Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing of Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin ETF Under NYSE Arca Rule 8.201-E, 38129-38137 [2021-15197]
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Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3011.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
U.S.C. 3642, 39 CFR part 3030, and 39
CFR part 3040, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3035, and
39 CFR part 3040, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: MC2021–113 and
CP2021–115; Filing Title: USPS Request
to Add Priority Mail Contract 712 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: July 13, 2021; Filing
Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Kenneth R. Moeller; Comments Due:
July 21, 2021.
This Notice will be published in the
Federal Register.
Erica A. Barker,
Secretary.
[FR Doc. 2021–15249 Filed 7–16–21; 8:45 am]
BILLING CODE 7710–FW–P
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to list and
trade the shares of the NYDIG Bitcoin
ETF (the ‘‘Trust’’) 4 under NYSE Arca
Rule 8.201–E. The common shares of
beneficial interest of the Trust are
referred to herein as the ‘‘Shares.’’ The
proposed change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
1. Purpose
[Release No. 34–92395; File No. SR–
NYSEArca–2021–57]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing of Proposed
Rule Change To List and Trade Shares
of the NYDIG Bitcoin ETF Under NYSE
Arca Rule 8.201–E
July 13, 2021.
lotter on DSK11XQN23PROD with NOTICES1
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on June 30,
2021, NYSE Arca, Inc. (‘‘NYSE Arca’’ or
the ‘‘Exchange’’) 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 self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
The Exchange proposes to list and
trade the Shares of the Trust under
NYSE Arca Rule 8.201–E, which
governs the listing and trading of
Commodity-Based Trust Shares.
Description of the Trust
The Shares will be issued by the
Trust, a Delaware statutory trust.
According to the Registration Statement,
the Trust’s investment objective is to
2 15
1 See
Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
1 15 U.S.C. 78s(b)(1).
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U.S.C. 78a.
CFR 240.19b–4.
4 The Trust was formed as a Delaware statutory
trust on January 22, 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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3 17
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38129
reflect the performance of the price of
bitcoin less the expenses of the Trust’s
operations. The Trust will not seek to
reflect the performance of any
benchmark or index.5
In seeking to achieve its investment
objective, the Trust will only hold
bitcoin. The Trust will value its assets
daily in accordance with Generally
Accepted Accounting Principles
(‘‘GAAP’’), which, according to the
Registration Statement, generally value
bitcoin by reference to orderly
transactions in the principal active
market for bitcoin, as described below.
NYDIG Asset Management LLC (the
‘‘Sponsor’’) is the Sponsor of the Trust.
Delaware Trust Company (the
‘‘Trustee’’) is the trustee of the Trust and
NYDIG Trust Company LLC (the
‘‘Bitcoin Custodian’’) will hold all of the
Trust’s bitcoin on the Trust’s behalf as
custodian. Both the Sponsor and the
Bitcoin Custodian are indirect whollyowned subsidiaries of New York Digital
Investment Group LLC (‘‘NYDIG’’).
Pursuant to the custodial agreement,
the Bitcoin Custodian will be
responsible for (1) safekeeping all of the
bitcoin owned by the Trust, (2) opening
an account that holds the Trust’s bitcoin
and (3) facilitating the transfer of bitcoin
required for the operation of the Trust,
as directed by the Sponsor. The Bitcoin
Custodian is chartered as a limited
purpose trust company by the New York
State Department of Financial Services
(‘‘NYDFS’’) and is authorized by NYDFS
to provide digital asset custody services.
U.S. Bancorp Fund Services, LLC will
act as the transfer agent for the Trust
(the ‘‘Transfer Agent’’) and as the
administrator of the Trust (the
‘‘Administrator’’) to perform various
administrative, tax, accounting and
recordkeeping functions on behalf of the
Trust. The Transfer Agent and the
Administrator will also be responsible
for issuing and redeeming Shares and
calculating the net asset value (‘‘NAV’’)
of the Shares, respectively.
According to the Registration
Statement, the Trust will process all
creations and redemptions of Shares in
transactions with financial firms that are
authorized to do so (known as
‘‘Authorized Participants’’). When the
Trust issues or redeems its Shares, it
will do so only in ‘‘in-kind’’
transactions in blocks of 10,000 Shares
5 On February 16, 2021, the Trust filed a draft
Registration Statement on Form S–1 under the
Securities Act of 1933 (the ‘‘Registration
Statement’’). The description of the operation of the
Trust herein is based, in part, on 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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(a ‘‘Creation Basket’’) based on the
quantity of bitcoin attributable to each
Share of the Trust (net of accrued but
unpaid Sponsor fees and any accrued
but unpaid extraordinary expenses or
liabilities). Because the creation and
redemption of Creation Baskets will be
effected via in-kind transactions based
on the quantity of bitcoin attributable to
each Share, the quantity of Creation
Baskets so created or redeemed will
generally not be affected by fluctuations
in the value of bitcoin. When
purchasing Creation Baskets,
Authorized Participants or their agents
will deliver bitcoin to the Trust’s
account with the Bitcoin Custodian in
exchange for Creation Baskets. When
redeeming Creation Baskets, Authorized
Participants or their agents will receive
bitcoin from the Trust through the
Bitcoin Custodian. The Trust will not
purchase or, barring a liquidation or
extraordinary circumstances, sell
bitcoin directly.
According to the Registration
Statement, to support the ability of
Authorized Participants to provide
liquidity at prices that reflect the value
of the Trust’s assets and to facilitate
orderly transactions in the Shares, the
Trust will ordinarily process
redemptions of Shares on the next day
when the Exchange is open for regular
trading (a ‘‘Business Day’’) following
receipt of a redemption request by an
Authorized Participant.
The Sponsor believes that the design
of the Trust will enable investors to
effectively and efficiently implement
strategic and tactical asset allocation
strategies that use bitcoin by investing
in the Shares rather than directly in
bitcoin.
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Custody of the Trust’s Bitcoin
According to the Registration
Statement, and as described above, the
Trust’s Bitcoin Custodian will custody
of all of the Trust’s bitcoin. Custody of
bitcoin typically involves the
generation, storage and utilization of
private keys. These private keys are
used to effect transfer transactions—i.e.,
transfers of bitcoin from an address
associated with the private key to
another address. While private keys
must be used to send bitcoin, private
keys do not need to be used or shared
in order to receive a bitcoin transfer;
every private key has an associated
public key and an address derived from
that public key that can be freely shared,
to which counterparties can transfer
bitcoin. The Bitcoin network has a
public ledger, meaning that anybody
with access to the address can see the
balance of digital assets in that address.
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The Bitcoin Custodian carefully
considers the design of the physical,
operational and cryptographic systems
for secure storage of the Trust’s private
keys in an effort to lower the risk of loss
or theft. According to the Registration
Statement, no such system is perfectly
secure and loss or theft due to
operational or other failure is always
possible. The Bitcoin Custodian uses a
multi-factor security system under
which actions by multiple individuals
working together are required to access
the private keys necessary to transfer
such digital assets and ensure the
Trust’s exclusive ownership. The multifactor security system generates private
keys using a Federal Information
Processing Standards Publication 140–2
(‘‘FIPS 140–2’’)-certified random
number generator to ensure the keys’
uniqueness. Before these keys are used,
the Bitcoin Custodian validates that the
public addresses associated with these
keys have no associated digital asset
balances. The software used for key
generation and verification is tested by
the Bitcoin Custodian and is reviewed
by third-party advisors from the security
community with specific expertise in
computer security and applied
cryptography. The private keys are
stored in an encrypted manner using a
FIPS 140–2-certified security module
held in redundant secure,
geographically dispersed locations with
high levels of physical security,
including robust physical barriers to
entry, electronic surveillance and
continuously roving patrols. The
operational procedures of these facilities
and of the Bitcoin Custodian are
reviewed by third-party advisors with
specific expertise in physical security.
The devices that store the keys will
never be connected to the internet or
any other public or private distributed
network—this is colloquially known as
‘‘cold storage.’’ Only specific
individuals are authorized to participate
in the custody process, and no
individual acting alone will be able to
access or use any of the private keys. In
addition, no combination of the
executive officers of the Sponsor or the
investment professionals managing the
Trust, acting alone or together, will be
able to access or use any of the private
keys that hold the Trust’s bitcoin.
The Trust generally does not intend to
hold cash or cash equivalents. However,
the Trust may hold cash and cash
equivalents on a temporary basis to pay
extraordinary expenses. The Trust will
enter into a cash custody agreement
with U.S. Bank N.A. under which U.S.
Bank N.A. will act as custodian of the
Trust’s cash and cash equivalents.
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Overview of Bitcoin and the Bitcoin
Network
According to the Registration
Statement, Bitcoin is a digital asset, the
ownership and behavior of which are
determined by participants in an online,
peer-to-peer network that connects
computers that run publicly accessible,
or ‘‘open source,’’ software that follows
the rules and procedures governing the
Bitcoin network, commonly referred to
as the Bitcoin protocol. The value of
bitcoin, like the value of other digital
assets, is not backed by any government,
corporation or other identified body.
Ownership and the ability to transfer or
take other actions with respect to
bitcoin is protected through public-key
cryptography. The supply of bitcoin is
constrained formulaically by the Bitcoin
protocol instead of being explicitly
delegated to an identified body (e.g., a
central bank or corporate treasury) to
control. Units of bitcoin are treated as
fungible. Bitcoin and certain other types
of digital assets are sometimes referred
to as digital currencies or
cryptocurrencies. No single entity owns
or operates the Bitcoin network, the
infrastructure of which is collectively
maintained by (1) a decentralized group
of participants who run computer
software that results in the recording
and validation of transactions
(commonly referred to as ‘‘miners’’), (2)
developers who propose improvements
to the Bitcoin protocol and the software
that enforces the protocol and (3) users
who choose what Bitcoin software to
run. Bitcoin was released in 2009 and,
as a result, there is little data on its longterm investment potential. Bitcoin is not
backed by a government-issued legal
tender or other assets or currency.
Bitcoin is ‘‘stored’’ or reflected on a
digital transaction ledger commonly
known as a ‘‘blockchain.’’ A blockchain
is a type of shared and continually
reconciled database, stored in a
decentralized manner on the computers
of certain users of the digital asset. A
blockchain is a canonical record of
every digital asset: The blockchain
records every ‘‘coin’’ or ‘‘token,’’
balances of digital assets, every
transaction and every address associated
with a quantity of a particular digital
asset. Bitcoin utilizes the blockchain to
record transactions into and out of
different addresses, facilitating a
determination of how much bitcoin is in
each address.
Bitcoin is created by ‘‘mining.’’
Mining involves miners using a
sophisticated computer program to
repeatedly solve complex mathematical
problems on specialized computer
hardware. The mathematical problem
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involves a computation involving all or
some bitcoin transactions that have been
proposed by the Bitcoin network’s
participants. When this problem is
solved, the computer creates a ‘‘block’’
consisting of these transactions. As each
newly solved block refers back to and
‘‘connects’’ with the immediately prior
solved block, the addition of a new
block adds to the blockchain in a
manner similar to a new link being
added to a chain. A miner’s proposed
block is added to the blockchain once a
majority of the nodes on the network
confirm the miner’s work. A miner that
is successful in adding a block to the
blockchain is automatically awarded a
fixed amount of bitcoin for its efforts
plus any transaction fees paid by
transferors whose transactions are
recorded in the block. This reward
system is the means by which new
bitcoin enter circulation. This reward
system, called proof of work, also
ensures that the local copies of the
Bitcoin blockchain maintained by
participants in the Bitcoin network are
kept in consensus with one another.
