addresses,’’ which are conceptually similar to bank account numbers. After establishing a bitcoin address, a user can send or receive bitcoin from his or her bitcoin address to another user’s address. Sending bitcoin from one bitcoin address to another is similar in concept to sending a bank wire from one person’s bank account to another person’s bank account. The amount of bitcoin associated with each bitcoin address is listed in a public ledger, referred to as the ‘‘blockchain.’’ Copies of the blockchain exist on thousands of computers on the Bitcoin network throughout the internet. A user’s bitcoin wallet will either contain a copy of the blockchain or be able to connect with another computer that holds a copy of the blockchain. When a bitcoin user wishes to transfer bitcoin to another user, the sender must first request a bitcoin address from the recipient. The sender then uses his or her bitcoin wallet software to create a proposed addition (often referred to as a ‘‘transaction’’) to the blockchain. The proposal will reduce the sender’s address and increase the recipient’s address by the amount of bitcoin desired to be transferred. The proposal is completely digital in nature, similar to a file on a computer, and it can be VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 sent to other computers participating in the Bitcoin network. Bitcoin Transactions A bitcoin transaction is similar in concept to an irreversible digital check. The transaction contains the sender’s bitcoin address, the recipient’s bitcoin address, the amount of bitcoin to be sent, a transaction fee and the sender’s digital signature. The sender’s use of his or her digital signature enables participants on the Bitcoin network to verify the authenticity of the bitcoin transaction. A user’s digital signature is generated via usage of the user’s so-called ‘‘private key,’’ one of two numbers in a so-called cryptographic ‘‘key pair.’’ A key pair consists of a ‘‘public key’’ and its corresponding private key, both of which are lengthy alphanumeric codes, derived together and possessing a unique relationship. Public keys are bitcoin addresses that are publicly known and can accept a bitcoin transfer. Private keys are used to sign transactions that initiate the transfer of bitcoin from a sender’s bitcoin address to a recipient’s bitcoin address. Only the holder of the private key associated with a particular bitcoin address can digitally sign a transaction proposing a transfer of bitcoin from that particular bitcoin address. A user’s bitcoin address may be safely distributed, but a user’s private key must be kept in accordance with appropriate controls and procedures to ensure it is used only for legitimate and intended transactions. Only by using a private key can a bitcoin user create a digital signature to transfer bitcoin to another user. In addition, if an unauthorized third person learns of a user’s private key, that third person could forge the user’s digital signature and send the user’s bitcoin to any arbitrary bitcoin address, thereby stealing the user’s bitcoin. The usage of key pairs is a cornerstone of the Bitcoin network. This is because the use of a private key is the only mechanism by which a bitcoin transaction can be signed. If a private key is lost, the corresponding bitcoin is thereafter permanently non-transferable. Moreover, the theft of a private key enables the thief immediate and unfettered access to the corresponding bitcoin. For large quantities of bitcoin, holders often embrace sophisticated security measures. The Trust will use a regulated, third-party custodian with institutional design controls and redundancies in place to safeguard and hold in custody the bitcoin private keys. The Bitcoin network incorporates a system to prevent double spending of a PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 23127 single bitcoin. To prevent the possibility of double-spending a single bitcoin, each validated transaction is recorded, time stamped and publicly displayed in a ‘‘block’’ in the Bitcoin Blockchain, which is publicly available. Thus, the Bitcoin network provides confirmation against double-spending by memorializing every transaction in the Bitcoin Blockchain, which is publicly accessible and downloaded in part or in whole by all users of the Bitcoin network software program. The process by which bitcoin are created and bitcoin transactions are verified is called mining. To begin mining, a user, or ‘‘miner,’’ can download and run a mining ‘‘client,’’ which, like regular Bitcoin network software programs, turns the user’s computer into a ‘‘node’’ on the Bitcoin network, and in this case has the ability to validate transactions and add new blocks of transactions to the Blockchain. Miners, through the use of the bitcoin software program, engage in a set of prescribed complex mathematical calculations in order to verify transactions and compete for the right to add a block of verified transactions to the Bitcoin Blockchain and thereby confirm bitcoin transactions included in that block’s data. The miner who successfully adds a block of transactions to the Blockchain is rewarded by a grant of bitcoin. The supply of bitcoin is programmatically limited to 21 million bitcoin. Confirmed and validated bitcoin transactions are recorded in blocks added to the Bitcoin Blockchain. Each block contains the details of some or all of the most recent transactions that are not memorialized in prior blocks, as well as a record of the award of bitcoin to the miner who added the new block. Each unique block can only be solved and added to the Bitcoin Blockchain by one miner; therefore, all individual miners and mining pools on the Bitcoin network must engage in a competitive process of constantly increasing their computing power to improve their likelihood of solving for new blocks. As more miners join the Bitcoin network and its processing power increases, the Bitcoin network adjusts the complexity of a block-solving equation to maintain a predetermined pace of adding a new block to the Bitcoin Blockchain approximately every ten minutes. Bitcoin Market and Bitcoin Exchanges In addition to using bitcoin to engage in transactions, investors may purchase and sell bitcoin to speculate as to the value of bitcoin in the bitcoin market, or as a long-term investment to diversify their portfolio. The value of bitcoin E:\FR\FM\21MYN1.SGM 21MYN1 jbell on DSK3GLQ082PROD with NOTICES 23128 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices within the market is determined, in part, by the supply of and demand for bitcoin in the bitcoin market, market expectations for the adoption of bitcoin by individuals, the number of merchants that accept bitcoin as a form of payment and the volume of private end-user-to-end-user transactions. Research conducted by Bitwise Index Services indicates that the vast majority of spot trading volume of bitcoin takes place on ten exchanges, although a number of other smaller exchanges exist as well. Bitcoin exchanges operate websites designed to permit investors to open accounts with the exchange and then purchase and sell bitcoin. As with conventional stock exchanges, an investor opening a trading account must deposit an accepted government-issued currency into their account with the exchange, or a previously acquired digital asset, before they can purchase or sell assets on the exchange. The process of establishing an account with a bitcoin exchange and trading bitcoin is different from the process of users sending bitcoin from one bitcoin address to another bitcoin address to pay for goods and services. This latter process is an activity that occurs wholly within the confines of the Bitcoin network, while the former is an activity that occurs entirely on private websites. According to the Registration Statement, Bitwise Index Services’ research has led it to believe that the bitcoin market has matured significantly in recent years. In particular, Bitwise Index Services believes that arbitrage on bitcoin exchanges (discussed below) has improved significantly since the introduction of bitcoin futures in December 2017, which fundamentally transformed the bitcoin market by creating a two-sided market and easy hedging for the first time. In addition, subsequent to the introduction of bitcoin futures, in early 2018, a large number of sophisticated market makers entered the bitcoin market, applying large balance sheets and tech-enabled trading platforms that further improved the quality of the market. By summer 2018, most major market makers were either present in the bitcoin market or actively exploring the space. In addition, over the course of 2018, a significant and efficient short lending market in bitcoin developed, with volume growing over the course of the year. Bitwise Index Services believes that the launch of futures, the arrival of major market makers, and the development of lending combined to dramatically improve the efficiency of the bitcoin market in 2018, creating a VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 dynamic, institutional-quality, twosided market for the first time. While further developments may be incrementally beneficial to the market, Bitwise Index Services believes that the spot bitcoin market today operates with an efficiency that matches or exceeds that of other major financial markets. As discussed in more detail below, the Trust will not directly purchase or sell bitcoin. Instead, Authorized Participants will deliver bitcoin to the Trust in exchange for Shares of the Trust, and the Trust will deliver bitcoin to Authorized Participants when those Authorized Participants redeem Shares of the Trust. The Trust will use ten spot exchanges that the Sponsor and Bitwise Index Services believe represent substantially all of the economically significant bitcoin trading volume in the world (outside of capital-controlled countries) in order to derive the Bitwise Daily Bitcoin Reference Price, which it will then use to price its Net Asset Value (‘‘NAV’’) at the end of every business day. Authorized Participants will have the option of purchasing and selling bitcoin used in Creation Basket transactions with the Trust either on bitcoin exchanges or in the ‘‘over-the-counter’’ (‘‘OTC’’) markets. Over-the-counter trading of bitcoin is generally accomplished via bilateral agreements on a principal-to-principal basis. All risks and issues related to creditworthiness are between the parties directly involved in the transaction. The Structure and Operation of the Trust Was Designed To Protect Investors and Satisfy Commission Requirements for Bitcoin-Based Exchange Traded Products The Registration Statement and the Sponsor’s submission to the Commission in connection with this filing,15 seek to explain how the structure and operation of the Trust is designed to protect investors and to respond to the concerns the Commission has raised and the requirements that must be satisfied by any bitcoin-based exchange-traded product set forth in the ‘‘Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change, as Modified by Amendments 15 See Bitwise Asset Management, Presentation to the U.S. Securities and Exchange Commission, dated March 19, 2019, attached to Memorandum from the Division of Trading and Markets regarding a March 19, 2019 meeting with representatives of Bitwise Asset Management, Inc., NYSE Arca, Inc., and Vedder Price P.C., available at https:// www.sec.gov/comments/sr-nysearca-2019-01/ srnysearca201901-5164833-183434.pdf. This document is referred to in this filing as the ‘‘Bitwise Study.’’ PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 No. 1 and 2, to List and Trade Shares of the Winklevoss Bitcoin Trust’’ (the ‘‘Winklevoss Order’’) 16 and the ‘‘Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related Holdings’’ (the ‘‘Staff Letter’’).17 The Commission has outlined two ways that a Rule 19b-4 filing relating to a bitcoin exchange-traded product can satisfy the concerns outlined in the Winklevoss Order and in particular the concerns regarding potential market manipulation of the underlying market. Bitwise believes these Commission concerns are addressed by demonstrating that: (1) Unique Resistance: The bitcoin market is uniquely resistant to market manipulation and fraudulent activity; and (2) Surveillance Sharing: The listing exchange has entered into a surveillance sharing agreement with a regulated market of significant size in bitcoin or derivatives on bitcoin. Historically, the existence of a surveilled market has been the primary consideration regarding addressing potential market manipulation, as the Commission stated when discussing its past approval of gold bullion exchangetraded products (‘‘ETPs’’) in the Winklevoss Order.18 The Sponsor believes that the gold market is substantially similar to the bitcoin market in all respects that are critically important from the perspective of the federal securities laws. That is, the bitcoin market (and the Trust specifically) is uniquely resistant to manipulation, and there is a significant, regulated and surveilled market for bitcoin futures. The ‘‘Real’’ Market for Bitcoin The Sponsor represents that bitcoin is a globally fungible commodity with low transaction costs, near-zero transportation costs that allows nearly instantaneous transportation to any location around the world, and low-tozero storage costs, as follows: • Globally Fungible Commodity: A bitcoin is the same anywhere around the world. Unlike wheat, oil or gold, there 16 See Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (SR– BatsBZX–2016–30) (Order Setting Aside Action by Delegated Authority and Disapproving a Proposed Rule Change to List and Trade Shares of the Winklevoss Bitcoin Trust). 17 See letter dated January 18, 2018 from Dalia Blass, Director, Division of Investment Management, Commission, to Paul Schott Stevens, President & CEO Investment Company Institute and Timothy W. Cameron, Asset Management Group— Head, Securities Industry and Financial Markets Association. 18 See Winklevoss Order at note 216 and accompanying text. E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES are no varieties, purities, or geographically specific delivery locations for bitcoin. • Low Transaction Costs: The median spread for bitcoin traded on Coinbase Pro, a leading bitcoin exchange, in the month of March 2019 was $0.01, with each bitcoin valued at approximately $5,000. This makes bitcoin one of the most tightly quoted financial instruments in the world. • Near-Zero Transportation Costs: Unlike physical commodities, there is virtually no cost to transport bitcoin anywhere in the world, and that transportation can occur nearly instantly. • Low-To-Zero Storage Costs: Bitcoin can safely be stored with established, regulated third-party custodians at a cost that ranges from 0% to 1.5% a year. These four factors would, in isolation, suggest that the bitcoin market should be uniquely orderly and efficient, with tight spreads and nearly perfect arbitrage between prices on different exchanges. Unfortunately, in practice, many perceive that the market for bitcoin as disorderly and inefficient, with many unregulated operators running crypto ‘‘exchanges’’ from unknown domiciles. Bitwise believes that this perception derives from the fact that leading data aggregators, including those cited by national media organizations like The New York Times, The Wall Street Journal and Barron’s, have reported volume, price and trading data for bitcoin that includes an overwhelming percentage of volume that is fake and/ or non-economic in nature. As discussed further below, Bitwise’s research concludes that when fake and/ or non-economic data is removed, the remaining or ‘‘real’’ market for bitcoin is significantly smaller, more orderly and more regulated than commonly understood, and that, with that understanding, this filing should squarely address the concerns laid out by the Commission in the Winklevoss Order. Bitwise’s Analysis of the Reported Market for Bitcoin Trading Bitwise conducted a thorough, datadriven analysis of the spot market for bitcoin from March 4, 2019 through March 8, 2019.19 Bitwise analyzed all exchanges reporting more than $1 million in average daily trading volume for bitcoin-fiat and bitcoin-stablecoin pairs to the popular data aggregator CoinMarketCap.com, which yielded 81 exchanges with approximately $6 billion in average daily volume. Bitwise 19 See note 15, supra. VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 deliberately utilized a short time period to both showcase that fake volume is a current problem impacting the bitcoin market and because, in its experience, exchanges change the algorithms driving how they fake volume over time, which obscures the results of certain data-driven analyses over longer periods. The Bitwise Study analyzed all purportedly significant bitcoin exchanges and initially found several widespread, superficial indicators of fake or non-economic trading volume. These indicators include the following. • Perfectly paired buy and sell orders. Bitwise does not believe that actual trading on exchanges generally result in perfectly-consistent alternating buy and sell orders of roughly equal size, but nonetheless exchanges exhibited this pattern in their data. • Spread sizes. Bitwise does not believe that there ought to be relatively large reported spreads between bid and ask prices exhibited on exchanges that report a large volume of trades in comparison to other bitcoin exchanges with lower reported volume, absent clear economic explanations (tick size, fees, etc.), but exchanges with large amounts of claimed volume showed spreads that were 100X, 1000X or more the size of spreads on certain exchanges with much lower levels of volume. • Real-World Footprint. Bitwise does not believe that exchanges with large reported amounts of volume would typically exhibit relatively small realworld footprints, including low web traffic, few known employees, minimal social media presence and limited or no fundraising or capitalization information, but it found many exchanges that exhibited these characteristics. • Unexplained periods of no trading. Bitwise found that certain exchanges with large reported volume nonetheless exhibited multiple hours and days with zero volume that are not correlated with business hours, volatility, up time, or other factors. • Monotonic trading volume. Bitwise found that some exchanges reported relatively large amounts of volume in which a roughly identical volume is reported every hour of every day, regardless of price movements, news, waking hours, weekends, or other realworld factors. Given these indications, Bitwise created a computer program for collecting or ‘‘scraping’’ data across different bitcoin exchanges, which collected and stored both the order book and recent trades for all exchanges reporting significant volume, four times each second. Bitwise analyzed data from PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 23129 these 81 different bitcoin exchanges and concluded, for reasons outlined below, that 95% of heretofore reported volume is either fake or non-economic trading. Bitwise estimates that the real total average daily bitcoin volume is approximately $273 million, and that this volume is more regulated, more U.S.-focused and more orderly than perceived. In separating exchanges that have real vs. non-economic transactions, Bitwise considered the following data characteristics: D Trade Size Histograms. Bitwise’s computer program can produce trade size ‘‘histograms’’ that show the percentage of volume that occur at particular trade sizes over a specified period. Trade size histograms for the exchanges that pass all of its data tests show consistent patterns that reflect trading that Bitwise believes naturally occurs. Such patterns include volume declining as trade size increases and a greater-than-random distribution of volume at whole bitcoin sizes. These patterns are roughly consistent in size and shape across all ten exchanges that pass all of Bitwise’s data tests. Trade size histograms from other exchanges, on the other hand, reflect patterns that were idiosyncratic and often had patterns that were transparently programmatic, such as bell curve-like distributions with no apparent reason for such a clustering of trade sizes, and increasing volume for larger trade sizes rather than the decaying trend mentioned above. Most of these exchanges showed no peaks at whole bitcoin sizes. • Volume Spike Analysis. Bitwise’s computer program can produce charts that show volume ‘‘spikes,’’ or periods of significantly increased transaction volume, across any exchange. Because the bitcoin market is a globally integrated market for a fungible good, Bitwise believed a priori that, with some limitations for time zones and holidays, volume on different exchanges would rise and fall concurrently in response to the same events or changes in market conditions. • This pattern played out as expected among the ten exchanges that passed all data tests and that Bitwise believes constitutes substantially all of the real global spot trading volume for bitcoin, but was noticeably absent among other exchanges, which either had no discernible volume spikes or had patterns that were wholly idiosyncratic and did not repeat on other exchanges. D Spread Patterning Analysis. The spread on an exchange with real volume will have two key features that Bitwise E:\FR\FM\21MYN1.SGM 21MYN1 jbell on DSK3GLQ082PROD with NOTICES 23130 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices believes it can identify through a data driven analysis. • First, Bitwise believes there should be a generally rational relationship between the volume on the exchange and the size of the spread (subject to limitations put in place at the exchange level, including the tick size and any exchange-level fees). In other words, exchanges with high volume should generally have smaller spreads than exchanges with low volume, and in a globally integrated market for a fungible good, those spreads should be competitive with other exchanges. Investors may tolerate a marginally higher spread on a particular exchange due to levels of comfort, design, user experience, regulatory status or other factors, but they are unlikely to trade significantly on exchanges with spreads that are many multiples larger than other available exchanges. In analyzing the data, Bitwise found many exchanges reporting very high levels of volume that nonetheless reported average spreads that were 1,000%-35,000% higher than the spreads reported on other well-established, regulated and well-capitalized exchanges that passed all of Bitwise’s data tests. • Second, as with volume, spreads change over time in reaction to market developments. Bitwise found that many exchanges exhibited spread patterns over time that revealed artificial, programmatic drivers, including spreads that unnaturally anchor on arbitrary high dollar levels (i.e., Bitwise found examples of exchanges with spreads that would consistently base at a random dollar value (for example, $10), and sometimes would change that resting mode spread in a step function (for example, going from a $10 mode spread over multiple days to a $7.50 mode spread over multiple days without a rational explanation owing to fees or other factors). As a result of its research, Bitwise believes that, as of March 8, 2019, as stated earlier, the real daily spot volume of the bitcoin market is approximately $273 million, and not the $6 billion that is commonly reported. It further believes that this volume is spread across ten exchanges that are located or domiciled in developed markets. Bitwise believes that this finding is significant and that it leads to the following key conclusions: • The smaller trade volume is more aligned with a priori expectations for bitcoin turnover, and is still sufficiently robust to support liquidity in the Trust, as discussed below. • The real market for bitcoin appears to be orderly and efficient, with effective arbitrage in place and robust VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 price discovery shared across multiple exchanges, as discussed below. • The regulated and surveilled bitcoin futures market is much larger in comparison to the spot bitcoin market than is commonly understood, with significant implications, as discussed below. The Real Market for Bitcoin Is Extremely Efficient, Well-Arbitraged and More Regulated Than Commonly Understood As described above, Bitwise found that just ten exchanges passed all of its data tests. It believes that these ten exchanges represent substantially all of the real global spot market for bitcoin, and notes that these exchanges are more established, more likely to be located in developed markets, more regulated, and more likely to have sophisticated market surveillance tools in place than the broader set of exchanges reporting significant volume. Whereas most of the broader set of analyzed exchanges have no known domicile, all ten of the exchanges that passed Bitwise’s data tests are domiciled or based in developed markets, including the U.S., the UK, Malta and Japan. Nine of the ten exchanges are regulated by the U.S. Department of Treasury’s FinCEN division as Money Services Businesses, and six have a BitLicense from the New York State Department of Financial Services.20 Finally, five of the ten exchanges have either robust internal (one) or robust third-party (four) market surveillance tools in place to monitor, report and correct for abusive trading behavior.21 Bitwise acknowledges that the regulatory status of these exchange platforms is not co-extensive to the obligations of and oversight for national securities exchanges or futures exchanges, but notes that these platforms are required to comply with particular obligations and types of regulatory compliance that provide business oversight and regulatory compliance requirements. For instance, the nine exchanges that are regulated by the U.S Department of Treasury’s FinCEN division as Money 20 See Exhibit 3 [to Amendment No. 1], Item 1. As of April 26, 2019, Bitfinex was removed by the Bitwise Crypto Index Committee from the exchanges contributing prices to deriving the Bitwise Daily Bitcoin Reference Price pursuant to the New York Attorney General’s claims towards iFinex Inc., operator of Bitfinex. As a result, the exchanges contributing to the Reference Price was reduced from ten to nine. 21 See Exhibit 3 [to Amendment No. 1], Item 2. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 Services Businesses are charged with various responsibilities including: 22 • Identifying people with ownership stakes or controlling roles in the MSB; • Establishing a formal Anti-Money Laundering (AML) policy in place with documentation, training, independent review, and a named compliance officer; • Having strict customer identification and verification policies and procedures; • Filing Suspicious Activity Reports (SARs) for suspicious customer transactions; • Filing Currency Transaction Reports (CTRs) for cash-in or cash-out transactions greater than $10,000; and • Maintaining a five-year record of currency exchanges greater than $1,000 and money transfers greater than $3,000. The six exchanges that are regulated by the New York State Department of Financial Services (‘‘NYDFS’’) under the BitLicense program have additional obligations, including the following: 23 • Submission of audited financial statements including income statements, statement of assets/ liabilities, insurance, and banking. • Capitalization requirements set at NYDFS’s discretion. • Full reserves of custodian assets selling/encumbering prohibited. • Fingerprints and photographs of employees with access to customer funds. • Qualified Chief Information Security Officer and annual penetration testing/audits. • Documented business continuity and disaster recovery plan, independently tested annually. • Independent exam by NYDFS. • Implementing measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing, including market manipulation, and to monitor, control, investigate and report back to the New York State Department of Financial Services any wrongdoing.24 An Efficient, Well-Arbitraged Market The Sponsor believes that, while the bitcoin market is commonly perceived to be disorderly and inefficient, when focused only on the ten exchanges 22 See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsa-requirementsmsbs. 