Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change, as Modified by Amendment No. 2, To List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 46249-46285 [2023-15267]
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
inconsistent to find that the CME
Bitcoin Futures market is a significant
market as it relates to the CME Bitcoin
Futures market, but not a significant
market as it relates to the bitcoin spot
market for the numerous reasons laid
out above.
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change,
rather will facilitate the listing and
trading of an additional exchange-traded
product that will enhance competition
among both market participants and
listing venues, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
ddrumheller on DSK120RN23PROD with NOTICES1
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
1, is consistent with the Act. Comments
may be submitted by any of the
following methods:
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CboeBZX–2023–038. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–038 and should be
submitted on or before August 9, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.73
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–15268 Filed 7–18–23; 8:45 am]
BILLING CODE 8011–01–P
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
CboeBZX–2023–038 on the subject line.
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97899; File No. SRCboeBZX–2023–044]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
a Proposed Rule Change, as Modified
by Amendment No. 2, To List and
Trade Shares of the Wise Origin
Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust
Shares
July 13, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–114 thereunder,2
notice is hereby given that on June 30,
2023, Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to list and trade shares of the Wise
Origin Bitcoin Trust under BZX Rule
14.11(e)(4), Commodity-Based Trust
Shares. On July 11, 2023, the Exchange
filed Amendment No. 1 to the proposed
rule change, which amended and
replaced the proposed rule change in its
entirety. On July 13, 2023, the Exchange
filed Amendment No. 2 to the proposed
rule change, which amended and
replaced the proposed rule change, as
modified by Amendment No. 1, in its
entirety. The proposed rule change, as
modified by Amendment No. 2, is
described in Items I, II, and III below,
which Items have been prepared by the
Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change,
as modified by Amendment No. 2, from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (‘‘BZX’’ or
the ‘‘Exchange’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) a proposed
rule change to list and trade shares of
the Wise Origin Bitcoin Trust (the
‘‘Trust’’),3 under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Trust was formed as a Delaware statutory
trust on March 17, 2021, and is operated as a
grantor trust for U.S. federal tax purposes. The
Trust has no fixed termination date.
2 17
73 17
CFR 200.30–3(a)(12).
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
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
ddrumheller on DSK120RN23PROD with NOTICES1
1. Purpose
This Amendment No. 2 to SR–
CboeBZX–2023–044 amends and
replaces in its entirety the proposal as
originally submitted on June 30, 2023
and as amended by Amendment No. 1
on July 11, 2023. The Exchange submits
this Amendment No. 2 in order to
clarify certain points and add additional
details to the proposal.
The Exchange proposes to list and
trade the Shares under BZX Rule
14.11(e)(4),4 which governs the listing
and trading of Commodity-Based Trust
Shares on the Exchange.5 FD Funds
Management LLC is the sponsor of the
Trust (‘‘Sponsor’’). The Shares will be
registered with the Commission by
means of the Trust’s registration
statement on Form S–1 (the
‘‘Registration Statement’’).6 Fidelity
Digital Assets Services, LLC (‘‘FDAS’’),
a regulated custodian licensed by the
New York Department of Financial
Services, will be responsible for custody
of the Trust’s bitcoin (the ‘‘Custodian’’).
The Trust is not permitted or required
to register under the Investment
Company Act of 1940, as amended (the
4 The Commission approved BZX Rule 14.11(e)(4)
in Securities Exchange Act Release No. 65225
(August 30, 2011), 76 FR 55148 (September 6, 2011)
(SR–BATS–2011–018).
5 All statements and representations made in this
filing regarding (a) the description of the portfolio,
(b) limitations on portfolio holdings or reference
assets, or (c) the applicability of Exchange rules and
surveillance procedures shall constitute continued
listing requirements for listing the Shares on the
Exchange.
6 See draft Registration Statement on Form S–1,
dated March 24, 2021, submitted to the Commission
by the Sponsor on behalf of the Trust. The
descriptions of the Trust, the Shares, and the Index
(as defined below) contained herein are based, in
part, on information in the Registration Statement.
The Registration Statement is not yet effective, and
the Shares will not trade on the Exchange until
such time that the Registration Statement is
effective.
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‘‘1940 Act’’), and therefore is not subject
to regulation under the 1940 Act.7
Further, the Registration Statement
states that the Trust will not hold or
trade in commodity interests regulated
by the Commodity Exchange Act of
1936, as amended (the ‘‘CEA’’), and
therefore is not a commodity pool for
purposes of the CEA.8 The Exchange
represents that the Shares satisfy the
requirements of BZX Rule 14.11(e)(4)
and thereby qualify for listing on the
Exchange.
As further discussed below, the
Commission has historically approved
or disapproved exchange filings to list
and trade series of Trust Issued
Receipts, including spot-based
Commodity-Based Trust Shares, on the
basis of whether the listing exchange
has in place a comprehensive
surveillance sharing agreement with a
regulated market of significant size
related to the underlying commodity to
be held.9 Prior orders from the
Commission have pointed out that in
every prior approval order for
Commodity-Based Trust Shares, there
has been a derivatives market that
represents the regulated market of
significant size, generally a Commodity
Futures Trading Commission (the
‘‘CFTC’’) regulated futures market.10
above.
above.
9 See Securities Exchange Act Release No. 83723
(July 26, 2018), 83 FR 37579 (August 1, 2018). This
proposal was subsequently disapproved by the
Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1,
2018) (the ‘‘Winklevoss Order’’).
10 See streetTRACKS Gold Shares, Exchange Act
Release No. 50603 (Oct. 28, 2004), 69 FR 64614,
64618–19 (Nov. 5, 2004) (SR–NYSE–2004–22) (the
‘‘First Gold Approval Order’’); iShares COMEX
Gold Trust, Exchange Act Release No. 51058 (Jan.
19, 2005), 70 FR 3749, 3751, 3754–55 (Jan. 26, 2005)
(SR–Amex–2004–38); iShares Silver Trust,
Exchange Act Release No. 53521 (Mar. 20, 2006), 71
FR 14967, 14968, 14973–74 (Mar. 24, 2006) (SR–
Amex-2005–072); ETFS Gold Trust, Exchange Act
Release No. 59895 (May 8, 2009), 74 FR 22993,
22994–95, 22998, 23000 (May 15, 2009) (SR–
NYSEArca–2009–40); ETFS Silver Trust, Exchange
Act Release No. 59781 (Apr. 17, 2009), 74 FR 18771,
18772, 18775–77 (Apr. 24, 2009) (SR–NYSEArca–
2009–28); ETFS Palladium Trust, Exchange Act
Release No. 61220 (Dec. 22, 2009), 74 FR 68895,
68896 (Dec. 29, 2009) (SR–NYSEArca–2009–94)
(notice of proposed rule change included NYSE
Arca’s representation that ‘‘[t]he most significant
palladium futures exchanges are the NYMEX and
the Tokyo Commodity Exchange,’’ that ‘‘NYMEX is
the largest exchange in the world for trading
precious metals futures and options,’’ and that
NYSE Arca ‘‘may obtain trading information via the
Intermarket Surveillance Group,’’ of which NYMEX
is a member, Exchange Act Release No. 60971 (Nov.
9, 2009), 74 FR 59283, 59285–86, 59291 (Nov. 17,
2009)); ETFS Platinum Trust, Exchange Act Release
No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887–88
(Dec. 29, 2009) (SR–NYSEArca–2009–95) (notice of
proposed rule change included NYSE Arca’s
representation that ‘‘[t]he most significant platinum
futures exchanges are the NYMEX and the Tokyo
Commodity Exchange,’’ that ‘‘NYMEX is the largest
PO 00000
7 See
8 See
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exchange in the world for trading precious metals
futures and options,’’ and that NYSE Arca ‘‘may
obtain trading information via the Intermarket
Surveillance Group,’’ of which NYMEX is a
member, Exchange Act Release No. 60970 (Nov. 9,
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009));
Sprott Physical Gold Trust, Exchange Act Release
No. 61496 (Feb. 4, 2010), 75 FR 6758, 6760 (Feb.
10, 2010) (SR–NYSEArca–2009–113) (notice of
proposed rule change included NYSE Arca’s
representation that the COMEX is one of the ‘‘major
world gold markets,’’ that NYSE Arca ‘‘may obtain
trading information via the Intermarket
Surveillance Group,’’ and that NYMEX, of which
COMEX is a division, is a member of the
Intermarket Surveillance Group, Exchange Act
Release No. 61236 (Dec. 23, 2009), 75 FR 170, 171,
174 (Jan. 4, 2010)); Sprott Physical Silver Trust,
Exchange Act Release No. 63043 (Oct. 5, 2010), 75
FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR–
NYSEArca–2010–84); ETFS Precious Metals Basket
Trust, Exchange Act Release No. 62692 (Aug. 11,
2010), 75 FR 50789, 50790 (Aug. 17, 2010) (SR–
NYSEArca–2010–56) (notice of proposed rule
change included NYSE Arca’s representation that
‘‘the most significant gold, silver, platinum and
palladium futures exchanges are the COMEX and
the TOCOM’’ and that NYSE Arca ‘‘may obtain
trading information via the Intermarket
Surveillance Group,’’ of which COMEX is a
member, Exchange Act Release No. 62402 (Jun. 29,
2010), 75 FR 39292, 39295, 39298 (July 8, 2010));
ETFS White Metals Basket Trust, Exchange Act
Release No. 62875 (Sept. 9, 2010), 75 FR 56156,
56158 (Sept. 15, 2010) (SR–NYSEArca–2010–71)
(notice of proposed rule change included NYSE
Arca’s representation that ‘‘the most significant
silver, platinum and palladium futures exchanges
are the COMEX and the TOCOM’’ and that NYSE
Arca ‘‘may obtain trading information via the
Intermarket Surveillance Group,’’ of which COMEX
is a member, Exchange Act Release No. 62620 (July
30, 2010), 75 FR 47655, 47657, 47660 (Aug. 6,
2010)); ETFS Asian Gold Trust, Exchange Act
Release No. 63464 (Dec. 8, 2010), 75 FR 77926,
77928 (Dec. 14, 2010) (SR–NYSEArca–2010–95)
(notice of proposed rule change included NYSE
Arca’s representation that ‘‘the most significant gold
futures exchanges are the COMEX and the Tokyo
Commodity Exchange,’’ that ‘‘COMEX is the largest
exchange in the world for trading precious metals
futures and options,’’ and that NYSE Arca ‘‘may
obtain trading information via the Intermarket
Surveillance Group,’’ of which COMEX is a
member, Exchange Act Release No. 63267 (Nov. 8,
2010), 75 FR 69494, 69496, 69500–01 (Nov. 12,
2010)); Sprott Physical Platinum and Palladium
Trust, Exchange Act Release No. 68430 (Dec. 13,
2012), 77 FR 75239, 75240–41 (Dec. 19, 2012) (SR–
NYSEArca–2012–111) (notice of proposed rule
change included NYSE Arca’s representation that
‘‘[f]utures on platinum and palladium are traded on
two major exchanges: The New York Mercantile
Exchange . . . and Tokyo Commodities Exchange’’
and that NYSE Arca ‘‘may obtain trading
information via the Intermarket Surveillance
Group,’’ of which COMEX is a member, Exchange
Act Release No. 68101 (Oct. 24, 2012), 77 FR 65732,
65733, 65739 (Oct. 30, 2012)); APMEX Physical—
1 oz. Gold Redeemable Trust, Exchange Act Release
No. 66930 (May 7, 2012), 77 FR 27817, 27818 (May
11, 2012) (SR–NYSEArca–2012–18) (notice of
proposed rule change included NYSE Arca’s
representation that NYSE Arca ‘‘may obtain trading
information via the Intermarket Surveillance
Group,’’ of which COMEX is a member, and that
gold futures are traded on COMEX and the Tokyo
Commodity Exchange, with a cross-reference to the
proposed rule change to list and trade shares of the
ETFS Gold Trust, in which NYSE Arca represented
that COMEX is one of the ‘‘major world gold
markets,’’ Exchange Act Release No. 66627 (Mar.