The Bitcoin Market
According to the Registration
Statement, Bitcoin is the oldest, bestknown and largest market-capitalization
digital asset. Since the advent of bitcoin,
numerous other digital assets have been
created. The website
CoinMarketCap.com tracks the U.S.
dollar price and total market
capitalization for each of more than
5,000 traded digital assets. As of April
30, 2021, bitcoin had a total market
capitalization in excess of $1 trillion
and represented more than 45% of the
entire digital asset market.
The first trading venues for bitcoin
were informal exchange services
marketed primarily in public online
forums. Transactions on these services
were effected via anonymous email, and
the fiat currency portions of these
transactions were effected through
payment services such as PayPal. These
services required their operators to
manually match buyers and sellers in
order to process transactions. Later,
automated exchanges that matched
buyers and sellers began to form. Many
such exchanges have been created in the
U.S. and abroad. In the U.S., a number
of exchanges now operate under
licensing from the NYDFS.
Beginning in 2016, more institutional
investors entered the bitcoin market. As
a result, an increasing number of
transactions have occurred in over-thecounter (‘‘OTC’’) markets instead of
exchanges. This type of trading allows
for bespoke trading arrangements that
may ease of the burden of trade
operations or reduce different types of
risks (e.g., counterparty risk).
As a result, there is not a single source
for pricing bitcoin. According to the
Registration Statement, the Trust
believes that prices on the bitcoin
trading venues are generally formed by
the levels of demand on either side of
the exchange’s order book, and arbitrage
between exchanges typically prevents
larger and/or more persistent differences
in prices between bitcoin trading
venues. Factors that the Trust believes
may influence the relative balance of
buyers and sellers on the bitcoin trading
venues include trading activity in the
OTC markets, global or regional
economic conditions, expected levels of
inflation, growth or reversal in the
adoption and use of bitcoin,
developments in the regulation of
bitcoin, changes in the preference of
market participants between bitcoin and
other digital assets, maintenance and
development of the open-source
software protocol of the Bitcoin
network, and negative consumer or
public perception of bitcoin specifically
or digital assets generally.
Bitcoin spot trading occurs on venues
in the U.S. that are licensed to conduct
Bitcoin
daily volume
(USD
millions)
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Year
2016
2017
2018
2019
2020
2021
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.............................................................................................................................................
.............................................................................................................................................
.............................................................................................................................................
(through 4/30) .....................................................................................................................
Calculation of Net Asset Value
The Trust’s NAV is determined in
accordance with GAAP as the total
value of bitcoin held by the Trust, plus
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that business by the NYDFS, other
venues in the U.S. and non-U.S. venues.
In addition, bitcoin futures and options
trading occurs on exchanges in the U.S.
regulated by the Commodity Futures
Trading Commission (the ‘‘CFTC’’). The
market for NYDFS-licensed and CFTCregulated trading of bitcoin and bitcoin
derivatives has developed substantially.
Bitcoin market conditions in the three
months ending on April 30, 2021 are
briefly summarized as follows:
• Bitcoin: Six NYDFS-licensed
entities operate trading venues with
order books for spot trading of bitcoin,
with a total average daily trading
volume of approximately $2.5 billion.
Across these venues, the average daily
deviation of prices was less than 0.08%.
The largest NYDFS-licensed trading
venue by volume had an average bid-ask
spread during the period of less than
0.05% for trades of $250,000.
• Futures: Two CFTC-regulated
exchanges facilitate trading of bitcoin
futures, with a total average daily
trading volume of approximately $2.9
billion.
• Options: One CFTC-regulated
exchange facilitates trading of options
on bitcoin futures, with average
monthly trading volume of
approximately $380 million.
The following table shows the average
daily trading volume for bitcoin across
the three largest NYDFS-licensed
exchanges, as well as the average daily
trading volume and average daily open
interest (i.e., the average total bitcoin
exposure of futures contracts held by
market participants at the end of each
trading day) for bitcoin futures contracts
on the Chicago Mercantile Exchange
(‘‘CME’’) and the Intercontinental
Exchange. The bitcoin data shown is for
trading volumes of bitcoin against U.S.
dollars and exclude trading transactions
of bitcoin against other digital assets
(e.g., Tether) or other fiat currencies
(e.g., euros).
any cash or other assets, less any
liabilities including accrued but unpaid
expenses. The NAV per Share is
determined by dividing the NAV of the
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7.95
215.44
267.19
216.97
708.39
2,564.30
Futures
daily volume
(USD
millions)
41.10
86.68
172.60
561.78
2,507.96
Futures
average open
interest
(USD
millions)
81.87
126.90
246.62
535.13
2,934.98
Trust by the number of Shares
outstanding. The NAV of the Trust is
typically determined as of 4:00 p.m.
Eastern Time (ET) on each Business
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Day. The Administrator will calculate
the NAV of the Trust once each
Exchange trading day. The Exchange’s
Core Trading Session closes at 4:00 p.m.
ET. The Trust’s daily activities are
generally not reflected in the NAV
determined for the Business Day on
which the transactions are effected (the
trade date), but rather on the following
Business Day. The NAV for the Trust’s
Shares will be disseminated daily to all
market participants at the same time.
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Intraday Indicative Value
In order to provide updated
information relating to the Trust for use
by shareholders and market
professionals, the Trust will disseminate
an intraday indicative value (‘‘IIV’’) per
Share updated every 15 seconds. The
IIV will be calculated by using the same
methodology that the Trust uses to
determine NAV, which, as described
above, is to follow GAAP. Generally,
GAAP requires the fair value of an asset
that is traded on a market to be
measured by reference to orderly
transactions on an active market.
Among all active markets with orderly
transactions, the market that is used to
determine the fair value of an asset is
the principal market. The Sponsor
expects that the principal market will
initially generally be the NYDFSregulated trading venue with the highest
trading volume and level of activity.
The IIV disseminated during the
Exchange’s Core Trading Session
between 9:30 a.m. to 4:00 p.m. ET
should not be viewed as an actual realtime 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 Core
Trading Session by one or more major
market data vendors.
Creation and Redemption of Shares
According to the Registration
Statement, the Trust will create and
redeem Shares from time to time, but
only in one or more blocks of 10,000
Shares (known as ‘‘Creation Baskets’’).
Creation Baskets will only be made in
exchange for delivery to the Trust or the
distribution by the Trust of the amount
of bitcoin represented by the Shares
being created or redeemed, the amount
of which will be based on the quantity
of bitcoin attributable to each Share of
the Trust (net of accrued but unpaid
Sponsor fees, extraordinary expenses or
liabilities) being created or redeemed
determined as of 4:00 p.m. ET on the
day the order is properly received.
Because creation and redemption of
Creation Baskets will be effected via inkind transactions based on the quantity
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of bitcoin attributable to each Share, the
quantity of Creation Baskets so created
or redeemed will generally not be
affected by fluctuations in the value of
bitcoin.
According to the Registration
Statement, Authorized Participants are
the only persons that may place orders
to create and redeem Creation Baskets.
Authorized Participants must be (1)
registered broker-dealers or other
securities market participants, such as
banks or other financial institutions,
that are not required to register as
broker-dealers to engage in securities
transactions, and (2) entities that have
an account with The Depository Trust
Company (‘‘DTC’’) such as banks,
brokers, dealers and trust companies. To
become an Authorized Participant, a
person must enter into an authorized
participant agreement with the Trust
and the Sponsor (the ‘‘Authorized
Participant Agreement’’). The
Authorized Participant Agreement
provides the procedures for the creation
and redemption of Shares and for the
delivery of the bitcoin required for such
creation and redemptions.
According to the Registration
Statement, Authorized Participants will
place orders through the Transfer Agent.
The Transfer Agent will coordinate with
the Trust’s Bitcoin Custodian in order to
facilitate settlement of the Shares and
bitcoin.
Creation Procedures
According to the Registration
Statement, on any Business Day, an
Authorized Participant may place an
order with the Transfer Agent to create
one or more Creation Baskets. Purchase
orders must be placed by 4:00 p.m. ET
or the close of regular trading on the
Exchange, whichever is earlier. The day
on which a valid order is received by
the Transfer Agent is considered the
purchase order date.
By placing a purchase order, an
Authorized Participant agrees to
facilitate the deposit of bitcoin with the
Trust. If required by the Sponsor and
the Trust, prior to the delivery of
Creation Baskets for a purchase order,
the Authorized Participant must also
have wired to the Transfer Agent the
non-refundable transaction fee due for
the purchase order. Authorized
Participants may not withdraw a
purchase order.
The manner by which Creation
Baskets are made is dictated by the
terms of the Authorized Participant
Agreement. By placing a purchase order,
an Authorized Participant agrees to
facilitate the deposit of bitcoin with the
Bitcoin Custodian. If an Authorized
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Participant fails to consummate the
foregoing, the order will be cancelled.
The total deposit of bitcoin required
to create each Creation Basket is an
amount of bitcoin that is in the same
proportion to the total amount of bitcoin
held by of the Trust (net of accrued but
unpaid Sponsor fees, extraordinary
expenses or liabilities) on the date the
purchase order is properly received as
the number of Shares to be created
under the purchase order is to the total
number of Shares outstanding on the
date the order is received.
Following an Authorized Participant’s
purchase order, the Trust’s bitcoin
account with the Bitcoin Custodian (the
‘‘Bitcoin Account’’) is credited with the
required bitcoin by the end of the
second Business Day following the
purchase order date. Upon receipt of the
bitcoin deposit amount in the Trust’s
Bitcoin Account, the Bitcoin Custodian
will notify the Transfer Agent, the
Authorized Participant and the Sponsor
that the bitcoin has been deposited. The
Transfer Agent will then direct DTC to
credit the number of Shares created to
the Authorized Participant’s DTC
account.
Redemption Procedures
According to the Registration
Statement, the procedures by which an
Authorized Participant can redeem one
or more Creation Baskets mirror the
procedures for the creation of Creation
Baskets. Accordingly, on any Business
Day, an Authorized Participant may
place an order with the Transfer Agent
to redeem one or more Creation Baskets.
Redemption orders must be placed by
4:00 p.m. ET or the close of regular
trading on the Exchange, whichever is
earlier. A redemption order will be
effective on the date it is received by the
Transfer Agent.
The redemption distribution from the
Trust consists of a transfer of bitcoin to
the redeeming Authorized Participant
corresponding to the number of Shares
being redeemed. The redemption
distribution due from the Trust will be
delivered once the Transfer Agent
notifies the Bitcoin Custodian and the
Sponsor that the Authorized Participant
has delivered the Shares represented by
the Creation Baskets to be redeemed to
the Transfer Agent’s DTC account. If the
Transfer Agent’s DTC account has not
been credited with all of the Shares of
the Creation Baskets to be redeemed, the
redemption distribution will be delayed
until such time as the Transfer Agent
confirms receipt of all such Shares.