23 See ‘‘New York’s Final ‘‘BitLicense’’ Rule: Overview and Changes from July 2014 Proposal,’’ June 5, 2015, Davis Polk, available at https:// www.davispolk.com/files/new_yorks_final_ bitlicense_rule_overview_changes_july_2014_ proposal.pdf. 24 See ‘‘DFS Takes Action to Deter Fraud and Manipulation in Virtual Currency Markets,’’ available at https://www.dfs.ny.gov/about/press/ pr1802071.htm. E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices referenced above, which it believes represent substantially all of the real spot trading volume in bitcoin, the bitcoin market is shown to be extraordinarily efficient, wellarbitraged, resilient and robust. Bitwise notes that, from January 1, 2018, through March 17, 2019, the price of bitcoin on each of the ten exchanges has traded almost perfectly in-line.25 The Bitwise Study further showed that the average deviation from the aggregate price from the ten exchanges ranged from 0.13% to 0.25% over this time period. It noted that this average deviation is well within the expected arbitrage band between these exchanges; many of these exchanges charge fees of up to 0.30% for trading, and one cannot expect average deviations below these exchanges to be arbitraged away.26 In addition, the Bitwise Study showed that the existence of sustained deviations—defined as differences in price greater than 1% that lasted for more than 100 seconds—were extremely rare over the time period studied. In the histogram attached as Exhibit 3 [to Amendment No. 1], each sustained deviation is marked as a thin white line.27 In sum, Bitwise believes that the Bitwise Study shows that the real market for bitcoin is extremely efficient and that arbitrage exists between and among the ten exchanges with real volume. Bitwise further believes, as discussed above, that the efficiency of the market has improved dramatically over the past eighteen months. Bitwise further believes that the market is approaching the practical limit of these improvements, in that prices among different exchanges are nearly perfectly arbitraged, spreads are incredibly tight, and the market is liquid on a twenty four hour/seven day a week basis. jbell on DSK3GLQ082PROD with NOTICES Protections Against Market Manipulation Specific to the Trust’s Design Bitwise believes that the specific design of the Trust’s NAV calculation process, as described below, its exclusive use of in-kind creation/ redemptions, and its decision to accrue all fees in bitcoin support its efforts to meet the concerns set forth in the Winklevoss Order. Net Asset Value According to the Registration Statement, the Trust’s per Share NAV will be calculated by dividing the value 25 See Exhibit 3 [to Amendment No. 1], Item 3. Exhibit 3 [to Amendment No. 1], Item 4. 27 See Exhibit 3 [to Amendment No. 1], Item 5. 26 See VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 of the net assets of the Trust (i.e., the value of its total assets less total liabilities) by the total number of Shares outstanding. The Trust’s NAV will be calculated on each trading day on the Exchange. The Trust will compute its NAV as of 4:00 p.m. E.T. The Trust’s NAV will be calculated only once each trading day. The Trust’s daily NAV may be found at the Trust’s website. In calculating the NAV, the Trust relies on the Bitwise Daily Bitcoin Reference Price, which is produced once per day at 4:00 p.m. E.T. using the methodology outlined below. First, Bitwise tracks a universe of over 200 on-line cryptocurrency exchanges that purport to offer trading on bitcoin and other cryptocurrencies. Bitwise eliminates a significant portion of the exchanges based on a number of factors. Those factors include, but are not limited to: • Eliminating exchanges that are domiciled in emerging market countries; • Eliminating exchanges domiciled in countries that have capital controls; • Eliminating exchanges that lack functioning and stable Application Programing Interfaces (‘‘API’’) for the transmission of price and volume data; • Eliminating exchanges which, in the judgment of Bitwise, have issues with significant downtime, problems with customers withdrawal abilities, or known security issues; • Eliminating exchanges which, in the judgement of Bitwise, are or may be subject to extraordinary legal or regulatory activity; and • Eliminating exchanges that do not have at least $1 million in average daily trading volume for bitcoin-fiat or bitcoin-stablecoin trading pairs over the past calendar quarter.28 In addition, on no less than a quarterly basis, the Bitwise Crypto Index Committee (the ‘‘Committee’’) reviews the actual published trading data of all exchanges that pass the above-mentioned screens. This further analysis includes bid/ask spreads, actual claimed executed trades with price and volume, and any other factors the Committee deems relevant. Exchanges that show persistent signs of artificial or inflated volume may be removed from the list of exchanges contributing prices to the Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin Price (the Bitwise Daily Bitcoin Reference Price, or 28 The volume requirement described in the last bullet in the list above may be waived by Bitwise Index Services for otherwise qualified exchanges if they are in fact being currently used to price publicly-listed cryptocurrency investment products such as futures contracts, non-U.S. exchange-traded funds and non-U.S. exchange-traded notes. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 23131 ‘‘Bitcoin Price,’’ is published once daily based on the procedures described herein and used for NAV calculation purposes, while the ‘‘Bitwise Real-Time Bitcoin Price’’ is published continuously for indicative purposes). As a result of this screening process, Bitwise’s list of exchanges currently used to price the Bitwise Daily Bitcoin Reference Price narrows from over 200 considered exchanges down to ten.29 Bitwise believes that these exchanges currently account for substantially all of the real, spot global volume of bitcoin traded on exchanges with economic intent, excluding capital-controlled countries, although both the number of exchanges and the percentage of global volume they represent is subject to change over time. The Bitwise Daily Bitcoin Reference Price relies on the prices and volume reported on these ten exchanges. To calculate the price, Bitwise examines six five-minute periods leading up to 4:00 p.m. E.T. It then calculates an equalweighted average of the volumeweighted median price of these six fiveminute periods.30 The Sponsor believes these procedures are designed to protect the Bitwise Daily Bitcoin Reference Price and therefore the Trust’s NAV from potential attempts at manipulation. Specifically, the Sponsor believes that using six consecutive five-minute segments over a thirty-minute period means malicious actors would need to sustain efforts to manipulate the market over an extended period of time, or would need to replicate efforts multiple times, potentially triggering review by exchange trading platforms, market participants, and regulators. In addition, the use of a median price eliminates the ability of outlier prices to impact the NAV, as it systematically excludes those prices from the NAV calculation.31 The use of a volume-weighted median (as opposed to a traditional median) protects against attempts to manipulate the NAV by executing a large number of low-dollar trades, because, any manipulation attempt would have to involve a majority of global spot bitcoin volume in a five-minute window to have any influence on the NAV.32 The use of ten exchanges 33 representing substantially all of the real global spot volume for bitcoin also mitigates against idiosyncratic exchange risk, as the failure of any individual 29 See note 20, supra. Exhibit 3 [to Amendment No. 1], Item 6. 31 See Exhibit 3 [to Amendment No. 1], Item 7. 32 See Exhibit 3 [to Amendment No. 1], Item 8. 33 See note 20, supra. 30 See E:\FR\FM\21MYN1.SGM 21MYN1 23132 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices exchange will not materially impact pricing for the Trust. It also allows the Administrator to calculate the NAV in a manner that significantly deters manipulation. The fact that there are multiple exchanges contributing prices to the NAV also makes manipulation more difficult in a well-arbitraged and fractured market, as a malicious actor would need to manipulate multiple exchanges simultaneously or dramatically skew the historical distribution of volume between the various exchanges in order to impact the NAV. Capturing substantially all of the spot trading in bitcoin further increases the difficulty, since significantly more capital would be required in any attempt to influence the NAV and attempts to profit from that manipulation would be difficult. Bitwise notes that the methodology for the Bitwise Daily Bitcoin Reference Price is similar in many respects to the CME CF Bitcoin Reference Rate, which is the rate at which the CME bitcoin futures settle.34 Indicative Fund Value jbell on DSK3GLQ082PROD with NOTICES In order to provide updated information relating to the Trust for use by investors, market professionals and other market data vendors, the Exchange will calculate an updated ‘‘Intraday Indicative Value’’ (‘‘IIV’’). The IIV will be calculated by using the prior day’s closing net assets of the Trust as a base and updated throughout the Exchange’s Core Trading Session of 9:30 a.m. E.T. to 4:00 p.m. E.T. to reflect changes in the most recently reported price level of the Bitwise Real-Time Bitcoin Price, as reported by Bloomberg, L.P. or another reporting service. As stated, the Bitwise Real-Time Bitcoin Price is calculated from the same exchanges as the Bitwise Daily Bitcoin Reference Rate, and also uses a volume-weighted median price methodology. Instead of equally weighting prices captured over six fiveminute periods, however, the Bitwise Real-Time Bitcoin Price uses only the last trade on each exchange, and uses the trailing 30-minute volume on those exchanges as the weighting factor. The IIV will be disseminated on a per Share basis every 15 seconds during the Exchange’s Core Trading Session and will be widely disseminated by one or 34 Bitwise notes that a detailed analysis on how a volume-weighted median pricing approach both theoretically and empirically protects against potential manipulation is available in the paper ‘‘Analysis of the CME CF Bitcoin Reference Rate and CME CF Bitcoin Real Time Index’’ by Andrew Paine and William J. Knottenbelt of the Imperial College Centre for Cryptocurrency Research and Engineering, November 14, 2016. VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 more major market data vendors during the NYSE Arca Core Trading Session. Creation and Redemption of Shares According to the Registration Statement, the Trust intends to create and redeem Shares in one or more Creation Baskets. A Creation Basket is a block of 25,000 Shares of the Trust. Except when aggregated in Creation Units, the Shares are not redeemable securities. Only Authorized Participants may purchase and redeem Creation Baskets. Authorized Participants must be (1) registered broker-dealers or other securities market participants, such as banks and other financial institutions, that are not required to register as broker-dealers to engage in securities transactions described below, and (2) the Depository Trust Company (‘‘DTC’’) Participants. An Authorized Participant is an entity that has entered into an Authorized Participant Agreement with the Trust and the Sponsor. Creation Procedures On any business day, an Authorized Participant may place an order with the Marketing Agent to create one or more Creation Baskets. For purposes of processing both purchase and redemption orders, a ‘‘business day’’ means any day other than a day when the Exchange or the New York Stock Exchange is closed for regular trading. All creation baskets are processed inkind. By placing a purchase order, an Authorized Participant agrees to deposit bitcoin with the Trust. Prior to the delivery of baskets for a purchase order, the Authorized Participant must also have wired to the custodian the nonrefundable transaction fee due for the purchase order. Authorized Participants may not withdraw a creation request. If an Authorized Participant fails to consummate the foregoing, the order shall be cancelled. Redemption Procedures According to the Registration Statement, the procedures by which an Authorized Participant can redeem one or more baskets mirror the procedures for the creation of creation baskets. On any business day, an Authorized Participant may place an order with the Marketing Agent to redeem one or more baskets. A redemption order so received will be effective on the date it is received in satisfactory form by the Marketing Agent (‘‘Redemption Order Date’’). The redemption procedures allow Authorized Participants to redeem baskets and do not entitle an individual shareholder to redeem any shares in an amount less than a Creation Basket, or PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 to redeem baskets other than through an Authorized Participant. By placing a redemption order, an Authorized Participant agrees to deliver the baskets to be redeemed through DTC’s book-entry system to the Trust not later than noon E.T. on the second business day following the effective date of the redemption order. Prior to the delivery of the redemption distribution for a redemption order, the Authorized Participant must also have wired to the Sponsor‘s account at the custodian the non-refundable transaction fee due for the redemption order. An Authorized Participant may not withdraw a redemption order. All redemption orders are processed in-kind. By placing a redemption order, an Authorized Participant agrees to receive bitcoin. The manner by which redemptions are made is dictated by the terms of the Authorized Participant Agreement. If an Authorized Participant fails to consummate the foregoing, the order shall be cancelled. Determination of Redemption Distribution The redemption distribution from the Trust will consist of a transfer to the redeeming Authorized Participant of an amount of bitcoin that is in the same proportion to the total assets of the Trust (net of estimated accrued but unpaid fees, expenses and other liabilities) on the date the order to redeem is properly received as the number of shares to be redeemed under the redemption order is in proportion to the total number of shares outstanding on the date the order is received. The Sponsor, directly or in consultation with the Administrator, determines the requirements for bitcoin that may be included in distributions to redeem baskets. The Marketing Agent will publish an estimate of the redemption distribution per basket as of the beginning of each business day. Fee Accrual The Sponsor proposes to accrue all fees in bitcoin. The Impact of the Exclusive Use of InKind Creations, Redemptions and Fee Accruals Bitwise believes that the exclusive use of in-kind creations, redemptions and fee accruals, in all situations except when the Trust is required to liquidate, provides long-term investors in the Trust with significant, redundant and strong protection against attempts to manipulate the price of bitcoin in such a way as to impact the Bitwise Daily E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES Bitcoin Reference Rate and therefore the NAV of the Trust. That is because, while Bitwise believes that the NAV will accurately reflect the globally integrated price for bitcoin, and that that price is uniquely resistant to market manipulation, and acknowledges that this is important, it gains additional comfort that long-term investors in the Trust are protected from short-term attempts to manipulate that NAV by the Trust’s exclusive use of inkind creations, redemptions and fee accruals, because denominating those transactions exclusively in bitcoin ensures that the Trust maintains the appropriate amount of bitcoin-per-Share in all scenarios, even if the NAV or the Bitwise Daily Bitcoin Reference Price were somehow to be manipulated. How The Trust Meets Standards in the Winklevoss Order The preceding information, both about the real nature of the bitcoin market and the structure of the Trust, informs the means by which Bitwise believes that the Trust meets the concerns and conditions set forth in the Winklevoss Order. Regarding the first condition— namely, showing that the bitcoin market is uniquely resistant to manipulation— Bitwise believes that the digital nature of bitcoin makes it unique compared to other commodities in three important ways, which combine to provide unique protections against attempts to manipulate the market: 1. Fungibility: As mentioned, unlike other commodities (like oil, wheat or even gold), as mentioned, there are no varieties, purities or geographical delivery locations for a bitcoin. 2. Transportability: Bitcoin has no physical manifestation. As a result, it can be instantly transported from one location to another, anywhere in the world, at a cost approaching zero. 3. Exchange Tradability: Most commodities trade over-the-counter or rely on representative, derivative futures contracts because they lack the characteristics listed above. Bitcoin is unique in that the commodity itself trades directly on exchange, allowing for open price discovery. These unique features allow the bitcoin market to be uniquely resistant to market manipulation in critical ways. For example, Bitiwse [sic] believes that the fact that bitcoin’s price is set on the open market makes it uniquely resistant to manipulation compared to other commodities whose price is set by coordinated fix pricing. The Bitwise Study notes that many of the largest recent market manipulation scandals have been driven by coordinated fix VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 pricing, including those related to London Interbank Offered Rate (LIBOR) (2012), Global Forex (2013), Gold Fix (2014), and the Australian Bank Bill Swap Rate (ASIC) (2016), among others. Bitwise believes that the fact that the bitcoin market engages in price discovery in an open, transparent and online setting introduces certain risks that must be considered and controlled through the careful design of the Trust, but notes that these risks can be weighed against the benefits that accrue to the public, transparent and open nature of that price discovery. The Bitwise Study and related research also show that the fact that bitcoin uniquely has no physical delivery location renders it immune to another common form of attempted and successful commodity market manipulation. For instance, in May 2011, the U.S. Commodity Futures Trading Commission filed suit against three American and international trading firms for attempting to manipulate the price of oil by cornering or partially cornering the market for oil storage in Cushing, Oklahoma.35 Cushing is the delivery point for the popular NYMEX WTI Crude Oil futures contract, the most liquid crude oil futures contract in the world, which is widely seen as the benchmark price for WTI crude oil in the U.S. While the price of the WTI contract is used as a proxy for the price of all WTI crude, just 5%–10% of U.S. crude oil storage is available in Cushing. This disconnect between the size of the storage market for the reference price contract and the much larger real market for WTI crude oil creates an opportunity for individuals and firms to attempt to profit from artificially manipulating the relatively small market for crude oil storage while holding broader positions in the underlying physical commodity. Because bitcoin itself trades on exchanges and does so at a globally integrated price, these types of attempts at market manipulation are not possible, because there is no narrowly constructed representative price with a physical storage limitation that can be manipulated. Other factors further contribute to the unique resistance to market manipulation that exists in the bitcoin market. For instance, as described above, the fact that bitcoin is fungible and transportable means that bitcoin trades at a single price on real exchanges around the world, and that 35 See ‘‘U.S. Suit Sees Manipulation of Oil Trades’’ by Graham Bowley, May 24, 2011, The New York Times, available at https:// www.nytimes.com/2011/05/25/business/global/ 25oil.html?ref=todayspaper. PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 23133 extremely effective arbitrage is in place between those exchanges. Because there is a single global price for bitcoin, any attempt to manipulate the market must involve a non-trivial amount of the total global liquidity, which makes it more difficult to achieve and significantly more risky to attempt. In addition, the fact that bitcoin itself (and not some derivative of it) is traded on exchanges means profiting from any such market manipulation would be difficult. The Trust’s NAV captures substantially all of the spot bitcoin trading volume in the world, and the Trust’s NAV is designed in a volumeweighted way, meaning attempts to manipulate must involve a majority of trading volume over a significant period of time. Further, Bitwise believes that the fact that bitcoin is fungible and transportable has allowed a distributed market to emerge, which provides unique resistance to market manipulation given the factors identified above. Bitwise’s research notes that no single exchange represents the majority of real trading volume on the bitcoin market, and that volume is spread amongst ten different exchanges. This contributes to bitcoin’s unique resistance to market manipulation, as any attempt to manipulate the market must either be coordinated synchronously across multiple exchanges or must involve a significant spike of volume on a single exchange (an action that would trigger review in the Trust’s NAV process). Bitwise notes that there is a carefully designed lag between the strike time of the NAV (4:00 p.m. E.T.) and the time that the NAV is distributed (approximately 5:30 p.m. E.T.), which allows time for Bitwise Index Services to review contributed prices in both an algorithmic and manual way to ensure that no anomalous behavior exists. Bitwise further believes that the unique design of the Bitwise Daily Bitcoin Reference Rate, and, therefore, the NAV—as well as the Trust’s exclusive use of in-kind creations and redemptions, and its decision to accrue all fees in bitcoin—provide additional unique resistance to any short-term attempts at market manipulation for the reasons described above. A Significant, Regulated and Surveilled Market Exists and Is Closely Connected With Spot Market for Bitcoin In the Winklevoss Order, the Commission laid out both the need for and the definition of a surveilled market of significant size. Specifically, the Commission explained that: E:\FR\FM\21MYN1.SGM 21MYN1 23134 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices [for the] commodity-trust ETPs approved to date for listing and trading, there has been in every case at least one significant, regulated market for trading futures on the underlying commodity—whether gold, silver, platinum, palladium, or copper—and the ETP listing exchange has entered into surveillancesharing agreements with, or held Intermarket Surveillance Group membership in common with, that market.36 Further, the Commission stated that the Commission interprets terms ‘‘significant market’’ and ‘‘market of significant size’’ to include: jbell on DSK3GLQ082PROD with NOTICES a market (or group of markets) as to which (a) there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, so that a surveillance-sharing agreement would assist the ETP listing market in detecting and deterring misconduct, and (b) it is unlikely that trading in the ETP would be the predominant influence on prices in that market.37 Bitwise believes that, in light of a better understanding of the true size of the spot bitcoin market, the combined CME/CFE futures market represents a large, surveilled and regulated market, as required above. Over the time period covered in the Bitcoin Study, the average daily volume of the bitcoin futures market was $91 million. While this appears tiny in relation to the reported volume of $6 billion, it is meaningful in relation to the actual volume of $273 million.38 In addition, the CME futures market is larger than all but one spot bitcoin exchange and nearly as large as the largest bitcoin exchange.39 The Bitwise Study found that the prices on the CME and CFE futures markets are closely aligned with the Bitwise Daily Bitcoin Reference Price on a once-a-day basis, and with the Bitwise Real-Time Bitcoin Price on an intraday basis. This follows logically, given that the CME futures settlement price is based on prices pulled from four of the ten exchanges that contribute to the Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin Rate, and the CFE futures settlement price is based on prices pulled from one of the ten exchanges that contribute to the Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin Rate. The tightness-of-fit between the two prices is limited by the term structure of the futures contract and the asymmetric cost of hedging a futures position—it is less expensive to hedge a short position 36 Winklevoss Order at note 209 and accompanying text. 37 Winklevoss Order, 83 FR at 37594. 38 See Exhibit 3 [to Amendment No. 1], Item 9. 