Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change To List and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), 74156-74164 [2021-28254]
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Federal Register / Vol. 86, No. 247 / Wednesday, December 29, 2021 / Notices
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Pursuant to Section 19(b)(3)(A)(ii) 36
of the Act, and Rule 19b–4(f)(2)
thereunder,37 the proposed rule change
is filed for immediate effectiveness as it
constitutes a change in fees charged to
OCC Clearing Members. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. The proposal shall
not take effect until all regulatory
actions required with respect to the
proposal are completed.38
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 rulecomments@sec.gov. Please include File
Number SR–OCC–2021–013 on the
subject line.
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Paper Comments
• Send paper comments in triplicate
to Vanessa Countryman, Secretary,
Securities and Exchange Commission,
100 F Street NE, Washington, DC
20549–1090.
All submissions should refer to File
Number SR–OCC–2021–013. 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
36 15
U.S.C. 78s(b)(3)(A)(ii).
CFR 240.19b–4(f)(2).
38 Notwithstanding its immediate effectiveness,
implementation of this rule change will be delayed
until this change is deemed certified under CFTC
Regulation 40.6.
37 17
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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 such
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s website at
https://www.theocc.com/CompanyInformation/Documents-and-Archives/
By-Laws-and-Rules.
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–OCC–2021–013 and should
be submitted on or before January 19,
2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.39
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2021–28327 Filed 12–28–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93859; File No. SR–
NYSEArca–2021–31]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Disapproving a
Proposed Rule Change To List and
Trade Shares of the Valkyrie Bitcoin
Fund Under NYSE Arca Rule 8.201–E
(Commodity-Based Trust Shares)
December 22, 2021.
I. Introduction
On April 23, 2021, NYSE Arca, Inc.
(‘‘NYSE Arca’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to list and trade
shares (‘‘Shares’’) of the Valkyrie Bitcoin
Fund (‘‘Trust’’) under NYSE Arca Rule
8.201–E (Commodity-Based Trust
Shares). The proposed rule change was
39 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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published for comment in the Federal
Register on May 12, 2021.3
On June 22, 2021, pursuant to Section
19(b)(2) of the Exchange Act,4 the
Commission designated a longer period
within which to approve the proposed
rule change, disapprove the proposed
rule change, or institute proceedings to
determine whether to disapprove the
proposed rule change.5 On August 9,
2021, the Commission instituted
proceedings under Section 19(b)(2)(B) of
the Exchange Act 6 to determine
whether to approve or disapprove the
proposed rule change.7 On November 1,
2021, the Commission designated a
longer period for Commission action on
the proposed rule change.8
This order disapproves the proposed
rule change. The Commission concludes
that NYSE Arca has not met its burden
under the Exchange Act and the
Commission’s Rules of Practice to
demonstrate that its proposal is
consistent with the requirements of
Exchange Act Section 6(b)(5), and in
particular, the requirement that the
rules of a national securities exchange
be ‘‘designed to prevent fraudulent and
manipulative acts and practices’’ and
‘‘to protect investors and the public
interest.’’ 9
When considering whether NYSE
Arca’s proposal to list and trade the
Shares is designed to prevent fraudulent
and manipulative acts and practices, the
Commission applies the same standard
used in its orders considering previous
proposals to list bitcoin 10-based
commodity trusts and bitcoin-based
trust issued receipts.11 As the
3 See Securities Exchange Act Release No. 91771
(May 6, 2021), 86 FR 26073 (‘‘Notice’’). Comments
on the proposed rule change can be found at:
https://www.sec.gov/comments/sr-nysearca-202131/srnysearca202131.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 92233,
86 FR 34107 (June 28, 2021).
6 15 U.S.C. 78s(b)(2)(B).
7 See Securities Exchange Act Release No. 92610,
86 FR 44763 (Aug. 13, 2021).
8 See Securities Exchange Act Release No. 93489,
86 FR 61344 (Nov. 5, 2021).
9 15 U.S.C. 78f(b)(5).
10 Bitcoins are digital assets that are issued and
transferred via a decentralized, open-source
protocol used by a peer-to-peer computer network
through which transactions are recorded on a
public transaction ledger known as the ‘‘bitcoin
blockchain.’’ The bitcoin protocol governs the
creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin
transactions. See, e.g., Notice, 86 FR at 26074–75.
11 See Order Setting Aside Action by Delegated
Authority and Disapproving a Proposed Rule
Change, as Modified by Amendments No. 1 and 2,
To List and Trade Shares of the Winklevoss Bitcoin
Trust, Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579 (Aug. 1, 2018) (SR–
BatsBZX–2016–30) (‘‘Winklevoss Order’’); Order
Disapproving a Proposed Rule Change, as Modified
by Amendment No. 1, To Amend NYSE Arca Rule
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Commission has explained, an exchange
that lists bitcoin-based exchange-traded
products (‘‘ETPs’’) can meet its
obligations under Exchange Act Section
6(b)(5) by demonstrating that the
exchange has a comprehensive
surveillance-sharing agreement with a
regulated market of significant size
related to the underlying or reference
bitcoin assets.12
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.’’ 13 The Commission has
emphasized that it is essential for an
exchange listing a derivative securities
product to enter into a surveillancesharing agreement with markets trading
the underlying assets for the listing
exchange to have the ability to obtain
information necessary to detect,
8.201–E (Commodity-Based Trust Shares) and To
List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca
Rule 8.201–E, Securities Exchange Act Release No.
88284 (Feb. 26, 2020), 85 FR 12595 (Mar. 3, 2020)
(SR–NYSEArca–2019–39) (‘‘USBT Order’’); Order
Disapproving a Proposed Rule Change To List and
Trade Shares of the WisdomTree Bitcoin Trust
Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No.
93700 (Dec. 1, 2021), 86 FR 69322 (Dec. 7, 2021)
(SR–CboeBZX–2021–024) (‘‘WisdomTree Order’’).
See also Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, Relating
to the Listing and Trading of Shares of the SolidX
Bitcoin Trust Under NYSE Arca Equities Rule
8.201, Securities Exchange Act Release No. 80319
(Mar. 28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR–
NYSEArca–2016–101) (‘‘SolidX Order’’). The
Commission also notes that orders were issued by
delegated authority on the following matters: Order
Disapproving a Proposed Rule Change To List and
Trade the Shares of the ProShares Bitcoin ETF and
the ProShares Short Bitcoin ETF, Securities
Exchange Act Release No. 83904 (Aug. 22, 2018),
83 FR 43934 (Aug. 28, 2018) (SR–NYSEArca–2017–
139) (‘‘ProShares Order’’); Order Disapproving a
Proposed Rule Change To List and Trade the Shares
of the GraniteShares Bitcoin ETF and the
GraniteShares Short Bitcoin ETF, Securities
Exchange Act Release No. 83913 (Aug. 22, 2018),
83 FR 43923 (Aug. 28, 2018) (SR–CboeBZX–2018–
001) (‘‘GraniteShares Order’’); Order Disapproving a
Proposed Rule Change To List and Trade Shares of
the VanEck Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares,
Securities Exchange Act Release No. 93559 (Nov.
12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR–
CboeBZX–2021–019).
12 See USBT Order, 85 FR at 12596. See also
Winklevoss Order, 83 FR at 37592 n.202 and
accompanying text (discussing previous
Commission approvals of commodity-trust ETPs);
GraniteShares Order, 83 FR at 43925–27 nn.35–39
and accompanying text (discussing previous
Commission approvals of commodity-futures ETPs).
13 See Amendment to Rule Filing Requirements
for Self-Regulatory Organizations Regarding New
Derivative Securities Products, Securities Exchange
Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952,
70959 (Dec. 22, 1998) (‘‘NDSP Adopting Release’’).
See also Winklevoss Order, 83 FR at 37594;
ProShares Order, 83 FR at 43936; GraniteShares
Order, 83 FR at 43924; USBT Order, 85 FR at 12596.
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investigate, and deter fraud and market
manipulation, as well as violations of
exchange rules and applicable federal
securities laws and rules.14 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.15
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.16 A surveillance-sharing
agreement must be entered into with a
‘‘significant market’’ to assist in
detecting and deterring manipulation of
the ETP, because a person attempting to
manipulate the ETP is reasonably likely
to also engage in trading activity on that
‘‘significant market.’’ 17
Consistent with this standard, for the
commodity-trust ETPs approved to date
for listing and trading, there has been in
every case at least one significant,
regulated market for trading futures on
the underlying commodity—whether
gold, silver, platinum, palladium, or
copper—and the ETP listing exchange
has entered into surveillance-sharing
agreements with, or held Intermarket
Surveillance Group (‘‘ISG’’) membership
in common with, that market.18
Moreover, the surveillance-sharing
agreements have been consistently
present whenever the Commission has
approved the listing and trading of
derivative securities, even where the
14 See
NDSP Adopting Release, 63 FR at 70959.
Winklevoss Order, 83 FR at 37592–93;
Letter from Brandon Becker, Director, Division of
Market Regulation, Commission, to Gerard D.
O’Connell, Chairman, Intermarket Surveillance
Group (June 3, 1994), available at https://
www.sec.gov/divisions/marketreg/mr-noaction/
isg060394.htm.
16 See Winklevoss Order, 83 FR at 37594. This
definition is illustrative and not exclusive. There
could be other types of ‘‘significant markets’’ and
‘‘markets of significant size,’’ but this definition is
an example that will provide guidance to market
participants. See id.
17 See USBT Order, 85 FR at 12597.
18 See Winklevoss Order, 83 FR at 37594.
15 See
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74157
underlying securities were also listed on
national securities exchanges—such as
options based on an index of stocks
traded on a national securities
exchange—and were thus subject to the
Commission’s direct regulatory
authority.19
Listing exchanges have also attempted
to demonstrate that other means besides
surveillance-sharing agreements will be
sufficient to prevent fraudulent and
manipulative acts and practices,
including that the bitcoin market as a
whole or the relevant underlying bitcoin
market is ‘‘uniquely’’ and ‘‘inherently’’
resistant to fraud and manipulation.20 In
response, the Commission has agreed
that, if a listing exchange could
establish that the underlying market
inherently possesses a unique resistance
to manipulation beyond the protections
that are utilized by traditional
commodity or securities markets, it
would not necessarily need to enter into
a surveillance-sharing agreement with a
regulated significant market.21 Such
resistance to fraud and manipulation,
however, must be novel and beyond
those protections that exist in
traditional commodity markets or equity
markets for which the Commission has
19 See USBT Order, 85 FR at 12597; Securities
Exchange Act Release No. 33555 (Jan. 31, 1994), 59
FR 5619, 5621 (Feb. 7, 1994) (SR–Amex–93–28)
(order approving listing of options on American
Depository Receipts (‘‘ADRs’’)). The Commission
has also required a surveillance-sharing agreement
in the context of index options even when (i) all
of the underlying index component stocks were
either registered with the Commission or exempt
from registration under the Exchange Act; (ii) all of
the underlying index component stocks traded in
the U.S. either directly or as ADRs on a national
securities exchange; and (iii) effective international
ADR arbitrage alleviated concerns over the
relatively smaller ADR trading volume, helped to
ensure that ADR prices reflected the pricing on the
home market, and helped to ensure more reliable
price determinations for settlement purposes, due
to the unique composition of the index and reliance
on ADR prices. See Securities Exchange Act Release
No. 26653 (Mar. 21, 1989), 54 FR 12705, 12708
(Mar. 28, 1989) (SR–Amex–87–25) (stating that
‘‘surveillance-sharing agreements between the
exchange on which the index option trades and the
markets that trade the underlying securities are
necessary’’ and that ‘‘[t]he exchange of surveillance
data by the exchange trading a stock index option
and the markets for the securities comprising the
index is important to the detection and deterrence
of intermarket manipulation.’’). And the
Commission has required a surveillance-sharing
agreement even when approving options based on
an index of stocks traded on a national securities
exchange. See Securities Exchange Act Release No.
30830 (June 18, 1992), 57 FR 28221, 28224 (June 24,
1992) (SR–Amex–91–22) (stating that surveillancesharing agreements ‘‘ensure the availability of
information necessary to detect and deter potential
manipulations and other trading abuses’’).
20 See USBT Order, 85 FR at 12597.
21 See Winklevoss Order, 83 FR at 37580, 37582–
91 (addressing assertions that ‘‘bitcoin and bitcoin
[spot] markets’’ generally, as well as one bitcoin
trading platform specifically, have unique
resistance to fraud and manipulation); see also
USBT Order, 85 FR at 12597.