Once the Transfer Agent notifies the
Bitcoin Custodian and the Sponsor that
the Shares have been received in the
Transfer Agent’s DTC account, the
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Sponsor will instruct the Bitcoin
Custodian to transfer the redemption
distribution from the Trust’s Bitcoin
Account to the Authorized Participant.
Availability of Information
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’).
In addition, the Trust’s website will
display the applicable end of day
closing NAV. The daily holdings of the
Trust will be available on the Trust’s
website before 9:30 a.m. E.T. The Trust’s
website will also include a form of the
prospectus for the Trust that may be
downloaded. The website will include
the Shares’ ticker and CUSIP
information, along with additional
quantitative information updated on a
daily basis for the Trust. The Trust’s
website will include (1) the prior
Business Day’s trading volume, the prior
Business Day’s reported NAV and
closing price, and a calculation of the
premium and discount of the closing
price or mid-point of the bid/ask spread
at the time of NAV calculation (‘‘Bid/
Ask Price’’) against the NAV; and (2)
data in chart format displaying the
frequency distribution of discounts and
premiums of the daily closing price or
Bid/Ask Price against the NAV, within
appropriate ranges, for at least each of
the four previous calendar quarters. The
Trust’s website will be publicly
available prior to the public offering of
Shares and accessible at no charge.
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Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
factors in exercising its discretion to
halt or suspend trading in the Shares of
the Trust.6 Trading in Shares of the
Trust will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached. Trading also may be
halted because of market conditions or
for reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable.
If the Exchange becomes aware that
the NAV with respect to the Shares is
not disseminated to all market
participants at the same time, it will halt
trading in the Shares until such time as
the NAV is available to all market
participants.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
6 See
NYSE Arca Rule 7.12–E.
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equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00
a.m. to 8:00 p.m. E.T. in accordance
with NYSE Arca Rule 7.34–E (Early,
Core, and Late Trading Sessions). The
Exchange has appropriate rules to
facilitate transactions in the Shares
during all trading sessions. As provided
in NYSE Arca Rule 7.6–E, the minimum
price variation (‘‘MPV’’) for quoting and
entry of orders in equity securities
traded on the NYSE Arca Marketplace is
$0.01, with the exception of securities
that are priced less than $1.00 for which
the MPV for order entry is $0.0001.
The Shares will conform to the initial
and continued listing criteria under
NYSE Arca Rule 8.201–E. The trading of
the Shares will be subject to NYSE Arca
Rule 8.201–E(g), which sets forth certain
restrictions on firms that have been
issued an Equity Trading Permit (‘‘ETP
Holders’’) to act as registered Market
Makers in Commodity-Based Trust
Shares to facilitate surveillance. The
Exchange represents that, for initial and
continued listing, the Trust will be in
compliance with Rule 10A–3 7 under
the Act, as provided by NYSE Arca Rule
5.3–E. A minimum of 100,000 Shares of
the Trust will be outstanding at the
commencement of trading on the
Exchange.
Surveillance
The Exchange represents that trading
in the Shares of the Trust will be subject
to the existing trading surveillances
administered by the Exchange, as well
as cross-market surveillances
administered by FINRA on behalf of the
Exchange, which are designed to detect
violations of Exchange rules and
applicable federal securities laws.8 The
Exchange represents that these
procedures are adequate to properly
monitor Exchange trading of the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
federal securities laws applicable to
trading on the Exchange.
The surveillances referred to above
generally focus on detecting securities
trading outside their normal patterns,
which could be indicative of
manipulative or other violative activity.
When such situations are detected,
surveillance analysis follows and
investigations are opened, where
appropriate, to review the behavior of
all relevant parties for all relevant
trading violations.
CFR 240.10A–3.
conducts cross-market surveillances on
behalf of the Exchange pursuant to a regulatory
services agreement. The Exchange is responsible for
FINRA’s performance under this regulatory services
agreement.
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The Exchange or FINRA, on behalf of
the Exchange, or both, will
communicate as needed regarding
trading in the Shares with other markets
and other entities that are members of
the Intermarket Surveillance Group
(‘‘ISG’’), and the Exchange or FINRA, on
behalf of the Exchange, or both, may
obtain trading information regarding
trading in the Shares from such markets
and other entities. In addition, the
Exchange may obtain information
regarding trading in the Shares from
markets and other entities that are
members of ISG or with which the
Exchange has in place a comprehensive
surveillance sharing agreement
(‘‘CSSA’’).9 The Exchange is also able to
obtain information regarding trading in
the Shares in connection with ETP
Holders’ proprietary or customer trades
which they effect through ETP Holders
on any relevant market.
In addition, the Exchange also has a
general policy prohibiting the
distribution of material, non-public
information by its employees.
All statements and representations
made in this filing regarding (a) the
description of the portfolios of the
Trust, (b) limitations on portfolio
holdings or reference assets, or (c) the
applicability of Exchange listing rules
specified in this rule filing shall
constitute continued listing
requirements for listing the Shares on
the Exchange.
The issuer has represented to the
Exchange that it will advise the
Exchange of any failure by the Trust to
comply with the continued listing
requirements, and, pursuant to its
obligations under Section 19(g)(1) of the
Act, the Exchange will monitor for
compliance with the continued listing
requirements. If the Trust is not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
NYSE Arca Rule 5.5–E(m).
Information Bulletin
Prior to the commencement of
trading, the Exchange will inform its
ETP Holders in an information bulletin
(the ‘‘Information Bulletin’’) of the
special characteristics and risks
associated with trading the Shares.
Specifically, the Information Bulletin
will discuss the following: (1) The
procedures for purchases and
redemptions of Shares; (2) NYSE Arca
Rule 9.2–E(a), which imposes a duty of
due diligence on its ETP Holders to
7 17
8 FINRA
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9 For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all
components of the Trust may trade on markets that
are members of ISG or with which the Exchange has
in place a CSSA.
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learn the essential facts relating to every
customer prior to trading the Shares; (3)
how information regarding portfolio
holdings is disseminated; (4) the
requirement that ETP Holders deliver a
prospectus to investors purchasing
newly issued Shares prior to or
concurrently with the confirmation of a
transaction; and (5) trading information.
Prior to the commencement of
trading, the Exchange will inform its
ETP Holders of the suitability
requirements of NYSE Arca Rule 9.2–
E(a) in an Information Bulletin.
Specifically, ETP Holders will be
reminded in the Information Bulletin
that, in recommending transactions in
the Shares, they must have a reasonable
basis to believe that (1) the
recommendation is suitable for a
customer given reasonable inquiry
concerning the customer’s investment
objectives, financial situation, needs,
and any other information known by
such ETP Holder, and (2) the customer
can evaluate the special characteristics,
and is able to bear the financial risks, of
an investment in the Shares. In
connection with the suitability
obligation, the Information Bulletin will
also provide that ETP Holders must
make reasonable efforts to obtain the
following information: (1) The
customer’s financial status; (2) the
customer’s tax status; (3) the customer’s
investment objectives; and (4) such
other information used or considered to
be reasonable by such ETP Holder or
registered representative in making
recommendations to the customer.
In addition, the Information Bulletin
will advise ETP Holders, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Trust. The Information
Bulletin will also discuss any
exemptive, no-action, and interpretive
relief granted by the Commission from
any rules under the Act. In addition, the
Information Bulletin will reference that
the Trust is subject to various fees and
expenses described in the Registration
Statement.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(5) 10 that an
exchange have rules that are designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to 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
10 15
U.S.C. 78f(b)(5).
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and, in general, to protect investors and
the public interest. The Exchange
believes that the proposed rule change
satisfies the requirements of Section
6(b)(5), as discussed in more detail
below.
The Commission has approved
numerous series of Trust Issued
Receipts,11 including Commodity-Based
Trust Shares,12 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, and, in
particular, the requirement that (i) a
national securities exchange’s rules are
designed to prevent fraudulent and
manipulative acts and practices; and (ii)
an exchange proposal be designed, in
general, to protect investors and the
public interest.
As discussed below, the Exchange, as
the listing exchange for the Shares, and
the CME, a regulated market of
significant size relating to bitcoin, are
both members of ISG, the purpose of
which is ‘‘to provide a framework for
the sharing of information and the
coordination of regulatory efforts among
exchanges trading securities and related
products to address potential
intermarket manipulation and trading
abuses.’’ 13 In addition, the Sponsor
believes that, on the whole, the
manipulation concerns previously
articulated by the Commission have
since been significantly mitigated, and
do not exceed those that exist in the
markets for other commodities that
underly securities listed on U.S.
national securities exchanges.
Specifically, significant increase in
trading volume and open interest in the
bitcoin futures market, growth of
liquidity in the spot market for bitcoin,
and certain features of the Shares
mitigate the manipulation concerns
expressed by the Commission when it
last reviewed exchange proposals to list
a bitcoin exchange-traded product
(‘‘ETP’’).
The proposed rule change is designed
to protect investors and the public
interest as an investment in the Trust
would provide investors with exposure
to bitcoin in a manner that may be more
efficient, more convenient and more
regulated than the purchase of bitcoin or
other investment products that provide
exposure to bitcoin.
Exchange Rule 8.200–E.
Trust Shares, as described in
Exchange Rule 8.201–E, are a type of Trust Issued
Receipt.
13 See https://isgportal.org/overview.
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11 See
12 Commodity-Based
Frm 00148
Fmt 4703
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For example, the Sponsor notes that
OTC bitcoin funds, which have attracted
significant investor interest, offer
exposure to bitcoin in a similar manner
as the Trust. However, OTC bitcoin
funds do not offer a creation or
redemption mechanism that would keep
their shares trading in line with their
NAVs and, as a result, OTC bitcoin
funds have historically traded at
significant premiums or discounts
compared to their NAVs. In contrast,
when the Trust’s Shares trade at a
premium or discount compared to their
NAV, creation or redemption can be
facilitated by the Authorized
Participants to drive the value of the
Shares towards their NAV. Notably,
investors in OTC bitcoin funds also
have historically borne significantly
higher fees and expenses than those that
would be borne by investors in the
Trust.
Additionally, the Sponsor notes that
investors holding bitcoin through a
cryptocurrency ‘‘exchange’’ often face
credit risk to the exchange for cash
balances, and often face risk of loss or
theft of their bitcoin as a result of the
exchange using internet-connected
storage (commonly known as ‘‘hot’’
wallets) and/or having poor private key
management (e.g., insufficient password
protection, lost key, etc.). In the Bitcoin
Custodian, the Trust is holding bitcoin
in 100% ‘‘cold’’ storage, meaning the
entire storage process is done
completely offline, with a regulated and
licensed entity applying industry best
practices.
(i) Designed To Prevent Fraudulent and
Manipulative Acts and Practices
When considering whether an
exchange’s proposal to list bitcoin-based
ETPs is designed to prevent fraudulent
and manipulative acts and practices, the
Commission requires that an exchange
demonstrate that there is a CSSA in
place with a regulated market of
significant size relating to the
underlying assets.14
14 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
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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.15 Sponsors of proposed
bitcoin-based ETPs in particular have
attempted to demonstrate that other
means besides surveillance-sharing
agreements are sufficient to prevent
fraudulent and manipulative acts and
practices, and in particular have
attempted to demonstrate that the
bitcoin market is ‘‘uniquely’’ and
‘‘inherently’’ resistant to fraud and
manipulation.16 Such resistance to
fraud and manipulation must be novel
and beyond those protections that exist
in traditional commodity markets or
equity markets for which the
Commission has long required
surveillance-sharing agreements in the
context of listing derivative securities
products. To date, exchanges proposing
rule changes to list bitcoin ETFs have
not been able to establish that the
relevant bitcoin market possesses a
resistance to manipulation that is
unique beyond that of traditional
security or commodity markets such
that it is inherently resistant to
manipulation.
