Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E, 28646-28662 [2021-11172]
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Federal Register / Vol. 86, No. 101 / Thursday, May 27, 2021 / Notices
reimbursable basis. The assessments are
authorized by various statutes and
regulations: Section 4702 of Title 5,
U.S.C; E.O. 12862; E.O. 13715; Section
1128 of the National Defense
Authorization Act for Fiscal Year 2004,
Public Law 108–136; 5 U.S.C. 1101 note,
1103(a)(5), 1104, 1302, 3301, 3302,
4702, 7701 note; E.O. 13197, 66 FR
7853, 3 CFR 748 (2002); E.O. 10577, 12
FR 1259, 3 CFR, 1954–1958 Comp., p.
218; and Section 4703 of Title 5, United
States Code.
This collection request includes
surveys we currently use and plan to
use during the next three years to
measure agency performance, climate,
engagement, and leadership
effectiveness. OMB No. 3206–0252
covers a broad range of surveys all
focused on improving organizational
performance. Non-Federal respondents
will almost never receive more than one
of these surveys. All of these surveys
consist of Likert-type, mark-one, and
mark-all-that-apply items, and may
include a small number of open-ended
comment items. Organizational
Assessment Surveys (OAS) typically
include a customized set of 50–150
standard items pulled from an item
bank of nearly 500 items and a small set
of 5–10 custom items developed to meet
the agency’s specific needs. OPM’s
Human Resources Strategy and
Evaluation Solutions administers a
supplemental OPM Federal Employee
Viewpoint Survey (Supplemental OPM
FEVS), a type of organizational
assessment survey, to employee groups
not covered by the official OPM FEVS
administration. Exit Surveys consist of
approximately 100 items that assess
reasons why employees decided to leave
their organization. Customization is
possible. The New Leaders Onboarding
Assessment (NLOA) is a combined
assessment consisting of approximately
100 items, including items measuring
organizational climate, employee
engagement, and leadership. New
Employee Surveys consist of
approximately 100 items that assess
satisfaction with the hiring, orientation,
and socialization of new employees.
Training Needs Assessment Surveys
consist of approximately 100 items that
assess an agency’s climate for training
and employees’ training preferences.
Program Evaluation surveys evaluate the
effectiveness of government initiatives,
programs, and offices. Program
Evaluation surveys are always
customized to assess specific program
elements. Program Evaluation surveys
may contain from 20 to 200 items, with
an average of approximately 100 items.
The surveys included under OMB No.
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3206–0252 are almost always
administered electronically.
the Exchange, and at the Commission’s
Public Reference Room.
Analysis
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.
Agency: Human Resources Strategy
and Evaluation Solutions, Office of
Personnel Management.
Title: Organizational Surveys.
OMB: 3206–0252.
Frequency: On occasion.
Affected Public: Government
contractors and individuals.
Number of Respondents:
approximately 78,780.
Estimated Time per Respondent:
10.62 minutes.
Total Burden Hours: 13,944 hours.
Office of Personnel Management.
Alexys Stanley,
Director, Office of Privacy and Information
Management.
[FR Doc. 2021–11177 Filed 5–26–21; 8:45 am]
BILLING CODE 6325–43–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91962; File No. SR–
NYSEArca–2021–37]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change To List and Trade Shares
of the First Trust SkyBridge Bitcoin
ETF Trust Under NYSE Arca Rule
8.201–E
May 21, 2021.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on May 6,
2021, 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, II, and
III below, which Items have been
prepared by the self-regulatory
organization. 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 to list and
trade shares of the following under
NYSE Arca Rule 8.201–E: First Trust
SkyBridge Bitcoin ETF Trust (the
‘‘Trust’’). The proposed change is
available on the Exchange’s website at
www.nyse.com, at the principal office of
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Under NYSE Arca Rule 8.201–E, the
Exchange may propose to list and/or
trade pursuant to unlisted trading
privileges ‘‘Commodity-Based Trust
Shares.’’ 4 The Exchange proposes to list
and trade shares of the Trust (the
‘‘Shares’’) pursuant to NYSE Arca Rule
8.201–E.5
The sponsor of the Trust is First Trust
Advisors L.P. (the ‘‘Sponsor’’ or
‘‘Advisor’’). The sub-adviser for the trust
is SkyBridge Capital II, LLC (the ‘‘SubAdvisor’’). The trustee for the Trust is
Delaware Trust Company (the
‘‘Trustee’’). The Bank of New York
Mellon is the transfer agent of the Trust
(in such capacity, the ‘‘Transfer Agent’’)
and the administrator of the Trust (in
such capacity, the ‘‘Administrator’’).
The bitcoin custodian for the Trust is
NYDIG Trust Company LLC (the
‘‘Bitcoin Custodian’’).
The Trust is a Delaware statutory
trust, organized on March 12, 2021, that
operates pursuant to a trust agreement
between the Advisor and the Trustee
(the ‘‘Trust Agreement’’). The Trust has
no fixed termination date.
Background
As discussed in further detail below,6
bitcoin is a digital asset based on the
decentralized, open source protocol of
4 Commodity-Based Trust Shares are securities
issued by a trust that represent investors’ discrete
identifiable and undivided beneficial ownership
interest in the commodities deposited into the
Trust.
5 On March 19, 2021, the Trust filed a registration
statement on Form S–1 under the Securities Act of
1933 (15 U.S.C. 77a) (the ‘‘Securities Act’’) (File No.
333–254529) and amended such registration
statement on May 6, 2021 (the ‘‘Registration
Statement’’).
6 See ‘‘The Bitcoin Industry and Market,’’ infra.
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the peer-to-peer computer network
launched in 2009 that governs the
creation, movement, and ownership of
bitcoin and hosts the public ledger, or
‘‘blockchain,’’ on which all bitcoin
transactions are recorded (the ‘‘Bitcoin
Network’’ or ‘‘Bitcoin’’). The
decentralized nature of the Bitcoin
Network allows parties to transact
directly with one another based on
cryptographic proof instead of relying
on a trusted third party. The protocol
also lays out the rate of issuance of new
bitcoin within the Bitcoin Network, a
rate that is reduced by half
approximately every four years with an
eventual hard cap of 21 million. It is
generally understood that the
combination of these two features—a
systemic hard cap of 21 million bitcoin
and the ability to transact trustlessly
with anyone connected to the Bitcoin
Network—gives bitcoin its value.7
The first rule filing proposing to list
an exchange-traded product to provide
exposure to bitcoin in the U.S. was
submitted by the Cboe BZX Exchange,
Inc. on June 30, 2016.8 At that time,
blockchain technology, and digital
assets that utilized it, were relatively
new to the broader public. The market
cap of all bitcoin in existence at that
time was approximately $10 billion. No
registered offering of digital asset
securities or shares in an investment
vehicle with exposure to bitcoin or any
other cryptocurrency had yet been
conducted, and the regulated
infrastructure for conducting a digital
asset securities offering had not begun
to develop.9 Similarly, regulated U.S.
bitcoin futures contracts did not exist.
The Commodity Futures Trading
Commission (the ‘‘CFTC’’) had
determined that bitcoin is a
commodity,10 but had not engaged in
7 For additional information about bitcoin and the
Bitcoin Network, see https://bitcoin.org/en/getting
started.
8 See 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, Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579 (August 1, 2018) (the
‘‘Winklevoss II Order’’). This proposal was
subsequently disapproved by the Commission. See
id.
9 Digital assets that are securities under U.S. law
are referred to throughout this proposal as ‘‘digital
asset securities.’’ All other digital assets, including
bitcoin, are referred to interchangeably as
‘‘cryptocurrencies’’ or ‘‘virtual currencies.’’ The
term ‘‘digital assets’’ refers to all digital assets,
including both digital asset securities and
cryptocurrencies, together.
10 See ‘‘In the Matter of Coinflip, Inc.’’
(‘‘Coinflip’’) (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), in which the
CFTC stated: ‘‘Section 1a(9) of the CEA defines
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significant enforcement actions in the
space. The New York Department of
Financial Services (‘‘NYDFS’’) adopted
its final BitLicense regulatory
framework in 2015, but had only
approved four entities to engage in
activities relating to virtual currencies
(whether through granting a BitLicense
or a limited-purpose trust charter) as of
June 30, 2016.11 While the first over-thecounter bitcoin fund launched in 2013,
public trading was limited and the fund
had only $60 million in assets.12 There
were very few, if any, traditional
financial institutions engaged in the
space, whether through investment or
providing services to digital asset
companies. In January 2018, the Staff of
the Commission noted in a letter to the
Investment Company Institute and
SIFMA that it was not aware, at that
time, of a single custodian providing
fund custodial services for digital
assets.13
As of the first quarter of 2021, the
digital assets financial ecosystem,
including bitcoin, has progressed
significantly. The development of a
regulated market for digital asset
securities has significantly evolved,
with market participants having
conducted registered public offerings of
both digital asset securities 14 and shares
in investment vehicles holding bitcoin
futures.15 Additionally, licensed and
regulated service providers have
‘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.’’
11 A list of virtual currency businesses that are
entities regulated by the NYDFS is available on the
NYDFS website. See https://www.dfs.ny.gov/apps_
and_licensing/virtual_currency_businesses/
regulated_entities.
12 See Bitcoin Investment Trust Form S–1, dated
May 27, 2016, available at: https://www.sec.gov/
Archives/edgar/data/1588489/
000095012316017801/filename1.htm (data as of
March 31, 2016 according to publicly available
filings).
13 See Letter from Dalia Blass, Director, Division
of Investment Management, U.S. Securities and
Exchange Commission to Paul Schott Stevens,
President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management
Group—Head, Securities Industry and Financial
Markets Association (January 18, 2018), available
at: https://www.sec.gov/divisions/investment/
noaction/2018/cryptocurrency-011818.htm.
14 See Prospectus Supplement filed pursuant to
Rule 424(b)(1) for INX Tokens (Registration No.
333–233363), available at: https://www.sec.gov/
Archives/edgar/data/1725882/
000121390020023202/ea125858-424b1_
inxlimited.htm.
15 See Prospectus filed by Stone Ridge Trust VI
on behalf of NYDIG Bitcoin Strategy Fund
Registration, available at: https://www.sec.gov/
Archives/edgar/data/1764894/
000119312519309942/d693146d497.htm.
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28647
emerged to provide fund custodial
services for digital assets, among other
services. For example, in December
2020, the Commission adopted a
conditional no-action position
permitting certain special purpose
broker-dealers to custody digital asset
securities under Rule 15c3–3 under the
Exchange Act; 16 in September 2020, the
Staff of the Commission released a noaction letter permitting certain brokerdealers to operate a non-custodial
Alternative Trading System (‘‘ATS’’) for
digital asset securities, subject to
specified conditions; 17 in October 2019,
the Staff of the Commission granted
temporary relief from the clearing
agency registration requirement to an
entity seeking to establish a securities
clearance and settlement system based
on distributed ledger technology; 18 and
multiple transfer agents who provide
services for digital asset securities have
registered with the Commission.19
Beyond the Commission’s purview,
the regulatory landscape has also
changed significantly since 2016, and
cryptocurrency markets have grown and
evolved as well. The market for bitcoin
is approximately 100 times larger,
having recently reached a market cap of
over $1 trillion. As of February 27, 2021,
bitcoin’s market cap is greater than
companies such as Facebook, Inc.,
Berkshire Hathaway Inc., and JP Morgan
Chase & Co. The number of verified
users at Coinbase, the largest U.S.-based
bitcoin exchange, has grown to over 56
million.20 CFTC-regulated bitcoin
futures (‘‘Bitcoin Futures’’) represented
approximately $28 billion in notional
trading volume on the Chicago
16 See Securities Exchange Act Release No. 90788,
86 FR 11627 (February 26, 2021) (File Number
S7–25–20) (Custody of Digital Asset Securities by
Special Purpose Broker-Dealers).
17 See Letter from Elizabeth Baird, Deputy
Director, Division of Trading and Markets, U.S.
Securities and Exchange Commission to Kris
Dailey, Vice President, Risk Oversight &
Operational Regulation, Financial Industry
Regulatory Authority (September 25, 2020),
available at: https://www.sec.gov/divisions/
marketreg/mr-noaction/2020/finra-ats-role-insettlement-of-digital-asset-security-trades09252020.pdf.
18 See Letter from Jeffrey S. Mooney, Associate
Director, Division of Trading and Markets, U.S.
Securities and Exchange Commission to Charles G.
Cascarilla & Daniel M. Burstein, Paxos Trust
Company, LLC (October 28, 2019), available at:
https://www.sec.gov/divisions/marketreg/mrnoaction/2019/paxos-trust-company-10281917a.pdf.
19 See, e.g., Form TA–1/A filed by Tokensoft
Transfer Agent LLC (CIK: 0001794142) on January
8, 2021, available at: https://www.sec.gov/Archives/
edgar/data/1794142/000179414219000001/
xslFTA1X01/primary_doc.xml.
20 See, e.g., ‘‘Riding Bitcoin Surge, Coinbase
Active Users Grew by 117% in Q1 2021; Revenue
Tops $1.8B’’ (April 6, 2021), available at: https://
www.coindesk.com/coinbase-q1-earnings-reportmonthly-active-users.
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Mercantile Exchange (the ‘‘CME’’) in
December 2020 compared to $737
million, $1.4 billion, and $3.9 billion in
total trading in December 2017,
December 2018, and December 2019,
respectively. Bitcoin Futures traded
over $1.2 billion per day in December
2020 and represented $1.6 billion in
open interest compared to $115 million
in December 2019.21 The CFTC has
exercised its regulatory jurisdiction in
bringing a number of enforcement
actions related to bitcoin and against
trading platforms that offer
cryptocurrency trading.22 The U.S.
Office of the Comptroller of the
Currency (the ‘‘OCC’’) has made clear
that federally-chartered banks are able
to provide custody services for
cryptocurrencies and other digital
assets.23 The OCC recently granted
conditional approval of two charter
conversions by state-chartered trust
companies to national banks, both of
which provide cryptocurrency custody
services.24 NYDFS has granted no fewer
than twenty-five BitLicenses, including
to established public payment
companies like PayPal Holdings, Inc.
and Square, Inc., and limited purpose
trust charters to entities providing
cryptocurrency custody services. The
U.S. Treasury Financial Crimes
Enforcement Network (‘‘FinCEN’’) has
released extensive guidance regarding
the applicability of the Bank Secrecy
Act (‘‘BSA’’) and implementing
regulations to virtual currency
businesses,25 and has proposed rules
21 All statistics and charts included in this
proposal with respect to the CME are sourced from
https://www.cmegroup.com/trading/bitcoinfutures.html. In addition, as further discussed
below, the Sponsor believes the CME represents a
regulated market of significant size for purposes of
addressing the Commission’s concerns about
potential manipulation of the bitcoin market.
22 The CFTC’s annual report for Fiscal Year 2020
(which ended on September 30, 2020) noted that
the CFTC ‘‘continued to aggressively prosecute
misconduct involving digital assets that fit within
the CEA’s definition of commodity’’ and ‘‘brought
a record setting seven cases involving digital
assets.’’ See CFTC FY2020 Division of Enforcement
Annual Report, available at: https://www.cftc.gov/
media/5321/DOE_FY2020_AnnualReport_120120/
download. Additionally, the CFTC filed on October
1, 2020, a civil enforcement action against the
owner/operators of the BitMEX trading platform,
which was one of the largest bitcoin derivative
exchanges. See CFTC Release No. 8270–20 (October
1, 2020), available at: https://www.cftc.gov/
PressRoom/PressReleases/8270-20.
23 See OCC News Release 2021–2 (January 4,
2021), available at: https://www.occ.gov/newsissuances/news-releases/2021/nr-occ-2021-2.html.
24 See OCC News Release 2021–6 (January 13,
2021), available at: https://www.occ.gov/newsissuances/news-releases/2021/nr-occ-2021-6.html
and OCC News Release 2021–19 (February 5, 2021),
available at: https://www.occ.gov/news-issuances/
news-releases/2021/nr-occ-2021-19.html.
25 See FinCEN Guidance FIN–2019–G001 (May 9,
2019) (Application of FinCEN’s Regulations to
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imposing requirements on entities
subject to the BSA that are specific to
the technological context of virtual
currencies.26 In addition, the Treasury’s
Office of Foreign Assets Control
(‘‘OFAC’’) has brought enforcement
actions over apparent violations of the
sanctions laws in connection with the
provision of wallet management
services for digital assets.27
In addition to the regulatory
developments laid out above, more
traditional financial market participants
appear to be embracing cryptocurrency:
Large insurance companies,28
investment banks,29 asset managers,30
credit card companies,31 university
endowments,32 pension funds,33 and
Certain Business Models Involving Convertible
Virtual Currencies), available at: https://
www.fincen.gov/sites/default/files/2019-05/FinCEN
%20Guidance%20CVC%20FINAL%20508.pdf.
26 See U.S. Department of the Treasury Press
Release: ‘‘The Financial Crimes Enforcement
Network Proposes Rule Aimed at Closing AntiMoney Laundering Regulatory Gaps for Certain
Convertible Virtual Currency and Digital Asset
Transactions’’ (December 18, 2020), available at:
https://home.treasury.gov/news/press-releases/
sm1216.
27 See U.S. Department of the Treasury
Enforcement Release: ‘‘OFAC Enters Into $98,830
Settlement with BitGo, Inc. for Apparent Violations
of Multiple Sanctions Programs Related to Digital
Currency Transactions’’ (December 30, 2020),
available at: https://home.treasury.gov/system/files/
126/20201230_bitgo.pdf.
28 On December 10, 2020, Massachusetts Mutual
Life Insurance Company (MassMutual) announced
that it had purchased $100 million in bitcoin for its
general investment account. See MassMutual Press
Release ‘‘Institutional Bitcoin provider NYDIG
announces minority stake purchase by
MassMutual’’ (December 10, 2020), available at:
https://www.massmutual.com/about-us/news-andpress-releases/press-releases/2020/12/institutionalbitcoin-provider-nydig-announces- minority-stakepurchase-by-massmutual.
29 See, e.g., ‘‘Morgan Stanley to Offer Rich Clients
Access to Bitcoin Funds’’ (March 17, 2021)
available at: https://www.bloomberg.com/news/
articles/2021-03-17/morgan-stanley-to-offer-richclients-access-to-bitcoin-funds.
30 See, e.g., ‘‘BlackRock’s Rick Rieder says the
world’s largest asset manager has ‘started to dabble’
in bitcoin’’ (February 17, 2021), available at:
https://www.cnbc.com/2021/02/17/blackrock-hasstarted-to-dabble-in-bitcoin-says-rick-rieder.html
and ‘‘Guggenheim’s Scott Minerd Says Bitcoin
Should Be Worth $400,000’’ (December 16, 2020),
available at: https://www.bloomberg.com/news/
articles/2020-12-16/guggenheim-s-scott- minerdsays-bitcoin-should-be-worth-400-000.
31 See, e.g., ‘‘Visa Moves to Allow Payment
Settlements Using Cryptocurrency’’ (March 29,
2021), available at: https://www.reuters.com/
business/autos-transportation/exclusive-visamoves-allow-payment-settlements-usingcryptocurrency-2021-03-29/.
32 See, e.g., ‘‘Harvard and Yale Endowments
Among Those Reportedly Buying Crypto’’ (January
25, 2021), available at: https://
www.bloomberg.com/news/articles/2021-01-26/
harvard-and-yale- endowments-among-thosereportedly-buying-crypto.
33 See, e.g., ‘‘Virginia Police Department Reveals
Why its Pension Fund is Betting on Bitcoin’’
(February 14, 2019), available at: https://
finance.yahoo.com/news/virginia-policedepartment-reveals-why-194558505.html.
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even historically bitcoin skeptical fund
managers 34 are allocating to bitcoin.
The largest over-the-counter bitcoin
fund previously filed a Form 10
registration statement, which the Staff of
the Commission reviewed and which
took effect automatically, and is now a
reporting company.35 Established
companies like Tesla, Inc.,36
MicroStrategy Incorporated,37 and
Square, Inc.,38 among others, have
recently announced substantial
investments in bitcoin in amounts as
large as $1.5 billion (Tesla) and $425
million (MicroStrategy).
Despite these developments, access
for U.S. retail investors to gain exposure
to bitcoin via a transparent and
regulated exchange-traded vehicle
remains limited. As investors and
advisors increasingly utilize exchangetraded product (‘‘ETP’’) to manage
diversified portfolios (including
equities, fixed income securities,
commodities, and currencies) quickly,
easily, relatively inexpensively, taxefficiently, and without having to hold
directly any of the underlying assets,
options for bitcoin exposure for U.S.
investors remain limited to: (i) Investing
in over-the-counter bitcoin funds (‘‘OTC
Bitcoin Funds’’) that are subject to high
premium/discount volatility (and high
management fees) to the advantage of
more sophisticated investors that are
able to purchase shares at net asset
value (‘‘NAV’’) directly with the issuing
trust; (ii) facing the technical risk,
complexity, and generally high fees
associated with buying and storing
bitcoin directly; or (iii) purchasing
shares of operating companies that they
believe will provide proxy exposure to
34 See, e.g., ‘‘Bridgewater: Our Thoughts on
Bitcoin’’ (January 28, 2021) available at: https://
www.bridgewater.com/research-and-insights/ourthoughts-on-bitcoin and ‘‘Paul Tudor Jones says he
likes bitcoin even more now, rally still in the ‘first
inning’’’ (October 22, 2020), available at: https://
www.cnbc.com/2020/10/22/-paul-tudor-jones-sayshe-likes-bitcoin-even-more-now-rally-still-in-thefirst-inning.html.
35 See Letter from Division of Corporation
Finance, Office of Real Estate & Construction to
Barry E. Silbert, Chief Executive Officer, Grayscale
Bitcoin Trust (January 31, 2020), available at:
https://www.sec.gov/Archives/edgar/data/1588489/
000000000020000953/filename1.pdf.
36 See Form 10–K submitted by Tesla, Inc. for the
fiscal year ended December 31, 2020 at 23: https://
www.sec.gov/ix?doc=/Archives/edgar/data/
1318605/000156459021004599/tsla-10k_
20201231.htm.
37 See Form 10–Q submitted by MicroStrategy
Incorporated for the quarterly period ended
September 30, 2020 at 8: https://www.sec.gov/
ix?doc=/Archives/edgar/data/1050446/
000156459020047995/mstr-10q_20200930.htm.