39 See Exhibit 3 [to Amendment No. 1], Item 10. VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 in bitcoin futures than it is to hedge a long position in bitcoin futures. Nonetheless, the connection between the two prices is strong and arbitrage exists between the two prices. Given the significant size of the CME and CFE futures markets (or the CME futures market in isolation), and the close relationship in prices between the derivatives market and the spot market, there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, since arbitrage between the derivative and spot markets would tend to counter an attempt to manipulate the spot market alone. As a result, the Exchange’s ability to obtain information regarding trading in the Shares and futures from markets and other entities that are members of the Intermarket Trading Group (‘‘ISG’’), which includes the CME and CFE, would assist the ETP listing market in detecting and deterring misconduct. Impact on the Spot Market for Bitcoin In the Winklevoss Order, the Commission noted that it wanted to see a market where ‘‘it is unlikely that trading in the ETP would be the predominant influence on prices in that market’’.40 While future inflows to the proposed Trust cannot be predicted, to provide comparable data, Bitwise examined total net inflows in the first year of existence for two types of ETPs: Commodity ETPs that were first to market in the U.S. and blockchain ETFs. Bitwise found that one year net inflows ranged from $2 million to approximately $3 billion for the ETPs meeting that definition.41 Given the size of these inflows versus the size of the real bitcoin market ($273 million in average daily volume), Bitwise believes that it is unlikely that trading in the ETP would become the predominant influence on prices in that market. Conclusion Regarding Standards in the Winklevoss Order In summary, the Commission articulated two ways that a proposed bitcoin ETP could meet the standards set forth in the Winklevoss Order. The Commission explained that the proposed ETP must show either that the underlying market for bitcoin is uniquely resistant to market manipulation, and/or that a surveilled derivatives market of significant size existed alongside that market. Bitwise believes that the information presented 40 See 41 See PO 00000 Winklevoss Order, 83 FR at 37594. Exhibit 3 [to Amendment No. 1], Item 11. Frm 00118 Fmt 4703 Sfmt 4703 above attempts to address those concerns, showing both the ways in which the bitcoin market (as the first digital commodity) is uniquely resistant to market manipulation, and that the CME and CFE are large, surveilled and regulated markets that fulfill the requirements for surveillance sharing. Bitwise further believes that the careful construction of the Bitwise Daily Bitcoin Reference Price (and the Bitwise Real-Time Bitcoin Price), and thereby the NAV (and IIV), the decision to process all creations and redemptions in-kind, and the decision to accrue all fees in-kind, provide additional protections against attempts to manipulate the spot market for bitcoin. Availability of Information Regarding Bitcoin The NAV for the Trust’s Shares will be disseminated daily to all market participants at the same time. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. The IIV will be available through online information services. In addition, the Trust’s website will display the applicable end of day closing NAV. The daily holdings of the Trust will be available on the Trust’s website before 9:30 a.m. E.T. The Trust’s total portfolio composition will be disclosed each business day that NYSE Arca is open for trading, on the Trust’s website. The Trust’s website will also include a form of the prospectus for the Trust that may be downloaded. The website will include the Shares’ ticker and CUSIP information, along with additional quantitative information updated on a daily basis for the Trust. The Trust’s website will include (1) the prior business day’s trading volume, the prior business day’s reported NAV and closing price, and a calculation of the premium and discount of the closing price or mid-point of the bid/ask spread at the time of NAV calculation (‘‘Bid/ Ask Price’’) against the NAV; and (2) data in chart format displaying the frequency distribution of discounts and premiums of the daily closing price or Bid/Ask Price against the NAV, within appropriate ranges, for at least each of the four previous calendar quarters. The Trust’s website will be publicly available prior to the public offering of Shares and accessible at no charge. The spot price of bitcoin as reflected in the Bitwise Daily Bitcoin Reference Price will also be available on a 24-hour basis from the Trust’s website. Trading Halts With respect to trading halts, the Exchange may consider all relevant E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES factors in exercising its discretion to halt or suspend trading in the Shares of the Trust.42 Trading in Shares of the Trust will be halted if the circuit breaker parameters in NYSE Arca Rule 7.12–E have been reached. Trading also may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. The Exchange may halt trading during the day in which an interruption to the dissemination of the IIV occurs.43 If the interruption to the dissemination of the IIV or the value of the Index persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. Shares will trade on the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with NYSE Arca Rule 7.34–E (Early, Core, and Late Trading Sessions). The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in NYSE Arca Rule 7.6–E, the minimum price variation (‘‘MPV’’) for quoting and entry of orders in equity securities traded on the NYSE Arca Marketplace is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for order entry is $0.0001. Further, NYSE Arca Rule 8.201–E sets forth certain restrictions on Equity Trading Permit Holders acting as registered Market Makers in the Shares to facilitate surveillance. Under NYSE Arca Rule 8.201–E(g), an Equity Trading Permit Holder acting as a registered Market Maker in the Shares is required to provide the Exchange with information relating to its trading in the underlying commodity, related futures or options on futures, or any other related derivatives. Commentary .04 of NYSE Arca Rule 11.3–E requires an Equity Trading Permit Holder acting as a registered Market Maker, and its affiliates, in the Shares to establish, 42 See NYSE Arca Rule 7.12–E. 43 A limit up/limit down condition in the futures market would not be considered an interruption requiring the Trust to be halted. VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 maintain and enforce written policies and procedures reasonably designed to prevent the misuse of any material nonpublic information with respect to such products, any components of the related products, any physical asset or commodity underlying the product, applicable currencies, underlying indexes, related futures or options on futures, and any related derivative instruments (including the Shares). As a general matter, the Exchange has regulatory jurisdiction over its Equity Trading Permit Holders and their associated persons, which include any person or entity controlling an Equity Trading Permit Holder. A subsidiary or affiliate of an Equity Trading Permit Holder that does business only in commodities or futures contracts would not be subject to Exchange jurisdiction, but the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. Surveillance The Exchange represents that trading in the Shares of the Trust will be subject to the existing trading surveillances administered by the Exchange, as well as cross-market surveillances administered by FINRA on behalf of the Exchange, which are designed to detect violations of Exchange rules and applicable federal securities laws.44 The Exchange represents that these procedures are adequate to properly monitor Exchange trading of the Shares in all trading sessions and to deter and detect violations of Exchange rules and federal securities laws applicable to trading on the Exchange. The surveillances referred to above generally focus on detecting securities trading outside their normal patterns, which could be indicative of manipulative or other violative activity. When such situations are detected, surveillance analysis follows and investigations are opened, where appropriate, to review the behavior of all relevant parties for all relevant trading violations. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and bitcoin futures with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading 44 FINRA conducts cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 23135 information regarding trading in the Shares and bitcoin futures from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares from markets and other entities that are members of ISG (including the CME and CFE) or with which the Exchange has in place a comprehensive surveillance sharing agreement (‘‘CSSA’’).45 Also, pursuant to NYSE Arca Rule 8.201–E(g), the Exchange is able to obtain information regarding trading in the Shares and the underlying bitcoin through ETP Holders acting as registered ‘‘Market Makers’’, in connection with such ETP Holders’ proprietary or customer trades through ETP Holders which they effect on any relevant market. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. All statements and representations made in this filing regarding (a) the description of the portfolios of the Trust or the Bitwise Daily Bitcoin Reference Price, (b) limitations on portfolio holdings, reference assets or the Bitwise Daily Bitcoin Reference Price, or (c) the applicability of Exchange listing rules specified in this rule filing shall constitute continued listing requirements for listing the Shares on the Exchange. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Act, the Exchange will monitor for compliance with the continued listing requirements. If the Trust is not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under NYSE Arca Rule 5.5–E(m). Information Bulletin Prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. Specifically, the Information Bulletin will discuss the following: (1) The risks involved in trading the Shares during the Early and Late Trading Sessions when an updated IIV will not be calculated or publicly disseminated; (2) the procedures for purchases and redemptions of Shares in Creation Units 45 For a list of the current members of ISG, see www.isgportal.org. The Exchange notes that not all components of the Trust may trade on markets that are members of ISG or with which the Exchange has in place a CSSA. E:\FR\FM\21MYN1.SGM 21MYN1 23136 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices jbell on DSK3GLQ082PROD with NOTICES (and that Shares are not individually redeemable); (3) NYSE Arca Rule 9.2– E(a), which imposes a duty of due diligence on its ETP Holders to learn the essential facts relating to every customer prior to trading the Shares; (4) how information regarding the IIV is disseminated; (5) how information regarding portfolio holdings is disseminated; (6) the requirement that ETP Holders deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; (7) trading information; and (8) NYSE Arca suitability rules. The Information Bulletin will also discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Bulletin will reference that the Trust is subject to various fees and expenses described in the Registration Statement. The Information Bulletin will also disclose the trading hours of the Shares that the NAV for the Shares will be calculated after 4:00 p.m. E.T. each trading day. The Information Bulletin will disclose that information about the Shares will be publicly available on the Trust’s website. 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 46 that an exchange have rules that are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to, and perfect the mechanism of a free and open market and, in general, to protect investors and the public interest. The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest in that the Shares will be listed and traded on the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Rule 8.201–E. As discussed above, bitcoin trades in a well-arbitraged and distributed market that is significantly smaller, more orderly, and more regulated than commonly reported. As a result, as discussed above, any attempts at manipulation must involve a large share of global bitcoin volume, which would be substantially difficult to achieve. Accordingly, the notional size of the regulated, surveilled CME and CFE bitcoin futures markets (or even the CME market in isolation) is larger than all but one of the ten spot bitcoin 46 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:50 May 20, 2019 exchanges, and is nearly as big as the largest exchange. In addition, prices on the CME and CFE futures markets are closely related to prices on the bitcoin spot market, and arbitrage between those prices is well-established. Given the significant size of the CME and CFE futures market, and the close relationship in prices between the derivatives market and the spot market, there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on that market to successfully manipulate the ETP, since arbitrage between the derivative and spot markets would tend to counter an attempt to manipulate the spot market alone. As a result, the fact that the CME and CFE are ISG members would assist the Exchange in detecting and deterring misconduct.47 The Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and bitcoin futures with other markets and other entities that are members of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares from such markets and other entities. In addition, the Exchange may obtain information regarding trading in the Shares from markets and other entities that are members of ISG or with which the Exchange has in place a CSSA. The Exchange is also able to obtain information regarding trading in the Shares and bitcoin futures or the underlying bitcoin through ETP Holders, in connection with such ETP Holders’ proprietary or customer trades which they effect through ETP Holders on any relevant market. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. The Trust’s website will also include a form of the prospectus for the Trust that may be downloaded. The website will include the Shares’ ticker and CUSIP information, along with additional quantitative information updated on a daily basis for the Trust. The Trust’s website will include (1) daily trading volume, the prior business day’s reported NAV and closing price, and a calculation of the premium and discount of the closing price or midpoint of the Bid/Ask Price against the NAV; and (2) data in chart format 47 See Jkt 247001 PO 00000 note 15, supra. Frm 00120 Fmt 4703 Sfmt 4703 displaying the frequency distribution of discounts and premiums of the daily closing price or Bid/Ask Price against the NAV, within appropriate ranges, for at least each of the four previous calendar quarters. The Trust’s website will be publicly available prior to the public offering of Shares and accessible at no charge. Moreover, prior to the commencement of trading, the Exchange will inform its ETP Holders in an Information Bulletin of the special characteristics and risks associated with trading the Shares. The Information Bulletin will also discuss any exemptive, no-action, and interpretive relief granted by the Commission from any rules under the Act. In addition, the Information Bulletin will reference that the Trust is subject to various fees and expenses described in the Registration Statement. The Information Bulletin will also disclose the trading hours of the Shares and that the NAV for the Shares will be calculated after 4:00 p.m. E.T. each trading day. The Information Bulletin will disclose that information about the Shares will be publicly available on the Trust’s website. Trading in Shares of the Trust will be halted if the circuit breaker parameters in NYSE Arca Rule 7.12–E have been reached or because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. The proposed rule change is designed to perfect the mechanism of a free and open market and, in general, to protect investors and the public interest in that it will facilitate the listing and trading of a new type of exchange-traded product based on the price of bitcoin that will enhance competition among market participants, to the benefit of investors and the marketplace. As noted above, the Exchange has in place surveillance procedures that are adequate to properly monitor trading in the Shares in all trading sessions and to deter and detect violations of Exchange rules and applicable federal securities laws. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change will facilitate the listing and trading of a new type of Commodity-Based Trust Share based on the price of bitcoin that will enhance competition among market participants, to the benefit of investors and the marketplace. E:\FR\FM\21MYN1.SGM 21MYN1 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. jbell on DSK3GLQ082PROD with NOTICES III. Proceedings To Determine Whether To Approve or Disapprove SR– NYSEArca–2019–01 and Grounds for Disapproval Under Consideration The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Act 48 to determine whether the proposed rule change should be approved or disapproved. Institution of such proceedings is appropriate at this time in view of the legal and policy issues raised by the proposed rule change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, as described below, the Commission seeks and encourages interested persons to provide comments on the proposed rule change. Pursuant to Section 19(b)(2)(B) of the Act,49 the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of the proposed rule change’s consistency with Section 6(b)(5) of the Act, which requires, among other things, that the rules of a national securities exchange be ‘‘designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade,’’ and ‘‘to protect investors and the public interest.’’ 50 IV. Procedure: Request for Written Comments The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the proposal. In particular, the Commission invites the written views of interested persons concerning whether the proposal is consistent with Section 6(b)(5) or any other provision of the Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b–4, any 48 15 U.S.C. 78s(b)(2)(B). 49 Id. 50 15 U.S.C. 78f(b)(5). VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 request for an opportunity to make an oral presentation.51 Interested persons are invited to submit written data, views, and arguments regarding whether the proposal should be approved or disapproved by June 11, 2019. Any person who wishes to file a rebuttal to any other person’s submission must file that rebuttal by June 25, 2019. The Commission asks that commenters address the sufficiency of the Exchange’s statements in support of the proposal, which are set forth in Amendment No. 1,52 in addition to any other comments they may wish to submit about the proposed rule change. In particular, the Commission seeks comment on the following questions and asks commenters to submit data where appropriate to support their views: 1. What are commenters’ views on the assertions by the Exchange and the Sponsor that bitcoin is uniquely resistant to manipulation? 53 What are commenters’ views on the Sponsor’s analysis as described by the Bitwise Presentation, and by the Exchange in Amendment No. 1, including the factual basis for the assertions made and the selection of the trading periods analyzed? 2. What are commenters’ views on the assertions by the Exchange and the Sponsor regarding the nature of the market for bitcoin, including the efficiency of that market, the susceptibility of that market to manipulation, and the ways in which that market is, or is not, similar to the markets for other commodities? 3. What are commenters’ views on the assertion by the Exchange and the Sponsor that a significant, regulated and surveilled market for bitcoin futures exists and that it is closely connected with the spot market for bitcoin? What are commenters’ views on whether there is a reasonable likelihood that a person attempting to manipulate the Shares would also have to trade in the bitcoin futures market to manipulate the Shares? What are commenters’ views on whether it is likely that trading in the 51 Section 19(b)(2) of the Act, as amended by the Securities Act Amendments of 1975, Public Law 94–29 (June 4, 1975), grants the Commission flexibility to determine what type of proceeding— either oral or notice and opportunity for written comments—is appropriate for consideration of a particular proposal by a self-regulatory organization. See Securities Act Amendments of 1975, Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975). 52 See supra note 6. 53 The Sponsor made a number of representations to the Commission in a presentation dated March 19, 2019 (‘‘Bitwise Presentation’’). See supra note 15. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 23137 Shares would be the predominant influence on prices in the bitcoin futures market? 4. What are commenters’ views on the relationship between the bitcoin futures market and the bitcoin spot market? For example, what is the relative size of these markets, and where does bitcoin price formation occur? Does the market, spot or futures, in which price formation occurs affect commenters’ analysis of whether it is reasonably likely that someone attempting to manipulate the Shares would be reasonably likely to have to trade in the bitcoin futures market, or that trading in the Shares would be the predominant influence on prices in the bitcoin futures market? To what extent, if at all, do recent developments in the bitcoin futures market—namely, the cessation of new bitcoin futures contract trading on the Chicago Futures Exchange— affect commenters’ analysis of these questions? 5. What are commenters’ views on whether the Exchange could enter into surveillance-sharing agreements with regulated spot markets of significant size related to bitcoin? 6. What are commenters’ views on the Sponsor’s assertions that a large percentage of publicly reported spot volume in bitcoin is ‘‘fake’’ or ‘‘noneconomic in nature’’? What are commenters’ views on the method by which the Sponsor purports to distinguish ‘‘real’’ bitcoin trading volume from ‘‘fake’’ bitcoin trading volume? What are commenters’ views on the Sponsor’s estimate of the average daily ‘‘real’’ volume of trading in the bitcoin spot market? 7. What are commenters’ views on the Sponsor’s assertion that the 10 identified bitcoin trading venues represent ‘‘substantially all of the economically significant bitcoin trading volume in the world (outside of capitalcontrolled countries)’’? What are commenters’ views on whether overthe-counter trading in bitcoin is economically significant, and what are commenters’ views on the share of bitcoin spot trading that takes place in the over-the-counter market? Does economically significant bitcoin spot trading occur elsewhere? 8. What are commenters’ views on the effectiveness of arbitrage among the 10 bitcoin trading venues identified by the Sponsor? What are commenters’ views on whether the price of bitcoin on these venues can be affected by activity on other bitcoin trading venues, including other centralized trading venues, the over-the-counter market, or bitcoin derivatives markets? What are commenters’ views on the Sponsor’s E:\FR\FM\21MYN1.SGM 21MYN1 jbell on DSK3GLQ082PROD with NOTICES 23138 Federal Register / Vol. 84, No. 98 / Tuesday, May 21, 2019 / Notices description of the bitcoin market as a ‘‘globally integrated market for a fungible good’’? 9. What are commenters’ views on the degree to which each of the 10 identified bitcoin trading venues is subject to regulation? What are commenters’ views on the extent to which each of these venues can, or does, conduct surveillance of bitcoin trading activity? 10. What are commenters’ views on the methodologies by which the Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin Reference Price are calculated? What are commenters’ views on the role of the Bitwise Crypto Index Committee in determining which trading venues will contribute prices to the Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin Reference Price? 11. What are commenters’ views on the use of the Bitwise Daily Bitcoin Reference Price to calculate the net asset value of the Shares? What are commenters’ views on the alternative valuation methods proposed by the Sponsor? What are commenters’ views on whether any of these pricing mechanisms, primary or alternate, would be affected by, or resistant to, manipulative activity in bitcoin markets? 12. The Exchange represents that, as of April 26, 2019, the Bitwise Crypto Index Committee removed Bitfinex from the list of trading venues that contribute prices to derive the Bitwise Daily Bitcoin Reference Price. The Exchange states that this action was taken ‘‘pursuant to the New York Attorney General’s claims towards iFinex Inc., operator of Bitfinex.’’ What are commenters’ views on whether the removal of Bitfinex—which the Sponsor asserts is a ‘‘real’’ trading venue—from the calculation of the Bitwise Daily Bitcoin Reference Price might affect the reliability or accuracy of that price? Does the removal of the Bitfinex venue from the calculation of this reference price because of regulatory or legal activity affect commenters’ views of the Sponsor’s screening process for bitcoin trading venues or its general distinction between ‘‘real’’ and ‘‘fake’’ bitcoin trading volume? Does the removal of the Bitfinex venue from the calculation of this reference price affect commenters’ views of whether it is appropriate to use the Bitwise Daily Bitcoin Reference Price to calculate the net asset value of the Shares? 13. What are commenters’ views on the Sponsor’s assertions regarding how bitcoin trading versus Tether compares to or might affect bitcoin pricing more generally? What are commenters’ views VerDate Sep<11>2014 17:50 May 20, 2019 Jkt 247001 on whether bitcoin trading versus Tether might affect the calculation of the net asset value of the Shares? 14. What are commenters’ views on the Sponsor’s assertions that the proposed in-kind creation and redemption mechanism and payment of Trust expenses directly in bitcoin would insulate holders of the Shares from harm resulting from manipulation of the Shares’ net asset value? Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEArca–2019–01 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2019–01. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSEArca–2019–01 and should be submitted by June 11, 2019. Rebuttal comments should be submitted by June 25, 2019. PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.54 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–10351 Filed 5–20–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Sunshine Act Meetings 2:00 p.m. on Thursday, May 23, 2019. PLACE: The meeting will be held at the Commission’s headquarters, 100 F Street NE, Washington, DC 20549. STATUS: This meeting will be closed to the public. MATTERS TO BE CONSIDERED: Commissioners, Counsel to the Commissioners, the Secretary to the Commission, and recording secretaries will attend the closed meeting. Certain staff members who have an interest in the matters also may be present. In the event that the time, date, or location of this meeting changes, an announcement of the change, along with the new time, date, and/or place of the meeting will be posted on the Commission’s website at https:// www.sec.gov. The General Counsel of the Commission, or his designee, has certified that, in his opinion, one or more of the exemptions set forth in 5 U.S.C. 552b(c)(3), (5), (6), (7), (8), 9(B) and (10) and 17 CFR 200.402(a)(3), (a)(5), (a)(6), (a)(7), (a)(8), (a)(9)(ii) and (a)(10), permit consideration of the scheduled matters at the closed meeting. The subject matters of the closed meeting will consist of the following topics: Institution and settlement of injunctive actions; Institution and settlement of administrative proceedings; Resolution of litigation claims; and Other matters relating to enforcement proceedings. At times, changes in Commission priorities require alterations in the scheduling of meeting agenda items that may consist of adjudicatory, examination, litigation, or regulatory matters. CONTACT PERSON FOR MORE INFORMATION: For further information; please contact Vanessa A. Countryman from the Office of the Secretary at (202) 551–5400. TIME AND DATE: 54 17 CFR 200.30–3(a)(12) & 17 CFR 200.30– 3(a)(57). E:\FR\FM\21MYN1.SGM 21MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 98 (Tuesday, May 21, 2019)]
[Notices]
[Pages 23125-23138]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-10351]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85854; File No. SR-NYSEArca-2019-01]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Amendment No. 1 and Order Instituting Proceedings To Determine
Whether To Approve or Disapprove a Proposed Rule Change, as Modified by
Amendment No. 1, Relating to the Listing and Trading of Shares of the
Bitwise Bitcoin ETF Trust

