Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 29321-29334 [2021-11402]

Download as PDF Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices 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–NASDAQ–2021–043 and should be submitted on or before June 22, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.18 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–11405 Filed 5–28–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–91994; File No. SR– CboeBZX–2021–039] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares May 25, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 10, 2021, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) 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 Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. jbell on DSKJLSW7X2PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to list and trade shares of the Wise 18 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 Origin Bitcoin Trust (the ‘‘Trust’’),3 under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, 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 list and trade the Shares under BZX Rule 14.11(e)(4),4 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.5 FD Funds Management LLC is the sponsor of the Trust (‘‘Sponsor’’). The Shares will be registered with the Commission by means of the Trust’s registration statement on Form S–1 (the ‘‘Registration Statement’’).6 3 The Trust was formed as a Delaware statutory trust on March 17, 2021 and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. 4 The Commission approved BZX Rule 14.11(e)(4) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 5 All statements and representations made in this filing regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures shall constitute continued listing requirements for listing the Shares on the Exchange. 6 See draft Registration Statement on Form S–1, dated March 24, 2021 submitted to the Commission by the Sponsor on behalf of the Trust. The descriptions of the Trust, the Shares, and the Index (as defined below) contained herein are based, in part, on information in the Registration Statement. The Registration Statement is not yet effective and the Shares will not trade on the Exchange until such time that the Registration Statement is effective. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 29321 Background Bitcoin is a digital asset based on the decentralized, open source protocol of 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 Exchange 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/gettingstarted; https://www.fidelitydigitalassets.com/ articles/addressing-bitcoin-criticisms; and https:// www.vaneck.com/education/investment-ideas/ investing-in-bitcoin-and-digital-assets/. 8 See Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently disapproved by the Commission. See Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the ‘‘Winklevoss Order’’). 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, E:\FR\FM\01JNN1.SGM Continued 01JNN1 29322 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES 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 Fast forward to the first quarter of 2021 and 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 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 Data as of March 31, 2016 according to publicly available filings. See Bitcoin Investment Trust Form S–1, dated May 27, 2016, available: https:// www.sec.gov/Archives/edgar/data/1588489/ 000095012316017801/filename1.htm. 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/1725882/000121390 020023202/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/ VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 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 noaction 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 registered with the Commission.19 Outside the Commission’s purview, the regulatory landscape has 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. CFTC regulated bitcoin futures represented approximately $28 billion in notional trading volume on Chicago Mercantile Exchange (‘‘CME’’) (‘‘Bitcoin Futures’’) in December 2020 compared to $737 million, $1.4 billion, and $3.9 billion in total trading in Archives/edgar/data/1764894/00011931 2519309942/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-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. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 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, which the Exchange believes represents a regulated market of significant size, as further discussed below.20 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.21 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.22 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.23 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, including the Trust’s Custodian. 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,24 and has proposed rules 20 All statistics and charts included in this proposal are sourced from https:// www.cmegroup.com/trading/bitcoin-futures.html. 21 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. The CFTC also 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. The CFTC also ordered Coinbase Inc. to pay $6.5 million for false, misleading, or inaccurate reporting and wash trading on March 19, 2021. See CFTC Release No. 8369–21 (March 19, 2021) available at: https:// cftc.gov/PressRoom/PressReleases/8369-21. 22 See OCC News Release 2021–2 (January 4, 2021) available at: https://www.occ.gov/newsissuances/news-releases/2021/nr-occ-2021-2.html. 23 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. 24 See FinCEN Guidance FIN–2019–G001 (May 9, 2019) (Application of FinCEN’s Regulations to E:\FR\FM\01JNN1.SGM 01JNN1 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES imposing requirements on entities subject to the BSA that are specific to the technological context of virtual currencies.25 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.26 In addition to the regulatory developments laid out above, more traditional financial market participants appear to be embracing cryptocurrency: Large insurance companies,27 asset managers,28 university endowments,29 pension funds,30 and even historically bitcoin skeptical fund managers 31 are Certain Business Models Involving Convertible Virtual Currencies) available at: https:// www.fincen.gov/sites/default/files/2019-05/ FinCEN%20Guidance%20CVC%20 FINAL%20508.pdf. 25 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. 26 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. 27 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. 28 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-startedto-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/202012-16/guggenheim-s-scott-minerd-says-bitcoinshould-be-worth-400-000. 29 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-yaleendowments-among-those-reportedly-buyingcrypto. 30 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. 31 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. VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 allocating to bitcoin. The largest overthe-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.32 Established companies like Tesla, Inc.,33 MicroStrategy Incorporated,34 and Square, Inc.,35 among others, have recently announced substantial investments in bitcoin in amounts as large as $1.5 billion (Tesla) and $425 million (MicroStrategy). Suffice to say, bitcoin is on its way to gaining mainstream usage. Despite these developments, access for U.S. investors to gain exposure to bitcoin via a transparent and regulated exchange-traded vehicle remains limited. As investors and advisors increasingly utilize ETPs to manage diversified portfolios (including equities, fixed income securities, commodities, and currencies) quickly, easily, relatively inexpensively, and without having to hold directly any of the underlying assets, alternatives for bitcoin exposure for U.S. investors are instead limited to: (i) Buying over-thecounter bitcoin funds (‘‘OTC Bitcoin Funds’’) that are subject to premium/ discount volatility; (ii) facing the technical risk, complexity and generally high fees associated with buying spot bitcoin; or (iii) purchasing shares of operating companies that they believe will provide proxy exposure to bitcoin. Meanwhile, investors in many other countries, including Canada,36 are able 32 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) https:// www.sec.gov/Archives/edgar/data/1588489/ 000000000020000953/filename1.pdf. 33 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. 34 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. 35 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. 36 The Exchange notes that the Purpose Bitcoin ETF, a publicly listed physical bitcoin ETP recently launched in Canada, reportedly reached $421.8 million in assets under management (‘‘AUM’’) in two days, demonstrating the demand for a North American market listed bitcoin exchange-traded product (‘‘ETP’’). 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, U.S. investors could seek to purchase these shares in order to get access to bitcoin exposure. Given the separate regulatory regime and the potential difficulties associated with PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 29323 to use more traditional exchange listed and traded products to gain exposure to bitcoin, disadvantaging U.S. investors and leaving them with riskier and more expensive means of getting bitcoin exposure.37 Institutional Adoption and Investor Interest in Bitcoin As noted above, institutional adoption and investor interest in bitcoin has increased significantly over the last two years. A recent independent investor survey, The Institutional Investors Digital Asset Survey (the ‘‘Survey’’) 38 conducted by Fidelity Digital Assets, Fidelity Center for Applied Technology and Fidelity Consulting in collaboration with Greenwich Associates from November 2019 to early March 2020 found that i. 36% of institutional investors surveyed currently invest in digital assets; ii. almost 60% of all investors surveyed have a neutral or positive perception toward digital assets; and iii. more than 80% of investors indicated they would be interested in institutional investment products that hold digital assets. The Survey reported that the portion of U.S. investors who have an allocation to digital assets increased to 27% from 22% in 2019 and cited multiple factors that may be driving ownership including, but not limited to, the entrance of incumbent custody, trading and derivatives service providers; and the expansion of the types of regulated derivatives available to institutional investors, which fueled awareness of digital assets. The Survey reported that exposure to digital assets continues to grow 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. 37 The Exchange notes that securities regulators in a number of other countries have either approved or otherwise allowed the listing and trading of bitcoin ETPs. Specifically, these funds include the Purpose Bitcoin ETF, Bitcoin ETF, VanEck Vectors Bitcoin ETN, WisdomTree Bitcoin ETP, Bitcoin Tracker One, BTCetc bitcoin ETP, Amun Bitcoin ETP, Amun Bitcoin Suisse ETP, 21Shares Short Bitcoin ETP, CoinShares Physical Bitcoin ETP. 38 The Survey included interviews with 774 institutional investors. 393 respondents were based in the U.S. and 381 respondents were based in Europe. The Survey spanned a variety of investor segments, including high-net worth individuals, financial advisors, family offices, crypto hedge and venture funds, traditional hedge funds, endowments and foundations. The first installment of The Institutional Investors Digital Assets Survey covered the period of November 2018 to January 2019 and surveyed over 400 U.S. investors. Thus, the year-over-year comparisons compare only the responses of U.S. investors. The Survey is available at the following link: https:// www.fidelitydigitalassets.com/bin-public/060_ www_fidelity_com/documents/FDAS/institutionalinvestors-digital-asset-survey.pdf. E:\FR\FM\01JNN1.SGM 01JNN1 29324 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES 22% of U.S. respondents invested in digital assets having exposure via futures, a substantial increase relative to 9% of U.S. investors surveyed in 2019. The Survey also reported that 91% of institutional investors that plan to make an allocation to digital assets expect to have at least 0.5% of their portfolio in digital assets within five years. The increase in institutional use and interest in the digital asset market is a benefit to all investors. As institutional participation increases, this helps to solidify the market for digital assets and assists in maturing the ecosystem for digital assets, creating a more sound structure for this asset class. ETPs are well established vehicles with a structure that has proven to be beneficial to investors based on the transparency, competition with respect to fees charged, and disclosures to help educate investors on risks associated with investment. The Exchange understands the Commission’s previous focus on potential manipulation of a bitcoin ETP in prior disapproval orders, but now believes that such concerns have been sufficiently mitigated. The Exchange believes that the significant increase in investor participation in and institutional adoption of bitcoin have facilitated the maturation of the bitcoin trading ecosystem. As such, the Exchange believes that approving this proposal (and comparable proposals submitted hereafter) provides the Commission with the opportunity to allow U.S. investors with access to bitcoin in a regulated and transparent exchange-traded vehicle that would act to reduce risk to U.S. investors by: (i) Reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing certain risks associated with investing in operating companies that are proxies for bitcoin exposure; and (iv) providing an alternative to custodying spot bitcoin. (i) 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 39 and, as such, frequently trade at 39 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 VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 a price that is out of line with the value of their assets held. Historically, OTC Bitcoin Funds have traded at significant premiums or discounts compared to their NAV. A bitcoin ETP would provide an alternative to OTC Bitcoin Funds that would offer investors access to direct bitcoin exposure with real time trading and transparency on pricing/ valuation, liquidity and active arbitrage—advantages of the ETP structure. (ii) Spot and Proxy Exposure Exposure to bitcoin through an ETP also presents certain advantages for investors compared to buying spot bitcoin directly. The most notable advantage is the use of the Custodian to custody the Trust’s bitcoin assets. The Sponsor has carefully selected the Custodian, a New York state limited liability trust,40 due to its manner of holding the Trust’s bitcoin. This includes, among others, the use of ‘‘cold’’ (offline) storage to hold private keys and the employment by the Custodian of a certain degree of cybersecurity measures and operational best practices.41 By contrast, an investor holding bitcoin through a cryptocurrency exchange lacks these protections. Typically, cryptocurrency exchanges hold most, if not all, investors’ bitcoin in ‘‘hot’’ (internetconnected) storage and do not make any commitments to indemnify investors or to observe any particular cybersecurity standard. Meanwhile, an investor holding spot bitcoin directly in a selfhosted wallet may suffer from inexperience in private key management (e.g., insufficient password protection, lost key, etc.), which could cause them Futures market results in increased investor protections compared to OTC Bitcoin Funds. 40 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. 41 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 Custodian is subject to annual examination, with specific attention to its internal controls and risk management systems. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 to lose some or all of their bitcoin holdings. In the 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 accountable for failures. Thus, with respect to custody of the Trust’s bitcoin assets, the Trust presents advantages for investors compared to owning spot bitcoin directly. Finally, as described in the Background section above, recently a number of operating companies engaged in unrelated businesses—such as Tesla (a car manufacturer) and MicroStrategy (an enterprise software company)—have announced investments as large as $1.5 billion in bitcoin.42 Without access to bitcoin exchange-traded products, 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.43 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.44 Such operating companies, however, are imperfect bitcoin proxies and provide investors with partial or indirect 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, 42 It has been announced that MicroStrategy is currently contemplating a $600 million convertible note offering for the purpose of acquiring bitcoin. See: https://www.cnbc.com/2021/02/16/ microstrategy-shares-rise-after-revealing-plans-tobuy-more-bitcoin.html. 43 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-andbulletins/ia_icorelatedclaims. 44 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. E:\FR\FM\01JNN1.SGM 01JNN1 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices Bitcoin Futures jbell on DSKJLSW7X2PROD with NOTICES CME began offering trading in Bitcoin Futures in 2017. Each contract represents five bitcoin and is based on the CME CF Bitcoin Reference Rate.46 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 Similarly, the number of large open interest holders 47 has continued to increase even as the price of bitcoin has risen, as have the number of unique accounts trading Bitcoin Futures. 45 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 46 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- VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 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. BILLING CODE 8011–01–P indices/cf-bitcoin-reference-rate.html?redirect=/ trading/cf-bitcoin-reference-rate.html. 47 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. E:\FR\FM\01JNN1.SGM 01JNN1 EN01JN21.000</GPH> typically amounting to a few sentences of narrative description and a handful of risk factors.45 29325 29326 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 E:\FR\FM\01JNN1.SGM 01JNN1 EN01JN21.001</GPH> jbell on DSKJLSW7X2PROD with NOTICES BILLING CODE 8011–01–C Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices The Sponsor further believes that academic research corroborates the overall trend outlined above and supports the thesis that the Bitcoin Futures pricing leads the spot market and, thus, a person attempting to manipulate the Shares would also have to trade on that market to manipulate the ETP. Specifically, the Sponsor believes that such research indicates that bitcoin futures lead the bitcoin spot market in price formation.48 jbell on DSKJLSW7X2PROD with NOTICES Section 6(b)(5) and the Applicable Standards The Commission has approved numerous series of Trust Issued Receipts,49 including Commodity-Based Trust Shares,50 to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6(b)(5) of the Act, specifically including: (i) The requirement that a national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices; 51 and 48 See Hu, Y., Hou, Y. and Oxley, L. (2019). ‘‘What role do futures markets play in Bitcoin pricing? Causality, cointegration and price discovery from a time-varying perspective’’ (available at: https://www.ncbi.nlm.nih.gov/pmc/ articles/PMC7481826/). This academic research paper concludes that ‘‘There exist no episodes where the Bitcoin spot markets dominates the price discovery processes with regard to Bitcoin futures. This points to a conclusion that the price formation originates solely in the Bitcoin futures market. We can, therefore, conclude that the Bitcoin futures markets dominate the dynamic price discovery process based upon time-varying information share measures. Overall, price discovery seems to occur in the Bitcoin futures markets rather than the underlying spot market based upon a time-varying perspective.’’ 