38 See Form 10–Q submitted by Square, Inc. for
the quarterly period ended September 30, 2020 at
51: https://www.sec.gov/ix?doc=/Archives/edgar/
data/1512673/000151267320000012/sq20200930.htm.
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bitcoin with limited disclosure about
the associated risks. Meanwhile,
investors in many other countries,
including Canada, are able to use more
traditional exchange listed and traded
products to gain exposure to bitcoin,
disadvantaging U.S. investors and
leaving them with riskier, more
expensive, and less regulated means of
getting bitcoin exposure.39
For example, the Purpose Bitcoin
ETF, a retail physical bitcoin ETP
recently launched in Canada, reportedly
reached $421.8 million in assets under
management (‘‘AUM’’) in two days, and
has achieved $993 million in assets as
of April 14, 2021, demonstrating the
demand for a North American market
listed bitcoin ETP. The Sponsor believes
that the demand for the Purpose Bitcoin
ETF is driven primarily by investors’
desire to have a regulated and accessible
means of exposure to bitcoin. The
Purpose Bitcoin ETF also offers a class
of units that is U.S. dollar denominated,
which could appeal to U.S. investors.
Without an approved bitcoin ETP in the
U.S. as a viable alternative, the Sponsor
believes U.S. investors will seek to
purchase these shares in order to get
access to bitcoin exposure, leaving them
without the protections of U.S.
securities laws. Given the separate
regulatory regime and the potential
difficulties associated with any
international litigation, such an
arrangement would create more risk
exposure for U.S. investors than they
would otherwise have with a U.S.
exchange listed ETP. With the addition
of more bitcoin ETPs in non-U.S.
jurisdictions expected to grow, the
Sponsor anticipates that such risks will
only continue to grow.
In addition, several funds registered
under the Investment Company Act of
1940 (the ‘‘1940 Act’’) have effective
registration statements that contemplate
bitcoin exposure through a variety of
means, including through investments
in bitcoin futures contacts 40 and
39 Securities regulators in a number of other
countries have either approved or otherwise
allowed the listing and trading of bitcoin ETPs.
Specifically, these funds (with their respective
approximate AUMs as of April 14, 2021) include
the Purpose Bitcoin ETF ($993,000,000), VanEck
Vectors Bitcoin ETN ($209,000,000), WisdomTree
Bitcoin ETP ($407,000,000), Bitcoin Tracker One
($1,380,000,000), BTCetc bitcoin ETP
($1,410,000,000), 21Shares Bitcoin ETP
($362,000,000), 21Shares Bitcoin Suisse ETP
($30,000,000), CoinShares Physical Bitcoin ETP
($396,000,000).
40 See, e.g., Stone Ridge Trust VI (File No. 333–
234055); BlackRock Global Allocation Fund, Inc.
(File No. 33–22462); and BlackRock Funds V (File
No. 333–224371).
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through OTC Bitcoin Funds.41 As of the
date of this filing, it is anticipated that
other 1940 Act funds will soon begin to
pursue bitcoin through other means,
including through put options on
bitcoin futures contracts and
investments in privately offered pooled
investment vehicles that invest in
bitcoin.42 In previous statements, the
Staff of the Commission has
acknowledged how such funds can
satisfy their concerns regarding custody,
valuation, and manipulation.43 The
funds that have already invested in
bitcoin instruments have no reported
issues regarding custody, valuation, or
manipulation of the instruments held by
these funds. While these funds do offer
investors some means of exposure to
bitcoin, the current offerings fall short of
giving investors an accessible, regulated
product that provides concentrated
exposure to bitcoin.
OTC Bitcoin Funds and Investor
Protection
Recently, U.S. investor exposure to
bitcoin through OTC Bitcoin Funds has
grown into the tens of billions of
dollars. With that growth, so too has
grown the potential risk to U.S.
investors. As described below, premium
and discount volatility, high fees,
insufficient disclosures, and technical
hurdles are exposing U.S. investors to
risks that could potentially be
eliminated through access to a bitcoin
ETP. The Sponsor understands the
Commission’s previous focus on
potential manipulation of a bitcoin ETP
in prior disapproval orders, but believes
that such concerns have been
sufficiently mitigated and may be
outweighed by the growing and
quantifiable investor protection
concerns related to OTC Bitcoin Funds.
Accordingly, the Sponsor believes that
this proposal (and other comparable
proposals) represents an opportunity for
U.S. investors to gain exposure to
bitcoin in a regulated and transparent
exchange-traded vehicle that limits risks
by: (i) Reducing premium and discount
volatility; (ii) reducing management fees
through meaningful competition; (iii)
reducing risks associated with investing
in operating companies that are
41 See, e.g., Amplify Transformational Data
Sharing ETF (File No. 333–207937); and ARK
Innovation ETF (File No. 333–191019).
42 See Stone Ridge Trust, Post-Effective
Amendment No. 74 to Registration Statement on
Form N–1A (File No. 333–184477), available at:
https://www.sec.gov/Archives/edgar/data/1559992/
000119312521072856/d129263d485apos.htm.
43 See Dalia Blass, ‘‘Keynote Address—2019 ICI
Securities Law Developments Conference’’
(December 3, 2019), available at: https://
www.sec.gov/news/speech/blass-keynote-address2019-ici-securities-law-developments-conference.
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imperfect proxies for bitcoin exposure;
and (iv) providing an alternative to
custodying spot bitcoin.
OTC Bitcoin Funds and Premium/
Discount Volatility
OTC Bitcoin Funds are generally
designed to provide exposure to bitcoin
in a manner similar to the Shares.
However, unlike the Shares, OTC
Bitcoin Funds are unable to freely offer
creation and redemption in a way that
incentivizes market participants to keep
their shares trading in line with their
NAV 44 and, as a result, shares of OTC
Bitcoin Funds frequently trade at a price
that is out of line with the value of their
assets held. Historically, OTC Bitcoin
Funds have traded at a significant
premium to NAV.45
Trading at a premium or a discount is
not unique to OTC Bitcoin Funds and is
not in itself problematic, but the size of
such premiums/discounts and volatility
thereof highlight the key differences in
operations and market structure of OTC
Bitcoin Funds as compared to ETPs.
Combined with the significant increase
in AUM for OTC Bitcoin Funds over the
past year, the size and volatility of
premiums and discounts for OTC
Bitcoin Funds have given rise to
significant and quantifiable investor
protection issues, as further described
below. In fact, the largest OTC Bitcoin
Fund has grown to $35.0 billion in
AUM as of February 19, 2021 46 and has
historically traded at a premium of
between roughly five and forty percent,
44 Because OTC Bitcoin Funds are not listed on
an exchange, they are also not subject to the same
transparency and regulatory oversight by a listing
exchange as the Shares would be. In the case of the
Trust, the existence of a surveillance-sharing
agreement between the Exchange and the Bitcoin
Futures market results in increased investor
protections as compared to OTC Bitcoin Funds.
45 The inability to trade in line with NAV may at
some point result in OTC Bitcoin Funds trading at
a discount to their NAV, which has occurred more
recently with respect to one prominent OTC Bitcoin
Fund. While that has not historically been the case,
and it is not clear whether such discounts will
continue, such a prolonged, significant discount
scenario would give rise to nearly identical
potential issues related to trading at a premium.
46 Compare to an AUM of approximately $2.6
billion on February 26, 2020, the date on which the
Commission issued the most recent disapproval
order for a bitcoin ETP. See Order Disapproving a
Proposed Rule Change, as Modified by Amendment
No. 1, 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, Securities Exchange Act Release No. 88284
(February 26, 2020), 85 FR 12595 (March 3, 2020)
(SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix
Order’’). While the price of one bitcoin has
increased approximately 400% in the intervening
period, the total AUM has increased by
approximately 1240%, indicating that the increase
in AUM is attributable to more than just price
appreciation in bitcoin.
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though it has seen premiums at times
above one hundred percent.47 Recently,
however, it has traded at a discount. As
of March 24, 2021, the discount was
approximately 14%,48 representing
around $4.9 billion less in market value
than the bitcoin actually held by the
fund. If premium/discount numbers
move back to the middle of its historical
range to a 20% premium (which
historically could occur at any time and
overnight), it would represent a swing of
approximately $11.9 billion in value
unrelated to the value of bitcoin held by
the fund and if the premium returns to
the upper end of its typical range, that
number increases to $18.9 billion. These
numbers are only associated with a
single OTC Bitcoin Fund—as more and
more OTC Bitcoin Funds come to
market and more investor assets flood
into them to get access to bitcoin
exposure, the potential dollars at risk
will only increase.
The risks associated with volatile
premiums/discounts for OTC Bitcoin
Funds raise significant investor
protection issues in several ways. First,
investors may be buying shares of a
fund for a price that is not reflective of
the per share value of the fund’s
underlying assets. Even operating
within the normal premium range, it is
possible for an investor to buy shares of
an OTC Bitcoin Fund only to have those
shares quickly lose 10% or more in
dollar value without any movement of
the price of bitcoin. That is to say—the
price of bitcoin could have stayed
exactly the same from market close on
one day to market open the next, yet the
value of the shares held by the investor
decreased only because of the
fluctuation of the premium/discount. As
more investment vehicles, including
mutual funds and ETFs, seek to gain
exposure to bitcoin, the easiest option
for a buy and hold strategy is often an
OTC Bitcoin Fund, meaning that even
investors that do not directly buy OTC
Bitcoin Funds can be disadvantaged by
extreme premiums (or discounts) and
premium volatility.
The second issue is related to the first
and explains how the premium in OTC
Bitcoin Funds essentially creates a
transfer of value from retail investors to
more sophisticated investors. Generally
speaking, only accredited investors are
able to purchase shares from the issuing
47 See ‘‘Traders Piling Into Overvalued Crypto
Funds Risk a Painful Exit’’ (February 4, 2021),
available at: https://www.bloomberg.com/news/
articles/2021-02-04/bitcoin-one-big-risk-wheninvesting-in-crypto-funds.
48 This discount is compared to another OTC
Bitcoin Product which had a premium of over 60%
on the same day, with a premium of over 200% a
few days earlier.
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fund, which means that they are able to
purchase shares directly with the fund
at NAV (in exchange for either cash or
bitcoin) without having to pay the
premium or sell into the discount.
While there are often minimum holding
periods for shares required by law, an
investor that is allowed to purchase
directly from the fund is able to hedge
their bitcoin exposure as needed to
satisfy the holding requirements and
collect on the premium or discount
opportunity.
As noted above, the existence of a
premium or discount and the premium/
discount collection opportunity is not
unique to OTC Bitcoin Funds and does
not in itself warrant the approval of an
exchange traded product.49 What makes
this situation unique is that such
significant and persistent premiums and
discounts can exist in a product with
over $35 billion in assets under
management,50 that billions of retail
investor dollars are constantly under
threat of premium/discount volatility,51
and that premium/discount volatility is
generally captured by more
sophisticated investors on a riskless
basis. While the Sponsor appreciates the
Commission’s focus on potential
manipulation of a bitcoin ETP in prior
disapproval orders and believes those
concerns are adequately addressed in
this filing, the Sponsor submits that
current circumstances warrant that the
Commission also consider the direct,
quantifiable investor protection issue in
determining whether to approve this
proposal, particularly when the Trust,
as a bitcoin ETP, is designed to reduce
the likelihood of significant and
prolonged premiums and discounts
with its open-ended nature as well as
the ability of market participants (i.e.,
market makers and authorized
participants) to create and redeem on a
daily basis. Furthermore, the risk of
manipulation of a bitcoin ETP is also
49 For example, similar premiums/discounts and
premium/discount volatility exist for other nonbitcoin cryptocurrency related over-the-counter
funds, but the size and investor interest in those
funds does not give rise to the same investor
protection concerns that exist for OTC Bitcoin
Funds.
50 At $35 billion in AUM, the largest OTC Bitcoin
Fund would be among the top 40 largest out of
roughly 2,400 U.S. listed ETPs.
51 In two recent incidents, the premium dropped
from 28.28% to 12.29% from the close on 3/19/20
to the close on 3/20/20 and from 38.40% to 21.05%
from the close on 5/13/19 to the close on 5/14/19.
Similarly, over the period of 12/21/20 to 1/21/20,
the premium went from 40.18% to 2.79%. While
the price of bitcoin appreciated significantly during
this period and NAV per share increased by
41.25%, the price per share increased by only
3.58%.
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present in and potentially magnified by
OTC Bitcoin Funds.
Spot and Proxy Exposure
Exposure to bitcoin through an ETP
also presents certain advantages for
retail investors compared to buying spot
bitcoin directly. The most notable
advantage is the use of the Bitcoin
Custodian to custody the Trust’s bitcoin
assets. The Sponsor has carefully
selected the Bitcoin Custodian, a thirdparty custodian that carries insurance
covering both hot and cold storage and
is chartered as a limited purpose trust
company under the New York Banking
Law,52 due to its manner of holding the
Trust’s bitcoin. Among other things, the
Bitcoin Custodian will use ‘‘cold’’
(offline) storage to hold private keys and
meet a certain degree of cybersecurity
measures and operational best
practices.53 By contrast, an individual
retail investor holding bitcoin through a
cryptocurrency exchange lacks these
protections. Typically, retail exchanges
hold most, if not all, retail investors’
bitcoin in ‘‘hot’’ (internet-connected)
storage and do not make any
commitments to indemnify retail
investors or to observe any particular
cybersecurity standard. Meanwhile, a
retail investor holding spot bitcoin
directly in a self-hosted wallet may
suffer from inexperience in private key
management (e.g., insufficient password
protection, lost key, etc.), which could
cause them to lose some or all of their
bitcoin holdings. In the Bitcoin
Custodian, the Trust has engaged a
regulated and licensed entity highly
experienced in bitcoin custody, with
dedicated, trained employees and
procedures to manage the private keys
to the Trust’s bitcoin, and which is
52 New York state trust companies are subject to
rigorous oversight similar to other types of entities,
such as nationally chartered banking entities, that
hold customer assets. Like national banks, they
must obtain specific approval of their primary
regulator for the exercise of their fiduciary powers.
Moreover, limited purpose trust companies engaged
in the custody of digital assets are subject to even
more stringent requirements than national banks
which, following initial approval of trust powers,
generally can exercise those powers broadly
without further approval of the OCC. In contrast,
NYDFS requires in their approval orders that
limited purpose trust companies obtain separate
approval for all material changes in business.
53 In addition to enforcing specific regulatory
reporting requirements, NYDFS consistently
exercises its broad authority to examine trust
companies for compliance with law, risk
management and general safety and soundness
considerations, including to assess items such as
the internal controls, client records and segregation
of assets topics that are typically important to the
ability of an entity to act as a qualified custodian.
In this regard, the Bitcoin Custodian is subject to
annual examination, with specific attention to its
internal controls and risk management systems.
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accountable for failures.54 In addition,
retail investors will be able to hold the
Shares in traditional brokerage accounts
which provide SIPC protection if a
brokerage firm fails. Thus, with respect
to custody of the Trust’s bitcoin assets,
the Trust presents advantages from an
investment protection standpoint for
retail investors compared to owning
spot bitcoin directly.
Finally, as described in the
Background section above, a number of
operating companies engaged in
unrelated businesses—such as Tesla (a
car manufacturer) and MicroStrategy (an
enterprise software company)—have
recently announced investments as large
as $1.5 billion in bitcoin.55 Without
access to bitcoin exchange-traded
products, retail investors seeking
investment exposure to bitcoin may end
up purchasing shares in these
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52 New York state trust companies are subject to
rigorous oversight similar to other types of entities,
such as nationally chartered banking entities, that
hold customer assets. Like national banks, they
must obtain specific approval of their primary
regulator for the exercise of their fiduciary powers.
Moreover, limited purpose trust companies engaged
in the custody of digital assets are subject to even
more stringent requirements than national banks
which, following initial approval of trust powers,
generally can exercise those powers broadly
without further approval of the OCC. In contrast,
NYDFS requires in their approval orders that
limited purpose trust companies obtain separate
approval for all material changes in business.
53 In addition to enforcing specific regulatory
reporting requirements, NYDFS consistently
exercises its broad authority to examine trust
companies for compliance with law, risk
management and general safety and soundness
considerations, including to assess items such as
the internal controls, client records and segregation
of assets topics that are typically important to the
ability of an entity to act as a qualified custodian.
In this regard, the Bitcoin Custodian is subject to
annual examination, with specific attention to its
internal controls and risk management systems.
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companies in order to gain the exposure
to bitcoin that they seek.56 In fact,
mainstream financial news networks
have written a number of articles
providing investors with guidance for
obtaining bitcoin exposure through
publicly traded companies (such as
MicroStrategy, Tesla, and bitcoin
mining companies, among others)
instead of dealing with the
complications associated with buying
spot bitcoin in the absence of a bitcoin
ETP.57 Such operating companies,
however, are imperfect bitcoin proxies
and provide investors with partial
bitcoin exposure paired with a host of
additional risks associated with
whichever operating company they
decide to purchase. Additionally, the
disclosures provided by the
aforementioned operating companies
with respect to risks relating to their
bitcoin holdings are generally
substantially smaller than the
registration statement of a bitcoin ETP,
including the Registration Statement,
typically amounting to a few sentences
of narrative description and a handful of
risk factors.58 In other words, investors
54 The Sponsor notes that the Sub-Advisor of the
Trust advises a 1940 Act-registered fund that
invests substantially in a private bitcoin fund to
which NYDIG Trust Company LLC serves as bitcoin
custodian. Pursuant to that investment, the SubAdvisor has previously conducted substantial due
diligence on the capabilities of the Bitcoin
Custodian. See SkyBridge Multi-Adviser Hedge
Fund Portfolios LLC (File No. 333–232584).
55 See notes 35–37 [sic], supra. MicroStrategy
recently completed a $900 million convertible note
offering for the purpose of acquiring bitcoin. See
https://www.microstrategy.com/en/investorrelations/press/microstrategy-announces-pricing-ofoffering-of-convertible-senior-notes_02-17-2021.
56 In August 2017, the Commission’s Office of
Investor Education and Advocacy warned investors
about situations where companies were publicly
announcing events relating to digital coins or
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28651
seeking bitcoin exposure through
publicly traded companies are gaining
only partial exposure to bitcoin, without
the full benefit of the risk disclosures
and associated investor protections that
come from the securities registration
process.
Bitcoin Futures
CME began offering trading in Bitcoin
Futures in 2017. Each contract
represents five bitcoin and is based on
the CME CF Bitcoin Reference Rate (the
‘‘CME CF BRR’’).59 The contracts trade
and settle like other cash-settled
commodity futures contracts. Nearly
every measurable metric related to
Bitcoin Futures has trended consistently
up since launch and/or accelerated
upward in the past year. For example,
there was approximately $28 billion in
trading in Bitcoin Futures in December
2020 compared to $737 million, $1.4
billion, and $3.9 billion in total trading
in December 2017, December 2018, and
December 2019, respectively. Bitcoin
Futures traded over $1.2 billion per day
on the CME in December 2020 and
represented $1.6 billion in open interest
compared to $115 million in December
2019. This general upward trend in
trading volume and open interest is
captured in the following chart.
tokens in an effort to affect the price of the
company’s publicly traded common stock. See
https://www.sec.gov/oiea/investor-alerts-andbulletins/ia_icorelatedclaims
57 See, e.g., ‘‘7 public companies with exposure to
bitcoin’’ (February 8, 2021) available at: https://
finance.yahoo.com/news/7-public-companies-withexposure-to-bitcoin-154201525.html; and ‘‘Want to
get in the crypto trade without holding bitcoin
yourself? Here are some investing ideas’’ (February
19, 2021) available at: https://www.cnbc.com/2021/
02/19/ways-to-invest-in-bitcoin-without-holdingthe-cryptocurrency-yourself-.html.
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Similarly, the number of large open
interest holders 60 has continued to
increase even as the price of bitcoin has
risen, as have the number of unique
accounts trading Bitcoin Futures.
The Trust will not be actively
managed. It will not engage in any
activities designed to obtain a profit
from, or to ameliorate losses caused by,
changes in the market prices of bitcoins.
Operation of the Trust
Investment Objective
According to the Registration
Statement, the investment objective of
the Trust is for the Shares to reflect the
performance of the value of bitcoin less
the Trust’s liabilities and expenses. The
Trust will not seek to reflect the
performance of any benchmark or index.
In order to pursue its investment
objective, the Trust will seek to
purchase and sell such number of
bitcoin so that the total value of the
bitcoin held by the Trust is as close to
100% of the net assets of the Trust, as
is reasonably practicable to achieve.
According to the Registration
Statement, the Trust will hold only
bitcoins and is expected from time to
time to issue Creation Units (as defined
below) in exchange for deposits of
bitcoins and to distribute bitcoins in
connection with redemptions of
Creation Units. The Shares represent
units of fractional undivided beneficial
interest in, and ownership of, the Trust.
The activities of the Trust will be
limited to (1) issuing Creation Units in
exchange for bitcoins deposited by the
Authorized Participants (as defined
below) with the Bitcoin Custodian as
consideration, (2) transferring actual
bitcoins as necessary to cover the
Advisor’s investment management fee
and selling bitcoins as necessary to pay
Trust expenses, (3) transferring actual
bitcoins in exchange for Creation Units
surrendered for redemption by the
Authorized Participants, (4) causing the
Advisor to sell bitcoins on the
termination of the Trust, and (5)
engaging in all administrative and
custodial procedures necessary to
accomplish such activities in
accordance with the provisions of the
Trust Agreement.
58 See, e.g., Tesla 10–K for the year ended
December 31, 2020, which mentions bitcoin just
nine times: https://www.sec.gov/ix?doc=/Archives/
edgar/data/1318605/000156459021004599/tsla10k_20201231.htm.
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The Bitcoin Industry and Market
Bitcoin
Bitcoin is the digital asset that is
native to, and created and transmitted
through the operations of, the peer-topeer Bitcoin Network, a decentralized
network of computers that operates on
cryptographic protocols. No single
entity owns or operates the Bitcoin
Network, the infrastructure of which is
collectively maintained by a
decentralized user base. The Bitcoin
Network allows people to exchange
tokens of value, called bitcoin, which
are recorded on a public transaction
ledger known as the Blockchain. Bitcoin
can be used to pay for goods and
services, or it can be converted to fiat
currencies, such as the U.S. dollar, at
rates determined on bitcoin trading
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platforms or in individual end-user-toend-user transactions under a barter
system. Although nascent in use, bitcoin
may be used as a medium of exchange,
unit of account or store of value.