20, 2012), 77 FR 17539, 17542–43, 17547 (Mar. 26,
2012)); JPM XF Physical Copper Trust, Exchange
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Further to this point, the Commission’s
prior orders have noted that the spot
commodities and currency markets for
which it has previously approved spot
ETPs are generally unregulated and that
the Commission relied on the
underlying futures market as the
regulated market of significant size that
formed the basis for approving the series
of Currency and Commodity-Based
Trust Shares, including gold, silver,
platinum, palladium, copper, and other
commodities and currencies. The
Commission specifically noted in the
Winklevoss Order that the First Gold
Approval Order ‘‘was based on an
assumption that the currency market
and the spot gold market were largely
unregulated.’’ 11
As such, the regulated market of
significant size test does not require that
the spot bitcoin market be regulated in
order for the Commission to approve
this proposal, and precedent makes
clear that an underlying market for a
spot commodity or currency being a
regulated market would actually be an
exception to the norm. These largely
unregulated currency and commodity
markets do not provide the same
protections as the markets that are
subject to the Commission’s oversight,
but the Commission has consistently
looked to surveillance sharing
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468,
75469–70, 75472, 75485–86 (Dec. 20, 2012) (SR–
NYSEArca–2012–28); iShares Copper Trust,
Exchange Act Release No. 68973 (Feb. 22, 2013), 78
FR 13726, 13727, 13729–30, 13739–40 (Feb. 28,
2013) (SR–NYSEArca–2012–66); First Trust Gold
Trust, Exchange Act Release No. 70195 (Aug. 14,
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR–
NYSEArca–2013–61) (notice of proposed rule
change included NYSE Arca’s representation that
FINRA, on behalf of the exchange, may obtain
trading information regarding gold futures and
options on gold futures from members of the
Intermarket Surveillance Group, including COMEX,
or from markets ‘‘with which [NYSE Arca] has in
place a comprehensive surveillance sharing
agreement,’’ and that gold futures are traded on
COMEX and the Tokyo Commodity Exchange, with
a cross-reference to the proposed rule change to list
and trade shares of the ETFS Gold Trust, in which
NYSE Arca represented that COMEX is one of the
‘‘major world gold markets,’’ Exchange Act Release
No. 69847 (June 25, 2013), 78 FR 39399, 39400,
39405 (July 1, 2013)); Merk Gold Trust, Exchange
Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786,
4786–87 (Jan. 29, 2014) (SR–NYSEArca–2013–137)
(notice of proposed rule change included NYSE
Arca’s representation that ‘‘COMEX is the largest
gold futures and options exchange’’ and that NYSE
Arca ‘‘may obtain trading information via the
Intermarket Surveillance Group,’’ including with
respect to transactions occurring on COMEX
pursuant to CME and NYMEX’s membership, or
from exchanges ‘‘with which [NYSE Arca] has in
place a comprehensive surveillance sharing
agreement,’’ Exchange Act Release No. 71038 (Dec.
11, 2013), 78 FR 76367, 76369, 76374 (Dec. 17,
2013)); Long Dollar Gold Trust, Exchange Act
Release No. 79518 (Dec. 9, 2016), 81 FR 90876,
90881, 90886, 90888 (Dec. 15, 2016) (SR–
NYSEArca–2016–84).
11 See Winklevoss Order at 37592.
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agreements with the underlying futures
market in order to determine whether
such products were consistent with the
Act. With this in mind, the CME Bitcoin
Futures market is the proper market to
consider in determining whether there
is a related regulated market of
significant size.
Further to this point, the Exchange
notes that the Commission has approved
proposals related to the listing and
trading of funds that would primarily
hold CME Bitcoin Futures that are
registered under the Securities Act of
1933.12 In the Teucrium Approval, the
Commission found the CME Bitcoin
Futures market to be a regulated market
of significant size as it relates to CME
Bitcoin Futures, an odd tautological
truth that is also inconsistent with prior
disapproval orders for ETPs that would
hold actual bitcoin instead of
derivatives contracts (‘‘Spot Bitcoin
ETPs’’) that use the exact same pricing
methodology as the CME Bitcoin
Futures. As further discussed below,
both the Exchange and the Sponsor
believe that this proposal and the
included analysis are sufficient to
establish that the CME Bitcoin Futures
market represents a regulated market of
significant size as it relates both to the
CME Bitcoin Futures market and to the
spot bitcoin market and that this
proposal should be approved.
Finally, as discussed in greater detail
below, by using professional custodians
and other service providers, the Trust
provides investors interested in
exposure to bitcoin with important
protections that are not always available
to investors that invest directly in
bitcoin, including protection against
insolvency of non-qualified custodians,
cyber-attacks, and other risks. If U.S.
investors had access to vehicles such as
the Trust for their bitcoin investments,
instead of directing their bitcoin
investments into loosely regulated
offshore platforms (such as loosely
regulated centralized exchanges that
have since faced bankruptcy
proceedings or other insolvencies), then
countless investors could have
protected their principal investments in
bitcoin and thus benefited.
Background
Bitcoin is a digital asset based on the
decentralized, open-source protocol of
the peer-to-peer computer network
launched in 2009 that governs the
creation, movement, and ownership of
bitcoin and hosts the public ledger, or
12 See Exchange Act Release No. 94620 (April 6,
2022), 87 FR 21676 (April 12, 2022) (the ‘‘Teucrium
Approval’’) and 94853 (May 5, 2022) (collectively,
with the Teucrium Approval, the ‘‘Bitcoin Futures
Approvals’’).
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46251
‘‘blockchain,’’ on which all bitcoin
transactions are recorded (the ‘‘Bitcoin
Network’’ or ‘‘Bitcoin’’). The
decentralized nature of the Bitcoin
Network allows parties to transact
directly with one another based on
cryptographic proof instead of relying
on a trusted third party. The protocol
also lays out the rate of issuance of new
bitcoin within the Bitcoin Network, a
rate that is reduced by half
approximately every four years with an
eventual hard cap of 21 million. It’s
generally understood that the
combination of these two features—a
systemic hard cap of 21 million bitcoin
and the ability to transact trustlessly
with anyone connected to the Bitcoin
Network—gives bitcoin its value.
The first rule filing proposing to list
an exchange-traded product to provide
exposure to bitcoin in the U.S. was
submitted by the Exchange on June 30,
2016.13 At that time, blockchain
technology, and digital assets that
utilized it, were relatively new to the
broader public. The market cap of all
bitcoin in existence at that time was
approximately $10 billion. No registered
offering of digital asset securities or
shares in an investment vehicle with
exposure to bitcoin or any other
cryptocurrency had yet been conducted,
and the regulated infrastructure for
conducting a digital asset securities
offering had not begun to develop.14
Similarly, regulated U.S. bitcoin futures
contracts did not exist. The CFTC had
determined that bitcoin is a
commodity,15 but had not engaged in
significant enforcement actions in the
space. The New York Department of
Financial Services (‘‘NYDFS’’) adopted
its final BitLicense regulatory
framework in 2015, but had only
approved four entities to engage in
activities relating to virtual currencies
(whether through granting a BitLicense
or a limited-purpose trust charter) as of
13 See
Winklevoss Order.
assets that are securities under U.S. law
are referred to throughout this proposal as ‘‘digital
asset securities.’’ All other digital assets, including
bitcoin, are referred to interchangeably as
‘‘cryptocurrencies’’ or ‘‘virtual currencies.’’ The
term ‘‘digital assets’’ refers to all digital assets,
including both digital asset securities and
cryptocurrencies, together.
15 See ‘‘In the Matter of Coinflip, Inc.’’
(‘‘Coinflip’’) (CFTC Docket 15–29 (September 17,
2015)) (order instituting proceedings pursuant to
Sections 6(c) and 6(d) of the CEA, making findings
and imposing remedial sanctions), in which the
CFTC stated: ‘‘Section 1a(9) of the CEA defines
‘commodity’ to include, among other things, ‘all
services, rights, and interests in which contracts for
future delivery are presently or in the future dealt
in.’ 7 U.S.C. 1a(9). The definition of a ‘commodity’
is broad. See, e.g., Board of Trade of City of Chicago
v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin
and other virtual currencies are encompassed in the
definition and properly defined as commodities.’’
14 Digital
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ddrumheller on DSK120RN23PROD with NOTICES1
June 30, 2016.16 While the first over-thecounter bitcoin fund launched in 2013,
public trading was limited and the fund
had only $60 million in assets.17 There
were very few, if any, traditional
financial institutions engaged in the
space, whether through investment or
providing services to digital asset
companies. In January 2018, the Staff of
the Commission noted in a letter to the
Investment Company Institute and
SIFMA that it was not aware, at that
time, of a single custodian providing
fund custodial services for digital
assets.18
Fast forward to today and the digital
assets financial ecosystem, including
bitcoin, has progressed significantly.
The development of a regulated market
for digital asset securities has
significantly evolved, with market
participants having conducted
registered public offerings of both
digital asset securities 19 and shares in
investment vehicles holding bitcoin
futures, including Bitcoin Futures ETFs
(as defined below). Additionally,
licensed and regulated service providers
have emerged to provide fund custodial
services for digital assets, among other
services. For example, in May 2021, the
Staff of the Commission released a
statement permitting open-end mutual
funds to invest in cash-settled bitcoin
futures; in December 2020, the
Commission adopted a conditional noaction position permitting certain
special purpose broker-dealers to
custody digital asset securities under
Rule 15c3–3 under the Exchange Act
(the ‘‘Custody Statement’’); 20 in
September 2020, the Staff of the
Commission released a no-action letter
permitting certain broker-dealers to
16 A list of virtual currency businesses that are
entities regulated by the NYDFS is available on the
NYDFS website. See https://www.dfs.ny.gov/apps_
and_licensing/virtual_currency_businesses/
regulated_entities.
17 Data as of March 31, 2016 according to publicly
available filings. See Bitcoin Investment Trust Form
S–1, dated May 27, 2016, available: https://
www.sec.gov/Archives/edgar/data/1588489/
000095012316017801/filename1.htm.
18 See letter from Dalia Blass, Director, Division
of Investment Management, U.S. Securities and
Exchange Commission to Paul Schott Stevens,
President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management
Group—Head, Securities Industry and Financial
Markets Association (January 18, 2018), available at
https://www.sec.gov/divisions/investment/
noaction/2018/cryptocurrency-011818.htm.
19 See Prospectus supplement filed pursuant to
Rule 424(b)(1) for INX Tokens (Registration No.
333–233363), available at: https://www.sec.gov/
Archives/edgar/data/1725882/
000121390020023202/ea125858-424b1_
inxlimited.htm.
20 See Securities Exchange Act Release No. 90788,
86 FR 11627 (February 26, 2021) (File Number S7–
25–20) (Custody of Digital Asset Securities by
Special Purpose Broker-Dealers).
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operate a non-custodial Alternative
Trading System (‘‘ATS’’) for digital asset
securities, subject to specified
conditions; 21 in October 2019, the Staff
of the Commission granted temporary
relief from the clearing agency
registration requirement to an entity
seeking to establish a securities
clearance and settlement system based
on distributed ledger technology,22 and
multiple transfer agents who provide
services for digital asset securities
registered with the Commission.23
Outside the Commission’s purview,
the regulatory landscape has changed
significantly since 2016, and
cryptocurrency markets have grown and
evolved as well. The market for bitcoin
is approximately 100 times larger,
having at one point reached a market
cap of over $1 trillion.24 According to
the CME Bitcoin Futures Report, from
February 13, 2023 through March 27,
2023, CFTC regulated bitcoin futures
represented between $750 million and
$3.2 billion in notional trading volume
on Chicago Mercantile Exchange
(‘‘CME’’) (‘‘Bitcoin Futures’’) on a daily
basis and notional volume was never
below $670 million.25 Open interest was
over $1.4 billion for the entirety of the
period and at one point was over $2
billion. ETPs that primarily hold CME
Bitcoin Futures have raised over $1
billion dollars in assets. The CFTC has
exercised its regulatory jurisdiction in
bringing a number of enforcement
actions related to bitcoin and against
trading platforms that offer
cryptocurrency trading.26 As of
21 See letter from Elizabeth Baird, Deputy
Director, Division of Trading and Markets, U.S.
Securities and Exchange Commission to Kris
Dailey, Vice President, Risk Oversight &
Operational Regulation, Financial Industry
Regulatory Authority (September 25, 2020),
available at: https://www.sec.gov/divisions/
marketreg/mr-noaction/2020/finra-ats-role-insettlement-of-digital-asset-security-trades09252020.pdf.
22 See letter from Jeffrey S. Mooney, Associate
Director, Division of Trading and Markets, U.S.
Securities and Exchange Commission to Charles G.
Cascarilla & Daniel M. Burstein, Paxos Trust
Company, LLC (October 28, 2019), available at:
https://www.sec.gov/divisions/marketreg/mrnoaction/2019/paxos-trust-company-10281917a.pdf.
23 See, e.g., Form TA–1/A filed by Tokensoft
Transfer Agent LLC (CIK: 0001794142) on January
8, 2021, available at: https://www.sec.gov/Archives/
edgar/data/1794142/000179414219000001/
xslFTA1X01/primary_doc.xml.
24 As of December 1, 2021, the total market cap
of all bitcoin in circulation was approximately
$1.08 trillion.
25 Data sourced from the CME Bitcoin Futures
Report: 19 Nov 2021, available at: https://
www.cmegroup.com/ftp/bitcoinfutures/Bitcoin_
Futures_Liquidity_Report.pdf.