49 See Exchange Rule 14.11(f). 50 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 51 As the Exchange has stated in a number of other public documents, it continues to believe that bitcoin is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of bitcoin trading render it difficult and prohibitively costly to manipulate the price of bitcoin. The fragmentation across bitcoin platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of bitcoin prices through continuous trading activity challenging. To the extent that there are bitcoin exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of bitcoin on other markets, such pricing does not normally impact prices on other exchange because participants will generally ignore markets with quotes that they deem non-executable. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of bitcoin price on any single venue would require VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act and that it has sufficiently demonstrated that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated. Specifically, the Exchange lays out below why it believes that the significant increase in trading volume in Bitcoin Futures, the growth of liquidity at the inside in the spot market for bitcoin, and certain features of the Shares and the Index 52 mitigate potential manipulation concerns since the Commission last reviewed an exchange proposal to list and trade a bitcoin ETP should be the central consideration as the Commission determines whether to approve this proposal. (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 53 with a regulated market of significant size. Both the manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. 52 The ‘‘Index’’ refers to the Fidelity Bitcoin Index PR. 53 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance- sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in ISG constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 29327 Exchange and CME are members of the Intermarket Surveillance Group (the ‘‘ISG’’).54 The only remaining issue to be addressed is whether the Bitcoin Futures market constitutes a market of significant size, which the Exchange believes that it does. 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 manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange 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.55 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying Section 6(b)(5) of the act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement.56 (a) Manipulation of the ETP The significant growth in Bitcoin Futures across each of trading volumes, open interest, large open interest holders, and total market participants since the Wilshire Phoenix Disapproval was issued are reflective of that market’s growing influence on the spot price, which according to the academic research cited above, was already leading the spot price in 2018 and 2019. Where Bitcoin Futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market (beyond just the constituents of the Index 57) would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because 54 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 55 See Wilshire Phoenix Disapproval. 56 See Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘‘cannot be manipulated’’ standard; instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met. Id. at 37582. 57 As further described below, the ‘‘Index’’ for the Fund is the Fidelity Bitcoin Index PR. The Index is constructed using bitcoin price feeds from eligible bitcoin spot markets. The current exchange composition of the Index is Bitstamp, Coinbase, Gemini, itBit and Kraken. E:\FR\FM\01JNN1.SGM 01JNN1 29328 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES the Index is based on spot prices. Further, the Trust receives and holds only bitcoin, which, as further described below, reduces the potential for manipulation of the Shares through manipulation of the Index or any of its individual constituents, again emphasizing that a potential manipulator of the Shares would have to manipulate the entirety of the bitcoin spot market, which is led by the Bitcoin Futures market. As such, the Exchange believes that part (a) of the significant market test outlined above is satisfied and that common membership in ISG between the Exchange and CME would assist the listing exchange in detecting and deterring misconduct in the Shares. markets, satisfying part (b) of the test outlined above. (c) 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 Exchange believes that such conditions are present. Specifically, the significant liquidity in the spot market and the impact of market orders on the overall price of bitcoin mean that attempting to move the price of bitcoin is costly and has grown more expensive over the past (b) Predominant Influence on Prices in year. In January 2020, for example, the Spot and Bitcoin Futures cost to buy or sell $5 million worth of The Exchange also believes that bitcoin averaged roughly 30 basis points trading in the Shares would not be the (compared to 10 basis points in 2/2021) predominant force on prices in the with a market impact of 50 basis points Bitcoin Futures market (or spot market) (compared to 30 basis points in for a number of reasons, including the 2/2021).59 For a $10 million market significant volume in the Bitcoin order, the cost to buy or sell was Futures market, the size of bitcoin’s roughly 50 basis points (compared to 20 market cap (approximately $1 trillion), basis points in 2/2021) with a market and the significant liquidity available in impact of 80 basis points (compared to the spot market. In addition to the 50 basis points in 2/2021). As the Bitcoin Futures market data points cited liquidity in the bitcoin spot market above, the spot market for bitcoin is also increases, it follows that the impact of very liquid. According to data from $5 million and $10 million orders will CoinRoutes from February 2021, the continue to decrease the overall impact cost to buy or sell $5 million worth of in spot price. bitcoin averages roughly 10 basis points Additionally, offering in-kind creation with a market impact of 30 basis and redemption will provide unique points.58 For a $10 million market order, protections against potential attempts to the cost to buy or sell is roughly 20 basis manipulate the Shares. While the points with a market impact of 50 basis Sponsor believes that the Index which points. Stated another way, a market it uses to value the Trust’s bitcoin is participant could enter a market buy or itself resistant to manipulation based on sell order for $10 million of bitcoin and the methodology further described only move the market 0.5%. More below, the fact that creations and strategic purchases or sales (such as redemptions are available in-kind makes using limit orders and executing the manipulability of the Index through OTC bitcoin trade desks) would significantly less important. likely have less obvious impact on the Specifically, because the Trust will not market—which is consistent with accept cash to buy bitcoin in order to MicroStrategy, Tesla, and Square being create new shares or, barring a forced able to collectively purchase billions of redemption of the Trust or under other dollars in bitcoin. As such, the extraordinary circumstances, be forced combination of Bitcoin Futures leading to sell bitcoin to pay cash for redeemed price discovery, the overall size of the shares, the price that the Sponsor uses bitcoin market, and the ability for to value the Trust’s bitcoin is not market participants, including particularly important.60 When authorized participants creating and authorized participants are creating redeeming with the Trust, to buy or sell with the Trust, they need to deliver a large amounts of bitcoin without certain number of bitcoin per share significant market impact will help (regardless of the valuation used) and prevent the Shares from becoming the predominant force on pricing in either 59 These statistics are based on samples of bitcoin the bitcoin spot or Bitcoin Futures liquidity in USD (excluding stablecoins or Euro 58 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. VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 liquidity) based on executable quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during February 2021. 60 While the Index will not be particularly important for the creation and redemption process, it will be used for calculating fees. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 when they’re redeeming, they can similarly expect to receive a certain number of bitcoin per share. As such, even if the price used to value the Trust’s bitcoin is manipulated (which the Sponsor believes that the Index methodology is resistant to), 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 not only mitigates the risk associated with potential manipulation, but also discourages and disincentivizes manipulation of the Index because there is little financial incentive to do so. Wise Origin Bitcoin Trust Delaware Trust Company is the trustee (‘‘Trustee’’). Fidelity Service Company, Inc. (‘‘FSC’’) will be the administrator (‘‘Administrator’’) A third-party transfer agent (the ‘‘Transfer Agent’’) will facilitate the issuance and redemption of Shares of the Trust, respond to correspondence by Trust Shareholders and others relating to its duties, maintain Shareholder accounts, and make periodic reports to the Trust.61 An affiliate of the Sponsor, Fidelity Distributors Corporation, will be the marketing agent (‘‘Marketing Agent’’) in connection with the creation and redemption of ‘‘Baskets’’ of Shares. The Sponsor provides assistance in the marketing of the Shares. Fidelity Digital Assets Services, LLC will serve as the Trust’s custodian (the ‘‘Custodian’’). According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in and ownership of the Trust. The Trust’s assets will consist of bitcoin held by the Custodian on behalf of the Trust. The Trust generally does not intend to hold cash or cash equivalents. However, there may be situations where the Trust will unexpectedly hold cash on a temporary basis. According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as amended,62 nor a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’), and neither the Trust nor the Sponsor is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. When the Trust sells or redeems its Shares, it will do so in ‘‘in-kind’’ transactions in blocks of Shares (a 61 The Exchange notes that the Sponsor is finalizing negotiations with several service providers and it will submit an amendment to this proposal upon finalization of those arrangements. 62 15 U.S.C. 80a–1. E:\FR\FM\01JNN1.SGM 01JNN1 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices ‘‘Creation Basket’’) at the Trust’s NAV. Authorized participants will deliver, or facilitate the delivery of, bitcoin to the Trust’s account with the Custodian in exchange for Shares when they purchase Shares, and the Trust, through the Custodian, will deliver bitcoin to such authorized participants when they redeem Shares with the Trust. Authorized participants may then offer Shares to the public at prices that depend on various factors, including the supply and demand for Shares, the value of the Trust’s assets, and market conditions at the time of a transaction. Shareholders who buy or sell Shares during the day from their broker may do so at a premium or discount relative to the NAV of the Shares of the Trust. jbell on DSKJLSW7X2PROD with NOTICES Investment Objective According to the Registration Statement and as further described below, the investment objective of the Trust is to seek to track the performance of bitcoin, as measured by the Index, adjusted for the Trust’s expenses and other liabilities. In seeking to achieve its investment objective, the Trust will hold bitcoin and will value its Shares daily as of 4:00 p.m. Eastern time using the same methodology used to calculate the Index and process all creations and redemptions in transactions with authorized participants. The Trust is not actively managed. The Index As described in the Registration Statement, for purposes of calculating the Trust’s NAV per Share, the Trust’s holdings of bitcoin will be valued using the same methodology as used to calculate the Index. The Index is designed to reflect the performance of bitcoin in U.S. dollars. The Index is constructed using bitcoin price feeds from eligible bitcoin spot markets and the VWMP methodology, calculated every 15 seconds based on VWMP spot market data over rolling 5-minute increments to develop a bitcoin price composite. The current exchange composition of the Index is Bitstamp, Coinbase, Gemini, itBit and Kraken. The Index methodology was developed by Fidelity Product Services, LLC (the ‘‘Index Provider’’) and is administered by the Fidelity Index Committee. Coin Metrics, Inc. is the third-party calculation agent for the Index.63 The Index is calculated using a volume-weighted median price approach. The Index market value is the volume-weighted median price of 63 The Sponsor’s affiliates have an ownership interest in Coin Metrics, Inc. VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 bitcoin in U.S. dollars over the previous five minutes, which is calculated by (1) ordering all individual transactions on eligible spot markets over the previous five minutes by price, and then (2) selecting the price associated with the 50th percentile of total volume. Using rolling five-minute segments means malicious actors would need to sustain efforts to manipulate the market over an extended period of time, or would need to replicate efforts multiple times across exchanges, potentially triggering review. This extended period also supports authorized participant activity by capturing volume over a longer time period, rather than forcing authorized participants to mark an individual close or auction. The use of a median price reduces the ability of outlier prices to impact the NAV, as it systematically excludes those prices from the NAV calculation. The use of a volumeweighted median (as opposed to a traditional median) serves as an additional protection against attempts to manipulate the NAV by executing a large number of low-dollar trades, because any manipulation attempt would have to involve a majority of global spot bitcoin volume in a threeminute window to have any influence on the NAV. Further, removing the highest and lowest prices further protects against attempts to manipulate the NAV, requiring bad actors to act on multiple exchanges at once to have any ability to influence the price. Availability of Information In addition to the price transparency of the Index, the Trust will provide information regarding the Trust’s bitcoin holdings as well as additional data regarding the Trust. The Trust will provide an Intraday 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 Regular Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Trust’s bitcoin holdings during the trading day. The IIV disseminated during Regular Trading Hours 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 Exchange’s Regular Trading Hours by one or more major market data vendors. In addition, the IIV will be available through on-line information services. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 29329 The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) The current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the BZX Official Closing Price 64 in relation to the NAV as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Official Closing Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Trust will also disseminate the Trust’s holdings on a daily basis on the Trust’s website. The value of the Index will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. The NAV for the Trust will be calculated by the Administrator 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 is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters, as well as the Index. Information relating to trading, including price and volume information, in bitcoin is available from major market data vendors and from the exchanges on which bitcoin are traded. Depth of book information is also available from bitcoin exchanges. The normal trading hours for bitcoin exchanges are 24 hours per day, 365 days per year. Net Asset Value NAV means the total assets of the Trust including, but not limited to, all bitcoin and cash, if any, less total liabilities of the Trust, each determined on the basis of generally accepted accounting principles. The NAV of the Trust is calculated by taking the fair market value of its total assets based on the volume-weighted median price of bitcoin used for the calculation of the Index, subtracting any liabilities (which include accrued expenses), and dividing that total by the total number of 64 As defined in Rule 11.23(a)(3), the term ‘‘BZX Official Closing Price’’ shall mean the price disseminated to the consolidated tape as the market center closing trade. E:\FR\FM\01JNN1.SGM 01JNN1 29330 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices outstanding Shares. The Administrator calculates the NAV of the Trust once each Exchange trading day. The NAV for a normal trading day will be released after 4:00 p.m. Eastern time. Trading during the core trading session on the Exchange typically closes at 4:00 p.m. Eastern time. However, NAVs are not officially struck until later in the day (often by 5:30 p.m. Eastern time and almost always by 8:00 p.m. Eastern time). The pause between 4:00 p.m. Eastern time and 5:30 p.m. Eastern time (or later) provides an opportunity to algorithmically detect, flag, investigate, and correct unusual pricing should it occur. Eastern time [sic]. jbell on DSKJLSW7X2PROD with NOTICES Creation and Redemption of Shares According to the Registration Statement, on any business day, an authorized participant may place an order to create one or more baskets. Purchase orders must be placed by the time noted in the Authorized Participant Agreement or as provided separately to all Authorized Participants. The day on which an order is received is considered the purchase order date. The total deposit of bitcoin required is an amount of bitcoin that is in the same proportion to the total assets of the Trust, net of accrued expenses and other liabilities, on the date the order to purchase is properly received, as the number of Shares to be created under the purchase order is in proportion to the total number of Shares outstanding on the date the order is received. Each night, the Sponsor will publish the amount of bitcoin that will be required in exchange for each creation order. The Administrator determines the required deposit for a given day by dividing the number of bitcoin held by the Trust as of the opening of business on that business day, adjusted for the amount of bitcoin constituting estimated accrued but unpaid fees and expenses of the Trust as of the opening of business on that business day, by the quotient of the number of Shares outstanding at the opening of business divided by the aggregation of Shares associated with a Creation Basket. The procedures by which an authorized participant can redeem one or more Creation Baskets mirror the procedures for the creation of Creation Baskets. Rule 14.11(e)(4)—Commodity-Based Trust Shares The Shares will be subject to BZX Rule 14.11(e)(4), which sets forth the initial and continued listing criteria applicable to Commodity-Based Trust Shares. The Exchange will obtain a representation that the Trust’s NAV will VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 be calculated daily and that these values and information about the assets of the Trust will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a trust that holds a specified commodity 65 deposited with the trust; (b) issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity; and (c) when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such trust which will deliver to the redeeming holder the quantity of the underlying commodity. Upon termination of the Trust, the Shares will be removed from listing. The Trustee, Delaware Trust Company, is a trust company having substantial capital and surplus. The Delaware Trust Company also has the experience and facilities for handling corporate trust business, as required under Rule 14.11(e)(4)(E)(iv)(a). No change will be made to the trustee without prior notice to and approval of the Exchange. The Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange shall have any liability for damages, claims, losses or expenses caused by any errors, omissions or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to the Trust in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent of the Exchange, or any act, condition or cause beyond the reasonable control of the Exchange, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity. Finally, as required in Rule 14.11(e)(4)(G), the Exchange notes that any registered market maker (‘‘Market Maker’’) in the Shares must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, 65 For purposes of Rule 14.11(e)(4), the term commodity takes on the definition of the term as provided in the Commodity Exchange Act. As noted above, the CFTC has opined that Bitcoin is a commodity as defined in Section 1a(9) of the Commodity Exchange Act. See Coinflip. