Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares) and To List and Trade Shares of the United States Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 31373-31384 [2019-13925]

Download as PDF Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices additional detail and make clarifying changes to the rule text of Exchange Rule 515, and correct errors in the hierarchical heading scheme to provide uniformity in the Exchange’s rulebook. The Exchange believes that the proposed changes will provide greater clarity to Members and the public regarding the Exchange’s rules and that it is in the public interest for rules to be accurate and concise so as to eliminate the potential for confusion. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule changes will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. Specifically, the Exchange believes the proposed changes will not impose any burden on intra-market competition as there is no functional change to the Exchange’s System and because the rules of the Exchange apply to all MIAX participants equally. The proposed rule changes will have no impact on competition as they are not designed to address any competitive issues but rather are designed to add additional clarity to existing Exchange Rule 515 and to remedy minor non-substantive issues in the rule text. In addition, the Exchange does not believe the proposal will impose any burden on inter-market competition as the proposal does not address any competitive issues and is intended to protect investors by providing further transparency regarding the Exchange’s functionality. khammond on DSKBBV9HB2PROD with NOTICES 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 foregoing 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 after the date of the filing, or such shorter time as the Commission may designate, it has become effective pursuant to 19(b)(3)(A) of the Act 28 and Rule 19b–4(f)(6) 29 thereunder. 28 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 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 should be approved or disapproved. 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–MIAX–2019–30, and should be submitted on or before July 22, 2019. IV. Solicitation of Comments For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.30 Eduardo A. Aleman, Deputy Secretary. 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: 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– MIAX–2019–30 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–MIAX–2019–30. 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 29 17 VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 31373 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. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 [FR Doc. 2019–13926 Filed 6–28–19; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No 34–86195; File No. SR– NYSEArca–2019–39] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To Amend NYSE Arca Rule 8.201–E (Commodity-Based Trust Shares) and To List and Trade Shares of the United States Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201–E June 25, 2019. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b-4 thereunder,3 notice is hereby given that on June 12, 2019, NYSE Arca, Inc. (‘‘NYSE Arca’’ or the ‘‘Exchange’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes (1) to amend NYSE Arca Rule 8.201–E (CommodityBased Trust Shares) to provide for issuance and redemption of such securities for the underlying commodity and/or cash, and (2) to list and trade the shares of the United States Bitcoin and Treasury Investment Trust under NYSE Arca Rule 8.201–E, as proposed to be 30 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 E:\FR\FM\01JYN1.SGM 01JYN1 31374 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices amended. 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 (1) amend NYSE Arca Rule 8.201–E (CommodityBased Trust Shares) to provide for issuance and redemption of such securities for the underlying commodity and/or cash, and (2) to list and trade shares (‘‘Shares’’) of the United States Bitcoin and Treasury Investment Trust (the ‘‘Trust’’) under NYSE Arca Rule 8.201–E, which governs the listing and trading of Commodity-Based Trust Shares. khammond on DSKBBV9HB2PROD with NOTICES Proposed Amendment to NYSE Arca Rule 8.201–E Under NYSE Arca Rule 8.201–E, the Exchange may propose to list and/or trade pursuant to unlisted trading privileges (‘‘UTP’’) ‘‘Commodity-Based Trust Shares.’’ 4 Rule 8.201–E(c)(1) currently states that such securities are issued by a trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity, and may be redeemed in the same specified minimum number by 4 Commodity-Based Trust Shares are securities issued by a trust that represents investors’ discrete identifiable and undivided beneficial ownership interest in the commodities deposited into the Trust. Rule 8.201–E (c)(1) defines the term ‘‘Commodity-Based Trust Shares’’ as follows: ‘‘The term ‘‘Commodity-Based Trust Shares’’ means a security (a) that is issued by a trust (‘‘Trust’’) that holds a specified commodity deposited with the Trust; (b) that is issued by such Trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity; and (c) that, when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such Trust which will deliver to the redeeming holder the quantity of the underlying commodity.’’ VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 a holder for the quantity of the underlying commodity. The Exchange proposes to amend Rule 8.201–E(c)(1) to provide that Commodity-Based Trust Shares may be issued and redeemed for the underlying commodity and/or cash. The Commission has previously approved listing and trading on the Exchange of Commodity-Based Trust Shares that permit issuance and redemption of shares for cash in whole or part.5 The Exchange believes the proposed change will provide a trust issuing Commodity-Based Trust Shares and holding a specified commodity with the flexibility to issue or redeem shares partially or wholly for cash. Such alternative would allow a trust to structure the procedures for issuance and redemption of shares in manner that as determined by the issuer, may provide operational efficiencies and accommodate investors who may wish to deliver or receive cash rather than the underlying commodity upon requesting the issuance or redemption of shares. The Exchange, therefore, believes the proposed change will facilitate the listing and trading of additional types of exchange-traded derivative securities products that will enhance competition among market participants, to the benefit of investors and the marketplace.6 5 See, e.g., Securities Exchange Act Release Nos. 61496 (February 4, 2010), 75 FR 6758 (February 10, 2010) (SR–NYSEArca–2009–113) (approving listing on the Exchange of Sprott Physical Gold Trust); 63043 (October 5, 2010), 75 FR 62615 (October 12, 2010) (SR–NYSEArca–2010–84) (approving listing on the Exchange of the Sprott Physical Silver Trust); 68430 (December 13, 2012) (SR–NYSEArca– 2012–111) (Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Units of the Sprott Physical Platinum and Palladium Trust Pursuant to NYSE Arca Equities Rule 8.201; 82448 (January 5, 2018) (SR– NYSEArca–2017–131) (Notice of Filing of Amendment No. 2 and Order Approving on an Accelerated Basis a Proposed Rule Change, as Modified by Amendment No. 2, to List and Trade Shares of the Sprott Physical Gold and Silver Trust under NYSE Arca Rule 8.201–E); 66930 (May 7, 2012), 77 FR 27817 (May 11, 2012) (SR–NYSEArca– 2012–18) (order approving listing and trading shares of the APMEX Physical-1 oz. Gold Redeemable Trust); 50603 October 28, 2004 (SR– NYSE–2004–22) (Order Granting Approval of Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval to Amendments No. 1 and No. 2 Thereto to the Proposed Rule Change by the New York Stock Exchange, Inc. Regarding Listing and Trading of streetTRACKS® Gold Shares). 6 The Commodity Futures Trading Commission (‘‘CFTC’’) has stated that bitcoin and other virtual currencies are encompassed in the definition of commodities under the Commodity Exchange Act (‘‘CEA’’) (17 U.S.C. 1). See ‘‘In the Matter of Coinflip, Inc.’’ (CFTC Docket 15–29 (September 17, 2015)) (order instituting proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making findings and imposing remedial sanctions) (‘‘Coinflip’’), in which the CFTC stated the following: ‘‘Section 1a(9) of the CEA defines ‘commodity’ to include, among other things, ‘all services, rights, and interests in PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 The Exchange further proposes to amend Rule 8.201–E(c)(2) to state that the term ‘‘commodity’’ is defined in Section 1(a)(9) of the Commodity Exchange Act (rather than Section 1(a)(4) as currently stated in Rule 8.201– E(c)(2)) to reflect an amendment to the Commodity Exchange Act included in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.7 United States Bitcoin and Treasury Investment Trust (the ‘‘Trust’’) Description of the Trust The Shares will be issued by the Trust, a Delaware statutory trust. The Trust will operate pursuant to a trust agreement (the ‘‘Trust Agreement’’) between Wilshire Phoenix Funds, LLC (the ‘‘Sponsor’’) and Delaware Trust Company, as the Trust’s trustee (the ‘‘Trustee’’).8 UMB Bank N.A. will act as custodian for the Trust’s cash and U.S. treasury assets (the ‘‘Cash and Treasury Custodian’’) and UMB Fund Services, Inc. will act as the transfer agent for the Trust (the ‘‘Transfer Agent’’) and as the administrator of the Trust (the ‘‘Administrator’’) to perform various administrative, accounting and recordkeeping functions on behalf of the Trust. Coinbase Custody Trust Company, LLC will act as the Bitcoin custodian for the Trust (the ‘‘Bitcoin Custodian’’) to maintain custody of the Trust’s Bitcoin assets in cold storage. According to the Registration Statement, the investment objective of the Trust is for the Shares to closely reflect the Bitcoin Treasury Index (the ‘‘BTI’’ or ‘‘Index’’), less the Trust’s liabilities and expenses. The Shares will provide investors with exposure to Bitcoin in a manner that is efficient and convenient while also reducing the volatility typically associated with Bitcoin without the use of derivatives or leverage methods. The Trust will have no assets other than (a) Bitcoin and (b) short-term U.S. which contracts for future delivery are presently or in the future dealt in.’ 7 U.S.C. 1a(9). The definition of a ‘commodity’ is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.’’ In Coinflip, the CFTC further concluded that Bitcoin is a virtual currency that is a commodity, ‘‘distinct from ‘real’ currencies, which are the coin and paper money of the United States or another country that are designated as legal tender, circulate, and are customarily used and accepted as a medium of exchange in the country of issuance.’’ See CFTC No. 15–29 (2015), 2015 CFTC LEXIS 20, at *1 n.2. 7 Public Law 111–203, 124 Stat. 1900 (2010). 8 On May 21, 2019, the Trust filed Amendment 3 to Form S–1 under the Securities Act of 1933 (File No. 333–229187) (the ‘‘Registration Statement’’). The description of the operation of the Trust herein is based, in part, on the Registration Statement. E:\FR\FM\01JYN1.SGM 01JYN1 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices Treasury securities with a maturity of less than one year (‘‘T-Bills’’). The Trust will also hold U.S. dollars for short periods of time in connection with (i) the maturity of any T-Bills, (ii) the purchase and sale of Bitcoin and/or TBills, and (iii) the payment of redemptions, if any, and fees and expenses of the Trust. Calculated on a daily basis, the ‘‘Bitcoin Price’’ (as defined below) is used to determine the Index’s monthly weighting between the ‘‘Bitcoin Component’’ and the ‘‘Treasury Component’’ (as described below). The amount of Bitcoin and T-Bills held by the Trust will be determined by the Index. On a monthly basis, following the calculation of the weighting of the components of the Index, the Trust will rebalance its holdings in Bitcoin and TBills in order to closely replicate the Index. Upon the maturity of any T-Bill, the Trust will receive U.S. dollars representing principal and interest. The portion of the cash that represents interest on the T-Bills will be used to pay, in full or in part, the sponsor’s fee, redemptions and any additional fees and expenses of the Trust. khammond on DSKBBV9HB2PROD with NOTICES Assets of the Trust According to the Registration Statement, Bitcoin will be held by the Bitcoin Custodian on behalf of the Trust, and T-Bills and U.S. dollars will be held by the Cash and Treasury Custodian on behalf of the Trust. The amount of Bitcoin and T-Bills held by the Trust will be determined by the Index. The Trust’s assets, other than Bitcoin, will consist of T-Bills to be purchased by the Cash and Treasury Custodian. The Trust will also hold U.S. dollars for short periods of time in connection with (i) the maturity of any T-Bills, (ii) the purchase and sale of Bitcoin and/or T-Bills, and (iii) the payment of redemptions, if any, and fees and expenses of the Trust. Custody of the Trust’s Bitcoin The Bitcoin Custodian is a New Yorkstate chartered trust company operating under the direct supervision of the New York State Department of Financial Services and is subject to the antimoney laundering requirements of the Financial Crimes Enforcement Network (‘‘FinCEN’’). In addition, the Bitcoin Custodian is a qualified custodian under the Investment Advisers Act of 1940. The Bitcoin Custodian will operate pursuant to the terms and provisions of the custody agreement between the Trust and the Bitcoin Custodian (the ‘‘Bitcoin Custodian Agreement’’). Under the Bitcoin Custodian Agreement, the VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 Bitcoin Custodian will be responsible for the safety and security of the Trust’s Bitcoin as well as overseeing the process of deposit, withdrawal, sale and purchase of the Trust’s Bitcoin. The Sponsor expects that the Bitcoin Custodian’s custodial operations will maintain custody and access of the private keys associated with the Trust’s Bitcoin.9 The Bitcoin Custodian will custody the Bitcoin in accordance with the terms of the Bitcoin Custodian Agreement. The Bitcoin Custodian will maintain a secured and segregated custody account in the name of the Trust (the ‘‘Bitcoin Custody Account’’). The Trust’s Bitcoin will be stored in the Bitcoin Custody Account on behalf of the Trust. The Bitcoin Custodian will utilize certain ‘‘Security Procedures’’ when the Trust is required to deposit or withdraw Bitcoin to or from the Bitcoin Custody Account. This deposit and withdrawal process provides additional levels of security including, but not limited to, passwords, encryption of private keys, multi-factor authentication process, multi-signature wallets and telephone call-backs during the administration and operation of the Bitcoin Custody Account. According to the Registration Statement, the Trust has obtained insurance for the Bitcoin held by the Trust, through the Bitcoin Custodian. Currently, the Bitcoin Custodian, either directly or through an affiliate, procures fidelity (also known as crime) insurance to protect the organization from risks such as theft of funds. Specifically, the fidelity insurance coverage program provides coverage for the theft of funds held in hot or cold storage and provides a limit excess of $200,000,000. The Bitcoin Custodian’s insurance coverage program is provided by a syndicate of industry-leading insurers that are highly rated by AM Best.10 To the extent the value of the Trust’s Bitcoin holdings exceeds the total insurance coverage provided by the Bitcoin Custodian’s insurance coverage program, the Sponsor will use commercially reasonable efforts to procure additional 9 According to the Registration Statement, the term ‘‘cold storage’’ refers to a safeguarding method by which the private keys corresponding to Bitcoin stored on a digital wallet are removed from any computers actively connected to the internet. Cold storage of private keys may involve keeping such wallet on a non-networked computer or electronic device or storing the public key and private keys relating to the digital wallet on a storage device (for example, a USB thumb drive) or printed medium (for example, papyrus or paper) and deleting the digital wallet from all computers. 10 AM Best is a global credit rating agency with a unique focus on the insurance industry. Credit ratings issued by AM Best are a recognized indicator of insurer financial strength and creditworthiness. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 31375 insurance coverage with the goal of maintaining insurance coverage at a one-to-one ratio with the Trust’s Bitcoin holdings such that for every dollar of Bitcoin held by the Trust there is an equal amount of insurance coverage. Custody of U.S. Dollars and T-Bills The Cash and Treasury Custodian will operate pursuant to the terms and provisions of the custody agreement between the Trust and the Cash and Treasury Custodian (the ‘‘Cash and Treasury Custodian Agreement’’). According to the Registration Statement, under the Cash and Treasury Custodian Agreement, the Cash and Treasury Custodian will be responsible for maintaining an account that holds TBills and U.S. dollars (the ‘‘Cash Account’’). Pursuant to a request from the Trust, the Cash and Treasury Custodian will establish and maintain the Cash Account in the name of the Trust that will hold U.S. dollars and TBills. The Cash and Treasury Custodian deposits and withdraws U.S. dollars to and from the Trust’s Cash Account at the instruction of the Trust’s Administrator or Sponsor, as applicable. The Cash and Treasury Custodian is responsible for administering the Cash Account. The Bitcoin Treasury Index The Index is based on a pairing of notional components and is not an investment product. The Index is calculated and published by Solactive AG (the ‘‘Index Calculation Agent’’).11 The level of the Index is published on each Business Day at approximately 5:00 p.m. Eastern time and is available through various market data vendors, including without limitation, Bloomberg L.P. and Thompson Reuters Company. ‘‘Business Day’’ means any day on which the New York Stock Exchange is scheduled to be open for business. The Index has two components: (1) A notional component representing Bitcoin (the ‘‘Bitcoin Component’’) and (2) a notional component representing T-Bills (the ‘‘Treasury Component’’). On a monthly basis, the Index rebalances its weighting of the Bitcoin Component and the Treasury Component utilizing a mathematically derived passive rules-based methodology that is based on the daily 11 The Index is a passive rules-based index and the Index Calculation Agent provides calculation services only. The Index Calculation Agent is not affiliated with the Sponsor and has represented that it and its employees are subject to market abuse laws and the Index Calculation Agent has established and maintains processes and procedures to prevent the use and dissemination of material non-public information regarding the Index. E:\FR\FM\01JYN1.SGM 01JYN1 31376 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES volatility of the Bitcoin Price (as defined below). The price of Bitcoin used to determine the weighting of the Bitcoin Component and the Treasury Component of the Index, as well as the value of Bitcoin held by the Trust, will be based on the Chicago Mercantile Exchange (‘‘CME’’) CF Bitcoin Reference Rate (‘‘CME CF BRR’’) (the ‘‘Bitcoin Reference Rate,’’ and the price of Bitcoin based on the Bitcoin Reference Rate (the ‘‘Bitcoin Price’’)). On a monthly basis, following the calculation of the weighting of the components of the Index, the Trust will rebalance its holdings in Bitcoin and TBills in order to closely replicate the Index. Bitcoin Component of the Index According to the Registration Statement, Bitcoin is a digital asset that is decentralized and issued by, and transmitted using cryptographic security through, an open source digital protocol platform known as the ‘‘Bitcoin Network.’’ The Bitcoin Network is an online end-user to end-user network that hosts the public transaction ledger, known as the ‘‘Bitcoin Blockchain,’’ and the source coding comprising the basis for the cryptographic and algorithmic protocols governing the Bitcoin Network. No single entity owns or operates the Bitcoin Network, and its infrastructure is collectively maintained by a decentralized user base. Bitcoin may be converted into U.S. dollars, other fiat currencies, or other crypto assets, at rates determined in individual end-user-to-end-user transactions under a barter system, or on Bitcoin exchanges. They can also be used to pay for certain goods and services. The Bitcoin Network does not rely on either governmental authorities or financial institutions to create, transmit or determine the value of Bitcoin. Rather, Bitcoin is created and allocated by the Bitcoin Network protocol through a ‘‘mining’’ process subject to a strict issuance schedule. The value of Bitcoin is determined by the supply of and demand for Bitcoin on Bitcoin exchanges (and in private end-user-toend-user transactions), as well as the number of merchants that accept them. Third-party service providers such as Bitcoin exchanges and third-party payment processing services may charge significant fees for processing transactions and for converting, or facilitating the conversion of, Bitcoin to or from fiat currency. The Bitcoin Blockchain is the digital transaction ledger on which Bitcoin is ‘‘stored’’ and reflected. The Bitcoin Blockchain is a decentralized digital file stored on the computers of each user of VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 the Bitcoin Network. It records the transaction history of all Bitcoin in existence and allows the Bitcoin Network to verify the association of each Bitcoin with the ‘‘digital wallet’’ that owns them through transparent transaction reporting. The Bitcoin Network and Bitcoin software programs can interpret the Bitcoin Blockchain to determine the exact Bitcoin balance of any digital wallet listed in the Bitcoin Blockchain as having taken part in a transaction on the Bitcoin Network. The Bitcoin Blockchain is made up of a digital file that is downloaded and stored, in whole or in part, on the software programs of all Bitcoin users. The file includes all blocks that have been solved by validators and it is updated to include new blocks as they are solved. As each newly solved block refers back to and ‘‘connects’’ with the solved block immediately prior to it, the addition of a new block adds to the Bitcoin Blockchain in a manner akin to a new link being added to a chain. The Bitcoin Blockchain represents a complete, transparent and unbroken history of all transactions on the Bitcoin Network. According to the Registration Statement, generally, every Bitcoin transaction is broadcast to the Bitcoin Network and recorded in the Bitcoin Blockchain. However, there are certain ‘‘Off-Blockchain transactions.’’ These transactions involve the transfer of control or ownership of a specific digital wallet holding Bitcoin, or of the reallocation of ownership of certain Bitcoin in a pooled-ownership digital wallet. Generally, information and data regarding Off-Blockchain transactions is not publicly available. This is unlike true Bitcoin transactions, which are publicly recorded and available on the Bitcoin Blockchain. Thus, according to the Registration Statement, OffBlockchain transactions are not truly Bitcoin transactions, as they do not involve the transfer of transaction data on the Bitcoin Network and do not reflect a movement of Bitcoin between addresses recorded in the Bitcoin Blockchain. Off-Blockchain transactions may include transactions on centralized exchanges. Bitcoin Exchange Market According to the Registration Statement, online Bitcoin exchanges represent a substantial percentage of Bitcoin transactional activity and thus offer the most data with respect to prevailing Bitcoin valuations. There are currently several Bitcoin exchanges operating globally. These include established trading platforms such as itBit, Coinbase Pro, Bitstamp and PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 Kraken. These Bitcoin trading platforms provide various options for buying and selling Bitcoin. In parallel to the open Bitcoin exchanges, informal ‘‘over-thecounter’’ or ‘‘OTC markets’’ for Bitcoin trading also exist as a result of the peerto-peer nature of the Bitcoin Network, which allows direct transactions between any seller and buyer. Bitcoin futures contracts are traded on the CME and the Cboe Futures Exchange (‘‘CFE’’).12 However, the Trust will not hold or trade in commodity futures contracts or other derivative contracts regulated by the Commodities Exchange Act,13 as administered by the Commodity Futures Trading Commission. The Bitcoin Price (i.e., the Bitcoin Reference Rate) The CME CF BRR was created to facilitate financial products based on Bitcoin.14 It serves as a once-a-day reference rate of the U.S. dollar price of Bitcoin (USD/BTC). The CME CF BRR is the rate on which bitcoin futures contracts are cash-settled in U.S. dollars at the CME 15 and serves as a reference rate in the settlement of financial derivatives based on the price of Bitcoin. The CME CF BRR may also serve as a reference rate in the net asset value (‘‘NAV’’) calculation of exchange traded products (‘‘ETPs’’).16 According to the Registration Statement, the Administrator of the Trust will utilize the CME CF BRR when valuing the Bitcoin held by the Trust. The CME CF BRR, which has been calculated and published since November 2016, aggregates the trade flow of several Bitcoin spot exchanges (the ‘‘Constituent Platforms’’), during a calculation window into the U.S. dollar price of one Bitcoin as of 4:00 p.m. London time. Specifically, the CME CF BRR is calculated based on the ‘‘Relevant Transactions’’ (as defined below) of all Constituent Platforms, as follows: 17 12 CFE recently announced that, effective March 2019, it would no longer list additional Cboe Bitcoin (USD) futures contracts for trading. See https://markets.cboe.com/resources/product_ update/2019/New-CFE-Products-Being-Added-inMarch-2019-Update.pdf. 13 7 U.S.C. 1. 14 Andrew Paine and William J. Knottenbelt, Analysis of the CME CF Bitcoin Reference Rate and Real Time Index, Oct. 2016, available at https:// www.cmegroup.com/trading/files/bitcoin-whitepaper.pdf, Section 2 (‘‘Paine & Knottenbelt’’). 15 While the Trust uses the CME CF BRR to calculate the value of its bitcoin assets, in no event will the Trust be trading in Bitcoin futures contracts. 16 See https://www.cmegroup.com/trading/files/ bitcoin-white-paper.pdf. 17 For a description of the CME CF BRR methodology, see https://www.cmegroup.com/ E:\FR\FM\01JYN1.SGM 01JYN1 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices 1. All Relevant Transactions are added to a joint list, recording the trade price and size for each transaction. 2. The list is partitioned into a number of equally-sized time intervals. 3. For each partition separately, the volume-weighted median trade price is calculated from the trade prices and sizes of all Relevant Transactions, i.e. across all Constituent Platforms. A volume-weighted median differs from a standard median in that a weighting factor, in this case trade size, is factored into the calculation.18 4. The CME CF BRR is then determined by the equally-weighted average of the volume-weighted medians of all partitions. The CME CF BRR does not include any futures prices in its methodology. A ‘‘Relevant Transaction’’ is any ‘‘cryptocurrency versus legal tender spot trade that occurs during the ‘‘Time Weighted Average Price (‘‘TWAP’’) Period’’ on a Constituent Platform in the BTC/USD pair that is reported and disseminated by the calculation agent for the CME CF BRR (the ‘‘BRR Calculation Agent’’). The CME CF BRR is administered by the administrator for the CME CF BRR (the ‘‘BRR Administrator’’). The mathematical representation of the CME CF BRR Methodology is attached [sic] as Exhibit 3A. khammond on DSKBBV9HB2PROD with NOTICES Calculation of Net Asset Value The Trust’s NAV will be determined daily by the Administrator at 4:00 p.m., E.T. on any Business Day or as soon thereafter as practicable. The NAV of the Trust will equal the value of the total assets of the Trust, including Bitcoin, T-Bills and U.S. dollars, less the liabilities and expenses of the Trust. The NAV per Share will be equal to the Trust’s NAV divided by the number of outstanding Shares. The NAV for the Trust’s Shares will be disseminated daily to all market participants at the same time. In accordance with the Trust’s valuation policy and procedures, the Administrator will determine the price of the Trust’s Bitcoin by reference to the Bitcoin Reference Rate (as described below), which is published between 4:00 p.m. and 4:30 p.m., London time, on every day of the year, including education/bitcoin/cme-cf-cryptocurrency-referencerate-methodology.html#2-overview (‘‘BRR Methodology’’). 18 See Paine & Knottenbelt, Section 2.2.2 (‘‘Volume-weighting of medians filters out high numbers of small trades that may otherwise dominate a non-volume-weighted median.’’). This assists in mitigating any series of small, frequent trades placed on any of the Constituent Platforms that could be used to manipulate the price of Bitcoin. See BRR Methodology, Section 7. VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 weekends. Similarly, the Administrator will determine the fair value of T-Bills based on the price of each T-Bill held by the Trust plus any cash, which will be held in U.S. dollars, as of 4:00 p.m., E.T., on any Business Day. The Trust’s NAV will be determined by the Administrator on a GAAP basis. Because the Trust rebalances monthly, in the periods between such monthly rebalancing, as a result of changes in the value of Bitcoin, among other factors, the value of Bitcoin relative to the value of the other assets of the Trust may diverge from the Index. Accordingly, the Trust’s NAV and NAV per Share are tracked, in part, by reference to the Bitcoin Reference Rate. Indicative Fund Value In order to provide updated information relating to the Trust for use by investors and market professionals, an updated ‘‘Indicative Fund Value’’ (‘‘IFV’’) will be calculated by using the prior day’s closing net assets of the Trust as a base and updating 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 value of the assets of the Trust. The IFV will be disseminated on a per Share basis every 15 seconds during the Exchange’s Core Trading Session and be widely disseminated by one or more major market data vendors during the NYSE Arca Core Trading Session.19 Creation of Shares The Shares shall represent beneficial interests in, and ownership of, the Trust. The Sponsor shall have the power and authority, in its sole discretion, without action or approval by the Shareholders, to cause the Trust to issue Shares from time to time. The Trust shall issue Shares solely in exchange for cash in U.S. Dollars. The Trust may offer and sell Shares of the Trust from time to time through (1) underwriters, placement agents or distributors (each, a ‘‘Share Placement’’) or such other means as the Sponsor may determine or (2) through subscription agreements. The Trust may not issue additional Shares unless the net proceeds per Share to be received by the Trust are not less than 100% of the most recently calculated NAV per Share immediately prior to, or upon, the determination of the pricing of such issuance. Any net proceeds received in connection with the offer and sale of Shares shall be used to purchase Bitcoin 19 Several major market data vendors display and/ or make widely available IFVs taken from the Consolidated Tape Association (‘‘CTA’’) or other data feeds. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 31377 and/or T-Bills, as applicable, in proportions consistent with the allocation of the Bitcoin Holdings and the Treasury and Cash Holdings of the Trust, as of the applicable date of sale. For this purpose, ‘‘Bitcoin Holdings’’ shall mean the sum of the value of the Bitcoin held by the Trust, and ‘‘Treasury and Cash Holdings’’ shall mean the value of the T-Bills and U.S. dollars held by the Trust. In the event that the Trust has no assets at the time of the sale of the initial Shares under the Registration Statement, then any net proceeds received in connection with the offer and sale of such initial Shares shall be used to purchase Bitcoin and/ or T-Bills, as applicable, in proportions consistent with the weighting of the Bitcoin Component and the Treasury Component of the Index as of the date of such sale. Redemption of Shares According to the Registration Statement, upon at least five (5) Business Days’ prior written notice, a shareholder may redeem all or a portion of its Shares on the last Business Day of each calendar month. All redemptions will be based on the NAV of Shares submitted for redemption, determined as of the last Business Day of the applicable calendar month. In general, redemptions will be deemed to occur on a ‘‘first-in first-out’’ basis among Shares held by a particular shareholder. A redemption notice is irrevocable unless otherwise agreed by the Sponsor in writing. In general, the final redemption of Shares will be paid in cash within five (5) Business Days after the applicable redemption date. Shareholders will be entitled to receive their applicable redemption amount in cash, which is the NAV of the Shares, determined as of the applicable redemption date. The Administrator shall calculate the applicable redemption amount and instruct the Cash and Treasury Custodian to pay from the Cash Account the applicable redemption amount to each redeeming Shareholder. Potential Manipulation in the Bitcoin Market In prior orders relating to the listing of certain ETPs on U.S. exchanges, the Commission Staff expressed its concern that the world-wide market for Bitcoin may be subject to potential manipulation.20 20 See Securities Exchange Act Release No. 80206 (Mar. 10, 2017), 82 FR 14076 (Mar. 16, 2017) (SR– BatsBZX–2016–30) (Order Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4), Commodity-Based E:\FR\FM\01JYN1.SGM Continued 01JYN1 31378 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES The Sponsor acknowledges that, numerous markets, commodity or otherwise, have historically been subject to manipulation.21 According to the Registration Statement, the Trust’s structure, together with the use of the CME CF BRR will provide investors with exposure to the Bitcoin market without a number of the risks from which other Bitcoin related products previously submitted for registration have suffered, and particularly mitigate the effects of potential manipulation of the Bitcoin market. In order for this proposed rule change to be approved, the Commission must determine that the proposal is consistent with the requirements of Section 6(b)(5) of the Act and that the Exchange’s rules are designed to prevent fraudulent and manipulative acts and practices.22 The Commission has previously stated that such a proposed rule change must offer evidence to demonstrate that either (i) the Bitcoin market is inherently resistant to fraud and manipulation, or (ii) the Exchange must have surveillance-sharing agreements with significant markets for trading the underlying commodity or Trust Shares, To List and Trade Shares Issued by the Winklevoss Bitcoin Trust) (‘‘Winklevoss I’’); and 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, as Modified by Amendments No. 1 and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust) (‘‘Winklevoss II’’); see also Securities Exchange Act Release No. 83912 (August 22, 2018), 83 FR 43912 (August 28, 2018) (SR–NYSEArca– 2018–02) (Order Disapproving a Proposed Rule Change Relating to Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200–E). 21 Spot and futures markets for other wellestablished commodities have previously been subject to manipulation concerns. See CFTC v. Amaranth Advisors, LLC, et al., 07–cv–6682 (S.D.N.Y. 2007); see also CFTC Press Release 5692– 09, August 12, 2009 (available at: www.cftc.gov/ PressRoom/PressReleases/pr5692-09) (Amaranth Advisors, LLC, and Amaranth Advisors (Calgary) ULC, entered into a consent order settling charges for attempting to manipulate the price of natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX) on February 24, and April 26, 2006); see CFTC Press Release 7000–14, September 15, 2014 (available at: www.cftc.gov/ PressRoom/PressReleases/pr7000-14) (Consent order settling charges for attempting to manipulate the price of natural gas futures contracts traded on the NYMEX on February 24, and April 26, 2006); see Craig Pirrong, The Economics of Commodity Market Manipulation: A Survey, 5 J. Commodity Mkts. 1, 13 (2017) (explaining that ‘‘[t]he subject of market manipulation has bedeviled commodity markets since the dawn of futures trading’’) (‘‘Pirrong’’). 22 15 U.S.C.S. § 78f (LEXIS through Pub. L. No. 116–8); 17 CFR 240.6a–1. VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 derivatives on that commodity and those markets must be regulated.23 As discussed in more detail below, the Sponsor believes that the CME CF BRR is inherently resistant to manipulation. In addition, as discussed below, significant regulated markets for trading Bitcoin derivatives are members of the Intermarket Surveillance Group (‘‘ISG’’) and the Exchange or the Financial Industry Regulatory Authority (‘‘FINRA’’), on behalf of the Exchange, may communicate with such markets as necessary in conducting market surveillance. As the Commission has previously acknowledged, trading in a Bitcoinbased ETP on a national securities exchange may provide additional protection to investors,24 as opposed to trading in an unregulated Bitcoin spot market. The Sponsor also believes that listing of the Trust’s Shares on the Exchange will provide investors with such an opportunity to obtain exposure to Bitcoin within a regulated environment. The Resistance of the CME CF BRR to Market Manipulation As noted above, one of the ways that the requirements of Section 6(b)(5) of the Exchange Act can be met is by demonstrating that the applicable market is inherently resistant to fraud and manipulation.25 The Sponsor notes that, in connection with the Commission’s analysis of whether a market is inherently resistant to manipulation, the Commission has in certain circumstances focused not on 23 See Winklevoss II, at 37580 and 37581 (noting that ‘‘. . . if BZX had demonstrated that Bitcoin and Bitcoin markets are inherently resistant to fraud and manipulation, comprehensive surveillancesharing agreements with significant, regulated markets would not be required, as the function of such agreements is to detect and deter fraud and manipulation.’’). See Craig Pirrong, The Economics of Commodity Market Manipulation: A Survey, 5 J. Commodity Mkts. 1, 13 (2017), generally, for a discussion of the economics of commodity market manipulation. For a discussion of commodity market manipulation in the U.S. historical context, see Philip M. Johnson, Commodity Market Manipulation, 38 Wash. & Lee L. Rev. 725 (1981). 