The Bitcoin Network is decentralized
and does not require governmental
authorities or financial institution
intermediaries to create, transmit, or
determine the value of bitcoin. In
addition, no party may easily censor
transactions on the Bitcoin Network. As
a result, the Bitcoin Network is often
referred to as decentralized and
censorship resistant.
The value of bitcoin is determined by
the supply of and demand for bitcoin.
New bitcoin are created and rewarded to
the parties providing the Bitcoin
Network’s infrastructure (‘‘miners’’) in
exchange for their expending
computational power to verify
transactions and add them to the
Blockchain. The Blockchain is
effectively a decentralized database that
includes all blocks that have been
solved by miners, and it is updated to
include new blocks as they are solved.
Each bitcoin transaction is broadcast to
the Bitcoin Network and, when
included in a block, recorded in the
Blockchain. As each new block records
outstanding bitcoin transactions, and
outstanding transactions are settled and
validated through such recording, the
Blockchain represents a complete,
transparent, and unbroken history of all
transactions of the Bitcoin Network.
Bitcoin Network
The first step in directly using the
Bitcoin Network for transactions is to
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download specialized software referred
to as a ‘‘bitcoin wallet.’’ A user’s bitcoin
wallet can run on a computer or
smartphone and can be used both to
send and to receive bitcoin. Within a
bitcoin wallet, a user can generate one
or more unique ‘‘bitcoin addresses,’’
which are conceptually similar to bank
account numbers. After establishing a
bitcoin address, a user can send or
receive bitcoin from his or her bitcoin
address to another user’s address.
Sending bitcoin from one bitcoin
address to another is similar in concept
to sending a bank wire from one
person’s bank account to another
person’s bank account, provided,
however, that such transactions are not
managed by an intermediary and
erroneous transactions generally may
not be reversed or remedied once sent.
The amount of bitcoin associated with
each bitcoin address, as well as each
bitcoin transaction to or from such
address, is transparently reflected in the
Blockchain and can be viewed by
websites that operate as ‘‘blockchain
explorers.’’ Copies of the Blockchain
exist on thousands of computers on the
Bitcoin Network. A user’s bitcoin wallet
will either contain a copy of the
blockchain or be able to connect with
another computer that holds a copy of
the blockchain. The innovative design
of the Bitcoin Network protocol allows
each Bitcoin user to trust that their copy
of the Blockchain will generally be
updated consistent with each other
user’s copy.
When a Bitcoin user wishes to
transfer bitcoin to another user, the
sender must first have the recipient’s
Bitcoin address. The sender then uses
his or her Bitcoin wallet software to
create a proposed transaction to be
added to the Blockchain. The proposal
would reduce the amount of bitcoin
allocated to the sender’s address and
increase the amount allocated
recipient’s address, in each case by the
amount of bitcoin desired to be
transferred. The proposal is completely
digital in nature, similar to a file on a
computer, and it can be sent to other
computers participating in the Bitcoin
Network; however, the use of ‘‘unspent
transaction outputs’’ that are verified
cryptographically prevents the ability to
duplicate or counterfeit bitcoin.
Bitcoin Transactions
A bitcoin transaction contains the
sender’s bitcoin address, the recipient’s
bitcoin address, the amount of bitcoin to
be sent, a transaction fee, and the
sender’s digital signature. Bitcoin
transactions are secured by
cryptography known as public-private
key cryptography, represented by the
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bitcoin addresses and digital signature
in a transaction’s data file. Each Bitcoin
Network address, or wallet, is associated
with a unique ‘‘public key’’ and ‘‘private
key’’ pair, both of which are lengthy
alphanumeric codes, derived together
and possessing a unique relationship.
The public key is visible to the public
and analogous to the Bitcoin Network
address. The private key is a secret and
may be used to digitally sign a
transaction in a way that proves the
transaction has been signed by the
holder of the public-private key pair,
without having to reveal the private key.
A user’s private key must be kept in
accordance with appropriate controls
and procedures to ensure it is used only
for legitimate and intended transactions.
If an unauthorized third person learns of
a user’s private key, that third person
could forge the user’s digital signature
and send the user’s bitcoin to any
arbitrary bitcoin address, thereby
stealing the user’s bitcoin. Similarly, if
a user loses his private key and cannot
restore such access (e.g., through a
backup), the user may permanently lose
access to the bitcoin contained in the
associated address.
The Bitcoin Network incorporates a
system to prevent double-spending of a
single bitcoin. To prevent the possibility
of double-spending a single bitcoin,
each validated transaction is recorded,
time stamped and publicly displayed in
a ‘‘block’’ in the Blockchain, which is
publicly available. Thus, the Bitcoin
Network provides confirmation against
double-spending by memorializing
every transaction in the Blockchain,
which is publicly accessible and
downloaded in part or in whole by all
users of the Bitcoin Network software
program. Any user may validate,
through their Bitcoin wallet or a
blockchain explorer, that each
transaction in the Bitcoin Network was
authorized by the holder of the
applicable private key, and Bitcoin
Network mining software consistent
with reference software requirements
typically validates each such transaction
before including it in the Blockchain.
This cryptographic security ensures that
bitcoin transactions may not generally
be counterfeited, although it does not
protect against the ‘‘real world’’ theft or
coercion of use of a Bitcoin user’s
private key, including the hacking of a
Bitcoin user’s computer or a service
provider’s systems.
A Bitcoin transaction between two
parties is settled when recorded in a
block added to the Blockchain.
Validation of a block is achieved by
confirming the cryptographic hash value
included in the block’s solution and by
the block’s addition to the longest
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confirmed Blockchain on the Bitcoin
Network. For a transaction, inclusion in
a block on the Blockchain constitutes a
‘‘confirmation’’ of a Bitcoin transaction.
As each block contains a reference to
the immediately preceding block,
additional blocks appended to and
incorporated into the Blockchain
constitute additional confirmations of
the transactions in such prior blocks,
and a transaction included in a block for
the first time is confirmed once against
double-spending. The layered
confirmation process makes changing
historical blocks (and reversing
transactions) exponentially more
difficult the further back one goes in the
Blockchain.
To undo past transactions in a block
recorded on the Blockchain, a malicious
actor would have to exert tremendous
computer power in re-solving each
block in the Blockchain starting with
and after the target block and
broadcasting all such blocks to the
Bitcoin Network. The Bitcoin Network
is generally programmed to consider the
longest Blockchain containing solved
and valid blocks to be the most accurate
Blockchain. In order to undo multiple
layers of confirmation and alter the
Blockchain, a malicious actor must resolve all of the old blocks sought to be
regenerated and be able to continuously
add new blocks to the Blockchain at a
speed that would have to outpace that
of all of the other miners on the Bitcoin
Network, who would be continuously
solving for and adding new blocks to the
Blockchain.
Custody of the Trust’s Bitcoins
According to the Registration
Statement, all bitcoins exist and are
stored on the Blockchain, the
decentralized transaction ledger of the
Bitcoin Network. The Blockchain
records most transactions (including
mining of new bitcoins) for all bitcoins
in existence, and in doing so verifies the
location of each bitcoin (or fraction
thereof) in a particular digital wallet.
The Trust’s Bitcoin Account 61 will be
maintained by the Bitcoin Custodian,
and cold storage mechanisms are used
for the Vault Account by the Bitcoin
Custodian. Each digital wallet of the
Trust may be accessed using its
corresponding private key. The Bitcoin
Custodian’s custodial operations will
61 According to the Registration Statement, the
‘‘Bitcoin Account’’ is defined as the Vault Account
and Wallet Account and any associated
subaccounts of either. The ‘‘Vault Account’’ is
defined as one or more cold storage accounts in the
name of the Advisor and of the Trust held for the
safekeeping of the Trust’s bitcoins. The ‘‘Wallet
Account’’ is defined as one or more wallets in the
name of the Advisor and of the Trust held for
deposit and withdrawal of bitcoins.
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maintain custody of the private keys
that have been deposited in cold storage
at its various vaulting premises. The
locations of the vaulting premises may
change regularly and will be kept
confidential by the Bitcoin Custodian
for security purposes.
The term ‘‘cold storage’’ refers to a
safeguarding method by which the
private keys corresponding to bitcoins
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. A digital wallet may receive
deposits of bitcoins but may not send
bitcoins without use of the bitcoins’
corresponding private keys. In order to
send bitcoin from a digital wallet in
which the private keys are kept in cold
storage, either the private keys must be
retrieved from cold storage and entered
them into a bitcoin software program to
sign the transaction, or the unsigned
transaction must be sent to the ‘‘cold’’
server in which the private keys are
held for signature by the private keys.
At that point, the user of the digital
wallet can transfer its bitcoins.
The Trust’s Bitcoin Custodian will
custody of all of the Trust’s bitcoin.
Custody of bitcoin typically involves the
generation, storage, and utilization of
private keys. These private keys are
used to effect transfer transactions, i.e.,
transfers of bitcoin from an address
associated with the private key to
another address. While private keys
must be used to send bitcoin, private
keys do not need to be used or shared
in order to receive a bitcoin transfer;
every private key has an associated
public key, and an address derived from
that public key that can be freely shared,
to which counterparties can transfer
bitcoin. The Bitcoin Network has a
public ledger, meaning that anybody
with access to the address can see the
balance of digital assets in that address.
The Bitcoin Custodian will carefully
consider the design of the physical,
operational, and cryptographic systems
for secure storage of the Trust’s private
keys in an effort to lower the risk of loss
or theft.
The Bitcoin Custodian will use a
multi-factor security system under
which actions by multiple individuals
working together are required to access
the private keys necessary to transfer
such digital assets and ensure the
Trust’s exclusive ownership. The
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multifactor security system generates
private keys using a FIPS 140–2certified random number generator to
ensure the keys’ uniqueness.
Before these keys are used, the Bitcoin
Custodian will validate that the public
addresses associated with these keys
have no associated digital asset
balances. The software used for key
generation and verification will be
tested by the Bitcoin Custodian and
reviewed by third-party advisors from
the security community with specific
expertise in computer security and
applied cryptography. The private keys
will be stored in an encrypted manner
using a FIPS 140–2-certified security
module held in redundant secure,
geographically dispersed locations with
high levels of physical security,
including robust physical barriers to
entry, electronic surveillance, and
continuously roving patrols. The
operational procedures of these facilities
and of the Bitcoin Custodian will be
reviewed by third-party advisors with
specific expertise in physical security.
The devices that store the keys will
never be connected to the internet or
any other public or private distributed
network (colloquially known as ‘‘cold
storage’’). Only specific individuals will
be authorized to participate in the
custody process, and no individual
acting alone will be able to access or use
any of the private keys. In addition, no
combination of the executive officers of
the Advisor, the Sub-Advisor, or the
investment professionals managing the
Trust, acting alone or together, will be
able to access or use any of the private
keys that hold the Trust’s bitcoin.
The Trust may engage third-party
custodians or vendors besides the
Bitcoin Custodian to provide custody
and security services for all or a portion
of its bitcoin and/or cash, and the
Advisor will pay the custody fees and
any other expenses associated with any
such third-party custodian or vendor.
The Bitcoin Custodian will be
authorized to accept, on behalf of the
Trust, deposits of bitcoins from
Authorized Participant SelfAdministered Accounts (as defined
below) held with the Bitcoin Custodian
and transfer such bitcoins into the
Bitcoin Account. Deposits of bitcoins
will be immediately available to the
Trust to the extent such bitcoins have
not already been transferred to the Vault
Account. Generally, bitcoins transferred
to the Bitcoin Account will be directly
deposited into digital wallets for which
the keys are already in cold storage.
The process of accessing and
withdrawing bitcoins from the Trust for
a redemption of a Creation Unit will
follow the same general procedure as
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depositing bitcoins with the Trust for a
creation of a Creation Unit, only in
reverse.
The Trust generally will not hold cash
or cash equivalents. However, the Trust
may hold cash and cash equivalents on
a temporary basis to pay extraordinary
expenses. The Trust has entered into a
cash custody agreement with the Bank
of New York Mellon under which the
Bank of New York Mellon acts as
custodian of the Trust’s cash and cash
equivalents.
Calculation of the Trust’s NAV
According to the Registration
Statement, the net asset value (‘‘NAV’’)
of the Trust will be determined in
accordance with Generally Accepted
Accounting Principles (‘‘GAAP’’) as the
total value of bitcoin held by the Trust,
plus any cash or other assets, less any
liabilities including accrued but unpaid
expenses. The NAV per Share will be
determined by dividing the NAV of the
Trust by the number of Shares
outstanding.
The NAV of the Trust will be
determined as of 4:00 p.m. Eastern time
(‘‘E.T.’’) on each Business Day.62 The
Trust’s daily activities will generally not
be reflected in the NAV determined for
the Business Day on which the
transactions are effected (the trade date),
but rather on the following Business
Day.
According to the Registration
Statement, under normal circumstances,
the Trust will use the CF Bitcoin US
Settlement Price (the ‘‘Reference Rate’’)
to calculate the Trust’s NAV. The
Reference Rate is not affiliated with the
Sponsor and was created and is
administered by CF Benchmarks Ltd.
(the ‘‘BRR Administrator’’), an
independent entity, to facilitate
financial products based on bitcoin. The
Reference Rate is designed based on the
IOSCO Principals for Financial
Benchmarks and serves as a once-a-day
benchmark rate of the U.S. dollar price
of bitcoin (USD/BTC), calculated as of
4:00 p.m. E.T. The Reference Rate is
based on materially the same
methodology (except calculation time)
as the CME CF BRR, which was first
introduced on November 14, 2016 and
is the rate on which bitcoin futures
contracts are cash-settled in U.S. dollars
at the CME. The Reference Rate
aggregates the trade flow of several
bitcoin exchanges, during an
observation window between 3:00 p.m.
and 4:00 p.m. E.T. into the U.S. dollar
price of one bitcoin at 4:00 p.m. E.T.
The current constituent bitcoin
62 ‘‘Business Day’’ is defined as each day that the
Shares trade on the Exchange.
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exchanges of the Reference Rate are
Bitstamp, Coinbase, Gemini, itBit, and
Kraken (the ‘‘Constituent Platforms’’).
The Reference Rate is calculated
based on the ‘‘Relevant Transactions’’
(as defined below) of all Constituent
Platforms, as follows: 63
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 64 trade price
is calculated from the trade prices and
sizes of all Relevant Transactions, i.e.,
across all Constituent Platforms.
4. The Reference Rate is then
determined by the equally-weighted
average of the volume-weighted
medians of all partitions.
The Reference Rate does not include
any futures prices in its methodology. A
‘‘Relevant Transaction’’ is any
cryptocurrency versus U.S. dollar spot
trade that occurs during the observation
window between 3:00 p.m. and 4:00
p.m. E.T. on a Constituent Platform in
the BTC/USD pair that is reported and
disseminated by a Constituent Platform
through its publicly available API and
observed by the Benchmark
Administrator, CF Benchmarks Ltd.
If the Reference Rate is unavailable,
the Trust’s bitcoin will be valued as
determined in good faith pursuant to
policies and procedures approved by
the Advisor’s valuation committee (‘‘fair
value pricing’’). In these circumstances,
the Trust will determine fair value in a
manner that seeks to reflect the market
value of the investment at the time of
valuation based on consideration of any
information or factors the Advisor’s
valuation committee deems appropriate,
as further described below. The
Advisor’s valuation committee will be
responsible for overseeing the
implementation of the Trust’s valuation
procedures and fair value
determinations. For purposes of
determining the fair value of bitcoin, the
valuation committee may consider,
without limitation: (i) Indications or
quotes from brokers; (ii) valuations
provided by a third-party pricing agent;
(iii) internal models that take into
consideration different factors
determined to be relevant by the
Advisor; or (iv) any combination of the
above.
The Advisor has adopted a policy
pursuant to which the Trust will value
63 See https://docscfbenchmarks.s3.amazonaws.com/
CME+CF+Reference+Rates+Methodology.pdf.
64 A volume-weighted median differs from a
standard median in that a weighting factor, in this
case trade size, is factored into the calculation.
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its assets other than bitcoin and
liabilities. Under this policy, the
Advisor will use fair value standards
according to GAAP. Generally, the fair
value of an asset that is traded on a
market is measured by reference to the
orderly transactions on an active
market. Among all active markets with
orderly transactions, the market that is
used to determine the fair value of an
asset is the principal market (with
exceptions described in more detail
below), which is either the market on
which the Trust actually transacts, or if
there is sufficient evidence, the market
with the most trading volume and level
of activity for the asset. Where there is
no active market with orderly
transactions for an asset, the Advisor’s
valuation committee will follow policies
and procedures described in more detail
below to determine the fair value.
While the Trust will publish its NAV
every day the Exchange is open, the
Trust’s operations will not rely to any
significant extent on its valuation
procedures. The Trust’s only regular
recurring expense is the Investment
Management Fee, which is both
calculated by reference to and paid in
bitcoin. Payment for Creation Units by
Authorized Participants may only be
made in-kind in bitcoin, and
redemption proceeds are similarly only
paid in bitcoin. While the Trust may
from time to time incur certain
extraordinary, non-recurring expenses
that must be paid in U.S. Dollars or
other fiat currency, such events would
only impact the amount of bitcoin
represented by a Share of the Trust.
Accordingly, while other proposed
bitcoin ETPs rely on a benchmark or
other reference rate to value their assets
and liabilities and determine the
amount of cash necessary to purchase or
redeem Creation Units (or their
equivalent), the Trust will not rely on
any such conversion rate, as it is
designed to transact only in bitcoin in
nearly all circumstances. The Trust’s
calculation of its NAV is intended to
assist investors in valuing their Shares,
and the Trust’s ability to transact only
in bitcoin further insulates the Trust
from activities designed to manipulate
the price of the bitcoin held by the
Trust.
The Structure and Operation of the
Trust Satisfies Commission
Requirements for Bitcoin-Based
Exchange Traded Products
In disapproving prior proposals to list
and trade shares of various bitcoin trusts
and bitcoin-based trust issued receipts,
the Commission noted that such
proposals did not adequately
demonstrate that they were designed to
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28655
prevent fraudulent and manipulative
acts and practices and to protect
investors and the public interest,
consistent with Section 6(b)(5) of the
Act.65 The Commission does not apply
a ‘‘cannot be manipulated’’ standard,
but instead seeks to examine whether a
proposal meets the requirements of the
Act.66 The Commission has explained
that a proposal could satisfy the
requirements of the Act in the first
instance by demonstrating that the
listing exchange has entered into a
comprehensive surveillance-sharing
agreement (‘‘CSSA’’) with a regulated
market of significant size relating to the
underlying assets.67 The Commission
has also recognized that a listing
exchange would not necessarily need to
enter into a CSSA with a regulated
significant market if the underlying
commodity market inherently possessed
a unique resistance to manipulation
beyond the protections that are utilized
by traditional commodity or securities
markets or if the listing exchange could
demonstrate that there were sufficient
‘‘other means to prevent fraudulent and
manipulative acts and practices.’’ 68
As described below, the Sponsor
believes the structure and operation of
the Trust are designed to prevent
fraudulent and manipulative acts and
practices, to protect investors and the
65 See, e.g., 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, Securities Exchange Act
Release No. 80206 (March 10, 2017), 82 FR 14076
(March 16, 2017) (SR–BatsBZX–2016–30) (the
‘‘Winklevoss I Order’’); the Winklevoss II Order;
Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the Bitwise Bitcoin
ETF Trust Under NYSE Arca Rule 8.201–E,
Securities Exchange Act Release No. 87267 (October
9, 2019), 84 FR 55382 (October 16, 2019) (SR–
NYSEArca–2019–01) (the ‘‘Bitwise Order’’); the
Wilshire Phoenix Order; Order Disapproving a
Proposed Rule Change to List and Trade the Shares
of the ProShares Bitcoin ETF and the ProShares
Short Bitcoin ETF, Securities Exchange Act Release
No. 83904 (August 22, 2018), 83 FR 43934 (August
28, 2018) (SR–NYSEArca–2017–139); 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, 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 to List and
Trade the Shares of the GraniteShares Bitcoin ETF
and the GraniteShares Short Bitcoin ETF, Securities
Exchange Act Release No. 83913 (August 22, 2018),
83 FR 43923 (August 28, 2018) (SR–CboeBZX–
2018–01) (the ‘‘GraniteShares Order’’).
66 See Winklevoss II Order, 84 FR 37582.
67 See Wilshire Phoenix Order, 85 FR 12596–97.
68 See Winklevoss II Order, 84 FR 37580, 37582–
91; Bitwise Order, 84 FR 55383, 55385–406;
Wilshire Phoenix Order, 85 FR 12597.
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public interest, and to respond to the
specific concerns that the Commission
has identified with respect to potential
fraud and manipulation in the context
of a bitcoin ETP. Further, as the
Commission has previously
acknowledged, trading in a bitcoinbased ETP on a national securities
exchange, as compared to trading in an
unregulated bitcoin spot market, may
provide additional protection to
investors.69 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.
Surveillance Sharing Agreements With a
Market of Significant Size
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1. 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.70 In
these orders, the Commission cited
numerous precedents 71 in which listing
proposals 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.72 The
69 See GraniteShares Order, 83 FR 43931. See also
Hester M. Peirce, U.S. Sec. Exch. Comm’n, Dissent
of Commissioner Hester M. Peirce to Release No.
34–83723 (July 26, 2018), available at: https://
www.sec.gov/news/public-statement/peirce-dissent34-83723 (‘‘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.’’).
70 See Winklevoss I Order and Winklevoss II
Order. 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 facts are not unique to
bitcoin and are true of 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 22% of total above
ground gold stocks are held by private investors and
17% are held by foreign governments; by
comparison, 13.61% of bitcoin are held by the 86
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-bitcoinaddresses.html for Bitcoin data.
71 For an extensive listing of such precedents, see
Winklevoss I Order, 82 FR 14083 n. 96.
72 The Exchange to date has not entered into
surveillance sharing agreements with any
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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
(the ‘‘ISG’’) membership in common
with, that market.’’ 73
The CME 74 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.’’ 75
Membership of a relevant futures
exchange in ISG is sufficient to meet the
surveillance-sharing requirement.76
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.77 The
Commission has also 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
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://docscfbenchmarks.s3.amazonaws.com/
CME+CF+Constituent+Exchanges+Criteria.pdf.