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, in an account in which a registered Market Maker, directly or indirectly, controls trading activities, or has a direct interest in the profits or losses thereof, which has not been reported to the Exchange as required by this Rule. In addition to the existing obligations under Exchange rules regarding the production of books and records (see, e.g., Rule 4.2), the registered Market Maker in CommodityBased Trust Shares shall make available to the Exchange such books, records or other information pertaining to transactions by such entity or registered or non-registered employee affiliated with such entity for its or their own accounts for trading the underlying physical commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, as may be requested by 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. The Exchange will halt trading in the Shares under the conditions specified in BZX Rule 11.18. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) The extent to which trading is not occurring in the bitcoin underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. Trading Rules The Exchange deems the Shares to be equity securities, thus rendering trading in the Shares subject to the Exchange’s existing rules governing the trading of equity securities. BZX will allow trading in the Shares during all trading sessions on the Exchange. The Exchange has appropriate rules to facilitate transactions in the Shares during all trading sessions. As provided in BZX Rule 11.11(a) the minimum price variation for quoting and entry of orders in securities traded on the Exchange is $0.01 where the price is greater than E:\FR\FM\01JNN1.SGM 01JNN1 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices $1.00 per share or $0.0001 where the price is less than $1.00 per share. Surveillance The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and Bitcoin Futures via ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.66 jbell on DSKJLSW7X2PROD with NOTICES Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (i) The procedures for the creation and redemption of Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the IIV and the Trust’s NAV are disseminated; (iv) the risks involved in trading the Shares outside of Regular Trading Hours 67 when an updated IIV will not be calculated or publicly disseminated; (v) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. 66 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 67 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern Time. VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Shares. Members purchasing the Shares for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, noaction and interpretive relief granted by the Commission from any rules under the Act. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act 68 in general and Section 6(b)(5) of the Act 69 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Commission has approved numerous series of Trust Issued Receipts,70 including Commodity-Based Trust Shares,71 to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6(b)(5) of the Act, specifically including: (i) The requirement that a national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices; 72 and 68 15 U.S.C. 78f. U.S.C. 78f(b)(5). 70 See Exchange Rule 14.11(f). 71 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 72 As the Exchange has stated in a number of other public documents, it continues to believe that bitcoin is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of bitcoin trading render it difficult and prohibitively costly to manipulate the price of bitcoin. The fragmentation across bitcoin platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of bitcoin prices through continuous trading activity challenging. To the extent that there are bitcoin exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of bitcoin on other markets, such pricing does not normally impact prices on other exchanges because participants will generally ignore markets with quotes that they deem non-executable. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets 69 15 PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 29331 (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. With the growth of OTC Bitcoin Funds over the past year, so too has grown the potential risk to U.S. investors. Significant and prolonged premiums and discounts, significant premium/ discount volatility, high fees, insufficient disclosures, and technical hurdles are putting U.S. investor money at risk on a daily basis that could potentially be eliminated through access to a bitcoin ETP. As such, the Exchange believes that this proposal acts to limit the risk to U.S. investors that are increasingly seeking exposure to bitcoin through the elimination of significant and prolonged premiums and discounts, the reduction of significant premium/ discount volatility, the reduction of management fees through meaningful competition, the avoidance of risks associated with investing in operating companies that are imperfect proxies for bitcoin exposure, and protection from risk associated with custodying spot bitcoin by providing direct, 1-for-1 exposure to bitcoin in a regulated, transparent, exchange-traded vehicle designed to reduce the likelihood of significant and prolonged premiums and discounts with its open-ended nature as well as the ability of authorized participants to create and redeem on a daily basis. The Exchange also believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act and that it has sufficiently demonstrated that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated. Specifically, the Exchange believes that the significant increase in trading volume in Bitcoin Futures, the growth of liquidity at the inside in the spot market for bitcoin, and certain features of the Shares and the Index mitigate potential manipulation concerns should be the central consideration as the Commission determines whether to approve this proposal. means that the manipulation of the price of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. E:\FR\FM\01JNN1.SGM 01JNN1 29332 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices jbell on DSKJLSW7X2PROD with NOTICES In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 73 with a regulated market of significant size. Both the Exchange and CME are members of ISG.74 The only remaining issue to be addressed is whether the Bitcoin Futures market constitutes a market of significant size, which the Exchange believes that it does. 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 manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange 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.75 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying Section 6(b)(5) of the act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement.76 73 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in ISG constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval. 74 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 75 See Wilshire Phoenix Disapproval. 76 See Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘‘cannot be manipulated’’ standard; VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 (a) Manipulation of the ETP The significant growth in Bitcoin Futures across each of trading volumes, open interest, large open interest holders, and total market participants since the Wilshire Phoenix Disapproval was issued are reflective of that market’s growing influence on the spot price, which according to the academic research cited above, was already leading the spot price in 2018 and 2019. Where Bitcoin Futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market (beyond just the constituents of the Index) would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because the Index is based on spot prices. Further, the Trust allows for in-kind creation and redemption, which, as further described below, reduces the potential for manipulation of the Shares through manipulation of the Index or any of its individual constituents, again emphasizing that a potential manipulator of the Shares would have to manipulate the entirety of the bitcoin spot market, which is led by the Bitcoin Futures market. As such, the Exchange believes that part (a) of the significant market test outlined above is satisfied and that common membership in ISG between the Exchange and CME would assist the listing exchange in detecting and deterring misconduct in the Shares. 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. As such, the combination of Bitcoin Futures leading price discovery, the overall size of the bitcoin market, and the ability for 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, satisfying part (b) of the test outlined above. (c) 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 Exchange believes that such conditions are present. Specifically, the significant (b) Predominant Influence on Prices in liquidity in the spot market and the Spot and Bitcoin Futures impact of market orders on the overall The Exchange also believes that price of bitcoin mean that attempting to trading in the Shares would not be the move the price of bitcoin is costly and predominant force on prices in the has grown more expensive over the past Bitcoin Futures market (or spot market) year. In January 2020, for example, the for a number of reasons, including the cost to buy or sell $5 million worth of significant volume in the Bitcoin bitcoin averaged roughly 30 basis points Futures market, the size of bitcoin’s (compared to 10 basis points in 2/2021) market cap (approximately $1 trillion), with a market impact of 50 basis points and the significant liquidity available in (compared to 30 basis points in the spot market. In addition to the 2/2021).78 For a $10 million market Bitcoin Futures market data points cited order, the cost to buy or sell was above, the spot market for bitcoin is also roughly 50 basis points (compared to 20 very liquid. According to data from basis points in 2/2021) with a market CoinRoutes from February 2021, the impact of 80 basis points (compared to cost to buy or sell $5 million worth of 50 basis points in 2/2021). As the bitcoin averages roughly 10 basis points liquidity in the bitcoin spot market with a market impact of 30 basis increases, it follows that the impact of points.77 For a $10 million market order, $5 million and $10 million orders will continue to decrease the overall impact instead, the Commission is examining whether the in spot price. proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met. Id. at 37582. 77 These statistics are based on samples of bitcoin liquidity in USD (excluding stablecoins or Euro liquidity) based on executable quotes on Coinbase PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during February 2021. 78 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. E:\FR\FM\01JNN1.SGM 01JNN1 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES Additionally, offering in-kind creation and redemption will provide unique protections against potential attempts to manipulate the Shares. While the Sponsor believes that the independently calculated Index which it uses to value the Trust’s bitcoin is itself resistant to manipulation based on the methodology further described below, the fact that creations and redemptions are available in-kind makes the manipulability of the Index significantly less important. Specifically, because the Trust will not accept cash to buy bitcoin in order to create new shares or, barring a forced redemption of the Trust or under other extraordinary circumstances, be forced to sell bitcoin to pay cash for redeemed shares, the price that the Sponsor uses to value the Trust’s bitcoin is not particularly important.79 When authorized participants are creating with the Trust, they need to deliver a certain number of bitcoin per share (regardless of the valuation used) and when they’re redeeming, they can similarly expect to receive a certain number of bitcoin per share. As such, even if the price used to value the Trust’s bitcoin is manipulated (which the Sponsor believes that its methodology is resistant to), 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 not only mitigates the risk associated with potential manipulation, but also discourages and disincentivizes manipulation of the Index because there is little financial incentive to do so. Commodity-Based Trust Shares 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 on the Exchange pursuant to the initial and continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or 79 While the Index will not be particularly important for the creation and redemption process, it will be used for calculating fees. VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 the Shares to comply with the continued listing requirements, and, pursuant to its obligations under Section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and listed bitcoin derivatives via the ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement. Availability of Information The Exchange also believes that the proposal promotes market transparency in that a large amount of information is currently available about bitcoin and will be available regarding the Trust and the Shares. In addition to the price transparency of the Index, the Trust will provide information regarding the Trust’s bitcoin holdings as well as additional data regarding the Trust. The Trust will provide an IIV per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Trust’s bitcoin holdings during the trading day. The IIV disseminated during Regular Trading Hours 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 Exchange’s Regular Trading Hours by one or more major market data vendors. In addition, the IIV will be available through on-line information services. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) The current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the BZX Official Closing Price in relation to the NAV as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Official Closing Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 29333 life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Trust will also disseminate the Trust’s holdings on a daily basis on the Trust’s website. The value of the Index will be made available by one or more major market data vendors, updated at least every 15 seconds during Regular Trading Hours. The NAV for the Trust will be calculated by the Administrator 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 CTA. Quotation and last sale information for bitcoin is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters, as well as the Index. Information relating to trading, including price and volume information, in bitcoin is available from major market data vendors and from the exchanges on which bitcoin are traded. Depth of book information is also available from bitcoin exchanges. The normal trading hours for bitcoin exchanges are 24 hours per day, 365 days per year. For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change, rather will facilitate the listing and trading of an additional exchange-traded product that will enhance competition among both market participants and listing venues, 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 The Exchange has neither solicited nor received written comments on 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 within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its E:\FR\FM\01JNN1.SGM 01JNN1 29334 Federal Register / Vol. 86, No. 103 / Tuesday, June 1, 2021 / Notices jbell on DSKJLSW7X2PROD with NOTICES reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. By order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. Number SR–CboeBZX–2021–039 and should be submitted on or before June 22, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.80 J. Matthew DeLesDernier, Assistant Secretary. 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: [FR Doc. 2021–11402 Filed 5–28–21; 8:45 am] 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– CboeBZX–2021–039 on the subject line. Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Designation of a Longer Period for Commission Action on a Proposed Rule Change To Adopt Rule 6.10 To Introduce a Voluntary Compression Service 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–CboeBZX–2021–039. 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 On March 24, 2021, Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change to adopt Rule 6.10 to introduce a voluntary compression service for Market Makers. The proposed rule change was published for comment in the Federal Register on April 12, 2021.3 The Commission has received two comment letters on the proposed rule change.4 Section 19(b)(2) of the Act 5 provides that, within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day after publication of the notice for this proposed rule change is May 27, 2021. The Commission is extending the 45day time period for Commission action on the proposed rule change. The VerDate Sep<11>2014 18:20 May 28, 2021 Jkt 253001 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92011; File No. SR–CBOE– 2021–020] May 25, 2021. 80 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 91482 (April 6, 2021), 86 FR 19067. 4 Comments received on the proposed rule change are available at: https://www.sec.gov/comments/srcboe-2021-020/srcboe2021020.htm. 5 15 U.S.C. 78s(b)(2). 1 15 PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 Commission finds that it is appropriate to designate a longer period within which to take action on the proposed rule change so that it has sufficient time to consider the novel proposed rule change, including the comments received thereon. Accordingly, pursuant to Section 19(b)(2) of the Act,6 the Commission designates July 11, 2021, as the date by which the Commission shall either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change (File No. SR–CBOE–2021– 020). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2021–11404 Filed 5–28–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92014; File No. SR–FICC– 2021–003] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Add the Sponsored GC Service and Make Other Changes May 25, 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 12, 2021, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency.3 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of modifications to the FICC Government 6 Id. 7 17 CFR 200.30–3(a)(31). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 On May 12, 2021, FICC filed this proposed rule change as an advance notice (SR–FICC–2021–801) with the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b–4(n)(1)(i) under the Act, 17 CFR 240.19b–4(n)(1)(i). A copy of the advance notice is available at https://www.dtcc.com/ legal/sec-rule-filings.aspx. 1 15 E:\FR\FM\01JNN1.SGM 01JNN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 103 (Tuesday, June 1, 2021)]
[Notices]
[Pages 29321-29334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-11402]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91994; File No. SR-CboeBZX-2021-039]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To List and Trade Shares of the Wise 
Origin Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares

May 25, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 10, 2021, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') 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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to list and trade shares of the Wise Origin Bitcoin Trust 
(the ``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares.
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    \3\ The Trust was formed as a Delaware statutory trust on March 
17, 2021 and is operated as a grantor trust for U.S. federal tax 
purposes. The Trust has no fixed termination date.
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    The text of the proposed rule change is also available on the 
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, 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 list and trade the Shares under BZX Rule 
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ FD Funds Management LLC is the 
sponsor of the Trust (``Sponsor''). The Shares will be registered with 
the Commission by means of the Trust's registration statement on Form 
S-1 (the ``Registration Statement'').\6\
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    \4\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \5\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \6\ See draft Registration Statement on Form S-1, dated March 
24, 2021 submitted to the Commission by the Sponsor on behalf of the 
Trust. The descriptions of the Trust, the Shares, and the Index (as 
defined below) contained herein are based, in part, on information 
in the Registration Statement. The Registration Statement is not yet 
effective and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective.
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Background
    Bitcoin is a digital asset based on the decentralized, open source 
protocol of 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\
---------------------------------------------------------------------------

    \7\ For additional information about bitcoin and the Bitcoin 
Network, see https://bitcoin.org/en/getting-started; https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms; and https://www.vaneck.com/education/investment-ideas/investing-in-bitcoin-and-digital-assets/.
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    The first rule filing proposing to list an exchange-traded product 
to provide exposure to bitcoin in the U.S. was submitted by the 
Exchange 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