The Exchange understands the
Commission’s focus on potential
manipulation of a bitcoin-based ETP in
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.’’ See Securities Exchange Act
Release No. 88284 (Feb. 26, 2020), 85 FR 12595
(Mar. 3, 2020) (the ‘‘Wilshire Phoenix Order’’) at
12596.
15 See Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579 (August 1, 2018) (the
‘‘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 [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 [Act] have been met.’’ Id. at 37582.
16 See Winklevoss Order, 83 FR at 37580, 37582–
91; see also Securities Exchange Act Release No.
87267 (Oct. 9, 2019), 84 FR 55382 (Oct. 16, 2019)
(the ‘‘Bitwise Order’’) at 55383, 55385–406. The
Commission noted that ‘‘the Winklevoss Order
addressed an assertion that ‘bitcoin and bitcoin
[spot] markets’ generally, as well as one bitcoin
trading platform specifically, have unique
resistance to fraud and manipulation; and the
Bitwise Order addressed the assertion that prices
from at least certain bitcoin trading platforms (‘the
‘real’ bitcoin spot market as opposed to the ‘fake’
and non-economic bitcoin spot market’) possessed
such unique resistance.’’ See Wilshire Phoenix
Order at 12597.
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prior disapproval orders, including the
Wilshire Phoenix Order, and believes
that such concerns have since been
largely mitigated. The Exchange
believes that increases in investor
participation in and institutional
adoption of bitcoin have facilitated the
maturation of the bitcoin trading
ecosystem.
However, the Exchange is not
required to demonstrate ‘‘other means to
prevent fraudulent and manipulative
acts and practices,’’ such as the
assertion that the relevant underlying
bitcoin market is ‘‘unique’’ or
‘‘inherently’’ resistant to manipulation,
if it can establish that it has a CSSA
with a regulated bitcoin market of
significant size, or that both the
Exchange and the relevant futures
market, in this case, the CME, hold
common membership in ISG. To this
end, the Exchange represents that both
the Exchange and CME are members of
the ISG. The remaining determination to
be made is whether the CME bitcoin
futures market constitutes a market of
significant size, which the Exchange
contends that it does, unlike at the time
of the Wilshire Phoenix Order. In the
context of this standard, the terms
‘‘significant market’’ and ‘‘market of
significant size’’ include a market (or
group of markets) as to which (a) there
is a reasonable likelihood that a person
attempting to manipulate the ETP
would also have to trade on that market
to successfully manipulate the ETP, so
that a surveillance-sharing agreement
would assist 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.17
(a) Manipulation of the ETP
The significant growth in trading
volumes, open interest, large open
interest holders, and total market
participants in the bitcoin futures
market since the Wilshire Phoenix
Order was issued is reflective of that
market’s growing influence on the spot
price of bitcoin.
Some academic research 18 suggests
that the bitcoin futures market has been
Wilshire Phoenix Order at 12596.
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
PO 00000
17 See
18 See
Frm 00149
Fmt 4703
Sfmt 4703
38135
leading bitcoin spot market price
discovery since as early as 2018.
However, in the Wilshire Phoenix
Order, the Commission noted that
academic research was, at the time,
inconclusive as to the influence of the
bitcoin futures market on price
discovery in bitcoin spot markets, and
noted specifically that existing research
did not focus appropriately on lead-lag
analyses, or on the influence of non-U.S.
bitcoin spot market.19 To this end,
NYDIG has developed more recent
proprietary research, including lead-lag
analyses, that demonstrates that prices
in the CME bitcoin futures market do
indeed lead prices in the bitcoin spot
market, including non-U.S. bitcoin spot
markets. This finding supports the
thesis that a market participant
attempting to manipulate the Shares
would have to trade on that market to
manipulate the ETP.
Because Shares can only be created or
redeemed in kind, and further because
the Sponsor fee is accrued with respect
to the quantity of bitcoin held by the
Trust and paid in kind by the Trust, the
Trust receives and holds only bitcoin.
This substantially reduces the potential
for manipulation of the number of
Shares created or redeemed, which
therefore substantially reduces the
potential for shareholders to be harmed
by manipulation.
NYDIG’s research shows that the
bitcoin futures market is one of the
primary venues that market participants
use to transact large exposures to
bitcoin. This can be attributed to
multiple factors, such as institutional
familiarity with futures margining and
settlement processes, the simplicity of
cash settlement instead of physical
settlement in a novel asset, and the
efficient leverage offered by exchange
margining.
In contrast to the efficient leverage
offered through the futures market,
many bitcoin spot trading venues
require full pre-funding of trading,
which means it would be highly capital
intensive to ‘‘spoof’’ or ‘‘layer’’ order
books on spot trading venues. This
further supports NYDIG’s conclusion
that if a market participant intended to
manipulate the price of bitcoin, and
thereby the Shares, the bitcoin futures
market is the one that would be
manipulated first.
As such, part (a) of the significant
market test outlined above is satisfied
and that common membership in ISG
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.’’
19 See Wilshire Phoenix Order at 12613.
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between the Exchange and CME would
assist the Exchange in detecting and
deterring misconduct in the Shares.
(b) Predominant Influence on Prices in
Spot and Bitcoin Futures
According to the Sponsor, trading in
the Shares would not be the
predominant force on prices in the
bitcoin futures market (or spot market)
given the significant volume in the
bitcoin futures market (in excess of $2.5
billion in average daily volume), the
size of bitcoin’s market cap (in excess of
$1 trillion), and the significant liquidity
available in the spot market (in excess
of $2.5 billion in average daily volume,
in each case as of April 30, 2021).
In addition, NYDIG performed a
conservative analysis, considering only
a small subset of spot trading venues,
that concludes that the cost to buy or
sell $5 million worth of bitcoin averages
roughly 20 basis points.20 For a $10
million market order, the cost to buy or
sell is roughly 40 basis points. This is
comparable to the liquidity of existing
commodity ETPs. Using more
sophisticated execution strategies and
additional liquidity sources would
likely result in a lower cost to trade.
As such, the overall size of the bitcoin
market and the ability for market
participants, including authorized
participants creating and redeeming inkind with the Trust, to buy or sell large
amounts of bitcoin without significant
market impact supports the Sponsor’s
belief that the Shares are unlikely to
become a predominant force on pricing
in either the bitcoin spot or bitcoin
futures markets, satisfying part (b) of the
test outlined above.
The proposed rule change is also
designed to prevent fraudulent and
manipulative acts and practices in that
the Shares will be listed and traded on
the Exchange pursuant to the initial and
continued listing criteria in NYSE Arca
Rule 8.201–E, which involve the
maintenance of surveillance procedures
by the Exchange for the Shares. The
Exchange has in place surveillance
procedures that are sufficiently robust to
properly monitor trading in the Shares
in all trading sessions and to deter and
detect violations of Exchange rules and
applicable federal securities laws. The
Exchange or FINRA, on behalf of the
Exchange, or both, will communicate as
needed regarding trading in the Shares
with other markets that are members of
the ISG, and the Exchange or FINRA, on
behalf of the Exchange, or both, may
20 These statistics are based on three random
daily samples of bitcoin liquidity in USD
(excluding stablecoins or Euro liquidity) based on
executable quotes on Coinbase Pro, Bitstamp and
Itbit from January 1, 2021 to April 30, 2021.
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obtain information regarding trading in
the Shares with other markets and other
entities that are members of the ISG, and
the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain
information regarding trading in the
Shares from such markets and other
entities. In addition, the Exchange may
obtain information regarding trading in
the Shares from markets that are
members of ISG or with which the
Exchange has in place a CSSA. Also,
pursuant to NYSE Arca Rule 8.201–E(g),
the Exchange is able to obtain
information regarding trading in the
Shares through ETP Holders acting as
registered Market Makers, in connection
with such ETP Holders’ proprietary or
customer trades through ETP Holders
which they effect on any relevant
market.
(ii) Designed To Protect Investors and
the Public Interest
The Exchange believes the proposed
rule change is designed to protect
investors and the public interest.
With the growth of OTC bitcoin
funds, 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,
limited liquidity to trade or borrow
shares, and the lack of surveillance and
oversight through a listed exchange are
putting U.S. investor money at risk in
ways that could potentially be
eliminated through access to the Shares.
For example, the OTC bitcoin fund with
the largest assets under management in
the United States returned 46.41% yearto-date through April 30, 2021 while
spot bitcoin returned 95.61% over the
same period. The deviation in price
performance can be attributed to the
fluctuation in NAV of this fund.
As such, the Sponsor believes that
this proposed rule change would act to
limit the risk to U.S. investors that are
increasingly seeking exposure to
bitcoin, with benefits such as 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 substantially greater
surveillance and regulatory oversight.
The Exchange also notes there is a
considerable amount of bitcoin price
and market information available on
public websites and through
professional and subscription services.
Investors may obtain, on a 24-hour
basis, bitcoin pricing information based
PO 00000
Frm 00150
Fmt 4703
Sfmt 4703
on the spot price for bitcoin from
various financial information service
providers. The closing price and
settlement prices of bitcoin are readily
available from the Bitcoin exchanges
and other publicly available websites. In
addition, such prices are published in
public sources, or on-line information
services such as Bloomberg. The Trust
will provide daily website disclosure of
its bitcoin holdings, net asset value, and
closing price daily.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA. Trading in Shares of the Trust
will be halted if the circuit breaker
parameters in NYSE Arca Rule 7.12–E
have been reached or because of market
conditions or for reasons that, in the
view of the Exchange, make trading in
the Shares inadvisable. Additionally,
the Exchange represents that the
Exchange may halt trading during the
day in which an interruption to the
dissemination of the IIV occurs. If the
interruption to the dissemination of the
IIV persists past the trading day in
which it occurred, the Exchange will
halt trading no later than the beginning
of the trading day following the
interruption. In addition, if the
Exchange becomes aware that the NAV
with respect to the Shares is not
disseminated to all market participants
at the same time, it will halt trading in
the Shares until such time as the NAV
is available to all market participants.
Moreover, prior to the commencement
of trading, the Exchange will inform its
ETP Holders in an Information Bulletin
of the special characteristics and risks
associated with trading the Shares and
of the suitability requirements of NYSE
Arca Rule 9.2–E(a). The Information
Bulletin will advise ETP Holders, prior
to the commencement of trading, of the
prospectus delivery requirements
applicable to the Trust. The Information
Bulletin will also discuss any
exemptive, no-action, and interpretive
relief granted by the Commission from
any rules under the Act. In addition, the
Information Bulletin will reference that
the Trust is subject to various fees and
expenses described in the Registration
Statement. The Information Bulletin
will disclose that information about the
Shares will be publicly available on the
Trust’s website.