73 See Winklevoss II Order, 84 FR 37594.
74 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. 7(d)(3)
(‘‘The board of trade shall list on the contract
market only contracts that are not readily
susceptible to manipulation.’’).
75 See https://isgportal.org/overview.
76 See, e.g., Winklevoss II Order, 84 FR 37594.
77 See, e.g., id. at 37589–90.
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detecting and deterring misconduct and
(b) it is unlikely that trading in the ETP
would be the predominant influence on
prices in that market.’’ 78
For the following reasons, 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’’ that satisfies
both elements of the example provided
by the Commission.
(a) Reasonable Likelihood That a Person
Manipulating the ETP Would Have To
Trade on the Market
The first element of a ‘‘significant
market’’ or ‘‘market of significant size’’
is a reasonable likelihood that a person
attempting to manipulate the ETP
would also have to trade on that market
(or group of markets) to successfully
manipulate the ETP, such that a
surveillance sharing agreement would
assist the ETP listing market in
detecting and deterring misconduct. The
Commission has stated that establishing
a lead-lag relationship between the
bitcoin futures market and the spot
market is central to understanding
whether it is reasonably likely that a
would-be manipulator of the ETP would
need to trade on the bitcoin futures
market to successfully manipulate
prices on those spot platforms that feed
into the proposed ETP’s pricing
mechanism.79
The Sponsor believes that the CME
meets the first element in several ways.
First, it is the primary market for bitcoin
futures, 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 80 and the
futures market.
Specifically, the Sponsor notes that
the CME is similarly situated to the
COMEX division of NYMEX with
78 Id. at 37594; see also GraniteShares Order, 83
FR 43930 n. 85 and accompanying text.
79 See Wilshire Phoenix Order, 85 FR 12612.
80 ‘‘The OTC market has no formal structure and
no open-outcry meeting place.’’ 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, Securities Exchange
Act Release No. 50603 (October 28, 2004), 69 FR
64614 (November 5, 2004) (SR–NYSE–2004–22)
(the ‘‘streetTRACKS Order’’).
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respect to gold ETPs.81 As with the OTC
gold market, it is not possible to enter
into an information sharing agreement
with the OTC bitcoin market.82 When
the Commission has approved the
listing of gold ETPs and other
commodity-trust ETPs, rather than
requiring surveillance sharing
agreements with the relevant OTC
markets, it has recognized surveillance
sharing agreements between the listing
exchange and ‘‘regulated markets for
trading futures on the underlying
commodity,’’ 83 given the understanding
that the manipulation of the market for
a commodity often involves the futures
market for that commodity.84
The Sponsor also believes that the
CME meets the first element because its
Bitcoin Futures are cash settled by
reference to a final settlement price
based on the CME CF BRR. Anyone
attempting to manipulate the CME CF
BRR would need to place numerous
large sized trades on any of the
Constituent Platforms that are used to
calculate the CME CF BRR,85 and the
resulting manipulative trading patterns
would be detectable by the BRR
Administrator and the CME.86 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
procedures.87 As a result, 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 Sponsor also maintains that any
would-be manipulator of bitcoin prices
would be reasonably likely to do so
through the Bitcoin Futures market in
order to take advantage of the leverage
inherent in trading futures contracts.
The inherent leverage in Bitcoin Futures
would allow a potential manipulator to
attempt a manipulation scheme with far
less upfront capital than it would need
to achieve the same results in the spot
market. As the spot bitcoin market has
grown tremendously since the issuance
of the Wilshire Phoenix Order, it would
be critical for a would-be manipulator to
efficiently use its capital to have the
desired effect, and a would-be
manipulator would certainly recognize
that the chances of successfully
deploying its scheme are increased
exponentially if it can affect the Bitcoin
Futures market (and thus the bitcoin
spot market) by posting only the
minimum margin required the Bitcoin
Futures exchange.88 Accordingly,
because the Bitcoin Futures market is in
effect the ‘‘cheapest’’ route to
manipulate bitcoin, it is highly likely
such manipulators would attempt to do
so there rather than any spot market.
Finally, the Sponsor maintains that a
would-be manipulator of bitcoin would
be required to execute trades on
28657
multiple exchanges simultaneously in
order to successful move the global
price of bitcoin due to the decentralized
nature of the Bitcoin Network. The
Sponsor thus believes that bitcoin
manipulators would be much more
likely to attempt to manipulate a limited
number of futures markets rather than
attempt simultaneous executions on
potentially dozens of different
exchanges. Even if a would-be
manipulator does attempt to manipulate
bitcoin across platforms, such a scheme
would also necessarily include some
attempt to manipulate the price of
bitcoin futures, including the CME.
(b) Predominant Influence on Prices in
Spot and Bitcoin Futures
The second feature of a ‘‘significant
market’’ or ‘‘market of significant size’’
in the Commission’s example is that the
market is one in which it is unlikely
that trading in the ETP would be the
predominant influence on prices in that
market. The Sponsor believes that
trading in the Shares would not be the
predominant force on prices in the
Bitcoin Futures market (or spot market)
for a number of reasons, including the
significant volume in the Bitcoin
Futures market, the size of bitcoin’s
market cap (approximately $1 trillion),
and the significant liquidity available in
the spot market.
Since the Wilshire Phoenix Order was
issued, there has been significant
growth in Bitcoin Futures across each of
trading volumes and open interest as
reflected in the chart below:
CHICAGO MERCANTILE EXCHANGE BITCOIN FUTURES
February 26, 2020
jbell on DSKJLSW7X2PROD with NOTICES
Trading Volume .......................................................................................................................
Open Interest ...........................................................................................................................
$433,000,000
238,000,000
April 7, 2021
$4,321,000,000
2,582,000,000
The growth of the Bitcoin Futures has
coincided with similar growth in the
bitcoin spot market. The market for
Bitcoin Futures is rapidly approaching
the size of markets for other commodity
interests, including interests in metals,
agricultural and petroleum products.
Accordingly, as the Bitcoin Futures
market continues to develop and more
closely resemble other commodity
futures markets, it can be reasonably
expected that the relationship between
the Bitcoin Futures market and bitcoin
spot market will behave similarly to
other future/spot market relationships,
81 Other applicants have made similar arguments
in their respective filings. See Notice of Filing of
Proposed Rule Change To List and Trade Shares of
SolidX Bitcoin Shares Issued by the VanEck SolidX
Bitcoin Trust, Under BZX Rule 14.11(e)(4),
Commodity-Based Trust, Securities Exchange Act
Release No. 85119 (February 13, 2019), 84 FR 5140
(February 20, 2019) (SRCboeBZX–2019–004), n. 11.
82 ‘‘It is not possible, however, to enter into an
information sharing agreement with the OTC gold
market.’’ streetTRACKS Order, 69 FR 64619. See
also Order Granting Approval of Proposed Rule
Change and Amendment Nos. 2, 3 and 4 and Notice
of Filing and Order Granting Accelerated Approval
to Amendment No. 5 by the American Stock
Exchange LLC Relating to the Listing and Trading
of the iShares® COMEX Gold Trust, Securities
Exchange Act Release No. 51058 (January 19, 2005),
70 FR 3749 (January 26, 2005) (SR–Amex–2004–38);
Notice of Filing of Proposed Rule Change Relating
to Listing and Trading of Shares of ETFS Palladium
Trust, Securities Exchange Act Release No. 60971
(November 9, 2009), 74 FR 59283 (November 17,
2009) (SRNYSEArca–2009–94).
83 See Winklevoss II Order, 84 FR 37591.
84 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).
85 Because the CME CF BRR is 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.
86 The BRR Calculation Agent receives trading
data from the Constituent Platforms through its
Automatic Programming Interface. See CME–CF
Practice Standards, available at: https://
www.cfbenchmarks.com/indices/BRR.
87 See https://docscfbenchmarks.s3.amazonaws.com/
CME+CF+Constituent+Exchanges+Criteria.pdf.
88 As of April 12, 2021, the initial margin required
in connection with CME Bitcoin Futures for the
April 2021 contract ranges from 42% to 38%.
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including periods where a lead-lag
relationship between the Bitcoin
Futures market and bitcoin spot market
exists.
In addition, the spot market for
bitcoin is also very liquid. According to
data from CoinRoutes from February
2021, the cost to buy or sell $5 million
worth of bitcoin averages roughly 10
basis points with a market impact of 30
basis points.89 For a $10 million market
order, the cost to buy or sell is roughly
20 basis points with a market impact of
50 basis points. Stated another way, a
market participant could enter a market
buy or sell order for $10 million of
bitcoin and only move the market 0.5%.
More strategic purchases or sales (such
as using limit orders and executing
through OTC bitcoin trade desks) would
likely have less obvious impact on the
market—which is consistent with
MicroStrategy, Tesla, and Square being
able to collectively purchase billions of
dollars in bitcoin. The Sponsor believes
that the combination of Bitcoin Futures’
important role in price discovery, the
overall size of the bitcoin market, and
the ability of market participants,
including authorized participants
creating and redeeming in-kind with the
Trust, to buy or sell large amounts of
bitcoin without significant market
impact will help prevent the Shares
from becoming the predominant force
on pricing in either the bitcoin spot or
Bitcoin Futures markets.
The results from a study conducted by
CF Benchmarks simulating to determine
the extent of ‘‘slippage’’ (i.e., the
difference between the expected price of
a trade and the price at which the trade
was actually executed) offer further
evidence that trading in the Shares is
unlikely to be the predominant
influence in the bitcoin spot market.90
The CF Benchmarks Analysis simulated
the purchase of 50 bitcoins a day for 686
days (an amount chosen specifically to
replicate hypothetical trades by an ETP)
and found that the maximum amount of
slippage on a particular day was 0.3%,
with the remainder of values between
0% and 0.15%. Thus, according to CF
Benchmarks, the slippage in this study
could be described as having been
largely negligible or, at most, minor
during the observation period.
89 These statistics are based on samples of bitcoin
liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase
Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
90 See CF Benchmarks, ‘‘An Analysis of the
Suitability of the CME CF BRR for the Creation of
Regulated Financial Products,’’ December 2020 (the
‘‘CF Benchmarks Analysis’’), available at: https://
docsend.com/view/kizk7rarzaba6jxf.
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Other Means To Prevent Fraudulent and
Manipulative Acts and Practices
As noted above, the Commission also
permits a listing exchange to
demonstrate that ‘‘other means to
prevent fraudulent and manipulative
acts and practices’’ are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement. The
Sponsor believes that the significant
liquidity in the spot market and the
impact of market orders on the overall
price of bitcoin have made attempts to
move the price of bitcoin increasingly
expensive over the past year, curtailing
potential fraud or manipulation in
connection with bitcoin pricing. In
January 2020, for example, the cost to
buy or sell $5 million worth of bitcoin
averaged roughly 30 basis points
(compared to 10 basis points in
February 2021) with a market impact of
50 basis points (compared to 30 basis
points in February 2021).91 For a $10
million market order, the cost to buy or
sell was roughly 50 basis points
(compared to 20 basis points in
February 2021) with a market impact of
80 basis points (compared to 50 basis
points in February 2021). As the
liquidity in the bitcoin spot market
increases, it follows that the impact of
$5 million and $10 million orders will
continue to decrease the overall impact
in spot price.
Additionally, the Sponsor believes
that offering only in-kind creation and
redemption will provide unique
protections against potential attempts to
manipulate the Shares. While the
Sponsor believes that the Reference Rate
used to value the Trust’s bitcoin is itself
resistant to manipulation based on the
methodology described above, the fact
that creations and redemptions are only
available in-kind makes the
manipulability of the Reference Rate
significantly less important.
Specifically, because the Trust will not
accept cash to buy bitcoin in order to
create or redeem Shares, the price that
the Sponsor uses to value the Trust’s
bitcoin is not particularly important.92
When authorized participants create
Shares with the Trust, they need to
deliver a certain number of bitcoin per
Share (regardless of the valuation used)
and when they redeem Shares, they can
similarly expect to receive a certain
number of bitcoin per Share. As a result,
even if the price used to value the
91 These statistics are based on samples of bitcoin
liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase
Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
92 The Investment Management Fee, which is the
Trust’s only normal recurring expense is both paid
and calculated in bitcoin.
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Trust’s bitcoin has been manipulated
(which the Sponsor believes is unlikely
given the resistance afforded by the
independent Reference Rate
methodology), the ratio of bitcoin per
Share does not change and the Trust
will either accept (for creations) or
distribute (for redemptions) the same
number of bitcoin regardless of the
value. This structure not only mitigates
the risk associated with potential
manipulation, but also discourages and
disincentivizes manipulation of the
Reference Rate because there is little
financial incentive to do so.
Creation and Redemption of Shares
According to the Registration
Statement, the Trust will issue and
redeem Shares on an ongoing basis in
one or more Creation Units. A Creation
Unit will consist of a block of 50,000
Shares. The creation and redemption of
Creation Units will be effected in inkind transactions based on the quantity
of bitcoin attributable to each Share.
The quantity of bitcoin required to
create each Creation Unit (the ‘‘Creation
Unit Deposit’’) may change from day to
day. On each day that the Exchange is
open for regular trading, the
Administrator will determine the
quantity of bitcoin constituting the
Creation Unit Deposit and may make
adjustments as appropriate to reflect
accrued expenses. Each Business Day,
the Administrator will communicate the
final Creation Unit Deposit for that same
Business Day and an estimated Creation
Unit Deposit for the next Business Day.
The number of outstanding Shares is
expected to increase and decrease from
time to time as a result of the creation
and redemption of Creation Units. The
creation and redemption of Creation
Units require the delivery to the Trust,
or the distribution by the Trust, of the
number of bitcoins represented by the
Creation Units being created or
redeemed. The creation and redemption
of a Creation Unit will be made only in
exchange for the delivery to the Trust,
or the distribution by the Trust, of the
number of whole and fractional bitcoins
represented by each Creation Unit being
created or redeemed, the number of
which is determined by dividing the
number of bitcoins owned by the Trust
at 4:00 p.m. E.T on the trade date of a
creation or redemption order, as
adjusted for the number of whole and
fractional bitcoins constituting accrued
but unpaid fees and expenses of the
Trust, by the number of Shares
outstanding at such time and
multiplying such quotient by 50,000.
Authorized Participants are the only
persons that may place orders to create
and redeem Creation Units. An
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Authorized Participant must (i) be a
registered broker-dealer, (ii) enter into a
Participant Agreement with the Advisor
and the Bitcoin Custodian, and (iii) own
a bitcoin wallet address that is
recognized by the Bitcoin Custodian as
belonging to the Authorized Participant
(an ‘‘Authorized Participant SelfAdministered Account’’). Authorized
Participants may act for their own
accounts or as agents for broker-dealers,
custodians, and other securities market
participants that wish to create or
redeem Creation Units. Shareholders
who are not Authorized Participants
will only be able to redeem their
Common Shares through an Authorized
Participant.
jbell on DSKJLSW7X2PROD with NOTICES
Creation Procedures
On any Business Day, an Authorized
Participant may place an order with the
Transfer Agent to create one or more
Creation Units. Purchase orders must be
placed prior to 4:00 p.m. E.T. or the
close of regular trading on the Exchange,
whichever is earlier. The day on which
a valid order is received by the Transfer
Agent is considered the purchase order
date.
By placing a purchase order, an
Authorized Participant agrees to
facilitate the deposit of bitcoin with the
Trust. The total deposit of bitcoin
required to create each Creation Unit is
an amount of bitcoin that is in the same
proportion to the total assets of the
Trust (net of accrued but unpaid fees
and expenses) on the date the purchase
order is properly received as the number
of Shares to be created under the
purchase order is to the total number of
Shares outstanding on the date the order
is received.
Following an Authorized Participant’s
purchase order, the Bitcoin Account
must be credited with the required
bitcoin by the end of the Business Day
following the purchase order date. Upon
receipt of the bitcoin deposit amount in
the Trust’s Bitcoin Account, the Bitcoin
Custodian will notify the Transfer
Agent, the Authorized Participant, and
the Advisor that the bitcoin has been
deposited. The Transfer Agent will then
direct the Depository Trust Company
(‘‘DTC’’) to credit the number of Shares
created to the Authorized Participant’s
DTC account.
Redemption Procedures
According to the Registration
Statement, on any Business Day, an
Authorized Participant may place an
order with the Transfer Agent to redeem
one or more Creation Units. Authorized
Participants may only redeem Creation
Units and cannot redeem any Shares in
an amount less than a Creation Unit.
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Redemption orders must be placed prior
to 4:00 p.m. E.T. or the close of regular
trading on the Exchange, whichever is
earlier. A redemption order will be
effective on the date it is received by the
Transfer Agent (‘‘Redemption Order
Date’’).
The redemption distribution from the
Trust consists of a transfer of bitcoin to
the redeeming Authorized Participant
corresponding to the number of Shares
being redeemed. The redemption
distribution due from the Trust will be
delivered once the Transfer Agent
notifies the Bitcoin Custodian and the
Advisor that the Authorized Participant
has delivered the Shares represented by
the Creation Units to be redeemed to the
Transfer Agent’s DTC account. If the
Transfer Agent’s DTC account has not
been credited with all of the Shares of
the Creation Units to be redeemed, the
redemption distribution will be delayed
until such time as the Transfer Agent
confirms receipt of all such Shares.
Once the Transfer Agent notifies the
Bitcoin Custodian and the Advisor that
the Shares have been received in the
Transfer Agent’s DTC account, the
Advisor will instruct the Bitcoin
Custodian to transfer the redemption
distribution from the Trust’s Bitcoin
Account to the Authorized Participant.
The redemption distribution from the
Trust will consist of a transfer to the
redeeming Authorized Participant of an
amount of bitcoin that is determined in
the same manner as the determination
of Creation Unit Deposits, as discussed
above. The redemption distribution due
from the Trust will be delivered to the
Authorized Participant on the first
Business Day following the Redemption
Order Date if, by 9:00 a.m. E.T. on such
Business Day, the Transfer Agent’s DTC
account has been credited with the
Creation Units to be redeemed. If the
Transfer Agent’s DTC account has not
been credited with all of the Creation
Units to be redeemed by such time, the
redemption distribution will also be
delayed.
28659
The Trust’s website (https://
www.ftportfolios.com) will include
quantitative information on a per Share
basis updated on a daily basis,
including (i) the current NAV per Share
daily and the prior business day’s NAV
and the reported closing price; (ii) the
mid-point of the bid-ask price 93 in
relation to the NAV as of the time the
NAV is calculated (‘‘Bid-Ask Price’’)
and a calculation of the premium or
discount of such price against such
NAV; and (iii) data in chart format
displaying the frequency distribution of
discounts and premiums of the daily
Bid-Ask Price against the NAV, within
appropriate ranges, for each of the four
previous calendar quarters (or for the
life of the Trust, if shorter). In addition,
on each business day the Trust’s website
will provide pricing information for the
Shares.
The Trust’s website, as well as one or
more major market data vendors, will
provide an intra-day indicative value
(‘‘IIV’’) per Share updated every 15
seconds, as calculated by the Exchange
or a third party financial data provider
during the Exchange’s Core Trading
Session (9:30 a.m. to 4:00 p.m., E.T.).94
The IIV will be calculated by using the
prior day’s closing NAV per Share as a
base and updating that value during the
NYSE Arca Core Trading Session to
reflect changes in the value of the
Trust’s NAV during the trading day.
The IIV disseminated during the
NYSE Arca Core Trading Session should
not be viewed as an actual real-time
update of the NAV, which will be
calculated only once at the end of each
trading day. The IIV will be widely
disseminated on a per Share basis every
15 seconds during the NYSE Arca Core
Trading Session by one or more major
market data vendors. In addition, the IIV
will be available through on-line
information services.
The NAV for the Trust will be
calculated by the Sponsor once a day
and will be disseminated daily to all
market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’).
Quotation and last sale information
for bitcoin will be widely disseminated
through a variety of major market data
vendors, including Bloomberg and
Reuters. In addition, the complete realtime price (and volume) data for bitcoin
is available by subscription from
Reuters and Bloomberg. The spot price
of bitcoin is available on a 24-hour basis
from major market data vendors,
including Bloomberg and Reuters.
Information relating to trading,
including price and volume
information, in bitcoin will be available
from major market data vendors and
from the exchanges on which bitcoin are
traded. The normal trading hours for
93 The bid-ask price of the Trust is determined
using the highest bid and lowest offer on the
Consolidated Tape as of the time of calculation of
the closing day NAV.
94 The IIV on a per Share basis disseminated
during the Core Trading Session should not be
viewed as a real-time update of the NAV, which is
calculated once a day.
Availability of Information
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bitcoin exchanges are 24-hours per day,
365-days per year.
The Sponsor will publish the NAV
per Share on the Trust’s website as soon
as practicable after its determination.
The Trust will provide website
disclosure of its NAV daily. The website
disclosure of the Trust’s NAV will occur
at the same time as the disclosure by the
Sponsor of the NAV to Authorized
Participants so that all market
participants are provided such
information at the same time. Therefore,
the same information will be provided
on the public website as well as in
electronic files provided to Authorized
Participants. Accordingly, each investor
will have access to the current NAV of
the Trust through the Trust’s website, as
well as from one or more major market
data vendors.
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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 4:00
a.m. to 8:00 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
Holders (‘‘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 95 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.
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
95 17
CFR 240.10A–3.
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17:29 May 26, 2021
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the Trust.96 Trading in Shares of the
Trust will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached. Trading also may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable.
The Exchange may halt trading during
the day in which an interruption to the
dissemination of the IIV occurs. If the
interruption to the dissemination of the
IIV 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.
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.97 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
obtain trading information regarding
trading in the Shares from such markets
and other entities. In addition, the
Exchange may obtain information
96 See
NYSE Arca Rule 7.12–E.
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.
97 FINRA
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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.98 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 Sponsor 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).
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 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.99
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices 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. 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
98 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.
99 15 U.S.C. 78f(b)(5).