[[Page 29322]]

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\
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    \8\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order'').
    \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\ Data as of March 31, 2016 according to publicly available 
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
    \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.
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    Fast forward to the first quarter of 2021 and 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 registered with the 
Commission.\19\
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    \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.
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    Outside the Commission's purview, the regulatory landscape has 
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. 
CFTC regulated bitcoin futures represented approximately $28 billion in 
notional trading volume on Chicago Mercantile Exchange (``CME'') 
(``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 in December 2020 and represented $1.6 billion in open 
interest compared to $115 million in December 2019, which the Exchange 
believes represents a regulated market of significant size, as further 
discussed below.\20\ 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.\21\ 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.\22\ 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.\23\ 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, including the Trust's Custodian. 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,\24\ and has 
proposed rules

[[Page 29323]]

imposing requirements on entities subject to the BSA that are specific 
to the technological context of virtual currencies.\25\ 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.\26\
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    \20\ All statistics and charts included in this proposal are 
sourced from https://www.cmegroup.com/trading/bitcoin-futures.html.
    \21\ 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. The 
CFTC also 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. The CFTC also ordered 
Coinbase Inc. to pay $6.5 million for false, misleading, or 
inaccurate reporting and wash trading on March 19, 2021. See CFTC 
Release No. 8369-21 (March 19, 2021) available at: https://cftc.gov/PressRoom/PressReleases/8369-21.
    \22\ 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.
    \23\ 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.
    \24\ 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.
    \25\ 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.
    \26\ 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,\27\ asset managers,\28\ 
university endowments,\29\ pension funds,\30\ and even historically 
bitcoin skeptical fund managers \31\ 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.\32\ 
Established companies like Tesla, Inc.,\33\ MicroStrategy 
Incorporated,\34\ and Square, Inc.,\35\ among others, have recently 
announced substantial investments in bitcoin in amounts as large as 
$1.5 billion (Tesla) and $425 million (MicroStrategy). Suffice to say, 
bitcoin is on its way to gaining mainstream usage.
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    \27\ 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.
    \28\ 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.
    \29\ 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.
    \30\ 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.
    \31\ 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.
    \32\ 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) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
    \33\ 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.
    \34\ 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.
    \35\ 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. investors to gain 
exposure to bitcoin via a transparent and regulated exchange-traded 
vehicle remains limited. As investors and advisors increasingly utilize 
ETPs to manage diversified portfolios (including equities, fixed income 
securities, commodities, and currencies) quickly, easily, relatively 
inexpensively, and without having to hold directly any of the 
underlying assets, alternatives for bitcoin exposure for U.S. investors 
are instead limited to: (i) Buying over-the-counter bitcoin funds 
(``OTC Bitcoin Funds'') that are subject to premium/discount 
volatility; (ii) facing the technical risk, complexity and generally 
high fees associated with buying spot bitcoin; or (iii) purchasing 
shares of operating companies that they believe will provide proxy 
exposure to bitcoin. Meanwhile, investors in many other countries, 
including Canada,\36\ 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 and more expensive means of 
getting bitcoin exposure.\37\
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    \36\ The Exchange notes that the Purpose Bitcoin ETF, a publicly 
listed physical bitcoin ETP recently launched in Canada, reportedly 
reached $421.8 million in assets under management (``AUM'') in two 
days, demonstrating the demand for a North American market listed 
bitcoin exchange-traded product (``ETP''). 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, U.S. investors could seek to 
purchase these shares in order to get access to bitcoin exposure. 
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.
    \37\ The Exchange notes that securities regulators in a number 
of other countries have either approved or otherwise allowed the 
listing and trading of bitcoin ETPs. Specifically, these funds 
include the Purpose Bitcoin ETF, Bitcoin ETF, VanEck Vectors Bitcoin 
ETN, WisdomTree Bitcoin ETP, Bitcoin Tracker One, BTCetc bitcoin 
ETP, Amun Bitcoin ETP, Amun Bitcoin Suisse ETP, 21Shares Short 
Bitcoin ETP, CoinShares Physical Bitcoin ETP.
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Institutional Adoption and Investor Interest in Bitcoin
    As noted above, institutional adoption and investor interest in 
bitcoin has increased significantly over the last two years. A recent 
independent investor survey, The Institutional Investors Digital Asset 
Survey (the ``Survey'') \38\ conducted by Fidelity Digital Assets, 
Fidelity Center for Applied Technology and Fidelity Consulting in 
collaboration with Greenwich Associates from November 2019 to early 
March 2020 found that i. 36% of institutional investors surveyed 
currently invest in digital assets; ii. almost 60% of all investors 
surveyed have a neutral or positive perception toward digital assets; 
and iii. more than 80% of investors indicated they would be interested 
in institutional investment products that hold digital assets. The 
Survey reported that the portion of U.S. investors who have an 
allocation to digital assets increased to 27% from 22% in 2019 and 
cited multiple factors that may be driving ownership including, but not 
limited to, the entrance of incumbent custody, trading and derivatives 
service providers; and the expansion of the types of regulated 
derivatives available to institutional investors, which fueled 
awareness of digital assets.
---------------------------------------------------------------------------