The proposed rule change is designed
to perfect the mechanism of a free and
open market and, in general, to protect
investors and the public interest in that
it will facilitate the listing and trading
of an additional type of exchange-traded
product that will enhance competition
among market participants, to the
benefit of investors and the marketplace.
E:\FR\FM\19JYN1.SGM
19JYN1
Federal Register / Vol. 86, No. 135 / Monday, July 19, 2021 / Notices
As noted above, the Exchange has in
place surveillance procedures that are
adequate to properly monitor trading in
the Shares in all trading sessions and
may obtain information via ISG from
other exchanges that are members of ISG
or with which the Exchange has entered
into a CSSA. In addition, as noted
above, investors will have ready access
to information regarding the Trust’s
bitcoin holdings, and quotation and last
sale information for the Shares.
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, and in the
best interest of investors and the public
at large.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change will
facilitate the listing and trading of a new
type of Commodity-Based Trust Share
based on the price of bitcoin that will
enhance competition among market
participants, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or up to 90 days (i) as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding
or (ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
the proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
lotter on DSK11XQN23PROD with NOTICES1
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:
VerDate Sep<11>2014
18:23 Jul 16, 2021
Jkt 253001
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
NYSEArca–2021–57 on the subject line.
Paper Comments
• Send paper comments in triplicate
to: Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–NYSEArca–2021–57. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–NYSEArca–2021–57 and
should be submitted on or before
August 9, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–15197 Filed 7–16–21; 8:45 am]
BILLING CODE 8011–01–P
PO 00000
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–92389; File No. SR–CBOE–
2021–039]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Fees
Schedule With Respect to Certain Fees
Related to Qualified Contingent Cross
Orders and the Clearing Trading
Permit Holder Fee Cap
July 13, 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 July 1,
2021, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) 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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
the Fees Schedule with respect to
certain fees related to Qualified
Contingent Cross orders and the
Clearing Trading Permit Holder (‘‘TPH’’)
Fee Cap. The text of the proposed rule
change is provided in Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegal
RegulatoryHome.aspx), 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
1 15
21 17
CFR 200.30–3(a)(12).
Frm 00151
Fmt 4703
Sfmt 4703
38137
2 17
E:\FR\FM\19JYN1.SGM
U.S.C. 78s(b)(1).
CFR 240.19b–4.
19JYN1
]]>Agencies
[Federal Register Volume 86, Number 135 (Monday, July 19, 2021)]
[Notices]
[Pages 38129-38137]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15197]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-92395; File No. SR-NYSEArca-2021-57]
Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin
ETF Under NYSE Arca Rule 8.201-E
July 13, 2021.
Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on June 30, 2021, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') 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 self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to list and trade the shares of the NYDIG
Bitcoin ETF (the ``Trust'') \4\ under NYSE Arca Rule 8.201-E. The
common shares of beneficial interest of the Trust are referred to
herein as the ``Shares.'' The proposed change is available on the
Exchange's website at www.nyse.com, at the principal office of the
Exchange, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------
\4\ The Trust was formed as a Delaware statutory trust on
January 22, 2021, and is operated as a grantor trust for U.S.
federal tax purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to list and trade the Shares of the Trust
under NYSE Arca Rule 8.201-E, which governs the listing and trading of
Commodity-Based Trust Shares.
Description of the Trust
The Shares will be issued by the Trust, a Delaware statutory trust.
According to the Registration Statement, the Trust's investment
objective is to reflect the performance of the price of bitcoin less
the expenses of the Trust's operations. The Trust will not seek to
reflect the performance of any benchmark or index.\5\
---------------------------------------------------------------------------
\5\ On February 16, 2021, the Trust filed a draft Registration
Statement on Form S-1 under the Securities Act of 1933 (the
``Registration Statement''). The description of the operation of the
Trust herein is based, in part, on 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.
---------------------------------------------------------------------------
In seeking to achieve its investment objective, the Trust will only
hold bitcoin. The Trust will value its assets daily in accordance with
Generally Accepted Accounting Principles (``GAAP''), which, according
to the Registration Statement, generally value bitcoin by reference to
orderly transactions in the principal active market for bitcoin, as
described below.
NYDIG Asset Management LLC (the ``Sponsor'') is the Sponsor of the
Trust. Delaware Trust Company (the ``Trustee'') is the trustee of the
Trust and NYDIG Trust Company LLC (the ``Bitcoin Custodian'') will hold
all of the Trust's bitcoin on the Trust's behalf as custodian. Both the
Sponsor and the Bitcoin Custodian are indirect wholly-owned
subsidiaries of New York Digital Investment Group LLC (``NYDIG'').
Pursuant to the custodial agreement, the Bitcoin Custodian will be
responsible for (1) safekeeping all of the bitcoin owned by the Trust,
(2) opening an account that holds the Trust's bitcoin and (3)
facilitating the transfer of bitcoin required for the operation of the
Trust, as directed by the Sponsor. The Bitcoin Custodian is chartered
as a limited purpose trust company by the New York State Department of
Financial Services (``NYDFS'') and is authorized by NYDFS to provide
digital asset custody services. U.S. Bancorp Fund Services, LLC will
act as the transfer agent for the Trust (the ``Transfer Agent'') and as
the administrator of the Trust (the ``Administrator'') to perform
various administrative, tax, accounting and recordkeeping functions on
behalf of the Trust. The Transfer Agent and the Administrator will also
be responsible for issuing and redeeming Shares and calculating the net
asset value (``NAV'') of the Shares, respectively.
According to the Registration Statement, the Trust will process all
creations and redemptions of Shares in transactions with financial
firms that are authorized to do so (known as ``Authorized
Participants''). When the Trust issues or redeems its Shares, it will
do so only in ``in-kind'' transactions in blocks of 10,000 Shares
[[Page 38130]]
(a ``Creation Basket'') based on the quantity of bitcoin attributable
to each Share of the Trust (net of accrued but unpaid Sponsor fees and
any accrued but unpaid extraordinary expenses or liabilities). Because
the creation and redemption of Creation Baskets will be effected via
in-kind transactions based on the quantity of bitcoin attributable to
each Share, the quantity of Creation Baskets so created or redeemed
will generally not be affected by fluctuations in the value of bitcoin.
When purchasing Creation Baskets, Authorized Participants or their
agents will deliver bitcoin to the Trust's account with the Bitcoin
Custodian in exchange for Creation Baskets. When redeeming Creation
Baskets, Authorized Participants or their agents will receive bitcoin
from the Trust through the Bitcoin Custodian. The Trust will not
purchase or, barring a liquidation or extraordinary circumstances, sell
bitcoin directly.
According to the Registration Statement, to support the ability of
Authorized Participants to provide liquidity at prices that reflect the
value of the Trust's assets and to facilitate orderly transactions in
the Shares, the Trust will ordinarily process redemptions of Shares on
the next day when the Exchange is open for regular trading (a
``Business Day'') following receipt of a redemption request by an
Authorized Participant.
The Sponsor believes that the design of the Trust will enable
investors to effectively and efficiently implement strategic and
tactical asset allocation strategies that use bitcoin by investing in
the Shares rather than directly in bitcoin.
Custody of the Trust's Bitcoin
According to the Registration Statement, and as described above,
the Trust's Bitcoin Custodian will custody of all of the Trust's
bitcoin. Custody of bitcoin typically involves the generation, storage
and utilization of private keys. These private keys are used to effect
transfer transactions--i.e., transfers of bitcoin from an address
associated with the private key to another address. While private keys
must be used to send bitcoin, private keys do not need to be used or
shared in order to receive a bitcoin transfer; every private key has an
associated public key and an address derived from that public key that
can be freely shared, to which counterparties can transfer bitcoin. The
Bitcoin network has a public ledger, meaning that anybody with access
to the address can see the balance of digital assets in that address.
The Bitcoin Custodian carefully considers the design of the
physical, operational and cryptographic systems for secure storage of
the Trust's private keys in an effort to lower the risk of loss or
theft. According to the Registration Statement, no such system is
perfectly secure and loss or theft due to operational or other failure
is always possible. The Bitcoin Custodian uses a multi-factor security
system under which actions by multiple individuals working together are
required to access the private keys necessary to transfer such digital
assets and ensure the Trust's exclusive ownership. The multi-factor
security system generates private keys using a Federal Information
Processing Standards Publication 140-2 (``FIPS 140-2'')-certified
random number generator to ensure the keys' uniqueness. Before these
keys are used, the Bitcoin Custodian validates that the public
addresses associated with these keys have no associated digital asset
balances. The software used for key generation and verification is
tested by the Bitcoin Custodian and is reviewed by third-party advisors
from the security community with specific expertise in computer
security and applied cryptography. The private keys are stored in an
encrypted manner using a FIPS 140-2-certified security module held in
redundant secure, geographically dispersed locations with high levels
of physical security, including robust physical barriers to entry,
electronic surveillance and continuously roving patrols. The
operational procedures of these facilities and of the Bitcoin Custodian
are reviewed by third-party advisors with specific expertise in
physical security. The devices that store the keys will never be
connected to the internet or any other public or private distributed
network--this is colloquially known as ``cold storage.'' Only specific
individuals are authorized to participate in the custody process, and
no individual acting alone will be able to access or use any of the
private keys. In addition, no combination of the executive officers of
the Sponsor or the investment professionals managing the Trust, acting
alone or together, will be able to access or use any of the private
keys that hold the Trust's bitcoin.
The Trust generally does not intend to hold cash or cash
equivalents. However, the Trust may hold cash and cash equivalents on a
temporary basis to pay extraordinary expenses. The Trust will enter
into a cash custody agreement with U.S. Bank N.A. under which U.S. Bank
N.A. will act as custodian of the Trust's cash and cash equivalents.
Overview of Bitcoin and the Bitcoin Network
According to the Registration Statement, Bitcoin is a digital
asset, the ownership and behavior of which are determined by
participants in an online, peer-to-peer network that connects computers
that run publicly accessible, or ``open source,'' software that follows
the rules and procedures governing the Bitcoin network, commonly
referred to as the Bitcoin protocol. The value of bitcoin, like the
value of other digital assets, is not backed by any government,
corporation or other identified body. Ownership and the ability to
transfer or take other actions with respect to bitcoin is protected
through public-key cryptography. The supply of bitcoin is constrained
formulaically by the Bitcoin protocol instead of being explicitly
delegated to an identified body (e.g., a central bank or corporate
treasury) to control. Units of bitcoin are treated as fungible. Bitcoin
and certain other types of digital assets are sometimes referred to as
digital currencies or cryptocurrencies. No single entity owns or
operates the Bitcoin network, the infrastructure of which is
collectively maintained by (1) a decentralized group of participants
who run computer software that results in the recording and validation
of transactions (commonly referred to as ``miners''), (2) developers
who propose improvements to the Bitcoin protocol and the software that
enforces the protocol and (3) users who choose what Bitcoin software to
run. Bitcoin was released in 2009 and, as a result, there is little
data on its long-term investment potential. Bitcoin is not backed by a
government-issued legal tender or other assets or currency.
Bitcoin is ``stored'' or reflected on a digital transaction ledger
commonly known as a ``blockchain.'' A blockchain is a type of shared
and continually reconciled database, stored in a decentralized manner
on the computers of certain users of the digital asset. A blockchain is
a canonical record of every digital asset: The blockchain records every
``coin'' or ``token,'' balances of digital assets, every transaction
and every address associated with a quantity of a particular digital
asset. Bitcoin utilizes the blockchain to record transactions into and
out of different addresses, facilitating a determination of how much
bitcoin is in each address.