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long required surveillance-sharing
agreements in the context of listing
derivative securities products.22 No
listing exchange has satisfied its burden
to make such demonstration.23
Here, NYSE Arca contends that
approval of the proposal is consistent
with Section 6(b)(5) of the Exchange
Act, in particular Section 6(b)(5)’s
requirement that the rules of a national
securities exchange be designed to
prevent fraudulent and manipulative
acts and practices and to protect
investors and the public interest.24
Although NYSE Arca recognizes the
Commission’s concern with potential
manipulation of bitcoin ETPs in prior
disapproval orders, NYSE Arca argues
that the proposal is consistent with
Section 6(b)(5) of the Exchange Act
because the growth of liquidity and
presence of arbitrage in the spot market
for bitcoin as well as the methodology
and framework of the Index (as defined
below) that is used to determine the
value of the assets and net asset value
(‘‘NAV’’) of the Trust sufficiently
mitigate effects of potential
manipulation in the bitcoin market.25
Further, NYSE Arca believes that the
proposal would provide investors a
more convenient, more efficient, and
less risky way to invest in bitcoin than
the purchase of a standalone bitcoin.26
In the analysis that follows, the
Commission examines whether the
proposed rule change is consistent with
Section 6(b)(5) of the Exchange Act by
addressing: in Section III.B.1 assertions
that other means besides surveillancesharing agreements will be sufficient to
prevent fraudulent and manipulative
acts and practices; in Section III.B.2
assertions relating to NYSE Arca’s
surveillance-sharing agreements related
to bitcoin; and in Section III.C assertions
that the proposal is consistent with the
protection of investors and the public
interest. As discussed further below,
NYSE Arca repeats various assertions
made in prior bitcoin-based ETP
proposals that the Commission has
previously addressed and rejected—and
more importantly, NYSE Arca does not
respond to the Commission’s reasons for
rejecting those assertions but merely
repeats them. The Commission
concludes that NYSE Arca has not
established that other means to prevent
fraudulent and manipulative acts and
practices are sufficient to justify
dispensing with the requisite
surveillance-sharing agreement. The
22 See
USBT Order, 85 FR at 12597.
supra note 11.
24 See Notice, 86 FR at 26080–81.
25 See id. at 26078–80.
26 See id. at 26073, 26080.
23 See
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Commission further concludes that
NYSE Arca has not established that it
has a comprehensive surveillancesharing agreement with a regulated
market of significant size related to
bitcoin. As a result, the Commission is
unable to find that the proposed rule
change is consistent with the statutory
requirements of Exchange Act Section
6(b)(5).
The Commission again emphasizes
that its disapproval of this proposed
rule change does not rest on an
evaluation of whether bitcoin, or
blockchain technology more generally,
has utility or value as an innovation or
an investment. Rather, the Commission
is disapproving this proposed rule
change because, as discussed below,
NYSE Arca has not met its burden to
demonstrate that its proposal is
consistent with the requirements of
Exchange Act Section 6(b)(5).
II. Description of the Proposed Rule
Change
As described in more detail in the
Notice,27 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 on the
Exchange.
The investment objective of the Trust
will be for the Shares to reflect the
performance of the value of a bitcoin as
represented by the CF Bitcoin U.S.
Settlement Price (‘‘Index’’), less the
Trust’s liabilities and expenses.28 The
Trust will use the Index to calculate the
Trust’s NAV. The Index was created and
is administered by CF Benchmarks Ltd.
(‘‘Benchmark Administrator’’) and
serves as a once-a-day benchmark rate of
the U.S. dollar price of bitcoin (USD/
BTC), calculated as of 4:00 p.m. E.T.29
The Index aggregates the trade flow of
several bitcoin platforms during an
observation window between 3:00 p.m.
27 See Notice, supra note 3. See also Registration
Statement on Form S–1/A, dated April 30, 2021
(File No. 333–252344), filed with the Commission
on behalf of the Trust (‘‘Registration Statement’’).
28 Valkyrie Digital Assets LLC is the sponsor of
the Trust (‘‘Sponsor’’) and Delaware Trust Company
is the trustee. Coinbase Custody Trust Company,
LLC (‘‘Custodian’’) will act as custodian for the
Trust’s bitcoins. U.S. Bancorp Fund Services, LLC
(‘‘Administrator’’) will act as the transfer agent and
administrator of the Trust. See Notice, 86 FR at
26073.
29 According to NYSE Arca, the Index is based on
materially the same methodology (except
calculation time, as described herein) as the
Benchmark Administrator’s CME CF Bitcoin
Reference Rate (‘‘BRR’’), which was first introduced
on November 14, 2016, and is the rate on which
bitcoin futures contracts are cash-settled in U.S.
dollars on the Chicago Mercantile Exchange
(‘‘CME’’). The Index is calculated as of 4:00 p.m.
E.T., whereas the BRR is calculated as of 4:00 p.m.
London Time. See id. at 26076 & n.9.
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and 4:00 p.m. E.T. into the U.S. dollar
price of one bitcoin at 4:00 p.m. E.T.
The current constituent bitcoin
platforms of the Index are Bitstamp,
Coinbase, Gemini, itBit, and Kraken
(‘‘Constituent Bitcoin Platforms’’). The
Index is calculated based on the
‘‘Relevant Transactions’’ 30 of all of its
Constituent Bitcoin Platforms. All
Relevant Transactions are added to a
joint list, recording the time of
execution, trade price, and size for each
transaction, and the list is partitioned by
timestamp into 12 equally-sized time
intervals of five minute length.31 For
each partition separately, the volumeweighted median trade price is
calculated from the trade prices and
sizes of all Relevant Transactions.32 The
Index is then determined by the
arithmetic mean of the volume-weighted
medians of all partitions.33
The Shares of the Trust represent
units of fractional undivided beneficial
interest in, and ownership of, the Trust.
The Trust will only hold bitcoin. The
Custodian will establish accounts that
hold the bitcoins deposited with the
Custodian on behalf of the Trust.34
The Administrator will calculate the
NAV of the Trust once each Exchange
trading day. The Sponsor will publish
the NAV and NAV per Share as soon as
practicable after their determination and
availability, and the NAV will be
released after the end of the Core
Trading Session (4:00 p.m. E.T.). The
NAV of the Trust is not officially struck
until later in the day (often by 5:30 p.m.
E.T, and usually by 8:00 p.m. E.T.). The
Trust’s NAV per Share is calculated by
taking the current market value of its
total assets, less any liabilities of the
Trust, and dividing that total by the
total number of outstanding Shares. The
bitcoin held by the Trust will be valued
based on the price set by the Index.35
The Trust will provide website
disclosure of its bitcoin holdings
daily.36 The Trust will also disseminate
an intraday indicative value (‘‘IIV’’) per
Share updated every 15 seconds by one
or more major market data vendors
30 According to the Exchange, a ‘‘Relevant
Transaction’’ is any cryptocurrency versus U.S.
dollar spot trade that occurs during the observation
window between 3:00 p.m. and 4:00 p.m. E.T. on
a Constituent Bitcoin Platform in the BTC/USD pair
that is reported and disseminated by a Constituent
Bitcoin Platform and observed by the Benchmark
Administrator. See id. at 26076 n.10.
31 See id. at 26076.
32 See id. According to the Exchange, a volumeweighted median differs from a standard median in
that a weighting factor, in this case trade size, is
factored into the calculation. See id.
33 See id.
34 See id. at 26073.
35 See id. at 26076.
36 See id. at 26081.
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during the Exchange’s Core Trading
Session (normally 9:30 a.m. to 4:00 p.m.
E.T.). The IIV will be calculated by a
third-party financial data provider using
the prior day’s closing NAV per Share
of the Trust as a base and updating that
value throughout the trading day to
reflect changes in the most recently
reported price level of the CME CF
Bitcoin Real-Time Index (‘‘BRTI’’), as
reported by CME Group, Inc.,
Bloomberg, L.P., or another reporting
service.37
The Trust will issue and redeem
Shares to authorized participants on an
ongoing basis in one or more ‘‘Baskets’’
of 50,000 Shares. The creation and
redemption of a Basket requires the
delivery to the Trust, or the distribution
by the Trust, of the number of whole
and fractional bitcoins represented by
each Basket being created or
redeemed.38 Creation orders and
redemption orders may be placed either
‘‘in-kind’’ or ‘‘in-cash.’’ Although the
Trust will create Baskets only upon the
receipt of bitcoins, and will redeem
Baskets only by distributing bitcoins, an
authorized participant may deposit cash
with the Administrator, which will
facilitate the purchase or sale of bitcoins
through a liquidity provider on behalf of
an authorized participant (‘‘Conversion
Procedures’’).39
III. Discussion
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A. The Applicable Standard for Review
The Commission must consider
whether NYSE Arca’s proposal is
consistent with the Exchange Act.
Section 6(b)(5) of the Exchange Act
requires, in relevant part, that the rules
of a national securities exchange be
designed ‘‘to prevent fraudulent and
manipulative acts and practices’’ and
‘‘to protect investors and the public
interest.’’ 40 Under the Commission’s
37 According to NYSE Arca, the BRTI is
calculated in real time based on the universe of the
currently unmatched limit orders to buy or sell in
the BTC/USD pair of all Constituent Bitcoin
Platforms. See id. at 26076.
38 See id. at 26076–77.
39 The Conversion Procedures will be facilitated
by a single liquidity provider, which will be
selected by the Sponsor on an order-by-order basis.
In the event that an order cannot be filled in its
entirety by a single liquidity provider, additional
liquidity provider(s) will be selected by the Sponsor
to fill the remaining amount. See id. at 26076–78.
40 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2)
of the Exchange Act, 15 U.S.C. 78s(b)(2), the
Commission must disapprove a proposed rule
change filed by a national securities exchange if it
does not find that the proposed rule change is
consistent with the applicable requirements of the
Exchange Act. Exchange Act Section 6(b)(5) states
that an exchange shall not be registered as a
national securities exchange unless the Commission
determines that ‘‘[t]he rules of the exchange are
designed to prevent fraudulent and manipulative
acts and practices, to promote just and equitable
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Rules of Practice, the ‘‘burden to
demonstrate that a proposed rule change
is consistent with the Exchange Act and
the rules and regulations issued
thereunder . . . is on the self-regulatory
organization [‘SRO’] that proposed the
rule change.’’ 41
The description of a proposed rule
change, its purpose and operation, its
effect, and a legal analysis of its
consistency with applicable
requirements must all be sufficiently
detailed and specific to support an
affirmative Commission finding,42 and
any failure of an SRO to provide this
information may result in the
Commission not having a sufficient
basis to make an affirmative finding that
a proposed rule change is consistent
with the Exchange Act and the
applicable rules and regulations.43
Moreover, ‘‘unquestioning reliance’’ on
an SRO’s representations in a proposed
rule change is not sufficient to justify
Commission approval of a proposed rule
change.44
B. Whether NYSE Arca Has Met Its
Burden To Demonstrate That the
Proposal Is Designed To Prevent
Fraudulent and Manipulative Acts and
Practices
(1) Assertions That Other Means Besides
Surveillance-Sharing Agreements Will
Be Sufficient To Prevent Fraudulent and
Manipulative Acts and Practices
As stated above, the Commission has
recognized that a listing exchange could
demonstrate that other means to prevent
fraudulent and manipulative acts and
practices are sufficient to justify
dispensing with a comprehensive
surveillance-sharing agreement with a
regulated market of significant size,
including by demonstrating that the
bitcoin market as a whole or the
relevant underlying bitcoin market is
uniquely and inherently resistant to
principles of trade, to foster cooperation and
coordination with persons engaged in regulating,
clearing, settling, processing information with
respect to, and facilitating transactions in securities,
to remove impediments to and perfect the
mechanism of a free and open market and a
national market system, and, in general, to protect
investors and the public interest; and are not
designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, or to regulate
by virtue of any authority conferred by this title
matters not related to the purposes of this title or
the administration of the exchange.’’ 15 U.S.C.
78f(b)(5).
41 Rule 700(b)(3), Commission Rules of Practice,
17 CFR 201.700(b)(3).
42 See id.
43 See id.
44 Susquehanna Int’l Group, LLP v. Securities and
Exchange Commission, 866 F.3d 442, 447 (D.C. Cir.
2017) (‘‘Susquehanna’’).
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fraud and manipulation.45 Such
resistance to fraud and manipulation
must be novel and beyond those
protections that exist in traditional
commodities or securities markets.46
NYSE Arca asserts that the bitcoin
marketplace has matured rapidly in
recent years regarding user growth,
market capitalization, volume, market
participants, and liquidity shifts, such
that billion-dollar bitcoin transactions
have occurred without significantly
distorting the marketplace.47 NYSE Arca
further asserts that bitcoin trades in a
well-arbitraged and distributed
market.48 NYSE Arca concludes that,
due to the linkage between the bitcoin
markets and the presence of arbitrageurs
in those markets, the manipulation of
the price of bitcoin on any Constituent
Bitcoin Platform would likely require
overcoming the liquidity supply of such
arbitrageurs who are potentially
eliminating any cross-market pricing
differences.49
As with the previous proposals, the
Commission here concludes that the
Exchange’s assertions about the nature
of the bitcoin market do not constitute
other means to prevent fraud and
manipulation sufficient to justify
dispensing with the requisite
surveillance-sharing agreement.50 The
Exchange argues that the maturation of
the bitcoin market mitigates against the
Commission’s concerns about fraud and
manipulation,51 but NYSE Arca
provides no evidence for how such
maturation serves to detect and deter
potential fraud and manipulation. Nor
does the Exchange provide any data or
analysis to support its assertions
regarding efficient price arbitrage across
bitcoin platforms, either in terms of how
closely bitcoin prices are aligned across
different bitcoin trading venues or how
quickly price disparities may be
arbitraged away. Indeed, NYSE Arca
45 See USBT Order, 85 FR at 12597 n.23. The
Commission is not applying a ‘‘cannot be
manipulated’’ standard. Instead, the Commission is
examining whether the proposal meets the
requirements of the Exchange Act and, pursuant to
its Rules of Practice, places the burden on the
listing exchange to demonstrate the validity of its
contentions and to establish that the requirements
of the Exchange Act have been met. See id.