    \38\ The Survey included interviews with 774 institutional 
investors. 393 respondents were based in the U.S. and 381 
respondents were based in Europe. The Survey spanned a variety of 
investor segments, including high-net worth individuals, financial 
advisors, family offices, crypto hedge and venture funds, 
traditional hedge funds, endowments and foundations. The first 
installment of The Institutional Investors Digital Assets Survey 
covered the period of November 2018 to January 2019 and surveyed 
over 400 U.S. investors. Thus, the year-over-year comparisons 
compare only the responses of U.S. investors. The Survey is 
available at the following link: https://www.fidelitydigitalassets.com/bin-public/060_www_fidelity_com/documents/FDAS/institutional-investors-digital-asset-survey.pdf.
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    The Survey reported that exposure to digital assets continues to 
grow with

[[Page 29324]]

22% of U.S. respondents invested in digital assets having exposure via 
futures, a substantial increase relative to 9% of U.S. investors 
surveyed in 2019. The Survey also reported that 91% of institutional 
investors that plan to make an allocation to digital assets expect to 
have at least 0.5% of their portfolio in digital assets within five 
years. The increase in institutional use and interest in the digital 
asset market is a benefit to all investors. As institutional 
participation increases, this helps to solidify the market for digital 
assets and assists in maturing the ecosystem for digital assets, 
creating a more sound structure for this asset class. ETPs are well 
established vehicles with a structure that has proven to be beneficial 
to investors based on the transparency, competition with respect to 
fees charged, and disclosures to help educate investors on risks 
associated with investment.
    The Exchange understands the Commission's previous focus on 
potential manipulation of a bitcoin ETP in prior disapproval orders, 
but now believes that such concerns have been sufficiently mitigated. 
The Exchange believes that the significant increase in investor 
participation in and institutional adoption of bitcoin have facilitated 
the maturation of the bitcoin trading ecosystem. As such, the Exchange 
believes that approving this proposal (and comparable proposals 
submitted hereafter) provides the Commission with the opportunity to 
allow U.S. investors with access to bitcoin in a regulated and 
transparent exchange-traded vehicle that would act to reduce risk to 
U.S. investors by: (i) Reducing premium and discount volatility; (ii) 
reducing management fees through meaningful competition; (iii) reducing 
certain risks associated with investing in operating companies that are 
proxies for bitcoin exposure; and (iv) providing an alternative to 
custodying spot bitcoin.
(i) 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 \39\ and, as such, frequently trade at a 
price that is out of line with the value of their assets held. 
Historically, OTC Bitcoin Funds have traded at significant premiums or 
discounts compared to their NAV. A bitcoin ETP would provide an 
alternative to OTC Bitcoin Funds that would offer investors access to 
direct bitcoin exposure with real time trading and transparency on 
pricing/valuation, liquidity and active arbitrage--advantages of the 
ETP structure.
---------------------------------------------------------------------------

    \39\ 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 compared to OTC Bitcoin Funds.
---------------------------------------------------------------------------

(ii) Spot and Proxy Exposure
    Exposure to bitcoin through an ETP also presents certain advantages 
for investors compared to buying spot bitcoin directly. The most 
notable advantage is the use of the Custodian to custody the Trust's 
bitcoin assets. The Sponsor has carefully selected the Custodian, a New 
York state limited liability trust,\40\ due to its manner of holding 
the Trust's bitcoin. This includes, among others, the use of ``cold'' 
(offline) storage to hold private keys and the employment by the 
Custodian of a certain degree of cybersecurity measures and operational 
best practices.\41\ By contrast, an investor holding bitcoin through a 
cryptocurrency exchange lacks these protections. Typically, 
cryptocurrency exchanges hold most, if not all, investors' bitcoin in 
``hot'' (internet-connected) storage and do not make any commitments to 
indemnify investors or to observe any particular cybersecurity 
standard. Meanwhile, an 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 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 accountable for failures. Thus, with respect to 
custody of the Trust's bitcoin assets, the Trust presents advantages 
for investors compared to owning spot bitcoin directly.
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    \40\ 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.
    \41\ 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 
Custodian is subject to annual examination, with specific attention 
to its internal controls and risk management systems.
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    Finally, as described in the Background section above, recently a 
number of operating companies engaged in unrelated businesses--such as 
Tesla (a car manufacturer) and MicroStrategy (an enterprise software 
company)--have announced investments as large as $1.5 billion in 
bitcoin.\42\ Without access to bitcoin exchange-traded products, 
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.\43\ 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.\44\ Such operating companies, 
however, are imperfect bitcoin proxies and provide investors with 
partial or indirect 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,

[[Page 29325]]

typically amounting to a few sentences of narrative description and a 
handful of risk factors.\45\
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    \42\ It has been announced that MicroStrategy is currently 
contemplating a $600 million convertible note offering for the 
purpose of acquiring bitcoin. See: https://www.cnbc.com/2021/02/16/microstrategy-shares-rise-after-revealing-plans-to-buy-more-bitcoin.html.
    \43\ 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.
    \44\ 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.
    \45\ 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.\46\ 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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    \46\ 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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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN01JN21.000

    Similarly, the number of large open interest holders \47\ 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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    \47\ 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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[GRAPHIC] [TIFF OMITTED] TN01JN21.001

BILLING CODE 8011-01-C

[[Page 29327]]

    The Sponsor further believes that academic research corroborates 
the overall trend outlined above and supports the thesis that the 
Bitcoin Futures pricing leads the spot market and, thus, a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP. Specifically, the Sponsor believes that 
such research indicates that bitcoin futures lead the bitcoin spot 
market in price formation.\48\
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    \48\ See Hu, Y., Hou, Y. and Oxley, L. (2019). ``What role do 
futures markets play in Bitcoin pricing? Causality, cointegration 
and price discovery from a time-varying perspective'' (available at: 
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This 
academic research paper concludes that ``There exist no episodes 
where the Bitcoin spot markets dominates the price discovery 
processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective.''
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Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\49\ including Commodity-Based Trust Shares,\50\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
The requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\51\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the Act and that it has sufficiently demonstrated 
that, on the whole, the manipulation concerns previously articulated by 
the Commission are sufficiently mitigated. Specifically, the Exchange 
lays out below why it believes that the significant increase in trading 
volume in Bitcoin Futures, the growth of liquidity at the inside in the 
spot market for bitcoin, and certain features of the Shares and the 
Index \52\ mitigate potential manipulation concerns since the 
Commission last reviewed an exchange proposal to list and trade a 
bitcoin ETP should be the central consideration as the Commission 
determines whether to approve this proposal.
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    \49\ See Exchange Rule 14.11(f).
    \50\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \51\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
    \52\ The ``Index'' refers to the Fidelity Bitcoin Index PR.
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(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \53\ with a regulated market of significant size. 
Both the Exchange and CME are members of the Intermarket Surveillance 
Group (the ``ISG'').\54\ The only remaining issue to be addressed is 
whether the Bitcoin Futures market constitutes a market of significant 
size, which the Exchange believes that it does. 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 manipulate the ETP, so that a surveillance-sharing 
agreement would assist the listing exchange 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.\55\
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    \53\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance- sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in ISG 
constitutes such a surveillance sharing agreement. See Wilshire 
Phoenix Disapproval.
    \54\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \55\ See Wilshire Phoenix Disapproval.
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    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\56\
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    \56\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
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(a) Manipulation of the ETP
    The significant growth in Bitcoin Futures across each of trading 
volumes, open interest, large open interest holders, and total market 
participants since the Wilshire Phoenix Disapproval was issued are 
reflective of that market's growing influence on the spot price, which 
according to the academic research cited above, was already leading the 
spot price in 2018 and 2019. Where Bitcoin Futures lead the price in 
the spot market such that a potential manipulator of the bitcoin spot 
market (beyond just the constituents of the Index \57\) would have to 
participate in the Bitcoin Futures market, it follows that a potential 
manipulator of the Shares would similarly have to transact in the 
Bitcoin Futures market because