26 The CFTC’s annual report for Fiscal Year 2020
(which ended on September 30, 2020) noted that
the CFTC ‘‘continued to aggressively prosecute
misconduct involving digital assets that fit within
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February 14, 2023 the NYDFS has
granted no fewer than thirty-four
BitLicenses,27 including to established
public payment companies like PayPal
Holdings, Inc. and Square, Inc., and
limited purpose trust charters to entities
providing cryptocurrency custody
services. In addition, the Treasury’s
Office of Foreign Assets Control
(‘‘OFAC’’) has brought enforcement
actions over apparent violations of the
sanctions laws in connection with the
provision of wallet management
services for digital assets.28
In addition to the regulatory
developments laid out above, more
traditional financial market participants
have become more active in
cryptocurrency: large insurance
companies, asset managers, university
endowments, pension funds, and even
historically bitcoin skeptical fund
managers 29 have allocated to bitcoin. In
June 2022, PwC estimated that the
number of crypto-specialist hedge funds
was more than 300 globally, with $4.1
billion in assets under management. In
addition, in a survey PwC found that 38
percent of surveyed traditional hedge
funds were currently investing in
‘digital assets,’ compared to 21 percent
the year prior.’’ 30 The largest over-thethe CEA’s definition of commodity’’ and ‘‘brought
a record setting seven cases involving digital
assets.’’ See CFTC FY2020 Division of Enforcement
Annual Report, available at: https://www.cftc.gov/
media/5321/DOE_FY2020_AnnualReport_120120/
download. Additionally, the CFTC filed on October
1, 2020, a civil enforcement action against the
owner/operators of the BitMEX trading platform,
which was one of the largest bitcoin derivative
exchanges. See CFTC Release No. 8270–20 (October
1, 2020) available at: https://www.cftc.gov/
PressRoom/PressReleases/8270-20.
27 See https://www.dfs.ny.gov/virtual_currency_
businesses.
28 See U.S. Department of the Treasury
Enforcement Release: ‘‘OFAC Enters Into $98,830
Settlement with BitGo, Inc. for Apparent Violations
of Multiple Sanctions Programs Related to Digital
Currency Transactions’’ (December 30, 2020)
available at: https://home.treasury.gov/system/files/
126/20201230_bitgo.pdf. See also U.S. Department
of the Treasury Enforcement Release: ‘‘Treasury
Announces Two Enforcement Actions for over
$24M and $29M Against Virtual Currency
Exchange, Bittrex, Inc.’’ (October 11, 2022)
available at: https://home.treasury.gov/news/pressreleases/jy1006. See also U.S. Department of
Treasure Enforcement Release ‘‘OFAC Settles with
Virtual Currency Exchange Kraken for $362,158.70
Related to Apparent Violations of the Iranian
Transactions and Sanctions Regulations’’
(November 28, 2022) available at: https://
home.treasury.gov/system/files/126/20221128_
kraken.pdf.
29 See e.g., ‘‘Bridgewater: Our Thoughts on
Bitcoin’’ (January 28, 2021) available at: https://
www.bridgewater.com/research-and-insights/ourthoughts-on-bitcoin and ‘‘Paul Tudor Jones says he
likes bitcoin even more now, rally still in the ‘first
inning’’’ (October 22, 2020) available at: https://
www.cnbc.com/2020/10/22/-paul-tudor-jones-sayshe-likes-bitcoin-even-more-now-rally-still-in-thefirst-inning.html.
30 See the FSOC ‘‘Report on Digital Asset
Financial Stability Risks and Regulation 2022’’
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ddrumheller on DSK120RN23PROD with NOTICES1
counter bitcoin fund previously filed a
Form 10 registration statement, which
the Staff of the Commission reviewed
and which took effect automatically,
and is now a reporting company.31
Established companies like Tesla, Inc.,
MicroStrategy Incorporated, and Square,
Inc., among others, have made
substantial investments in bitcoin. The
foregoing examples demonstrate that
bitcoin has gained mainstream usage
and recognition.
Despite these developments, access
for U.S. retail investors to gain exposure
to bitcoin via a transparent and U.S.
regulated, U.S. exchange-traded vehicle
remains limited. Instead current options
include: (i) facing the counter-party risk,
legal uncertainty, technical risk, and
complexity associated with accessing
spot bitcoin; (ii) over-the-counter
bitcoin funds (‘‘OTC Bitcoin Funds’’)
with high management fees and
potentially volatile premiums and
discounts; 32 (iii) purchasing shares of
operating companies that they believe
will provide proxy exposure to bitcoin
with limited disclosure about the
associated risks; 33 or (iv) purchasing
(October 3, 2022) (at footnote 26) at https://
home.treasury.gov/system/files/261/FSOC-DigitalAssets-Report-2022.pdf.
31 See Letter from Division of Corporation
Finance, Office of Real Estate & Construction to
Barry E. Silbert, Chief Executive Officer, Grayscale
Bitcoin Trust (January 31, 2020) https://
www.sec.gov/Archives/edgar/data/1588489/
000000000020000953/filename1.pdf.
32 The largest OTC Bitcoin Fund has an AUM of
$23 billion. The premium and discount for OTC
Bitcoin Funds is known to move rapidly. For
example, over the period of 12/21/20 to 1/21/20, the
premium for the largest OTC Bitcoin Fund went
from 40.18% to 2.79%. While the price of bitcoin
appreciated significantly during this period and
NAV per share increased by 41.25%, the price per
share increased by only 3.58%. This means that
investors are buying shares of a fund that
experiences significant volatility in its premium
and discount outside of the fluctuations in price of
the underlying asset. Even operating within the
normal premium and discount range, it’s possible
for an investor to buy shares of an OTC Bitcoin
Fund only to have those shares quickly lose 10%
or more in dollar value excluding any movement of
the price of bitcoin. That is to say—the price of
bitcoin could have stayed exactly the same from
market close on one day to market open the next,
yet the value of the shares held by the investor
decreased only because of the fluctuation of the
premium. As more investment vehicles, including
mutual funds and ETFs, seek to gain exposure to
bitcoin, the easiest option for a buy and hold
strategy for such vehicles is often an OTC Bitcoin
Fund, meaning that even investors that do not
directly buy OTC Bitcoin Funds can be
disadvantaged by extreme premiums (or discounts)
and premium volatility.
33 A number of operating companies engaged in
unrelated businesses—such as Tesla (a car
manufacturer) and MicroStrategy (an enterprise
software company)—have announced investments
as large as $5.3 billion in bitcoin. Without access
to bitcoin exchange-traded products, retail investors
seeking investment exposure to bitcoin may end up
purchasing shares in these companies in order to
gain the exposure to bitcoin that they seek. In fact,
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Bitcoin Futures ETFs, as defined below,
which represent a sub-optimal structure
for long-term investors that will cost
them significant amounts of money
every year compared to Spot Bitcoin
ETPs, as further discussed below.
Meanwhile, investors in many other
countries, including Canada and Brazil,
are able to use more traditional
exchange listed and traded products
(including exchange-traded funds
holding physical bitcoin) to gain
exposure to bitcoin. Similarly, investors
in Switzerland and across Europe have
access to Exchange Traded Products
which trade on regulated exchanges and
provide exposure to a broad array of
spot crypto assets. U.S. investors, by
contrast, are left with fewer and more
risky means of getting bitcoin exposure,
as described above.34
To this point, the lack of a Spot
Bitcoin ETP exposes U.S. investor assets
to significant risk because investors that
would otherwise seek crypto asset
exposure through a Spot Bitcoin ETP are
forced to find alternative exposure
through generally riskier means. For
instance, many U.S. investors that held
their digital assets in accounts at FTX,35
Celsius Network LLC,36 BlockFi Inc.37
mainstream financial news networks have written
a number of articles providing investors with
guidance for obtaining bitcoin exposure through
publicly traded companies (such as MicroStrategy,
Tesla, and bitcoin mining companies, among
others) instead of dealing with the complications
associated with buying spot bitcoin in the absence
of a bitcoin ETP. See e.g., ‘‘7 public companies with
exposure to bitcoin’’ (February 8, 2021) available at:
https://finance.yahoo.com/news/7-publiccompanies-with-exposure-to-bitcoin154201525.html; and ‘‘Want to get in the crypto
trade without holding bitcoin yourself? Here are
some investing ideas’’ (February 19, 2021) available
at: https://www.cnbc.com/2021/02/19/ways-toinvest-in-bitcoin-without-holding-thecryptocurrency-yourself-.html. Such operating
companies, however, are imperfect bitcoin proxies
and provide investors with partial bitcoin exposure
paired with a host of additional risks associated
with whichever operating company they decide to
purchase. Additionally, the disclosures provided by
such operating companies with respect to risks
relating to their bitcoin holdings are generally
substantially smaller than the registration statement
of a bitcoin ETP, including the Registration
Statement, typically amounting to a few sentences
of narrative description and a handful of risk
factors. In other words, investors seeking bitcoin
exposure through publicly traded companies are
gaining only partial exposure to bitcoin and are not
fully benefitting from the risk disclosures and
associated investor protections that come from the
securities registration process.
34 The Exchange notes that the list of countries
above is not exhaustive and that securities
regulators in a number of additional countries have
either approved or otherwise allowed the listing
and trading of Spot Bitcoin ETPs.
35 See FTX Trading Ltd., et al., Case No. 22–
11068.
36 See Celsius Network LLC, et al., Case No. 22–
10964.
37 See BlockFi Inc., Case No. 22–19361.
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46253
and Voyager Digital Holdings, Inc.38
have become unsecured creditors in the
insolvencies of those entities. If a Spot
Bitcoin ETP was available, it is likely
that at least a portion of the billions of
dollars tied up in those proceedings
would still reside in the brokerage
accounts of U.S. investors, having
instead been invested in a transparent,
regulated, and well-understood
structure—a Spot Bitcoin ETP. To this
point, approval of a Spot Bitcoin ETP
would represent a major win for the
protection of U.S. investors in the
cryptoasset space. As further described
below, the Trust, like all other series of
Commodity-Based Trust Shares, is
designed to protect investors against the
risk of losses through fraud and
insolvency that arise by holding digital
assets, including bitcoin, on centralized
platforms.
Additionally, investors in other
countries, specifically Canada, generally
pay lower fees than U.S. retail investors
that invest in OTC Bitcoin Funds due to
the fee pressure that results from
increased competition among available
bitcoin investment options. Without an
approved and regulated Spot Bitcoin
ETP in the U.S. as a viable alternative,
U.S. investors could seek to purchase
shares of non-U.S. bitcoin vehicles in
order to get access to bitcoin exposure.
Given the separate regulatory regime
and the potential difficulties associated
with any international litigation, such
an arrangement would create more risk
exposure for U.S. investors than they
would otherwise have with a U.S.
exchange listed ETP. Further to this
point, the lack of a U.S.-listed Spot
Bitcoin ETP is not preventing U.S. funds
from gaining exposure to bitcoin—
several U.S. exchange-traded funds are
using Canadian bitcoin ETPs to gain
exposure to spot bitcoin. In addition to
the benefits to U.S. investors articulated
throughout this proposal, approving this
proposal (and others like it) would
provide U.S. exchange-traded funds and
mutual funds with a U.S.-listed and
regulated product to provide such
access rather than relying on either
flawed products or products listed and
primarily regulated in other countries.
Bitcoin Futures ETFs
The Exchange and Sponsor applaud
the Commission for allowing the launch
of ETFs registered under the 1940 Act
and the Bitcoin Futures Approvals that
provide exposure to bitcoin primarily
through CME Bitcoin Futures (‘‘Bitcoin
Futures ETFs’’). Allowing such products
to list and trade is a productive first step
38 See Voyager Digital Holdings, Inc., et al., Case
No. 22–10943.
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
in providing U.S. investors and traders
with transparent, exchange-listed tools
for expressing a view on bitcoin. The
Bitcoin Futures Approvals, however,
have created a logical inconsistency in
the application of the standard the
Commission applies when considering
bitcoin ETP proposals.
As discussed further below, the
standard applicable to bitcoin ETPs is
whether the listing exchange has in
place a comprehensive surveillance
sharing agreement with a regulated
market of significant size in the
underlying asset. Previous disapproval
orders have made clear that a market
that constitutes a regulated market of
significant size is generally a futures
and/or options market based on the
underlying reference asset rather than
the spot commodity markets, which are
often unregulated.39 Leaving aside the
analysis of that standard until later in
this proposal,40 the Exchange believes
that the following rationale the
Commission applied to a Bitcoin
Futures ETF should result in the
Commission approving this and other
Spot Bitcoin ETP proposals:
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The CME ‘‘comprehensively surveils
futures market conditions and price
movements on a real-time and ongoing basis
in order to detect and prevent price
distortions, including price distortions
caused by manipulative efforts.’’ Thus, the
CME’s surveillance can reasonably be relied
upon to capture the effects on the CME
bitcoin futures market caused by a person
attempting to manipulate the proposed
futures ETP by manipulating the price of
CME bitcoin futures contracts, whether that
attempt is made by directly trading on the
CME bitcoin futures market or indirectly by
trading outside of the CME bitcoin futures
market. As such, when the CME shares its
39 See Winklevoss Order at 37593, specifically
footnote 202, which includes the language from
numerous approval orders for which the underlying
futures markets formed the basis for approving
series of ETPs that hold physical metals, including
gold, silver, palladium, platinum, and precious
metals more broadly; and 37600, specifically where
the Commission provides that ‘‘when the spot
market is unregulated—the requirement of
preventing fraudulent and manipulative acts may
possibly be satisfied by showing that the ETP listing
market has entered into a surveillance-sharing
agreement with a regulated market of significant
size in derivatives related to the underlying asset.’’