46 See id. at 12597.
47 See Notice, 86 FR at 26078.
48 See id. at 26080.
49 See id.
50 One commenter describes digital assets such as
bitcoin, and the blockchains on which they rely, as
having complexity that makes users vulnerable to
fraud. See letter from JC, dated June 24, 2021 (‘‘JC
Letter’’).
51 The Commission notes that the Exchange does
not explicitly tie the asserted maturation of the
bitcoin market to an argument that such market
evolution provides sufficient means besides
surveillance-sharing agreements to prevent fraud
and manipulation.
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concedes that ‘‘the global [b]itcoin
market is not inherently resistant to
fraud and manipulation.’’ 52 As stated
above, ‘‘unquestioning reliance’’ on an
SRO’s representations in a proposed
rule change is not sufficient to justify
Commission approval of a proposed rule
change.53
Efficient price arbitrage, moreover, is
not sufficient to dispense with
surveillance-sharing agreements.54 The
Commission has stated, for example,
that even for equity options based on
securities listed on national securities
exchanges, the Commission relies on
surveillance-sharing agreements to
detect and deter fraud and
manipulation.55 Here, the Exchange
provides no evidence to support its
assertion of efficient price arbitrage
across bitcoin platforms, let alone any
evidence that price arbitrage in the
bitcoin market is novel or unique so as
to warrant the Commission dispensing
with the requisite surveillance-sharing
agreement. Moreover, NYSE Arca does
not take into account that a market
participant with a dominant ownership
position would not find it prohibitively
expensive to overcome the liquidity
supplied by arbitrageurs and could use
dominant market share to engage in
manipulation.56
Furthermore, NYSE Arca concedes
that the global bitcoin market is not
inherently resistant to fraud and
manipulation and that concerns exist
over whether bitcoin trading platforms
‘‘have mechanisms in place to report
and remediate price and overall, ensure
market integrity.’’ 57 In addition, the
Trust’s Registration Statement
acknowledges that ‘‘[bitcoin platforms]
are relatively new and, in some cases,
largely unregulated, and, therefore, may
be more exposed to fraud and security
breaches than established, regulated
exchanges for other financial assets or
instruments;’’ that the bitcoin network
is currently vulnerable to a ‘‘51%
attack,’’ in which a bad actor or actors
that control a majority of the processing
power dedicated to mining on the
bitcoin network may be able to gain full
control of the network and the ability to
manipulate the bitcoin blockchain; that
‘‘in 2019 there were reports claiming
52 See Notice, 86 FR at 26080. See also id. at
26078 (‘‘There has been concern over whether
cryptocurrency exchanges have mechanisms in
place to report and remediate price and overall,
ensure integrity.’’).
53 See supra note 44.
54 See Winklevoss Order, 83 FR at 37586; SolidX
Order, 82 FR at 16256–57; USBT Order, 85 FR at
12601.
55 See, e.g., USBT Order, 85 FR at 12601.
56 See, e.g., Winklevoss Order, 83 FR at 37584;
USBT Order, 85 FR at 12600–01.
57 See supra note 52 and accompanying text.
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that 80–95% of Bitcoin trading volume
on [bitcoin platforms] was false or noneconomic in nature;’’ and that ‘‘over the
past several years, some [bitcoin trading
platforms] have been closed due to
fraud and manipulative activity,
business failure or security breaches.’’ 58
NYSE Arca also does not contest the
presence of possible sources of fraud
and manipulation in the bitcoin spot
market generally that the Commission
has raised in previous orders, which
have included (1) ‘‘wash’’ trading, (2)
persons with a dominant position in
bitcoin manipulating bitcoin pricing, (3)
hacking of the bitcoin network and
trading platforms, (4) malicious control
of the bitcoin network, (5) trading based
on material, non-public information
(such as plans of market participants to
significantly increase or decrease their
holdings in bitcoin; new sources of
demand for bitcoin; the decision of a
bitcoin-based investment vehicle on
how to respond to a ‘‘fork’’ in the
bitcoin blockchain, which would create
two different, non-interchangeable types
of bitcoin), or based on the
dissemination of false and misleading
information, (6) manipulative activity
involving the purported ‘‘stablecoin’’
Tether (USDT), and (7) fraud and
manipulation at bitcoin trading
platforms.59
Instead, NYSE Arca asserts that the
methodology and framework of the
Index used by the Trust to determine
the value of its bitcoin assets and its
NAV serve to mitigate against fraud and
manipulation.60 First, NYSE Arca
asserts that the methodology employed
in constructing the Index makes the
Index more resistant to manipulation
than other measurements that employ
different methodologies and that the
Benchmark Administrator aggregates the
trade data from the Constituent Bitcoin
Platforms in a manner designed to resist
manipulation.61 NYSE Arca states that
the Index utilizes partitions to ensure
large individual trades have a limited
effect on the price of the Index, and the
Index utilizes volume-weighted
medians to ensure that outlying prices
do not have an excessive effect on the
value of a partition.62 NYSE Arca also
states that transactions from a
Constituent Bitcoin Platform may be
excluded from the Index calculation if
58 See
Registration Statement at 14, 17, 36.
USBT Order, 85 FR at 12600–01 & nn.66–
67 (discussing J. Griffin & A. Shams, Is Bitcoin
Really Untethered? (October 28, 2019), available at
https://ssrn.com/abstract=3195066 and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83
FR at 37585–86.
60 See Notice, 86 FR at 26078, 26080.
61 See id. at 26076, 26079.
62 See id. at 26079.
59 See
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they are deemed potentially
erroneous.63
Second, NYSE Arca argues that the
Index’s exclusive use of transactions
from Constituent Bitcoin Platforms
mitigates the effects of potential
manipulation of the bitcoin market.64
NYSE Arca states that, to be eligible for
inclusion in the Index, a Constituent
Bitcoin Platform must make trade and
order data available through an
Automatic Programming Interface with
sufficient reliability, relevant data, and
appropriate speed, and must meet a
minimum trading volume threshold.65
In addition, NYSE Arca states that a
Constituent Bitcoin Platform must
enforce policies to ensure fair and
transparent market conditions; have
processes in place to impede illegal or
manipulative trading practices; and
comply with applicable law and
regulation, including proper AntiMoney Laundering (‘‘AML’’) and KnowYour-Customer (‘‘KYC’’) procedures.66
NYSE Arca states that the calculation
agent of the Index conducts a thorough
review of any bitcoin trading platform
under consideration and the
arrangements of all Constituent Bitcoin
Platforms are reviewed regularly to
ensure they continue to meet all
criteria.67
Third, NYSE Arca asserts that the
Commodity Futures Trading
Commission (‘‘CFTC’’) has been
successfully exercising its enforcement
authority related to fraud and
manipulation on the Constituent Bitcoin
Platforms.68 In addition, the Exchange
asserts that the Constituent Bitcoin
Platforms must enter into a data sharing
agreement with the CME, cooperate
with inquiries and investigations of
regulators and the Benchmark
Administrator, and submit each of their
clients to their KYC procedures.69
According to the Exchange, in the case
of any suspicious trades on the
Constituent Bitcoin Platforms, the CME
would therefore be able to discover all
63 See id. The Exchange states that, where a
Constituent Bitcoin Platform’s volume-weighted
median transaction price exhibits an absolute
percentage deviation from the volume-weighted
median price of other Constituent Bitcoin Platform
transactions greater than the potentially erroneous
data parameter (10%), then transactions from that
Constituent Bitcoin Platform are deemed potentially
erroneous and excluded from the index calculation.
See id.
64 See id. at 26080.
65 See id. at 26078. The Exchange states that the
Index included over $133,293,551,000 in bitcoin
trades (approximately 16,304,168 bitcoins) during
the one-year period ended December 31, 2020. See
id. at 26076.
66 See id. at 26078.
67 See id. at 26079.
68 See id.
69 See id.
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material trade information, including
the identities of the customers placing
the trades.70
Finally, NYSE Arca asserts that the
oversight of the Index by the Benchmark
Administrator and the CME mitigates
concerns relating to manipulation.71
The Exchange states that, to date, there
has been no evidence that the Index has
been subject to manipulation or that the
‘‘Index provider’’ 72 has been failing to
maintain processes and controls to
prevent manipulation by its
organization. It further asserts that the
CME participates in an oversight
committee of the Index that is
responsible for regularly reviewing and
overseeing the methodology, practice,
standards, and scope of the Index to
ensure that it continues to accurately
track the spot prices of bitcoin.73
According to the Exchange, given that
the Index formula and data sources are
publicly available, if manipulation of
the Index were to occur, it would be
quickly detected by the CME and
hundreds of sophisticated market
participants.74
Based on assertions made and the
information provided, the Commission
can find no basis to conclude that NYSE
Arca has articulated other means to
prevent fraud and manipulation that are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement. First, the record does not
demonstrate that the proposed
methodology for calculating the Index
would make the proposed ETP resistant
to fraud or manipulation such that a
surveillance-sharing agreement with a
regulated market of significant size is
unnecessary.75 Specifically, the
Exchange has not assessed the possible
influence that spot platforms not
included among the Constituent Bitcoin
Platforms would have on bitcoin prices
used to calculate the Index. As
discussed above, NYSE Arca does not
contest the presence of possible sources
of fraud and manipulation in the bitcoin
spot market generally.76 Instead, NYSE
Arca focuses its analysis on the
Constituent Bitcoin Platforms.
Importantly, however, the record does
70 See
id.
id. at 26076, 26079.
72 See id. at 26079. The Exchange uses the term
‘‘Index provider’’ with respect to this particular
assertion. The Commission understands the term to
mean the Benchmark Administrator.
73 See id. at 26076, 26079.
74 See id. at 26079.
75 The Commission has previously considered
and rejected similar arguments about the valuation
of bitcoin according to a benchmark or reference
price. See, e.g., SolidX Order, 82 FR at 16258;
Winklevoss Order, 83 FR at 37587–90; USBT Order,
85 FR at 12599–601.
76 See supra notes 57–59 and accompanying text.
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not demonstrate that these possible
sources of fraud and manipulation in
the broader bitcoin spot market do not
affect the Constituent Bitcoin Platforms
that represent a slice of the bitcoin spot
market. To the extent that fraudulent
and manipulative trading on the broader
bitcoin market could influence prices or
trading activity on the Constituent
Bitcoin Platforms, the Constituent
Bitcoin Platforms would not be
inherently resistant to manipulation.77
Moreover, the Exchange’s assertions
that the Index’s methodology helps
make the Index resistant to
manipulation are contradicted by the
Registration Statement’s own
statements. The Sponsor raises, but does
not address here, concerns regarding the
Index in the Registration Statement,
stating that ‘‘the [Index] has a limited
history and there are limitations with
the price of bitcoin reflected there.’’ 78
And while the Exchange asserts that the
Index’s exclusive use of Constituent
Bitcoin Platforms helps make the Index
resistant to manipulation, such
assertions are called into question by
the Sponsor’s own statements in the
Registration Statement that ‘‘[b]itcoin
[platforms] on which users trade bitcoin
. . . may be more exposed to fraud and
security breaches than established,
regulated exchanges for other financial
assets or instruments, which could have
a negative impact on the performance of
the Trust.’’ 79 Constituent Bitcoin
Platforms are a subset of the existing
bitcoin platforms. Although the Sponsor
raises concerns regarding fraud and
security of bitcoin platforms in the
Registration Statement, the Exchange
does not explain how or why such
concerns are consistent with its
assertion that the Index is resistant to
fraud and manipulation.
NYSE Arca also has not shown that its
proposed use of 12 equally-sized time
intervals of five minute length over the
observation window between 3:00 p.m.
and 4:00 p.m. E.T. to calculate the Index
would effectively be able to eliminate
fraudulent or manipulative activity that
is not transient. Fraud and manipulation
in the bitcoin spot market could persist
for a ‘‘significant duration.’’ 80 The
Exchange does not connect the use of
such partitions to the duration of the
effects of the wash and fictitious trading
that may exist in the bitcoin spot
market.81 Thus, the Exchange fails to
establish how the Index’s methodology
77 See
USBT Order, 85 FR at 12601.
Registration Statement at 30.
79 See id. at 14.
80 See USBT Order, 85 FR at 12601 n.66; see also
id. at 12607.