[[Page 29328]]

the Index is based on spot prices. Further, the Trust receives and 
holds only bitcoin, which, as further described below, reduces the 
potential for manipulation of the Shares through manipulation of the 
Index or any of its individual constituents, again emphasizing that a 
potential manipulator of the Shares would have to manipulate the 
entirety of the bitcoin spot market, which is led by the Bitcoin 
Futures market. As such, the Exchange believes that part (a) of the 
significant market test outlined above is satisfied and that common 
membership in ISG between the Exchange and CME would assist the listing 
exchange in detecting and deterring misconduct in the Shares.
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    \57\ As further described below, the ``Index'' for the Fund is 
the Fidelity Bitcoin Index PR. The Index is constructed using 
bitcoin price feeds from eligible bitcoin spot markets. The current 
exchange composition of the Index is Bitstamp, Coinbase, Gemini, 
itBit and Kraken.
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(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange also 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. In addition to the Bitcoin Futures market data points 
cited above, 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.\58\ 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. As such, the combination of Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants, including authorized 
participants creating and redeeming 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, satisfying part (b) 
of the test outlined above.
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    \58\ 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.
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(c) 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 Exchange believes that 
such conditions are present. Specifically, the significant liquidity in 
the spot market and the impact of market orders on the overall price of 
bitcoin mean that attempting to move the price of bitcoin is costly and 
has grown more expensive over the past year. 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 2/2021) with a 
market impact of 50 basis points (compared to 30 basis points in 2/
2021).\59\ For a $10 million market order, the cost to buy or sell was 
roughly 50 basis points (compared to 20 basis points in 2/2021) with a 
market impact of 80 basis points (compared to 50 basis points in 2/
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.
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    \59\ 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.
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    Additionally, offering in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Index which it uses to value the 
Trust's bitcoin is itself resistant to manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are available in-kind makes the manipulability of the Index 
significantly less important. Specifically, because the Trust will not 
accept cash to buy bitcoin in order to create new shares or, barring a 
forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\60\ When authorized participants are 
creating with the Trust, they need to deliver a certain number of 
bitcoin per share (regardless of the valuation used) and when they're 
redeeming, they can similarly expect to receive a certain number of 
bitcoin per share. As such, even if the price used to value the Trust's 
bitcoin is manipulated (which the Sponsor believes that the Index 
methodology is resistant to), 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 not only mitigates the risk associated with potential 
manipulation, but also discourages and disincentivizes manipulation of 
the Index because there is little financial incentive to do so.
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    \60\ While the Index will not be particularly important for the 
creation and redemption process, it will be used for calculating 
fees.
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Wise Origin Bitcoin Trust
    Delaware Trust Company is the trustee (``Trustee''). Fidelity 
Service Company, Inc. (``FSC'') will be the administrator 
(``Administrator'') A third-party transfer agent (the ``Transfer 
Agent'') will facilitate the issuance and redemption of Shares of the 
Trust, respond to correspondence by Trust Shareholders and others 
relating to its duties, maintain Shareholder accounts, and make 
periodic reports to the Trust.\61\ An affiliate of the Sponsor, 
Fidelity Distributors Corporation, will be the marketing agent 
(``Marketing Agent'') in connection with the creation and redemption of 
``Baskets'' of Shares. The Sponsor provides assistance in the marketing 
of the Shares. Fidelity Digital Assets Services, LLC will serve as the 
Trust's custodian (the ``Custodian'').
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    \61\ The Exchange notes that the Sponsor is finalizing 
negotiations with several service providers and it will submit an 
amendment to this proposal upon finalization of those arrangements.
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    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in and ownership of the 
Trust. The Trust's assets will consist of bitcoin held by the Custodian 
on behalf of the Trust. The Trust generally does not intend to hold 
cash or cash equivalents. However, there may be situations where the 
Trust will unexpectedly hold cash on a temporary basis.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\62\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
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    \62\ 15 U.S.C. 80a-1.
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    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of Shares (a

[[Page 29329]]

``Creation Basket'') at the Trust's NAV. Authorized participants will 
deliver, or facilitate the delivery of, bitcoin to the Trust's account 
with the Custodian in exchange for Shares when they purchase Shares, 
and the Trust, through the Custodian, will deliver bitcoin to such 
authorized participants when they redeem Shares with the Trust. 
Authorized participants may then offer Shares to the public at prices 
that depend on various factors, including the supply and demand for 
Shares, the value of the Trust's assets, and market conditions at the 
time of a transaction. Shareholders who buy or sell Shares during the 
day from their broker may do so at a premium or discount relative to 
the NAV of the Shares of the Trust.
Investment Objective
    According to the Registration Statement and as further described 
below, the investment objective of the Trust is to seek to track the 
performance of bitcoin, as measured by the Index, adjusted for the 
Trust's expenses and other liabilities.
    In seeking to achieve its investment objective, the Trust will hold 
bitcoin and will value its Shares daily as of 4:00 p.m. Eastern time 
using the same methodology used to calculate the Index and process all 
creations and redemptions in transactions with authorized participants. 
The Trust is not actively managed.
The Index
    As described in the Registration Statement, for purposes of 
calculating the Trust's NAV per Share, the Trust's holdings of bitcoin 
will be valued using the same methodology as used to calculate the 
Index. The Index is designed to reflect the performance of bitcoin in 
U.S. dollars. The Index is constructed using bitcoin price feeds from 
eligible bitcoin spot markets and the VWMP methodology, calculated 
every 15 seconds based on VWMP spot market data over rolling 5-minute 
increments to develop a bitcoin price composite. The current exchange 
composition of the Index is Bitstamp, Coinbase, Gemini, itBit and 
Kraken. The Index methodology was developed by Fidelity Product 
Services, LLC (the ``Index Provider'') and is administered by the 
Fidelity Index Committee. Coin Metrics, Inc. is the third-party 
calculation agent for the Index.\63\
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    \63\ The Sponsor's affiliates have an ownership interest in Coin 
Metrics, Inc.
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    The Index is calculated using a volume-weighted median price 
approach. The Index market value is the volume-weighted median price of 
bitcoin in U.S. dollars over the previous five minutes, which is 
calculated by (1) ordering all individual transactions on eligible spot 
markets over the previous five minutes by price, and then (2) selecting 
the price associated with the 50th percentile of total volume. Using 
rolling five-minute segments means malicious actors would need to 
sustain efforts to manipulate the market over an extended period of 
time, or would need to replicate efforts multiple times across 
exchanges, potentially triggering review. This extended period also 
supports authorized participant activity by capturing volume over a 
longer time period, rather than forcing authorized participants to mark 
an individual close or auction. The use of a median price reduces the 
ability of outlier prices to impact the NAV, as it systematically 
excludes those prices from the NAV calculation. The use of a volume-
weighted median (as opposed to a traditional median) serves as an 
additional protection against attempts to manipulate the NAV by 
executing a large number of low-dollar trades, because any manipulation 
attempt would have to involve a majority of global spot bitcoin volume 
in a three-minute window to have any influence on the NAV. Further, 
removing the highest and lowest prices further protects against 
attempts to manipulate the NAV, requiring bad actors to act on multiple 
exchanges at once to have any ability to influence the price.
Availability of Information
    In addition to the price transparency of the Index, the Trust will 
provide information regarding the Trust's bitcoin holdings as well as 
additional data regarding the Trust. The Trust will provide an Intraday 
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 Regular Trading Hours (9:30 a.m. to 4:00 p.m. 
Eastern time). The IIV will be calculated by using the prior day's 
closing NAV per Share as a base and updating that value during Regular 
Trading Hours to reflect changes in the value of the Trust's bitcoin 
holdings during the trading day.
    The IIV disseminated during Regular Trading Hours 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 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price \64\ in relation to the NAV 
as of the time the NAV is calculated and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The value of the 
Index will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours.
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    \64\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
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    The NAV for the Trust will be calculated by the Administrator 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 is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
Net Asset Value
    NAV means the total assets of the Trust including, but not limited 
to, all bitcoin and cash, if any, less total liabilities of the Trust, 
each determined on the basis of generally accepted accounting 
principles. The NAV of the Trust is calculated by taking the fair 
market value of its total assets based on the volume-weighted median 
price of bitcoin used for the calculation of the Index, subtracting any 
liabilities (which include accrued expenses), and dividing that total 
by the total number of