As noted above, the Exchange believes that these
citations are particularly helpful in making clear
that the spot market for a spot commodity ETP need
not be ‘‘regulated’’ in order for a spot commodity
ETP to be approved by the Commission, and in fact
that it’s been the common historical practice of the
Commission to rely on such derivatives markets as
the regulated market of significant size because
such spot commodities markets are largely
unregulated.
40 As further outlined below, both the Exchange
and the Sponsor believe that the Bitcoin Futures
market represents a regulated market of significant
size and that this proposal and others like it should
be approved on this basis.
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surveillance information with Arca, the
information would assist in detecting and
deterring fraudulent or manipulative
misconduct related to the non-cash assets
held by the proposed ETP.41
CME Bitcoin Futures pricing is based
on pricing from spot bitcoin markets.
The statement from the Teucrium
Approval that ‘‘CME’s surveillance can
reasonably be relied upon to capture the
effects on the CME bitcoin futures
market caused by a person attempting to
manipulate the proposed futures ETP by
manipulating the price of CME bitcoin
futures contracts . . . indirectly by
trading outside of the CME bitcoin
futures market,’’ makes clear that the
Commission believes that CME’s
surveillance can capture the effects of
trading on the relevant spot markets on
the pricing of Bitcoin Futures. If CME is
able to detect such attempts at
manipulation in the complex and
interconnected spot bitcoin market, how
would such an ability to detect
attempted manipulation and the utility
in sharing that information with the
listing exchange apply only to Bitcoin
Futures ETFs and not Spot Bitcoin
ETPs? Stated a different way, given that
there is significant trading volume on
numerous bitcoin exchanges that are not
part of the CME CF Bitcoin Reference
Rate and that arbitrage opportunities
across bitcoin exchanges means that
such trading volume will influence spot
bitcoin prices across the market and,
despite this, the Commission still
believes that CME can detect attempted
manipulation of the Bitcoin Futures
through ‘‘trading outside of the CME
bitcoin futures market,’’ it is clear that
such ability would apply equally to both
Bitcoin Futures ETFs and Spot Bitcoin
ETPs. To take it a step further, such an
ability would also seem to be a strong
indication that the CME Bitcoin Futures
market represents a regulated market of
significant size. The Exchange agrees
with the Commission on this point and
notes that the pricing mechanism
applicable to the Shares is similar to
that of the CME CF Bitcoin Futures.
Further to this point, a Bitcoin
Futures ETF is potentially more
susceptible to potential manipulation
than a Spot Bitcoin ETP that offers only
in-kind creation and redemption
because settlement of CME Bitcoin
Futures pricing (and thus the value of
the underlying holdings of a Bitcoin
Futures ETF) occurs at a single price
derived from spot bitcoin pricing, while
shares of a Spot Bitcoin ETP would
represent interest in bitcoin directly and
authorized participants for a Spot
Bitcoin ETP (as proposed herein) would
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41 See
Teucrium Approval at 21679.
Frm 00128
Fmt 4703
Sfmt 4703
be able to source bitcoin from any
exchange and create or redeem with the
applicable trust regardless of the price
of the underlying index. It is not
logically possible to conclude that the
CME Bitcoin Futures market represents
a significant market for a futures-based
product, but also conclude that the CMR
Bitcoin Futures market does not
represent a significant market for a spotbased product.
In addition to potentially being more
susceptible to manipulation than a Spot
Bitcoin ETP, the structure of Bitcoin
Futures ETFs provides negative
outcomes for buy and hold investors as
compared to a Spot Bitcoin ETP.42
Specifically, the cost of rolling CME
Bitcoin Futures contracts will cause the
Bitcoin Futures ETFs to lag the
performance of bitcoin itself and, at over
a billion dollars in assets under
management, would cost U.S. investors
significant amounts of money on an
annual basis compared to Spot Bitcoin
ETPs. Such rolling costs would not be
required for Spot Bitcoin ETPs that hold
bitcoin. Further, Bitcoin Futures ETFs
could potentially hit CME position
limits, which would force a Bitcoin
Futures ETF to invest in non-futures
assets for bitcoin exposure and cause
potential investor confusion and lack of
certainty about what such Bitcoin
Futures ETFs are actually holding to try
to get exposure to bitcoin, not to
mention completely changing the risk
profile associated with such an ETF.
While Bitcoin Futures ETFs represent a
useful trading tool, they are clearly a
sub-optimal structure for U.S. investors
that are looking for long-term exposure
to bitcoin that will, based on the
calculations above, unnecessarily cost
U.S. investors significant amounts of
money every year compared to Spot
Bitcoin ETPs and the Exchange believes
that any proposal to list and trade a Spot
Bitcoin ETP should be reviewed by the
Commission with this important
investor protection context in mind.
Based on the foregoing, the Exchange
and Sponsor believe that any objective
review of the proposals to list Spot
Bitcoin ETPs compared to the Bitcoin
Futures ETFs and the Bitcoin Futures
Approvals would lead to the conclusion
that Spot Bitcoin ETPs should be
42 See e.g., ‘‘Bitcoin ETF’s Success Could Come at
Fundholders’ Expense,’’ Wall Street Journal
(October 24, 2021), available at: https://
www.wsj.com/articles/bitcoin-etfs-success-couldcome-at-fundholders-expense-11635080580;
‘‘Physical Bitcoin ETF Prospects Accelerate,’’
ETF.com (October 25, 2021), available at: https://
www.etf.com/sections/blog/physical-bitcoin-etfprospects-shine?nopaging=1&__cf_chl_jschl_tk__
=pmd_
JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl441635476946-0-gqNtZGzNApCjcnBszQql.
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available to U.S. investors and, as such,
this proposal and other comparable
proposals to list and trade Spot Bitcoin
ETPs should be approved by the
Commission. Stated simply, U.S.
investors will continue to lose
significant amounts of money from
holding Bitcoin Futures ETFs as
compared to Spot Bitcoin ETPs, losses
which could be prevented by the
Commission approving Spot Bitcoin
ETPs. Additionally, any concerns
related to preventing fraudulent and
manipulative acts and practices related
to Spot Bitcoin ETPs would apply
equally to the spot markets underlying
the futures contracts held by a Bitcoin
Futures ETF. While the 1940 Act does
offer certain investor protections, those
protections do not relate to mitigating
potential manipulation of the holdings
of an ETF in a way that warrants
distinction between Bitcoin Futures
ETFs and Spot Bitcoin ETPs. To be
clear, both the Exchange and Sponsor
believe that the Bitcoin Futures market
is a regulated market of significant size
and that such manipulation concerns
are mitigated as described throughout
this proposal. After issuing the Bitcoin
Futures Approvals which conclude the
CME Bitcoin Futures market is a
regulated market of significant size as it
relates to Bitcoin Futures, the only
consistent outcome would be approving
Spot Bitcoin ETPs on the basis that the
CME Bitcoin Futures market is also a
regulated market of significant size as it
relates to the bitcoin spot market. Given
the current landscape, approving this
proposal (and others like it) and
allowing Spot Bitcoin ETPs to be listed
and traded alongside Bitcoin Futures
ETFs would establish a consistent
regulatory approach, provide U.S.
investors with choice in product
structures for bitcoin exposure, and
offer flexibility in the means of gaining
exposure to bitcoin through transparent,
regulated, U.S. exchange-listed vehicles.
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Spot and Proxy Exposure to Bitcoin
Exposure to bitcoin through an ETP
also presents certain advantages for
retail investors compared to buying spot
bitcoin directly. The most notable
advantage from the Sponsor’s
perspective is the elimination of the
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need for an individual retail investor to
either manage their own private keys or
to hold bitcoin through a
cryptocurrency exchange that lacks
sufficient protections. Typically, retail
exchanges hold most, if not all, retail
investors’ bitcoin in ‘‘hot’’ (internetconnected) storage and do not make any
commitments to indemnify retail
investors or to observe any particular
cybersecurity standard. Meanwhile, a
retail investor holding spot bitcoin
directly in a self-hosted wallet may
suffer from inexperience in private key
management (e.g., insufficient password
protection, lost key, etc.), which could
cause them to lose some or all of their
bitcoin holdings. Thus, with respect to
custody of the Trust’s bitcoin assets, the
Trust presents advantages from an
investment protection standpoint for
retail investors compared to owning
spot bitcoin directly.
Finally, as described in the
Background section above, a number of
operating companies largely engaged in
unrelated businesses—such as Tesla (a
car manufacturer) and MicroStrategy (an
enterprise software company)—have
announced significant investments in
bitcoin. Without access to bitcoin
exchange-traded products, retail
investors seeking investment exposure
to bitcoin may end up purchasing shares
in these companies in order to gain the
exposure to bitcoin that they seek.43 In
fact, mainstream financial news
networks have written a number of
articles providing investors with
guidance for obtaining bitcoin exposure
through publicly traded companies
(such as MicroStrategy, Tesla, and
bitcoin mining companies, among
others) instead of dealing with the
complications associated with buying
spot bitcoin in the absence of a bitcoin
ETP.44 Such operating companies,
however, are imperfect bitcoin proxies
and provide investors with partial
CME, Yahoo Finance 4/30/23.
large open interest holder in Bitcoin Futures
is an entity that holds at least 25 contracts, which
is the equivalent of 125 bitcoin. At a price of
approximately $29,268.81 per bitcoin on 4/30/2023,
more than 100 firms had outstanding positions of
greater than $3.65 million in Bitcoin Futures.
49 See Exchange Act Releases No. 94080 (January
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bitcoin exposure paired with a host of
additional risks associated with
whichever operating company they
decide to purchase. Additionally, the
disclosures provided by the
aforementioned operating companies
with respect to risks relating to their
bitcoin holdings are generally
substantially smaller than the
registration statement of a bitcoin ETP,
including the Registration Statement,
typically amounting to a few sentences
of narrative description and a handful of
risk factors.45 In other words, investors
seeking bitcoin exposure through
publicly traded companies are gaining
only partial exposure to bitcoin and are
not fully benefitting from the risk
disclosures and associated investor
protections that come from the
securities registration process.
Bitcoin Futures
CME began offering trading in Bitcoin
Futures in 2017. Each contract
represents five bitcoin and is based on
the CME CF Bitcoin Reference Rate.46
The contracts trade and settle like other
cash-settled commodity futures
contracts. Nearly every measurable
metric related to Bitcoin Futures has
generally trended up since launch,
although certain notional volume
calculations have decreased roughly in
line with the decrease in the price of
bitcoin. For example, there were
143,215 Bitcoin Futures contracts traded
in April 2023 (approximately $20.07
billion) compared to 193,182 ($5
billion), 104,713 ($3.9 billion) 118714
($42.7b billion), and 111,964 ($23.2b
billion) contracts traded in April 2019,
April 2020, and April 2021, and April
2022, respectively.47
BILLING CODE 8011–01–P
44 See, e.g., ‘‘7 public companies with exposure to
bitcoin’’ (February 8, 2021) available at: https://
finance.yahoo.com/news/7-public-companies-withexposure-to-bitcoin-154201525.html; and ‘‘Want to
get in the crypto trade without holding bitcoin
yourself? Here are some investing ideas’’ (February
19, 2021) available at: https://www.cnbc.com/2021/
02/19/ways-to-invest-in-bitcoin-without-holdingthe-cryptocurrency-yourself-.html.
45 See, e.g., Tesla 10–K for the year ended
December 31, 2020, which mentions bitcoin just
nine times: https://www.sec.gov/ix?doc=/Archives/
edgar/data/1318605/000156459021004599/tsla10k_20201231.htm.
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The number of large open interest
holders 48 and unique accounts trading
Bitcoin Futures have both increased,
even in the face of heightened Bitcoin
price volatility.