Bitcoin is created by ``mining.'' Mining involves miners using a
sophisticated computer program to repeatedly solve complex mathematical
problems on specialized computer hardware. The mathematical problem
[[Page 38131]]
involves a computation involving all or some bitcoin transactions that
have been proposed by the Bitcoin network's participants. When this
problem is solved, the computer creates a ``block'' consisting of these
transactions. As each newly solved block refers back to and
``connects'' with the immediately prior solved block, the addition of a
new block adds to the blockchain in a manner similar to a new link
being added to a chain. A miner's proposed block is added to the
blockchain once a majority of the nodes on the network confirm the
miner's work. A miner that is successful in adding a block to the
blockchain is automatically awarded a fixed amount of bitcoin for its
efforts plus any transaction fees paid by transferors whose
transactions are recorded in the block. This reward system is the means
by which new bitcoin enter circulation. This reward system, called
proof of work, also ensures that the local copies of the Bitcoin
blockchain maintained by participants in the Bitcoin network are kept
in consensus with one another.
The Bitcoin Market
According to the Registration Statement, Bitcoin is the oldest,
best-known and largest market-capitalization digital asset. Since the
advent of bitcoin, numerous other digital assets have been created. The
website CoinMarketCap.com tracks the U.S. dollar price and total market
capitalization for each of more than 5,000 traded digital assets. As of
April 30, 2021, bitcoin had a total market capitalization in excess of
$1 trillion and represented more than 45% of the entire digital asset
market.
The first trading venues for bitcoin were informal exchange
services marketed primarily in public online forums. Transactions on
these services were effected via anonymous email, and the fiat currency
portions of these transactions were effected through payment services
such as PayPal. These services required their operators to manually
match buyers and sellers in order to process transactions. Later,
automated exchanges that matched buyers and sellers began to form. Many
such exchanges have been created in the U.S. and abroad. In the U.S., a
number of exchanges now operate under licensing from the NYDFS.
Beginning in 2016, more institutional investors entered the bitcoin
market. As a result, an increasing number of transactions have occurred
in over-the-counter (``OTC'') markets instead of exchanges. This type
of trading allows for bespoke trading arrangements that may ease of the
burden of trade operations or reduce different types of risks (e.g.,
counterparty risk).
As a result, there is not a single source for pricing bitcoin.
According to the Registration Statement, the Trust believes that prices
on the bitcoin trading venues are generally formed by the levels of
demand on either side of the exchange's order book, and arbitrage
between exchanges typically prevents larger and/or more persistent
differences in prices between bitcoin trading venues. Factors that the
Trust believes may influence the relative balance of buyers and sellers
on the bitcoin trading venues include trading activity in the OTC
markets, global or regional economic conditions, expected levels of
inflation, growth or reversal in the adoption and use of bitcoin,
developments in the regulation of bitcoin, changes in the preference of
market participants between bitcoin and other digital assets,
maintenance and development of the open-source software protocol of the
Bitcoin network, and negative consumer or public perception of bitcoin
specifically or digital assets generally.
Bitcoin spot trading occurs on venues in the U.S. that are licensed
to conduct that business by the NYDFS, other venues in the U.S. and
non-U.S. venues. In addition, bitcoin futures and options trading
occurs on exchanges in the U.S. regulated by the Commodity Futures
Trading Commission (the ``CFTC''). The market for NYDFS-licensed and
CFTC-regulated trading of bitcoin and bitcoin derivatives has developed
substantially. Bitcoin market conditions in the three months ending on
April 30, 2021 are briefly summarized as follows:
Bitcoin: Six NYDFS-licensed entities operate trading
venues with order books for spot trading of bitcoin, with a total
average daily trading volume of approximately $2.5 billion. Across
these venues, the average daily deviation of prices was less than
0.08%. The largest NYDFS-licensed trading venue by volume had an
average bid-ask spread during the period of less than 0.05% for trades
of $250,000.
Futures: Two CFTC-regulated exchanges facilitate trading
of bitcoin futures, with a total average daily trading volume of
approximately $2.9 billion.
Options: One CFTC-regulated exchange facilitates trading
of options on bitcoin futures, with average monthly trading volume of
approximately $380 million.
The following table shows the average daily trading volume for
bitcoin across the three largest NYDFS-licensed exchanges, as well as
the average daily trading volume and average daily open interest (i.e.,
the average total bitcoin exposure of futures contracts held by market
participants at the end of each trading day) for bitcoin futures
contracts on the Chicago Mercantile Exchange (``CME'') and the
Intercontinental Exchange. The bitcoin data shown is for trading
volumes of bitcoin against U.S. dollars and exclude trading
transactions of bitcoin against other digital assets (e.g., Tether) or
other fiat currencies (e.g., euros).
----------------------------------------------------------------------------------------------------------------
Futures
Bitcoin daily Futures daily average open
Year volume (USD volume (USD interest (USD
millions) millions) millions)
----------------------------------------------------------------------------------------------------------------
2016............................................................ 7.95
2017............................................................ 215.44 41.10 81.87
2018............................................................ 267.19 86.68 126.90
2019............................................................ 216.97 172.60 246.62
2020............................................................ 708.39 561.78 535.13
2021 (through 4/30)............................................. 2,564.30 2,507.96 2,934.98
----------------------------------------------------------------------------------------------------------------
Calculation of Net Asset Value
The Trust's NAV is determined in accordance with GAAP as the total
value of bitcoin held by the Trust, plus any cash or other assets, less
any liabilities including accrued but unpaid expenses. The NAV per
Share is determined by dividing the NAV of the Trust by the number of
Shares outstanding. The NAV of the Trust is typically determined as of
4:00 p.m. Eastern Time (ET) on each Business
[[Page 38132]]
Day. The Administrator will calculate the NAV of the Trust once each
Exchange trading day. The Exchange's Core Trading Session closes at
4:00 p.m. ET. The Trust's daily activities are generally not reflected
in the NAV determined for the Business Day on which the transactions
are effected (the trade date), but rather on the following Business
Day. The NAV for the Trust's Shares will be disseminated daily to all
market participants at the same time.
Intraday Indicative Value
In order to provide updated information relating to the Trust for
use by shareholders and market professionals, the Trust will
disseminate an intraday indicative value (``IIV'') per Share updated
every 15 seconds. The IIV will be calculated by using the same
methodology that the Trust uses to determine NAV, which, as described
above, is to follow GAAP. Generally, GAAP requires the fair value of an
asset that is traded on a market to be measured by reference to orderly
transactions on an active market. Among all active markets with orderly
transactions, the market that is used to determine the fair value of an
asset is the principal market. The Sponsor expects that the principal
market will initially generally be the NYDFS-regulated trading venue
with the highest trading volume and level of activity.
The IIV disseminated during the Exchange's Core Trading Session
between 9:30 a.m. to 4:00 p.m. ET 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 Core Trading Session
by one or more major market data vendors.
Creation and Redemption of Shares
According to the Registration Statement, the Trust will create and
redeem Shares from time to time, but only in one or more blocks of
10,000 Shares (known as ``Creation Baskets''). Creation Baskets will
only be made in exchange for delivery to the Trust or the distribution
by the Trust of the amount of bitcoin represented by the Shares being
created or redeemed, the amount of which will be based on the quantity
of bitcoin attributable to each Share of the Trust (net of accrued but
unpaid Sponsor fees, extraordinary expenses or liabilities) being
created or redeemed determined as of 4:00 p.m. ET on the day the order
is properly received. Because creation and redemption of Creation
Baskets will be effected via in-kind transactions based on the quantity
of bitcoin attributable to each Share, the quantity of Creation Baskets
so created or redeemed will generally not be affected by fluctuations
in the value of bitcoin.
According to the Registration Statement, Authorized Participants
are the only persons that may place orders to create and redeem
Creation Baskets. Authorized Participants must be (1) registered
broker-dealers or other securities market participants, such as banks
or other financial institutions, that are not required to register as
broker-dealers to engage in securities transactions, and (2) entities
that have an account with The Depository Trust Company (``DTC'') such
as banks, brokers, dealers and trust companies. To become an Authorized
Participant, a person must enter into an authorized participant
agreement with the Trust and the Sponsor (the ``Authorized Participant
Agreement''). The Authorized Participant Agreement provides the
procedures for the creation and redemption of Shares and for the
delivery of the bitcoin required for such creation and redemptions.
According to the Registration Statement, Authorized Participants
will place orders through the Transfer Agent. The Transfer Agent will
coordinate with the Trust's Bitcoin Custodian in order to facilitate
settlement of the Shares and bitcoin.
Creation Procedures
According to the Registration Statement, on any Business Day, an
Authorized Participant may place an order with the Transfer Agent to
create one or more Creation Baskets. Purchase orders must be placed by
4:00 p.m. ET or the close of regular trading on the Exchange, whichever
is earlier. The day on which a valid order is received by the Transfer
Agent is considered the purchase order date.
By placing a purchase order, an Authorized Participant agrees to
facilitate the deposit of bitcoin with the Trust. If required by the
Sponsor and the Trust, prior to the delivery of Creation Baskets for a
purchase order, the Authorized Participant must also have wired to the
Transfer Agent the non-refundable transaction fee due for the purchase
order. Authorized Participants may not withdraw a purchase order.
The manner by which Creation Baskets are made is dictated by the
terms of the Authorized Participant Agreement. By placing a purchase
order, an Authorized Participant agrees to facilitate the deposit of
bitcoin with the Bitcoin Custodian. If an Authorized Participant fails
to consummate the foregoing, the order will be cancelled.
The total deposit of bitcoin required to create each Creation
Basket is an amount of bitcoin that is in the same proportion to the
total amount of bitcoin held by of the Trust (net of accrued but unpaid
Sponsor fees, extraordinary expenses or liabilities) on the date the
purchase order is properly received as the number of Shares to be
created under the purchase order is to the total number of Shares
outstanding on the date the order is received.
Following an Authorized Participant's purchase order, the Trust's
bitcoin account with the Bitcoin Custodian (the ``Bitcoin Account'') is
credited with the required bitcoin by the end of the second Business
Day following the purchase order date. Upon receipt of the bitcoin
deposit amount in the Trust's Bitcoin Account, the Bitcoin Custodian
will notify the Transfer Agent, the Authorized Participant and the
Sponsor that the bitcoin has been deposited. The Transfer Agent will
then direct DTC to credit the number of Shares created to the
Authorized Participant's DTC account.
Redemption Procedures
According to the Registration Statement, the procedures by which an
Authorized Participant can redeem one or more Creation Baskets mirror
the procedures for the creation of Creation Baskets. Accordingly, on
any Business Day, an Authorized Participant may place an order with the
Transfer Agent to redeem one or more Creation Baskets. Redemption
orders must be placed by 4:00 p.m. ET or the close of regular trading
on the Exchange, whichever is earlier. A redemption order will be
effective on the date it is received by the Transfer Agent.