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Federal Register / Vol. 86, No. 101 / Thursday, May 27, 2021 / Notices
laws. The Exchange or FINRA, on behalf
of the Exchange, or both, will
communicate as needed regarding
trading in the Shares with other markets
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. In addition,
the Exchange may obtain information
regarding trading in the Shares from
markets that are members of ISG or with
which the Exchange has in place a
CSSA. Also, pursuant to NYSE Arca
Rule 8.201–E(g), the Exchange is able to
obtain information regarding trading in
the Shares and the underlying bitcoin or
any bitcoin derivative through ETP
Holders acting as registered Market
Makers, in connection with such ETP
Holders’ proprietary or customer trades
through ETP Holders which they effect
on any relevant market.
The Exchange also believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices and to protect
investors and the public interest
because investing in the Trust will
provide investors with exposure to
bitcoin in a manner that is more
efficient and convenient than the
purchase of stand-alone bitcoin, while
also mitigating some of the volatility
risk typically associated with the
purchase of stand-alone bitcoin. As
discussed above, the Trust will use the
Reference Rate to determine the value of
its bitcoin assets and its NAV. While
bitcoin is listed and traded on a number
of markets and platforms, the Reference
Rate is determined exclusively based on
its Constituent Platforms, and therefore,
use of the Reference Rate 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 Reference Rate
unlikely. Bitcoin trades in a wellarbitraged 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. The proposed rule change is
also designed to prevent fraudulent and
manipulative acts and practices based
on the function of the CME, either alone
as the sole market for bitcoin futures or
as a group of markets together with the
Constituent Platforms, as a ‘‘market of
significant size’’ consistent with the
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Jkt 253001
Commission’s guidance with respect to
surveillance sharing agreements. As
discussed above, the CME is the primary
market for bitcoin futures, is designed to
detect and resist potentially
manipulative trading activity, and, as a
member of ISG, can provide the
Exchange with information to assist in
detecting and deterring potential fraud
or manipulation.
The proposed rule change is also
designed to promote just and equitable
principles of trade and to protect
investors and the public interest in that
there is a considerable amount of
bitcoin price and market information
available on public websites and
through professional and subscription
services. Investors may obtain, on a 24hour basis, bitcoin pricing information
based on the spot price for bitcoin from
various financial information service
providers. The closing price and
settlement prices of bitcoin are readily
available from the bitcoin exchanges
and other publicly available websites. In
addition, such prices are published in
public sources, or on-line information
services such as Bloomberg and Reuters.
The NAV per Share will be calculated
daily and made available to all market
participants at the same time. The Trust
will provide website disclosure of its
NAV daily. One or more major market
data vendors will disseminate for the
Trust on a daily basis information with
respect to the most recent NAV per
Share and Shares outstanding. 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. Quotation and last-sale
information regarding the Shares will be
disseminated through the facilities of
the CTA. The IIV will be widely
disseminated on a per Share basis every
15 seconds during the NYSE Arca Core
Trading Session (normally 9:30 a.m.,
E.T., to 4:00 p.m., E.T.) by one or more
major market data vendors. In addition,
the IIV will be available on the Trust’s
website and through on-line information
services. The Exchange represents that
the Exchange may halt trading during
the day in which an interruption to the
dissemination of the IIV occurs. If the
interruption to the dissemination of the
IIV 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.
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
PO 00000
Frm 00137
Fmt 4703
Sfmt 4703
28661
it will facilitate the listing and trading
of an additional type of exchange-traded
product 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 relating to
trading in the Shares and may obtain
information via ISG from other
exchanges that are members of ISG or
with which the Exchange has entered
into a CSSA. In addition, as noted
above, investors will have ready access
to information regarding the Trust’s
NAV, IIV, and quotation and last sale
information for the Shares.
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 purposes of the Act. The
Exchange notes that the proposed rule
change will facilitate the listing and
trading of an additional type of
exchange-traded product, which 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 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:
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Federal Register / Vol. 86, No. 101 / Thursday, May 27, 2021 / Notices
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–2021–37 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.
jbell on DSKJLSW7X2PROD with NOTICES
All submissions should refer to File
Number SR–NYSEArca–2021–37. 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–2021–37 and
should be submitted on or before June
17, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.100
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–11172 Filed 5–26–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–91963; File No. SR–
EMERALD–2021–18]
Self-Regulatory Organizations; MIAX
Emerald, LLC; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Adopt a New
Historical Market Data Product To Be
Known as the Open-Close Report
May 21, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 10,
2021, MIAX Emerald, LLC (‘‘MIAX
Emerald’’ or the ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) a
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 to adopt a
new historical market data product to be
known as the Open-Close Report.
The text of the proposed rule change
is available on the Exchange’s website at
https://www.miaxoptions.com/rulefilings/emerald at MIAX Emerald’s
principal office, 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
Exchange 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 these
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 aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt a
new historical market data product to be
known as the Open-Close Report, which
1 15
100 17
CFR 200.30–3(a)(12).
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17:29 May 26, 2021
2 17
Jkt 253001
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00138
Fmt 4703
Sfmt 4703
will be available to all Members and
Non-Members.3 The proposed OpenClose Report would be described in
Exchange Rule 531(b)(1) and is based on
market data products currently available
on most other options exchanges.4
The Exchange proposes to offer the
Open-Close Report, which will be a
volume summary of trading activity on
the Exchange at the option level by
origin (Priority Customer, Non-Priority
Customer, Firm, Broker-Dealer, and
Market Maker 5), side of the market (buy
or sell), contract volume, and
transaction type (opening or closing).
The Priority Customer, Non-Priority
Customer, Firm, Broker-Dealer, and
Market Maker volume is further broken
down into trade size buckets (less than
100 contracts, 100–199 contracts, greater
than 199 contracts). The Open-Close
Report is proprietary Exchange trade
data and does not include trade data
from any other exchange. It is also a
historical data product and not a realtime data feed. The Open-Close Report
would be described under proposed
Exchange Rule 531(b)(1).6
Specifically, the Open-Close Report
would include the following data:
• Aggregate number of buy and sell
transactions in the affected series;
• Aggregate volume traded
electronically on the Exchange in the
affected series;
• Aggregate number of trades effected
on the Exchange to open a position; 7
3 The term ‘‘Member’’ means an individual or
organization approved to exercise the trading rights
associated with a Trading Permit. Members are
deemed ‘‘members’’ under the Exchange Act. See
Exchange Rule 100.
4 See Securities Exchange Act Release Nos. 89497
(August 6, 2020), 85 FR 48747 (August 12, 2020)
(SR–CboeBZX–2020–059); 89498 (August 6, 2020),
85 FR 48735 (August 12, 2020) (SR–Cboe–EDGX–
2020–36); 85817 (May 9, 2019), 84 FR 21863 (May
15, 2019) (SR–CBOE–2019–026); 89496 (August 6,
2020), 85 FR 48743 (August 12, 2020) (SR–C2–
2020–010); 89596 (August 17, 2020), 85 FR 51833
(August 21, 2020) (SR–C2–2020–012); 62887
(September 10, 2010), 75 FR 57092 (September 17,
2010) (SR–Phlx–2010–121); 65587 (October 18,
2011), 76 FR 65765 (October 24, 2011) (SR–
NASDAQ–2011–144); 61317 (January 8, 2010), 75
FR 2915 (January 19, 2010) (SR–ISE–2009–103);
62887 (September 10, 2010), 75 FR 57092
(September 17, 2010) (SR–Phlx–2010–121); 65587
(October 18, 2011), 76 FR 65765 (October 24, 2011)
(SR–NASDAQ–2011–144); and 81632 (September
15, 2017), 82 FR 44235 (September 21, 2017) (SR–
GEMX–2017–42).
5 See Exchange Rule 100 for the definitions of the
terms Priority Customer, Non-Priority Customer,
Firm, Broker-Dealer, and Market Maker.
6 The Exchange also proposes to amend the title
of Exchange Rule 531 to include ‘‘Market Data
Products.’’
7 The Open-Close Report would provide
subscribers with the aggregate number of ‘‘opening
purchase transactions’’ in the affected series. An
opening purchase transaction is an Exchange
options transaction in which the purchaser’s
intention is to create or increase a long position in
the series of options involved in such transaction.
E:\FR\FM\27MYN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 101 (Thursday, May 27, 2021)]
[Notices]
[Pages 28646-28662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11172]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-91962; File No. SR-NYSEArca-2021-37]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the First Trust
SkyBridge Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E
May 21, 2021.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on May 6, 2021, 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, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade shares of the following
under NYSE Arca Rule 8.201-E: First Trust SkyBridge Bitcoin ETF Trust
(the ``Trust''). 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
Under NYSE Arca Rule 8.201-E, the Exchange may propose to list and/
or trade pursuant to unlisted trading privileges ``Commodity-Based
Trust Shares.'' \4\ The Exchange proposes to list and trade shares of
the Trust (the ``Shares'') pursuant to NYSE Arca Rule 8.201-E.\5\
---------------------------------------------------------------------------
\4\ Commodity-Based Trust Shares are securities issued by a
trust that represent investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
Trust.
\5\ On March 19, 2021, the Trust filed a registration statement
on Form S-1 under the Securities Act of 1933 (15 U.S.C. 77a) (the
``Securities Act'') (File No. 333-254529) and amended such
registration statement on May 6, 2021 (the ``Registration
Statement'').
---------------------------------------------------------------------------
The sponsor of the Trust is First Trust Advisors L.P. (the
``Sponsor'' or ``Advisor''). The sub-adviser for the trust is SkyBridge
Capital II, LLC (the ``Sub-Advisor''). The trustee for the Trust is
Delaware Trust Company (the ``Trustee''). The Bank of New York Mellon
is the transfer agent of the Trust (in such capacity, the ``Transfer
Agent'') and the administrator of the Trust (in such capacity, the
``Administrator''). The bitcoin custodian for the Trust is NYDIG Trust
Company LLC (the ``Bitcoin Custodian'').
The Trust is a Delaware statutory trust, organized on March 12,
2021, that operates pursuant to a trust agreement between the Advisor
and the Trustee (the ``Trust Agreement''). The Trust has no fixed
termination date.
Background
As discussed in further detail below,\6\ bitcoin is a digital asset
based on the decentralized, open source protocol of
[[Page 28647]]
the peer-to-peer computer network launched in 2009 that governs the
creation, movement, and ownership of bitcoin and hosts the public
ledger, or ``blockchain,'' on which all bitcoin transactions are
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized
nature of the Bitcoin Network allows parties to transact directly with
one another based on cryptographic proof instead of relying on a
trusted third party. The protocol also lays out the rate of issuance of
new bitcoin within the Bitcoin Network, a rate that is reduced by half
approximately every four years with an eventual hard cap of 21 million.
It is generally understood that the combination of these two features--
a systemic hard cap of 21 million bitcoin and the ability to transact
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin
its value.\7\
---------------------------------------------------------------------------
\6\ See ``The Bitcoin Industry and Market,'' infra.
\7\ For additional information about bitcoin and the Bitcoin
Network, see https://bitcoin.org/en/getting started.
---------------------------------------------------------------------------
The first rule filing proposing to list an exchange-traded product
to provide exposure to bitcoin in the U.S. was submitted by the Cboe
BZX Exchange, Inc. on June 30, 2016.\8\ At that time, blockchain
technology, and digital assets that utilized it, were relatively new to
the broader public. The market cap of all bitcoin in existence at that
time was approximately $10 billion. No registered offering of digital
asset securities or shares in an investment vehicle with exposure to
bitcoin or any other cryptocurrency had yet been conducted, and the
regulated infrastructure for conducting a digital asset securities
offering had not begun to develop.\9\ Similarly, regulated U.S. bitcoin
futures contracts did not exist. The Commodity Futures Trading
Commission (the ``CFTC'') had determined that bitcoin is a
commodity,\10\ but had not engaged in significant enforcement actions
in the space. The New York Department of Financial Services (``NYDFS'')
adopted its final BitLicense regulatory framework in 2015, but had only
approved four entities to engage in activities relating to virtual
currencies (whether through granting a BitLicense or a limited-purpose
trust charter) as of June 30, 2016.\11\ While the first over-the-
counter bitcoin fund launched in 2013, public trading was limited and
the fund had only $60 million in assets.\12\ There were very few, if
any, traditional financial institutions engaged in the space, whether
through investment or providing services to digital asset companies. In
January 2018, the Staff of the Commission noted in a letter to the
Investment Company Institute and SIFMA that it was not aware, at that
time, of a single custodian providing fund custodial services for
digital assets.\13\
---------------------------------------------------------------------------
\8\ See 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,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (August 1, 2018) (the ``Winklevoss II Order''). This proposal
was subsequently disapproved by the Commission. See id.
\9\ Digital assets that are securities under U.S. law are
referred to throughout this proposal as ``digital asset
securities.'' All other digital assets, including bitcoin, are
referred to interchangeably as ``cryptocurrencies'' or ``virtual
currencies.'' The term ``digital assets'' refers to all digital
assets, including both digital asset securities and
cryptocurrencies, together.
\10\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'')
(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), in which the CFTC stated:
``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.''
\11\ A list of virtual currency businesses that are entities
regulated by the NYDFS is available on the NYDFS website. See
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
\12\ See Bitcoin Investment Trust Form S-1, dated May 27, 2016,
available at: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm (data as of March 31, 2016
according to publicly available filings).
\13\ See Letter from Dalia Blass, Director, Division of
Investment Management, U.S. Securities and Exchange Commission to
Paul Schott Stevens, President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management Group--Head, Securities
Industry and Financial Markets Association (January 18, 2018),
available at: https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
---------------------------------------------------------------------------
As of the first quarter of 2021, the digital assets financial
ecosystem, including bitcoin, has progressed significantly. The
development of a regulated market for digital asset securities has
significantly evolved, with market participants having conducted
registered public offerings of both digital asset securities \14\ and
shares in investment vehicles holding bitcoin futures.\15\
Additionally, licensed and regulated service providers have emerged to
provide fund custodial services for digital assets, among other
services. For example, in December 2020, the Commission adopted a
conditional no-action position permitting certain special purpose
broker-dealers to custody digital asset securities under Rule 15c3-3
under the Exchange Act; \16\ in September 2020, the Staff of the
Commission released a no-action letter permitting certain broker-
dealers to operate a non-custodial Alternative Trading System (``ATS'')
for digital asset securities, subject to specified conditions; \17\ in
October 2019, the Staff of the Commission granted temporary relief from
the clearing agency registration requirement to an entity seeking to
establish a securities clearance and settlement system based on
distributed ledger technology; \18\ and multiple transfer agents who
provide services for digital asset securities have registered with the
Commission.\19\
---------------------------------------------------------------------------
\14\ See Prospectus Supplement filed pursuant to Rule 424(b)(1)
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
\15\ See Prospectus filed by Stone Ridge Trust VI on behalf of
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
\16\ See Securities Exchange Act Release No. 90788, 86 FR 11627
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset
Securities by Special Purpose Broker-Dealers).
\17\ See Letter from Elizabeth Baird, Deputy Director, Division
of Trading and Markets, U.S. Securities and Exchange Commission to
Kris Dailey, Vice President, Risk Oversight & Operational
Regulation, Financial Industry Regulatory Authority (September 25,
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
\18\ See Letter from Jeffrey S. Mooney, Associate Director,
Division of Trading and Markets, U.S. Securities and Exchange
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
\19\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
---------------------------------------------------------------------------
Beyond the Commission's purview, the regulatory landscape has also
changed significantly since 2016, and cryptocurrency markets have grown
and evolved as well. The market for bitcoin is approximately 100 times
larger, having recently reached a market cap of over $1 trillion. As of
February 27, 2021, bitcoin's market cap is greater than companies such
as Facebook, Inc., Berkshire Hathaway Inc., and JP Morgan Chase & Co.
The number of verified users at Coinbase, the largest U.S.-based
bitcoin exchange, has grown to over 56 million.\20\ CFTC-regulated
bitcoin futures (``Bitcoin Futures'') represented approximately $28
billion in notional trading volume on the Chicago
[[Page 28648]]
Mercantile Exchange (the ``CME'') in December 2020 compared to $737
million, $1.4 billion, and $3.9 billion in total trading in December
2017, December 2018, and December 2019, respectively. Bitcoin Futures
traded over $1.2 billion per day in December 2020 and represented $1.6
billion in open interest compared to $115 million in December 2019.\21\
The CFTC has exercised its regulatory jurisdiction in bringing a number
of enforcement actions related to bitcoin and against trading platforms
that offer cryptocurrency trading.\22\ The U.S. Office of the
Comptroller of the Currency (the ``OCC'') has made clear that
federally-chartered banks are able to provide custody services for
cryptocurrencies and other digital assets.\23\ The OCC recently granted
conditional approval of two charter conversions by state-chartered
trust companies to national banks, both of which provide cryptocurrency
custody services.\24\ NYDFS has granted no fewer than twenty-five
BitLicenses, including to established public payment companies like
PayPal Holdings, Inc. and Square, Inc., and limited purpose trust
charters to entities providing cryptocurrency custody services. The
U.S. Treasury Financial Crimes Enforcement Network (``FinCEN'') has
released extensive guidance regarding the applicability of the Bank
Secrecy Act (``BSA'') and implementing regulations to virtual currency
businesses,\25\ and has proposed rules imposing requirements on
entities subject to the BSA that are specific to the technological
context of virtual currencies.\26\ In addition, the Treasury's Office
of Foreign Assets Control (``OFAC'') has brought enforcement actions
over apparent violations of the sanctions laws in connection with the
provision of wallet management services for digital assets.\27\
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\20\ See, e.g., ``Riding Bitcoin Surge, Coinbase Active Users
Grew by 117% in Q1 2021; Revenue Tops $1.8B'' (April 6, 2021),
available at: https://www.coindesk.com/coinbase-q1-earnings-report-monthly-active-users.
\21\ All statistics and charts included in this proposal with
respect to the CME are sourced from https://www.cmegroup.com/trading/bitcoin-futures.html. In addition, as further discussed
below, the Sponsor believes the CME represents a regulated market of
significant size for purposes of addressing the Commission's
concerns about potential manipulation of the bitcoin market.
\22\ The CFTC's annual report for Fiscal Year 2020 (which ended
on September 30, 2020) noted that the CFTC ``continued to
aggressively prosecute misconduct involving digital assets that fit
within the CEA's definition of commodity'' and ``brought a record
setting seven cases involving digital assets.'' See CFTC FY2020
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download.
Additionally, the CFTC filed on October 1, 2020, a civil enforcement
action against the owner/operators of the BitMEX trading platform,
which was one of the largest bitcoin derivative exchanges. See CFTC
Release No. 8270-20 (October 1, 2020), available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
\23\ See OCC News Release 2021-2 (January 4, 2021), available
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html.
\24\ See OCC News Release 2021-6 (January 13, 2021), available
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-6.html and OCC News Release 2021-19 (February 5, 2021),
available at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-19.html.
\25\ See FinCEN Guidance FIN-2019-G001 (May 9, 2019)
(Application of FinCEN's Regulations to Certain Business Models
Involving Convertible Virtual Currencies), available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
\26\ See U.S. Department of the Treasury Press Release: ``The
Financial Crimes Enforcement Network Proposes Rule Aimed at Closing
Anti-Money Laundering Regulatory Gaps for Certain Convertible
Virtual Currency and Digital Asset Transactions'' (December 18,
2020), available at: https://home.treasury.gov/news/press-releases/sm1216.
\27\ See U.S. Department of the Treasury Enforcement Release:
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent
Violations of Multiple Sanctions Programs Related to Digital
Currency Transactions'' (December 30, 2020), available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
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In addition to the regulatory developments laid out above, more
traditional financial market participants appear to be embracing
cryptocurrency: Large insurance companies,\28\ investment banks,\29\
asset managers,\30\ credit card companies,\31\ university
endowments,\32\ pension funds,\33\ and even historically bitcoin
skeptical fund managers \34\ are allocating to bitcoin. The largest
over-the-counter bitcoin fund previously filed a Form 10 registration
statement, which the Staff of the Commission reviewed and which took
effect automatically, and is now a reporting company.\35\ Established
companies like Tesla, Inc.,\36\ MicroStrategy Incorporated,\37\ and
Square, Inc.,\38\ among others, have recently announced substantial
investments in bitcoin in amounts as large as $1.5 billion (Tesla) and
$425 million (MicroStrategy).
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\28\ On December 10, 2020, Massachusetts Mutual Life Insurance
Company (MassMutual) announced that it had purchased $100 million in
bitcoin for its general investment account. See MassMutual Press
Release ``Institutional Bitcoin provider NYDIG announces minority
stake purchase by MassMutual'' (December 10, 2020), available at:
https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2020/12/institutional-bitcoin-provider-nydig-announces-
minority-stake-purchase-by-massmutual.
\29\ See, e.g., ``Morgan Stanley to Offer Rich Clients Access to
Bitcoin Funds'' (March 17, 2021) available at: https://www.bloomberg.com/news/articles/2021-03-17/morgan-stanley-to-offer-rich-clients-access-to-bitcoin-funds.
\30\ See, e.g., ``BlackRock's Rick Rieder says the world's
largest asset manager has `started to dabble' in bitcoin'' (February
17, 2021), available at: https://www.cnbc.com/2021/02/17/blackrock-has-started-to-dabble-in-bitcoin-says-rick-rieder.html and
``Guggenheim's Scott Minerd Says Bitcoin Should Be Worth $400,000''
(December 16, 2020), available at: https://www.bloomberg.com/news/articles/2020-12-16/guggenheim-s-scott- minerd-says-bitcoin-should-
be-worth-400-000.
\31\ See, e.g., ``Visa Moves to Allow Payment Settlements Using
Cryptocurrency'' (March 29, 2021), available at: https://www.reuters.com/business/autos-transportation/exclusive-visa-moves-allow-payment-settlements-using-cryptocurrency-2021-03-29/.
\32\ See, e.g., ``Harvard and Yale Endowments Among Those
Reportedly Buying Crypto'' (January 25, 2021), available at: https://www.bloomberg.com/news/articles/2021-01-26/harvard-and-yale-
endowments-among-those-reportedly-buying-crypto.
\33\ See, e.g., ``Virginia Police Department Reveals Why its
Pension Fund is Betting on Bitcoin'' (February 14, 2019), available
at: https://finance.yahoo.com/news/virginia-police-department-reveals-why-194558505.html.