May 14, 2019.
On January 28, 2019, NYSE Arca, Inc. (``Exchange'' or ``NYSE
Arca'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares of the Bitwise Bitcoin
ETF Trust under NYSE Arca Rule 8.201-E. The proposed rule change was
published for comment in the Federal Register on February 15, 2019.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 85093 (Feb. 11,
2019), 84 FR 4589 (Feb. 15, 2019).
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On March 29, 2019, pursuant to Section 19(b)(2) of the Act,\4\ the
Commission designated a longer period within which to approve the
proposed rule change, disapprove the proposed rule change, or institute
proceedings to

[[Page 23126]]

determine whether to approve or disapprove the proposed rule change.\5\
On May 7, 2019, the Exchange filed Amendment No. 1 to the proposed rule
change, which replaced and superseded the proposed rule change as
originally filed.\6\ As of May 14, 2019, the Commission has received 25
comment letters on the proposal.\7\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 85461 (Mar. 29,
2019), 84 FR 13339 (Apr. 4, 2019). The Commission designated May 16,
2019, as the date by which the Commission shall approve or
disapprove, or institute proceedings to determine whether to approve
or disapprove, the proposed rule change.
\6\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5461982-184967.pdf.
\7\ Comments on the proposed rule change can be found at:
https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901.htm.
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The Commission is publishing this notice and order to solicit
comments on the proposed rule change, as modified by Amendment No. 1,
from interested persons and to institute proceedings pursuant to
Section 19(b)(2)(B) of the Act \8\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.
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\8\ 15 U.S.C. 78s(b)(2)(B).
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I. Exchange's Description of the Proposal, as Modified by Amendment No.
1

The Exchange proposes to list and trade shares of the Bitwise
Bitcoin ETF Trust under NYSE Arca Rule 8.201-E. This Amendment No. 1 to
SR-NYSEArca-2019-01 replaces SR-NYSEArca-2019-01 as originally filed
and supersedes such filing in its entirety. The proposed change is
available on the Exchange's website at www.nyse.com, at the principal
office of the Exchange, and at the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change

1. Purpose
The Exchange proposes to list and trade shares (``Shares'') of the
Bitwise Bitcoin ETF Trust (the ``Trust''), under NYSE Arca Rule 8.201-
E.\9\
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\9\ The Trust is a Delaware statutory trust. On January 10,
2019, the Trust filed with the Commission an initial registration
statement on Form S-1 under the Securities Act of 1933 (15 U.S.C.
77a) (the ``Securities Act'') (File No. 333-229180). On April 6,
2019, the Trust filed with the Commission Pre-Effective Amendment
No. 1 to the initial registration statement (the initial
registration statement, as amended by Pre-Effective Amendment No. 1,
the ``Registration Statement''). The description of the operation of
the Trust herein is based, in part, on the Registration Statement.
---------------------------------------------------------------------------

According to the Registration Statement, the Trust will not be
registered as an investment company under the Investment Company Act of
1940, as amended,\10\ and is not required to register under such act.
The Trust is not a commodity pool for purposes of the Commodity
Exchange Act, as amended.\11\
---------------------------------------------------------------------------

\10\ 15 U.S.C. 80a-1.
\11\ 17 U.S.C. 1.
---------------------------------------------------------------------------

The Trust is managed and controlled by Bitwise Investment Advisers,
LLC (the ``Sponsor'').
The Trust will offer Shares of the Trust for sale through the
Trust's Marketing Agent in ``Creation Units,'' as described below. The
Marketing Agent will also assist the Sponsor and the Trust's
administrator with certain functions and duties relating to
distribution and marketing.
The Exchange represents that the Shares satisfy the requirements of
NYSE Arca Rule 8.201-E and thereby qualify for listing on the
Exchange.\12\
---------------------------------------------------------------------------

\12\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the Act, the Trust relies on the exemption
contained in Rule 10A-3(c)(7).
---------------------------------------------------------------------------

Operation of the Trust \13\
---------------------------------------------------------------------------

\13\ The description of the operation of the Trust, the Shares
and the bitcoin market contained herein are based, in part, on the
Registration Statement. See note 9, supra.
---------------------------------------------------------------------------