The redemption distribution from the Trust consists of a transfer
of bitcoin to the redeeming Authorized Participant corresponding to the
number of Shares being redeemed. The redemption distribution due from
the Trust will be delivered once the Transfer Agent notifies the
Bitcoin Custodian and the Sponsor that the Authorized Participant has
delivered the Shares represented by the Creation Baskets to be redeemed
to the Transfer Agent's DTC account. If the Transfer Agent's DTC
account has not been credited with all of the Shares of the Creation
Baskets to be redeemed, the redemption distribution will be delayed
until such time as the Transfer Agent confirms receipt of all such
Shares.
Once the Transfer Agent notifies the Bitcoin Custodian and the
Sponsor that the Shares have been received in the Transfer Agent's DTC
account, the
[[Page 38133]]
Sponsor will instruct the Bitcoin Custodian to transfer the redemption
distribution from the Trust's Bitcoin Account to the Authorized
Participant.
Availability of Information
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
In addition, the Trust's website will display the applicable end of
day closing NAV. The daily holdings of the Trust will be available on
the Trust's website before 9:30 a.m. E.T. The Trust's website will also
include a form of the prospectus for the Trust that may be downloaded.
The website will include the Shares' ticker and CUSIP information,
along with additional quantitative information updated on a daily basis
for the Trust. The Trust's website will include (1) the prior Business
Day's trading volume, the prior Business Day's reported NAV and closing
price, and a calculation of the premium and discount of the closing
price or mid-point of the bid/ask spread at the time of NAV calculation
(``Bid/Ask Price'') against the NAV; and (2) data in chart format
displaying the frequency distribution of discounts and premiums of the
daily closing price or Bid/Ask Price against the NAV, within
appropriate ranges, for at least each of the four previous calendar
quarters. The Trust's website will be publicly available prior to the
public offering of Shares and accessible at no charge.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares of the Trust.\6\ Trading in Shares of the Trust
will be halted if the circuit breaker parameters in NYSE Arca Rule
7.12-E have been reached. Trading also may be halted because of market
conditions or for reasons that, in the view of the Exchange, make
trading in the Shares inadvisable.
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\6\ See NYSE Arca Rule 7.12-E.
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If the Exchange becomes aware that the NAV with respect to the
Shares is not disseminated to all market participants at the same time,
it will halt trading in the Shares until such time as the NAV is
available to all market participants.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. Shares will trade on
the NYSE Arca Marketplace from 4:00 a.m. to 8:00 p.m. E.T. in
accordance with NYSE Arca Rule 7.34-E (Early, Core, and Late Trading
Sessions). The Exchange has appropriate rules to facilitate
transactions in the Shares during all trading sessions. As provided in
NYSE Arca Rule 7.6-E, the minimum price variation (``MPV'') for quoting
and entry of orders in equity securities traded on the NYSE Arca
Marketplace is $0.01, with the exception of securities that are priced
less than $1.00 for which the MPV for order entry is $0.0001.
The Shares will conform to the initial and continued listing
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain
restrictions on firms that have been issued an Equity Trading Permit
(``ETP Holders'') to act as registered Market Makers in Commodity-Based
Trust Shares to facilitate surveillance. The Exchange represents that,
for initial and continued listing, the Trust will be in compliance with
Rule 10A-3 \7\ under the Act, as provided by NYSE Arca Rule 5.3-E. A
minimum of 100,000 Shares of the Trust will be outstanding at the
commencement of trading on the Exchange.
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\7\ 17 CFR 240.10A-3.
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Surveillance
The Exchange represents that trading in the Shares of the Trust
will be subject to the existing trading surveillances administered by
the Exchange, as well as cross-market surveillances administered by
FINRA on behalf of the Exchange, which are designed to detect
violations of Exchange rules and applicable federal securities laws.\8\
The Exchange represents that these procedures are adequate to properly
monitor Exchange trading of the Shares in all trading sessions and to
deter and detect violations of Exchange rules and federal securities
laws applicable to trading on the Exchange.
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\8\ FINRA conducts cross-market surveillances on behalf of the
Exchange pursuant to a regulatory services agreement. The Exchange
is responsible for FINRA's performance under this regulatory
services agreement.
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The surveillances referred to above generally focus on detecting
securities trading outside their normal patterns, which could be
indicative of manipulative or other violative activity. When such
situations are detected, surveillance analysis follows and
investigations are opened, where appropriate, to review the behavior of
all relevant parties for all relevant trading violations.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares with other
markets and other entities that are members of the Intermarket
Surveillance Group (``ISG''), and the Exchange or FINRA, on behalf of
the Exchange, or both, may obtain trading information regarding trading
in the Shares from such markets and other entities. In addition, the
Exchange may obtain information regarding trading in the Shares from
markets and other entities that are members of ISG or with which the
Exchange has in place a comprehensive surveillance sharing agreement
(``CSSA'').\9\ The Exchange is also able to obtain information
regarding trading in the Shares in connection with ETP Holders'
proprietary or customer trades which they effect through ETP Holders on
any relevant market.
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\9\ For a list of the current members of ISG, see
www.isgportal.org. The Exchange notes that not all components of the
Trust may trade on markets that are members of ISG or with which the
Exchange has in place a CSSA.
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In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
All statements and representations made in this filing regarding
(a) the description of the portfolios of the Trust, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange listing rules specified in this rule filing shall constitute
continued listing requirements for listing the Shares on the Exchange.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Trust to comply with the continued
listing requirements, and, pursuant to its obligations under Section
19(g)(1) of the Act, the Exchange will monitor for compliance with the
continued listing requirements. If the Trust is not in compliance with
the applicable listing requirements, the Exchange will commence
delisting procedures under NYSE Arca Rule 5.5-E(m).
Information Bulletin
Prior to the commencement of trading, the Exchange will inform its
ETP Holders in an information bulletin (the ``Information Bulletin'')
of the special characteristics and risks associated with trading the
Shares. Specifically, the Information Bulletin will discuss the
following: (1) The procedures for purchases and redemptions of Shares;
(2) NYSE Arca Rule 9.2-E(a), which imposes a duty of due diligence on
its ETP Holders to
[[Page 38134]]
learn the essential facts relating to every customer prior to trading
the Shares; (3) how information regarding portfolio holdings is
disseminated; (4) the requirement that ETP Holders deliver a prospectus
to investors purchasing newly issued Shares prior to or concurrently
with the confirmation of a transaction; and (5) trading information.
Prior to the commencement of trading, the Exchange will inform its
ETP Holders of the suitability requirements of NYSE Arca Rule 9.2-E(a)
in an Information Bulletin. Specifically, ETP Holders will be reminded
in the Information Bulletin that, in recommending transactions in the
Shares, they must have a reasonable basis to believe that (1) the
recommendation is suitable for a customer given reasonable inquiry
concerning the customer's investment objectives, financial situation,
needs, and any other information known by such ETP Holder, and (2) the
customer can evaluate the special characteristics, and is able to bear
the financial risks, of an investment in the Shares. In connection with
the suitability obligation, the Information Bulletin will also provide
that ETP Holders must make reasonable efforts to obtain the following
information: (1) The customer's financial status; (2) the customer's
tax status; (3) the customer's investment objectives; and (4) such
other information used or considered to be reasonable by such ETP
Holder or registered representative in making recommendations to the
customer.
In addition, the Information Bulletin will advise ETP Holders,
prior to the commencement of trading, of the prospectus delivery
requirements applicable to the Trust. The Information Bulletin will
also discuss any exemptive, no-action, and interpretive relief granted
by the Commission from any rules under the Act. In addition, the
Information Bulletin will reference that the Trust is subject to
various fees and expenses described in the Registration Statement.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) \10\ that an exchange have rules that
are designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to 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, in general, to protect
investors and the public interest. The Exchange believes that the
proposed rule change satisfies the requirements of Section 6(b)(5), as
discussed in more detail below.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts,\11\ including Commodity-Based Trust Shares,\12\ 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, and, in particular, the
requirement that (i) a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices; and
(ii) an exchange proposal be designed, in general, to protect investors
and the public interest.
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\11\ See Exchange Rule 8.200-E.
\12\ Commodity-Based Trust Shares, as described in Exchange Rule
8.201-E, are a type of Trust Issued Receipt.
---------------------------------------------------------------------------
As discussed below, the Exchange, as the listing exchange for the
Shares, and the CME, a regulated market of significant size relating to
bitcoin, are both members of ISG, the purpose of which is ``to provide
a framework for the sharing of information and the coordination of
regulatory efforts among exchanges trading securities and related
products to address potential intermarket manipulation and trading
abuses.'' \13\ In addition, the Sponsor believes that, on the whole,
the manipulation concerns previously articulated by the Commission have
since been significantly mitigated, and do not exceed those that exist
in the markets for other commodities that underly securities listed on
U.S. national securities exchanges. Specifically, significant increase
in trading volume and open interest in the bitcoin futures market,
growth of liquidity in the spot market for bitcoin, and certain
features of the Shares mitigate the manipulation concerns expressed by
the Commission when it last reviewed exchange proposals to list a
bitcoin exchange-traded product (``ETP'').
---------------------------------------------------------------------------
\13\ See https://isgportal.org/overview.
---------------------------------------------------------------------------
The proposed rule change is designed to protect investors and the
public interest as an investment in the Trust would provide investors
with exposure to bitcoin in a manner that may be more efficient, more
convenient and more regulated than the purchase of bitcoin or other
investment products that provide exposure to bitcoin.
For example, the Sponsor notes that OTC bitcoin funds, which have
attracted significant investor interest, offer exposure to bitcoin in a
similar manner as the Trust. However, OTC bitcoin funds do not offer a
creation or redemption mechanism that would keep their shares trading
in line with their NAVs and, as a result, OTC bitcoin funds have
historically traded at significant premiums or discounts compared to
their NAVs. In contrast, when the Trust's Shares trade at a premium or
discount compared to their NAV, creation or redemption can be
facilitated by the Authorized Participants to drive the value of the
Shares towards their NAV. Notably, investors in OTC bitcoin funds also
have historically borne significantly higher fees and expenses than
those that would be borne by investors in the Trust.
Additionally, the Sponsor notes that investors holding bitcoin
through a cryptocurrency ``exchange'' often face credit risk to the
exchange for cash balances, and often face risk of loss or theft of
their bitcoin as a result of the exchange using internet-connected
storage (commonly known as ``hot'' wallets) and/or having poor private
key management (e.g., insufficient password protection, lost key,
etc.). In the Bitcoin Custodian, the Trust is holding bitcoin in 100%
``cold'' storage, meaning the entire storage process is done completely
offline, with a regulated and licensed entity applying industry best
practices.
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
When considering whether an exchange's proposal to list bitcoin-
based ETPs is designed to prevent fraudulent and manipulative acts and
practices, the Commission requires that an exchange demonstrate that
there is a CSSA in place with a regulated market of significant size
relating to the underlying assets.\14\
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\14\ 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.'' See
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (the ``Wilshire Phoenix Order'') at 12596.
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[[Page 38135]]
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.\15\ Sponsors of
proposed bitcoin-based ETPs in particular have attempted to demonstrate
that other means besides surveillance-sharing agreements are sufficient
to prevent fraudulent and manipulative acts and practices, and in
particular have attempted to demonstrate that the bitcoin market is
``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\16\ Such resistance to fraud and manipulation must be
novel and beyond those protections that exist in traditional commodity
markets or equity markets for which the Commission has long required
surveillance-sharing agreements in the context of listing derivative
securities products. To date, exchanges proposing rule changes to list
bitcoin ETFs have not been able to establish that the relevant bitcoin
market possesses a resistance to manipulation that is unique beyond
that of traditional security or commodity markets such that it is
inherently resistant to manipulation.