\34\ See, e.g., ``Bridgewater: Our Thoughts on Bitcoin''
(January 28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones
says he likes bitcoin even more now, rally still in the `first
inning''' (October 22, 2020), available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
\35\ See Letter from Division of Corporation Finance, Office of
Real Estate & Construction to Barry E. Silbert, Chief Executive
Officer, Grayscale Bitcoin Trust (January 31, 2020), available at:
https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
\36\ See Form 10-K submitted by Tesla, Inc. for the fiscal year
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
\37\ See Form 10-Q submitted by MicroStrategy Incorporated for
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
\38\ See Form 10-Q submitted by Square, Inc. for the quarterly
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
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Despite these developments, access for U.S. retail investors to
gain exposure to bitcoin via a transparent and regulated exchange-
traded vehicle remains limited. As investors and advisors increasingly
utilize exchange-traded product (``ETP'') to manage diversified
portfolios (including equities, fixed income securities, commodities,
and currencies) quickly, easily, relatively inexpensively, tax-
efficiently, and without having to hold directly any of the underlying
assets, options for bitcoin exposure for U.S. investors remain limited
to: (i) Investing in over-the-counter bitcoin funds (``OTC Bitcoin
Funds'') that are subject to high premium/discount volatility (and high
management fees) to the advantage of more sophisticated investors that
are able to purchase shares at net asset value (``NAV'') directly with
the issuing trust; (ii) facing the technical risk, complexity, and
generally high fees associated with buying and storing bitcoin
directly; or (iii) purchasing shares of operating companies that they
believe will provide proxy exposure to
[[Page 28649]]
bitcoin with limited disclosure about the associated risks. Meanwhile,
investors in many other countries, including Canada, are able to use
more traditional exchange listed and traded products to gain exposure
to bitcoin, disadvantaging U.S. investors and leaving them with
riskier, more expensive, and less regulated means of getting bitcoin
exposure.\39\
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\39\ Securities regulators in a number of other countries have
either approved or otherwise allowed the listing and trading of
bitcoin ETPs. Specifically, these funds (with their respective
approximate AUMs as of April 14, 2021) include the Purpose Bitcoin
ETF ($993,000,000), VanEck Vectors Bitcoin ETN ($209,000,000),
WisdomTree Bitcoin ETP ($407,000,000), Bitcoin Tracker One
($1,380,000,000), BTCetc bitcoin ETP ($1,410,000,000), 21Shares
Bitcoin ETP ($362,000,000), 21Shares Bitcoin Suisse ETP
($30,000,000), CoinShares Physical Bitcoin ETP ($396,000,000).
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For example, the Purpose Bitcoin ETF, a retail physical bitcoin ETP
recently launched in Canada, reportedly reached $421.8 million in
assets under management (``AUM'') in two days, and has achieved $993
million in assets as of April 14, 2021, demonstrating the demand for a
North American market listed bitcoin ETP. The Sponsor believes that the
demand for the Purpose Bitcoin ETF is driven primarily by investors'
desire to have a regulated and accessible means of exposure to bitcoin.
The Purpose Bitcoin ETF also offers a class of units that is U.S.
dollar denominated, which could appeal to U.S. investors. Without an
approved bitcoin ETP in the U.S. as a viable alternative, the Sponsor
believes U.S. investors will seek to purchase these shares in order to
get access to bitcoin exposure, leaving them without the protections of
U.S. securities laws. Given the separate regulatory regime and the
potential difficulties associated with any international litigation,
such an arrangement would create more risk exposure for U.S. investors
than they would otherwise have with a U.S. exchange listed ETP. With
the addition of more bitcoin ETPs in non-U.S. jurisdictions expected to
grow, the Sponsor anticipates that such risks will only continue to
grow.
In addition, several funds registered under the Investment Company
Act of 1940 (the ``1940 Act'') have effective registration statements
that contemplate bitcoin exposure through a variety of means, including
through investments in bitcoin futures contacts \40\ and through OTC
Bitcoin Funds.\41\ As of the date of this filing, it is anticipated
that other 1940 Act funds will soon begin to pursue bitcoin through
other means, including through put options on bitcoin futures contracts
and investments in privately offered pooled investment vehicles that
invest in bitcoin.\42\ In previous statements, the Staff of the
Commission has acknowledged how such funds can satisfy their concerns
regarding custody, valuation, and manipulation.\43\ The funds that have
already invested in bitcoin instruments have no reported issues
regarding custody, valuation, or manipulation of the instruments held
by these funds. While these funds do offer investors some means of
exposure to bitcoin, the current offerings fall short of giving
investors an accessible, regulated product that provides concentrated
exposure to bitcoin.
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\40\ See, e.g., Stone Ridge Trust VI (File No. 333-234055);
BlackRock Global Allocation Fund, Inc. (File No. 33-22462); and
BlackRock Funds V (File No. 333-224371).
\41\ See, e.g., Amplify Transformational Data Sharing ETF (File
No. 333-207937); and ARK Innovation ETF (File No. 333-191019).
\42\ See Stone Ridge Trust, Post-Effective Amendment No. 74 to
Registration Statement on Form N-1A (File No. 333-184477), available
at: https://www.sec.gov/Archives/edgar/data/1559992/000119312521072856/d129263d485apos.htm.
\43\ See Dalia Blass, ``Keynote Address--2019 ICI Securities Law
Developments Conference'' (December 3, 2019), available at: https://www.sec.gov/news/speech/blass-keynote-address-2019-ici-securities-law-developments-conference.
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OTC Bitcoin Funds and Investor Protection
Recently, U.S. investor exposure to bitcoin through OTC Bitcoin
Funds has grown into the tens of billions of dollars. With that growth,
so too has grown the potential risk to U.S. investors. As described
below, premium and discount volatility, high fees, insufficient
disclosures, and technical hurdles are exposing U.S. investors to risks
that could potentially be eliminated through access to a bitcoin ETP.
The Sponsor understands the Commission's previous focus on potential
manipulation of a bitcoin ETP in prior disapproval orders, but believes
that such concerns have been sufficiently mitigated and may be
outweighed by the growing and quantifiable investor protection concerns
related to OTC Bitcoin Funds. Accordingly, the Sponsor believes that
this proposal (and other comparable proposals) represents an
opportunity for U.S. investors to gain exposure to bitcoin in a
regulated and transparent exchange-traded vehicle that limits risks by:
(i) Reducing premium and discount volatility; (ii) reducing management
fees through meaningful competition; (iii) reducing risks associated
with investing in operating companies that are imperfect proxies for
bitcoin exposure; and (iv) providing an alternative to custodying spot
bitcoin.
OTC Bitcoin Funds and Premium/Discount Volatility
OTC Bitcoin Funds are generally designed to provide exposure to
bitcoin in a manner similar to the Shares. However, unlike the Shares,
OTC Bitcoin Funds are unable to freely offer creation and redemption in
a way that incentivizes market participants to keep their shares
trading in line with their NAV \44\ and, as a result, shares of OTC
Bitcoin Funds frequently trade at a price that is out of line with the
value of their assets held. Historically, OTC Bitcoin Funds have traded
at a significant premium to NAV.\45\
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\44\ Because OTC Bitcoin Funds are not listed on an exchange,
they are also not subject to the same transparency and regulatory
oversight by a listing exchange as the Shares would be. In the case
of the Trust, the existence of a surveillance-sharing agreement
between the Exchange and the Bitcoin Futures market results in
increased investor protections as compared to OTC Bitcoin Funds.
\45\ The inability to trade in line with NAV may at some point
result in OTC Bitcoin Funds trading at a discount to their NAV,
which has occurred more recently with respect to one prominent OTC
Bitcoin Fund. While that has not historically been the case, and it
is not clear whether such discounts will continue, such a prolonged,
significant discount scenario would give rise to nearly identical
potential issues related to trading at a premium.
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Trading at a premium or a discount is not unique to OTC Bitcoin
Funds and is not in itself problematic, but the size of such premiums/
discounts and volatility thereof highlight the key differences in
operations and market structure of OTC Bitcoin Funds as compared to
ETPs. Combined with the significant increase in AUM for OTC Bitcoin
Funds over the past year, the size and volatility of premiums and
discounts for OTC Bitcoin Funds have given rise to significant and
quantifiable investor protection issues, as further described below. In
fact, the largest OTC Bitcoin Fund has grown to $35.0 billion in AUM as
of February 19, 2021 \46\ and has historically traded at a premium of
between roughly five and forty percent,
[[Page 28650]]
though it has seen premiums at times above one hundred percent.\47\
Recently, however, it has traded at a discount. As of March 24, 2021,
the discount was approximately 14%,\48\ representing around $4.9
billion less in market value than the bitcoin actually held by the
fund. If premium/discount numbers move back to the middle of its
historical range to a 20% premium (which historically could occur at
any time and overnight), it would represent a swing of approximately
$11.9 billion in value unrelated to the value of bitcoin held by the
fund and if the premium returns to the upper end of its typical range,
that number increases to $18.9 billion. These numbers are only
associated with a single OTC Bitcoin Fund--as more and more OTC Bitcoin
Funds come to market and more investor assets flood into them to get
access to bitcoin exposure, the potential dollars at risk will only
increase.
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\46\ Compare to an AUM of approximately $2.6 billion on February
26, 2020, the date on which the Commission issued the most recent
disapproval order for a bitcoin ETP. See Order Disapproving a
Proposed Rule Change, as Modified by Amendment No. 1, 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, Securities Exchange Act Release
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Order''). While the price
of one bitcoin has increased approximately 400% in the intervening
period, the total AUM has increased by approximately 1240%,
indicating that the increase in AUM is attributable to more than
just price appreciation in bitcoin.
\47\ See ``Traders Piling Into Overvalued Crypto Funds Risk a
Painful Exit'' (February 4, 2021), available at: https://www.bloomberg.com/news/articles/2021-02-04/bitcoin-one-big-risk-when-investing-in-crypto-funds.
\48\ This discount is compared to another OTC Bitcoin Product
which had a premium of over 60% on the same day, with a premium of
over 200% a few days earlier.
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The risks associated with volatile premiums/discounts for OTC
Bitcoin Funds raise significant investor protection issues in several
ways. First, investors may be buying shares of a fund for a price that
is not reflective of the per share value of the fund's underlying
assets. Even operating within the normal premium range, it is possible
for an investor to buy shares of an OTC Bitcoin Fund only to have those
shares quickly lose 10% or more in dollar value without any movement of
the price of bitcoin. That is to say--the price of bitcoin could have
stayed exactly the same from market close on one day to market open the
next, yet the value of the shares held by the investor decreased only
because of the fluctuation of the premium/discount. As more investment
vehicles, including mutual funds and ETFs, seek to gain exposure to
bitcoin, the easiest option for a buy and hold strategy is often an OTC
Bitcoin Fund, meaning that even investors that do not directly buy OTC
Bitcoin Funds can be disadvantaged by extreme premiums (or discounts)
and premium volatility.
The second issue is related to the first and explains how the
premium in OTC Bitcoin Funds essentially creates a transfer of value
from retail investors to more sophisticated investors. Generally
speaking, only accredited investors are able to purchase shares from
the issuing fund, which means that they are able to purchase shares
directly with the fund at NAV (in exchange for either cash or bitcoin)
without having to pay the premium or sell into the discount. While
there are often minimum holding periods for shares required by law, an
investor that is allowed to purchase directly from the fund is able to
hedge their bitcoin exposure as needed to satisfy the holding
requirements and collect on the premium or discount opportunity.
As noted above, the existence of a premium or discount and the
premium/discount collection opportunity is not unique to OTC Bitcoin
Funds and does not in itself warrant the approval of an exchange traded
product.\49\ What makes this situation unique is that such significant
and persistent premiums and discounts can exist in a product with over
$35 billion in assets under management,\50\ that billions of retail
investor dollars are constantly under threat of premium/discount
volatility,\51\ and that premium/discount volatility is generally
captured by more sophisticated investors on a riskless basis. While the
Sponsor appreciates the Commission's focus on potential manipulation of
a bitcoin ETP in prior disapproval orders and believes those concerns
are adequately addressed in this filing, the Sponsor submits that
current circumstances warrant that the Commission also consider the
direct, quantifiable investor protection issue in determining whether
to approve this proposal, particularly when the Trust, as a bitcoin
ETP, is designed to reduce the likelihood of significant and prolonged
premiums and discounts with its open-ended nature as well as the
ability of market participants (i.e., market makers and authorized
participants) to create and redeem on a daily basis. Furthermore, the
risk of manipulation of a bitcoin ETP is also present in and
potentially magnified by OTC Bitcoin Funds.
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\49\ For example, similar premiums/discounts and premium/
discount volatility exist for other non-bitcoin cryptocurrency
related over-the-counter funds, but the size and investor interest
in those funds does not give rise to the same investor protection
concerns that exist for OTC Bitcoin Funds.
\50\ At $35 billion in AUM, the largest OTC Bitcoin Fund would
be among the top 40 largest out of roughly 2,400 U.S. listed ETPs.
\51\ In two recent incidents, the premium dropped from 28.28% to
12.29% from the close on 3/19/20 to the close on 3/20/20 and from
38.40% to 21.05% from the close on 5/13/19 to the close on 5/14/19.
Similarly, over the period of 12/21/20 to 1/21/20, the premium went
from 40.18% to 2.79%. While the price of bitcoin appreciated
significantly during this period and NAV per share increased by
41.25%, the price per share increased by only 3.58%.
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Spot and Proxy Exposure
Exposure to bitcoin through an ETP also presents certain advantages
for retail investors compared to buying spot bitcoin directly. The most
notable advantage is the use of the Bitcoin Custodian to custody the
Trust's bitcoin assets. The Sponsor has carefully selected the Bitcoin
Custodian, a third-party custodian that carries insurance covering both
hot and cold storage and is chartered as a limited purpose trust
company under the New York Banking Law,\52\ due to its manner of
holding the Trust's bitcoin. Among other things, the Bitcoin Custodian
will use ``cold'' (offline) storage to hold private keys and meet a
certain degree of cybersecurity measures and operational best
practices.\53\ By contrast, an individual retail investor holding
bitcoin through a cryptocurrency exchange lacks these protections.
Typically, retail exchanges hold most, if not all, retail investors'
bitcoin in ``hot'' (internet-connected) storage and do not make any
commitments to indemnify retail investors or to observe any particular
cybersecurity standard. Meanwhile, a retail investor holding spot
bitcoin directly in a self-hosted wallet may suffer from inexperience
in private key management (e.g., insufficient password protection, lost
key, etc.), which could cause them to lose some or all of their bitcoin
holdings. In the Bitcoin Custodian, the Trust has engaged a regulated
and licensed entity highly experienced in bitcoin custody, with
dedicated, trained employees and procedures to manage the private keys
to the Trust's bitcoin, and which is
[[Page 28651]]
accountable for failures.\54\ In addition, retail investors will be
able to hold the Shares in traditional brokerage accounts which provide
SIPC protection if a brokerage firm fails. Thus, with respect to
custody of the Trust's bitcoin assets, the Trust presents advantages
from an investment protection standpoint for retail investors compared
to owning spot bitcoin directly.
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\52\ New York state trust companies are subject to rigorous
oversight similar to other types of entities, such as nationally
chartered banking entities, that hold customer assets. Like national
banks, they must obtain specific approval of their primary regulator
for the exercise of their fiduciary powers. Moreover, limited
purpose trust companies engaged in the custody of digital assets are
subject to even more stringent requirements than national banks
which, following initial approval of trust powers, generally can
exercise those powers broadly without further approval of the OCC.
In contrast, NYDFS requires in their approval orders that limited
purpose trust companies obtain separate approval for all material
changes in business.
\53\ In addition to enforcing specific regulatory reporting
requirements, NYDFS consistently exercises its broad authority to
examine trust companies for compliance with law, risk management and
general safety and soundness considerations, including to assess
items such as the internal controls, client records and segregation
of assets topics that are typically important to the ability of an
entity to act as a qualified custodian. In this regard, the Bitcoin
Custodian is subject to annual examination, with specific attention
to its internal controls and risk management systems.
\54\ The Sponsor notes that the Sub-Advisor of the Trust advises
a 1940 Act-registered fund that invests substantially in a private
bitcoin fund to which NYDIG Trust Company LLC serves as bitcoin
custodian. Pursuant to that investment, the Sub-Advisor has
previously conducted substantial due diligence on the capabilities
of the Bitcoin Custodian. See SkyBridge Multi-Adviser Hedge Fund
Portfolios LLC (File No. 333-232584).
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Finally, as described in the Background section above, a number of
operating companies engaged in unrelated businesses--such as Tesla (a
car manufacturer) and MicroStrategy (an enterprise software company)--
have recently announced investments as large as $1.5 billion in
bitcoin.\55\ Without access to bitcoin exchange-traded products, retail
investors seeking investment exposure to bitcoin may end up purchasing
shares in these companies in order to gain the exposure to bitcoin that
they seek.\56\ In fact, mainstream financial news networks have written
a number of articles providing investors with guidance for obtaining
bitcoin exposure through publicly traded companies (such as
MicroStrategy, Tesla, and bitcoin mining companies, among others)
instead of dealing with the complications associated with buying spot
bitcoin in the absence of a bitcoin ETP.\57\ Such operating companies,
however, are imperfect bitcoin proxies and provide investors with
partial bitcoin exposure paired with a host of additional risks
associated with whichever operating company they decide to purchase.
Additionally, the disclosures provided by the aforementioned operating
companies with respect to risks relating to their bitcoin holdings are
generally substantially smaller than the registration statement of a
bitcoin ETP, including the Registration Statement, typically amounting
to a few sentences of narrative description and a handful of risk
factors.\58\ In other words, investors seeking bitcoin exposure through
publicly traded companies are gaining only partial exposure to bitcoin,
without the full benefit of the risk disclosures and associated
investor protections that come from the securities registration
process.
---------------------------------------------------------------------------
\55\ See notes 35-37 [sic], supra. MicroStrategy recently
completed a $900 million convertible note offering for the purpose
of acquiring bitcoin. See https://www.microstrategy.com/en/investor-relations/press/microstrategy-announces-pricing-of-offering-of-convertible-senior-notes_02-17-2021.
\56\ In August 2017, the Commission's Office of Investor
Education and Advocacy warned investors about situations where
companies were publicly announcing events relating to digital coins
or tokens in an effort to affect the price of the company's publicly
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims
\57\ See, e.g., ``7 public companies with exposure to bitcoin''
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want
to get in the crypto trade without holding bitcoin yourself? Here
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
\58\ See, e.g., Tesla 10-K for the year ended December 31, 2020,
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
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Bitcoin Futures
CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate (the ``CME CF BRR'').\59\ The contracts trade and settle
like other cash-settled commodity futures contracts. Nearly every
measurable metric related to Bitcoin Futures has trended consistently
up since launch and/or accelerated upward in the past year. For
example, there was approximately $28 billion in trading in Bitcoin
Futures in December 2020 compared to $737 million, $1.4 billion, and
$3.9 billion in total trading in December 2017, December 2018, and
December 2019, respectively. Bitcoin Futures traded over $1.2 billion
per day on the CME in December 2020 and represented $1.6 billion in
open interest compared to $115 million in December 2019. This general
upward trend in trading volume and open interest is captured in the
following chart.
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\59\ According to CME, the CME CF Bitcoin Reference Rate
aggregates the trade flow of major bitcoin spot exchanges during a
specific calculation window into a once-a-day reference rate of the
U.S. dollar price of bitcoin. Calculation rules are geared toward
maximum transparency and real-time replicability in underlying spot
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken.
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
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Similarly, the number of large open interest holders \60\ has
continued to increase even as the price of bitcoin has risen, as have
the number of unique accounts trading Bitcoin Futures.
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\60\ A large open interest holder in Bitcoin Futures is an
entity that holds at least 25 contracts, which is the equivalent of
125 bitcoin. At a price of approximately $30,000 per bitcoin on 12/
31/20, more than 80 firms had outstanding positions of greater than
$3.8 million in Bitcoin Futures.
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Operation of the Trust
According to the Registration Statement, the Trust will hold only
bitcoins and is expected from time to time to issue Creation Units (as
defined below) in exchange for deposits of bitcoins and to distribute
bitcoins in connection with redemptions of Creation Units. The Shares
represent units of fractional undivided beneficial interest in, and
ownership of, the Trust.
The activities of the Trust will be limited to (1) issuing Creation
Units in exchange for bitcoins deposited by the Authorized Participants
(as defined below) with the Bitcoin Custodian as consideration, (2)
transferring actual bitcoins as necessary to cover the Advisor's
investment management fee and selling bitcoins as necessary to pay
Trust expenses, (3) transferring actual bitcoins in exchange for
Creation Units surrendered for redemption by the Authorized
Participants, (4) causing the Advisor to sell bitcoins on the
termination of the Trust, and (5) engaging in all administrative and
custodial procedures necessary to accomplish such activities in
accordance with the provisions of the Trust Agreement.
The Trust will not be actively managed. It will not engage in any
activities designed to obtain a profit from, or to ameliorate losses
caused by, changes in the market prices of bitcoins.
Investment Objective
According to the Registration Statement, the investment objective
of the Trust is for the Shares to reflect the performance of the value
of bitcoin less the Trust's liabilities and expenses. The Trust will
not seek to reflect the performance of any benchmark or index. In order
to pursue its investment objective, the Trust will seek to purchase and
sell such number of bitcoin so that the total value of the bitcoin held
by the Trust is as close to 100% of the net assets of the Trust, as is
reasonably practicable to achieve.
The Bitcoin Industry and Market
Bitcoin
Bitcoin is the digital asset that is native to, and created and
transmitted through the operations of, the peer-to-peer Bitcoin
Network, a decentralized network of computers that operates on
cryptographic protocols. No single entity owns or operates the Bitcoin
Network, the infrastructure of which is collectively maintained by a
decentralized user base. The Bitcoin Network allows people to exchange
tokens of value, called bitcoin, which are recorded on a public
transaction ledger known as the Blockchain. Bitcoin can be used to pay
for goods and services, or it can be converted to fiat currencies, such
as the U.S. dollar, at rates determined on bitcoin trading platforms or
in individual end-user-to-end-user transactions under a barter system.
Although nascent in use, bitcoin may be used as a medium of exchange,
unit of account or store of value.
The Bitcoin Network is decentralized and does not require
governmental authorities or financial institution intermediaries to
create, transmit, or determine the value of bitcoin. In addition, no
party may easily censor transactions on the Bitcoin Network. As a
result, the Bitcoin Network is often referred to as decentralized and
censorship resistant.