24 See Securities Exchange Act Release No. 83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) (SR–CboeBZX–2018–001) (Order Disapproving a Proposed Rule Change to List and Trade the Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF). See also, Hester M. Pierce, U.S. Sec. Exch. Comm’n, Dissent of Commissioner Hester M. Pierce to Release No. 34– 83723 (July 26, 2018), https://www.sec.gov/news/ public-statement/peirce-dissent-34-83723 (‘‘An ETP based on bitcoin would offer investors indirect exposure to bitcoin through a product that trades on a regulated securities market and in a manner that eliminates some of the frictions and worries of buying and holding bitcoin directly. If we were to approve the ETP at issue here, investors could choose whether to buy it or avoid it.’’). 25 See Winklevoss II, at 37580. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 the market as a whole but instead on the significant subset of the market that has a meaningful impact on the particular ETP. For instance, orders approving listing applications of ETPs that invest in gold bullion focused on the spot and futures market,26 even though gold is traded on a number of different market segments. Focusing on the spot market is appropriate because the spot market is the market to which the particular ETP would look to determine its NAV. Using the example of gold, it would not be proper to use the price of gold in the jewelry market or gold coin market to value the NAV of a gold bullion ETP, even though by volume gold bought in such markets equals or surpasses gold purchased in all other segments of the market, including investment and ‘‘Central Banks,’’ which are more likely to purchase gold at the spot market.27 The Trust utilizes the CME CF BRR to determine the NAV of the Bitcoin held by the Trust. While Bitcoin is listed and traded on a number of markets and platforms, the CME CF BRR exclusively utilizes its Constituent Platforms to determine the value of the CME CF BRR. Since (i) the Trust uses the CME CF BRR to determine its NAV, (ii) the CME CF BRR is what determines the ratio of Bitcoin to Treasuries held by the Trust, and (iii) the CME CF BRR is determined based on the price of Bitcoin on the Constituent Platform and no other exchanges, the Sponsor maintains that the proper ‘‘market’’ that one should evaluate to determine whether the ‘‘market’’ is inherently resistant to manipulation is the segment of the market formed by the Constituent Platforms. The Sponsor found that price discovery is substantially similar among each of the Constituent Platforms.28 As shown in the chart included as Exhibit 3B to this proposed rule change, none of the Constituent Platforms exhibit a statistically significant average difference from the CME CF BRR. During the 3:00 p.m. to 4:00 p.m. London time CME CF BRR observation window, volume of Bitcoin trading among the four Constituent Platforms 26 See, e.g., Securities Exchange Act Release No. 51058 (January 19, 2005) 70 FR 3749 (January 26, 2005) (SR–Amex–2004–38) (iShares COMEX Gold Trust I). 27 See World Gold Council, Goldhub, Gold supply and demand statistics, available at https:// www.gold.org/goldhub/data/gold-supply-anddemand-statistics. 28 All statistical analysis provided herein was performed solely by the Sponsor. The Sponsor did not engage any third-parties in connection with such statistical analysis in an effort to insure quality and integrity. Any data utilized for any statistical analysis provided in this proposal will be made available to the Commission upon request. E:\FR\FM\01JYN1.SGM 01JYN1 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices was split as follows: 13.3% of the Bitcoin volume was on itBit, 21.2% of the Bitcoin volume was on Kraken, 28.4% of the Bitcoin volume was on Bitstamp and 37.1% of the Bitcoin volume was on Coinbase.29 The Constituent Platforms also show a substantially similar degree of price volatility, with the standard deviation of the difference of 4:00 p.m. London time exchange prices from the CME CF BRR being 1.12–1.13%.30 When the 4:00 p.m. London time snapshot prices do deviate from the CME CF BRR, they are generally in the same direction (occurring 87.4% of the time).31 The Sponsor maintains that the foregoing data also supports the conclusion that robust arbitrage trading and liquidity provision occurs among the Constituent Platforms. An independent examination of the methodology (Paine & Knottenbelt) of the CME CF BRR, supports the Sponsor’s assertion that the CME CF BRR is not susceptible to manipulation.32 The use of a volumeweighted average median price determined over twelve five-minute windows in a specific 60-minute period over any Constituent Platform makes any attempt to manipulate the CME CF BRR unlikely. Further, the capital necessary to maintain a significant presence on any Constituent Platform makes manipulation of the CME CF BRR unlikely. The linkage between the Bitcoin markets and the presence of arbitrageurs (as evidenced in the data set forth above) in those markets means that the manipulation of the price of Bitcoin on any Constituent Platform would likely require overcoming the liquidity supply of such arbitrageurs who are potentially eliminating any cross-market pricing differences. The Presence of Surveillance Sharing Agreements khammond on DSKBBV9HB2PROD with NOTICES In previous orders rejecting the listing of Bitcoin ETFs, the Commission noted its concerns that the Bitcoin market 29 Analysis performed by the Sponsor using data provided by Kaiko//Challenger Deep. 30 Analysis performed by the Sponsor using data provided by Kaiko//Challenger Deep. 31 Analysis performed by the Sponsor using data provided by Kaiko//Challenger Deep. 32 ‘‘The chosen specification makes the BRR highly resistant against manipulation. The use of medians likely reduces the effect of outlier prices on one or more exchanges. Volume-weighting of medians filters [out high numbers of small trades] that may otherwise dominate a non-volumeweighted median. The use of 12 non-weighted partitions assures that price information is sourced equally over the entire observation period. Influencing the BRR would therefore require price manipulation. . .over an extended period of time.’’ Paine & Knottenbelt, Section 2.2.2. VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 could be subject to manipulation.33 In these orders, the Commission cited numerous precedents 34 in which 19b–4 listing applications were approved based on findings that the particular market was either inherently resistant to manipulation or that the listing exchange had entered into a surveillance sharing agreement with a market of significant size.35 The Commission noted that, for commoditytrust ETPs ‘‘there has been in every case at least one significant, regulated market for trading futures in 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 (‘‘ISG’’) membership in common with, that market.’’ 36 The CME 37 is a member of the ISG, the purpose of which is ‘‘to provide a framework for the sharing of information and the coordination of 33 See Winklevoss I and Winklevoss II, supra note 20. The Sponsor represents that some of the concerns raised are that a significant portion of Bitcoin trading occurs on unregulated platforms and that there is a concentration of a significant number of Bitcoin in the hands of a small number of holders. However, these aspects are not unique to Bitcoin and are present in a number of commodity and other markets. For instance, some gold bullion trading takes place on unregulated OTC markets and a significant percentage of gold is held by a relative few (according to estimates of the World Gold Council, approximately 21.3% of total above-ground gold stocks are held by private investors and 17.2% are held by foreign governments; by comparison, 15.7% of Bitcoin are held by the 100 largest Bitcoin addresses, some of which are known to be cold storage addresses of large centralized cryptocurrency trading platforms). See https://www.gold.org/goldhub/data/aboveground-stocks for gold data cited in this note and https://bitinfocharts.com/top-100-richest-bitcoinaddresses.html for Bitcoin data. 34 For an extensive listing of such precedents, see Winklevoss I, at 14083 n.96. 35 The Exchange to date has not entered into surveillance sharing agreements with any cryptocurrency platform. However, the CME, which calculates the CME CF BRR, and which has offered contracts for Bitcoin futures products since 2017, is, as noted below, a member of the ISG. In addition, each Constituent Platform has entered into a data sharing agreement with CME. See https:// www.cmegroup.com/education/constituentexchanges-criteria.html. 36 See Winklevoss II, at 37594. 37 The CME is regulated by the CFTC, which has broad reaching anti-fraud and anti-manipulation authority including with respect to the Bitcoin market since Bitcoin has been designated as a commodity by the CFTC. See A CFTC Primer on Virtual Currencies (October 17, 2017), available at https://www.cftc.gov/sites/default/files/idc/groups/ public/documents/file/labcftc_ primercurrencies100417.pdf (the ‘‘CFTC Primer on Virtual Currencies’’) (‘‘The CFTC’s jurisdiction is implicated when a virtual currency is used in a derivatives contract or if there is fraud or manipulation involving a virtual currency traded in interstate commerce.’’). See also 7 U.S.C. Sec. 7(d)(3) (‘‘The board of trade shall list on the contract market only contracts that are not readily susceptible to manipulation.’’). PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 31379 regulatory efforts among exchanges trading securities and related products to address potential intermarket manipulations and trading abuses.’’ 38 Membership of a relevant futures exchange in ISG is sufficient to meet the surveillance-sharing requirement.39 The Commission has previously noted that the existence of a surveillancesharing agreement by itself is not sufficient for purposes of meeting the requirements of Section 6(b)(5); the surveillance-sharing agreement must be with a market of significant size.40 The Commission has provided an example of how it interprets the terms ‘‘significant market’’ and ‘‘market of significant size,’’ though that definition is meant to be illustrative and not exclusive: ‘‘The terms ‘significant market’ and ‘market of significant size’ . . . 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.’’ 41 As discussed below, the Sponsor maintains that the CME, either alone as the sole market for bitcoin futures or as a group of markets together with the Constituent Platforms, is a ‘‘market of significant size’’ as it satisfies both elements of the example provided by the Commission. Reasonable Likelihood That a Person Manipulating the ETP Would Have To Trade on the Market The first element of what constitutes a ‘‘significant market’’ or ‘‘market of significant size’’ is that there is a reasonable likelihood that a person attempting to manipulate the ETP would also have to trade on a market (or group of markets) to successfully manipulate the ETP so that a surveillance sharing agreement would assist the ETP listing market in detecting and deterring misconduct. The Sponsor concludes that the CME meets this element in two ways. First, it is the sole market for Bitcoin futures, 38 https://www.isgportal.org/isgPortal/public/ overview.htm. 39 See, e.g., Winklevoss II, at 37594. 40 See, e.g., Winklevoss II, at 37589–90. 41 See, e.g., Winklevoss II, at 37594; and see Securities Exchange Act Release No. 83913 (August 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR– CboeBZX–2018–001) (GraniteShares Bitcoin ETF and GraniteShares Short Bitcoin ETF), n. 85 and accompanying text. E:\FR\FM\01JYN1.SGM 01JYN1 31380 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES and compares favorably with other markets that were deemed to be markets of significant size in precedents. One particularly salient group of precedents are prior orders approving the listing of ETPs that invest in gold bullion, since the gold market exhibits a number of similarities with the market for Bitcoin. The Sponsor maintains that, like Bitcoin, the primary markets for gold bullion are unstructured OTC markets 42 and the futures market. As with the OTC gold market, it is not possible to enter into an information sharing agreement with the OTC Bitcoin market.43 When the Commission approved the listing of gold ETPs and other commodity-trust ETPs, rather than surveillance sharing agreements with the relevant OTC markets, there have been surveillance sharing agreements between the listing exchange and ‘‘regulated markets for trading futures on the underlying commodity.’’ 44 It has been widely discussed that manipulating the market for a commodity often involves the futures market for that commodity.45 The CME is a member of ISG, is regulated by the CFTC, and is situated very much like the COMEX division of NYMEX is with respect to gold ETPs.46 The CME is subject to a surveillancesharing agreement arrangement pursuant to which the Exchange can obtain data from the CME. Additionally, the Sponsor found that the Bitcoin futures market is larger in size (as a percentage of spot trading) than the size of the gold futures markets are in relation to the gold OTC market 42 ‘‘The OTC market has no formal structure and no open-outcry meeting place.’’ Securities Exchange Act Release No 50603 (October 28, 2004), 69 FR 64614 (November 5, 2004) (SR–NYSE–2004–22) (streetTRACKS Gold Shares) (‘‘streetTRACKS’’). 43 ‘‘It is not possible, however, to enter into an information sharing agreement with the OTC gold market.’’ streetTRACKS, at 64619. See also iShares COMEX Gold Trust, Securities Exchange Act Release No. 51058 (January 19, 2005), 70 FR 3749 (January 26, 2005) (SR–Amex–2004–38); and Securities Exchange Act Release No. 60971 (November 9, 2009), 74 FR 59283 (November 17, 2009) (SR–NYSEArca–2009–94) (ETFS Palladium Trust). 44 See Winklevoss II, at 37591. 45 See, e.g., Frank Easterbrook, Monopoly, Manipulation, and the Regulation of Futures Markets, 59 J. of Bus. S103, S103–S127 (1986); William D. Harrington, The Manipulation of Commodity Futures Prices, 55 St. Johns L. Rev. 240, 240–275 (2012); Robert C. Lower, Disruptions of the Futures Market: A Comment on Dealing With Market Manipulation, 8 Yale J. on Reg. 391, 391– 402 (1991). 46 Other applicants have made similar arguments in their respective 19b–4 applications. See VanEck SolidX Bitcoin Trust, Securities Exchange Act Release No. 34–85119 (February 13, 2019), 84 FR 5140 (February 20, 2019) (SR–CboeBZX–2019–004), n. 11 (‘‘VanEck’’). VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 (expressed as a percentage).47 Using the most recent data cited by the World Gold Council, an affiliate of the SPDR Gold Shares (GLD), for 2016, the ratio of daily trading volume of Gold futures on COMEX ($28.9 billion) to daily trading volume on gold OTC markets ($167.9 billion, which is the midpoint of the estimated high and low points by the World Gold Council) is approximately 17.2%.48 In comparison, using data from the CME and the four CME CF BRR Constituent Platforms over the 6-month period of October 1, 2018 to March 31, 2019, the ratio of daily trading volume of BTC futures on the CME ($90.4 million) to the daily trading volume of BTC/USD spot ($131.6 million) is approximately 68.7%.49 The Sponsor maintains that another way that the CME meets the first element arises from the fact that the value of the Bitcoin assets held by the Trust is based on the CME CF BRR. Anyone attempting to manipulate the Trust would need to place numerous large sized trades on any of the Constituent Platforms that are used to calculate the CME CF BRR,50 and if such an attempt was made the BRR Administrator and the CME would be able to detect such manipulative trading patterns.51 In addition, any platform that is accepted by the CME to become part of the constituent trading platforms that are used to calculate the CME CF BRR, including the Constituent Platforms, (1) must enter into a data sharing agreement with the CME, (2) 47 Analysis performed by the Sponsor using data available from (i) CME with respect to the CME futures, and (ii) Kaiko//Challenger Deep with respect to BTC/USD spot. 48 Data available at https://www.gold.org/ goldhub/data. 49 Analysis performed by the Sponsor using data available from (i) CME with respect to the CME futures, and (ii) Kaiko//Challenger Deep with respect to BTC/USD spot. The Sponsor represents that the volume of the bitcoin futures market is also comparable with volumes on other markets deemed to be markets of significant size in a previous Commission approval order. See VanEck, at 5143 (comparing the bitcoin futures market favorably with the freight futures market). 50 Because the CME CF BRR is calculated based solely on the price data from the Constituent Platforms, manipulating the CME CF BRR must necessarily entail manipulating the price data at one or more Constituent Platforms. 