46 The CME CF Bitcoin Reference Rate is based on
a publicly available calculation methodology based
on pricing sourced from several crypto exchanges
and trading platforms, including Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
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The Sponsor further believes that
publicly available research, including
research done as part of rule filings
proposing to list and trade shares of
Spot Bitcoin ETPs, corroborates the
overall trend outlined above and
supports the thesis that the Bitcoin
Futures pricing leads the spot market
and, thus, a person attempting to
manipulate the Shares would also have
to trade on that market to manipulate
the ETP. Specifically, the Sponsor
believes that such research indicates
that bitcoin futures lead the bitcoin spot
market in price formation.49
Section 6(b)(5) and the Applicable
Standards
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The Commission has approved
numerous series of Trust Issued
Receipts,50 including Commodity-Based
49 See Exchange Act Releases No. 94080 (January
27, 2022), 87 FR 5527 (April 12, 2022) (specifically
‘‘Amendment No. 1 to the Proposed Rule Change
To List and Trade Shares of the Wise Origin Bitcoin
Trust Under BZX Rule 14.11(3)(4), CommodityBased Trust Shares’’); 94982 (May 25, 2022), 87 FR
33250 (June 1, 2022); 94844 (May 4, 2022), 87 FR
28043 (May 10, 2022); and 93445 (October 28,
2021), 86 FR 60695 (November 3, 2021). See also
Hu, Y., Hou, Y. and Oxley, L. (2019). ‘‘What role
do futures markets play in Bitcoin pricing?
Causality, cointegration and price discovery from a
time-varying perspective’’ (available at: https://
www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/).
This academic research paper concludes that
‘‘There exist no episodes where the Bitcoin spot
markets dominates the price discovery processes
with regard to Bitcoin futures. This points to a
conclusion that the price formation originates solely
in the Bitcoin futures market. We can, therefore,
conclude that the Bitcoin futures markets dominate
the dynamic price discovery process based upon
time-varying information share measures. Overall,
price discovery seems to occur in the Bitcoin
futures markets rather than the underlying spot
market based upon a time-varying perspective.’’
50 See Exchange Rule 14.11(f).
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Trust Shares,51 to be listed on U.S.
national securities exchanges. In order
for any proposed rule change from an
exchange to be approved, the
Commission must determine that,
among other things, the proposal is
consistent with the requirements of
Section 6(b)(5) of the Act, specifically
including: (i) the requirement that a
national securities exchange’s rules are
designed to prevent fraudulent and
manipulative acts and practices; 52 and
(ii) the requirement that an exchange
51 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
52 As the Exchange has stated in a number of
other public documents, it continues to believe that
bitcoin is resistant to price manipulation and that
‘‘other means to prevent fraudulent and
manipulative acts and practices’’ exist to justify
dispensing with the requisite surveillance sharing
agreement. The geographically diverse and
continuous nature of bitcoin trading render it
difficult and prohibitively costly to manipulate the
price of bitcoin. The fragmentation across bitcoin
platforms, the relatively slow speed of transactions,
and the capital necessary to maintain a significant
presence on each trading platform make
manipulation of bitcoin prices through continuous
trading activity challenging. To the extent that there
are bitcoin exchanges engaged in or allowing wash
trading or other activity intended to manipulate the
price of bitcoin on other markets, such pricing does
not normally impact prices on other exchange
because participants will generally ignore markets
with quotes that they deem non-executable.
Moreover, the linkage between the bitcoin markets
and the presence of arbitrageurs in those markets
means that the manipulation of the price of bitcoin
price on any single venue would require
manipulation of the global bitcoin price in order to
be effective. Arbitrageurs must have funds
distributed across multiple trading platforms in
order to take advantage of temporary price
dislocations, thereby making it unlikely that there
will be strong concentration of funds on any
particular bitcoin exchange or OTC platform. As a
result, the potential for manipulation on a trading
platform would require overcoming the liquidity
supply of such arbitrageurs who are effectively
eliminating any cross-market pricing differences.
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proposal be designed, in general, to
protect investors and the public interest.
The Exchange believes that this
proposal is consistent with the
requirements of Section 6(b)(5) of the
Act and that this filing sufficiently
demonstrates that the CME Bitcoin
Futures market represents a regulated
market of significant size and that, on
the whole, the manipulation concerns
previously articulated by the
Commission are sufficiently mitigated to
the point that they are outweighed by
quantifiable investor protection issues
that would be resolved by approving
this proposal.
(i) Designed To Prevent Fraudulent and
Manipulative Acts and Practices
In order to meet this standard in a
proposal to list and trade a series of
Commodity-Based Trust Shares, the
Commission requires that an exchange
demonstrate that there is a
comprehensive surveillance-sharing
agreement in place 53 with a regulated
53 As previously articulated by the Commission,
‘‘The standard requires such surveillance-sharing
agreements since ‘‘they provide a necessary
deterrent to manipulation because they facilitate the
availability of information needed to fully
investigate a manipulation if it were to occur.’’ The
Commission has emphasized that it is essential for
an exchange listing a derivative securities product
to enter into a surveillance- sharing agreement with
markets trading underlying securities for the listing
exchange to have the ability to obtain information
necessary to detect, investigate, and deter fraud and
market manipulation, as well as violations of
exchange rules and applicable federal securities
laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides
for the sharing of information about market trading
activity, clearing activity, and customer identity;
that the parties to the agreement have reasonable
ability to obtain access to and produce requested
information; and that no existing rules, laws, or
practices would impede one party to the agreement
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market of significant size. Specifically,
the Commission has previously stated
that:
. . . when the spot market is unregulated—
the requirement of preventing fraudulent and
manipulative acts may possibly be satisfied
by showing that the ETP listing market has
entered into a surveillance-sharing agreement
with a regulated market of significant size in
derivatives related to the underlying asset.
That is because, where a market of significant
size exists with respect to derivatives on the
asset underlying the commodity-trust ETP,
the Commission believes that there is a
reasonable likelihood that a person
attempting to manipulate the ETP by
manipulating the underlying spot market
would also have to trade in the derivatives
market in order to succeed, since arbitrage
between the derivative and spot markets
would tend to counter an attempt to
manipulate the spot market alone.54
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The Commission has provided
illustrative guidance in interpreting the
terms ‘‘significant market’’ and ‘‘market
of significant size’’ to 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 a surveillance-sharing
agreement would assist the ETP listing
market in detecting and deterring
misconduct, and (b) it is unlikely that
trading in the ETP would be the
predominant influence on prices in that
market.’’ 55
The Commission has stated in a prior
disapproval order that ‘‘the lead-lag
relationship between the bitcoin futures
market and the spot market . . . is
central to understanding whether it is
reasonably likely that a would-be
manipulator of the ETP would need to
trade on the bitcoin futures market to
successfully manipulate prices on those
spot platforms that feed into the
proposed ETP’s pricing mechanism.’’ 56
The Commission further noted that ‘‘in
particular, if the spot market leads the
from obtaining this information from, or producing
it to, the other party.’’ The Commission has
historically held that joint membership in the
Intermarket Surveillance Group (‘‘ISG’’) constitutes
such a surveillance sharing agreement. See
Securities Exchange Act Release No. 88284
(February 26, 2020), 85 FR 12595 (March 3, 2020)
(SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix
Disapproval’’).
54 Self-Regulatory Organizations; Bats BZX
Exchange, Inc.; 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, 83 FR 37579, 37600 (Aug 1, 2018).
55 Id.
56 Self-Regulatory Organizations; NYSE Arca,
Inc.; Order Disapproving a Proposed Rule Change,
as Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the Bitwise Bitcoin
ETF Trust Under NYSE Arca Rule 8.201–E, 84–FR
55382, 55411 (Oct 16, 2019).
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futures market, this would indicate that
it would not be necessary to trade on the
futures market to manipulate the
proposed ETP, even if arbitrage worked
efficiently, because the futures price
would move to meet the spot price.’’ 57
The Commission has also recognized
that the ‘‘regulated market of significant
size’’ standard is not the only means for
satisfying Section 6(b)(5) of the act,
specifically providing that a listing
exchange could demonstrate that ‘‘other
means to prevent fraudulent and
manipulative acts and practices’’ are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement.58
The Exchange believes that this
proposal is consistent with the
requirements of Section 6(b)(5) of the
Act and that the Sponsor’s analysis
demonstrates that the Exchange can
meet such requirements in that the CME
Bitcoin Futures Market (i) is a regulated
market; (ii) has a comprehensive
surveillance-sharing agreement with the
Exchange; and (iii) satisfies the
Commission’s ‘‘significant market’’
definition.
1.The CME Bitcoin Futures Market Is a
Regulated Market and ISG Member
The CME is regulated by the CFTC
and is a member of the Intermarket
Surveillance Group (‘‘ISG’’), which was
established to provide a framework for
sharing information and coordinating
regulatory efforts among exchanges
trading securities and related products
and to address potential intermarket
manipulations and trading abuses. The
Commission has previously stated that
membership by a regulated futures
exchange in ISG is sufficient to meet the
surveillance-sharing requirement.59
Both the Exchange and CME are
members of the Intermarket
Surveillance Group (the ‘‘ISG’’).60
2.The CME Bitcoin Futures Market Is a
Market of Significant Size
Based on the Commission’s prior
guidance, Sponsor conducted a detailed
price discovery study through its leadlag analysis of bitcoin spot and futures
trading across markets located globally.
57 Id.
58 See Winklevoss Order at 37580. The
Commission has also specifically noted that it ‘‘is
not applying a ‘cannot be manipulated’ standard;
instead, the Commission is examining whether the
proposal meets the requirements of the Exchange
Act and, pursuant to its Rules of Practice, places the
burden on the listing exchange to demonstrate the
validity of its contentions and to establish that the
requirements of the Exchange Act have been met.’’
Id. at 37582.
59 See Winklevoss Order at 37594.
60 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
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As discussed below, Sponsor’s analysis
concludes that the CME Bitcoin Futures
market is consistently the leading
market for price discovery across USD
bitcoin markets located globally,
including bitcoin spot markets and
offshore, unregulated bitcoin futures
markets. Thus, Sponsor’s analysis
supports the conclusion that there is a
reasonable likelihood that a person
attempting to manipulate the Shares
would also have to trade on the CME
Bitcoin Futures market to manipulate
the Trust. Sponsor also conducted an
additional lead-lag analysis including
data from a recently launched bitcoin
futures-based ETF to evaluate the
likelihood of whether trading in the
Trust could become the predominant
influence on prices in the CME Bitcoin
Futures market and concluded that it is
unlikely that trading in the Trust would
be the predominant influence on prices
in the CME Bitcoin Futures market.
Sponsor’s analysis on price discovery
in the Bitcoin spot and futures markets
is described below.
Data Description and Sources
Sponsor obtained tick level trade data
for Bitcoin spot prices and futures
prices used in its analysis from Coin
Metrics for the period spanning from
January 1, 2019, to March 31, 2021.
Table 1 summarizes the dataset by
exchange, market type, and quote
currency.
Sponsor aggregated the tick level
trades to the one second floor level
using a volume weighted average price
(VWAP) approach. Compared to the
daily/minute level granularity of
timestamps, Sponsor believes the
second level can capture more intra-day
price dynamics and is more useful here
to investigate price discovery, as both
arbitrage and manipulative activities
can occur within a matter of seconds. To
preprocess the tick level trade data to
second level granularity, two typical
methods are often used. One is to use
the last observed trade price within a
second, and the other is to use VWAP
within a second. Since multiple trades
can occur with simultaneous
timestamps but with different
transaction prices, a VWAP can
represent the price information from
each trade instead of randomly selecting
the last price. It is worth mentioning
that although the price time series’ have
second level resolution (timestamped to
seconds), this does not mean that the
price time series’ values are evenly
spaced at each second since a market
may not have trades within every
second. Given this non-synchronous
nature of trading and the potential
model issues arising from utilizing data
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with numerous imputed values,
Sponsor’s analysis leverages a method
that eliminates the need for imputation
for the timestamps without trades. This
approach allows the model inputs of
price time series from different markets
to stay non-synchronous without further
data processing.
In order to exclude any impacts
caused by exchange rate movements,
Sponsor limited the dataset to BTC-USD
and BTC-USDT trades. Markets with an
average correlation lower than 0.1 to
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other bitcoin markets, in any given
quarter, were removed from the
analysis. For futures markets, Sponsor
included both ordinary futures and
perpetuals. Contract frequencies were
validated and recorded via respective
exchange websites, and, for CME data,
the sponsor compared data from the
exchange directly with data provided by
Coin Metrics to verify accuracy.
Within the ordinary futures market,
one exchange, quote and contract
lifespan combination can often have
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46259
same-day trading on contracts with
different expiration dates. To remove
price gaps in this market, Sponsor
constructed a continuous time-series of
prices by choosing the contract with the
highest volume per day within an
exchange, quote, and contract lifespan
combination. For each combination,
successive contracts are backwards
adjusted using the price difference
between the two contracts at the time of
rollover.