---------------------------------------------------------------------------
\15\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018) (the ``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
[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 [Act] have been met.''
Id. at 37582.
\16\ See Winklevoss Order, 83 FR at 37580, 37582-91; see also
Securities Exchange Act Release No. 87267 (Oct. 9, 2019), 84 FR
55382 (Oct. 16, 2019) (the ``Bitwise Order'') at 55383, 55385-406.
The Commission noted that ``the Winklevoss Order addressed an
assertion that `bitcoin and bitcoin [spot] markets' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation; and the Bitwise Order
addressed the assertion that prices from at least certain bitcoin
trading platforms (`the `real' bitcoin spot market as opposed to the
`fake' and non-economic bitcoin spot market') possessed such unique
resistance.'' See Wilshire Phoenix Order at 12597.
---------------------------------------------------------------------------
The Exchange understands the Commission's focus on potential
manipulation of a bitcoin-based ETP in prior disapproval orders,
including the Wilshire Phoenix Order, and believes that such concerns
have since been largely mitigated. The Exchange believes that increases
in investor participation in and institutional adoption of bitcoin have
facilitated the maturation of the bitcoin trading ecosystem.
However, the Exchange is not required to demonstrate ``other means
to prevent fraudulent and manipulative acts and practices,'' such as
the assertion that the relevant underlying bitcoin market is ``unique''
or ``inherently'' resistant to manipulation, if it can establish that
it has a CSSA with a regulated bitcoin market of significant size, or
that both the Exchange and the relevant futures market, in this case,
the CME, hold common membership in ISG. To this end, the Exchange
represents that both the Exchange and CME are members of the ISG. The
remaining determination to be made is whether the CME bitcoin futures
market constitutes a market of significant size, which the Exchange
contends that it does, unlike at the time of the Wilshire Phoenix
Order. In the context of this standard, the terms ``significant
market'' and ``market of significant size'' include a market (or group
of markets) as to which (a) there is a reasonable likelihood that a
person attempting to manipulate the ETP would also have to trade on
that market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist 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.\17\
---------------------------------------------------------------------------
\17\ See Wilshire Phoenix Order at 12596.
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(a) Manipulation of the ETP
The significant growth in trading volumes, open interest, large
open interest holders, and total market participants in the bitcoin
futures market since the Wilshire Phoenix Order was issued is
reflective of that market's growing influence on the spot price of
bitcoin.
Some academic research \18\ suggests that the bitcoin futures
market has been leading bitcoin spot market price discovery since as
early as 2018. However, in the Wilshire Phoenix Order, the Commission
noted that academic research was, at the time, inconclusive as to the
influence of the bitcoin futures market on price discovery in bitcoin
spot markets, and noted specifically that existing research did not
focus appropriately on lead-lag analyses, or on the influence of non-
U.S. bitcoin spot market.\19\ To this end, NYDIG has developed more
recent proprietary research, including lead-lag analyses, that
demonstrates that prices in the CME bitcoin futures market do indeed
lead prices in the bitcoin spot market, including non-U.S. bitcoin spot
markets. This finding supports the thesis that a market participant
attempting to manipulate the Shares would have to trade on that market
to manipulate the ETP.
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\18\ 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.''
\19\ See Wilshire Phoenix Order at 12613.
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Because Shares can only be created or redeemed in kind, and further
because the Sponsor fee is accrued with respect to the quantity of
bitcoin held by the Trust and paid in kind by the Trust, the Trust
receives and holds only bitcoin. This substantially reduces the
potential for manipulation of the number of Shares created or redeemed,
which therefore substantially reduces the potential for shareholders to
be harmed by manipulation.
NYDIG's research shows that the bitcoin futures market is one of
the primary venues that market participants use to transact large
exposures to bitcoin. This can be attributed to multiple factors, such
as institutional familiarity with futures margining and settlement
processes, the simplicity of cash settlement instead of physical
settlement in a novel asset, and the efficient leverage offered by
exchange margining.
In contrast to the efficient leverage offered through the futures
market, many bitcoin spot trading venues require full pre-funding of
trading, which means it would be highly capital intensive to ``spoof''
or ``layer'' order books on spot trading venues. This further supports
NYDIG's conclusion that if a market participant intended to manipulate
the price of bitcoin, and thereby the Shares, the bitcoin futures
market is the one that would be manipulated first.
As such, part (a) of the significant market test outlined above is
satisfied and that common membership in ISG
[[Page 38136]]
between the Exchange and CME would assist the Exchange in detecting and
deterring misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
According to the Sponsor, trading in the Shares would not be the
predominant force on prices in the bitcoin futures market (or spot
market) given the significant volume in the bitcoin futures market (in
excess of $2.5 billion in average daily volume), the size of bitcoin's
market cap (in excess of $1 trillion), and the significant liquidity
available in the spot market (in excess of $2.5 billion in average
daily volume, in each case as of April 30, 2021).
In addition, NYDIG performed a conservative analysis, considering
only a small subset of spot trading venues, that concludes that the
cost to buy or sell $5 million worth of bitcoin averages roughly 20
basis points.\20\ For a $10 million market order, the cost to buy or
sell is roughly 40 basis points. This is comparable to the liquidity of
existing commodity ETPs. Using more sophisticated execution strategies
and additional liquidity sources would likely result in a lower cost to
trade.
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\20\ These statistics are based on three random daily samples of
bitcoin liquidity in USD (excluding stablecoins or Euro liquidity)
based on executable quotes on Coinbase Pro, Bitstamp and Itbit from
January 1, 2021 to April 30, 2021.
---------------------------------------------------------------------------
As such, 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 supports the Sponsor's belief
that the Shares are unlikely to become a predominant force on pricing
in either the bitcoin spot or bitcoin futures markets, satisfying part
(b) of the test outlined above.
The proposed rule change is also designed to prevent fraudulent and
manipulative acts and practices in that the Shares will be listed and
traded on the Exchange pursuant to the initial and continued listing
criteria in NYSE Arca Rule 8.201-E, which involve the maintenance of
surveillance procedures by the Exchange for the Shares. The Exchange
has in place surveillance procedures that are sufficiently robust to
properly monitor trading in the Shares in all trading sessions and to
deter and detect violations of Exchange rules and applicable federal
securities laws. The Exchange or FINRA, on behalf of the Exchange, or
both, will communicate as needed regarding trading in the Shares with
other markets that are members of the ISG, and the Exchange or FINRA,
on behalf of the Exchange, or both, may obtain information regarding
trading in the Shares with other markets and other entities that are
members of the ISG, and the Exchange or FINRA, on behalf of the
Exchange, or both, may obtain information regarding trading in the
Shares from such markets and other entities. In addition, the Exchange
may obtain information regarding trading in the Shares from markets
that are members of ISG or with which the Exchange has in place a CSSA.
Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is able to
obtain information regarding trading in the Shares through ETP Holders
acting as registered Market Makers, in connection with such ETP
Holders' proprietary or customer trades through ETP Holders which they
effect on any relevant market.
(ii) Designed To Protect Investors and the Public Interest
The Exchange believes the proposed rule change is designed to
protect investors and the public interest.
With the growth of OTC bitcoin funds, 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, limited liquidity to trade or borrow shares,
and the lack of surveillance and oversight through a listed exchange
are putting U.S. investor money at risk in ways that could potentially
be eliminated through access to the Shares. For example, the OTC
bitcoin fund with the largest assets under management in the United
States returned 46.41% year-to-date through April 30, 2021 while spot
bitcoin returned 95.61% over the same period. The deviation in price
performance can be attributed to the fluctuation in NAV of this fund.
As such, the Sponsor believes that this proposed rule change would
act to limit the risk to U.S. investors that are increasingly seeking
exposure to bitcoin, with benefits such as 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 substantially greater surveillance and regulatory
oversight.
The Exchange also notes there is a considerable amount of bitcoin
price and market information available on public websites and through
professional and subscription services. Investors may obtain, on a 24-
hour basis, bitcoin pricing information based on the spot price for
bitcoin from various financial information service providers. The
closing price and settlement prices of bitcoin are readily available
from the Bitcoin exchanges and other publicly available websites. In
addition, such prices are published in public sources, or on-line
information services such as Bloomberg. The Trust will provide daily
website disclosure of its bitcoin holdings, net asset value, and
closing price daily.
Quotation and last-sale information regarding the Shares will be
disseminated through the facilities of the CTA. Trading in Shares of
the Trust will be halted if the circuit breaker parameters in NYSE Arca
Rule 7.12-E have been reached or because of market conditions or for
reasons that, in the view of the Exchange, make trading in the Shares
inadvisable. Additionally, the Exchange represents that the Exchange
may halt trading during the day in which an interruption to the
dissemination of the IIV occurs. If the interruption to the
dissemination of the IIV persists past the trading day in which it
occurred, the Exchange will halt trading no later than the beginning of
the trading day following the interruption. In addition, if the
Exchange becomes aware that the NAV with respect to the Shares is not
disseminated to all market participants at the same time, it will halt
trading in the Shares until such time as the NAV is available to all
market participants.
Moreover, prior to the commencement of trading, the Exchange will
inform its ETP Holders in an Information Bulletin of the special
characteristics and risks associated with trading the Shares and of the
suitability requirements of NYSE Arca Rule 9.2-E(a). The Information
Bulletin will advise ETP Holders, prior to the commencement of trading,
of the prospectus delivery requirements applicable to the Trust. The
Information Bulletin will also discuss any exemptive, no-action, and
interpretive relief granted by the Commission from any rules under the
Act. In addition, the Information Bulletin will reference that the
Trust is subject to various fees and expenses described in the
Registration Statement. The Information Bulletin will disclose that
information about the Shares will be publicly available on the Trust's
website.
The proposed rule change is designed to perfect the mechanism of a
free and open market and, in general, to protect investors and the
public interest in that it will facilitate the listing and trading of
an additional type of exchange-traded product that will enhance
competition among market participants, to the benefit of investors and
the marketplace.
[[Page 38137]]
As noted above, the Exchange has in place surveillance procedures that
are adequate to properly monitor trading in the Shares in all trading
sessions and may obtain information via ISG from other exchanges that
are members of ISG or with which the Exchange has entered into a CSSA.
In addition, as noted above, investors will have ready access to
information regarding the Trust's bitcoin holdings, and quotation and
last sale information for the Shares.
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, and in the best interest of investors and the public at large.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change will facilitate the listing and trading of a new
type of Commodity-Based Trust Share based on the price of bitcoin that
will enhance competition among market participants, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or up to 90 days (i) as the Commission may designate
if it finds such longer period to be appropriate and publishes its
reasons for so finding or (ii) as to which the self-regulatory
organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSEArca-2021-57 on the subject line.
Paper Comments
Send paper comments in triplicate to: Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number SR-NYSEArca-2021-57. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2021-57 and should be submitted
on or before August 9, 2021.
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\21\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-15197 Filed 7-16-21; 8:45 am]
BILLING CODE 8011-01-P