51 The BRR Calculation Agent receives trading data from the Constituent Platforms through its Automatic Programming Interface (‘‘API’’). See https://www.cmegroup.com/education/bitcoin/ pricing-products-practice-standards.html (‘‘‘‘The [BRR] Administrator will have primary responsibility for all of the following in respect of Bitcoin Pricing Products: . . .Establishing appropriate monitoring processes and procedures designed to identify any breaches of these Practice Standards and any attempted manipulation or manipulative behavior and reporting any such incidents to the Oversight Committee in a timely manner.’’) PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 must cooperate with inquiries and investigations of regulators and the BRR Administrator and (3) must submit each of its clients to its Know-Your-Customer (‘‘KYC’’) procedures; 52 therefore, the CME and the Exchange would be able, in the case of any suspicious trades, to discover all material trade information including the identities of the customers placing the trades. The CME Has Rigorous Criteria for Constituent Platforms Which It Monitors Regularly The Sponsor notes that the CME’s criteria for each of the Constituent Platforms requires that the platform facilitates spot trading of the relevant cryptocurrency against the corresponding fiat currency (the ‘‘Relevant Pair’’) and makes trade data and order data available through an API with sufficient reliability, detail and timeliness. In addition, (1) the platform’s Relevant Pair spot trading volume must meet the minimum thresholds as detailed in the CME CF Cryptocurrency Indices Methodology Guide; (2) the platform must publish policies to ensure fair and transparent market conditions at all times and have processes in place to identify and impede illegal, unfair or manipulative trading practices; (3) the platform must not impose undue barriers to entry or restrictions on market participants, and utilizing the platform must not expose market participants to undue credit risk, operational risk, legal risk or other risks; (4) the platform must comply with applicable law and regulation, including, but not limited to capital markets regulations, money transmission regulations, client money custody regulations, KYC regulations and anti-money-laundering (AML) regulations; and (5) the platform must cooperate with inquiries and investigations of regulators and the BRR Administrator upon request and must execute data sharing agreements with CME.53 52 See https://www.cmegroup.com/education/ constituent-exchanges-criteria.html. 53 See https://www.cmegroup.com/education/ constituent-exchanges-criteria.html. The CME monitors the Constituent Platforms to ensure compliance with its criteria and removed two platforms in April 2017 for failing to meet its criteria. See Minutes of the CME CF BRR and BRTI Oversight Committee Meeting for BRR and BRTI held via conference call on 7th June 2017, available at https://www.cmegroup.com/education/bitcoin/ cme-cf-brr-and-brti-oversight-meeting-minutes2017-06.html. E:\FR\FM\01JYN1.SGM 01JYN1 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES Each of the Constituent Platforms Is Subject to Oversight by Federal and State Financial Regulators Each of the Constituent Platforms are (i) registered with, and licensed by, the relevant financial authorities, (ii) subject to compliance with the rigorous requirements of the U.S. Bank Secrecy Act (‘‘BSA’’) and implementing AML regulations, and (iii) subject to the examination and enforcement authority of both federal and state regulators.54 Under applicable FinCEN guidance, virtual currency exchanges such as the Constituent Platforms are considered ‘‘money transmitters’’ for the purposes of federal AML law and must be registered with FinCEN.55 As a result, the Constituent Platforms must fully comply with BSA and AML requirements, which include developing, implementing, and maintaining an effective AML program.56 In general, an effective AML program requires the Constituent Platforms to, among other things: • Perform a comprehensive money laundering risk assessment; • Designate a qualified AML compliance officer with reporting lines to the board of directors; • Implement AML procedures, such as a customer identification program to identify customers and the source of virtual currency; 54 All of the Constituent Platforms are registered with FinCEN as a money services business. Additionally, three of the four Constituent Platforms have obtained state money transmitter licenses, as applicable, and the fourth Constituent Platform is operated by a trust company chartered by the state of New York, which subjects it to New York AML requirements and enables it to operate in other states without a separate money transmitter license. See 3 NYCRR 504. 55 FinCEN, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, FIN–2013–G0001, (Mar. 18, 2013), https://www.fincen.gov/sites/default/files/ shared/FIN-2013-G001.pdf. FinCEN has prosecuted entities that omit to register with it as a Money Services Business (‘‘MSB’’) or fail to comply with its regulations aggressively. See, e.g., Release by Office of Public Affairs, Department of Justice, Ripple Labs Inc. Resolves Criminal Investigation, available at https://www.justice.gov/opa/pr/ripplelabs-inc-resolves-criminal-investigation; see also Consent to the Assessment of a Civil Money Penalty, In the Matter of Eric Powers, U.S. Dep’t of Treas., No. 2019–01 (Apr. 18, 2019) (enforcement action against a peer-to-peer cryptocurrency exchanger by FinCEN). 56 See 31 CFR part 1022. The effectiveness of AML procedures was noted by FinCEN Director Kenneth A. Blanco. See Prepared Remarks of FinCEN Director Kenneth A. Blanco, delivered at the 2018 Chicago-Kent Block (Legal) Tech Conference, Aug. 09, 2018, available at https:// www.fincen.gov/news/speeches/prepared-remarksfincen-director-kenneth-blanco-delivered-2018chicago-kent-block (reporting that FinCEN now receives over 1,500 SARs per month describing suspicious activity involving virtual currency, with reports coming from both MSBs in the virtual currency industry itself and other financial institutions). VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 • Perform customer due diligence or enhanced due diligence; • Monitor transactions and file suspicious activity reports; • File currency transaction reports and reports of foreign bank and financial accounts; • Keep records of transactions for inspection by authorities; • Screen transactions to ensure that they do not violate sanctions imposed by the Treasury Department; • Perform independent testing of the AML compliance program; and • Conduct continuing employee education and training. Further, most states require money transmitters to obtain a license before offering money transmission services in that state. In order to obtain such state licenses, a money transmitter must implement an AML policy and comply with applicable state AML laws.57 Since each Constituent Platform must have AML and KYC procedures in place, and anyone intending to trade on that platform must complete the KYC on-boarding process, each of the Constituent Platforms has information that identifies anyone who makes a trade on that platform, meaning that no trades are anonymous or ‘‘pseudonymous.’’ 58 As a result of such AML and KYC procedures, together with the data sharing agreements that each of the Constituent Platforms enters into with CME, the CME and the Exchange will be able to ascertain all necessary information about any suspicious trades on each of the Constituent Platforms, including the identity of the customer(s) placing such trades. Trading in the ETP Will Not Be the Predominant Influence on Prices in That Market The second element to determine whether a market or group of markets is of ‘‘significant size’’ requires that it is unlikely that trading in the ETP would be the predominant influence on prices in that market. As discussed in more detail below, the Sponsor concludes 57 The Sponsor concludes that the presence of robust AML and KYC policies and procedures, among other things, should lead to robust trading data and may inhibit trades placed with the intent of facilitating manipulation of the Bitcoin Price. 58 The Sponsor notes that all Bitcoin trades are visible publicly, but because trades are made from and to electronic wallets, only the electronic ‘‘addresses’’ of these wallets are available publicly. This form of trading has been called ‘‘pseudonymous’’, meaning that while the wallet addresses are discernable, the identity of the wallet owners is not. Because each Constituent Platform knows the identity of its customers and the wallet addresses they use to trade on the platform, the Constituent Platform can ascertain the identity of the customer making each trade on that platform. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 31381 that, given the nature of the Trust and the composition of its assets, trading in the Trust would not be the predominant influence on prices (i) that make up the CME CF BRR, (ii) in the Bitcoin futures market on the CME, or (iii) in the USD/ BTC spot market on the Constituent Platforms. Due to the structure of the Trust, the Trust will only purchase Bitcoin if (1) required to as a result of the monthly rebalancing of its assets or (2) if it sells Shares to new investors. Conversely, the Trust will only sell Bitcoin if required to as a result of the monthly rebalancing of its assets. This means that trading in the Shares will not cause the Trust to purchase or sell Bitcoin and will therefore not influence the price of Bitcoin. Even though the Trust may purchase Bitcoin from one or more of the Constituent Platforms 59 in connection with the issuance of Shares or a monthly rebalancing of its assets, such purchases will take place only on limited occasions and will not be the ‘‘predominant influence’’ on the market. As noted previously, in no event will the Trust be trading in Bitcoin futures contracts and therefore the purchase or sale of Bitcoin by the Trust will not be the predominant influence on prices in the Bitcoin futures market. In addition, the Trust’s assets consist of (a) Bitcoin and (b) T-Bills in proportions that seek to closely replicate the Index. The Sponsor notes that, because Bitcoin is not the sole asset of the Trust, even if it were possible to influence the price of Bitcoin or the CME CF BRR through trading shares of the Trust, the influence of such trades would be muted by the presence of the T-Bills held by the Trust, and therefore such trading would not be the predominant influence on Bitcoin prices in such market. Unique Aspects of the Trust Enhancing the Trust’s Resistance to Market Manipulation and Volatility According to the registration statement, the Trust was created as a way for market participants to gain reasonable exposure to Bitcoin through a vehicle that mitigates the volatility that has historically been associated with Bitcoin.60 According to the 59 None of the transaction documents relating to the Trust, nor the Trust’s or the Sponsor’s internal policies, require the Trust to purchase Bitcoin from any of the Constituent Platforms. 60 See, e.g., Statement on Cryptocurrencies and Initial Coin Offerings by Chairman Jay Clayton, Dec. 11, 2017, n. 7; and CFTC Primer on Virtual Currencies pp. 7 and 19 (noting that trading in virtual currencies may involve significant speculation and volatility risk and that the virtual E:\FR\FM\01JYN1.SGM Continued 01JYN1 31382 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES registration statement, the Trust is designed to utilize a passive rules-based methodology without the use of derivatives or leverage in order to avoid complexity and confusion (often associated with those methods) and to provide for increased transparency to shareholders. According to the Registration Statement, the Trust will have no assets other than (a) Bitcoin and (b) T-Bills in proportions that seek to closely replicate the Index, which is calculated and published by Solactive AG. T-Bills are among the most liquid and widely traded assets in the world and are deemed to be risk free. The Sponsor believes that its selection of T-Bills as a constituent of the Trust will dampen the volatility of Bitcoin as it relates to the Trust, and consequently the Shares. In addition, based on the passive rules-based methodology noted above, as the CME CF BRR becomes more volatile, the Index, and thus the Trust, will have less exposure to Bitcoin and more exposure to T-Bills, and conversely, when the CME CF BRR becomes less volatile, the Index, and thus the Trust, will have more exposure to Bitcoin and less exposure to T-Bills. Therefore, the monthly rebalancing of the Trust’s assets will also reduce the effects of Bitcoin volatility on the Trust and the Shares. The Sponsor maintains that, in contrast to other Bitcoin-related ETP Rule 19b–4 filings previously submitted, because Bitcoin is not the only constituent of the Trust (with the other constituent—T-Bills—being historically stable and risk-free), any potential manipulation of the Trust and the Shares would be extremely difficult and therefore unlikely. Availability of Information Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the CTA. The IFV will be available through on-line 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 currency marketplace has been subject to substantial volatility and price swings). VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 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 Index value and price information for T-Bills is available from major market data vendors. The CME CF BRR value is available on the CME website and from major market data vendors. The spot price of Bitcoin also is available on a 24-hour basis from major market data vendors. Trading Halts With respect to trading halts, the Exchange may consider all relevant factors in exercising its discretion to halt or suspend trading in the Shares of the Trust.61 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 IFV or the value of the Index occurs. If the interruption to the dissemination of the IFV 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 61 See PO 00000 NYSE Arca Rule 7.12–E. Frm 00096 Fmt 4703 Sfmt 4703 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. The Shares will conform to the initial and continued listing criteria under NYSE Arca Rule 8.201–E. The trading of the Shares will be subject to NYSE Arca Rule 8.201–E(g), which sets forth certain restrictions on Equity Trading Permit (‘‘ETP’’) Holders acting as registered Market Makers in Commodity-Based Trust Shares to facilitate surveillance. The Exchange represents that, for initial and continued listing, the Trust will be in compliance with Rule 10A–3 62 under the Act, as provided by NYSE Arca Rule 5.3–E. A minimum of 100,000 Shares of the Trust will be outstanding at the commencement of trading on the Exchange. 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.63 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 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 62 17 CFR 240.10A–3. 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. 63 FINRA E:\FR\FM\01JYN1.SGM 01JYN1 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices khammond on DSKBBV9HB2PROD with NOTICES 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 comprehensive surveillance sharing agreement (‘‘CSSA’’).64 The Exchange is also able to obtain information regarding trading in the Shares in connection with such ETP Holders’ proprietary or customer trades which they effect through ETP Holders 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, (b) limitations on portfolio holdings or reference assets, 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 IFV will not be calculated or publicly disseminated; (2) the procedures for purchases and redemptions of Shares; (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 IFV is disseminated; (5) how information regarding portfolio holdings is 64 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. VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 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; and (7) trading information. Prior to the commencement of trading, the Exchange will inform its ETP Holders of the suitability requirements of NYSE Arca Rule 9.2– E(a) in an Information Bulletin. Specifically, ETP Holders will be reminded in the Information Bulletin that, in recommending transactions in the Shares, they must have a reasonable basis to believe that (1) the recommendation is suitable for a customer given reasonable inquiry concerning the customer’s investment objectives, financial situation, needs, and any other information known by such ETP Holder, and (2) the customer can evaluate the special characteristics, and is able to bear the financial risks, of an investment in the Shares. In connection with the suitability obligation, the Information Bulletin will also provide that ETP Holders must make reasonable efforts to obtain the following information: (1) The customer’s financial status; (2) the customer’s tax status; (3) the customer’s investment objectives; and (4) such other information used or considered to be reasonable by such ETP Holder or registered representative in making recommendations to the customer. In addition, the Information Bulletin will advise ETP Holders, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Trust. 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 [sic] 2. Statutory Basis The basis under the Act for this proposed rule change is the requirement under Section 6(b)(5) 65 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 65 15 PO 00000 U.S.C. 78f(b)(5). Frm 00097 Fmt 4703 Sfmt 4703 31383 the Exchange pursuant to the initial and continued listing criteria in NYSE Arca Rule 8.201–E. Investing in the Trust will provide investors with exposure to Bitcoin in a manner that is efficient and convenient, while also reducing the volatility typically associated with Bitcoin. The Trust uses the CME CF BRR to determine the value of its Bitcoin assets, its NAV and the ratio of Bitcoin to TBills held by the Trust. While Bitcoin is listed and traded on a number of markets and platforms, the CME CF BRR exclusively utilizes its Constituent Platforms to determine the value of the CME CF BRR. Therefore, use of the CME CF BRR would mitigate the effects of potential manipulation of the Bitcoin market. Additionally, the capital necessary to maintain a significant presence on any Constituent Platform would make manipulation of the CME CF BRR unlikely. Bitcoin trades in a well-arbitraged and distributed market. The linkage between the Bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of Bitcoin on any Constituent Platform would likely require overcoming the liquidity supply of such arbitrageurs who are potentially eliminating any cross-market pricing differences. In addition, 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 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 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 IFV will be available through on-line information services. In addition, the Trust’s website will display the applicable end of day E:\FR\FM\01JYN1.SGM 01JYN1 khammond on DSKBBV9HB2PROD with NOTICES 31384 Federal Register / Vol. 84, No. 126 / Monday, July 1, 2019 / Notices 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 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 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. 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 and of the suitability requirements of NYSE Arca Rule 9.2–E(a). The Information Bulletin will advise ETP Holders, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Trust. 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 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 Commodity-Based VerDate Sep<11>2014 19:58 Jun 28, 2019 Jkt 247001 Trust Share based in part 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 in part on the price of Bitcoin and that will enhance competition among market participants, to the benefit of investors and the marketplace. 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. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove the proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. 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: PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 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–2019–39 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–2019–39. 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–2019–39, and should be submitted on or before July 22, 2019. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.66 Eduardo A. Aleman, Deputy Secretary. [FR Doc. 2019–13925 Filed 6–28–19; 8:45 am] BILLING CODE 8011–01–P 66 17 E:\FR\FM\01JYN1.SGM CFR 200.30–3(a)(12). 01JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 84, Number 126 (Monday, July 1, 2019)]
[Notices]
[Pages 31373-31384]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13925]