The value of bitcoin is determined by the supply of and demand for
bitcoin. New bitcoin are created and rewarded to the parties providing
the Bitcoin Network's infrastructure (``miners'') in exchange for their
expending computational power to verify transactions and add them to
the Blockchain. The Blockchain is effectively a decentralized database
that includes all blocks that have been solved by miners, and it is
updated to include new blocks as they are solved. Each bitcoin
transaction is broadcast to the Bitcoin Network and, when included in a
block, recorded in the Blockchain. As each new block records
outstanding bitcoin transactions, and outstanding transactions are
settled and validated through such recording, the Blockchain represents
a complete, transparent, and unbroken history of all transactions of
the Bitcoin Network.
Bitcoin Network
The first step in directly using the Bitcoin Network for
transactions is to
[[Page 28653]]
download specialized software referred to as a ``bitcoin wallet.'' A
user's bitcoin wallet can run on a computer or smartphone and can be
used both to send and to receive bitcoin. Within a bitcoin wallet, a
user can generate one or more unique ``bitcoin addresses,'' which are
conceptually similar to bank account numbers. After establishing a
bitcoin address, a user can send or receive bitcoin from his or her
bitcoin address to another user's address. Sending bitcoin from one
bitcoin address to another is similar in concept to sending a bank wire
from one person's bank account to another person's bank account,
provided, however, that such transactions are not managed by an
intermediary and erroneous transactions generally may not be reversed
or remedied once sent.
The amount of bitcoin associated with each bitcoin address, as well
as each bitcoin transaction to or from such address, is transparently
reflected in the Blockchain and can be viewed by websites that operate
as ``blockchain explorers.'' Copies of the Blockchain exist on
thousands of computers on the Bitcoin Network. A user's bitcoin wallet
will either contain a copy of the blockchain or be able to connect with
another computer that holds a copy of the blockchain. The innovative
design of the Bitcoin Network protocol allows each Bitcoin user to
trust that their copy of the Blockchain will generally be updated
consistent with each other user's copy.
When a Bitcoin user wishes to transfer bitcoin to another user, the
sender must first have the recipient's Bitcoin address. The sender then
uses his or her Bitcoin wallet software to create a proposed
transaction to be added to the Blockchain. The proposal would reduce
the amount of bitcoin allocated to the sender's address and increase
the amount allocated recipient's address, in each case by the amount of
bitcoin desired to be transferred. The proposal is completely digital
in nature, similar to a file on a computer, and it can be sent to other
computers participating in the Bitcoin Network; however, the use of
``unspent transaction outputs'' that are verified cryptographically
prevents the ability to duplicate or counterfeit bitcoin.
Bitcoin Transactions
A bitcoin transaction contains the sender's bitcoin address, the
recipient's bitcoin address, the amount of bitcoin to be sent, a
transaction fee, and the sender's digital signature. Bitcoin
transactions are secured by cryptography known as public-private key
cryptography, represented by the bitcoin addresses and digital
signature in a transaction's data file. Each Bitcoin Network address,
or wallet, is associated with a unique ``public key'' and ``private
key'' pair, both of which are lengthy alphanumeric codes, derived
together and possessing a unique relationship.
The public key is visible to the public and analogous to the
Bitcoin Network address. The private key is a secret and may be used to
digitally sign a transaction in a way that proves the transaction has
been signed by the holder of the public-private key pair, without
having to reveal the private key. A user's private key must be kept in
accordance with appropriate controls and procedures to ensure it is
used only for legitimate and intended transactions. If an unauthorized
third person learns of a user's private key, that third person could
forge the user's digital signature and send the user's bitcoin to any
arbitrary bitcoin address, thereby stealing the user's bitcoin.
Similarly, if a user loses his private key and cannot restore such
access (e.g., through a backup), the user may permanently lose access
to the bitcoin contained in the associated address.
The Bitcoin Network incorporates a system to prevent double-
spending of a single bitcoin. To prevent the possibility of double-
spending a single bitcoin, each validated transaction is recorded, time
stamped and publicly displayed in a ``block'' in the Blockchain, which
is publicly available. Thus, the Bitcoin Network provides confirmation
against double-spending by memorializing every transaction in the
Blockchain, which is publicly accessible and downloaded in part or in
whole by all users of the Bitcoin Network software program. Any user
may validate, through their Bitcoin wallet or a blockchain explorer,
that each transaction in the Bitcoin Network was authorized by the
holder of the applicable private key, and Bitcoin Network mining
software consistent with reference software requirements typically
validates each such transaction before including it in the Blockchain.
This cryptographic security ensures that bitcoin transactions may not
generally be counterfeited, although it does not protect against the
``real world'' theft or coercion of use of a Bitcoin user's private
key, including the hacking of a Bitcoin user's computer or a service
provider's systems.
A Bitcoin transaction between two parties is settled when recorded
in a block added to the Blockchain. Validation of a block is achieved
by confirming the cryptographic hash value included in the block's
solution and by the block's addition to the longest confirmed
Blockchain on the Bitcoin Network. For a transaction, inclusion in a
block on the Blockchain constitutes a ``confirmation'' of a Bitcoin
transaction. As each block contains a reference to the immediately
preceding block, additional blocks appended to and incorporated into
the Blockchain constitute additional confirmations of the transactions
in such prior blocks, and a transaction included in a block for the
first time is confirmed once against double-spending. The layered
confirmation process makes changing historical blocks (and reversing
transactions) exponentially more difficult the further back one goes in
the Blockchain.
To undo past transactions in a block recorded on the Blockchain, a
malicious actor would have to exert tremendous computer power in re-
solving each block in the Blockchain starting with and after the target
block and broadcasting all such blocks to the Bitcoin Network. The
Bitcoin Network is generally programmed to consider the longest
Blockchain containing solved and valid blocks to be the most accurate
Blockchain. In order to undo multiple layers of confirmation and alter
the Blockchain, a malicious actor must re-solve all of the old blocks
sought to be regenerated and be able to continuously add new blocks to
the Blockchain at a speed that would have to outpace that of all of the
other miners on the Bitcoin Network, who would be continuously solving
for and adding new blocks to the Blockchain.
Custody of the Trust's Bitcoins
According to the Registration Statement, all bitcoins exist and are
stored on the Blockchain, the decentralized transaction ledger of the
Bitcoin Network. The Blockchain records most transactions (including
mining of new bitcoins) for all bitcoins in existence, and in doing so
verifies the location of each bitcoin (or fraction thereof) in a
particular digital wallet. The Trust's Bitcoin Account \61\ will be
maintained by the Bitcoin Custodian, and cold storage mechanisms are
used for the Vault Account by the Bitcoin Custodian. Each digital
wallet of the Trust may be accessed using its corresponding private
key. The Bitcoin Custodian's custodial operations will
[[Page 28654]]
maintain custody of the private keys that have been deposited in cold
storage at its various vaulting premises. The locations of the vaulting
premises may change regularly and will be kept confidential by the
Bitcoin Custodian for security purposes.
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\61\ According to the Registration Statement, the ``Bitcoin
Account'' is defined as the Vault Account and Wallet Account and any
associated subaccounts of either. The ``Vault Account'' is defined
as one or more cold storage accounts in the name of the Advisor and
of the Trust held for the safekeeping of the Trust's bitcoins. The
``Wallet Account'' is defined as one or more wallets in the name of
the Advisor and of the Trust held for deposit and withdrawal of
bitcoins.
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The term ``cold storage'' refers to a safeguarding method by which
the private keys corresponding to bitcoins 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. A digital
wallet may receive deposits of bitcoins but may not send bitcoins
without use of the bitcoins' corresponding private keys. In order to
send bitcoin from a digital wallet in which the private keys are kept
in cold storage, either the private keys must be retrieved from cold
storage and entered them into a bitcoin software program to sign the
transaction, or the unsigned transaction must be sent to the ``cold''
server in which the private keys are held for signature by the private
keys. At that point, the user of the digital wallet can transfer its
bitcoins.
The Trust's Bitcoin Custodian will custody of all of the Trust's
bitcoin. Custody of bitcoin typically involves the generation, storage,
and utilization of private keys. These private keys are used to effect
transfer transactions, i.e., transfers of bitcoin from an address
associated with the private key to another address. While private keys
must be used to send bitcoin, private keys do not need to be used or
shared in order to receive a bitcoin transfer; every private key has an
associated public key, and an address derived from that public key that
can be freely shared, to which counterparties can transfer bitcoin. The
Bitcoin Network has a public ledger, meaning that anybody with access
to the address can see the balance of digital assets in that address.
The Bitcoin Custodian will carefully consider the design of the
physical, operational, and cryptographic systems for secure storage of
the Trust's private keys in an effort to lower the risk of loss or
theft.
The Bitcoin Custodian will use a multi-factor security system under
which actions by multiple individuals working together are required to
access the private keys necessary to transfer such digital assets and
ensure the Trust's exclusive ownership. The multifactor security system
generates private keys using a FIPS 140-2-certified random number
generator to ensure the keys' uniqueness.
Before these keys are used, the Bitcoin Custodian will validate
that the public addresses associated with these keys have no associated
digital asset balances. The software used for key generation and
verification will be tested by the Bitcoin Custodian and reviewed by
third-party advisors from the security community with specific
expertise in computer security and applied cryptography. The private
keys will be stored in an encrypted manner using a FIPS 140-2-certified
security module held in redundant secure, geographically dispersed
locations with high levels of physical security, including robust
physical barriers to entry, electronic surveillance, and continuously
roving patrols. The operational procedures of these facilities and of
the Bitcoin Custodian will be reviewed by third-party advisors with
specific expertise in physical security. The devices that store the
keys will never be connected to the internet or any other public or
private distributed network (colloquially known as ``cold storage'').
Only specific individuals will be authorized to participate in the
custody process, and no individual acting alone will be able to access
or use any of the private keys. In addition, no combination of the
executive officers of the Advisor, the Sub-Advisor, or the investment
professionals managing the Trust, acting alone or together, will be
able to access or use any of the private keys that hold the Trust's
bitcoin.
The Trust may engage third-party custodians or vendors besides the
Bitcoin Custodian to provide custody and security services for all or a
portion of its bitcoin and/or cash, and the Advisor will pay the
custody fees and any other expenses associated with any such third-
party custodian or vendor.
The Bitcoin Custodian will be authorized to accept, on behalf of
the Trust, deposits of bitcoins from Authorized Participant Self-
Administered Accounts (as defined below) held with the Bitcoin
Custodian and transfer such bitcoins into the Bitcoin Account. Deposits
of bitcoins will be immediately available to the Trust to the extent
such bitcoins have not already been transferred to the Vault Account.
Generally, bitcoins transferred to the Bitcoin Account will be directly
deposited into digital wallets for which the keys are already in cold
storage.
The process of accessing and withdrawing bitcoins from the Trust
for a redemption of a Creation Unit will follow the same general
procedure as depositing bitcoins with the Trust for a creation of a
Creation Unit, only in reverse.
The Trust generally will not hold cash or cash equivalents.
However, the Trust may hold cash and cash equivalents on a temporary
basis to pay extraordinary expenses. The Trust has entered into a cash
custody agreement with the Bank of New York Mellon under which the Bank
of New York Mellon acts as custodian of the Trust's cash and cash
equivalents.
Calculation of the Trust's NAV
According to the Registration Statement, the net asset value
(``NAV'') of the Trust will be determined in accordance with Generally
Accepted Accounting Principles (``GAAP'') as the total value of bitcoin
held by the Trust, plus any cash or other assets, less any liabilities
including accrued but unpaid expenses. The NAV per Share will be
determined by dividing the NAV of the Trust by the number of Shares
outstanding.
The NAV of the Trust will be determined as of 4:00 p.m. Eastern
time (``E.T.'') on each Business Day.\62\ The Trust's daily activities
will generally not be reflected in the NAV determined for the Business
Day on which the transactions are effected (the trade date), but rather
on the following Business Day.
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\62\ ``Business Day'' is defined as each day that the Shares
trade on the Exchange.
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According to the Registration Statement, under normal
circumstances, the Trust will use the CF Bitcoin US Settlement Price
(the ``Reference Rate'') to calculate the Trust's NAV. The Reference
Rate is not affiliated with the Sponsor and was created and is
administered by CF Benchmarks Ltd. (the ``BRR Administrator''), an
independent entity, to facilitate financial products based on bitcoin.
The Reference Rate is designed based on the IOSCO Principals for
Financial Benchmarks and serves as a once-a-day benchmark rate of the
U.S. dollar price of bitcoin (USD/BTC), calculated as of 4:00 p.m. E.T.
The Reference Rate is based on materially the same methodology (except
calculation time) as the CME CF BRR, which was first introduced on
November 14, 2016 and is the rate on which bitcoin futures contracts
are cash-settled in U.S. dollars at the CME. The Reference Rate
aggregates the trade flow of several bitcoin exchanges, during an
observation window between 3:00 p.m. and 4:00 p.m. E.T. into the U.S.
dollar price of one bitcoin at 4:00 p.m. E.T. The current constituent
bitcoin
[[Page 28655]]
exchanges of the Reference Rate are Bitstamp, Coinbase, Gemini, itBit,
and Kraken (the ``Constituent Platforms'').
The Reference Rate is calculated based on the ``Relevant
Transactions'' (as defined below) of all Constituent Platforms, as
follows: \63\
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\63\ See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf.
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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 \64\
trade price is calculated from the trade prices and sizes of all
Relevant Transactions, i.e., across all Constituent Platforms.
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\64\ A volume-weighted median differs from a standard median in
that a weighting factor, in this case trade size, is factored into
the calculation.
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4. The Reference Rate is then determined by the equally-weighted
average of the volume-weighted medians of all partitions.
The Reference Rate does not include any futures prices in its
methodology. A ``Relevant Transaction'' is any cryptocurrency versus
U.S. dollar spot trade that occurs during the observation window
between 3:00 p.m. and 4:00 p.m. E.T. on a Constituent Platform in the
BTC/USD pair that is reported and disseminated by a Constituent
Platform through its publicly available API and observed by the
Benchmark Administrator, CF Benchmarks Ltd.
If the Reference Rate is unavailable, the Trust's bitcoin will be
valued as determined in good faith pursuant to policies and procedures
approved by the Advisor's valuation committee (``fair value pricing'').
In these circumstances, the Trust will determine fair value in a manner
that seeks to reflect the market value of the investment at the time of
valuation based on consideration of any information or factors the
Advisor's valuation committee deems appropriate, as further described
below. The Advisor's valuation committee will be responsible for
overseeing the implementation of the Trust's valuation procedures and
fair value determinations. For purposes of determining the fair value
of bitcoin, the valuation committee may consider, without limitation:
(i) Indications or quotes from brokers; (ii) valuations provided by a
third-party pricing agent; (iii) internal models that take into
consideration different factors determined to be relevant by the
Advisor; or (iv) any combination of the above.
The Advisor has adopted a policy pursuant to which the Trust will
value its assets other than bitcoin and liabilities. Under this policy,
the Advisor will use fair value standards according to GAAP. Generally,
the fair value of an asset that is traded on a market is measured by
reference to the orderly transactions on an active market. Among all
active markets with orderly transactions, the market that is used to
determine the fair value of an asset is the principal market (with
exceptions described in more detail below), which is either the market
on which the Trust actually transacts, or if there is sufficient
evidence, the market with the most trading volume and level of activity
for the asset. Where there is no active market with orderly
transactions for an asset, the Advisor's valuation committee will
follow policies and procedures described in more detail below to
determine the fair value.
While the Trust will publish its NAV every day the Exchange is
open, the Trust's operations will not rely to any significant extent on
its valuation procedures. The Trust's only regular recurring expense is
the Investment Management Fee, which is both calculated by reference to
and paid in bitcoin. Payment for Creation Units by Authorized
Participants may only be made in-kind in bitcoin, and redemption
proceeds are similarly only paid in bitcoin. While the Trust may from
time to time incur certain extraordinary, non-recurring expenses that
must be paid in U.S. Dollars or other fiat currency, such events would
only impact the amount of bitcoin represented by a Share of the Trust.
Accordingly, while other proposed bitcoin ETPs rely on a benchmark or
other reference rate to value their assets and liabilities and
determine the amount of cash necessary to purchase or redeem Creation
Units (or their equivalent), the Trust will not rely on any such
conversion rate, as it is designed to transact only in bitcoin in
nearly all circumstances. The Trust's calculation of its NAV is
intended to assist investors in valuing their Shares, and the Trust's
ability to transact only in bitcoin further insulates the Trust from
activities designed to manipulate the price of the bitcoin held by the
Trust.
The Structure and Operation of the Trust Satisfies Commission
Requirements for Bitcoin-Based Exchange Traded Products
In disapproving prior proposals to list and trade shares of various
bitcoin trusts and bitcoin-based trust issued receipts, the Commission
noted that such proposals did not adequately demonstrate that they were
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest, consistent with Section
6(b)(5) of the Act.\65\ The Commission does not apply a ``cannot be
manipulated'' standard, but instead seeks to examine whether a proposal
meets the requirements of the Act.\66\ The Commission has explained
that a proposal could satisfy the requirements of the Act in the first
instance by demonstrating that the listing exchange has entered into a
comprehensive surveillance-sharing agreement (``CSSA'') with a
regulated market of significant size relating to the underlying
assets.\67\ The Commission has also recognized that a listing exchange
would not necessarily need to enter into a CSSA with a regulated
significant market if the underlying commodity market inherently
possessed a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets or if
the listing exchange could demonstrate that there were sufficient
``other means to prevent fraudulent and manipulative acts and
practices.'' \68\
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\65\ See, e.g., 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, Securities Exchange Act Release No. 80206
(March 10, 2017), 82 FR 14076 (March 16, 2017) (SR-BatsBZX-2016-30)
(the ``Winklevoss I Order''); the Winklevoss II Order; Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin
ETF Trust Under NYSE Arca Rule 8.201-E, Securities Exchange Act
Release No. 87267 (October 9, 2019), 84 FR 55382 (October 16, 2019)
(SR-NYSEArca-2019-01) (the ``Bitwise Order''); the Wilshire Phoenix
Order; Order Disapproving a Proposed Rule Change to List and Trade
the Shares of the ProShares Bitcoin ETF and the ProShares Short
Bitcoin ETF, Securities Exchange Act Release No. 83904 (August 22,
2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017-139); 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, 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 to List
and Trade the Shares of the GraniteShares Bitcoin ETF and the
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No.
83913 (August 22, 2018), 83 FR 43923 (August 28, 2018) (SR-CboeBZX-
2018-01) (the ``GraniteShares Order'').
\66\ See Winklevoss II Order, 84 FR 37582.
\67\ See Wilshire Phoenix Order, 85 FR 12596-97.
\68\ See Winklevoss II Order, 84 FR 37580, 37582-91; Bitwise
Order, 84 FR 55383, 55385-406; Wilshire Phoenix Order, 85 FR 12597.
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As described below, the Sponsor believes the structure and
operation of the Trust are designed to prevent fraudulent and
manipulative acts and practices, to protect investors and the
[[Page 28656]]
public interest, and to respond to the specific concerns that the
Commission has identified with respect to potential fraud and
manipulation in the context of a bitcoin ETP. Further, as the
Commission has previously acknowledged, trading in a bitcoin-based ETP
on a national securities exchange, as compared to trading in an
unregulated bitcoin spot market, may provide additional protection to
investors.\69\ 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.
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\69\ See GraniteShares Order, 83 FR 43931. See also Hester M.
Peirce, U.S. Sec. Exch. Comm'n, Dissent of Commissioner Hester M.
Peirce to Release No. 34-83723 (July 26, 2018), available at:
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.'').
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Surveillance Sharing Agreements With a Market of Significant Size
1. 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.\70\ In these orders, the Commission cited numerous
precedents \71\ in which listing proposals 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.\72\
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 (the ``ISG'') membership in common with, that market.'' \73\
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\70\ See Winklevoss I Order and Winklevoss II Order. 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 facts are not
unique to bitcoin and are true of 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 22% of total above ground gold stocks are held by
private investors and 17% are held by foreign governments; by
comparison, 13.61% of bitcoin are held by the 86 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.
\71\ For an extensive listing of such precedents, see Winklevoss
I Order, 82 FR 14083 n. 96.
\72\ 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://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges+Criteria.pdf.
\73\ See Winklevoss II Order, 84 FR 37594.
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The CME \74\ 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.'' \75\ Membership of a relevant futures exchange in ISG is
sufficient to meet the surveillance-sharing requirement.\76\
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\74\ 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. 7(d)(3) (``The
board of trade shall list on the contract market only contracts that
are not readily susceptible to manipulation.'').
\75\ See https://isgportal.org/overview.
\76\ See, e.g., Winklevoss II Order, 84 FR 37594.
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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.\77\ The
Commission has also 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.'' \78\
---------------------------------------------------------------------------
\77\ See, e.g., id. at 37589-90.
\78\ Id. at 37594; see also GraniteShares Order, 83 FR 43930 n.
85 and accompanying text.
---------------------------------------------------------------------------
For the following reasons, 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'' that satisfies both elements of the example provided
by the Commission.
(a) Reasonable Likelihood That a Person Manipulating the ETP Would Have
To Trade on the Market
The first element of a ``significant market'' or ``market of
significant size'' is a reasonable likelihood that a person attempting
to manipulate the ETP would also have to trade on that market (or group
of markets) to successfully manipulate the ETP, such that a
surveillance sharing agreement would assist the ETP listing market in
detecting and deterring misconduct. The Commission has stated that
establishing a lead-lag relationship between the bitcoin futures market
and the spot market is central to understanding whether it is
reasonably likely that a would-be manipulator of the ETP would need to
trade on the bitcoin futures market to successfully manipulate prices
on those spot platforms that feed into the proposed ETP's pricing
mechanism.\79\
---------------------------------------------------------------------------
\79\ See Wilshire Phoenix Order, 85 FR 12612.
---------------------------------------------------------------------------
The Sponsor believes that the CME meets the first element in
several ways. First, it is the primary market for bitcoin futures, 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 \80\ and the futures market.
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\80\ ``The OTC market has no formal structure and no open-outcry
meeting place.'' 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, Securities Exchange Act Release
No. 50603 (October 28, 2004), 69 FR 64614 (November 5, 2004) (SR-
NYSE-2004-22) (the ``streetTRACKS Order'').