81 See WisdomTree Order, 86 FR at 69327.
78 See
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eliminates fraudulent or manipulative
activity that is not transient.82
While the Exchange asserts that the
oversight of the Constituent Bitcoin
Platforms helps to prevent and detect
manipulation, the level of regulation of
the Constituent Bitcoin Platforms is not
equivalent to the obligations, authority,
and oversight of national securities
exchanges or futures exchanges and
therefore is not an appropriate
substitute.83 National securities
exchanges are required to 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
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.’’ 84 Moreover, national
securities exchanges must file proposed
rules with the Commission regarding
certain material aspects of their
operations,85 and the Commission has
the authority to disapprove any such
rule that is not consistent with the
requirements of the Exchange Act.86
Thus, national securities exchanges are
subject to Commission oversight of,
among other things, their governance,
membership qualifications, trading
rules, disciplinary procedures,
recordkeeping, and fees.87
The Constituent Bitcoin Platforms, on
the other hand, have none of these
requirements (none are registered as a
national securities exchange).88 While
the Exchange asserts that various
entities require the Constituent Bitcoin
Platforms to adopt certain policies and
processes, including AML/KYC
82 See
USBT Order, 85 FR at 12607.
also id. at 12603–05.
84 See 15 U.S.C. 78f(b)(5).
85 17 CFR 240.19b–4(a)(6)(i).
86 Section 6 of the Exchange Act, 15 U.S.C. 78f,
requires national securities exchanges to register
with the Commission and requires an exchange’s
registration to be approved by the Commission, and
Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file
proposed rules changes with the Commission and
provides the Commission with the authority to
disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated
contract markets (‘‘DCMs’’) (commonly called
‘‘futures markets’’) registered with and regulated by
the CFTC must comply with, among other things,
a similarly comprehensive range of regulatory
principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets
(DCMs), CFTC, available at https://www.cftc.gov/
IndustryOversight/TradingOrganizations/DCMs/
index.htm.
87 See Winklevoss Order, 83 FR at 37597.
88 See 15 U.S.C. 78e, 78f.
83 See
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compliance policies, such requirements
are fundamentally different from the
Exchange Act’s requirements for
national securities exchanges.89
NYSE Arca’s further assertions
regarding CFTC’s enforcement authority
with respect to the Constituent Bitcoin
Platforms also do not establish a level of
oversight sufficient to dispense with the
requisite surveillance-sharing
agreement. While the Commission
recognizes that the CFTC maintains
some jurisdiction over the bitcoin spot
market, under the Commodity Exchange
Act, the CFTC does not have regulatory
authority over bitcoin spot trading
platforms, including the Constituent
Bitcoin Platforms.90 Except in certain
limited circumstances, bitcoin spot
trading platforms are not required to
register with the CFTC, and the CFTC
does not set standards for, approve the
rules of, examine, or otherwise regulate
bitcoin spot markets.91 As the CFTC
itself stated, while the CFTC ‘‘has an
important role to play,’’ U.S. law ‘‘does
not provide for direct, comprehensive
Federal oversight of underlying Bitcoin
or virtual currency spot markets.’’ 92
Further, although NYSE Arca states
that the Constituent Bitcoin Platforms
must cooperate with inquiries and
investigations of regulators and the
Benchmark Administrator, it does not
describe the scope of such requirements
or what authority the Benchmark
Administrator or regulators would have
to compel the platforms’’ cooperation.
And while NYSE Arca asserts that the
CME has in place information-sharing
agreements with the Constituent Bitcoin
Platforms, it does not provide any
information on the scope, terms, or
enforcement authority for such
agreements. Nor has NYSE Arca put any
information in the record as to whether
and how it would use or enforce such
agreements. Moreover, such agreements
are contractual in nature and do not
satisfy the regulatory requirements or
purposes of national securities
exchanges and the Exchange Act. The
CME (and the CFTC, as discussed
above) does not have regulatory
authority over the spot bitcoin trading
89 See USBT Order, 85 FR at 12603. The
Commission has previously concluded that such
AML and KYC policies and procedures do not serve
as a substitute for, and are not otherwise dispositive
in the analysis regarding the importance of having
a surveillance-sharing agreement with a regulated
market of significant size relating to bitcoin. For
example, AML and KYC policies and procedures do
not substitute for the sharing of information about
market trading activity or clearing activity and do
not substitute for regulation of a national securities
exchange. See id. at 12603 n.101.
90 See id. at 12604.
91 See id.
92 See Winklevoss Order, 83 FR at 37599 n.288.
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platforms,93 and, while the CME is
regulated by the CFTC, the CFTC’s
regulations do not extend to the
Constituent Bitcoin Platforms by virtue
of such contractual agreements.
While NYSE Arca asserts the
Benchmark Administrator oversees the
integrity of the Index, the oversight by
the Benchmark Administrator does not
represent a unique measure to resist
manipulation beyond mechanisms that
exist in securities or commodities
markets. Other commodity-based and
equity index ETPs approved by the
Commission for listing and trading
utilize reference rates or indices
administered by similar benchmark
administrators,94 and the Commission
has not, in those instances, dispensed
with the need for a surveillance-sharing
agreement with a significant regulated
market.95 For the same reason, even if,
as the Exchange claims, there is no
evidence that the Index has been subject
to manipulation or that the Benchmark
Administrator ever failed to maintain
processes and controls to prevent
manipulation by its organization, such
lack of evidence is not a basis for the
Commission to disregard the need for a
surveillance-sharing agreement.
Moreover, the Benchmark
Administrator does not itself exercise
governmental regulatory authority.
Rather, the Benchmark Administrator is
a registered, privately-held company in
England.96 The Benchmark
Administrator’s relationship with the
Constituent Bitcoin Platforms is based
on their participation in the
determination of reference rates, such as
the Index. While the Benchmark
Administrator is regulated by the UK
FCA as a benchmark administrator, the
93 See
supra notes 90–92 and accompanying text.
e.g., Securities Exchange Act Release Nos.
80840 (June 1, 2017) 82 FR 26534 (June 7, 2017)
(SR–NYSEArca–2017–33) (approving the listing and
trading of shares of exchange traded funds seeking
to track the Solactive GLD EUR Gold Index,
Solactive GLD GBP Gold Index, and the Solactive
GLD JPY Gold Index); and 83046 (Apr. 13, 2018) 83
FR 17462 (Apr. 19, 2018) (SR–Nasdaq–2018–012)
(approving the listing and trading of shares of an
exchange-traded fund that seeks to track an equity
index, the CBOE Russell 2000 30–Delta BuyWrite
V2 Index).
95 See USBT Order, 85 FR at 12605. See also
supra note 19.
96 See https://blog.cfbenchmarks.com/legal/
(stating that the Benchmark Administrator is
authorized and regulated by the UK Financial
Conduct Authority (‘‘UK FCA’’) as a registered
Benchmark Administrator (FRN 847100) under the
EU benchmark regulation, and further noting that
the Benchmark Administrator is a member of the
Crypto Facilities group of companies which is in
turn a member of the Payward, Inc. group of
companies, and Payward, Inc. is the owner and
operator of the Kraken Exchange, a venue that
facilitates the trading of cryptocurrencies). The
Commission notes that the Kraken is one of the
Constituent Bitcoin Platforms underlying the Index.
94 See,
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UK FCA’s regulations do not extend to
the Constituent Bitcoin Platforms by
virtue of their trade prices serving as
input data underlying the Index.97
Further, the oversight performed by
the Benchmark Administrator of the
Constituent Bitcoin Platforms is for the
purpose of ensuring the accuracy and
integrity of the Index.98 Such oversight
serves a fundamentally different
purpose as compared to the regulation
of national securities exchanges and the
requirements of the Exchange Act.
Likewise, while the Exchange states that
the CME participates in an oversight
committee for the Index, the purpose of
such committee is to ensure that the
Index continues to accurately track the
spot prices of bitcoin. While the
Commission recognizes that these
oversight functions may be important in
ensuring the integrity of the Index, such
requirements do not imbue either the
Benchmark Administrator, the CME
with respect to the Constituent Bitcoin
Platforms, or the Constituent Bitcoin
Platforms themselves, with regulatory
authority similar to that the Exchange
Act confers upon self-regulatory
organizations such as national securities
exchanges.99
Finally, the Exchange does not
sufficiently explain the significance of
the Index’s purported resistance to
manipulation to the overall analysis of
whether the proposal to list and trade
the Shares is designed to prevent fraud
and manipulation. The Index is used by
the Trust to value its bitcoin and to
calculate its NAV. However, the Shares
would trade at market-based prices in
the secondary market, not at NAV.
In sum, none of NYSE Arca’s
assertions suggests that other means to
prevent fraud and manipulation are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement. Importantly, even if NYSE
Arca had provided evidence to establish
its assertions addressed above regarding
the robustness of the Index methodology
and framework and the regulation and
oversight of the Constituent Bitcoin
Platforms and Index, such assertions
would render the proposed ETP no
97 See USBT Order, 85 FR at 12604. The
Benchmark Administrator is also not required to
apply certain provisions of EU benchmark
regulation to the Constituent Bitcoin Platforms
because the Reference Rate’s input data is not
‘‘contributed.’’ See Benchmark Statement, at 5
available at https://docscfbenchmarks.s3.amazonaws.com/
CME+CF+Benchmark+Statement.pdf.
98 See Notice, 86 FR at 26077 (‘‘. . . an oversight
function is implemented by the Benchmark
Administrator in seeking to ensure that the Index
is administered through codified policies for Index
integrity.’’).
99 See 15 U.S.C. 78f(b).
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more resistant to manipulation than
derivative products based on traditional
commodities or securities markets.100
Thus, the record does not establish that
NYSE Arca may satisfy Section 6(b)(5)
of the Exchange Act without entering
into a surveillance-sharing agreement
with a regulated market of significant
size.
(2) Assertions Relating to
Surveillance-Sharing Agreements
As NYSE Arca has not demonstrated
that other means besides surveillancesharing agreements will be sufficient to
prevent fraudulent and manipulative
acts and practices, the Commission next
examines whether the record supports
the conclusion that NYSE Arca has
entered into a comprehensive
surveillance-sharing agreement with a
regulated market of significant size
relating to the underlying assets. In this
context, the term ‘‘market of significant
size’’ includes a market (or group of
markets) as to which (i) 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 (ii) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.101
However, NYSE Arca does not
identify any market as a ‘‘market of
significant size’’ and accordingly makes
no assertions regarding, and provides no
information to establish, either prong of
the ‘‘market of significant size’’
determination.
The requirements of Section 6(b)(5) of
the Exchange Act apply to the rules of
national securities exchanges.
Accordingly, the relevant obligation for
a comprehensive surveillance-sharing
agreement with a regulated market of
significant size, or other means to
prevent fraudulent and manipulative
acts and practices that are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement, resides
with the listing exchange. Because there
is insufficient evidence in the record
demonstrating that NYSE Arca has
satisfied this obligation, the
Commission cannot approve the
proposed ETP for listing and trading on
NYSE Arca.
100 See
USBT Order, 85 FR at 12599.
Winklevoss Order, 83 FR at 37594. This
definition is illustrative and not exclusive. There
could be other types of ‘‘significant markets’’ and
‘‘markets of significant size,’’ but this definition is
an example that provides guidance to market
participants. See id.
101 See
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C. Whether NYSE Arca Has Met Its
Burden to Demonstrate That the
Proposal Is Designed To Protect
Investors and the Public Interest
NYSE Arca contends that, if
approved, the proposed ETP would
protect investors and the public interest.
However, the Commission must
consider these potential benefits in the
broader context of whether the proposal
meets each of the applicable
requirements of the Exchange Act.102
Because NYSE Arca has not
demonstrated that its proposed rule
change is designed to prevent
fraudulent and manipulative acts and
practices, the Commission must
disapprove the proposal.
NYSE Arca asserts that the Trust will
provide investors with exposure to
bitcoin in a manner that is more
efficient and convenient than the
purchase of stand-alone bitcoin, while
also mitigating some of the risk by
reducing the volatility typically
associated with the purchase of standalone bitcoin and without the uncertain
and often complex requirements relating
to acquiring and/or holding bitcoin.103
NYSE Arca concludes that the
manipulation concerns previously
articulated by the Commission are
mitigated by investor protection
issues.104
In essence, NYSE Arca asserts that the
risky nature of a direct investment in
the underlying bitcoin compels
approval of the proposed rule change.
The Commission disagrees. Pursuant to
Section 19(b)(2) of the Exchange Act,
the Commission must approve a
proposed rule change filed by a national
securities exchange if it finds that the
proposed rule change is consistent with
the applicable requirements of the
Exchange Act—including the
requirement under Section 6(b)(5) that
the rules of a national securities
exchange be designed to prevent
fraudulent and manipulative acts and
practices—and it must disapprove the
filing if it does not make such a
finding.105 Thus, even if a proposed rule
change purports to protect investors
from a particular type of investment
risk—such as complexity to acquire
and/or hold the underlying asset—the
proposed rule change may still fail to
meet the requirements under the
Exchange Act.106
102 See id. at 37601. See also GraniteShares Order,
83 FR at 43931; ProShares Order, 83 FR at 43941;
USBT Order, 85 FR at 12615.
103 See Notice, 86 FR at 26073.
104 See id. at 26078.
105 See Exchange Act Section 19(b)(2)(C), 15
U.S.C. 78s(b)(2)(C).