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SECURITIES AND EXCHANGE COMMISSION

[Release No 34-86195; File No. SR-NYSEArca-2019-39]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To Amend NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares) and To List and Trade Shares of the United States
Bitcoin and Treasury Investment Trust Under NYSE Arca Rule 8.201-E

June 25, 2019.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that on June 12, 2019, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I and II
below, which Items have been prepared by the Exchange. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes (1) to amend NYSE Arca Rule 8.201-E
(Commodity-Based Trust Shares) to provide for issuance and redemption
of such securities for the underlying commodity and/or cash, and (2) to
list and trade the shares of the United States Bitcoin and Treasury
Investment Trust under NYSE Arca Rule 8.201-E, as proposed to be

[[Page 31374]]

amended. 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 (1) amend NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares) to provide for issuance and redemption of such
securities for the underlying commodity and/or cash, and (2) to list
and trade shares (``Shares'') of the United States Bitcoin and Treasury
Investment Trust (the ``Trust'') under NYSE Arca Rule 8.201-E, which
governs the listing and trading of Commodity-Based Trust Shares.
Proposed Amendment to NYSE Arca Rule 8.201-E
Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/
or trade pursuant to unlisted trading privileges (``UTP'') ``Commodity-
Based Trust Shares.'' \4\ Rule 8.201-E(c)(1) currently states that such
securities are issued by a trust in a specified aggregate minimum
number in return for a deposit of a quantity of the underlying
commodity, and may be redeemed in the same specified minimum number by
a holder for the quantity of the underlying commodity. The Exchange
proposes to amend Rule 8.201-E(c)(1) to provide that Commodity-Based
Trust Shares may be issued and redeemed for the underlying commodity
and/or cash.
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\4\ Commodity-Based Trust Shares are securities issued by a
trust that represents investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
Trust. Rule 8.201-E (c)(1) defines the term ``Commodity-Based Trust
Shares'' as follows: ``The term ``Commodity-Based Trust Shares''
means a security (a) that is issued by a trust (``Trust'') that
holds a specified commodity deposited with the Trust; (b) that is
issued by such Trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and
(c) that, when aggregated in the same specified minimum number, may
be redeemed at a holder's request by such Trust which will deliver
to the redeeming holder the quantity of the underlying commodity.''
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The Commission has previously approved listing and trading on the
Exchange of Commodity-Based Trust Shares that permit issuance and
redemption of shares for cash in whole or part.\5\ The Exchange
believes the proposed change will provide a trust issuing Commodity-
Based Trust Shares and holding a specified commodity with the
flexibility to issue or redeem shares partially or wholly for cash.
Such alternative would allow a trust to structure the procedures for
issuance and redemption of shares in manner that as determined by the
issuer, may provide operational efficiencies and accommodate investors
who may wish to deliver or receive cash rather than the underlying
commodity upon requesting the issuance or redemption of shares. The
Exchange, therefore, believes the proposed change will facilitate the
listing and trading of additional types of exchange-traded derivative
securities products that will enhance competition among market
participants, to the benefit of investors and the marketplace.\6\
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\5\ See, e.g., Securities Exchange Act Release Nos. 61496
(February 4, 2010), 75 FR 6758 (February 10, 2010) (SR-NYSEArca-
2009-113) (approving listing on the Exchange of Sprott Physical Gold
Trust); 63043 (October 5, 2010), 75 FR 62615 (October 12, 2010) (SR-
NYSEArca-2010-84) (approving listing on the Exchange of the Sprott
Physical Silver Trust); 68430 (December 13, 2012) (SR-NYSEArca-2012-
111) (Order Approving a Proposed Rule Change, as Modified by
Amendment No. 1, to List and Trade Units of the Sprott Physical
Platinum and Palladium Trust Pursuant to NYSE Arca Equities Rule
8.201; 82448 (January 5, 2018) (SR-NYSEArca-2017-131) (Notice of
Filing of Amendment No. 2 and Order Approving on an Accelerated
Basis a Proposed Rule Change, as Modified by Amendment No. 2, to
List and Trade Shares of the Sprott Physical Gold and Silver Trust
under NYSE Arca Rule 8.201-E); 66930 (May 7, 2012), 77 FR 27817 (May
11, 2012) (SR-NYSEArca-2012-18) (order approving listing and trading
shares of the APMEX Physical-1 oz. Gold Redeemable Trust); 50603
October 28, 2004 (SR-NYSE-2004-22) (Order Granting Approval of
Proposed Rule Change and Notice of Filing and Order Granting
Accelerated Approval to Amendments No. 1 and No. 2 Thereto to the
Proposed Rule Change by the New York Stock Exchange, Inc. Regarding
Listing and Trading of streetTRACKS[supreg] Gold Shares).
\6\ The Commodity Futures Trading Commission (``CFTC'') has
stated that bitcoin and other virtual currencies are encompassed in
the definition of commodities under the Commodity Exchange Act
(``CEA'') (17 U.S.C. 1). See ``In the Matter of Coinflip, Inc.''
(CFTC Docket 15-29 (September 17, 2015)) (order instituting
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making
findings and imposing remedial sanctions) (``Coinflip''), in which
the CFTC stated the following: ``Section 1a(9) of the CEA defines
`commodity' to include, among other things, `all services, rights,
and interests in which contracts for future delivery are presently
or in the future dealt in.' 7 U.S.C. 1a(9). The definition of a
`commodity' is broad. See, e.g., Board of Trade of City of Chicago
v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other
virtual currencies are encompassed in the definition and properly
defined as commodities.'' In Coinflip, the CFTC further concluded
that Bitcoin is a virtual currency that is a commodity, ``distinct
from `real' currencies, which are the coin and paper money of the
United States or another country that are designated as legal
tender, circulate, and are customarily used and accepted as a medium
of exchange in the country of issuance.'' See CFTC No. 15-29 (2015),
2015 CFTC LEXIS 20, at *1 n.2.
---------------------------------------------------------------------------

The Exchange further proposes to amend Rule 8.201-E(c)(2) to state
that the term ``commodity'' is defined in Section 1(a)(9) of the
Commodity Exchange Act (rather than Section 1(a)(4) as currently stated
in Rule 8.201-E(c)(2)) to reflect an amendment to the Commodity
Exchange Act included in the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010.\7\
---------------------------------------------------------------------------

\7\ Public Law 111-203, 124 Stat. 1900 (2010).
---------------------------------------------------------------------------

United States Bitcoin and Treasury Investment Trust (the ``Trust'')
Description of the Trust
The Shares will be issued by the Trust, a Delaware statutory trust.
The Trust will operate pursuant to a trust agreement (the ``Trust
Agreement'') between Wilshire Phoenix Funds, LLC (the ``Sponsor'') and
Delaware Trust Company, as the Trust's trustee (the ``Trustee'').\8\
UMB Bank N.A. will act as custodian for the Trust's cash and U.S.
treasury assets (the ``Cash and Treasury Custodian'') and UMB Fund
Services, Inc. will act as the transfer agent for the Trust (the
``Transfer Agent'') and as the administrator of the Trust (the
``Administrator'') to perform various administrative, accounting and
recordkeeping functions on behalf of the Trust. Coinbase Custody Trust
Company, LLC will act as the Bitcoin custodian for the Trust (the
``Bitcoin Custodian'') to maintain custody of the Trust's Bitcoin
assets in cold storage.
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\8\ On May 21, 2019, the Trust filed Amendment 3 to Form S-1
under the Securities Act of 1933 (File No. 333-229187) (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 investment objective
of the Trust is for the Shares to closely reflect the Bitcoin Treasury
Index (the ``BTI'' or ``Index''), less the Trust's liabilities and
expenses. The Shares will provide investors with exposure to Bitcoin in
a manner that is efficient and convenient while also reducing the
volatility typically associated with Bitcoin without the use of
derivatives or leverage methods.
The Trust will have no assets other than (a) Bitcoin and (b) short-
term U.S.

[[Page 31375]]

Treasury securities with a maturity of less than one year (``T-
Bills''). The Trust will also hold U.S. dollars for short periods of
time in connection with (i) the maturity of any T-Bills, (ii) the
purchase and sale of Bitcoin and/or T-Bills, and (iii) the payment of
redemptions, if any, and fees and expenses of the Trust.
Calculated on a daily basis, the ``Bitcoin Price'' (as defined
below) is used to determine the Index's monthly weighting between the
``Bitcoin Component'' and the ``Treasury Component'' (as described
below). The amount of Bitcoin and T-Bills held by the Trust will be
determined by the Index. On a monthly basis, following the calculation
of the weighting of the components of the Index, the Trust will
rebalance its holdings in Bitcoin and T-Bills in order to closely
replicate the Index.
Upon the maturity of any T-Bill, the Trust will receive U.S.
dollars representing principal and interest. The portion of the cash
that represents interest on the T-Bills will be used to pay, in full or
in part, the sponsor's fee, redemptions and any additional fees and
expenses of the Trust.
Assets of the Trust
According to the Registration Statement, Bitcoin will be held by
the Bitcoin Custodian on behalf of the Trust, and T-Bills and U.S.
dollars will be held by the Cash and Treasury Custodian on behalf of
the Trust. The amount of Bitcoin and T-Bills held by the Trust will be
determined by the Index. The Trust's assets, other than Bitcoin, will
consist of T-Bills to be purchased by the Cash and Treasury Custodian.
The Trust will also hold U.S. dollars for short periods of time in
connection with (i) the maturity of any T-Bills, (ii) the purchase and
sale of Bitcoin and/or T-Bills, and (iii) the payment of redemptions,
if any, and fees and expenses of the Trust.
Custody of the Trust's Bitcoin
The Bitcoin Custodian is a New York-state chartered trust company
operating under the direct supervision of the New York State Department
of Financial Services and is subject to the anti-money laundering
requirements of the Financial Crimes Enforcement Network (``FinCEN'').
In addition, the Bitcoin Custodian is a qualified custodian under the
Investment Advisers Act of 1940. The Bitcoin Custodian will operate
pursuant to the terms and provisions of the custody agreement between
the Trust and the Bitcoin Custodian (the ``Bitcoin Custodian
Agreement''). Under the Bitcoin Custodian Agreement, the Bitcoin
Custodian will be responsible for the safety and security of the
Trust's Bitcoin as well as overseeing the process of deposit,
withdrawal, sale and purchase of the Trust's Bitcoin. The Sponsor
expects that the Bitcoin Custodian's custodial operations will maintain
custody and access of the private keys associated with the Trust's
Bitcoin.\9\ The Bitcoin Custodian will custody the Bitcoin in
accordance with the terms of the Bitcoin Custodian Agreement. The
Bitcoin Custodian will maintain a secured and segregated custody
account in the name of the Trust (the ``Bitcoin Custody Account''). The
Trust's Bitcoin will be stored in the Bitcoin Custody Account on behalf
of the Trust. The Bitcoin Custodian will utilize certain ``Security
Procedures'' when the Trust is required to deposit or withdraw Bitcoin
to or from the Bitcoin Custody Account. This deposit and withdrawal
process provides additional levels of security including, but not
limited to, passwords, encryption of private keys, multi-factor
authentication process, multi-signature wallets and telephone call-
backs during the administration and operation of the Bitcoin Custody
Account.
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\9\ According to the Registration Statement, the term ``cold
storage'' refers to a safeguarding method by which the private keys
corresponding to Bitcoin stored on a digital wallet are removed from
any computers actively connected to the internet. Cold storage of
private keys may involve keeping such wallet on a non-networked
computer or electronic device or storing the public key and private
keys relating to the digital wallet on a storage device (for
example, a USB thumb drive) or printed medium (for example, papyrus
or paper) and deleting the digital wallet from all computers.
---------------------------------------------------------------------------

According to the Registration Statement, the Trust has obtained
insurance for the Bitcoin held by the Trust, through the Bitcoin
Custodian. Currently, the Bitcoin Custodian, either directly or through
an affiliate, procures fidelity (also known as crime) insurance to
protect the organization from risks such as theft of funds.
Specifically, the fidelity insurance coverage program provides coverage
for the theft of funds held in hot or cold storage and provides a limit
excess of $200,000,000. The Bitcoin Custodian's insurance coverage
program is provided by a syndicate of industry-leading insurers that
are highly rated by AM Best.\10\ To the extent the value of the Trust's
Bitcoin holdings exceeds the total insurance coverage provided by the
Bitcoin Custodian's insurance coverage program, the Sponsor will use
commercially reasonable efforts to procure additional insurance
coverage with the goal of maintaining insurance coverage at a one-to-
one ratio with the Trust's Bitcoin holdings such that for every dollar
of Bitcoin held by the Trust there is an equal amount of insurance
coverage.
---------------------------------------------------------------------------

\10\ AM Best is a global credit rating agency with a unique
focus on the insurance industry. Credit ratings issued by AM Best
are a recognized indicator of insurer financial strength and
creditworthiness.
---------------------------------------------------------------------------

Custody of U.S. Dollars and T-Bills
The Cash and Treasury Custodian will operate pursuant to the terms
and provisions of the custody agreement between the Trust and the Cash
and Treasury Custodian (the ``Cash and Treasury Custodian Agreement'').
According to the Registration Statement, under the Cash and
Treasury Custodian Agreement, the Cash and Treasury Custodian will be
responsible for maintaining an account that holds T-Bills and U.S.
dollars (the ``Cash Account''). Pursuant to a request from the Trust,
the Cash and Treasury Custodian will establish and maintain the Cash
Account in the name of the Trust that will hold U.S. dollars and T-
Bills. The Cash and Treasury Custodian deposits and withdraws U.S.
dollars to and from the Trust's Cash Account at the instruction of the
Trust's Administrator or Sponsor, as applicable. The Cash and Treasury
Custodian is responsible for administering the Cash Account.
The Bitcoin Treasury Index
The Index is based on a pairing of notional components and is not
an investment product. The Index is calculated and published by
Solactive AG (the ``Index Calculation Agent'').\11\ The level of the
Index is published on each Business Day at approximately 5:00 p.m.
Eastern time and is available through various market data vendors,
including without limitation, Bloomberg L.P. and Thompson Reuters
Company. ``Business Day'' means any day on which the New York Stock
Exchange is scheduled to be open for business. The Index has two
components: (1) A notional component representing Bitcoin (the
``Bitcoin Component'') and (2) a notional component representing T-
Bills (the ``Treasury Component'').
---------------------------------------------------------------------------

\11\ The Index is a passive rules-based index and the Index
Calculation Agent provides calculation services only. The Index
Calculation Agent is not affiliated with the Sponsor and has
represented that it and its employees are subject to market abuse
laws and the Index Calculation Agent has established and maintains
processes and procedures to prevent the use and dissemination of
material non-public information regarding the Index.
---------------------------------------------------------------------------

On a monthly basis, the Index rebalances its weighting of the
Bitcoin Component and the Treasury Component utilizing a mathematically
derived passive rules-based methodology that is based on the daily