BILLING CODE 8011–01–P
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Research Design
Price discovery between spot and
futures markets plays an important role
in financial research due to its
association with market maturity. In
theory, the futures market is expected to
lead price discovery in established asset
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classes due to its inherent features, such
as lower transaction fees, built-in
leverage, unconstrained short-selling,
and greater transparency. Since bitcoin
futures contracts began trading on
regulated exchanges in December 2017,
several academic and market research
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papers have studied spot-futures price
discovery in bitcoin markets. Sponsor
started its research by reviewing the
existing literature. Table 2 summarizes
the metrics, data ranges, frequency
levels, and conclusions for thirteen
papers.
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BILLING CODE 8011–01–C
Sponsor noted that each of the studies
reviewed used metrics derived from the
Vector Error Correction Model (VECM)
or an extension of VECM to examine
price discovery. Within the column of
metrics, Information Share (IS)
proposed by Hasbrouk (1995) and
Component Share (CS) pioneered by
Gonzalo and Granger (1995) are mostly
used. Hasbrouk transforms the VECM
into a vector moving average with a
common factor component and
transitory component and defines the
metric IS to measure the proportion of
the variance of the permanent
component of prices coming from each
market with Cholesky factorization. The
IS is not unique if switching the order
of input price data of the underlying
two markets. To overcome it, Lien and
Shrestha (2009) use eigenvalue
decomposition instead of Cholesky
factorization—this metric is called
Modified Information Share. Both
Information Share and Modified
Information Share are used for pair-wise
analysis. The extension of Modified
Information Share to more than two
markets is called Generalized
Information Share (Lien and Shrestha,
2014). Component Share is calculated
from the normalized orthogonal
coefficients to the vector of the lagged
error correlation term in the VECM.
Fractional Component Share is derived
similarly to CS but from a version of
VECM that uses a fractional difference
operator instead of the first order
difference operator. Information
Leadership Share (Yan and Zivot, 2010)
and Information Leadership Share
(Putnins, 2013) combine Information
Share and Component Share nonlinearly.
Although the metrics used in
reviewed studies are similar, the
conclusions from these papers are
mixed as to which markets lead or lag
in price discovery. Buccheri (2021) 61
discussed the limitations for VECM
derived metrics and noted that when
price observations are sparse (See CME
price observations in Figure 1 as an
example), a lot of zero returns are
produced through imputation; therefore,
the time series of prices strongly deviate
from the standard semi-martingale
assumption and sample covariances can
be downward biased. The authors in
Buccheri (2021) conclude that when the
prices have a high level of sparsity, the
VECM is clearly mis-specified and the
estimates are potentially biased.
61 Buccheri, Giuseppe, Giacomo Bormetti, Fulvio
Corsi, and Fabrizio Lillo. ‘‘Comment on: Price
discovery in high resolution.’’ Journal of Financial
Econometrics 19, no. 3 (2021): 439–451. https://
doi.org/10.1093/jjfinec/nbz008. The authors
comment on the limitations of using information
share within markets with trades on high resolution
frequencies. The paper illustrates why the
application of a VECM methodology like
information share would be mis-specified and the
OLS estimates could be biased because of high
sparsity in the data.
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46263
This conclusion in Buccheri (2021)
provides theorical support on why
VECM derived metrics are not suitable
to use when the underlying data has
high level of sparsity but does not
quantify the actual impact in practice.
In ‘‘Suitable Price Discovery
Measurement of Bitcoin Spot and
Futures Markets’’ 62 (Robertson and
Zhang, 2022), the authors demonstrate
that the conclusions of Buccheri (2019)
are of high importance by quantifying
the impact of sparsity. within bitcoin
markets.
The authors show IS and CS are
sensitive to input data’s level of sparsity
with numerical experiments. When the
sparsity level is about 10% for a
designed-to-lead market, IS and CS
show the known-leading market clearly
contributes a majority to price
discovery. However, as the sparsity is
increased, the known-leading market
begins to contribute less to price
discovery and, when the level of
sparsity is higher than 30%, using IS
and CS produces mixed results or the
opposite conclusion of what is true.
Buccheri explains the effect of using
VECM based metrics with violation of
model assumptions from theorical
perspective, and Robertson and Zhang
show the effect with numerical
experiments and provide empirical
evidence about to what extent using
VECM can give unreliable results. Both
emphasize that sparsity level is
important regarding price discovery
measurement using VECM based
metrics.
Although Robertson and Zhang state
that the choice of market to create the
experiment data does not change the
conclusion, Sponsor replicated their
experiment using a different market to
provide additional evidence on the
impact of sparsity on VECM based
metrics. Sponsor calculates the IS and
CS every day from Q1 2019 through Q1
2021 (821 days) between the artificially
leading (by 3 seconds) version of the
BitMEX USD perpetual futures market
at 9 different levels of sparsity
(measured by the percent of random
data removed, 10% increments starting
at 10% and ending at 90%) and the
original BitMEX USD perpetual futures
market. To satisfy the VECM
assumption that prices/returns are
synchronous, Sponsor used the typical
and commonly used form of forward
filling using previous second values.
Figure 2 shows the distributions of daily
IS and CS values for the designed-tolead market. The x axis is the sparsity
level, and the y axis is IS/CS. The
plotted results show that, as the level of
sparsity is increased, the known leading
market begins to contribute less to price
discovery causing mixed results (both IS
and CS dropped from above 0.8 to less
than 0.2) and the opposite conclusion of
what is true. The market is considered
leading when IS/CS is above 0.5.
62 Robertson, Kevin, and Jiani Zhang. (2022)
‘‘Suitable Price Discovery Measurement of Bitcoin
Spot and Futures Markets.’’ Available at SSRN:
https://ssrn.com/abstract=4012165 or https://
dx.doi.org/10.2139/ssrn.4012165.
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The observations from Sponsor’s
experiment confirm the conclusions of
Buccheri (2019) and Robertson and
Zhang (2022) that VECM derived
metrics are sensitive to the level of
sparsity within market data.
Robertson and Zhang (2022) show
that only about half of the markets
included in the quarter of 2021 have
trades for every second increment.
Taking the CME USD futures market,
Coinbase USD spot market, and BitMEX
USD perpetual futures markets as
representatives of bitcoin futures
market, spot market, and perpetual
market, Table 3 shows their comparison
in average time in seconds between
trades in each quarter. In the first
quarter of 2019, on average, CME
records a trade every 111 seconds (∼2
minutes) while Coinbase records a trade
every 3 seconds. In more recent time
periods, the sparsity level decreases for
CME, but is still 25 times higher than
the Coinbase USD spot market and
BitMEX USD perpetual futures market
in the first quarter of 2021.
Due to the high sparsity of CME
Bitcoin futures data, the Sponsor
attributes the ‘‘mixed results’’ in
previous academic studies that have
failed to demonstrate that the CME
bitcoin futures market constitutes a
market of significant size to the
problems associated with using
econometric models without
considering the suitability. When
analyzing information flow with daily
data that has low sparsity level, the
analysis using metrics derived from
VECM (e.g., Hu, et al., 2019) is
convincing. However, for analyzing
intraday information flow and
accounting for the varying levels of
sparsity among the bitcoin market, the
sponsor believes the framework of
correlation-based lead-lag analysis using
the Hayashi-Yoshida (HY) estimator 63
to compute correlation and its extension
by other academic researchers,
including Hoffman (2013) 64 and Huth
(2011),65 to obtain the lead-lag seconds
and lead-lag ratio is more suitable.
Lead-lag seconds and lead-lag ratio
are the typical output metrics in
correlation-based lead-lag analysis. The
former measures the relative time in
lead or lag between two markets and the
latter measures the relative strength of
the lead-lag relationship between two
markets. They are both free from any
imputation or sampling within nonsynchronous and/or infrequent data and
have proven to be useful in price
discovery research in other markets. Dao
(2018) 66 applied the Hayashi-Yoshida
estimator in a lead-lag framework with
these two metrics on price discovery
63 Hayashi, Takaki, and Nakahiro Yoshida. ‘‘On
covariance estimation of non-synchronously
observed diffusion processes.’’ Bernoulli 11, no. 2
(2005): 359–379. https://www.jstor.org/stable/
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3318933. The authors proposed a novel method (HY
estimator) of estimating the covariance of two
diffusion processes when they are observed only at
discrete times in a non-synchronous manner. This
methodology addresses the issue that the traditional
realized covariance estimator encounters, which is
that the choice of regular interval size and data
interpolation scheme can lead to unreliable
estimation. The new method Hayashi and Yoshida
introduced in this paper is free from any
interpolation and therefore avoids the bias and
other problems caused by it.
64 Hoffmann, Marc, Mathieu Rosenbaum, and
Nakahiro Yoshida. ‘‘Estimation of the lead-lag
parameter from non-synchronous data.’’ Bernoulli
19, no. 2 (2013): 426–461. https://www.jstor.org/
stable/23525731. The authors propose a
methodology for modeling the lead-lag effect
between two financial assets with non-synchronous
data based on Hayashi and Yoshida’s work (2015).
It has been applied in various price discovery
research publications. The Sponsor’s analysis
utilized this methodology to obtain pairwise leadlag seconds between two markets.
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65 Huth, Nicolas, and Fre
´ de´ric Abergel. ‘‘High
frequency lead/lag relationships—empirical facts.’’
Journal of Empirical Finance 26 (2014): 41–58.
https://doi.org/10.1016/j.jempfin.2014.01.003.
66 Dao, Thong Minh, Frank McGroarty, and
Andrew Urquhart. ‘‘Ultra-high-frequency lead-lag
relationship and information arrival.’’ Quantitative
Finance 18, no. 5 (2018): 725–735. https://doi.org/
10.1080/14697688.2017.1414484.
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research of the S&P 500 index and the
two most liquid ETFs that track it. This
academic study is the first to analyze
the effect of information arrival on the
lead-lag relationship among related spot
instruments and concludes that
sophisticated investors have a more
significant effect on the lead-lag
relationship. The analysis from this
study confirms that using the HayashiYoshida estimator in a lead-lag
framework is suitable for analyzing high
frequency, tick level, non-synchronous
data even timestamped to milliseconds.
Sponsor notes that there is academic
research studying high-frequency leadlag relationships between multiple
bitcoin spot markets using the HayashiYoshida estimator with lead-lag seconds
and lead-lag ratio from Schei (2019).67
The suitability test performed by
Robertson and Zhang (2022) shows that
these two metrics are not sensitive to
the level of sparsity within markets.
Their experiment shows that the
accuracy of lead-lag seconds is
consistent across the varying levels of
sparsity and the lead-lag ratio moves
closer to 1 (i.e., provides less certainty
about the result) when the level of
sparsity increases. Lead-lag ratio
quantifies how strong the relationship
is, and the strength can be considered as
the confidence level associated with the
conclusion that one market leads or lags
another. The closer the lead-lag ratio is
to 1, the less certain one can conclude
the relationship is of one market’s lead/
lag over the other market.
Again, Sponsor replicated the
suitability test using the HY estimator in
a lead-lag framework performed by
Robertson and Zhang (2022) but on the
BitMEX USD perpetual futures market.
As mentioned by the authors, no
interpolation is needed in this version
of the experiment because the HY
estimator computes directly from nonsynchronous data. Figure 3 shows the
distribution of daily lead-lag seconds
and daily lead-lag ratios between the
artificially leading and sparse versions
of the BitMEX USD perpetual futures
market and the original BitMEX USD
perpetual futures market.
The observations from Sponsor’s
experiment match those of Robertson
and Zhang (2022) that the HY estimator
used in a lead-lag framework is not
sensitive to the level of sparsity within
market data. The distribution of lead-lag
seconds shows that the time shift
parameter that maximizes the HY
estimator is consistently +3 seconds—
which is the amount of time the
artificial market was advanced by. The
distribution of the lead-lag ratios are
consistently above 1, showing that the
leading relationship of the artificial
market over the original is strong. As
Robertson and Zhang also noted, the
lead-lag ratios decay towards the level
of 1 with increasing levels of sparsity,
which matches the expectation that the
lead-lag relationship becomes weak
when one of the markets rarely has data.
Sponsor’s analysis expands the
research of Schei by using the HayashiYoshida estimator with a lead-lag
framework and the same metrics but on
both bitcoin spot and futures markets. It
is worth mentioning, the lead-lag
framework is different than a VECM
based approach. A VECM based
approach, for example IS, measures the
proportion of the variance of the
permanent component of prices coming
from each market and the total variance
and the variance proportion change
when the number of markets included
changes. Therefore, ‘‘omitting
substantial information flows from other
markets [by using a two-dimensional
methodology] can produce misleading
results’’, which Alexander and Heck
(2020) 68 state in their study as the
motivation to use Generalized
Information Share instead of the original
Information Share metric. This is a
limitation for two-dimensional VECM
based metrics and does not apply to
Sponsor’s correlation-based lead-lag
analysis. This is because VECM based
metrics measure the proportion of price
discovery among markets while a lead-
lag framework measures how much time
one market leads/lags another without
the need to compute the total variance
of the permanent component of prices.