106 See SolidX Order, 82 FR at 16259;
WisdomTree Order, 86 FR at 69334.
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Frm 00101
Fmt 4703
Sfmt 4703
74163
Here, even if it were true that,
compared to trading in unregulated
bitcoin spot markets, trading a bitcoinbased ETP on a national securities
exchange provides some additional
protection to investors, the Commission
must consider this potential benefit in
the broader context of whether the
proposal meets each of the applicable
requirements of the Exchange Act.107 As
explained above, for bitcoin-based ETPs,
the Commission has consistently
required that the listing exchange have
a comprehensive surveillance-sharing
agreement with a regulated market of
significant size related to bitcoin, or
demonstrate that other means to prevent
fraudulent and manipulative acts and
practices are sufficient to justify
dispensing with the requisite
surveillance-sharing agreement. The
listing exchange has not met that
requirement here. Therefore, the
Commission is unable to find that the
proposed rule change is consistent with
the statutory standard.
Pursuant to Section 19(b)(2) of the
Exchange Act, the Commission must
disapprove a proposed rule change filed
by a national securities exchange if it
does not find that the proposed rule
change is consistent with the applicable
requirements of the Exchange Act—
including the requirement under
Section 6(b)(5) that the rules of a
national securities exchange be
designed to prevent fraudulent and
manipulative acts and practices.108
For the reasons discussed above,
NYSE Arca has not met its burden of
demonstrating that the proposal is
consistent with Exchange Act Section
6(b)(5),109 and, accordingly, the
Commission must disapprove the
proposal.110
D. Other Comments
Comment letters address the general
nature and value of bitcoin; 111 the
inherent value of, and risks of investing
107 See
supra note 102.
15 U.S.C. 78s(b)(2)(C).
109 15 U.S.C. 78f(b)(5).
110 In disapproving the proposed rule change, the
Commission has considered its impact on
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f). A commenter argues, for efficiency
reasons, against approving a bitcoin ETP. This
commenter asserts that the adoption of multiple
digital assets would force merchants to deal with
‘‘complexity [that] doesn’t foster [the] modularity
which is needed to gain economic efficiency.’’ See
JC Letter at 1. For the reasons discussed throughout,
however, see supra note 40, the Commission is
disapproving the proposed rule change because it
does not find that the proposed rule change is
consistent with the Exchange Act. See also USBT
Order, 85 FR at 12615.
111 See JC Letter; letter from Sam Ahn, dated May
26, 2021 (‘‘Ahn Letter’’).
108 See
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in, bitcoin; 112 the potential impact of
Commission approval of bitcoin ETPs
on the U.S. economy and financial
system; 113 and the retirement
investment risks of a bitcoin ETP.114
Ultimately, however, additional
discussion of these topics is
unnecessary, as they do not bear on the
basis for the Commission’s decision to
disapprove the proposal.
IV. Conclusion
For the reasons set forth above, the
Commission does not find, pursuant to
Section 19(b)(2) of the Exchange Act,
that the proposed rule change is
consistent with the requirements of the
Exchange Act and the rules and
regulations thereunder applicable to a
national securities exchange, and in
particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,
that proposed rule change SR–
NYSEArca–2021–31 be, and hereby is,
disapproved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021–28254 Filed 12–28–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–93853; File No. SR–Phlx–
2021–75]
Self-Regulatory Organizations; Nasdaq
PHLX LLC; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change To Extend the Expiration
Date of the Temporary Amendments
Concerning Video Conference
Hearings
khammond on DSKJM1Z7X2PROD with NOTICES
December 22, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
17, 2021, Nasdaq PHLX LLC (‘‘Phlx’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange has
designated the proposed rule change as
constituting a ‘‘non-controversial’’ rule
change under paragraph (f)(6) of Rule
112 See
JC Letter; Ahn Letter.
JC Letter.
114 See id.
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
113 See
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19b–4 under the Act,3 which renders
the proposal effective upon receipt of
this filing by the Commission. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to extend the
expiration date of the temporary
amendments in SR–Phlx–2020–53 from
December 31, 2021, to March 31, 2022.4
The proposed rule change would not
make any changes to the text of the
Exchange rules.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/phlx/rules, 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
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to continue to
harmonize Exchange Rule General 3,
Section 16 with recent changes by the
Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) to its Rule
1015 in response to the COVID–19
global health crisis and the
corresponding need to restrict in-person
activities.5 The Exchange originally
3 17
CFR 240.19b–4(f)(6).
the Exchange seeks to provide additional
temporary relief from the rule requirements
identified in this proposed rule change beyond
March 31, 2022, the Exchange will submit a
separate rule filing to further extend the temporary
extension of time. The amended Exchange rules
will revert to their original form at the conclusion
of the temporary relief period and any extension
thereof.
5 See Securities Exchange Act Release No. 93758
(December 13, 2021) (SR–FINRA–2021–031)
(‘‘FINRA Filing’’). The Exchange notes that the
FINRA Filing also proposed to temporarily amend
FINRA Rules 9261, 9524, and 9830, which govern
4 If
PO 00000
Frm 00102
Fmt 4703
Sfmt 4703
filed proposed rule change SR–Phlx–
2020–53, which allows the Exchange
Review Council (‘‘ERC’’) to conduct
hearings in connection with appeals of
Membership Application Program
decisions, on a temporary basis, by
video conference, if warranted by the
current COVID–19-related public health
risks posed by an in-person hearing. In
August 2021, the Exchange filed a
proposed rule change, SR–Phlx–2021–
49, to extend the expiration date of the
temporary amendments in SR–Phlx–
2020–53 from August 31, 2021, to
December 31, 2021.6 While there are
signs of improvement, much uncertainty
remains for the coming months. The
presence of the Delta variant, dissimilar
vaccination rates throughout the United
States, and the uptick in transmissions
in many locations indicate that COVID–
19 remains an active and real public
health concern.7 Due to the uncertainty
and the lack of a clear timeframe for a
sustained and widespread abatement of
COVID–19-related health concerns and
corresponding restrictions,8 the
hearings in connection with appeals of disciplinary
actions, eligibility proceedings, and temporary and
permanent cease and desist orders. The Exchange’s
Rules 9261, 9524, and 9830 incorporate by
reference The Nasdaq Stock Market LLC rules,
which are the subject of a separate filing. See SR–
NASDAQ–2021–104. Therefore, the Exchange is not
proposing to adopt that aspect of the FINRA Filing.
6 See Securities Exchange Act Release No. 92906
(September 9, 2021), 86 FR 51404 (September 15,
2021) (Notice of Filing and Immediate Effectiveness
of File No. SR–Phlx–2021–49); see also Securities
Exchange Act Release No. 90758 (December 21,
2020), 85 FR 85782 (December 29, 2020) (Notice of
Filing and Immediate Effectiveness of File No. SR–
Phlx–2020–053).
7 For example, President Joe Biden on July 29,
2021, announced several measures to increase the
number of people vaccinated against COVID–19 and
to slow the spread of the Delta variant, including
strengthening safety protocols for federal
government employees and contractors. See https://
www.whitehouse.gov/briefing-room/statementsreleases/2021/07/29/fact-sheet-president-biden-toannounce-new-actions-to-get-more-americansvaccinated-and-slow-the-spread-of-the-deltavariant/. Thereafter, the Biden Administration
announced on November 4, 2021, details of two
major vaccination policies to further help fight
COVID–19. See https://www.whitehouse.gov/
briefing-room/statements-releases/2021/11/04/factsheet-biden-administration-announces-details-oftwo-major-vaccination-policies/. Most recently,
President Biden announced several new actions to
help protect Americans against the Delta and
Omicron variants. See https://www.whitehouse.gov/
briefing-room/statements-releases/2021/12/02/factsheet-president-biden-announces-new-actions-toprotect-americans-against-the-delta-and-omicronvariants-as-we-battle-covid-19-this-winter/.
8 For instance, the Centers for Disease Control and
Prevention (‘‘CDC’’) recently announced that the
first confirmed case of COVID–19 caused by the
Omicron variant was detected in the United States.
See https://www.cdc.gov/media/releases/2021/
s1201-omicron-variant.html. The CDC also
recommends that fully vaccinated people wear a
mask in public indoor settings in areas of
substantial or high transmission and noted that
fully vaccinated people might choose to wear a
E:\FR\FM\29DEN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74156-74164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28254]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93859; File No. SR-NYSEArca-2021-31]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Valkyrie Bitcoin Fund Under NYSE Arca Rule 8.201-E (Commodity-Based
Trust Shares)
December 22, 2021.
I. Introduction
On April 23, 2021, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the Valkyrie Bitcoin
Fund (``Trust'') under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares). The proposed rule change was published for comment in the
Federal Register on May 12, 2021.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 91771 (May 6, 2021),
86 FR 26073 (``Notice''). Comments on the proposed rule change can
be found at: https://www.sec.gov/comments/sr-nysearca-2021-31/srnysearca202131.htm.
---------------------------------------------------------------------------
On June 22, 2021, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On August 9, 2021, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On November 1, 2021, the Commission designated a longer period for
Commission action on the proposed rule change.\8\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 92233, 86 FR 34107
(June 28, 2021).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 92610, 86 FR 44763
(Aug. 13, 2021).
\8\ See Securities Exchange Act Release No. 93489, 86 FR 61344
(Nov. 5, 2021).
---------------------------------------------------------------------------
This order disapproves the proposed rule change. The Commission
concludes that NYSE Arca has not met its burden under the Exchange Act
and the Commission's Rules of Practice to demonstrate that its proposal
is consistent with the requirements of Exchange Act Section 6(b)(5),
and in particular, the requirement that the rules of a national
securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \9\
---------------------------------------------------------------------------
\9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
When considering whether NYSE Arca's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same standard used in its orders
considering previous proposals to list bitcoin \10\-based commodity
trusts and bitcoin-based trust issued receipts.\11\ As the
[[Page 74157]]
Commission has explained, an exchange that lists bitcoin-based
exchange-traded products (``ETPs'') can meet its obligations under
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to the underlying or reference bitcoin
assets.\12\
---------------------------------------------------------------------------
\10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 86 FR at 26074-75.
\11\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) and To List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1,
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024)
(``WisdomTree Order''). See also Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, Relating to the Listing and
Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca
Equities Rule 8.201, Securities Exchange Act Release No. 80319 (Mar.
28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101)
(``SolidX Order''). The Commission also notes that orders were
issued by delegated authority on the following matters: Order
Disapproving a Proposed Rule Change To List and Trade the Shares of
the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF,
Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83 FR
43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares Order'');
Order Disapproving a Proposed Rule Change To List and Trade the
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short
Bitcoin ETF, Securities Exchange Act Release No. 83913 (Aug. 22,
2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001)
(``GraniteShares Order''); Order Disapproving a Proposed Rule Change
To List and Trade Shares of the VanEck Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act
Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-
CboeBZX-2021-019).
\12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
---------------------------------------------------------------------------
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.'' \13\ 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 the underlying assets 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.\14\ 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.\15\
---------------------------------------------------------------------------
\13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at
12596.
\14\ See NDSP Adopting Release, 63 FR at 70959.
\15\ See Winklevoss Order, 83 FR at 37592-93; Letter from
Brandon Becker, Director, Division of Market Regulation, Commission,
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
---------------------------------------------------------------------------
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.\16\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \17\
---------------------------------------------------------------------------
\16\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants. See id.
\17\ See USBT Order, 85 FR at 12597.
---------------------------------------------------------------------------
Consistent with this standard, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity--whether gold, silver, platinum, palladium, or
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
(``ISG'') membership in common with, that market.\18\ Moreover, the
surveillance-sharing agreements have been consistently present whenever
the Commission has approved the listing and trading of derivative
securities, even where the underlying securities were also listed on
national securities exchanges--such as options based on an index of
stocks traded on a national securities exchange--and were thus subject
to the Commission's direct regulatory authority.\19\
---------------------------------------------------------------------------
\18\ See Winklevoss Order, 83 FR at 37594.
\19\ See USBT Order, 85 FR at 12597; Securities Exchange Act
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994)
(SR-Amex-93-28) (order approving listing of options on American
Depository Receipts (``ADRs'')). The Commission has also required a
surveillance-sharing agreement in the context of index options even
when (i) all of the underlying index component stocks were either
registered with the Commission or exempt from registration under the
Exchange Act; (ii) all of the underlying index component stocks
traded in the U.S. either directly or as ADRs on a national
securities exchange; and (iii) effective international ADR arbitrage
alleviated concerns over the relatively smaller ADR trading volume,
helped to ensure that ADR prices reflected the pricing on the home
market, and helped to ensure more reliable price determinations for
settlement purposes, due to the unique composition of the index and
reliance on ADR prices. See Securities Exchange Act Release No.
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the
exchange on which the index option trades and the markets that trade
the underlying securities are necessary'' and that ``[t]he exchange
of surveillance data by the exchange trading a stock index option
and the markets for the securities comprising the index is important
to the detection and deterrence of intermarket manipulation.''). And
the Commission has required a surveillance-sharing agreement even
when approving options based on an index of stocks traded on a
national securities exchange. See Securities Exchange Act Release
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure
the availability of information necessary to detect and deter
potential manipulations and other trading abuses'').