[[Page 31376]]

volatility of the Bitcoin Price (as defined below). The price of
Bitcoin used to determine the weighting of the Bitcoin Component and
the Treasury Component of the Index, as well as the value of Bitcoin
held by the Trust, will be based on the Chicago Mercantile Exchange
(``CME'') CF Bitcoin Reference Rate (``CME CF BRR'') (the ``Bitcoin
Reference Rate,'' and the price of Bitcoin based on the Bitcoin
Reference Rate (the ``Bitcoin Price'')).
On a monthly basis, following the calculation of the weighting of
the components of the Index, the Trust will rebalance its holdings in
Bitcoin and T-Bills in order to closely replicate the Index.
Bitcoin Component of the Index
According to the Registration Statement, Bitcoin is a digital asset
that is decentralized and issued by, and transmitted using
cryptographic security through, an open source digital protocol
platform known as the ``Bitcoin Network.'' The Bitcoin Network is an
online end-user to end-user network that hosts the public transaction
ledger, known as the ``Bitcoin Blockchain,'' and the source coding
comprising the basis for the cryptographic and algorithmic protocols
governing the Bitcoin Network. No single entity owns or operates the
Bitcoin Network, and its infrastructure is collectively maintained by a
decentralized user base. Bitcoin may be converted into U.S. dollars,
other fiat currencies, or other crypto assets, at rates determined in
individual end-user-to-end-user transactions under a barter system, or
on Bitcoin exchanges. They can also be used to pay for certain goods
and services. The Bitcoin Network does not rely on either governmental
authorities or financial institutions to create, transmit or determine
the value of Bitcoin. Rather, Bitcoin is created and allocated by the
Bitcoin Network protocol through a ``mining'' process subject to a
strict issuance schedule. The value of Bitcoin is determined by the
supply of and demand for Bitcoin on Bitcoin exchanges (and in private
end-user-to-end-user transactions), as well as the number of merchants
that accept them. Third-party service providers such as Bitcoin
exchanges and third-party payment processing services may charge
significant fees for processing transactions and for converting, or
facilitating the conversion of, Bitcoin to or from fiat currency.
The Bitcoin Blockchain is the digital transaction ledger on which
Bitcoin is ``stored'' and reflected. The Bitcoin Blockchain is a
decentralized digital file stored on the computers of each user of the
Bitcoin Network. It records the transaction history of all Bitcoin in
existence and allows the Bitcoin Network to verify the association of
each Bitcoin with the ``digital wallet'' that owns them through
transparent transaction reporting. The Bitcoin Network and Bitcoin
software programs can interpret the Bitcoin Blockchain to determine the
exact Bitcoin balance of any digital wallet listed in the Bitcoin
Blockchain as having taken part in a transaction on the Bitcoin
Network.
The Bitcoin Blockchain is made up of a digital file that is
downloaded and stored, in whole or in part, on the software programs of
all Bitcoin users. The file includes all blocks that have been solved
by validators and it is updated to include new blocks as they are
solved. As each newly solved block refers back to and ``connects'' with
the solved block immediately prior to it, the addition of a new block
adds to the Bitcoin Blockchain in a manner akin to a new link being
added to a chain. The Bitcoin Blockchain represents a complete,
transparent and unbroken history of all transactions on the Bitcoin
Network.
According to the Registration Statement, generally, every Bitcoin
transaction is broadcast to the Bitcoin Network and recorded in the
Bitcoin Blockchain. However, there are certain ``Off-Blockchain
transactions.'' These transactions involve the transfer of control or
ownership of a specific digital wallet holding Bitcoin, or of the
reallocation of ownership of certain Bitcoin in a pooled-ownership
digital wallet. Generally, information and data regarding Off-
Blockchain transactions is not publicly available. This is unlike true
Bitcoin transactions, which are publicly recorded and available on the
Bitcoin Blockchain. Thus, according to the Registration Statement, Off-
Blockchain transactions are not truly Bitcoin transactions, as they do
not involve the transfer of transaction data on the Bitcoin Network and
do not reflect a movement of Bitcoin between addresses recorded in the
Bitcoin Blockchain. Off-Blockchain transactions may include
transactions on centralized exchanges.
Bitcoin Exchange Market
According to the Registration Statement, online Bitcoin exchanges
represent a substantial percentage of Bitcoin transactional activity
and thus offer the most data with respect to prevailing Bitcoin
valuations. There are currently several Bitcoin exchanges operating
globally. These include established trading platforms such as itBit,
Coinbase Pro, Bitstamp and Kraken. These Bitcoin trading platforms
provide various options for buying and selling Bitcoin. In parallel to
the open Bitcoin exchanges, informal ``over-the-counter'' or ``OTC
markets'' for Bitcoin trading also exist as a result of the peer-to-
peer nature of the Bitcoin Network, which allows direct transactions
between any seller and buyer.
Bitcoin futures contracts are traded on the CME and the Cboe
Futures Exchange (``CFE'').\12\ However, the Trust will not hold or
trade in commodity futures contracts or other derivative contracts
regulated by the Commodities Exchange Act,\13\ as administered by the
Commodity Futures Trading Commission.
---------------------------------------------------------------------------

\12\ CFE recently announced that, effective March 2019, it would
no longer list additional Cboe Bitcoin (USD) futures contracts for
trading. See https://markets.cboe.com/resources/product_update/2019/New-CFE-Products-Being-Added-in-March-2019-Update.pdf.
\13\ 7 U.S.C. 1.
---------------------------------------------------------------------------

The Bitcoin Price (i.e., the Bitcoin Reference Rate)
The CME CF BRR was created to facilitate financial products based
on Bitcoin.\14\ It serves as a once-a-day reference rate of the U.S.
dollar price of Bitcoin (USD/BTC). The CME CF BRR is the rate on which
bitcoin futures contracts are cash-settled in U.S. dollars at the CME
\15\ and serves as a reference rate in the settlement of financial
derivatives based on the price of Bitcoin. The CME CF BRR may also
serve as a reference rate in the net asset value (``NAV'') calculation
of exchange traded products (``ETPs'').\16\ According to the
Registration Statement, the Administrator of the Trust will utilize the
CME CF BRR when valuing the Bitcoin held by the Trust.
---------------------------------------------------------------------------

\14\ Andrew Paine and William J. Knottenbelt, Analysis of the
CME CF Bitcoin Reference Rate and Real Time Index, Oct. 2016,
available at https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf, Section 2 (``Paine & Knottenbelt'').
\15\ While the Trust uses the CME CF BRR to calculate the value
of its bitcoin assets, in no event will the Trust be trading in
Bitcoin futures contracts.
\16\ See https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf.
---------------------------------------------------------------------------

The CME CF BRR, which has been calculated and published since
November 2016, aggregates the trade flow of several Bitcoin spot
exchanges (the ``Constituent Platforms''), during a calculation window
into the U.S. dollar price of one Bitcoin as of 4:00 p.m. London time.
Specifically, the CME CF BRR is calculated based on the ``Relevant
Transactions'' (as defined below) of all Constituent Platforms, as
follows: \17\
---------------------------------------------------------------------------

\17\ For a description of the CME CF BRR methodology, see
https://www.cmegroup.com/education/bitcoin/cme-cf-cryptocurrency-reference-rate-methodology.html#2-overview (``BRR Methodology'').

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[[Page 31377]]

1. All Relevant Transactions are added to a joint list, recording
the trade price and size for each transaction.
2. The list is partitioned into a number of equally-sized time
intervals.
3. For each partition separately, the volume-weighted median trade
price is calculated from the trade prices and sizes of all Relevant
Transactions, i.e. across all Constituent Platforms. A volume-weighted
median differs from a standard median in that a weighting factor, in
this case trade size, is factored into the calculation.\18\
---------------------------------------------------------------------------

\18\ See Paine & Knottenbelt, Section 2.2.2 (``Volume-weighting
of medians filters out high numbers of small trades that may
otherwise dominate a non-volume-weighted median.''). This assists in
mitigating any series of small, frequent trades placed on any of the
Constituent Platforms that could be used to manipulate the price of
Bitcoin. See BRR Methodology, Section 7.
---------------------------------------------------------------------------

4. The CME CF BRR is then determined by the equally-weighted
average of the volume-weighted medians of all partitions.
The CME CF BRR does not include any futures prices in its
methodology. A ``Relevant Transaction'' is any ``cryptocurrency versus
legal tender spot trade that occurs during the ``Time Weighted Average
Price (``TWAP'') Period'' on a Constituent Platform in the BTC/USD pair
that is reported and disseminated by the calculation agent for the CME
CF BRR (the ``BRR Calculation Agent''). The CME CF BRR is administered
by the administrator for the CME CF BRR (the ``BRR Administrator'').
The mathematical representation of the CME CF BRR Methodology is
attached [sic] as Exhibit 3A.
Calculation of Net Asset Value
The Trust's NAV will be determined daily by the Administrator at
4:00 p.m., E.T. on any Business Day or as soon thereafter as
practicable. The NAV of the Trust will equal the value of the total
assets of the Trust, including Bitcoin, T-Bills and U.S. dollars, less
the liabilities and expenses of the Trust. The NAV per Share will be
equal to the Trust's NAV divided by the number of outstanding Shares.
The NAV for the Trust's Shares will be disseminated daily to all market
participants at the same time.
In accordance with the Trust's valuation policy and procedures, the
Administrator will determine the price of the Trust's Bitcoin by
reference to the Bitcoin Reference Rate (as described below), which is
published between 4:00 p.m. and 4:30 p.m., London time, on every day of
the year, including weekends. Similarly, the Administrator will
determine the fair value of T-Bills based on the price of each T-Bill
held by the Trust plus any cash, which will be held in U.S. dollars, as
of 4:00 p.m., E.T., on any Business Day. The Trust's NAV will be
determined by the Administrator on a GAAP basis. Because the Trust
rebalances monthly, in the periods between such monthly rebalancing, as
a result of changes in the value of Bitcoin, among other factors, the
value of Bitcoin relative to the value of the other assets of the Trust
may diverge from the Index. Accordingly, the Trust's NAV and NAV per
Share are tracked, in part, by reference to the Bitcoin Reference Rate.
Indicative Fund Value
In order to provide updated information relating to the Trust for
use by investors and market professionals, an updated ``Indicative Fund
Value'' (``IFV'') will be calculated by using the prior day's closing
net assets of the Trust as a base and updating 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 value of the assets of the Trust.
The IFV will be disseminated on a per Share basis every 15 seconds
during the Exchange's Core Trading Session and be widely disseminated
by one or more major market data vendors during the NYSE Arca Core
Trading Session.\19\
---------------------------------------------------------------------------

\19\ Several major market data vendors display and/or make
widely available IFVs taken from the Consolidated Tape Association
(``CTA'') or other data feeds.
---------------------------------------------------------------------------

Creation of Shares
The Shares shall represent beneficial interests in, and ownership
of, the Trust. The Sponsor shall have the power and authority, in its
sole discretion, without action or approval by the Shareholders, to
cause the Trust to issue Shares from time to time. The Trust shall
issue Shares solely in exchange for cash in U.S. Dollars.
The Trust may offer and sell Shares of the Trust from time to time
through (1) underwriters, placement agents or distributors (each, a
``Share Placement'') or such other means as the Sponsor may determine
or (2) through subscription agreements. The Trust may not issue
additional Shares unless the net proceeds per Share to be received by
the Trust are not less than 100% of the most recently calculated NAV
per Share immediately prior to, or upon, the determination of the
pricing of such issuance.
Any net proceeds received in connection with the offer and sale of
Shares shall be used to purchase Bitcoin and/or T-Bills, as applicable,
in proportions consistent with the allocation of the Bitcoin Holdings
and the Treasury and Cash Holdings of the Trust, as of the applicable
date of sale. For this purpose, ``Bitcoin Holdings'' shall mean the sum
of the value of the Bitcoin held by the Trust, and ``Treasury and Cash
Holdings'' shall mean the value of the T-Bills and U.S. dollars held by
the Trust. In the event that the Trust has no assets at the time of the
sale of the initial Shares under the Registration Statement, then any
net proceeds received in connection with the offer and sale of such
initial Shares shall be used to purchase Bitcoin and/or T-Bills, as
applicable, in proportions consistent with the weighting of the Bitcoin
Component and the Treasury Component of the Index as of the date of
such sale.
Redemption of Shares
According to the Registration Statement, upon at least five (5)
Business Days' prior written notice, a shareholder may redeem all or a
portion of its Shares on the last Business Day of each calendar month.
All redemptions will be based on the NAV of Shares submitted for
redemption, determined as of the last Business Day of the applicable
calendar month.
In general, redemptions will be deemed to occur on a ``first-in
first-out'' basis among Shares held by a particular shareholder. A
redemption notice is irrevocable unless otherwise agreed by the Sponsor
in writing.
In general, the final redemption of Shares will be paid in cash
within five (5) Business Days after the applicable redemption date.
Shareholders will be entitled to receive their applicable redemption
amount in cash, which is the NAV of the Shares, determined as of the
applicable redemption date. The Administrator shall calculate the
applicable redemption amount and instruct the Cash and Treasury
Custodian to pay from the Cash Account the applicable redemption amount
to each redeeming Shareholder.
Potential Manipulation in the Bitcoin Market
In prior orders relating to the listing of certain ETPs on U.S.
exchanges, the Commission Staff expressed its concern that the world-
wide market for Bitcoin may be subject to potential manipulation.\20\
---------------------------------------------------------------------------

\20\ See Securities Exchange Act Release No. 80206 (Mar. 10,
2017), 82 FR 14076 (Mar. 16, 2017) (SR-BatsBZX-2016-30) (Order
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, To
List and Trade Shares Issued by the Winklevoss Bitcoin Trust)
(``Winklevoss I''); and 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, as Modified by Amendments No. 1 and 2, To
List and Trade Shares of the Winklevoss Bitcoin Trust) (``Winklevoss
II''); see also Securities Exchange Act Release No. 83912 (August
22, 2018), 83 FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02)
(Order Disapproving a Proposed Rule Change Relating to Listing and
Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily
Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares,
Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X
Bear Shares Under NYSE Arca Rule 8.200-E).

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[[Page 31378]]

The Sponsor acknowledges that, numerous markets, commodity or
otherwise, have historically been subject to manipulation.\21\
According to the Registration Statement, the Trust's structure,
together with the use of the CME CF BRR will provide investors with
exposure to the Bitcoin market without a number of the risks from which
other Bitcoin related products previously submitted for registration
have suffered, and particularly mitigate the effects of potential
manipulation of the Bitcoin market.
---------------------------------------------------------------------------

\21\ Spot and futures markets for other well-established
commodities have previously been subject to manipulation concerns.
See CFTC v. Amaranth Advisors, LLC, et al., 07-cv-6682 (S.D.N.Y.
2007); see also CFTC Press Release 5692-09, August 12, 2009
(available at: www.cftc.gov/PressRoom/PressReleases/pr5692-09)
(Amaranth Advisors, LLC, and Amaranth Advisors (Calgary) ULC,
entered into a consent order settling charges for attempting to
manipulate the price of natural gas futures contracts traded on the
New York Mercantile Exchange (NYMEX) on February 24, and April 26,
2006); see CFTC Press Release 7000-14, September 15, 2014 (available
at: www.cftc.gov/PressRoom/PressReleases/pr7000-14) (Consent order
settling charges for attempting to manipulate the price of natural
gas futures contracts traded on the NYMEX on February 24, and April
26, 2006); see Craig Pirrong, The Economics of Commodity Market
Manipulation: A Survey, 5 J. Commodity Mkts. 1, 13 (2017)
(explaining that ``[t]he subject of market manipulation has
bedeviled commodity markets since the dawn of futures trading'')
(``Pirrong'').
---------------------------------------------------------------------------

In order for this proposed rule change to be approved, the
Commission must determine that the proposal is consistent with the
requirements of Section 6(b)(5) of the Act and that the Exchange's
rules are designed to prevent fraudulent and manipulative acts and
practices.\22\ The Commission has previously stated that such a
proposed rule change must offer evidence to demonstrate that either (i)
the Bitcoin market is inherently resistant to fraud and manipulation,
or (ii) the Exchange must have surveillance-sharing agreements with
significant markets for trading the underlying commodity or derivatives
on that commodity and those markets must be regulated.\23\
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\22\ 15 U.S.C.S. Sec. 78f (LEXIS through Pub. L. No. 116-8); 17
CFR 240.6a-1.
\23\ See Winklevoss II, at 37580 and 37581 (noting that ``. . .
if BZX had demonstrated that Bitcoin and Bitcoin markets are
inherently resistant to fraud and manipulation, comprehensive
surveillance-sharing agreements with significant, regulated markets
would not be required, as the function of such agreements is to
detect and deter fraud and manipulation.''). See Craig Pirrong, The
Economics of Commodity Market Manipulation: A Survey, 5 J. Commodity
Mkts. 1, 13 (2017), generally, for a discussion of the economics of
commodity market manipulation. For a discussion of commodity market
manipulation in the U.S. historical context, see Philip M. Johnson,
Commodity Market Manipulation, 38 Wash. & Lee L. Rev. 725 (1981).
---------------------------------------------------------------------------

As discussed in more detail below, the Sponsor believes that the
CME CF BRR is inherently resistant to manipulation. In addition, as
discussed below, significant regulated markets for trading Bitcoin
derivatives are members of the Intermarket Surveillance Group (``ISG'')
and the Exchange or the Financial Industry Regulatory Authority
(``FINRA''), on behalf of the Exchange, may communicate with such
markets as necessary in conducting market surveillance.
As the Commission has previously acknowledged, trading in a
Bitcoin-based ETP on a national securities exchange may provide
additional protection to investors,\24\ as opposed to trading in an
unregulated Bitcoin spot market. The Sponsor also believes that listing
of the Trust's Shares on the Exchange will provide investors with such
an opportunity to obtain exposure to Bitcoin within a regulated
environment.
---------------------------------------------------------------------------