[[Page 29330]]

outstanding Shares. The Administrator calculates the NAV of the Trust 
once each Exchange trading day. The NAV for a normal trading day will 
be released after 4:00 p.m. Eastern time. Trading during the core 
trading session on the Exchange typically closes at 4:00 p.m. Eastern 
time. However, NAVs are not officially struck until later in the day 
(often by 5:30 p.m. Eastern time and almost always by 8:00 p.m. Eastern 
time). The pause between 4:00 p.m. Eastern time and 5:30 p.m. Eastern 
time (or later) provides an opportunity to algorithmically detect, 
flag, investigate, and correct unusual pricing should it occur. Eastern 
time [sic].
Creation and Redemption of Shares
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by the time noted in the 
Authorized Participant Agreement or as provided separately to all 
Authorized Participants. The day on which an order is received is 
considered the purchase order date. The total deposit of bitcoin 
required is an amount of bitcoin that is in the same proportion to the 
total assets of the Trust, net of accrued expenses and other 
liabilities, on the date the order to purchase is properly received, as 
the number of Shares to be created under the purchase order is in 
proportion to the total number of Shares outstanding on the date the 
order is received. Each night, the Sponsor will publish the amount of 
bitcoin that will be required in exchange for each creation order. The 
Administrator determines the required deposit for a given day by 
dividing the number of bitcoin held by the Trust as of the opening of 
business on that business day, adjusted for the amount of bitcoin 
constituting estimated accrued but unpaid fees and expenses of the 
Trust as of the opening of business on that business day, by the 
quotient of the number of Shares outstanding at the opening of business 
divided by the aggregation of Shares associated with a Creation Basket. 
The procedures by which an authorized participant can redeem one or 
more Creation Baskets mirror the procedures for the creation of 
Creation Baskets.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a 
trust that holds a specified commodity \65\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity.
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    \65\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted above, the CFTC has opined that Bitcoin is a commodity 
as defined in Section 1a(9) of the Commodity Exchange Act. See 
Coinflip.
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    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus. The Delaware Trust Company also has 
the experience and facilities for handling corporate trust business, as 
required under Rule 14.11(e)(4)(E)(iv)(a). No change will be made to 
the trustee without prior notice to and approval of the Exchange. The 
Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the 
Exchange nor any agent of the Exchange shall have any liability for 
damages, claims, losses or expenses caused by any errors, omissions or 
delays in calculating or disseminating any underlying commodity value, 
the current value of the underlying commodity required to be deposited 
to the Trust in connection with issuance of Commodity-Based Trust 
Shares; resulting from any negligent act or omission by the Exchange, 
or any agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g., Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by 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. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than

[[Page 29331]]

$1.00 per share or $0.0001 where the price is less than $1.00 per 
share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information regarding 
trading in the Shares and Bitcoin Futures via ISG, from other exchanges 
who are members or affiliates of the ISG, or with which the Exchange 
has entered into a comprehensive surveillance sharing agreement.\66\
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    \66\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
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Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) The procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares outside of Regular Trading Hours \67\ 
when an updated IIV will not be calculated or publicly disseminated; 
(v) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (vi) trading information.
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    \67\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
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    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \68\ in general and Section 6(b)(5) of the Act \69\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \68\ 15 U.S.C. 78f.
    \69\ 15 U.S.C. 78f(b)(5).
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    The Commission has approved numerous series of Trust Issued 
Receipts,\70\ including Commodity-Based Trust Shares,\71\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
The requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\72\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest.
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    \70\ See Exchange Rule 14.11(f).
    \71\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \72\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchanges because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
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    The Exchange believes that the proposal is, in particular, designed 
to protect investors and the public interest. With the growth of OTC 
Bitcoin Funds over the past year, so too has grown the potential risk 
to U.S. investors. Significant and prolonged premiums and discounts, 
significant premium/discount volatility, high fees, insufficient 
disclosures, and technical hurdles are putting U.S. investor money at 
risk on a daily basis that could potentially be eliminated through 
access to a bitcoin ETP. As such, the Exchange believes that this 
proposal acts to limit the risk to U.S. investors that are increasingly 
seeking exposure to bitcoin through the elimination of significant and 
prolonged premiums and discounts, the reduction of significant premium/
discount volatility, the reduction of management fees through 
meaningful competition, the avoidance of risks associated with 
investing in operating companies that are imperfect proxies for bitcoin 
exposure, and protection from risk associated with custodying spot 
bitcoin by providing direct, 1-for-1 exposure to bitcoin in a 
regulated, transparent, exchange-traded vehicle designed to reduce the 
likelihood of significant and prolonged premiums and discounts with its 
open-ended nature as well as the ability of authorized participants to 
create and redeem on a daily basis.
    The Exchange also believes that this proposal is consistent with 
the requirements of Section 6(b)(5) of the Act and that it has 
sufficiently demonstrated that, on the whole, the manipulation concerns 
previously articulated by the Commission are sufficiently mitigated. 
Specifically, the Exchange believes that the significant increase in 
trading volume in Bitcoin Futures, the growth of liquidity at the 
inside in the spot market for bitcoin, and certain features of the 
Shares and the Index mitigate potential manipulation concerns should be 
the central consideration as the Commission determines whether to 
approve this proposal.

[[Page 29332]]

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \73\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\74\ The only remaining 
issue to be addressed is whether the Bitcoin Futures market constitutes 
a market of significant size, which the Exchange believes that it does. 
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 manipulate the ETP, so that 
a surveillance-sharing agreement would assist the listing exchange 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.\75\
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    \73\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in ISG 
constitutes such a surveillance sharing agreement. See Wilshire 
Phoenix Disapproval.
    \74\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \75\ See Wilshire Phoenix Disapproval.
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    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\76\
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    \76\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
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(a) Manipulation of the ETP
    The significant growth in Bitcoin Futures across each of trading 
volumes, open interest, large open interest holders, and total market 
participants since the Wilshire Phoenix Disapproval was issued are 
reflective of that market's growing influence on the spot price, which 
according to the academic research cited above, was already leading the 
spot price in 2018 and 2019. Where Bitcoin Futures lead the price in 
the spot market such that a potential manipulator of the bitcoin spot 
market (beyond just the constituents of the Index) would have to 
participate in the Bitcoin Futures market, it follows that a potential 
manipulator of the Shares would similarly have to transact in the 
Bitcoin Futures market because the Index is based on spot prices. 
Further, the Trust allows for in-kind creation and redemption, which, 
as further described below, reduces the potential for manipulation of 
the Shares through manipulation of the Index or any of its individual 
constituents, again emphasizing that a potential manipulator of the 
Shares would have to manipulate the entirety of the bitcoin spot 
market, which is led by the Bitcoin Futures market. As such, the 
Exchange believes that part (a) of the significant market test outlined 
above is satisfied and that common membership in ISG between the 
Exchange and CME would assist the listing exchange in detecting and 
deterring misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange also 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. In addition to the Bitcoin Futures market data points 
cited above, 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.\77\ 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. As such, the combination of Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for 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, satisfying part 
(b) of the test outlined above.
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    \77\ 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.
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(c) 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 Exchange believes that 
such conditions are present. Specifically, the significant liquidity in 
the spot market and the impact of market orders on the overall price of 
bitcoin mean that attempting to move the price of bitcoin is costly and 
has grown more expensive over the past year. 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 2/2021) with a 
market impact of 50 basis points (compared to 30 basis points in 2/
2021).\78\ For a $10 million market order, the cost to buy or sell was 
roughly 50 basis points (compared to 20 basis points in 2/2021) with a 
market impact of 80 basis points (compared to 50 basis points in 2/
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.
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    \78\ 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.

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[[Page 29333]]

    Additionally, offering in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the independently calculated Index 
which it uses to value the Trust's bitcoin is itself resistant to 
manipulation based on the methodology further described below, the fact 
that creations and redemptions are available in-kind makes the 
manipulability of the Index significantly less important. Specifically, 
because the Trust will not accept cash to buy bitcoin in order to 
create new shares or, barring a forced redemption of the Trust or under 
other extraordinary circumstances, be forced to sell bitcoin to pay 
cash for redeemed shares, the price that the Sponsor uses to value the 
Trust's bitcoin is not particularly important.\79\ When authorized 
participants are creating with the Trust, they need to deliver a 
certain number of bitcoin per share (regardless of the valuation used) 
and when they're redeeming, they can similarly expect to receive a 
certain number of bitcoin per share. As such, even if the price used to 
value the Trust's bitcoin is manipulated (which the Sponsor believes 
that its methodology is resistant to), 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 not only mitigates the risk associated with potential 
manipulation, but also discourages and disincentivizes manipulation of 
the Index because there is little financial incentive to do so.
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    \79\ While the Index will not be particularly important for the 
creation and redemption process, it will be used for calculating 
fees.
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Commodity-Based Trust Shares
    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 on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed 
bitcoin derivatives via the ISG, from other exchanges who are members 
or affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about bitcoin and will be available regarding the Trust and 
the Shares. In addition to the price transparency of the Index, the 
Trust will provide information regarding the Trust's bitcoin holdings 
as well as additional data regarding the Trust. The Trust will provide 
an IIV per Share updated every 15 seconds, as calculated by the 
Exchange or a third-party financial data provider during the Exchange's 
Regular Trading Hours (9:30 a.m. to 4:00 p.m. Eastern time). The IIV 
will be calculated by using the prior day's closing NAV per Share as a 
base and updating that value during Regular Trading Hours to reflect 
changes in the value of the Trust's bitcoin holdings during the trading 
day.
    The IIV disseminated during Regular Trading Hours 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 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price in relation to the NAV as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The value of the 
Index will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours.
    The NAV for the Trust will be calculated by the Administrator 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 CTA.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change, rather will facilitate the listing and trading of 
an additional exchange-traded product that will enhance competition 
among both market participants and listing venues, 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

    The Exchange has neither solicited nor received written comments on 
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 within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its

[[Page 29334]]

reasons for so finding or (ii) as to which the Exchange consents, the 
Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2021-039 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-CboeBZX-2021-039. 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-CboeBZX-2021-039 and should be submitted 
on or before June 22, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\80\
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    \80\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-11402 Filed 5-28-21; 8:45 am]
BILLING CODE 8011-01-P

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