---------------------------------------------------------------------------
Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\20\ In response, the Commission has agreed that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, it
would not necessarily need to enter into a surveillance-sharing
agreement with a regulated significant market.\21\ Such resistance to
fraud and manipulation, however, must be novel and beyond those
protections that exist in traditional commodity markets or equity
markets for which the Commission has
[[Page 74158]]
long required surveillance-sharing agreements in the context of listing
derivative securities products.\22\ No listing exchange has satisfied
its burden to make such demonstration.\23\
---------------------------------------------------------------------------
\20\ See USBT Order, 85 FR at 12597.
\21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation); see also USBT Order, 85 FR at
12597.
\22\ See USBT Order, 85 FR at 12597.
\23\ See supra note 11.
---------------------------------------------------------------------------
Here, NYSE Arca contends that approval of the proposal is
consistent with Section 6(b)(5) of the Exchange Act, in particular
Section 6(b)(5)'s requirement that the rules of a national securities
exchange be designed to prevent fraudulent and manipulative acts and
practices and to protect investors and the public interest.\24\
Although NYSE Arca recognizes the Commission's concern with potential
manipulation of bitcoin ETPs in prior disapproval orders, NYSE Arca
argues that the proposal is consistent with Section 6(b)(5) of the
Exchange Act because the growth of liquidity and presence of arbitrage
in the spot market for bitcoin as well as the methodology and framework
of the Index (as defined below) that is used to determine the value of
the assets and net asset value (``NAV'') of the Trust sufficiently
mitigate effects of potential manipulation in the bitcoin market.\25\
Further, NYSE Arca believes that the proposal would provide investors a
more convenient, more efficient, and less risky way to invest in
bitcoin than the purchase of a standalone bitcoin.\26\
---------------------------------------------------------------------------
\24\ See Notice, 86 FR at 26080-81.
\25\ See id. at 26078-80.
\26\ See id. at 26073, 26080.
---------------------------------------------------------------------------
In the analysis that follows, the Commission examines whether the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act by addressing: in Section III.B.1 assertions that other means
besides surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices; in Section III.B.2
assertions relating to NYSE Arca's surveillance-sharing agreements
related to bitcoin; and in Section III.C assertions that the proposal
is consistent with the protection of investors and the public interest.
As discussed further below, NYSE Arca repeats various assertions made
in prior bitcoin-based ETP proposals that the Commission has previously
addressed and rejected--and more importantly, NYSE Arca does not
respond to the Commission's reasons for rejecting those assertions but
merely repeats them. The Commission concludes that NYSE Arca has not
established that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Commission further
concludes that NYSE Arca has not established that it has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to bitcoin. As a result, the Commission is
unable to find that the proposed rule change is consistent with the
statutory requirements of Exchange Act Section 6(b)(5).
The Commission again emphasizes that its disapproval of this
proposed rule change does not rest on an evaluation of whether bitcoin,
or blockchain technology more generally, has utility or value as an
innovation or an investment. Rather, the Commission is disapproving
this proposed rule change because, as discussed below, NYSE Arca has
not met its burden to demonstrate that its proposal is consistent with
the requirements of Exchange Act Section 6(b)(5).
II. Description of the Proposed Rule Change
As described in more detail in the Notice,\27\ 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 on the Exchange.
---------------------------------------------------------------------------
\27\ See Notice, supra note 3. See also Registration Statement
on Form S-1/A, dated April 30, 2021 (File No. 333-252344), filed
with the Commission on behalf of the Trust (``Registration
Statement'').
---------------------------------------------------------------------------
The investment objective of the Trust will be for the Shares to
reflect the performance of the value of a bitcoin as represented by the
CF Bitcoin U.S. Settlement Price (``Index''), less the Trust's
liabilities and expenses.\28\ The Trust will use the Index to calculate
the Trust's NAV. The Index was created and is administered by CF
Benchmarks Ltd. (``Benchmark Administrator'') and serves as a once-a-
day benchmark rate of the U.S. dollar price of bitcoin (USD/BTC),
calculated as of 4:00 p.m. E.T.\29\ The Index aggregates the trade flow
of several bitcoin platforms during an observation window between 3:00
p.m. and 4:00 p.m. E.T. into the U.S. dollar price of one bitcoin at
4:00 p.m. E.T. The current constituent bitcoin platforms of the Index
are Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent
Bitcoin Platforms''). The Index is calculated based on the ``Relevant
Transactions'' \30\ of all of its Constituent Bitcoin Platforms. All
Relevant Transactions are added to a joint list, recording the time of
execution, trade price, and size for each transaction, and the list is
partitioned by timestamp into 12 equally-sized time intervals of five
minute length.\31\ For each partition separately, the volume-weighted
median trade price is calculated from the trade prices and sizes of all
Relevant Transactions.\32\ The Index is then determined by the
arithmetic mean of the volume-weighted medians of all partitions.\33\
---------------------------------------------------------------------------
\28\ Valkyrie Digital Assets LLC is the sponsor of the Trust
(``Sponsor'') and Delaware Trust Company is the trustee. Coinbase
Custody Trust Company, LLC (``Custodian'') will act as custodian for
the Trust's bitcoins. U.S. Bancorp Fund Services, LLC
(``Administrator'') will act as the transfer agent and administrator
of the Trust. See Notice, 86 FR at 26073.
\29\ According to NYSE Arca, the Index is based on materially
the same methodology (except calculation time, as described herein)
as the Benchmark Administrator's CME CF Bitcoin Reference Rate
(``BRR''), which was first introduced on November 14, 2016, and is
the rate on which bitcoin futures contracts are cash-settled in U.S.
dollars on the Chicago Mercantile Exchange (``CME''). The Index is
calculated as of 4:00 p.m. E.T., whereas the BRR is calculated as of
4:00 p.m. London Time. See id. at 26076 & n.9.
\30\ According to the Exchange, a ``Relevant Transaction'' is
any cryptocurrency versus U.S. dollar spot trade that occurs during
the observation window between 3:00 p.m. and 4:00 p.m. E.T. on a
Constituent Bitcoin Platform in the BTC/USD pair that is reported
and disseminated by a Constituent Bitcoin Platform and observed by
the Benchmark Administrator. See id. at 26076 n.10.
\31\ See id. at 26076.
\32\ See id. According to the Exchange, a volume-weighted median
differs from a standard median in that a weighting factor, in this
case trade size, is factored into the calculation. See id.
\33\ See id.
---------------------------------------------------------------------------
The Shares of the Trust represent units of fractional undivided
beneficial interest in, and ownership of, the Trust. The Trust will
only hold bitcoin. The Custodian will establish accounts that hold the
bitcoins deposited with the Custodian on behalf of the Trust.\34\
---------------------------------------------------------------------------
\34\ See id. at 26073.
---------------------------------------------------------------------------
The Administrator will calculate the NAV of the Trust once each
Exchange trading day. The Sponsor will publish the NAV and NAV per
Share as soon as practicable after their determination and
availability, and the NAV will be released after the end of the Core
Trading Session (4:00 p.m. E.T.). The NAV of the Trust is not
officially struck until later in the day (often by 5:30 p.m. E.T, and
usually by 8:00 p.m. E.T.). The Trust's NAV per Share is calculated by
taking the current market value of its total assets, less any
liabilities of the Trust, and dividing that total by the total number
of outstanding Shares. The bitcoin held by the Trust will be valued
based on the price set by the Index.\35\
---------------------------------------------------------------------------
\35\ See id. at 26076.
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The Trust will provide website disclosure of its bitcoin holdings
daily.\36\ The Trust will also disseminate an intraday indicative value
(``IIV'') per Share updated every 15 seconds by one or more major
market data vendors
[[Page 74159]]
during the Exchange's Core Trading Session (normally 9:30 a.m. to 4:00
p.m. E.T.). The IIV will be calculated by a third-party financial data
provider using the prior day's closing NAV per Share of the Trust as a
base and updating that value throughout the trading day to reflect
changes in the most recently reported price level of the CME CF Bitcoin
Real-Time Index (``BRTI''), as reported by CME Group, Inc., Bloomberg,
L.P., or another reporting service.\37\
---------------------------------------------------------------------------
\36\ See id. at 26081.
\37\ According to NYSE Arca, the BRTI is calculated in real time
based on the universe of the currently unmatched limit orders to buy
or sell in the BTC/USD pair of all Constituent Bitcoin Platforms.
See id. at 26076.
---------------------------------------------------------------------------
The Trust will issue and redeem Shares to authorized participants
on an ongoing basis in one or more ``Baskets'' of 50,000 Shares. The
creation and redemption of a Basket requires the delivery to the Trust,
or the distribution by the Trust, of the number of whole and fractional
bitcoins represented by each Basket being created or redeemed.\38\
Creation orders and redemption orders may be placed either ``in-kind''
or ``in-cash.'' Although the Trust will create Baskets only upon the
receipt of bitcoins, and will redeem Baskets only by distributing
bitcoins, an authorized participant may deposit cash with the
Administrator, which will facilitate the purchase or sale of bitcoins
through a liquidity provider on behalf of an authorized participant
(``Conversion Procedures'').\39\
---------------------------------------------------------------------------
\38\ See id. at 26076-77.
\39\ The Conversion Procedures will be facilitated by a single
liquidity provider, which will be selected by the Sponsor on an
order-by-order basis. In the event that an order cannot be filled in
its entirety by a single liquidity provider, additional liquidity
provider(s) will be selected by the Sponsor to fill the remaining
amount. See id. at 26076-78.
---------------------------------------------------------------------------
III. Discussion
A. The Applicable Standard for Review
The Commission must consider whether NYSE Arca's proposal is
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act
requires, in relevant part, that the rules of a national securities
exchange be designed ``to prevent fraudulent and manipulative acts and
practices'' and ``to protect investors and the public interest.'' \40\
Under the Commission's Rules of Practice, the ``burden to demonstrate
that a proposed rule change is consistent with the Exchange Act and the
rules and regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \41\
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange 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 regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
\41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\42\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\43\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\44\
---------------------------------------------------------------------------
\42\ See id.
\43\ See id.
\44\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------
B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and
Practices
(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and
Practices
As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with a comprehensive surveillance-sharing agreement with a regulated
market of significant size, including by demonstrating that the bitcoin
market as a whole or the relevant underlying bitcoin market is uniquely
and inherently resistant to fraud and manipulation.\45\ Such resistance
to fraud and manipulation must be novel and beyond those protections
that exist in traditional commodities or securities markets.\46\
---------------------------------------------------------------------------
\45\ See USBT Order, 85 FR at 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
\46\ See id. at 12597.
---------------------------------------------------------------------------
NYSE Arca asserts that the bitcoin marketplace has matured rapidly
in recent years regarding user growth, market capitalization, volume,
market participants, and liquidity shifts, such that billion-dollar
bitcoin transactions have occurred without significantly distorting the
marketplace.\47\ NYSE Arca further asserts that bitcoin trades in a
well-arbitraged and distributed market.\48\ NYSE Arca concludes that,
due to the linkage between the bitcoin markets and the presence of
arbitrageurs in those markets, the manipulation of the price of bitcoin
on any Constituent Bitcoin Platform would likely require overcoming the
liquidity supply of such arbitrageurs who are potentially eliminating
any cross-market pricing differences.\49\
---------------------------------------------------------------------------
\47\ See Notice, 86 FR at 26078.
\48\ See id. at 26080.
\49\ See id.
---------------------------------------------------------------------------
As with the previous proposals, the Commission here concludes that
the Exchange's assertions about the nature of the bitcoin market do not
constitute other means to prevent fraud and manipulation sufficient to
justify dispensing with the requisite surveillance-sharing
agreement.\50\ The Exchange argues that the maturation of the bitcoin
market mitigates against the Commission's concerns about fraud and
manipulation,\51\ but NYSE Arca provides no evidence for how such
maturation serves to detect and deter potential fraud and manipulation.
Nor does the Exchange provide any data or analysis to support its
assertions regarding efficient price arbitrage across bitcoin
platforms, either in terms of how closely bitcoin prices are aligned
across different bitcoin trading venues or how quickly price
disparities may be arbitraged away. Indeed, NYSE Arca
[[Page 74160]]
concedes that ``the global [b]itcoin market is not inherently resistant
to fraud and manipulation.'' \52\ As stated above, ``unquestioning
reliance'' on an SRO's representations in a proposed rule change is not
sufficient to justify Commission approval of a proposed rule
change.\53\
---------------------------------------------------------------------------
\50\ One commenter describes digital assets such as bitcoin, and
the blockchains on which they rely, as having complexity that makes
users vulnerable to fraud. See letter from JC, dated June 24, 2021
(``JC Letter'').
\51\ The Commission notes that the Exchange does not explicitly
tie the asserted maturation of the bitcoin market to an argument
that such market evolution provides sufficient means besides
surveillance-sharing agreements to prevent fraud and manipulation.
\52\ See Notice, 86 FR at 26080. See also id. at 26078 (``There
has been concern over whether cryptocurrency exchanges have
mechanisms in place to report and remediate price and overall,
ensure integrity.'').