67 Schei, Norheim Schei. ‘‘High Frequency LeadLag Relationships in the Bitcoin Market.’’
(unpublished master’s thesis, 2019). Copenhagen
Business School, Copenhagen, Denmark.
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Lead-Lag Analysis
In the lead-lag analysis, Sponsor
examined the pairwise lead-lag
relationship within the spot market and
futures market, as well as across them.
For each pair, Sponsor computed the
correlation coefficients using the HY
estimator between one market price
time series and a second market price
time series as well as timestampadjusted (leading/lagging) versions of
the second market to find the time delta
that maximizes their correlation. The
range of time deltas is from ¥N seconds
to N seconds in one second increments.
In the Sponsor’s analysis, the parameter
N is set as 15. In the Sponsor’s analysis,
the parameter N is set as 15. For
illustration below, Sponsor uses the pair
of CME USD Futures (denoted as price
68 C. Alexander & D. Heck ‘‘Price discovery in
Bitcoin: The impact of unregulated markets’’, 50 J.
Financial Stability 100776 (2020).
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time series X) and Coinbase USD Spot
(denoted as price time series Y) as an
example to describe the process.
Step 1: Fix the timestamp of CME and
adjust the timestamps of Coinbase from
N seconds lagging to N seconds leading.
Figure 4 shows this process with time
Step 2: Compute the correlation
coefficients between CME price time
series and each of timestamp-adjusted
time series of Coinbase with l seconds
(l ∈ [¥N, N]) lead/lag using HY
estimator. The correlation coefficient is
defined as (Hayashi & Yoshida 2005):
The numerator of pˆ is the covariance
between CME and Coinbase, which
equates to the sum pf every product of
price changes that share a time overlap.
Figure 5 shows this process with a
simple example.
deltas equal to 1 and ¥1 for illustration
purpose.
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Step 3: Collect the correlation
coefficients with different lead-lag
seconds as a correlation curve and
search for the value lmax from ¥N to N
that maximizes their correlation.
Meanwhile, compute the lead-lag ratio
between CME and Coinbase, llr, to
measure the strength of the lead-lag
relationship (Huth & Abergel 2012). It is
defined as
The further the llr is from 1, the
stronger the relationship is of one
market’s lead/lag over the other market.
The llr is used in conjuntion with the
HY correlation coefficient and the lead-
lag seconds to provide a more
comprehensive analysis. If llr ∈ [0.95,
1.05] or lmax is zero, we conclude neither
market leads. If llr is not in the range
[0.95, 1.05] and lmax is positive, CME
leads Coinbase by lmax seconds and vice
versa. Figure 6 shows an example of the
correlation curve.
These three steps provide the
pairwise lead-lag seconds between two
markets. To measure a market’s overall
price discovery leadership, the results
are aggregated by taking the average
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lead-lag seconds it has with all other
markets included in a quarter.
Sponsor’s results suggest that, out of
the 20 spot markets and 26 futures
markets analyzed, the CME bitcoin
futures market plays the most important
role in price discovery during each
quarter spanning from the first quarter
of 2019 to the first quarter of 2021.
Figure 7 shows the average pairwise
lead-lag seconds between CME bitcoin
futures and other bitcoin markets with
95% confidence intervals using the
calculations introduced in previous
session. The blue dots represent the
Table 4 lists the detailed results for
every pair of CME against other markets
with lead-lag seconds used to create
Figure 7 along with lead-lag ratios.
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Conclusion of Reasonable LikelihoodLead Lag Analysis
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CME’s average leading time in seconds
and the black line represents the
confidence interval. All the blue dots
are above 0 and only 6 markets have
lower confidence bounds slightly below
0; therefore, Sponsor concludes the
CME bitcoin futures market leads all
other markets included in the analysis.
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Additionally, Sponsor compared the
CME bitcoin futures market’s leadership
with other markets by aggregating each
market’s lead-lag by taking the average
of each markets lead-lag seconds over
all other markets in a quarter.
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Figure 8 shows that, while other
category leaders can change rank each
quarter, they consistently rank below
CME futures in average seconds leading.
This consistency, along with the
Sponsor’s inclusion standards of strict
overall average market correlations and
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demonstrative lead-lag ratios, speaks to
the strength of CME futures’ leadership
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the market leader within the USD
Futures category (which is consistently
CME) leads all other markets by an
average of 5.8 seconds in Q1 2019.
Another observation from Figure 9 is
that there is a clear decline in secondsleading through time for these market
category leaders. As discussed further
below (Figure 10 & 11), this declining
lead-lag time does not mean that a
particular market category leader’s
strength in leadership is deteriorating,
as it is not only evident for market
category leaders, but all markets, and
suggests efficiency within the bitcoin
markets has continued to improve.
The lead-lag relationships between
and among bitcoin futures and spot
markets provide insights into the
directional influences of markets on
price discovery, with the CME Bitcoin
futures market playing the most
69 For more information, see Memorandum from
the Division of Trading and Markets regarding a
September 8, 2021 meeting with representatives
from Fidelity Digital Assets, et al. (Sept. 8, 2021)
available at https://www.sec.gov/comments/srcboebzx-2021-039/srcboebzx2021039-250110.pdf.
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Figure 9 shows the average lead over
all other markets for each market
category leader by quarter. For example,
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across spot and futures markets
globally.69
46271
supports the conclusion that there is a
reasonable likelihood that a person
attempting to manipulate the Shares
would also have to trade on the CME
Bitcoin futures market to manipulate the
ETP.
Figure 10 shows that the absolute
average of every market’s overall lead-
lag seconds (average lead-lag seconds
over all other markets) has steadily
decreased from the first quarter of 2019
to the first quarter of 2021. This suggests
that the efficiency within bitcoin
markets has continued to improve, and
the window of arbitrage opportunity has
closed with increasing speed.
While average lead/lag among markets
has decreased over time, this does not
mean that relative leadership among
markets has decreased over time. To
understand relative leadership among
markets during different time periods,
Sponsor standardizes each market’s
average lead/lag with other markets by
dividing the market’s average lead with
other markets by the average of every
market’s absolute average lead with
other markets. This relative leadership
score (RLS) of market x is defined as:
The RLS of the CME bitcoin futures
market indicates that the strength of
CME leadership has not deteriorated,
shown in Figure 11. The RLS for the
CME USD futures market is relatively
stable—indicating that there is no
deterioration in the strength of this
market and even a slight increase in
strength during the last three quarters
observed—even the average lead/lag
(the denominator of RLS plotted in
Figure 10) among markets has decreased
over time.
EN19JY23.188</GPH>
important role in price discovery during
each quarter spanning from the first
quarter of 2019 to the first quarter of
2021, as noted above. Arbitrage between
the CME Bitcoin futures market and
spot markets would tend to counter an
attempt to manipulate the spot market
alone. Thus, the Sponsor’s analysis
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To summarize, the top rank in average
leading seconds and the pairwise
leading results with confidence
intervals for the CME bitcoin futures
market, support the conclusion that
there is a reasonable likelihood that a
person attempting to manipulate the
Shares would also have to trade on the
CME bitcoin futures market to
manipulate the ETP. The RLS of the
CME bitcoin futures market provides
evidence that that likelihood has stayed
consistent while the efficiency within
the bitcoin markets has continued to
improve.
3. Trading in the Shares Unlikely to be
Predominant Influence on Prices in
CME Bitcoin Futures Market
As described above, the Commission
requires the Exchange to conclude that
it is unlikely that trading in the Shares
would become the predominant
influence on prices in the CME Bitcoin
Futures market. In a recent approval
order 70 of a bitcoin-futures ETP, the
Commission concluded that it is
unlikely that trading in the proposed
bitcoin-futures ETP would be the
predominant influence on prices in the
CME bitcoin futures market. The
Commission specifies as reasons for its
conclusion ‘‘the maturation of the CME
bitcoin futures market since its
inception in 2017-including, but not
limited to, the overall size, volume,
liquidity, and number of years of trading
in the CME bitcoin futures market and
evidence from the 1940 Act-registered
Bitcoin Futures ETFs’’. Sponsor agrees
with the Commission’s remarks on the
maturation of the CME bitcoin futures
market and would also add ‘‘price
70 See Exchange Act Release No. 94620 (April 6,
2022), 87 FR 21676 (April 12, 2022) (the ‘‘Teucrium
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discovery leadership’’, as discussed
above, to the list of maturation
evidence. As evidence from the 1940
Act-registered Bitcoin Futures ETFs, the
Commission states it ‘‘has neither
observed any disruption to the CME
bitcoin futures market, nor any evidence
that the Bitcoin Futures ETFs have
exerted dominant influence on CME
bitcoin futures prices.’’ Through its own
analysis, Sponsor again agrees with the
Commission’s remarks and, as discussed
below, also found that the level of price
discovery leadership associated with the
CME bitcoin futures market remained
unchanged since the launch of Bitcoin
Futures ETFs.
In considering the question of
whether the proposed bitcoin-spot ETP
would be the predominant influence on
prices in the CME bitcoin futures
market, Sponsor conducted a numerical
experiment to best estimate the effect
since it is not feasible to directly
evaluate the effect for the proposed ETP
before its existence. The experiment is
designed to observe whether the price
discovery leadership of the CME bitcoin
futures market can be changed by a new
market (specifically an ETP) entering
with high trade activity. If it is, it is
reasonable to assume that the proposed
bitcoin-spot ETP could be the
predominant influence on prices in the
CME bitcoin futures market if it has
high trade activity. However, if it is not,
it is also reasonable to assume that the
proposed bitcoin-spot ETP would not be
the predominant influence. From the
numerical experiment, Sponsor aims to
demonstrate that high trade activity or
volume is not the key factor in price
discovery.
Sponsor used trade data from a
recently launched bitcoin futures-based
ETF, ProShares Bitcoin Strategy ETF
(‘‘BITO’’), which caused high trading
activity after its launch, as the model in
its experiment. BITO is a Commissionregistered ETF that is listed and traded
on a U.S. regulated national securities
exchange and was launched on October
18, 2021. As described in its prospectus,
BITO seeks to invest primarily in CME
Bitcoin futures contracts.
Sponsor selected two periods,
representing a regular period with
normal trading activity and a period
with new information and heightened
trading activity (from approximately $15
billion to $34 billion) in the CME
Bitcoin futures market as seen from
Figure 12. The experiment is to compare
whether the leadership of CME
increased during the second period. If
not, it is reasonable to conclude the
heightened trading activity in the
futures market did not increase the
leadership of the futures market. With
that same logic, the potential heightened
trading activity in the spot market
would not increase the leadership of the
spot market.
Sponsor obtained tick level data from
Coin Metrics for all markets included in
the lead-lag analysis described above
spanning two specific periods: 11 days
before the launch of BITO (10/8/2021—
10/18/2021) and 11 days after the
launch (10/19/2021–10/29/2021). For
the 11 days after the launch of BITO,
Sponsor obtained tick-level trade data
on BITO via Bloomberg and aggregated
to the one second floor level using the
same method described above.
Approval’’) and 94853 (May 5, 2022) (collectively,
with the Teucrium Approval, the ‘‘Bitcoin Futures
Approvals’’).
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the time delta that maximized their
correlation. The only differences
between Sponsor’s BITO analysis and
the quarterly analysis spanning Q1 2019
through Q1 2021 discussed above are
the timeframes and a stricter average
correlation threshold (.2 instead of.1) in
the BITO analysis given the shorter
timeframe.
The results of this experiment in
Figure 13 show the CME bitcoin futures
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market leading all markets for the
period of 11 days prior to the launch of
BITO. The price discovery leadership of
the CME bitcoin futures market still
leads after BITO’s launch in the period
of 10/19/2021 to 10/29/2020, but CME’s
leadership does not become stronger
even though the trading volume
increased significantly.
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Sponsor examined the pairwise leadlag relationship between CME bitcoin
futures and all other markets included.
For each pair, Sponsor computed the
correlation coefficients using the same
lead-lag framework and HY estimator
between CME bitcoin futures and the
second market price timeseries as well
as timestamp-adjusted (leading/lagging)
versions of the second market to find
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Given that the CME bitcoin futures
market did not see an increase in price
discovery leadership even during a
period of heightened activity (trading
volume increased from 15 billion to 34
billion) on that market after BITO’s
launch, Sponsor believes it would be
unreasonable to assume that the level of
the spot markets’ leadership would
increase (CME bitcoin futures market
price leadership would deteriorate) due
to the potential heightened trade
activity in the spot markets after the
proposed spot-based ETP launch. This
dynamic is illustrated in Figure 14.
BILLING CODE 8011–01–C
price discovery and allow this market to
dominate even with lower or changing
levels of volume. This conclusion is also
supported in academic research 71
Based on the experiment, Sponsor
concludes the inherent features of
futures are more important factors in
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71 Futures with much smaller trading volumes
compared to the underlying spot market can still
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studying similar patterns in other asset
classes. It is worth mentioning that it is
not feasible to directly evaluate the
effect for the proposed ETP before its
existence. The numerical experiment
above is to best estimate the effect and
eliminate the concern on the potential
high trade activity in spot markets
caused by the proposed ETP.