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Specifically, the Sponsor notes that the CME is similarly situated
to the COMEX division of NYMEX with
[[Page 28657]]
respect to gold ETPs.\81\ As with the OTC gold market, it is not
possible to enter into an information sharing agreement with the OTC
bitcoin market.\82\ When the Commission has approved the listing of
gold ETPs and other commodity-trust ETPs, rather than requiring
surveillance sharing agreements with the relevant OTC markets, it has
recognized surveillance sharing agreements between the listing exchange
and ``regulated markets for trading futures on the underlying
commodity,'' \83\ given the understanding that the manipulation of the
market for a commodity often involves the futures market for that
commodity.\84\
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\81\ Other applicants have made similar arguments in their
respective filings. See Notice of Filing of Proposed Rule Change To
List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck
SolidX Bitcoin Trust, Under BZX Rule 14.11(e)(4), Commodity-Based
Trust, Securities Exchange Act Release No. 85119 (February 13,
2019), 84 FR 5140 (February 20, 2019) (SRCboeBZX-2019-004), n. 11.
\82\ ``It is not possible, however, to enter into an information
sharing agreement with the OTC gold market.'' streetTRACKS Order, 69
FR 64619. See also Order Granting Approval of Proposed Rule Change
and Amendment Nos. 2, 3 and 4 and Notice of Filing and Order
Granting Accelerated Approval to Amendment No. 5 by the American
Stock Exchange LLC Relating to the Listing and Trading of the
iShares[supreg] COMEX Gold Trust, Securities Exchange Act Release
No. 51058 (January 19, 2005), 70 FR 3749 (January 26, 2005) (SR-
Amex-2004-38); Notice of Filing of Proposed Rule Change Relating to
Listing and Trading of Shares of ETFS Palladium Trust, Securities
Exchange Act Release No. 60971 (November 9, 2009), 74 FR 59283
(November 17, 2009) (SRNYSEArca-2009-94).
\83\ See Winklevoss II Order, 84 FR 37591.
\84\ 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 Sponsor also believes that the CME meets the first element
because its Bitcoin Futures are cash settled by reference to a final
settlement price based on the CME CF BRR. Anyone attempting to
manipulate the CME CF BRR would need to place numerous large sized
trades on any of the Constituent Platforms that are used to calculate
the CME CF BRR,\85\ and the resulting manipulative trading patterns
would be detectable by the BRR Administrator and the CME.\86\ 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 procedures.\87\ As
a result, 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.
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\85\ Because the CME CF BRR is 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.
\86\ The BRR Calculation Agent receives trading data from the
Constituent Platforms through its Automatic Programming Interface.
See CME-CF Practice Standards, available at: https://www.cfbenchmarks.com/indices/BRR.
\87\ See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges+Criteria.pdf.
---------------------------------------------------------------------------
The Sponsor also maintains that any would-be manipulator of bitcoin
prices would be reasonably likely to do so through the Bitcoin Futures
market in order to take advantage of the leverage inherent in trading
futures contracts. The inherent leverage in Bitcoin Futures would allow
a potential manipulator to attempt a manipulation scheme with far less
upfront capital than it would need to achieve the same results in the
spot market. As the spot bitcoin market has grown tremendously since
the issuance of the Wilshire Phoenix Order, it would be critical for a
would-be manipulator to efficiently use its capital to have the desired
effect, and a would-be manipulator would certainly recognize that the
chances of successfully deploying its scheme are increased
exponentially if it can affect the Bitcoin Futures market (and thus the
bitcoin spot market) by posting only the minimum margin required the
Bitcoin Futures exchange.\88\ Accordingly, because the Bitcoin Futures
market is in effect the ``cheapest'' route to manipulate bitcoin, it is
highly likely such manipulators would attempt to do so there rather
than any spot market.
---------------------------------------------------------------------------
\88\ As of April 12, 2021, the initial margin required in
connection with CME Bitcoin Futures for the April 2021 contract
ranges from 42% to 38%.
---------------------------------------------------------------------------
Finally, the Sponsor maintains that a would-be manipulator of
bitcoin would be required to execute trades on multiple exchanges
simultaneously in order to successful move the global price of bitcoin
due to the decentralized nature of the Bitcoin Network. The Sponsor
thus believes that bitcoin manipulators would be much more likely to
attempt to manipulate a limited number of futures markets rather than
attempt simultaneous executions on potentially dozens of different
exchanges. Even if a would-be manipulator does attempt to manipulate
bitcoin across platforms, such a scheme would also necessarily include
some attempt to manipulate the price of bitcoin futures, including the
CME.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
The second feature of a ``significant market'' or ``market of
significant size'' in the Commission's example is that the market is
one in which it is unlikely that trading in the ETP would be the
predominant influence on prices in that market. The Sponsor believes
that trading in the Shares would not be the predominant force on prices
in the Bitcoin Futures market (or spot market) for a number of reasons,
including the significant volume in the Bitcoin Futures market, the
size of bitcoin's market cap (approximately $1 trillion), and the
significant liquidity available in the spot market.
Since the Wilshire Phoenix Order was issued, there has been
significant growth in Bitcoin Futures across each of trading volumes
and open interest as reflected in the chart below:
Chicago Mercantile Exchange Bitcoin Futures
----------------------------------------------------------------------------------------------------------------
February 26, 2020 April 7, 2021
----------------------------------------------------------------------------------------------------------------
Trading Volume................................................ $433,000,000 $4,321,000,000
Open Interest................................................. 238,000,000 2,582,000,000
----------------------------------------------------------------------------------------------------------------
The growth of the Bitcoin Futures has coincided with similar growth
in the bitcoin spot market. The market for Bitcoin Futures is rapidly
approaching the size of markets for other commodity interests,
including interests in metals, agricultural and petroleum products.
Accordingly, as the Bitcoin Futures market continues to develop and
more closely resemble other commodity futures markets, it can be
reasonably expected that the relationship between the Bitcoin Futures
market and bitcoin spot market will behave similarly to other future/
spot market relationships,
[[Page 28658]]
including periods where a lead-lag relationship between the Bitcoin
Futures market and bitcoin spot market exists.
In addition, the spot market for bitcoin is also very liquid.
According to data from CoinRoutes from February 2021, the cost to buy
or sell $5 million worth of bitcoin averages roughly 10 basis points
with a market impact of 30 basis points.\89\ For a $10 million market
order, the cost to buy or sell is roughly 20 basis points with a market
impact of 50 basis points. Stated another way, a market participant
could enter a market buy or sell order for $10 million of bitcoin and
only move the market 0.5%. More strategic purchases or sales (such as
using limit orders and executing through OTC bitcoin trade desks) would
likely have less obvious impact on the market--which is consistent with
MicroStrategy, Tesla, and Square being able to collectively purchase
billions of dollars in bitcoin. The Sponsor believes that the
combination of Bitcoin Futures' important role in price discovery, the
overall size of the bitcoin market, and the ability of market
participants, including authorized participants creating and redeeming
in-kind with the Trust, to buy or sell large amounts of bitcoin without
significant market impact will help prevent the Shares from becoming
the predominant force on pricing in either the bitcoin spot or Bitcoin
Futures markets.
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\89\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------
The results from a study conducted by CF Benchmarks simulating to
determine the extent of ``slippage'' (i.e., the difference between the
expected price of a trade and the price at which the trade was actually
executed) offer further evidence that trading in the Shares is unlikely
to be the predominant influence in the bitcoin spot market.\90\ The CF
Benchmarks Analysis simulated the purchase of 50 bitcoins a day for 686
days (an amount chosen specifically to replicate hypothetical trades by
an ETP) and found that the maximum amount of slippage on a particular
day was 0.3%, with the remainder of values between 0% and 0.15%. Thus,
according to CF Benchmarks, the slippage in this study could be
described as having been largely negligible or, at most, minor during
the observation period.
---------------------------------------------------------------------------
\90\ See CF Benchmarks, ``An Analysis of the Suitability of the
CME CF BRR for the Creation of Regulated Financial Products,''
December 2020 (the ``CF Benchmarks Analysis''), available at:
https://docsend.com/view/kizk7rarzaba6jxf.
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Other Means To Prevent Fraudulent and Manipulative Acts and Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Sponsor believes that the
significant liquidity in the spot market and the impact of market
orders on the overall price of bitcoin have made attempts to move the
price of bitcoin increasingly expensive over the past year, curtailing
potential fraud or manipulation in connection with bitcoin pricing. In
January 2020, for example, the cost to buy or sell $5 million worth of
bitcoin averaged roughly 30 basis points (compared to 10 basis points
in February 2021) with a market impact of 50 basis points (compared to
30 basis points in February 2021).\91\ For a $10 million market order,
the cost to buy or sell was roughly 50 basis points (compared to 20
basis points in February 2021) with a market impact of 80 basis points
(compared to 50 basis points in February 2021). As the liquidity in the
bitcoin spot market increases, it follows that the impact of $5 million
and $10 million orders will continue to decrease the overall impact in
spot price.
---------------------------------------------------------------------------
\91\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------
Additionally, the Sponsor believes that offering only in-kind
creation and redemption will provide unique protections against
potential attempts to manipulate the Shares. While the Sponsor believes
that the Reference Rate used to value the Trust's bitcoin is itself
resistant to manipulation based on the methodology described above, the
fact that creations and redemptions are only available in-kind makes
the manipulability of the Reference Rate significantly less important.
Specifically, because the Trust will not accept cash to buy bitcoin in
order to create or redeem Shares, the price that the Sponsor uses to
value the Trust's bitcoin is not particularly important.\92\ When
authorized participants create Shares with the Trust, they need to
deliver a certain number of bitcoin per Share (regardless of the
valuation used) and when they redeem Shares, they can similarly expect
to receive a certain number of bitcoin per Share. As a result, even if
the price used to value the Trust's bitcoin has been manipulated (which
the Sponsor believes is unlikely given the resistance afforded by the
independent Reference Rate methodology), the ratio of bitcoin per Share
does not change and the Trust will either accept (for creations) or
distribute (for redemptions) the same number of bitcoin regardless of
the value. This structure not only mitigates the risk associated with
potential manipulation, but also discourages and disincentivizes
manipulation of the Reference Rate because there is little financial
incentive to do so.
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\92\ The Investment Management Fee, which is the Trust's only
normal recurring expense is both paid and calculated in bitcoin.
---------------------------------------------------------------------------
Creation and Redemption of Shares
According to the Registration Statement, the Trust will issue and
redeem Shares on an ongoing basis in one or more Creation Units. A
Creation Unit will consist of a block of 50,000 Shares. The creation
and redemption of Creation Units will be effected in in-kind
transactions based on the quantity of bitcoin attributable to each
Share.
The quantity of bitcoin required to create each Creation Unit (the
``Creation Unit Deposit'') may change from day to day. On each day that
the Exchange is open for regular trading, the Administrator will
determine the quantity of bitcoin constituting the Creation Unit
Deposit and may make adjustments as appropriate to reflect accrued
expenses. Each Business Day, the Administrator will communicate the
final Creation Unit Deposit for that same Business Day and an estimated
Creation Unit Deposit for the next Business Day.
The number of outstanding Shares is expected to increase and
decrease from time to time as a result of the creation and redemption
of Creation Units. The creation and redemption of Creation Units
require the delivery to the Trust, or the distribution by the Trust, of
the number of bitcoins represented by the Creation Units being created
or redeemed. The creation and redemption of a Creation Unit will be
made only in exchange for the delivery to the Trust, or the
distribution by the Trust, of the number of whole and fractional
bitcoins represented by each Creation Unit being created or redeemed,
the number of which is determined by dividing the number of bitcoins
owned by the Trust at 4:00 p.m. E.T on the trade date of a creation or
redemption order, as adjusted for the number of whole and fractional
bitcoins constituting accrued but unpaid fees and expenses of the
Trust, by the number of Shares outstanding at such time and multiplying
such quotient by 50,000.
Authorized Participants are the only persons that may place orders
to create and redeem Creation Units. An
[[Page 28659]]
Authorized Participant must (i) be a registered broker-dealer, (ii)
enter into a Participant Agreement with the Advisor and the Bitcoin
Custodian, and (iii) own a bitcoin wallet address that is recognized by
the Bitcoin Custodian as belonging to the Authorized Participant (an
``Authorized Participant Self-Administered Account''). Authorized
Participants may act for their own accounts or as agents for broker-
dealers, custodians, and other securities market participants that wish
to create or redeem Creation Units. Shareholders who are not Authorized
Participants will only be able to redeem their Common Shares through an
Authorized Participant.
Creation Procedures
On any Business Day, an Authorized Participant may place an order
with the Transfer Agent to create one or more Creation Units. Purchase
orders must be placed prior to 4:00 p.m. E.T. or the close of regular
trading on the Exchange, whichever is earlier. The day on which a valid
order is received by the Transfer Agent is considered the purchase
order date.
By placing a purchase order, an Authorized Participant agrees to
facilitate the deposit of bitcoin with the Trust. The total deposit of
bitcoin required to create each Creation Unit is an amount of bitcoin
that is in the same proportion to the total assets of the Trust (net of
accrued but unpaid fees and expenses) on the date the purchase order is
properly received as the number of Shares to be created under the
purchase order is to the total number of Shares outstanding on the date
the order is received.
Following an Authorized Participant's purchase order, the Bitcoin
Account must be credited with the required bitcoin by the end of the
Business Day following the purchase order date. Upon receipt of the
bitcoin deposit amount in the Trust's Bitcoin Account, the Bitcoin
Custodian will notify the Transfer Agent, the Authorized Participant,
and the Advisor that the bitcoin has been deposited. The Transfer Agent
will then direct the Depository Trust Company (``DTC'') to credit the
number of Shares created to the Authorized Participant's DTC account.
Redemption Procedures
According to the Registration Statement, on any Business Day, an
Authorized Participant may place an order with the Transfer Agent to
redeem one or more Creation Units. Authorized Participants may only
redeem Creation Units and cannot redeem any Shares in an amount less
than a Creation Unit. Redemption orders must be placed prior to 4:00
p.m. E.T. or the close of regular trading on the Exchange, whichever is
earlier. A redemption order will be effective on the date it is
received by the Transfer Agent (``Redemption Order Date'').
The redemption distribution from the Trust consists of a transfer
of bitcoin to the redeeming Authorized Participant corresponding to the
number of Shares being redeemed. The redemption distribution due from
the Trust will be delivered once the Transfer Agent notifies the
Bitcoin Custodian and the Advisor that the Authorized Participant has
delivered the Shares represented by the Creation Units to be redeemed
to the Transfer Agent's DTC account. If the Transfer Agent's DTC
account has not been credited with all of the Shares of the Creation
Units to be redeemed, the redemption distribution will be delayed until
such time as the Transfer Agent confirms receipt of all such Shares.
Once the Transfer Agent notifies the Bitcoin Custodian and the
Advisor that the Shares have been received in the Transfer Agent's DTC
account, the Advisor will instruct the Bitcoin Custodian to transfer
the redemption distribution from the Trust's Bitcoin Account to the
Authorized Participant.
The redemption distribution from the Trust will consist of a
transfer to the redeeming Authorized Participant of an amount of
bitcoin that is determined in the same manner as the determination of
Creation Unit Deposits, as discussed above. The redemption distribution
due from the Trust will be delivered to the Authorized Participant on
the first Business Day following the Redemption Order Date if, by 9:00
a.m. E.T. on such Business Day, the Transfer Agent's DTC account has
been credited with the Creation Units to be redeemed. If the Transfer
Agent's DTC account has not been credited with all of the Creation
Units to be redeemed by such time, the redemption distribution will
also be delayed.
Availability of Information
The Trust's website (https://www.ftportfolios.com) will include
quantitative information on a per Share basis updated on a daily basis,
including (i) the current NAV per Share daily and the prior business
day's NAV and the reported closing price; (ii) the mid-point of the
bid-ask price \93\ in relation to the NAV as of the time the NAV is
calculated (``Bid-Ask Price'') and a calculation of the premium or
discount of such price against such NAV; and (iii) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily Bid-Ask Price against the NAV, within appropriate ranges, for
each of the four previous calendar quarters (or for the life of the
Trust, if shorter). In addition, on each business day the Trust's
website will provide pricing information for the Shares.
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\93\ The bid-ask price of the Trust is determined using the
highest bid and lowest offer on the Consolidated Tape as of the time
of calculation of the closing day NAV.
---------------------------------------------------------------------------
The Trust's website, as well as one or more major market data
vendors, will provide an intra-day indicative value (``IIV'') per Share
updated every 15 seconds, as calculated by the Exchange or a third
party financial data provider during the Exchange's Core Trading
Session (9:30 a.m. to 4:00 p.m., E.T.).\94\ The IIV will be calculated
by using the prior day's closing NAV per Share as a base and updating
that value during the NYSE Arca Core Trading Session to reflect changes
in the value of the Trust's NAV during the trading day.
---------------------------------------------------------------------------
\94\ The IIV on a per Share basis disseminated during the Core
Trading Session should not be viewed as a real-time update of the
NAV, which is calculated once a day.
---------------------------------------------------------------------------
The IIV disseminated during the NYSE Arca Core Trading Session
should not be viewed as an actual real-time update of the NAV, which
will be calculated only once at the end of each trading day. The IIV
will be widely disseminated on a per Share basis every 15 seconds
during the NYSE Arca Core Trading Session by one or more major market
data vendors. In addition, the IIV will be available through on-line
information services.
The NAV for the Trust will be calculated by the Sponsor once a day
and will be disseminated daily to all market participants at the same
time. Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for bitcoin will be widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. In addition, the complete real-time price (and
volume) data for bitcoin is available by subscription from Reuters and
Bloomberg. The spot price of bitcoin is available on a 24-hour basis
from major market data vendors, including Bloomberg and Reuters.
Information relating to trading, including price and volume
information, in bitcoin will be available from major market data
vendors and from the exchanges on which bitcoin are traded. The normal
trading hours for
[[Page 28660]]
bitcoin exchanges are 24-hours per day, 365-days per year.
The Sponsor will publish the NAV per Share on the Trust's website
as soon as practicable after its determination. The Trust will provide
website disclosure of its NAV daily. The website disclosure of the
Trust's NAV will occur at the same time as the disclosure by the
Sponsor of the NAV to Authorized Participants so that all market
participants are provided such information at the same time. Therefore,
the same information will be provided on the public website as well as
in electronic files provided to Authorized Participants. Accordingly,
each investor will have access to the current NAV of the Trust through
the Trust's website, as well as from one or more major market data
vendors.
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 4:00 a.m. to 8:00 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 Holders (``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 \95\
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.
---------------------------------------------------------------------------
\95\ 17 CFR 240.10A-3.
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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.\96\ 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.
---------------------------------------------------------------------------
\96\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------
The Exchange may halt trading during the day in which an
interruption to the dissemination of the IIV occurs. If the
interruption to the dissemination of the IIV 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.
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.\97\ 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.
---------------------------------------------------------------------------
\97\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
---------------------------------------------------------------------------
The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares 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.\98\
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.
---------------------------------------------------------------------------
\98\ 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.
---------------------------------------------------------------------------
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 Sponsor 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).
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) 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.\99\
---------------------------------------------------------------------------
\99\ 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 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. 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
[[Page 28661]]
laws. The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets 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. In addition, the
Exchange may obtain information regarding trading in the Shares from
markets that are members of ISG or with which the Exchange has in place
a CSSA. Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is
able to obtain information regarding trading in the Shares and the
underlying bitcoin or any bitcoin derivative through ETP Holders acting
as registered Market Makers, in connection with such ETP Holders'
proprietary or customer trades through ETP Holders which they effect on
any relevant market.
The Exchange also believes that the proposed rule change is
designed to prevent fraudulent and manipulative acts and practices and
to protect investors and the public interest because investing in the
Trust will provide investors with exposure to bitcoin in a manner that
is more efficient and convenient than the purchase of stand-alone
bitcoin, while also mitigating some of the volatility risk typically
associated with the purchase of stand-alone bitcoin. As discussed
above, the Trust will use the Reference Rate to determine the value of
its bitcoin assets and its NAV. While bitcoin is listed and traded on a
number of markets and platforms, the Reference Rate is determined
exclusively based on its Constituent Platforms, and therefore, use of
the Reference Rate 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 Reference Rate 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. The proposed rule change is also designed to prevent
fraudulent and manipulative acts and practices based on the function of
the CME, either alone as the sole market for bitcoin futures or as a
group of markets together with the Constituent Platforms, as a ``market
of significant size'' consistent with the Commission's guidance with
respect to surveillance sharing agreements. As discussed above, the CME
is the primary market for bitcoin futures, is designed to detect and
resist potentially manipulative trading activity, and, as a member of
ISG, can provide the Exchange with information to assist in detecting
and deterring potential fraud or manipulation.
The proposed rule change is also designed to promote just and
equitable principles of trade and to protect investors and the public
interest in that there is a considerable amount of bitcoin price and
market information available on public websites and through
professional and subscription services. Investors may obtain, on a 24-
hour basis, bitcoin pricing information based on the spot price for
bitcoin from various financial information service providers. The
closing price and settlement prices of bitcoin are readily available
from the bitcoin exchanges and other publicly available websites. In
addition, such prices are published in public sources, or on-line
information services such as Bloomberg and Reuters. The NAV per Share
will be calculated daily and made available to all market participants
at the same time. The Trust will provide website disclosure of its NAV
daily. One or more major market data vendors will disseminate for the
Trust on a daily basis information with respect to the most recent NAV
per Share and Shares outstanding. 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. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the CTA. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
NYSE Arca Core Trading Session (normally 9:30 a.m., E.T., to 4:00 p.m.,
E.T.) by one or more major market data vendors. In addition, the IIV
will be available on the Trust's website and through on-line
information services. The Exchange represents that the Exchange may
halt trading during the day in which an interruption to the
dissemination of the IIV occurs. If the interruption to the
dissemination of the IIV 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.
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
an additional type of exchange-traded product 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 relating to trading in the Shares and may obtain information
via ISG from other exchanges that are members of ISG or with which the
Exchange has entered into a CSSA. In addition, as noted above,
investors will have ready access to information regarding the Trust's
NAV, IIV, and quotation and last sale information for the Shares.
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 purposes of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of an
additional type of exchange-traded product, which 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 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:
[[Page 28662]]
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-2021-37 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-2021-37. 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-2021-37 and should be submitted
on or before June 17, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\100\
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\100\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-11172 Filed 5-26-21; 8:45 am]
BILLING CODE 8011-01-P