According to the Registration Statement, the investment objective
of the Trust is to provide exposure to bitcoin that is reflective of
the actual bitcoin market where investors can purchase and sell
bitcoin, less the expenses of the Trust's operation. In seeking to
achieve its investment objective, the Trust will hold bitcoin, and in
seeking to ensure that the price of the Trust's shares is reflective of
the actual bitcoin market, the Trust will value its shares daily based
on prices drawn from ten bitcoin exchanges that the Sponsor and its
affiliate, Bitwise Index Services, LLC (``Bitwise Index Services'')
believe, based on their research and analysis (discussed below),
represent substantially all of the economically significant spot
trading volume on bitcoin exchanges around the world (the ``Bitwise
Daily Bitcoin Reference Price'' or ``Bitcoin Price'').\14\
---------------------------------------------------------------------------

\14\ Bitwise Index Services conducts research upon and provides
pricing and indexing data related to the bitcoin market for use by
the Trust and other unaffiliated parties. Bitwise Index Services
manages the process for collection and dissemination of the Bitcoin
Price with input from its Bitwise Crypto Index Committee, which has
ultimate responsibility and authority for developing, maintaining
and adjusting the Bitcoin Price as well as other cryptoasset data
products and indexes. The Committee is composed of three members of
the Bitwise leadership team selected for seniority and expertise in
indexing, cryptoassets and data engineering. The Committee is
advised in this effort by the Bitwise Crypto Index Advisory Board
(the ``Advisory Board''), an independent group of leading experts in
the fields of both traditional asset indexing and crypto assets with
members both internal and external to Bitwise. Advisory Board
suggestions are not binding to the Committee. Bitwise Index Services
and the Sponsor are referred to herein as ``Bitwise'' throughout
unless the explicit clarification of a particular role of either
affiliate is required to describe the operations of the Trust. Both
Bitwise Index Services and the Sponsor are affiliates of Bitwise
Asset Management, Inc.
---------------------------------------------------------------------------

The Trust will store its bitcoin in custody at a regulated third-
party custodian, and will not use derivatives that may subject the
Trust to counterparty and credit risks.
The Trust will process all creations and redemptions in-kind, and
accrue all fees in bitcoin (rather than cash), as a way of ensuring
that the Trust holds the desired amount of bitcoin-per-share under all
scenarios. The Trust will not buy or sell bitcoin under any situation
other than if the Trust is required to liquidate.
The Sponsor believes that the design of the Trust will enable
certain investors to more effectively and efficiently implement
strategic and tactical asset allocation strategies that use bitcoin by
investing in the Trust's Shares rather than purchasing, holding and
trading bitcoin directly, while protecting the Trust from potential
concerns around market manipulation and other factors, as explained
below.
Bitcoin, Bitcoin Market, Bitcoin Exchanges and Regulation of Bitcoin
The following sections describe bitcoin, including the historical
development of bitcoin and the bitcoin network, how a person holds
bitcoin, how to use bitcoin in transactions, the ``exchange'' market
where bitcoin can be bought, held and sold, and the bitcoin ``over-the-
counter'' (``OTC'') market.

[[Page 23127]]

Bitcoin
According to the Registration Statement, bitcoin is a digital asset
that can be transferred among parties via the internet. Unlike other
means of electronic payments such as credit card transactions, one of
the advantages of bitcoin is that it can be transferred without the use
of a central administrator or clearing agency. Because a central party
is not necessary to administer bitcoin transactions or maintain the
bitcoin ledger, the term decentralized is often used in descriptions of
bitcoin.
Bitcoin Network
Bitcoin was first described in a white paper released in 2008 and
published under the name ``Satoshi Nakamoto.'' The protocol underlying
Bitcoin was subsequently released in 2009 as open source software and
currently operates on a worldwide network of computers.
For persons that want to use bitcoins to pay for goods and services
in actual transactions, the first step is to download specialized
software referred to as a ``bitcoin wallet.'' A user's bitcoin wallet
can run on a computer or smartphone, and can be used both to send and
to receive bitcoin. Within a bitcoin wallet, a user can generate one or
more unique ``bitcoin addresses,'' which are conceptually similar to
bank account numbers. After establishing a bitcoin address, a user can
send or receive bitcoin from his or her bitcoin address to another
user's address. Sending bitcoin from one bitcoin address to another is
similar in concept to sending a bank wire from one person's bank
account to another person's bank account.
The amount of bitcoin associated with each bitcoin address is
listed in a public ledger, referred to as the ``blockchain.'' Copies of
the blockchain exist on thousands of computers on the Bitcoin network
throughout the internet. A user's bitcoin wallet will either contain a
copy of the blockchain or be able to connect with another computer that
holds a copy of the blockchain.
When a bitcoin user wishes to transfer bitcoin to another user, the
sender must first request a bitcoin address from the recipient. The
sender then uses his or her bitcoin wallet software to create a
proposed addition (often referred to as a ``transaction'') to the
blockchain. The proposal will reduce the sender's address and increase
the recipient's address by the amount of bitcoin desired to be
transferred. The proposal is completely digital in nature, similar to a
file on a computer, and it can be sent to other computers participating
in the Bitcoin network.
Bitcoin Transactions
A bitcoin transaction is similar in concept to an irreversible
digital check. The transaction contains the sender's bitcoin address,
the recipient's bitcoin address, the amount of bitcoin to be sent, a
transaction fee and the sender's digital signature. The sender's use of
his or her digital signature enables participants on the Bitcoin
network to verify the authenticity of the bitcoin transaction.
A user's digital signature is generated via usage of the user's so-
called ``private key,'' one of two numbers in a so-called cryptographic
``key pair.'' A key pair consists of a ``public key'' and its
corresponding private key, both of which are lengthy alphanumeric
codes, derived together and possessing a unique relationship.
Public keys are bitcoin addresses that are publicly known and can
accept a bitcoin transfer. Private keys are used to sign transactions
that initiate the transfer of bitcoin from a sender's bitcoin address
to a recipient's bitcoin address. Only the holder of the private key
associated with a particular bitcoin address can digitally sign a
transaction proposing a transfer of bitcoin from that particular
bitcoin address.
A user's bitcoin address may be safely distributed, but a user's
private key must be kept in accordance with appropriate controls and
procedures to ensure it is used only for legitimate and intended
transactions. Only by using a private key can a bitcoin user create a
digital signature to transfer bitcoin to another user. In addition, if
an unauthorized third person learns of a user's private key, that third
person could forge the user's digital signature and send the user's
bitcoin to any arbitrary bitcoin address, thereby stealing the user's
bitcoin.
The usage of key pairs is a cornerstone of the Bitcoin network.
This is because the use of a private key is the only mechanism by which
a bitcoin transaction can be signed. If a private key is lost, the
corresponding bitcoin is thereafter permanently non-transferable.
Moreover, the theft of a private key enables the thief immediate and
unfettered access to the corresponding bitcoin. For large quantities of
bitcoin, holders often embrace sophisticated security measures. The
Trust will use a regulated, third-party custodian with institutional
design controls and redundancies in place to safeguard and hold in
custody the bitcoin private keys.
The Bitcoin network incorporates a system to prevent double
spending of a single bitcoin. To prevent the possibility of double-
spending a single bitcoin, each validated transaction is recorded, time
stamped and publicly displayed in a ``block'' in the Bitcoin
Blockchain, which is publicly available. Thus, the Bitcoin network
provides confirmation against double-spending by memorializing every
transaction in the Bitcoin Blockchain, which is publicly accessible and
downloaded in part or in whole by all users of the Bitcoin network
software program.
The process by which bitcoin are created and bitcoin transactions
are verified is called mining. To begin mining, a user, or ``miner,''
can download and run a mining ``client,'' which, like regular Bitcoin
network software programs, turns the user's computer into a ``node'' on
the Bitcoin network, and in this case has the ability to validate
transactions and add new blocks of transactions to the Blockchain.
Miners, through the use of the bitcoin software program, engage in
a set of prescribed complex mathematical calculations in order to
verify transactions and compete for the right to add a block of
verified transactions to the Bitcoin Blockchain and thereby confirm
bitcoin transactions included in that block's data. The miner who
successfully adds a block of transactions to the Blockchain is rewarded
by a grant of bitcoin. The supply of bitcoin is programmatically
limited to 21 million bitcoin.
Confirmed and validated bitcoin transactions are recorded in blocks
added to the Bitcoin Blockchain. Each block contains the details of
some or all of the most recent transactions that are not memorialized
in prior blocks, as well as a record of the award of bitcoin to the
miner who added the new block. Each unique block can only be solved and
added to the Bitcoin Blockchain by one miner; therefore, all individual
miners and mining pools on the Bitcoin network must engage in a
competitive process of constantly increasing their computing power to
improve their likelihood of solving for new blocks. As more miners join
the Bitcoin network and its processing power increases, the Bitcoin
network adjusts the complexity of a block-solving equation to maintain
a predetermined pace of adding a new block to the Bitcoin Blockchain
approximately every ten minutes.
Bitcoin Market and Bitcoin Exchanges
In addition to using bitcoin to engage in transactions, investors
may purchase and sell bitcoin to speculate as to the value of bitcoin
in the bitcoin market, or as a long-term investment to diversify their
portfolio. The value of bitcoin

[[Page 23128]]

within the market is determined, in part, by the supply of and demand
for bitcoin in the bitcoin market, market expectations for the adoption
of bitcoin by individuals, the number of merchants that accept bitcoin
as a form of payment and the volume of private end-user-to-end-user
transactions.
Research conducted by Bitwise Index Services indicates that the
vast majority of spot trading volume of bitcoin takes place on ten
exchanges, although a number of other smaller exchanges exist as well.
Bitcoin exchanges operate websites designed to permit investors to open
accounts with the exchange and then purchase and sell bitcoin.
As with conventional stock exchanges, an investor opening a trading
account must deposit an accepted government-issued currency into their
account with the exchange, or a previously acquired digital asset,
before they can purchase or sell assets on the exchange. The process of
establishing an account with a bitcoin exchange and trading bitcoin is
different from the process of users sending bitcoin from one bitcoin
address to another bitcoin address to pay for goods and services. This
latter process is an activity that occurs wholly within the confines of
the Bitcoin network, while the former is an activity that occurs
entirely on private websites.
According to the Registration Statement, Bitwise Index Services'
research has led it to believe that the bitcoin market has matured
significantly in recent years. In particular, Bitwise Index Services
believes that arbitrage on bitcoin exchanges (discussed below) has
improved significantly since the introduction of bitcoin futures in
December 2017, which fundamentally transformed the bitcoin market by
creating a two-sided market and easy hedging for the first time. In
addition, subsequent to the introduction of bitcoin futures, in early
2018, a large number of sophisticated market makers entered the bitcoin
market, applying large balance sheets and tech-enabled trading
platforms that further improved the quality of the market. By summer
2018, most major market makers were either present in the bitcoin
market or actively exploring the space. In addition, over the course of
2018, a significant and efficient short lending market in bitcoin
developed, with volume growing over the course of the year.
Bitwise Index Services believes that the launch of futures, the
arrival of major market makers, and the development of lending combined
to dramatically improve the efficiency of the bitcoin market in 2018,
creating a dynamic, institutional-quality, two-sided market for the
first time. While further developments may be incrementally beneficial
to the market, Bitwise Index Services believes that the spot bitcoin
market today operates with an efficiency that matches or exceeds that
of other major financial markets.
As discussed in more detail below, the Trust will not directly
purchase or sell bitcoin. Instead, Authorized Participants will deliver
bitcoin to the Trust in exchange for Shares of the Trust, and the Trust
will deliver bitcoin to Authorized Participants when those Authorized
Participants redeem Shares of the Trust. The Trust will use ten spot
exchanges that the Sponsor and Bitwise Index Services believe represent
substantially all of the economically significant bitcoin trading
volume in the world (outside of capital-controlled countries) in order
to derive the Bitwise Daily Bitcoin Reference Price, which it will then
use to price its Net Asset Value (``NAV'') at the end of every business
day.
Authorized Participants will have the option of purchasing and
selling bitcoin used in Creation Basket transactions with the Trust
either on bitcoin exchanges or in the ``over-the-counter'' (``OTC'')
markets. Over-the-counter trading of bitcoin is generally accomplished
via bilateral agreements on a principal-to-principal basis. All risks
and issues related to creditworthiness are between the parties directly
involved in the transaction.
The Structure and Operation of the Trust Was Designed To Protect
Investors and Satisfy Commission Requirements for Bitcoin-Based
Exchange Traded Products
The Registration Statement and the Sponsor's submission to the
Commission in connection with this filing,\15\ seek to explain how the
structure and operation of the Trust is designed to protect investors
and to respond to the concerns the Commission has raised and the
requirements that must be satisfied by any bitcoin-based exchange-
traded product set forth in the ``Order Setting Aside Action by
Delegated Authority and Disapproving a Proposed Rule Change, as
Modified by Amendments No. 1 and 2, to List and Trade Shares of the
Winklevoss Bitcoin Trust'' (the ``Winklevoss Order'') \16\ and the
``Staff Letter: Engaging on Fund Innovation and Cryptocurrency-related
Holdings'' (the ``Staff Letter'').\17\
---------------------------------------------------------------------------

\15\ See Bitwise Asset Management, Presentation to the U.S.
Securities and Exchange Commission, dated March 19, 2019, attached
to Memorandum from the Division of Trading and Markets regarding a
March 19, 2019 meeting with representatives of Bitwise Asset
Management, Inc., NYSE Arca, Inc., and Vedder Price P.C., available
at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf. This document is referred to in
this filing as the ``Bitwise Study.''
\16\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-2016-30) (Order
Setting Aside Action by Delegated Authority and Disapproving a
Proposed Rule Change to List and Trade Shares of the Winklevoss
Bitcoin Trust).
\17\ See letter dated January 18, 2018 from Dalia Blass,
Director, Division of Investment Management, Commission, to Paul
Schott Stevens, President & CEO Investment Company Institute and
Timothy W. Cameron, Asset Management Group--Head, Securities
Industry and Financial Markets Association.
---------------------------------------------------------------------------

The Commission has outlined two ways that a Rule 19b-4 filing
relating to a bitcoin exchange-traded product can satisfy the concerns
outlined in the Winklevoss Order and in particular the concerns
regarding potential market manipulation of the underlying market.
Bitwise believes these Commission concerns are addressed by
demonstrating that:
(1) Unique Resistance: The bitcoin market is uniquely resistant to
market manipulation and fraudulent activity; and
(2) Surveillance Sharing: The listing exchange has entered into a
surveillance sharing agreement with a regulated market of significant
size in bitcoin or derivatives on bitcoin.
Historically, the existence of a surveilled market has been the
primary consideration regarding addressing potential market
manipulation, as the Commission stated when discussing its past
approval of gold bullion exchange-traded products (``ETPs'') in the
Winklevoss Order.\18\
---------------------------------------------------------------------------

\18\ See Winklevoss Order at note 216 and accompanying text.
---------------------------------------------------------------------------

The Sponsor believes that the gold market is substantially similar
to the bitcoin market in all respects that are critically important
from the perspective of the federal securities laws. That is, the
bitcoin market (and the Trust specifically) is uniquely resistant to
manipulation, and there is a significant, regulated and surveilled
market for bitcoin futures.
The ``Real'' Market for Bitcoin
The Sponsor represents that bitcoin is a globally fungible
commodity with low transaction costs, near-zero transportation costs
that allows nearly instantaneous transportation to any location around
the world, and low-to-zero storage costs, as follows:
Globally Fungible Commodity: A bitcoin is the same
anywhere around the world. Unlike wheat, oil or gold, there

[[Page 23129]]

are no varieties, purities, or geographically specific delivery
locations for bitcoin.
Low Transaction Costs: The median spread for bitcoin
traded on Coinbase Pro, a leading bitcoin exchange, in the month of
March 2019 was $0.01, with each bitcoin valued at approximately $5,000.
This makes bitcoin one of the most tightly quoted financial instruments
in the world.
Near-Zero Transportation Costs: Unlike physical
commodities, there is virtually no cost to transport bitcoin anywhere
in the world, and that transportation can occur nearly instantly.
Low-To-Zero Storage Costs: Bitcoin can safely be stored
with established, regulated third-party custodians at a cost that
ranges from 0% to 1.5% a year.
These four factors would, in isolation, suggest that the bitcoin
market should be uniquely orderly and efficient, with tight spreads and
nearly perfect arbitrage between prices on different exchanges.
Unfortunately, in practice, many perceive that the market for bitcoin
as disorderly and inefficient, with many unregulated operators running
crypto ``exchanges'' from unknown domiciles.
Bitwise believes that this perception derives from the fact that
leading data aggregators, including those cited by national media
organizations like The New York Times, The Wall Street Journal and
Barron's, have reported volume, price and trading data for bitcoin that
includes an overwhelming percentage of volume that is fake and/or non-
economic in nature. As discussed further below, Bitwise's research
concludes that when fake and/or non-economic data is removed, the
remaining or ``real'' market for bitcoin is significantly smaller, more
orderly and more regulated than commonly understood, and that, with
that understanding, this filing should squarely address the concerns
laid out by the Commission in the Winklevoss Order.
Bitwise's Analysis of the Reported Market for Bitcoin Trading
Bitwise conducted a thorough, data-driven analysis of the spot
market for bitcoin from March 4, 2019 through March 8, 2019.\19\
Bitwise analyzed all exchanges reporting more than $1 million in
average daily trading volume for bitcoin-fiat and bitcoin-stablecoin
pairs to the popular data aggregator CoinMarketCap.com, which yielded
81 exchanges with approximately $6 billion in average daily volume.
Bitwise deliberately utilized a short time period to both showcase that
fake volume is a current problem impacting the bitcoin market and
because, in its experience, exchanges change the algorithms driving how
they fake volume over time, which obscures the results of certain data-
driven analyses over longer periods.
---------------------------------------------------------------------------