\53\ See supra note 44.
---------------------------------------------------------------------------
Efficient price arbitrage, moreover, is not sufficient to dispense
with surveillance-sharing agreements.\54\ The Commission has stated,
for example, that even for equity options based on securities listed on
national securities exchanges, the Commission relies on surveillance-
sharing agreements to detect and deter fraud and manipulation.\55\
Here, the Exchange provides no evidence to support its assertion of
efficient price arbitrage across bitcoin platforms, let alone any
evidence that price arbitrage in the bitcoin market is novel or unique
so as to warrant the Commission dispensing with the requisite
surveillance-sharing agreement. Moreover, NYSE Arca does not take into
account that a market participant with a dominant ownership position
would not find it prohibitively expensive to overcome the liquidity
supplied by arbitrageurs and could use dominant market share to engage
in manipulation.\56\
---------------------------------------------------------------------------
\54\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR
at 16256-57; USBT Order, 85 FR at 12601.
\55\ See, e.g., USBT Order, 85 FR at 12601.
\56\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85
FR at 12600-01.
---------------------------------------------------------------------------
Furthermore, NYSE Arca concedes that the global bitcoin market is
not inherently resistant to fraud and manipulation and that concerns
exist over whether bitcoin trading platforms ``have mechanisms in place
to report and remediate price and overall, ensure market integrity.''
\57\ In addition, the Trust's Registration Statement acknowledges that
``[bitcoin platforms] are relatively new and, in some cases, largely
unregulated, and, therefore, may be more exposed to fraud and security
breaches than established, regulated exchanges for other financial
assets or instruments;'' that the bitcoin network is currently
vulnerable to a ``51% attack,'' in which a bad actor or actors that
control a majority of the processing power dedicated to mining on the
bitcoin network may be able to gain full control of the network and the
ability to manipulate the bitcoin blockchain; that ``in 2019 there were
reports claiming that 80-95% of Bitcoin trading volume on [bitcoin
platforms] was false or non-economic in nature;'' and that ``over the
past several years, some [bitcoin trading platforms] have been closed
due to fraud and manipulative activity, business failure or security
breaches.'' \58\
---------------------------------------------------------------------------
\57\ See supra note 52 and accompanying text.
\58\ See Registration Statement at 14, 17, 36.
---------------------------------------------------------------------------
NYSE Arca also does not contest the presence of possible sources of
fraud and manipulation in the bitcoin spot market generally that the
Commission has raised in previous orders, which have included (1)
``wash'' trading, (2) persons with a dominant position in bitcoin
manipulating bitcoin pricing, (3) hacking of the bitcoin network and
trading platforms, (4) malicious control of the bitcoin network, (5)
trading based on material, non-public information (such as plans of
market participants to significantly increase or decrease their
holdings in bitcoin; new sources of demand for bitcoin; the decision of
a bitcoin-based investment vehicle on how to respond to a ``fork'' in
the bitcoin blockchain, which would create two different, non-
interchangeable types of bitcoin), or based on the dissemination of
false and misleading information, (6) manipulative activity involving
the purported ``stablecoin'' Tether (USDT), and (7) fraud and
manipulation at bitcoin trading platforms.\59\
---------------------------------------------------------------------------
\59\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28,
2019), available at https://ssrn.com/abstract=3195066 and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------
Instead, NYSE Arca asserts that the methodology and framework of
the Index used by the Trust to determine the value of its bitcoin
assets and its NAV serve to mitigate against fraud and
manipulation.\60\ First, NYSE Arca asserts that the methodology
employed in constructing the Index makes the Index more resistant to
manipulation than other measurements that employ different
methodologies and that the Benchmark Administrator aggregates the trade
data from the Constituent Bitcoin Platforms in a manner designed to
resist manipulation.\61\ NYSE Arca states that the Index utilizes
partitions to ensure large individual trades have a limited effect on
the price of the Index, and the Index utilizes volume-weighted medians
to ensure that outlying prices do not have an excessive effect on the
value of a partition.\62\ NYSE Arca also states that transactions from
a Constituent Bitcoin Platform may be excluded from the Index
calculation if they are deemed potentially erroneous.\63\
---------------------------------------------------------------------------
\60\ See Notice, 86 FR at 26078, 26080.
\61\ See id. at 26076, 26079.
\62\ See id. at 26079.
\63\ See id. The Exchange states that, where a Constituent
Bitcoin Platform's volume-weighted median transaction price exhibits
an absolute percentage deviation from the volume-weighted median
price of other Constituent Bitcoin Platform transactions greater
than the potentially erroneous data parameter (10%), then
transactions from that Constituent Bitcoin Platform are deemed
potentially erroneous and excluded from the index calculation. See
id.
---------------------------------------------------------------------------
Second, NYSE Arca argues that the Index's exclusive use of
transactions from Constituent Bitcoin Platforms mitigates the effects
of potential manipulation of the bitcoin market.\64\ NYSE Arca states
that, to be eligible for inclusion in the Index, a Constituent Bitcoin
Platform must make trade and order data available through an Automatic
Programming Interface with sufficient reliability, relevant data, and
appropriate speed, and must meet a minimum trading volume
threshold.\65\ In addition, NYSE Arca states that a Constituent Bitcoin
Platform must enforce policies to ensure fair and transparent market
conditions; have processes in place to impede illegal or manipulative
trading practices; and comply with applicable law and regulation,
including proper Anti-Money Laundering (``AML'') and Know-Your-Customer
(``KYC'') procedures.\66\ NYSE Arca states that the calculation agent
of the Index conducts a thorough review of any bitcoin trading platform
under consideration and the arrangements of all Constituent Bitcoin
Platforms are reviewed regularly to ensure they continue to meet all
criteria.\67\
---------------------------------------------------------------------------
\64\ See id. at 26080.
\65\ See id. at 26078. The Exchange states that the Index
included over $133,293,551,000 in bitcoin trades (approximately
16,304,168 bitcoins) during the one-year period ended December 31,
2020. See id. at 26076.
\66\ See id. at 26078.
\67\ See id. at 26079.
---------------------------------------------------------------------------
Third, NYSE Arca asserts that the Commodity Futures Trading
Commission (``CFTC'') has been successfully exercising its enforcement
authority related to fraud and manipulation on the Constituent Bitcoin
Platforms.\68\ In addition, the Exchange asserts that the Constituent
Bitcoin Platforms must enter into a data sharing agreement with the
CME, cooperate with inquiries and investigations of regulators and the
Benchmark Administrator, and submit each of their clients to their KYC
procedures.\69\ According to the Exchange, in the case of any
suspicious trades on the Constituent Bitcoin Platforms, the CME would
therefore be able to discover all
[[Page 74161]]
material trade information, including the identities of the customers
placing the trades.\70\
---------------------------------------------------------------------------
\68\ See id.
\69\ See id.
\70\ See id.
---------------------------------------------------------------------------
Finally, NYSE Arca asserts that the oversight of the Index by the
Benchmark Administrator and the CME mitigates concerns relating to
manipulation.\71\ The Exchange states that, to date, there has been no
evidence that the Index has been subject to manipulation or that the
``Index provider'' \72\ has been failing to maintain processes and
controls to prevent manipulation by its organization. It further
asserts that the CME participates in an oversight committee of the
Index that is responsible for regularly reviewing and overseeing the
methodology, practice, standards, and scope of the Index to ensure that
it continues to accurately track the spot prices of bitcoin.\73\
According to the Exchange, given that the Index formula and data
sources are publicly available, if manipulation of the Index were to
occur, it would be quickly detected by the CME and hundreds of
sophisticated market participants.\74\
---------------------------------------------------------------------------
\71\ See id. at 26076, 26079.
\72\ See id. at 26079. The Exchange uses the term ``Index
provider'' with respect to this particular assertion. The Commission
understands the term to mean the Benchmark Administrator.
\73\ See id. at 26076, 26079.
\74\ See id. at 26079.
---------------------------------------------------------------------------
Based on assertions made and the information provided, the
Commission can find no basis to conclude that NYSE Arca has articulated
other means to prevent fraud and manipulation that are sufficient to
justify dispensing with the requisite surveillance-sharing agreement.
First, the record does not demonstrate that the proposed methodology
for calculating the Index would make the proposed ETP resistant to
fraud or manipulation such that a surveillance-sharing agreement with a
regulated market of significant size is unnecessary.\75\ Specifically,
the Exchange has not assessed the possible influence that spot
platforms not included among the Constituent Bitcoin Platforms would
have on bitcoin prices used to calculate the Index. As discussed above,
NYSE Arca does not contest the presence of possible sources of fraud
and manipulation in the bitcoin spot market generally.\76\ Instead,
NYSE Arca focuses its analysis on the Constituent Bitcoin Platforms.
Importantly, however, the record does not demonstrate that these
possible sources of fraud and manipulation in the broader bitcoin spot
market do not affect the Constituent Bitcoin Platforms that represent a
slice of the bitcoin spot market. To the extent that fraudulent and
manipulative trading on the broader bitcoin market could influence
prices or trading activity on the Constituent Bitcoin Platforms, the
Constituent Bitcoin Platforms would not be inherently resistant to
manipulation.\77\
---------------------------------------------------------------------------
\75\ The Commission has previously considered and rejected
similar arguments about the valuation of bitcoin according to a
benchmark or reference price. See, e.g., SolidX Order, 82 FR at
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at
12599-601.
\76\ See supra notes 57-59 and accompanying text.
\77\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------
Moreover, the Exchange's assertions that the Index's methodology
helps make the Index resistant to manipulation are contradicted by the
Registration Statement's own statements. The Sponsor raises, but does
not address here, concerns regarding the Index in the Registration
Statement, stating that ``the [Index] has a limited history and there
are limitations with the price of bitcoin reflected there.'' \78\ And
while the Exchange asserts that the Index's exclusive use of
Constituent Bitcoin Platforms helps make the Index resistant to
manipulation, such assertions are called into question by the Sponsor's
own statements in the Registration Statement that ``[b]itcoin
[platforms] on which users trade bitcoin . . . may be more exposed to
fraud and security breaches than established, regulated exchanges for
other financial assets or instruments, which could have a negative
impact on the performance of the Trust.'' \79\ Constituent Bitcoin
Platforms are a subset of the existing bitcoin platforms. Although the
Sponsor raises concerns regarding fraud and security of bitcoin
platforms in the Registration Statement, the Exchange does not explain
how or why such concerns are consistent with its assertion that the
Index is resistant to fraud and manipulation.
---------------------------------------------------------------------------
\78\ See Registration Statement at 30.
\79\ See id. at 14.
---------------------------------------------------------------------------
NYSE Arca also has not shown that its proposed use of 12 equally-
sized time intervals of five minute length over the observation window
between 3:00 p.m. and 4:00 p.m. E.T. to calculate the Index would
effectively be able to eliminate fraudulent or manipulative activity
that is not transient. Fraud and manipulation in the bitcoin spot
market could persist for a ``significant duration.'' \80\ The Exchange
does not connect the use of such partitions to the duration of the
effects of the wash and fictitious trading that may exist in the
bitcoin spot market.\81\ Thus, the Exchange fails to establish how the
Index's methodology eliminates fraudulent or manipulative activity that
is not transient.\82\
---------------------------------------------------------------------------
\80\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
\81\ See WisdomTree Order, 86 FR at 69327.
\82\ See USBT Order, 85 FR at 12607.
---------------------------------------------------------------------------
While the Exchange asserts that the oversight of the Constituent
Bitcoin Platforms helps to prevent and detect manipulation, the level
of regulation of the Constituent Bitcoin Platforms is not equivalent to
the obligations, authority, and oversight of national securities
exchanges or futures exchanges and therefore is not an appropriate
substitute.\83\ National securities exchanges are required to 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 regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public
interest.'' \84\ Moreover, national securities exchanges must file
proposed rules with the Commission regarding certain material aspects
of their operations,\85\ and the Commission has the authority to
disapprove any such rule that is not consistent with the requirements
of the Exchange Act.\86\ Thus, national securities exchanges are
subject to Commission oversight of, among other things, their
governance, membership qualifications, trading rules, disciplinary
procedures, recordkeeping, and fees.\87\
---------------------------------------------------------------------------
\83\ See also id. at 12603-05.
\84\ See 15 U.S.C. 78f(b)(5).
\85\ 17 CFR 240.19b-4(a)(6)(i).
\86\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated contract markets
(``DCMs'') (commonly called ``futures markets'') registered with and
regulated by the CFTC must comply with, among other things, a
similarly comprehensive range of regulatory principles and must file
rule changes with the CFTC. See, e.g., Designated Contract Markets
(DCMs), CFTC, available at https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
\87\ See Winklevoss Order, 83 FR at 37597.
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The Constituent Bitcoin Platforms, on the other hand, have none of
these requirements (none are registered as a national securities
exchange).\88\ While the Exchange asserts that various entities require
the Constituent Bitcoin Platforms to adopt certain policies and
processes, including AML/KYC
[[Page 74162]]
compliance policies, such requirements are fundamentally different from
the Exchange Act's requirements for national securities exchanges.\89\
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\88\ See 15 U.S.C. 78e, 78f.