\24\ See Securities Exchange Act Release No. 83913 (August 22,
2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-2018-001) (Order
Disapproving a Proposed Rule Change to List and Trade the Shares of
the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin
ETF). See also, Hester M. Pierce, U.S. Sec. Exch. Comm'n, Dissent of
Commissioner Hester M. Pierce to Release No. 34-83723 (July 26,
2018), https://www.sec.gov/news/public-statement/peirce-dissent-34-83723 (``An ETP based on bitcoin would offer investors indirect
exposure to bitcoin through a product that trades on a regulated
securities market and in a manner that eliminates some of the
frictions and worries of buying and holding bitcoin directly. If we
were to approve the ETP at issue here, investors could choose
whether to buy it or avoid it.'').
---------------------------------------------------------------------------

The Resistance of the CME CF BRR to Market Manipulation
As noted above, one of the ways that the requirements of Section
6(b)(5) of the Exchange Act can be met is by demonstrating that the
applicable market is inherently resistant to fraud and
manipulation.\25\
---------------------------------------------------------------------------

\25\ See Winklevoss II, at 37580.
---------------------------------------------------------------------------

The Sponsor notes that, in connection with the Commission's
analysis of whether a market is inherently resistant to manipulation,
the Commission has in certain circumstances focused not on the market
as a whole but instead on the significant subset of the market that has
a meaningful impact on the particular ETP. For instance, orders
approving listing applications of ETPs that invest in gold bullion
focused on the spot and futures market,\26\ even though gold is traded
on a number of different market segments. Focusing on the spot market
is appropriate because the spot market is the market to which the
particular ETP would look to determine its NAV. Using the example of
gold, it would not be proper to use the price of gold in the jewelry
market or gold coin market to value the NAV of a gold bullion ETP, even
though by volume gold bought in such markets equals or surpasses gold
purchased in all other segments of the market, including investment and
``Central Banks,'' which are more likely to purchase gold at the spot
market.\27\
---------------------------------------------------------------------------

\26\ See, e.g., Securities Exchange Act Release No. 51058
(January 19, 2005) 70 FR 3749 (January 26, 2005) (SR-Amex-2004-38)
(iShares COMEX Gold Trust I).
\27\ See World Gold Council, Goldhub, Gold supply and demand
statistics, available at https://www.gold.org/goldhub/data/gold-supply-and-demand-statistics.
---------------------------------------------------------------------------

The Trust utilizes the CME CF BRR to determine the NAV of the
Bitcoin held by the Trust. While Bitcoin is listed and traded on a
number of markets and platforms, the CME CF BRR exclusively utilizes
its Constituent Platforms to determine the value of the CME CF BRR.
Since (i) the Trust uses the CME CF BRR to determine its NAV, (ii) the
CME CF BRR is what determines the ratio of Bitcoin to Treasuries held
by the Trust, and (iii) the CME CF BRR is determined based on the price
of Bitcoin on the Constituent Platform and no other exchanges, the
Sponsor maintains that the proper ``market'' that one should evaluate
to determine whether the ``market'' is inherently resistant to
manipulation is the segment of the market formed by the Constituent
Platforms.
The Sponsor found that price discovery is substantially similar
among each of the Constituent Platforms.\28\ As shown in the chart
included as Exhibit 3B to this proposed rule change, none of the
Constituent Platforms exhibit a statistically significant average
difference from the CME CF BRR. During the 3:00 p.m. to 4:00 p.m.
London time CME CF BRR observation window, volume of Bitcoin trading
among the four Constituent Platforms

[[Page 31379]]

was split as follows: 13.3% of the Bitcoin volume was on itBit, 21.2%
of the Bitcoin volume was on Kraken, 28.4% of the Bitcoin volume was on
Bitstamp and 37.1% of the Bitcoin volume was on Coinbase.\29\ The
Constituent Platforms also show a substantially similar degree of price
volatility, with the standard deviation of the difference of 4:00 p.m.
London time exchange prices from the CME CF BRR being 1.12-1.13%.\30\
When the 4:00 p.m. London time snapshot prices do deviate from the CME
CF BRR, they are generally in the same direction (occurring 87.4% of
the time).\31\ The Sponsor maintains that the foregoing data also
supports the conclusion that robust arbitrage trading and liquidity
provision occurs among the Constituent Platforms.
---------------------------------------------------------------------------

\28\ All statistical analysis provided herein was performed
solely by the Sponsor. The Sponsor did not engage any third-parties
in connection with such statistical analysis in an effort to insure
quality and integrity. Any data utilized for any statistical
analysis provided in this proposal will be made available to the
Commission upon request.
\29\ Analysis performed by the Sponsor using data provided by
Kaiko//Challenger Deep.
\30\ Analysis performed by the Sponsor using data provided by
Kaiko//Challenger Deep.
\31\ Analysis performed by the Sponsor using data provided by
Kaiko//Challenger Deep.
---------------------------------------------------------------------------

An independent examination of the methodology (Paine & Knottenbelt)
of the CME CF BRR, supports the Sponsor's assertion that the CME CF BRR
is not susceptible to manipulation.\32\ The use of a volume-weighted
average median price determined over twelve five-minute windows in a
specific 60-minute period over any Constituent Platform makes any
attempt to manipulate the CME CF BRR unlikely. Further, the capital
necessary to maintain a significant presence on any Constituent
Platform makes manipulation of the CME CF BRR unlikely. The linkage
between the Bitcoin markets and the presence of arbitrageurs (as
evidenced in the data set forth above) in those markets means that the
manipulation of the price of Bitcoin on any Constituent Platform would
likely require overcoming the liquidity supply of such arbitrageurs who
are potentially eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

\32\ ``The chosen specification makes the BRR highly resistant
against manipulation. The use of medians likely reduces the effect
of outlier prices on one or more exchanges. Volume-weighting of
medians filters [out high numbers of small trades] that may
otherwise dominate a non-volume-weighted median. The use of 12 non-
weighted partitions assures that price information is sourced
equally over the entire observation period. Influencing the BRR
would therefore require price manipulation. . .over an extended
period of time.'' Paine & Knottenbelt, Section 2.2.2.
---------------------------------------------------------------------------

The Presence of Surveillance Sharing Agreements
In previous orders rejecting the listing of Bitcoin ETFs, the
Commission noted its concerns that the Bitcoin market could be subject
to manipulation.\33\ In these orders, the Commission cited numerous
precedents \34\ in which 19b-4 listing applications were approved based
on findings that the particular market was either inherently resistant
to manipulation or that the listing exchange had entered into a
surveillance sharing agreement with a market of significant size.\35\
The Commission noted that, for commodity-trust ETPs ``there has been in
every case at least one significant, regulated market for trading
futures in 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 (``ISG'') membership in common with, that market.'' \36\
---------------------------------------------------------------------------

\33\ See Winklevoss I and Winklevoss II, supra note 20. The
Sponsor represents that some of the concerns raised are that a
significant portion of Bitcoin trading occurs on unregulated
platforms and that there is a concentration of a significant number
of Bitcoin in the hands of a small number of holders. However, these
aspects are not unique to Bitcoin and are present in a number of
commodity and other markets. For instance, some gold bullion trading
takes place on unregulated OTC markets and a significant percentage
of gold is held by a relative few (according to estimates of the
World Gold Council, approximately 21.3% of total above-ground gold
stocks are held by private investors and 17.2% are held by foreign
governments; by comparison, 15.7% of Bitcoin are held by the 100
largest Bitcoin addresses, some of which are known to be cold
storage addresses of large centralized cryptocurrency trading
platforms). See https://www.gold.org/goldhub/data/above-ground-stocks for gold data cited in this note and https://bitinfocharts.com/top-100-richest-bitcoin-addresses.html for Bitcoin
data.
\34\ For an extensive listing of such precedents, see Winklevoss
I, at 14083 n.96.
\35\ The Exchange to date has not entered into surveillance
sharing agreements with any cryptocurrency platform. However, the
CME, which calculates the CME CF BRR, and which has offered
contracts for Bitcoin futures products since 2017, is, as noted
below, a member of the ISG. In addition, each Constituent Platform
has entered into a data sharing agreement with CME. See https://www.cmegroup.com/education/constituent-exchanges-criteria.html.
\36\ See Winklevoss II, at 37594.
---------------------------------------------------------------------------

The CME \37\ is a member of the ISG, the purpose of which is ``to
provide a framework for the sharing of information and the coordination
of regulatory efforts among exchanges trading securities and related
products to address potential intermarket manipulations and trading
abuses.'' \38\ Membership of a relevant futures exchange in ISG is
sufficient to meet the surveillance-sharing requirement.\39\
---------------------------------------------------------------------------

\37\ The CME is regulated by the CFTC, which has broad reaching
anti-fraud and anti-manipulation authority including with respect to
the Bitcoin market since Bitcoin has been designated as a commodity
by the CFTC. See A CFTC Primer on Virtual Currencies (October 17,
2017), available at https://www.cftc.gov/sites/default/files/idc/groups/public/documents/file/labcftc_primercurrencies100417.pdf (the
``CFTC Primer on Virtual Currencies'') (``The CFTC's jurisdiction is
implicated when a virtual currency is used in a derivatives contract
or if there is fraud or manipulation involving a virtual currency
traded in interstate commerce.''). See also 7 U.S.C. Sec. 7(d)(3)
(``The board of trade shall list on the contract market only
contracts that are not readily susceptible to manipulation.'').
\38\ https://www.isgportal.org/isgPortal/public/overview.htm.
\39\ See, e.g., Winklevoss II, at 37594.
---------------------------------------------------------------------------

The Commission has previously noted that the existence of a
surveillance-sharing agreement by itself is not sufficient for purposes
of meeting the requirements of Section 6(b)(5); the surveillance-
sharing agreement must be with a market of significant size.\40\ The
Commission has provided an example of how it interprets the terms
``significant market'' and ``market of significant size,'' though that
definition is meant to be illustrative and not exclusive: ``The terms
`significant market' and `market of significant size' . . . 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.'' \41\
---------------------------------------------------------------------------

\40\ See, e.g., Winklevoss II, at 37589-90.
\41\ See, e.g., Winklevoss II, at 37594; and see Securities
Exchange Act Release No. 83913 (August 22, 2018), 83 FR 43923 (Aug.
28, 2018) (SR-CboeBZX-2018-001) (GraniteShares Bitcoin ETF and
GraniteShares Short Bitcoin ETF), n. 85 and accompanying text.
---------------------------------------------------------------------------

As discussed below, the Sponsor maintains that the CME, either
alone as the sole market for bitcoin futures or as a group of markets
together with the Constituent Platforms, is a ``market of significant
size'' as it satisfies both elements of the example provided by the
Commission.
Reasonable Likelihood That a Person Manipulating the ETP Would Have To
Trade on the Market
The first element of what constitutes a ``significant market'' or
``market of significant size'' is that there is a reasonable likelihood
that a person attempting to manipulate the ETP would also have to trade
on a market (or group of markets) to successfully manipulate the ETP so
that a surveillance sharing agreement would assist the ETP listing
market in detecting and deterring misconduct.
The Sponsor concludes that the CME meets this element in two ways.
First, it is the sole market for Bitcoin futures,

[[Page 31380]]

and compares favorably with other markets that were deemed to be
markets of significant size in precedents. One particularly salient
group of precedents are prior orders approving the listing of ETPs that
invest in gold bullion, since the gold market exhibits a number of
similarities with the market for Bitcoin. The Sponsor maintains that,
like Bitcoin, the primary markets for gold bullion are unstructured OTC
markets \42\ and the futures market.
---------------------------------------------------------------------------

\42\ ``The OTC market has no formal structure and no open-outcry
meeting place.'' Securities Exchange Act Release No 50603 (October
28, 2004), 69 FR 64614 (November 5, 2004) (SR-NYSE-2004-22)
(streetTRACKS Gold Shares) (``streetTRACKS'').
---------------------------------------------------------------------------

As with the OTC gold market, it is not possible to enter into an
information sharing agreement with the OTC Bitcoin market.\43\ When the
Commission approved the listing of gold ETPs and other commodity-trust
ETPs, rather than surveillance sharing agreements with the relevant OTC
markets, there have been surveillance sharing agreements between the
listing exchange and ``regulated markets for trading futures on the
underlying commodity.'' \44\ It has been widely discussed that
manipulating the market for a commodity often involves the futures
market for that commodity.\45\
---------------------------------------------------------------------------

\43\ ``It is not possible, however, to enter into an information
sharing agreement with the OTC gold market.'' streetTRACKS, at
64619. See also iShares COMEX Gold Trust, Securities Exchange Act
Release No. 51058 (January 19, 2005), 70 FR 3749 (January 26, 2005)
(SR-Amex-2004-38); and Securities Exchange Act Release No. 60971
(November 9, 2009), 74 FR 59283 (November 17, 2009) (SR-NYSEArca-
2009-94) (ETFS Palladium Trust).
\44\ See Winklevoss II, at 37591.
\45\ See, e.g., Frank Easterbrook, Monopoly, Manipulation, and
the Regulation of Futures Markets, 59 J. of Bus. S103, S103-S127
(1986); William D. Harrington, The Manipulation of Commodity Futures
Prices, 55 St. Johns L. Rev. 240, 240-275 (2012); Robert C. Lower,
Disruptions of the Futures Market: A Comment on Dealing With Market
Manipulation, 8 Yale J. on Reg. 391, 391-402 (1991).
---------------------------------------------------------------------------

The CME is a member of ISG, is regulated by the CFTC, and is
situated very much like the COMEX division of NYMEX is with respect to
gold ETPs.\46\ The CME is subject to a surveillance-sharing agreement
arrangement pursuant to which the Exchange can obtain data from the
CME.
---------------------------------------------------------------------------

\46\ Other applicants have made similar arguments in their
respective 19b-4 applications. See VanEck SolidX Bitcoin Trust,
Securities Exchange Act Release No. 34-85119 (February 13, 2019), 84
FR 5140 (February 20, 2019) (SR-CboeBZX-2019-004), n. 11
(``VanEck'').
---------------------------------------------------------------------------

Additionally, the Sponsor found that the Bitcoin futures market is
larger in size (as a percentage of spot trading) than the size of the
gold futures markets are in relation to the gold OTC market (expressed
as a percentage).\47\ Using the most recent data cited by the World
Gold Council, an affiliate of the SPDR Gold Shares (GLD), for 2016, the
ratio of daily trading volume of Gold futures on COMEX ($28.9 billion)
to daily trading volume on gold OTC markets ($167.9 billion, which is
the midpoint of the estimated high and low points by the World Gold
Council) is approximately 17.2%.\48\ In comparison, using data from the
CME and the four CME CF BRR Constituent Platforms over the 6-month
period of October 1, 2018 to March 31, 2019, the ratio of daily trading
volume of BTC futures on the CME ($90.4 million) to the daily trading
volume of BTC/USD spot ($131.6 million) is approximately 68.7%.\49\
---------------------------------------------------------------------------

\47\ Analysis performed by the Sponsor using data available from
(i) CME with respect to the CME futures, and (ii) Kaiko//Challenger
Deep with respect to BTC/USD spot.
\48\ Data available at https://www.gold.org/goldhub/data.
\49\ Analysis performed by the Sponsor using data available from
(i) CME with respect to the CME futures, and (ii) Kaiko//Challenger
Deep with respect to BTC/USD spot. The Sponsor represents that the
volume of the bitcoin futures market is also comparable with volumes
on other markets deemed to be markets of significant size in a
previous Commission approval order. See VanEck, at 5143 (comparing
the bitcoin futures market favorably with the freight futures
market).
---------------------------------------------------------------------------

The Sponsor maintains that another way that the CME meets the first
element arises from the fact that the value of the Bitcoin assets held
by the Trust is based on the CME CF BRR. Anyone attempting to
manipulate the Trust would need to place numerous large sized trades on
any of the Constituent Platforms that are used to calculate the CME CF
BRR,\50\ and if such an attempt was made the BRR Administrator and the
CME would be able to detect such manipulative trading patterns.\51\ In
addition, any platform that is accepted by the CME to become part of
the constituent trading platforms that are used to calculate the CME CF
BRR, including the Constituent Platforms, (1) must enter into a data
sharing agreement with the CME, (2) must cooperate with inquiries and
investigations of regulators and the BRR Administrator and (3) must
submit each of its clients to its Know-Your-Customer (``KYC'')
procedures; \52\ therefore, the CME and the Exchange would be able, in
the case of any suspicious trades, to discover all material trade
information including the identities of the customers placing the
trades.
---------------------------------------------------------------------------