\19\ See note 15, supra.
---------------------------------------------------------------------------

The Bitwise Study analyzed all purportedly significant bitcoin
exchanges and initially found several widespread, superficial
indicators of fake or non-economic trading volume. These indicators
include the following.
Perfectly paired buy and sell orders. Bitwise does not
believe that actual trading on exchanges generally result in perfectly-
consistent alternating buy and sell orders of roughly equal size, but
nonetheless exchanges exhibited this pattern in their data.
Spread sizes. Bitwise does not believe that there ought to
be relatively large reported spreads between bid and ask prices
exhibited on exchanges that report a large volume of trades in
comparison to other bitcoin exchanges with lower reported volume,
absent clear economic explanations (tick size, fees, etc.), but
exchanges with large amounts of claimed volume showed spreads that were
100X, 1000X or more the size of spreads on certain exchanges with much
lower levels of volume.
Real-World Footprint. Bitwise does not believe that
exchanges with large reported amounts of volume would typically exhibit
relatively small real-world footprints, including low web traffic, few
known employees, minimal social media presence and limited or no
fundraising or capitalization information, but it found many exchanges
that exhibited these characteristics.
Unexplained periods of no trading. Bitwise found that
certain exchanges with large reported volume nonetheless exhibited
multiple hours and days with zero volume that are not correlated with
business hours, volatility, up time, or other factors.
Monotonic trading volume. Bitwise found that some
exchanges reported relatively large amounts of volume in which a
roughly identical volume is reported every hour of every day,
regardless of price movements, news, waking hours, weekends, or other
real-world factors.
Given these indications, Bitwise created a computer program for
collecting or ``scraping'' data across different bitcoin exchanges,
which collected and stored both the order book and recent trades for
all exchanges reporting significant volume, four times each second.
Bitwise analyzed data from these 81 different bitcoin exchanges and
concluded, for reasons outlined below, that 95% of heretofore reported
volume is either fake or non-economic trading. Bitwise estimates that
the real total average daily bitcoin volume is approximately $273
million, and that this volume is more regulated, more U.S.-focused and
more orderly than perceived.
In separating exchanges that have real vs. non-economic
transactions, Bitwise considered the following data characteristics:
[ssquf] Trade Size Histograms. Bitwise's computer program can
produce trade size ``histograms'' that show the percentage of volume
that occur at particular trade sizes over a specified period. Trade
size histograms for the exchanges that pass all of its data tests show
consistent patterns that reflect trading that Bitwise believes
naturally occurs. Such patterns include volume declining as trade size
increases and a greater-than-random distribution of volume at whole
bitcoin sizes. These patterns are roughly consistent in size and shape
across all ten exchanges that pass all of Bitwise's data tests. Trade
size histograms from other exchanges, on the other hand, reflect
patterns that were idiosyncratic and often had patterns that were
transparently programmatic, such as bell curve-like distributions with
no apparent reason for such a clustering of trade sizes, and increasing
volume for larger trade sizes rather than the decaying trend mentioned
above. Most of these exchanges showed no peaks at whole bitcoin sizes.
Volume Spike Analysis. Bitwise's computer program can
produce charts that show volume ``spikes,'' or periods of significantly
increased transaction volume, across any exchange. Because the bitcoin
market is a globally integrated market for a fungible good, Bitwise
believed a priori that, with some limitations for time zones and
holidays, volume on different exchanges would rise and fall
concurrently in response to the same events or changes in market
conditions.
This pattern played out as expected among the ten
exchanges that passed all data tests and that Bitwise believes
constitutes substantially all of the real global spot trading volume
for bitcoin, but was noticeably absent among other exchanges, which
either had no discernible volume spikes or had patterns that were
wholly idiosyncratic and did not repeat on other exchanges.
[ssquf] Spread Patterning Analysis. The spread on an exchange with
real volume will have two key features that Bitwise

[[Page 23130]]

believes it can identify through a data driven analysis.
First, Bitwise believes there should be a generally
rational relationship between the volume on the exchange and the size
of the spread (subject to limitations put in place at the exchange
level, including the tick size and any exchange-level fees). In other
words, exchanges with high volume should generally have smaller spreads
than exchanges with low volume, and in a globally integrated market for
a fungible good, those spreads should be competitive with other
exchanges. Investors may tolerate a marginally higher spread on a
particular exchange due to levels of comfort, design, user experience,
regulatory status or other factors, but they are unlikely to trade
significantly on exchanges with spreads that are many multiples larger
than other available exchanges. In analyzing the data, Bitwise found
many exchanges reporting very high levels of volume that nonetheless
reported average spreads that were 1,000%-35,000% higher than the
spreads reported on other well-established, regulated and well-
capitalized exchanges that passed all of Bitwise's data tests.
Second, as with volume, spreads change over time in
reaction to market developments. Bitwise found that many exchanges
exhibited spread patterns over time that revealed artificial,
programmatic drivers, including spreads that unnaturally anchor on
arbitrary high dollar levels (i.e., Bitwise found examples of exchanges
with spreads that would consistently base at a random dollar value (for
example, $10), and sometimes would change that resting mode spread in a
step function (for example, going from a $10 mode spread over multiple
days to a $7.50 mode spread over multiple days without a rational
explanation owing to fees or other factors).
As a result of its research, Bitwise believes that, as of March 8,
2019, as stated earlier, the real daily spot volume of the bitcoin
market is approximately $273 million, and not the $6 billion that is
commonly reported. It further believes that this volume is spread
across ten exchanges that are located or domiciled in developed
markets.
Bitwise believes that this finding is significant and that it leads
to the following key conclusions:
The smaller trade volume is more aligned with a priori
expectations for bitcoin turnover, and is still sufficiently robust to
support liquidity in the Trust, as discussed below.
The real market for bitcoin appears to be orderly and
efficient, with effective arbitrage in place and robust price discovery
shared across multiple exchanges, as discussed below.
The regulated and surveilled bitcoin futures market is
much larger in comparison to the spot bitcoin market than is commonly
understood, with significant implications, as discussed below.
The Real Market for Bitcoin Is Extremely Efficient, Well-Arbitraged and
More Regulated Than Commonly Understood
As described above, Bitwise found that just ten exchanges passed
all of its data tests. It believes that these ten exchanges represent
substantially all of the real global spot market for bitcoin, and notes
that these exchanges are more established, more likely to be located in
developed markets, more regulated, and more likely to have
sophisticated market surveillance tools in place than the broader set
of exchanges reporting significant volume. Whereas most of the broader
set of analyzed exchanges have no known domicile, all ten of the
exchanges that passed Bitwise's data tests are domiciled or based in
developed markets, including the U.S., the UK, Malta and Japan. Nine of
the ten exchanges are regulated by the U.S. Department of Treasury's
FinCEN division as Money Services Businesses, and six have a BitLicense
from the New York State Department of Financial Services.\20\ Finally,
five of the ten exchanges have either robust internal (one) or robust
third-party (four) market surveillance tools in place to monitor,
report and correct for abusive trading behavior.\21\
---------------------------------------------------------------------------

\20\ See Exhibit 3 [to Amendment No. 1], Item 1. As of April 26,
2019, Bitfinex was removed by the Bitwise Crypto Index Committee
from the exchanges contributing prices to deriving the Bitwise Daily
Bitcoin Reference Price pursuant to the New York Attorney General's
claims towards iFinex Inc., operator of Bitfinex. As a result, the
exchanges contributing to the Reference Price was reduced from ten
to nine.
\21\ See Exhibit 3 [to Amendment No. 1], Item 2.
---------------------------------------------------------------------------

Bitwise acknowledges that the regulatory status of these exchange
platforms is not co-extensive to the obligations of and oversight for
national securities exchanges or futures exchanges, but notes that
these platforms are required to comply with particular obligations and
types of regulatory compliance that provide business oversight and
regulatory compliance requirements.
For instance, the nine exchanges that are regulated by the U.S
Department of Treasury's FinCEN division as Money Services Businesses
are charged with various responsibilities including: \22\
---------------------------------------------------------------------------

\22\ See BSA Requirements for MSBs, FinCEN website: https://www.fincen.gov/bsa-requirements-msbs.
---------------------------------------------------------------------------

Identifying people with ownership stakes or controlling
roles in the MSB;
Establishing a formal Anti-Money Laundering (AML) policy
in place with documentation, training, independent review, and a named
compliance officer;
Having strict customer identification and verification
policies and procedures;
Filing Suspicious Activity Reports (SARs) for suspicious
customer transactions;
Filing Currency Transaction Reports (CTRs) for cash-in or
cash-out transactions greater than $10,000; and
Maintaining a five-year record of currency exchanges
greater than $1,000 and money transfers greater than $3,000.
The six exchanges that are regulated by the New York State
Department of Financial Services (``NYDFS'') under the BitLicense
program have additional obligations, including the following: \23\
---------------------------------------------------------------------------

\23\ See ``New York's Final ``BitLicense'' Rule: Overview and
Changes from July 2014 Proposal,'' June 5, 2015, Davis Polk,
available at https://www.davispolk.com/files/new_yorks_final_bitlicense_rule_overview_changes_july_2014_proposal.pdf.
---------------------------------------------------------------------------

Submission of audited financial statements including
income statements, statement of assets/liabilities, insurance, and
banking.
Capitalization requirements set at NYDFS's discretion.
Full reserves of custodian assets selling/encumbering
prohibited.
Fingerprints and photographs of employees with access to
customer funds.
Qualified Chief Information Security Officer and annual
penetration testing/audits.
Documented business continuity and disaster recovery plan,
independently tested annually.
Independent exam by NYDFS.
Implementing measures designed to effectively detect,
prevent, and respond to fraud, attempted fraud, and similar wrongdoing,
including market manipulation, and to monitor, control, investigate and
report back to the New York State Department of Financial Services any
wrongdoing.\24\
---------------------------------------------------------------------------

\24\ See ``DFS Takes Action to Deter Fraud and Manipulation in
Virtual Currency Markets,'' available at https://www.dfs.ny.gov/about/press/pr1802071.htm.
---------------------------------------------------------------------------

An Efficient, Well-Arbitraged Market
The Sponsor believes that, while the bitcoin market is commonly
perceived to be disorderly and inefficient, when focused only on the
ten exchanges

[[Page 23131]]

referenced above, which it believes represent substantially all of the
real spot trading volume in bitcoin, the bitcoin market is shown to be
extraordinarily efficient, well-arbitraged, resilient and robust.
Bitwise notes that, from January 1, 2018, through March 17, 2019,
the price of bitcoin on each of the ten exchanges has traded almost
perfectly in-line.\25\
---------------------------------------------------------------------------

\25\ See Exhibit 3 [to Amendment No. 1], Item 3.
---------------------------------------------------------------------------

The Bitwise Study further showed that the average deviation from
the aggregate price from the ten exchanges ranged from 0.13% to 0.25%
over this time period. It noted that this average deviation is well
within the expected arbitrage band between these exchanges; many of
these exchanges charge fees of up to 0.30% for trading, and one cannot
expect average deviations below these exchanges to be arbitraged
away.\26\
---------------------------------------------------------------------------

\26\ See Exhibit 3 [to Amendment No. 1], Item 4.
---------------------------------------------------------------------------

In addition, the Bitwise Study showed that the existence of
sustained deviations--defined as differences in price greater than 1%
that lasted for more than 100 seconds--were extremely rare over the
time period studied. In the histogram attached as Exhibit 3 [to
Amendment No. 1], each sustained deviation is marked as a thin white
line.\27\
---------------------------------------------------------------------------

\27\ See Exhibit 3 [to Amendment No. 1], Item 5.
---------------------------------------------------------------------------

In sum, Bitwise believes that the Bitwise Study shows that the real
market for bitcoin is extremely efficient and that arbitrage exists
between and among the ten exchanges with real volume.
Bitwise further believes, as discussed above, that the efficiency
of the market has improved dramatically over the past eighteen months.
Bitwise further believes that the market is approaching the practical
limit of these improvements, in that prices among different exchanges
are nearly perfectly arbitraged, spreads are incredibly tight, and the
market is liquid on a twenty four hour/seven day a week basis.
Protections Against Market Manipulation Specific to the Trust's Design
Bitwise believes that the specific design of the Trust's NAV
calculation process, as described below, its exclusive use of in-kind
creation/redemptions, and its decision to accrue all fees in bitcoin
support its efforts to meet the concerns set forth in the Winklevoss
Order.
Net Asset Value
According to the Registration Statement, the Trust's per Share NAV
will be calculated by dividing the value of the net assets of the Trust
(i.e., the value of its total assets less total liabilities) by the
total number of Shares outstanding. The Trust's NAV will be calculated
on each trading day on the Exchange. The Trust will compute its NAV as
of 4:00 p.m. E.T. The Trust's NAV will be calculated only once each
trading day. The Trust's daily NAV may be found at the Trust's website.
In calculating the NAV, the Trust relies on the Bitwise Daily
Bitcoin Reference Price, which is produced once per day at 4:00 p.m.
E.T. using the methodology outlined below.
First, Bitwise tracks a universe of over 200 on-line cryptocurrency
exchanges that purport to offer trading on bitcoin and other
cryptocurrencies. Bitwise eliminates a significant portion of the
exchanges based on a number of factors. Those factors include, but are
not limited to:
Eliminating exchanges that are domiciled in emerging
market countries;
Eliminating exchanges domiciled in countries that have
capital controls;
Eliminating exchanges that lack functioning and stable
Application Programing Interfaces (``API'') for the transmission of
price and volume data;
Eliminating exchanges which, in the judgment of Bitwise,
have issues with significant downtime, problems with customers
withdrawal abilities, or known security issues;
Eliminating exchanges which, in the judgement of Bitwise,
are or may be subject to extraordinary legal or regulatory activity;
and
Eliminating exchanges that do not have at least $1 million
in average daily trading volume for bitcoin-fiat or bitcoin-stablecoin
trading pairs over the past calendar quarter.\28\
---------------------------------------------------------------------------

\28\ The volume requirement described in the last bullet in the
list above may be waived by Bitwise Index Services for otherwise
qualified exchanges if they are in fact being currently used to
price publicly-listed cryptocurrency investment products such as
futures contracts, non-U.S. exchange-traded funds and non-U.S.
exchange-traded notes.
---------------------------------------------------------------------------

In addition, on no less than a quarterly basis, the Bitwise Crypto
Index Committee (the ``Committee'') reviews the actual published
trading data of all exchanges that pass the above-mentioned screens.
This further analysis includes bid/ask spreads, actual claimed executed
trades with price and volume, and any other factors the Committee deems
relevant. Exchanges that show persistent signs of artificial or
inflated volume may be removed from the list of exchanges contributing
prices to the Bitwise Daily Bitcoin Reference Price and the Bitwise
Real-Time Bitcoin Price (the Bitwise Daily Bitcoin Reference Price, or
``Bitcoin Price,'' is published once daily based on the procedures
described herein and used for NAV calculation purposes, while the
``Bitwise Real-Time Bitcoin Price'' is published continuously for
indicative purposes).
As a result of this screening process, Bitwise's list of exchanges
currently used to price the Bitwise Daily Bitcoin Reference Price
narrows from over 200 considered exchanges down to ten.\29\ Bitwise
believes that these exchanges currently account for substantially all
of the real, spot global volume of bitcoin traded on exchanges with
economic intent, excluding capital-controlled countries, although both
the number of exchanges and the percentage of global volume they
represent is subject to change over time.
---------------------------------------------------------------------------

\29\ See note 20, supra.
---------------------------------------------------------------------------

The Bitwise Daily Bitcoin Reference Price relies on the prices and
volume reported on these ten exchanges. To calculate the price, Bitwise
examines six five-minute periods leading up to 4:00 p.m. E.T. It then
calculates an equal-weighted average of the volume-weighted median
price of these six five-minute periods.\30\
---------------------------------------------------------------------------

\30\ See Exhibit 3 [to Amendment No. 1], Item 6.
---------------------------------------------------------------------------

The Sponsor believes these procedures are designed to protect the
Bitwise Daily Bitcoin Reference Price and therefore the Trust's NAV
from potential attempts at manipulation. Specifically, the Sponsor
believes that using six consecutive five-minute segments over a thirty-
minute period means malicious actors would need to sustain efforts to
manipulate the market over an extended period of time, or would need to
replicate efforts multiple times, potentially triggering review by
exchange trading platforms, market participants, and regulators.
In addition, the use of a median price eliminates the ability of
outlier prices to impact the NAV, as it systematically excludes those
prices from the NAV calculation.\31\
---------------------------------------------------------------------------

\31\ See Exhibit 3 [to Amendment No. 1], Item 7.
---------------------------------------------------------------------------

The use of a volume-weighted median (as opposed to a traditional
median) protects against attempts to manipulate the NAV by executing a
large number of low-dollar trades, because, any manipulation attempt
would have to involve a majority of global spot bitcoin volume in a
five-minute window to have any influence on the NAV.\32\
---------------------------------------------------------------------------

\32\ See Exhibit 3 [to Amendment No. 1], Item 8.
---------------------------------------------------------------------------

The use of ten exchanges \33\ representing substantially all of the
real global spot volume for bitcoin also mitigates against
idiosyncratic exchange risk, as the failure of any individual