\89\ See USBT Order, 85 FR at 12603. The Commission has
previously concluded that such AML and KYC policies and procedures
do not serve as a substitute for, and are not otherwise dispositive
in the analysis regarding the importance of having a surveillance-
sharing agreement with a regulated market of significant size
relating to bitcoin. For example, AML and KYC policies and
procedures do not substitute for the sharing of information about
market trading activity or clearing activity and do not substitute
for regulation of a national securities exchange. See id. at 12603
n.101.
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NYSE Arca's further assertions regarding CFTC's enforcement
authority with respect to the Constituent Bitcoin Platforms also do not
establish a level of oversight sufficient to dispense with the
requisite surveillance-sharing agreement. While the Commission
recognizes that the CFTC maintains some jurisdiction over the bitcoin
spot market, under the Commodity Exchange Act, the CFTC does not have
regulatory authority over bitcoin spot trading platforms, including the
Constituent Bitcoin Platforms.\90\ Except in certain limited
circumstances, bitcoin spot trading platforms are not required to
register with the CFTC, and the CFTC does not set standards for,
approve the rules of, examine, or otherwise regulate bitcoin spot
markets.\91\ As the CFTC itself stated, while the CFTC ``has an
important role to play,'' U.S. law ``does not provide for direct,
comprehensive Federal oversight of underlying Bitcoin or virtual
currency spot markets.'' \92\
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\90\ See id. at 12604.
\91\ See id.
\92\ See Winklevoss Order, 83 FR at 37599 n.288.
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Further, although NYSE Arca states that the Constituent Bitcoin
Platforms must cooperate with inquiries and investigations of
regulators and the Benchmark Administrator, it does not describe the
scope of such requirements or what authority the Benchmark
Administrator or regulators would have to compel the platforms''
cooperation. And while NYSE Arca asserts that the CME has in place
information-sharing agreements with the Constituent Bitcoin Platforms,
it does not provide any information on the scope, terms, or enforcement
authority for such agreements. Nor has NYSE Arca put any information in
the record as to whether and how it would use or enforce such
agreements. Moreover, such agreements are contractual in nature and do
not satisfy the regulatory requirements or purposes of national
securities exchanges and the Exchange Act. The CME (and the CFTC, as
discussed above) does not have regulatory authority over the spot
bitcoin trading platforms,\93\ and, while the CME is regulated by the
CFTC, the CFTC's regulations do not extend to the Constituent Bitcoin
Platforms by virtue of such contractual agreements.
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\93\ See supra notes 90-92 and accompanying text.
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While NYSE Arca asserts the Benchmark Administrator oversees the
integrity of the Index, the oversight by the Benchmark Administrator
does not represent a unique measure to resist manipulation beyond
mechanisms that exist in securities or commodities markets. Other
commodity-based and equity index ETPs approved by the Commission for
listing and trading utilize reference rates or indices administered by
similar benchmark administrators,\94\ and the Commission has not, in
those instances, dispensed with the need for a surveillance-sharing
agreement with a significant regulated market.\95\ For the same reason,
even if, as the Exchange claims, there is no evidence that the Index
has been subject to manipulation or that the Benchmark Administrator
ever failed to maintain processes and controls to prevent manipulation
by its organization, such lack of evidence is not a basis for the
Commission to disregard the need for a surveillance-sharing agreement.
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\94\ See, e.g., Securities Exchange Act Release Nos. 80840 (June
1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33) (approving
the listing and trading of shares of exchange traded funds seeking
to track the Solactive GLD EUR Gold Index, Solactive GLD GBP Gold
Index, and the Solactive GLD JPY Gold Index); and 83046 (Apr. 13,
2018) 83 FR 17462 (Apr. 19, 2018) (SR-Nasdaq-2018-012) (approving
the listing and trading of shares of an exchange-traded fund that
seeks to track an equity index, the CBOE Russell 2000 30-Delta
BuyWrite V2 Index).
\95\ See USBT Order, 85 FR at 12605. See also supra note 19.
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Moreover, the Benchmark Administrator does not itself exercise
governmental regulatory authority. Rather, the Benchmark Administrator
is a registered, privately-held company in England.\96\ The Benchmark
Administrator's relationship with the Constituent Bitcoin Platforms is
based on their participation in the determination of reference rates,
such as the Index. While the Benchmark Administrator is regulated by
the UK FCA as a benchmark administrator, the UK FCA's regulations do
not extend to the Constituent Bitcoin Platforms by virtue of their
trade prices serving as input data underlying the Index.\97\
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\96\ See https://blog.cfbenchmarks.com/legal/ (stating that the
Benchmark Administrator is authorized and regulated by the UK
Financial Conduct Authority (``UK FCA'') as a registered Benchmark
Administrator (FRN 847100) under the EU benchmark regulation, and
further noting that the Benchmark Administrator is a member of the
Crypto Facilities group of companies which is in turn a member of
the Payward, Inc. group of companies, and Payward, Inc. is the owner
and operator of the Kraken Exchange, a venue that facilitates the
trading of cryptocurrencies). The Commission notes that the Kraken
is one of the Constituent Bitcoin Platforms underlying the Index.
\97\ See USBT Order, 85 FR at 12604. The Benchmark Administrator
is also not required to apply certain provisions of EU benchmark
regulation to the Constituent Bitcoin Platforms because the
Reference Rate's input data is not ``contributed.'' See Benchmark
Statement, at 5 available at https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Benchmark+Statement.pdf.
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Further, the oversight performed by the Benchmark Administrator of
the Constituent Bitcoin Platforms is for the purpose of ensuring the
accuracy and integrity of the Index.\98\ Such oversight serves a
fundamentally different purpose as compared to the regulation of
national securities exchanges and the requirements of the Exchange Act.
Likewise, while the Exchange states that the CME participates in an
oversight committee for the Index, the purpose of such committee is to
ensure that the Index continues to accurately track the spot prices of
bitcoin. While the Commission recognizes that these oversight functions
may be important in ensuring the integrity of the Index, such
requirements do not imbue either the Benchmark Administrator, the CME
with respect to the Constituent Bitcoin Platforms, or the Constituent
Bitcoin Platforms themselves, with regulatory authority similar to that
the Exchange Act confers upon self-regulatory organizations such as
national securities exchanges.\99\
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\98\ See Notice, 86 FR at 26077 (``. . . an oversight function
is implemented by the Benchmark Administrator in seeking to ensure
that the Index is administered through codified policies for Index
integrity.'').
\99\ See 15 U.S.C. 78f(b).
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Finally, the Exchange does not sufficiently explain the
significance of the Index's purported resistance to manipulation to the
overall analysis of whether the proposal to list and trade the Shares
is designed to prevent fraud and manipulation. The Index is used by the
Trust to value its bitcoin and to calculate its NAV. However, the
Shares would trade at market-based prices in the secondary market, not
at NAV.
In sum, none of NYSE Arca's assertions suggests that other means to
prevent fraud and manipulation are sufficient to justify dispensing
with the requisite surveillance-sharing agreement. Importantly, even if
NYSE Arca had provided evidence to establish its assertions addressed
above regarding the robustness of the Index methodology and framework
and the regulation and oversight of the Constituent Bitcoin Platforms
and Index, such assertions would render the proposed ETP no
[[Page 74163]]
more resistant to manipulation than derivative products based on
traditional commodities or securities markets.\100\ Thus, the record
does not establish that NYSE Arca may satisfy Section 6(b)(5) of the
Exchange Act without entering into a surveillance-sharing agreement
with a regulated market of significant size.
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\100\ See USBT Order, 85 FR at 12599.
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(2) Assertions Relating to Surveillance-Sharing Agreements
As NYSE Arca has not demonstrated that other means besides
surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices, the Commission next
examines whether the record supports the conclusion that NYSE Arca has
entered into a comprehensive surveillance-sharing agreement with a
regulated market of significant size relating to the underlying assets.
In this context, the term ``market of significant size'' includes a
market (or group of markets) as to which (i) 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 (ii) it is unlikely that trading in the ETP
would be the predominant influence on prices in that market.\101\
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\101\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that provides guidance to market
participants. See id.
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However, NYSE Arca does not identify any market as a ``market of
significant size'' and accordingly makes no assertions regarding, and
provides no information to establish, either prong of the ``market of
significant size'' determination.
The requirements of Section 6(b)(5) of the Exchange Act apply to
the rules of national securities exchanges. Accordingly, the relevant
obligation for a comprehensive surveillance-sharing agreement with a
regulated market of significant size, or other means to prevent
fraudulent and manipulative acts and practices that are sufficient to
justify dispensing with the requisite surveillance-sharing agreement,
resides with the listing exchange. Because there is insufficient
evidence in the record demonstrating that NYSE Arca has satisfied this
obligation, the Commission cannot approve the proposed ETP for listing
and trading on NYSE Arca.
C. Whether NYSE Arca Has Met Its Burden to Demonstrate That the
Proposal Is Designed To Protect Investors and the Public Interest
NYSE Arca contends that, if approved, the proposed ETP would
protect investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\102\ Because NYSE Arca has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
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\102\ See id. at 37601. See also GraniteShares Order, 83 FR at
43931; ProShares Order, 83 FR at 43941; USBT Order, 85 FR at 12615.
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NYSE Arca asserts that the Trust will provide investors with
exposure to bitcoin in a manner that is more efficient and convenient
than the purchase of stand-alone bitcoin, while also mitigating some of
the risk by reducing the volatility typically associated with the
purchase of stand-alone bitcoin and without the uncertain and often
complex requirements relating to acquiring and/or holding bitcoin.\103\
NYSE Arca concludes that the manipulation concerns previously
articulated by the Commission are mitigated by investor protection
issues.\104\
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\103\ See Notice, 86 FR at 26073.
\104\ See id. at 26078.
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In essence, NYSE Arca asserts that the risky nature of a direct
investment in the underlying bitcoin compels approval of the proposed
rule change. The Commission disagrees. Pursuant to Section 19(b)(2) of
the Exchange Act, the Commission must approve a proposed rule change
filed by a national securities exchange if it finds that the proposed
rule change is consistent with the applicable requirements of the
Exchange Act--including the requirement under Section 6(b)(5) that the
rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices--and it must disapprove
the filing if it does not make such a finding.\105\ Thus, even if a
proposed rule change purports to protect investors from a particular
type of investment risk--such as complexity to acquire and/or hold the
underlying asset--the proposed rule change may still fail to meet the
requirements under the Exchange Act.\106\
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\105\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
\106\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR
at 69334.
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Here, even if it were true that, compared to trading in unregulated
bitcoin spot markets, trading a bitcoin-based ETP on a national
securities exchange provides some additional protection to investors,
the Commission must consider this potential benefit in the broader
context of whether the proposal meets each of the applicable
requirements of the Exchange Act.\107\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing
exchange have a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to bitcoin, or demonstrate
that other means to prevent fraudulent and manipulative acts and
practices are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The listing exchange has not met that
requirement here. Therefore, the Commission is unable to find that the
proposed rule change is consistent with the statutory standard.
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\107\ See supra note 102.
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Pursuant to Section 19(b)(2) of the Exchange Act, the Commission
must disapprove a proposed rule change filed by a national securities
exchange if it does not find that the proposed rule change is
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices.\108\
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\108\ See 15 U.S.C. 78s(b)(2)(C).
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For the reasons discussed above, NYSE Arca has not met its burden
of demonstrating that the proposal is consistent with Exchange Act
Section 6(b)(5),\109\ and, accordingly, the Commission must disapprove
the proposal.\110\
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\109\ 15 U.S.C. 78f(b)(5).
\110\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f). A commenter argues, for efficiency
reasons, against approving a bitcoin ETP. This commenter asserts
that the adoption of multiple digital assets would force merchants
to deal with ``complexity [that] doesn't foster [the] modularity
which is needed to gain economic efficiency.'' See JC Letter at 1.
For the reasons discussed throughout, however, see supra note 40,
the Commission is disapproving the proposed rule change because it
does not find that the proposed rule change is consistent with the
Exchange Act. See also USBT Order, 85 FR at 12615.
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D. Other Comments
Comment letters address the general nature and value of bitcoin;
\111\ the inherent value of, and risks of investing
[[Page 74164]]
in, bitcoin; \112\ the potential impact of Commission approval of
bitcoin ETPs on the U.S. economy and financial system; \113\ and the
retirement investment risks of a bitcoin ETP.\114\ Ultimately, however,
additional discussion of these topics is unnecessary, as they do not
bear on the basis for the Commission's decision to disapprove the
proposal.
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\111\ See JC Letter; letter from Sam Ahn, dated May 26, 2021
(``Ahn Letter'').
\112\ See JC Letter; Ahn Letter.
\113\ See JC Letter.
\114\ See id.
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IV. Conclusion
For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, with Section 6(b)(5) of the
Exchange Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-NYSEArca-2021-31 be, and
hereby is, disapproved.
By the Commission.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-28254 Filed 12-28-21; 8:45 am]
BILLING CODE 8011-01-P