\50\ Because the CME CF BRR is calculated based solely on the
price data from the Constituent Platforms, manipulating the CME CF
BRR must necessarily entail manipulating the price data at one or
more Constituent Platforms.
\51\ The BRR Calculation Agent receives trading data from the
Constituent Platforms through its Automatic Programming Interface
(``API''). See https://www.cmegroup.com/education/bitcoin/pricing-products-practice-standards.html (````The [BRR] Administrator will
have primary responsibility for all of the following in respect of
Bitcoin Pricing Products: . . .Establishing appropriate monitoring
processes and procedures designed to identify any breaches of these
Practice Standards and any attempted manipulation or manipulative
behavior and reporting any such incidents to the Oversight Committee
in a timely manner.'')
\52\ See https://www.cmegroup.com/education/constituent-exchanges-criteria.html.
---------------------------------------------------------------------------

The CME Has Rigorous Criteria for Constituent Platforms Which It
Monitors Regularly
The Sponsor notes that the CME's criteria for each of the
Constituent Platforms requires that the platform facilitates spot
trading of the relevant cryptocurrency against the corresponding fiat
currency (the ``Relevant Pair'') and makes trade data and order data
available through an API with sufficient reliability, detail and
timeliness. In addition, (1) the platform's Relevant Pair spot trading
volume must meet the minimum thresholds as detailed in the CME CF
Cryptocurrency Indices Methodology Guide; (2) the platform must publish
policies to ensure fair and transparent market conditions at all times
and have processes in place to identify and impede illegal, unfair or
manipulative trading practices; (3) the platform must not impose undue
barriers to entry or restrictions on market participants, and utilizing
the platform must not expose market participants to undue credit risk,
operational risk, legal risk or other risks; (4) the platform must
comply with applicable law and regulation, including, but not limited
to capital markets regulations, money transmission regulations, client
money custody regulations, KYC regulations and anti-money-laundering
(AML) regulations; and (5) the platform must cooperate with inquiries
and investigations of regulators and the BRR Administrator upon request
and must execute data sharing agreements with CME.\53\
---------------------------------------------------------------------------

\53\ See https://www.cmegroup.com/education/constituent-exchanges-criteria.html. The CME monitors the Constituent Platforms
to ensure compliance with its criteria and removed two platforms in
April 2017 for failing to meet its criteria. See Minutes of the CME
CF BRR and BRTI Oversight Committee Meeting for BRR and BRTI held
via conference call on 7th June 2017, available at https://www.cmegroup.com/education/bitcoin/cme-cf-brr-and-brti-oversight-meeting-minutes-2017-06.html.

---------------------------------------------------------------------------

[[Page 31381]]

Each of the Constituent Platforms Is Subject to Oversight by Federal
and State Financial Regulators
Each of the Constituent Platforms are (i) registered with, and
licensed by, the relevant financial authorities, (ii) subject to
compliance with the rigorous requirements of the U.S. Bank Secrecy Act
(``BSA'') and implementing AML regulations, and (iii) subject to the
examination and enforcement authority of both federal and state
regulators.\54\
---------------------------------------------------------------------------

\54\ All of the Constituent Platforms are registered with FinCEN
as a money services business. Additionally, three of the four
Constituent Platforms have obtained state money transmitter
licenses, as applicable, and the fourth Constituent Platform is
operated by a trust company chartered by the state of New York,
which subjects it to New York AML requirements and enables it to
operate in other states without a separate money transmitter
license. See 3 NYCRR 504.
---------------------------------------------------------------------------

Under applicable FinCEN guidance, virtual currency exchanges such
as the Constituent Platforms are considered ``money transmitters'' for
the purposes of federal AML law and must be registered with FinCEN.\55\
As a result, the Constituent Platforms must fully comply with BSA and
AML requirements, which include developing, implementing, and
maintaining an effective AML program.\56\ In general, an effective AML
program requires the Constituent Platforms to, among other things:
---------------------------------------------------------------------------

\55\ FinCEN, Application of FinCEN's Regulations to Persons
Administering, Exchanging, or Using Virtual Currencies, FIN-2013-
G0001, (Mar. 18, 2013), https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf. FinCEN has prosecuted entities that omit
to register with it as a Money Services Business (``MSB'') or fail
to comply with its regulations aggressively. See, e.g., Release by
Office of Public Affairs, Department of Justice, Ripple Labs Inc.
Resolves Criminal Investigation, available at https://www.justice.gov/opa/pr/ripple-labs-inc-resolves-criminal-investigation; see also Consent to the Assessment of a Civil Money
Penalty, In the Matter of Eric Powers, U.S. Dep't of Treas., No.
2019-01 (Apr. 18, 2019) (enforcement action against a peer-to-peer
cryptocurrency exchanger by FinCEN).
\56\ See 31 CFR part 1022. The effectiveness of AML procedures
was noted by FinCEN Director Kenneth A. Blanco. See Prepared Remarks
of FinCEN Director Kenneth A. Blanco, delivered at the 2018 Chicago-
Kent Block (Legal) Tech Conference, Aug. 09, 2018, available at
https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-2018-chicago-kent-block (reporting
that FinCEN now receives over 1,500 SARs per month describing
suspicious activity involving virtual currency, with reports coming
from both MSBs in the virtual currency industry itself and other
financial institutions).
---------------------------------------------------------------------------

Perform a comprehensive money laundering risk assessment;
Designate a qualified AML compliance officer with
reporting lines to the board of directors;
Implement AML procedures, such as a customer
identification program to identify customers and the source of virtual
currency;
Perform customer due diligence or enhanced due diligence;
Monitor transactions and file suspicious activity reports;
File currency transaction reports and reports of foreign
bank and financial accounts;
Keep records of transactions for inspection by
authorities;
Screen transactions to ensure that they do not violate
sanctions imposed by the Treasury Department;
Perform independent testing of the AML compliance program;
and
Conduct continuing employee education and training.
Further, most states require money transmitters to obtain a license
before offering money transmission services in that state. In order to
obtain such state licenses, a money transmitter must implement an AML
policy and comply with applicable state AML laws.\57\
---------------------------------------------------------------------------

\57\ The Sponsor concludes that the presence of robust AML and
KYC policies and procedures, among other things, should lead to
robust trading data and may inhibit trades placed with the intent of
facilitating manipulation of the Bitcoin Price.
---------------------------------------------------------------------------

Since each Constituent Platform must have AML and KYC procedures in
place, and anyone intending to trade on that platform must complete the
KYC on-boarding process, each of the Constituent Platforms has
information that identifies anyone who makes a trade on that platform,
meaning that no trades are anonymous or ``pseudonymous.'' \58\ As a
result of such AML and KYC procedures, together with the data sharing
agreements that each of the Constituent Platforms enters into with CME,
the CME and the Exchange will be able to ascertain all necessary
information about any suspicious trades on each of the Constituent
Platforms, including the identity of the customer(s) placing such
trades.
---------------------------------------------------------------------------

\58\ The Sponsor notes that all Bitcoin trades are visible
publicly, but because trades are made from and to electronic
wallets, only the electronic ``addresses'' of these wallets are
available publicly. This form of trading has been called
``pseudonymous'', meaning that while the wallet addresses are
discernable, the identity of the wallet owners is not. Because each
Constituent Platform knows the identity of its customers and the
wallet addresses they use to trade on the platform, the Constituent
Platform can ascertain the identity of the customer making each
trade on that platform.
---------------------------------------------------------------------------

Trading in the ETP Will Not Be the Predominant Influence on Prices in
That Market
The second element to determine whether a market or group of
markets is of ``significant size'' requires that it is unlikely that
trading in the ETP would be the predominant influence on prices in that
market. As discussed in more detail below, the Sponsor concludes that,
given the nature of the Trust and the composition of its assets,
trading in the Trust would not be the predominant influence on prices
(i) that make up the CME CF BRR, (ii) in the Bitcoin futures market on
the CME, or (iii) in the USD/BTC spot market on the Constituent
Platforms.
Due to the structure of the Trust, the Trust will only purchase
Bitcoin if (1) required to as a result of the monthly rebalancing of
its assets or (2) if it sells Shares to new investors. Conversely, the
Trust will only sell Bitcoin if required to as a result of the monthly
rebalancing of its assets. This means that trading in the Shares will
not cause the Trust to purchase or sell Bitcoin and will therefore not
influence the price of Bitcoin.
Even though the Trust may purchase Bitcoin from one or more of the
Constituent Platforms \59\ in connection with the issuance of Shares or
a monthly rebalancing of its assets, such purchases will take place
only on limited occasions and will not be the ``predominant influence''
on the market. As noted previously, in no event will the Trust be
trading in Bitcoin futures contracts and therefore the purchase or sale
of Bitcoin by the Trust will not be the predominant influence on prices
in the Bitcoin futures market.
---------------------------------------------------------------------------

\59\ None of the transaction documents relating to the Trust,
nor the Trust's or the Sponsor's internal policies, require the
Trust to purchase Bitcoin from any of the Constituent Platforms.
---------------------------------------------------------------------------

In addition, the Trust's assets consist of (a) Bitcoin and (b) T-
Bills in proportions that seek to closely replicate the Index. The
Sponsor notes that, because Bitcoin is not the sole asset of the Trust,
even if it were possible to influence the price of Bitcoin or the CME
CF BRR through trading shares of the Trust, the influence of such
trades would be muted by the presence of the T-Bills held by the Trust,
and therefore such trading would not be the predominant influence on
Bitcoin prices in such market.
Unique Aspects of the Trust Enhancing the Trust's Resistance to Market
Manipulation and Volatility
According to the registration statement, the Trust was created as a
way for market participants to gain reasonable exposure to Bitcoin
through a vehicle that mitigates the volatility that has historically
been associated with Bitcoin.\60\ According to the

[[Page 31382]]

registration statement, the Trust is designed to utilize a passive
rules-based methodology without the use of derivatives or leverage in
order to avoid complexity and confusion (often associated with those
methods) and to provide for increased transparency to shareholders.
---------------------------------------------------------------------------

\60\ See, e.g., Statement on Cryptocurrencies and Initial Coin
Offerings by Chairman Jay Clayton, Dec. 11, 2017, n. 7; and CFTC
Primer on Virtual Currencies pp. 7 and 19 (noting that trading in
virtual currencies may involve significant speculation and
volatility risk and that the virtual currency marketplace has been
subject to substantial volatility and price swings).
---------------------------------------------------------------------------

According to the Registration Statement, the Trust will have no
assets other than (a) Bitcoin and (b) T-Bills in proportions that seek
to closely replicate the Index, which is calculated and published by
Solactive AG.
T-Bills are among the most liquid and widely traded assets in the
world and are deemed to be risk free. The Sponsor believes that its
selection of T-Bills as a constituent of the Trust will dampen the
volatility of Bitcoin as it relates to the Trust, and consequently the
Shares.
In addition, based on the passive rules-based methodology noted
above, as the CME CF BRR becomes more volatile, the Index, and thus the
Trust, will have less exposure to Bitcoin and more exposure to T-Bills,
and conversely, when the CME CF BRR becomes less volatile, the Index,
and thus the Trust, will have more exposure to Bitcoin and less
exposure to T-Bills. Therefore, the monthly rebalancing of the Trust's
assets will also reduce the effects of Bitcoin volatility on the Trust
and the Shares.
The Sponsor maintains that, in contrast to other Bitcoin-related
ETP Rule 19b-4 filings previously submitted, because Bitcoin is not the
only constituent of the Trust (with the other constituent--T-Bills--
being historically stable and risk-free), any potential manipulation of
the Trust and the Shares would be extremely difficult and therefore
unlikely.
Availability of Information
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the CTA. The IFV will be
available through on-line 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 Index value and price information for T-Bills is available from
major market data vendors. The CME CF BRR value is available on the CME
website and from major market data vendors. The spot price of Bitcoin
also is available on a 24-hour basis from major market data vendors.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Trust.\61\ 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.
---------------------------------------------------------------------------

\61\ See NYSE Arca Rule 7.12-E.
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The Exchange may halt trading during the day in which an
interruption to the dissemination of the IFV or the value of the Index
occurs. If the interruption to the dissemination of the IFV 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.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain
restrictions on Equity Trading Permit (``ETP'') Holders acting as
registered Market Makers in Commodity-Based Trust Shares to facilitate
surveillance. The Exchange represents that, for initial and continued
listing, the Trust will be in compliance with Rule 10A-3 \62\ under the
Act, as provided by NYSE Arca Rule 5.3-E. A minimum of 100,000 Shares
of the Trust will be outstanding at the commencement of trading on the
Exchange.
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\62\ 17 CFR 240.10A-3.
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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.\63\ 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.
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\63\ 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.
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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 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

[[Page 31383]]

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 comprehensive surveillance sharing agreement (``CSSA'').\64\
The Exchange is also able to obtain information regarding trading in
the Shares in connection with such ETP Holders' proprietary or customer
trades which they effect through ETP Holders on any relevant market.
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\64\ 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.
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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, (b) limitations on
portfolio holdings or reference assets, 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 IFV will not be calculated or publicly disseminated; (2) the
procedures for purchases and redemptions of Shares; (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 IFV 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; and (7) trading information.
Prior to the commencement of trading, the Exchange will inform its
ETP Holders of the suitability requirements of NYSE Arca Rule 9.2-E(a)
in an Information Bulletin. Specifically, ETP Holders will be reminded
in the Information Bulletin that, in recommending transactions in the
Shares, they must have a reasonable basis to believe that (1) the
recommendation is suitable for a customer given reasonable inquiry
concerning the customer's investment objectives, financial situation,
needs, and any other information known by such ETP Holder, and (2) the
customer can evaluate the special characteristics, and is able to bear
the financial risks, of an investment in the Shares. In connection with
the suitability obligation, the Information Bulletin will also provide
that ETP Holders must make reasonable efforts to obtain the following
information: (1) The customer's financial status; (2) the customer's
tax status; (3) the customer's investment objectives; and (4) such
other information used or considered to be reasonable by such ETP
Holder or registered representative in making recommendations to the
customer.
In addition, the Information Bulletin will advise ETP Holders,
prior to the commencement of trading, of the prospectus delivery
requirements applicable to the Trust. 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 [sic]
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \65\ 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.
---------------------------------------------------------------------------

\65\ 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.
Investing in the Trust will provide investors with exposure to
Bitcoin in a manner that is efficient and convenient, while also
reducing the volatility typically associated with Bitcoin. The Trust
uses the CME CF BRR to determine the value of its Bitcoin assets, its
NAV and the ratio of Bitcoin to T-Bills held by the Trust. While
Bitcoin is listed and traded on a number of markets and platforms, the
CME CF BRR exclusively utilizes its Constituent Platforms to determine
the value of the CME CF BRR. Therefore, use of the CME CF BRR would
mitigate the effects of potential manipulation of the Bitcoin market.
Additionally, the capital necessary to maintain a significant presence
on any Constituent Platform would make manipulation of the CME CF BRR
unlikely. Bitcoin trades in a well-arbitraged and distributed market.
The linkage between the Bitcoin markets and the presence of
arbitrageurs in those markets means that the manipulation of the price
of Bitcoin on any Constituent Platform would likely require overcoming
the liquidity supply of such arbitrageurs who are potentially
eliminating any cross-market pricing differences.
In addition, 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 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 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 IFV will be
available through on-line information services. In addition, the
Trust's website will display the applicable end of day

[[Page 31384]]

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 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 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.
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 and of the
suitability requirements of NYSE Arca Rule 9.2-E(a). The Information
Bulletin will advise ETP Holders, prior to the commencement of trading,
of the prospectus delivery requirements applicable to the Trust. 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 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 Commodity-Based Trust Share based in part 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 in part on the price of
Bitcoin and that will enhance competition among market participants, to
the benefit of investors and the marketplace.

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. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

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:

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-2019-39 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-2019-39. 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-2019-39, and should be
submitted on or before July 22, 2019.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\66\
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\66\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-13925 Filed 6-28-19; 8:45 am]
BILLING CODE 8011-01-P

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