[[Page 23132]]

exchange will not materially impact pricing for the Trust. It also
allows the Administrator to calculate the NAV in a manner that
significantly deters manipulation. The fact that there are multiple
exchanges contributing prices to the NAV also makes manipulation more
difficult in a well-arbitraged and fractured market, as a malicious
actor would need to manipulate multiple exchanges simultaneously or
dramatically skew the historical distribution of volume between the
various exchanges in order to impact the NAV. Capturing substantially
all of the spot trading in bitcoin further increases the difficulty,
since significantly more capital would be required in any attempt to
influence the NAV and attempts to profit from that manipulation would
be difficult.
---------------------------------------------------------------------------

\33\ See note 20, supra.
---------------------------------------------------------------------------

Bitwise notes that the methodology for the Bitwise Daily Bitcoin
Reference Price is similar in many respects to the CME CF Bitcoin
Reference Rate, which is the rate at which the CME bitcoin futures
settle.\34\
---------------------------------------------------------------------------

\34\ Bitwise notes that a detailed analysis on how a volume-
weighted median pricing approach both theoretically and empirically
protects against potential manipulation is available in the paper
``Analysis of the CME CF Bitcoin Reference Rate and CME CF Bitcoin
Real Time Index'' by Andrew Paine and William J. Knottenbelt of the
Imperial College Centre for Cryptocurrency Research and Engineering,
November 14, 2016.
---------------------------------------------------------------------------

Indicative Fund Value
In order to provide updated information relating to the Trust for
use by investors, market professionals and other market data vendors,
the Exchange will calculate an updated ``Intraday Indicative Value''
(``IIV''). The IIV will be calculated by using the prior day's closing
net assets of the Trust as a base and updated throughout the Exchange's
Core Trading Session of 9:30 a.m. E.T. to 4:00 p.m. E.T. to reflect
changes in the most recently reported price level of the Bitwise Real-
Time Bitcoin Price, as reported by Bloomberg, L.P. or another reporting
service.
As stated, the Bitwise Real-Time Bitcoin Price is calculated from
the same exchanges as the Bitwise Daily Bitcoin Reference Rate, and
also uses a volume-weighted median price methodology. Instead of
equally weighting prices captured over six five-minute periods,
however, the Bitwise Real-Time Bitcoin Price uses only the last trade
on each exchange, and uses the trailing 30-minute volume on those
exchanges as the weighting factor.
The IIV will be disseminated on a per Share basis every 15 seconds
during the Exchange's Core Trading Session and will be widely
disseminated by one or more major market data vendors during the NYSE
Arca Core Trading Session.
Creation and Redemption of Shares
According to the Registration Statement, the Trust intends to
create and redeem Shares in one or more Creation Baskets. A Creation
Basket is a block of 25,000 Shares of the Trust. Except when aggregated
in Creation Units, the Shares are not redeemable securities.
Only Authorized Participants may purchase and redeem Creation
Baskets. Authorized Participants must be (1) registered broker-dealers
or other securities market participants, such as banks and other
financial institutions, that are not required to register as broker-
dealers to engage in securities transactions described below, and (2)
the Depository Trust Company (``DTC'') Participants. An Authorized
Participant is an entity that has entered into an Authorized
Participant Agreement with the Trust and the Sponsor.
Creation Procedures
On any business day, an Authorized Participant may place an order
with the Marketing Agent to create one or more Creation Baskets. For
purposes of processing both purchase and redemption orders, a
``business day'' means any day other than a day when the Exchange or
the New York Stock Exchange is closed for regular trading.
All creation baskets are processed in-kind. By placing a purchase
order, an Authorized Participant agrees to deposit bitcoin with the
Trust. Prior to the delivery of baskets for a purchase order, the
Authorized Participant must also have wired to the custodian the
nonrefundable transaction fee due for the purchase order. Authorized
Participants may not withdraw a creation request. If an Authorized
Participant fails to consummate the foregoing, the order shall be
cancelled.
Redemption Procedures
According to the Registration Statement, the procedures by which an
Authorized Participant can redeem one or more baskets mirror the
procedures for the creation of creation baskets. On any business day,
an Authorized Participant may place an order with the Marketing Agent
to redeem one or more baskets. A redemption order so received will be
effective on the date it is received in satisfactory form by the
Marketing Agent (``Redemption Order Date''). The redemption procedures
allow Authorized Participants to redeem baskets and do not entitle an
individual shareholder to redeem any shares in an amount less than a
Creation Basket, or to redeem baskets other than through an Authorized
Participant.
By placing a redemption order, an Authorized Participant agrees to
deliver the baskets to be redeemed through DTC's book-entry system to
the Trust not later than noon E.T. on the second business day following
the effective date of the redemption order. Prior to the delivery of
the redemption distribution for a redemption order, the Authorized
Participant must also have wired to the Sponsor`s account at the
custodian the non-refundable transaction fee due for the redemption
order. An Authorized Participant may not withdraw a redemption order.
All redemption orders are processed in-kind. By placing a
redemption order, an Authorized Participant agrees to receive bitcoin.
The manner by which redemptions are made is dictated by the terms
of the Authorized Participant Agreement. If an Authorized Participant
fails to consummate the foregoing, the order shall be cancelled.
Determination of Redemption Distribution
The redemption distribution from the Trust will consist of a
transfer to the redeeming Authorized Participant of an amount of
bitcoin that is in the same proportion to the total assets of the Trust
(net of estimated accrued but unpaid fees, expenses and other
liabilities) on the date the order to redeem is properly received as
the number of shares to be redeemed under the redemption order is in
proportion to the total number of shares outstanding on the date the
order is received. The Sponsor, directly or in consultation with the
Administrator, determines the requirements for bitcoin that may be
included in distributions to redeem baskets. The Marketing Agent will
publish an estimate of the redemption distribution per basket as of the
beginning of each business day.
Fee Accrual
The Sponsor proposes to accrue all fees in bitcoin.
The Impact of the Exclusive Use of In-Kind Creations, Redemptions and
Fee Accruals
Bitwise believes that the exclusive use of in-kind creations,
redemptions and fee accruals, in all situations except when the Trust
is required to liquidate, provides long-term investors in the Trust
with significant, redundant and strong protection against attempts to
manipulate the price of bitcoin in such a way as to impact the Bitwise
Daily

[[Page 23133]]

Bitcoin Reference Rate and therefore the NAV of the Trust.
That is because, while Bitwise believes that the NAV will
accurately reflect the globally integrated price for bitcoin, and that
that price is uniquely resistant to market manipulation, and
acknowledges that this is important, it gains additional comfort that
long-term investors in the Trust are protected from short-term attempts
to manipulate that NAV by the Trust's exclusive use of in-kind
creations, redemptions and fee accruals, because denominating those
transactions exclusively in bitcoin ensures that the Trust maintains
the appropriate amount of bitcoin-per-Share in all scenarios, even if
the NAV or the Bitwise Daily Bitcoin Reference Price were somehow to be
manipulated.
How The Trust Meets Standards in the Winklevoss Order
The preceding information, both about the real nature of the
bitcoin market and the structure of the Trust, informs the means by
which Bitwise believes that the Trust meets the concerns and conditions
set forth in the Winklevoss Order.
Regarding the first condition--namely, showing that the bitcoin
market is uniquely resistant to manipulation--Bitwise believes that the
digital nature of bitcoin makes it unique compared to other commodities
in three important ways, which combine to provide unique protections
against attempts to manipulate the market:
1. Fungibility: As mentioned, unlike other commodities (like oil,
wheat or even gold), as mentioned, there are no varieties, purities or
geographical delivery locations for a bitcoin.
2. Transportability: Bitcoin has no physical manifestation. As a
result, it can be instantly transported from one location to another,
anywhere in the world, at a cost approaching zero.
3. Exchange Tradability: Most commodities trade over-the-counter or
rely on representative, derivative futures contracts because they lack
the characteristics listed above. Bitcoin is unique in that the
commodity itself trades directly on exchange, allowing for open price
discovery.
These unique features allow the bitcoin market to be uniquely
resistant to market manipulation in critical ways.
For example, Bitiwse [sic] believes that the fact that bitcoin's
price is set on the open market makes it uniquely resistant to
manipulation compared to other commodities whose price is set by
coordinated fix pricing. The Bitwise Study notes that many of the
largest recent market manipulation scandals have been driven by
coordinated fix pricing, including those related to London Interbank
Offered Rate (LIBOR) (2012), Global Forex (2013), Gold Fix (2014), and
the Australian Bank Bill Swap Rate (ASIC) (2016), among others. Bitwise
believes that the fact that the bitcoin market engages in price
discovery in an open, transparent and online setting introduces certain
risks that must be considered and controlled through the careful design
of the Trust, but notes that these risks can be weighed against the
benefits that accrue to the public, transparent and open nature of that
price discovery.
The Bitwise Study and related research also show that the fact that
bitcoin uniquely has no physical delivery location renders it immune to
another common form of attempted and successful commodity market
manipulation. For instance, in May 2011, the U.S. Commodity Futures
Trading Commission filed suit against three American and international
trading firms for attempting to manipulate the price of oil by
cornering or partially cornering the market for oil storage in Cushing,
Oklahoma.\35\ Cushing is the delivery point for the popular NYMEX WTI
Crude Oil futures contract, the most liquid crude oil futures contract
in the world, which is widely seen as the benchmark price for WTI crude
oil in the U.S. While the price of the WTI contract is used as a proxy
for the price of all WTI crude, just 5%-10% of U.S. crude oil storage
is available in Cushing. This disconnect between the size of the
storage market for the reference price contract and the much larger
real market for WTI crude oil creates an opportunity for individuals
and firms to attempt to profit from artificially manipulating the
relatively small market for crude oil storage while holding broader
positions in the underlying physical commodity. Because bitcoin itself
trades on exchanges and does so at a globally integrated price, these
types of attempts at market manipulation are not possible, because
there is no narrowly constructed representative price with a physical
storage limitation that can be manipulated.
---------------------------------------------------------------------------

\35\ See ``U.S. Suit Sees Manipulation of Oil Trades'' by Graham
Bowley, May 24, 2011, The New York Times, available at https://www.nytimes.com/2011/05/25/business/global/25oil.html?ref=todayspaper.
---------------------------------------------------------------------------

Other factors further contribute to the unique resistance to market
manipulation that exists in the bitcoin market. For instance, as
described above, the fact that bitcoin is fungible and transportable
means that bitcoin trades at a single price on real exchanges around
the world, and that extremely effective arbitrage is in place between
those exchanges. Because there is a single global price for bitcoin,
any attempt to manipulate the market must involve a non-trivial amount
of the total global liquidity, which makes it more difficult to achieve
and significantly more risky to attempt.
In addition, the fact that bitcoin itself (and not some derivative
of it) is traded on exchanges means profiting from any such market
manipulation would be difficult. The Trust's NAV captures substantially
all of the spot bitcoin trading volume in the world, and the Trust's
NAV is designed in a volume-weighted way, meaning attempts to
manipulate must involve a majority of trading volume over a significant
period of time.
Further, Bitwise believes that the fact that bitcoin is fungible
and transportable has allowed a distributed market to emerge, which
provides unique resistance to market manipulation given the factors
identified above. Bitwise's research notes that no single exchange
represents the majority of real trading volume on the bitcoin market,
and that volume is spread amongst ten different exchanges. This
contributes to bitcoin's unique resistance to market manipulation, as
any attempt to manipulate the market must either be coordinated
synchronously across multiple exchanges or must involve a significant
spike of volume on a single exchange (an action that would trigger
review in the Trust's NAV process). Bitwise notes that there is a
carefully designed lag between the strike time of the NAV (4:00 p.m.
E.T.) and the time that the NAV is distributed (approximately 5:30 p.m.
E.T.), which allows time for Bitwise Index Services to review
contributed prices in both an algorithmic and manual way to ensure that
no anomalous behavior exists.
Bitwise further believes that the unique design of the Bitwise
Daily Bitcoin Reference Rate, and, therefore, the NAV--as well as the
Trust's exclusive use of in-kind creations and redemptions, and its
decision to accrue all fees in bitcoin--provide additional unique
resistance to any short-term attempts at market manipulation for the
reasons described above.
A Significant, Regulated and Surveilled Market Exists and Is Closely
Connected With Spot Market for Bitcoin
In the Winklevoss Order, the Commission laid out both the need for
and the definition of a surveilled market of significant size.
Specifically, the Commission explained that:

[[Page 23134]]

[for the] commodity-trust ETPs approved to date for listing and
trading, there has been in every case at least one significant,
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP
listing exchange has entered into surveillance-sharing agreements
with, or held Intermarket Surveillance Group membership in common
with, that market.\36\
---------------------------------------------------------------------------

\36\ Winklevoss Order at note 209 and accompanying text.

Further, the Commission stated that the Commission interprets terms
---------------------------------------------------------------------------
``significant market'' and ``market of significant size'' to include:

a market (or group of markets) as to which (a) there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to successfully manipulate the ETP, so
that a surveillance-sharing agreement would assist the ETP listing
market in detecting and deterring misconduct, and (b) it is unlikely
that trading in the ETP would be the predominant influence on prices
in that market.\37\
---------------------------------------------------------------------------

\37\ Winklevoss Order, 83 FR at 37594.

Bitwise believes that, in light of a better understanding of the
true size of the spot bitcoin market, the combined CME/CFE futures
market represents a large, surveilled and regulated market, as required
above. Over the time period covered in the Bitcoin Study, the average
daily volume of the bitcoin futures market was $91 million. While this
appears tiny in relation to the reported volume of $6 billion, it is
meaningful in relation to the actual volume of $273 million.\38\
---------------------------------------------------------------------------

\38\ See Exhibit 3 [to Amendment No. 1], Item 9.
---------------------------------------------------------------------------

In addition, the CME futures market is larger than all but one spot
bitcoin exchange and nearly as large as the largest bitcoin
exchange.\39\
---------------------------------------------------------------------------

\39\ See Exhibit 3 [to Amendment No. 1], Item 10.
---------------------------------------------------------------------------

The Bitwise Study found that the prices on the CME and CFE futures
markets are closely aligned with the Bitwise Daily Bitcoin Reference
Price on a once-a-day basis, and with the Bitwise Real-Time Bitcoin
Price on an intraday basis. This follows logically, given that the CME
futures settlement price is based on prices pulled from four of the ten
exchanges that contribute to the Bitwise Daily Bitcoin Reference Price
and the Bitwise Real-Time Bitcoin Rate, and the CFE futures settlement
price is based on prices pulled from one of the ten exchanges that
contribute to the Bitwise Daily Bitcoin Reference Price and the Bitwise
Real-Time Bitcoin Rate. The tightness-of-fit between the two prices is
limited by the term structure of the futures contract and the
asymmetric cost of hedging a futures position--it is less expensive to
hedge a short position in bitcoin futures than it is to hedge a long
position in bitcoin futures. Nonetheless, the connection between the
two prices is strong and arbitrage exists between the two prices.
Given the significant size of the CME and CFE futures markets (or
the CME futures market in isolation), and the close relationship in
prices between the derivatives market and the spot market, there is a
reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to successfully manipulate the
ETP, since arbitrage between the derivative and spot markets would tend
to counter an attempt to manipulate the spot market alone. As a result,
the Exchange's ability to obtain information regarding trading in the
Shares and futures from markets and other entities that are members of
the Intermarket Trading Group (``ISG''), which includes the CME and
CFE, would assist the ETP listing market in detecting and deterring
misconduct.
Impact on the Spot Market for Bitcoin
In the Winklevoss Order, the Commission noted that it wanted to see
a market where ``it is unlikely that trading in the ETP would be the
predominant influence on prices in that market''.\40\ While future
inflows to the proposed Trust cannot be predicted, to provide
comparable data, Bitwise examined total net inflows in the first year
of existence for two types of ETPs: Commodity ETPs that were first to
market in the U.S. and blockchain ETFs. Bitwise found that one year net
inflows ranged from $2 million to approximately $3 billion for the ETPs
meeting that definition.\41\
---------------------------------------------------------------------------

\40\ See Winklevoss Order, 83 FR at 37594.
\41\ See Exhibit 3 [to Amendment No. 1], Item 11.
---------------------------------------------------------------------------

Given the size of these inflows versus the size of the real bitcoin
market ($273 million in average daily volume), Bitwise believes that it
is unlikely that trading in the ETP would become the predominant
influence on prices in that market.
Conclusion Regarding Standards in the Winklevoss Order
In summary, the Commission articulated two ways that a proposed
bitcoin ETP could meet the standards set forth in the Winklevoss Order.
The Commission explained that the proposed ETP must show either that
the underlying market for bitcoin is uniquely resistant to market
manipulation, and/or that a surveilled derivatives market of
significant size existed alongside that market. Bitwise believes that
the information presented above attempts to address those concerns,
showing both the ways in which the bitcoin market (as the first digital
commodity) is uniquely resistant to market manipulation, and that the
CME and CFE are large, surveilled and regulated markets that fulfill
the requirements for surveillance sharing. Bitwise further believes
that the careful construction of the Bitwise Daily Bitcoin Reference
Price (and the Bitwise Real-Time Bitcoin Price), and thereby the NAV
(and IIV), the decision to process all creations and redemptions in-
kind, and the decision to accrue all fees in-kind, provide additional
protections against attempts to manipulate the spot market for bitcoin.
Availability of Information Regarding Bitcoin
The NAV for the Trust's Shares will be disseminated daily to all
market participants at the same time.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the CTA. The IIV will be
available through online information services.
In addition, the Trust's website will display the applicable end of
day closing NAV. The daily holdings of the Trust will be available on
the Trust's website before 9:30 a.m. E.T. The Trust's total portfolio
composition will be disclosed each business day that NYSE Arca is open
for trading, on the Trust's website. The Trust's website will also
include a form of the prospectus for the Trust that may be downloaded.
The website will include the Shares' ticker and CUSIP information,
along with additional quantitative information updated on a daily basis
for the Trust. The Trust's website will include (1) the prior business
day's trading volume, the prior business day's reported NAV and closing
price, and a calculation of the premium and discount of the closing
price or mid-point of the bid/ask spread at the time of NAV calculation
(``Bid/Ask Price'') against the NAV; and (2) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily closing price or Bid/Ask Price against the NAV, within
appropriate ranges, for at least each of the four previous calendar
quarters. The Trust's website will be publicly available prior to the
public offering of Shares and accessible at no charge.
The spot price of bitcoin as reflected in the Bitwise Daily Bitcoin
Reference Price will also be available on a 24-hour basis from the
Trust's website.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant

[[Page 23135]]

factors in exercising its discretion to halt or suspend trading in the
Shares of the Trust.\42\ Trading in Shares of the Trust will be halted
if the circuit breaker parameters in NYSE Arca Rule 7.12-E have been
reached. Trading also may be halted because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable.
---------------------------------------------------------------------------

\42\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------

The Exchange may halt trading during the day in which an
interruption to the dissemination of the IIV occurs.\43\ If the
interruption to the dissemination of the IIV or the value of the Index
persists past the trading day in which it occurred, the Exchange will
halt trading no later than the beginning of the trading day following
the interruption. In addition, if the Exchange becomes aware that the
NAV with respect to the Shares is not disseminated to all market
participants at the same time, it will halt trading in the Shares until
such time as the NAV is available to all market participants.
---------------------------------------------------------------------------

\43\ A limit up/limit down condition in the futures market would
not be considered an interruption requiring the Trust to be halted.
---------------------------------------------------------------------------

Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with
NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions). The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in NYSE Arca Rule 7.6-E, the
minimum price variation (``MPV'') for quoting and entry of orders in
equity securities traded on the NYSE Arca Marketplace is $0.01, with
the exception of securities that are priced less than $1.00 for which
the MPV for order entry is $0.0001.
Further, NYSE Arca Rule 8.201-E sets forth certain restrictions on
Equity Trading Permit Holders acting as registered Market Makers in the
Shares to facilitate surveillance. Under NYSE Arca Rule 8.201-E(g), an
Equity Trading Permit Holder acting as a registered Market Maker in the
Shares is required to provide the Exchange with information relating to
its trading in the underlying commodity, related futures or options on
futures, or any other related derivatives. Commentary .04 of NYSE Arca
Rule 11.3-E requires an Equity Trading Permit Holder acting as a
registered Market Maker, and its affiliates, in the Shares to
establish, maintain and enforce written policies and procedures
reasonably designed to prevent the misuse of any material nonpublic
information with respect to such products, any components of the
related products, any physical asset or commodity underlying the
product, applicable currencies, underlying indexes, related futures or
options on futures, and any related derivative instruments (including
the Shares).
As a general matter, the Exchange has regulatory jurisdiction over
its Equity Trading Permit Holders and their associated persons, which
include any person or entity controlling an Equity Trading Permit
Holder. A subsidiary or affiliate of an Equity Trading Permit Holder
that does business only in commodities or futures contracts would not
be subject to Exchange jurisdiction, but the Exchange could obtain
information regarding the activities of such subsidiary or affiliate
through surveillance sharing agreements with regulatory organizations
of which such subsidiary or affiliate is a member.
Surveillance
The Exchange represents that trading in the Shares of the Trust
will be subject to the existing trading surveillances administered by
the Exchange, as well as cross-market surveillances administered by
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities
laws.\44\ The Exchange represents that these procedures are adequate to
properly monitor Exchange trading of the Shares in all trading sessions
and to deter and detect violations of Exchange rules and federal
securities laws applicable to trading on the Exchange.
---------------------------------------------------------------------------

\44\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
---------------------------------------------------------------------------

The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and bitcoin
futures with other markets and other entities that are members of the
ISG, and the Exchange or FINRA, on behalf of the Exchange, or both, may
obtain trading information regarding trading in the Shares and bitcoin
futures from such markets and other entities. In addition, the Exchange
may obtain information regarding trading in the Shares from markets and
other entities that are members of ISG (including the CME and CFE) or
with which the Exchange has in place a comprehensive surveillance
sharing agreement (``CSSA'').\45\
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\45\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Trust may trade on markets that are members of ISG or with which the
Exchange has in place a CSSA.
---------------------------------------------------------------------------

Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is able
to obtain information regarding trading in the Shares and the
underlying bitcoin through ETP Holders acting as registered ``Market
Makers'', in connection with such ETP Holders' proprietary or customer
trades through ETP Holders which they effect on any relevant market.
In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolios of the Trust or the Bitwise Daily
Bitcoin Reference Price, (b) limitations on portfolio holdings,
reference assets or the Bitwise Daily Bitcoin Reference Price, or (c)
the applicability of Exchange listing rules specified in this rule
filing shall constitute continued listing requirements for listing the
Shares on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an Information Bulletin of the special characteristics
and risks associated with trading the Shares. Specifically, the
Information Bulletin will discuss the following: (1) The risks involved
in trading the Shares during the Early and Late Trading Sessions when
an updated IIV will not be calculated or publicly disseminated; (2) the
procedures for purchases and redemptions of Shares in Creation Units

[[Page 23136]]

(and that Shares are not individually redeemable); (3) NYSE Arca Rule
9.2-E(a), which imposes a duty of due diligence on its ETP Holders to
learn the essential facts relating to every customer prior to trading
the Shares; (4) how information regarding the IIV is disseminated; (5)
how information regarding portfolio holdings is disseminated; (6) the
requirement that ETP Holders deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; (7) trading information; and (8) NYSE
Arca suitability rules.
The Information Bulletin will also discuss any exemptive, no-
action, and interpretive relief granted by the Commission from any
rules under the Act. In addition, the Information Bulletin will
reference that the Trust is subject to various fees and expenses
described in the Registration Statement.
The Information Bulletin will also disclose the trading hours of
the Shares that the NAV for the Shares will be calculated after 4:00
p.m. E.T. each trading day. The Information Bulletin will disclose that
information about the Shares will be publicly available on the Trust's
website.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \46\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to remove
impediments to, and perfect the mechanism of a free and open market
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

\46\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices and to protect
investors and the public interest in that the Shares will be listed and
traded on the Exchange pursuant to the initial and continued listing
criteria in NYSE Arca Rule 8.201-E. As discussed above, bitcoin trades
in a well-arbitraged and distributed market that is significantly
smaller, more orderly, and more regulated than commonly reported. As a
result, as discussed above, any attempts at manipulation must involve a
large share of global bitcoin volume, which would be substantially
difficult to achieve. Accordingly, the notional size of the regulated,
surveilled CME and CFE bitcoin futures markets (or even the CME market
in isolation) is larger than all but one of the ten spot bitcoin
exchanges, and is nearly as big as the largest exchange. In addition,
prices on the CME and CFE futures markets are closely related to prices
on the bitcoin spot market, and arbitrage between those prices is well-
established. Given the significant size of the CME and CFE futures
market, and the close relationship in prices between the derivatives
market and the spot market, there is a reasonable likelihood that a
person attempting to manipulate the ETP would also have to trade on
that market to successfully manipulate the ETP, since arbitrage between
the derivative and spot markets would tend to counter an attempt to
manipulate the spot market alone. As a result, the fact that the CME
and CFE are ISG members would assist the Exchange in detecting and
deterring misconduct.\47\
---------------------------------------------------------------------------

\47\ See note 15, supra.
---------------------------------------------------------------------------

The Exchange has in place surveillance procedures that are adequate
to properly monitor trading in the Shares in all trading sessions and
to deter and detect violations of Exchange rules and applicable federal
securities laws. The Exchange or FINRA, on behalf of the Exchange, or
both, will communicate as needed regarding trading in the Shares and
bitcoin futures with other markets and other entities that are members
of the ISG, and the Exchange or FINRA, on behalf of the Exchange, or
both, may obtain trading information regarding trading in the Shares
from such markets and other entities. In addition, the Exchange may
obtain information regarding trading in the Shares from markets and
other entities that are members of ISG or with which the Exchange has
in place a CSSA. The Exchange is also able to obtain information
regarding trading in the Shares and bitcoin futures or the underlying
bitcoin through ETP Holders, in connection with such ETP Holders'
proprietary or customer trades which they effect through ETP Holders on
any relevant market.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the CTA. The Trust's website
will also include a form of the prospectus for the Trust that may be
downloaded. The website will include the Shares' ticker and CUSIP
information, along with additional quantitative information updated on
a daily basis for the Trust. The Trust's website will include (1) daily
trading volume, the prior business day's reported NAV and closing
price, and a calculation of the premium and discount of the closing
price or mid-point of the Bid/Ask Price against the NAV; and (2) data
in chart format displaying the frequency distribution of discounts and
premiums of the daily closing price or Bid/Ask Price against the NAV,
within appropriate ranges, for at least each of the four previous
calendar quarters. The Trust's website will be publicly available prior
to the public offering of Shares and accessible at no charge.
Moreover, prior to the commencement of trading, the Exchange will
inform its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares. The
Information Bulletin will also discuss any exemptive, no-action, and
interpretive relief granted by the Commission from any rules under the
Act. In addition, the Information Bulletin will reference that the
Trust is subject to various fees and expenses described in the
Registration Statement. The Information Bulletin will also disclose the
trading hours of the Shares and that the NAV for the Shares will be
calculated after 4:00 p.m. E.T. each trading day. The Information
Bulletin will disclose that information about the Shares will be
publicly available on the Trust's website.
Trading in Shares of the Trust will be halted if the circuit
breaker parameters in NYSE Arca Rule 7.12-E have been reached or
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of a
new type of exchange-traded product based on the price of bitcoin that
will enhance competition among market participants, to the benefit of
investors and the marketplace. As noted above, the Exchange has in
place surveillance procedures that are adequate to properly monitor
trading in the Shares in all trading sessions and to deter and detect
violations of Exchange rules and applicable federal securities laws.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of a new
type of Commodity-Based Trust Share based on the price of bitcoin that
will enhance competition among market participants, to the benefit of
investors and the marketplace.

[[Page 23137]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

No written comments were solicited or received with respect to the
proposed rule change.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2019-01 and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \48\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
---------------------------------------------------------------------------

\48\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

Pursuant to Section 19(b)(2)(B) of the Act,\49\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \50\
---------------------------------------------------------------------------

\49\ Id.
\50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Procedure: Request for Written Comments

The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, or
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\51\
---------------------------------------------------------------------------

\51\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
---------------------------------------------------------------------------

Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by June 11, 2019. Any person who wishes to file a rebuttal
to any other person's submission must file that rebuttal by June 25,
2019. The Commission asks that commenters address the sufficiency of
the Exchange's statements in support of the proposal, which are set
forth in Amendment No. 1,\52\ in addition to any other comments they
may wish to submit about the proposed rule change. In particular, the
Commission seeks comment on the following questions and asks commenters
to submit data where appropriate to support their views:
---------------------------------------------------------------------------

\52\ See supra note 6.
---------------------------------------------------------------------------

1. What are commenters' views on the assertions by the Exchange and
the Sponsor that bitcoin is uniquely resistant to manipulation? \53\
What are commenters' views on the Sponsor's analysis as described by
the Bitwise Presentation, and by the Exchange in Amendment No. 1,
including the factual basis for the assertions made and the selection
of the trading periods analyzed?
---------------------------------------------------------------------------

\53\ The Sponsor made a number of representations to the
Commission in a presentation dated March 19, 2019 (``Bitwise
Presentation''). See supra note 15.
---------------------------------------------------------------------------

2. What are commenters' views on the assertions by the Exchange and
the Sponsor regarding the nature of the market for bitcoin, including
the efficiency of that market, the susceptibility of that market to
manipulation, and the ways in which that market is, or is not, similar
to the markets for other commodities?
3. What are commenters' views on the assertion by the Exchange and
the Sponsor that a significant, regulated and surveilled market for
bitcoin futures exists and that it is closely connected with the spot
market for bitcoin? What are commenters' views on whether there is a
reasonable likelihood that a person attempting to manipulate the Shares
would also have to trade in the bitcoin futures market to manipulate
the Shares? What are commenters' views on whether it is likely that
trading in the Shares would be the predominant influence on prices in
the bitcoin futures market?
4. What are commenters' views on the relationship between the
bitcoin futures market and the bitcoin spot market? For example, what
is the relative size of these markets, and where does bitcoin price
formation occur? Does the market, spot or futures, in which price
formation occurs affect commenters' analysis of whether it is
reasonably likely that someone attempting to manipulate the Shares
would be reasonably likely to have to trade in the bitcoin futures
market, or that trading in the Shares would be the predominant
influence on prices in the bitcoin futures market? To what extent, if
at all, do recent developments in the bitcoin futures market--namely,
the cessation of new bitcoin futures contract trading on the Chicago
Futures Exchange--affect commenters' analysis of these questions?
5. What are commenters' views on whether the Exchange could enter
into surveillance-sharing agreements with regulated spot markets of
significant size related to bitcoin?
6. What are commenters' views on the Sponsor's assertions that a
large percentage of publicly reported spot volume in bitcoin is
``fake'' or ``non-economic in nature''? What are commenters' views on
the method by which the Sponsor purports to distinguish ``real''
bitcoin trading volume from ``fake'' bitcoin trading volume? What are
commenters' views on the Sponsor's estimate of the average daily
``real'' volume of trading in the bitcoin spot market?
7. What are commenters' views on the Sponsor's assertion that the
10 identified bitcoin trading venues represent ``substantially all of
the economically significant bitcoin trading volume in the world
(outside of capital-controlled countries)''? What are commenters' views
on whether over-the-counter trading in bitcoin is economically
significant, and what are commenters' views on the share of bitcoin
spot trading that takes place in the over-the-counter market? Does
economically significant bitcoin spot trading occur elsewhere?
8. What are commenters' views on the effectiveness of arbitrage
among the 10 bitcoin trading venues identified by the Sponsor? What are
commenters' views on whether the price of bitcoin on these venues can
be affected by activity on other bitcoin trading venues, including
other centralized trading venues, the over-the-counter market, or
bitcoin derivatives markets? What are commenters' views on the
Sponsor's

[[Page 23138]]

description of the bitcoin market as a ``globally integrated market for
a fungible good''?
9. What are commenters' views on the degree to which each of the 10
identified bitcoin trading venues is subject to regulation? What are
commenters' views on the extent to which each of these venues can, or
does, conduct surveillance of bitcoin trading activity?
10. What are commenters' views on the methodologies by which the
Bitwise Daily Bitcoin Reference Price and the Bitwise Real-Time Bitcoin
Reference Price are calculated? What are commenters' views on the role
of the Bitwise Crypto Index Committee in determining which trading
venues will contribute prices to the Bitwise Daily Bitcoin Reference
Price and the Bitwise Real-Time Bitcoin Reference Price?
11. What are commenters' views on the use of the Bitwise Daily
Bitcoin Reference Price to calculate the net asset value of the Shares?
What are commenters' views on the alternative valuation methods
proposed by the Sponsor? What are commenters' views on whether any of
these pricing mechanisms, primary or alternate, would be affected by,
or resistant to, manipulative activity in bitcoin markets?
12. The Exchange represents that, as of April 26, 2019, the Bitwise
Crypto Index Committee removed Bitfinex from the list of trading venues
that contribute prices to derive the Bitwise Daily Bitcoin Reference
Price. The Exchange states that this action was taken ``pursuant to the
New York Attorney General's claims towards iFinex Inc., operator of
Bitfinex.'' What are commenters' views on whether the removal of
Bitfinex--which the Sponsor asserts is a ``real'' trading venue--from
the calculation of the Bitwise Daily Bitcoin Reference Price might
affect the reliability or accuracy of that price? Does the removal of
the Bitfinex venue from the calculation of this reference price because
of regulatory or legal activity affect commenters' views of the
Sponsor's screening process for bitcoin trading venues or its general
distinction between ``real'' and ``fake'' bitcoin trading volume? Does
the removal of the Bitfinex venue from the calculation of this
reference price affect commenters' views of whether it is appropriate
to use the Bitwise Daily Bitcoin Reference Price to calculate the net
asset value of the Shares?
13. What are commenters' views on the Sponsor's assertions
regarding how bitcoin trading versus Tether compares to or might affect
bitcoin pricing more generally? What are commenters' views on whether
bitcoin trading versus Tether might affect the calculation of the net
asset value of the Shares?
14. What are commenters' views on the Sponsor's assertions that the
proposed in-kind creation and redemption mechanism and payment of Trust
expenses directly in bitcoin would insulate holders of the Shares from
harm resulting from manipulation of the Shares' net asset value?
Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2019-01 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-NYSEArca-2019-01. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2019-01 and should be submitted
by June 11, 2019. Rebuttal comments should be submitted by June 25,
2019.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\54\
---------------------------------------------------------------------------

\54\ 17 CFR 200.30-3(a)(12) & 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-10351 Filed 5-20-19; 8:45 am]
BILLING CODE 8011-01-P

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