Moreover, Sponsor believes that there
will be no material effect of the Shares’
trade prices on CME bitcoin futures
prices from secondary market trading
activities. To estimate this effect,
Sponsor uses BITO in its analysis as the
first ETP launched in U.S. and a
reasonable example of a general ETP.
Sponsor examined the pairwise lead-lag
relationship between BITO and all other
markets included in previous analysis.
As seen in Table 5, only four markets
have a lead-lag ratio (the strength
measurement of the lead-lag
relationship) outside the range of
[.95,1.05] and non-zero lead-lag seconds
to conclude they are leading or lagging.
Sponsor interprets this result as BITO’s
lead-lag relationship with other bitcoin
markets is not significant.
TABLE 5—MARKETS WITH SIGNIFICANT LEAD/LAG RELATIONSHIPS TO BITO
BITO
leadership
(lead-lag
seconds)
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CME USD Ordinary Futures ....................................................................................................................................
Kraken USD Ordinary Futures ................................................................................................................................
Huobi USD Ordinary Futures (Bi-Quarterly) ............................................................................................................
CEX.IO USD Spot ...................................................................................................................................................
¥1
¥1
¥1
12
Lead-lag
ratio
0.909
0.926
0.933
1.067
Regarding BITO’s price discovery
contribution measured by lead-lag
seconds, it does not lead any bitcoin
markets except CEX.IO USD spot
market, which not only lags BITO but
also lags all other bitcoin markets. More
importantly, the CME bitcoin futures
market leads BITO with the highest
level of certainty as seen from the leadlag ratio. As such, Sponsor concludes
that the proposed ETP would have no
material impact on CME bitcoin futures
prices.
The gold market shares certain
characteristics with the bitcoin market—
both gold and bitcoin have a finite
supply, are traded globally in various
market venues against various currency
pairs and have a robust futures market.
In addition, many investors view bitcoin
as a form of digital gold and in looking
to determine the potential impact of
price discovery in trading in the ETP
shares on the secondary market, the
Sponsor looks to the gold market as an
analogous market to bitcoin when
looking to determine the impact of price
discovery. According to a previous
study 72 the Sponsor reviewed, the
authors analyzed intraday data on gold
prices from 1997–2014 and concluded
that futures markets tend to lead price
discovery in the gold market despite the
spot market having ten times more
volume than the U.S. futures market. A
second 73 study that the sponsor
analyzed, came to the same conclusion
that futures are the global leader in price
discovery for gold, with a growing
influence of ETPs.
Further, Sponsor believes that Shares
of the Trust trading on the secondary
market could have a positive impact on
the CME Bitcoin Futures market leading
position. Sponsor believes this due to
the use of CME Bitcoin Futures in
hedging activities by market
participants. One such example, is
when Authorized Participants transact
on both the secondary and primary
markets. In order to arbitrage or fulfill
large basket trades on behalf of clients,
Authorized Participants may transact in
the primary market with the ETP by
creating and/or redeeming and then
immediately offsetting that transaction
in the secondary market. Because the
primary market is settled in-kind
(meaning the exchange of shares and
bitcoin) and the secondary market is
settled in cash (meaning the exchange of
shares and fiat currency), the
Authorized Participant needs to transact
in the bitcoin spot market. Given there
is a lag between the secondary market
transaction, the striking of the NAV per
Share in the primary market and the
settlement of the primary market
transaction, the Authorized Participants
will look to hedge their exposure to the
bitcoin market using bitcoin futures. For
the reasons discussed throughout this
document such as the transparency, low
fees, and leverage capabilities, many
market participants look to hedge
themselves using futures and Sponsor
believes that will be the case with
Authorized Participant transactions in
respect of the Trust as well.
The Exchange also believes that
trading in the Shares would not be the
predominant force on prices in the
Bitcoin Futures market (or spot market)
for several additional reasons, including
the significant volume in the Bitcoin
Futures market, the size of bitcoin’s
market cap (approximately $1 trillion),
and the significant liquidity available in
the spot market. According to the
Sponsor’s analysis, in the second
quarter of 2021, bitcoin futures volume
greatly exceeded volumes in the spot
markets. The volume of the bitcoin
futures market was approximately $7.1
trillion where the volume of the bitcoin
spot markets was approximately $1.4
trillion.74 In addition to the Bitcoin
Futures market data points cited above,
the spot market for bitcoin is also very
liquid. According to data from
CoinRoutes from February 2021, the
cost to buy or sell $5 million worth of
bitcoin averages roughly 10 basis points
with a market impact of 30 basis
points.75 For a $10 million market order,
the cost to buy or sell is roughly 20 basis
points with a market impact of 50 basis
points. Stated another way, a market
participant could enter a market buy or
sell order for $10 million of bitcoin and
only move the market 0.5%. More
strategic purchases or sales (such as
using limit orders and executing
through OTC bitcoin trade desks) would
dominate price discovery. See Hauptfleisch, Martin,
Ta¯lis J. Putnin
¸ sˆ, and Brian Lucey. ‘‘Who sets the
price of gold?’’ ‘‘London or New York.’’ Journal of
Futures Markets 36, no. 6 (2016): 564–586. https://
doi.org/10.1002/fut.21775 for more information.
72 See Hauptfleisch, et. al.
73 Sehgal, Sanjay, Neharika Sobti, and Florent
Diesting. ‘‘Who leads in intraday gold price
discovery and volatility connectedness: Spot,
futures, or exchange-traded fund?’’ Journal of
Futures Markets 41, no. 7 (2021): 1092–1123.
https://doi.org/10.1002/fut.22208.
74 For more information, see Memorandum from
the Division of Trading and Markets regarding a
September 8, 2021 meeting with representatives
from Fidelity Digital Assets, et al. (Sept. 8, 2021)
available at https://www.sec.gov/comments/srcboebzx-2021-039/srcboebzx2021039-250110.pdf.
75 These statistics are based on samples of bitcoin
liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase
Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
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likely have less obvious impact on the
market—which is consistent with
MicroStrategy, Tesla, and Square being
able to collectively purchase billions of
dollars in bitcoin. As such, the
combination of Bitcoin Futures leading
price discovery, the overall size of the
bitcoin market, and the ability for
market participants, including
authorized participants creating and
redeeming with the Trust, to buy or sell
large amounts of bitcoin without
significant market impact will help
prevent the Shares from becoming the
predominant force on pricing in either
the bitcoin spot or Bitcoin Futures
markets, satisfying part (b) of the test
outlined above.
(b) SEC Approval of Bitcoin Futures
ETFs and CME Surveillance
Bitcoin Futures represent a growing
influence on pricing in the spot bitcoin
market as has been laid out above and
in other proposals to list and trade Spot
Bitcoin ETPs. Pricing in Bitcoin Futures
is based on pricing from spot bitcoin
markets. As noted above, the statement
from the Teucrium Approval that
‘‘CME’s surveillance can reasonably be
relied upon to capture the effects on the
CME bitcoin futures market caused by a
person attempting to manipulate the
proposed futures ETP by manipulating
the price of CME bitcoin futures
contracts . . . indirectly by trading
outside of the CME bitcoin futures
market,’’ makes clear that the
Commission believes that CME’s
surveillance can capture the effects of
trading on the relevant spot markets on
the pricing of Bitcoin Futures. While the
Commission makes clear in the
Teucrium Approval that the analysis
only applies to the Bitcoin Futures
market as it relates to an ETP that
invests in Bitcoin Futures as its only
non-cash or cash equivalent holding, if
CME’s surveillance is sufficient to
mitigate concerns related to trading in
Bitcoin Futures for which the pricing is
based directly on pricing from spot
bitcoin markets, it’s not clear how such
a conclusion could apply only to ETPs
based on Bitcoin Futures and not extend
to Spot Bitcoin ETPs.
Additionally, a Bitcoin Futures ETF is
actually potentially more susceptible to
manipulation than a Spot Bitcoin ETP
where the underlying trust offers only
in-kind creation and redemption.
Specifically, the pricing of Bitcoin
Futures is based on prices from spot
bitcoin markets, while shares of a Spot
Bitcoin ETP would represent an interest
in bitcoin directly and authorized
participants for a Spot Bitcoin ETP
would be able to source bitcoin from
any exchange and create or redeem with
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the applicable trust regardless of the
price of the underlying index. Potential
manipulation of a Bitcoin Futures ETF
would require manipulation on the spot
markets on which the pricing for Bitcoin
Futures are based while the in-kind
creation and redemption process and
fungibility of bitcoin means that a
would be manipulator of a Spot Bitcoin
ETP would need to manipulate the price
across all bitcoin markets or risk simply
providing arbitrage opportunities for
authorized participants. Further to this
point, this arbitrage opportunity also
acts to reduce any incentives to
manipulate the price of a Spot Bitcoin
ETP because the underlying trust will
create and redeem shares at set rates of
bitcoin per share without regard to the
price that the ETP is trading at in the
secondary market or the price of the
underlying index. As such, the
Exchange believes that part (a) of the
significant market test outlined above is
satisfied and that common membership
in ISG between the Exchange and CME
would assist the listing exchange in
detecting and deterring misconduct in
the Shares.
Recently, the Commission allowed
three ETFs primarily invested in CME
Bitcoin futures to register and list on a
national securities exchange (‘‘Bitcoin
Futures ETFs’’).76 As described in its
prospectus, BITO does not invest
directly in bitcoin but rather seeks to
provide capital appreciation primarily
through managed exposure to cashsettled bitcoin futures contracts traded
on commodity exchanges registered
with the Commodity Futures Trading
Commission (‘‘CFTC’’). Currently, the
only such contracts that are traded on,
or subject to the rules of, the CME. CME
Bitcoin futures are cash-settled in U.S.
dollars based on the CME DF Bitcoin
Reference Rate (‘‘BRR’’), which is a
volume-weighted composite of U.S.
dollar-bitcoin trading activity on certain
constituent exchanges including
Bitstamp, Coinbase, Gemini, itBit,
Kraken, and LMAX Digital.77
The CME reference rate is based on
substantially the same pricing data from
digital asset trading platforms as the
Index used by the Trust. The Index is
designed to reflect the performance of
bitcoin in U.S. dollars and the current
constituent exchange composition of the
Index is Bitstamp, Coinbase, Gemini,
itBit, Kraken, and LMAX Digital. As
noted recently by a commenter on
76 ProShares Bitcoin Strategy ETF (BITO); VanEck
Bitcoin Strategy ETF (XBTF); Valkyrie Bitcoin
Strategy ETF (BTF).
77 See CME CF Bitcoin Reference Rate Index data
at https://www.cmegroup.com/trading/
cryptocurrency-indices/cf-bitcoin-referencerate.html.
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another Rule 19b–4 application for a
bitcoin spot ETP, Bitcoin Futures ETFs
and the Trust are exposed to the same
underlying pricing data and the same
risks of manipulation.78
There is no basis, in law or in fact, for
determining that the Bitcoin Futures
ETFs satisfy the standards of Section
6(b)(5) of the Exchange Act while the
Trust does not. Bitcoin pricing, whether
in the spot market or the futures market,
is determined in the digital asset trading
platforms where supply and demand
interact; and there is almost complete
overlap in the underlying digital asset
trading platforms that supply pricing
information for the reference indices
used by both the CME Bitcoin futures
market and the Trust.
Just three weeks after the Bitcoin
Futures ETFs began trading, the
Commission again rejected a 19b–4
application filed by a spot bitcoin ETP
on the grounds that the listing exchange
had failed to demonstrate satisfaction of
the Section 6(b)(5) standard.79 The
Commission specifically disagreed with
the exchange’s premises that (i) it is
inconsistent with the Section 6(b)(5)
standard for the Commission to permit
a Bitcoin Futures ETF registered under
the 1940 Act to launch but to
disapprove the approval of a bitcoin
spot ETP; (ii) it is inconsistent for the
Commission to approve a Bitcoin
Futures ETF that trades exclusively in
CME Bitcoin Futures contracts and
conclude that the CME Bitcoin Futures
market is not a ‘‘market of significant
size’’ under the Section 6(b)(5) standard;
and (iii) there is no basis of fact or law
that the 1940 Act is designed to prevent
market manipulation in the markets in
which the Bitcoin Futures ETF trades.
Instead, the Commission stated that it
considers each proposed rule change on
its own merits and noted that the
proposed rule did not relate to a product
regulated under the 1940 Act and did
not relate to the same underlying
holdings as the Bitcoin Futures ETFs. In
practice, however, the Commission did
not address why a bitcoin spot ETP fails
to satisfy the Section 6(b)(5) standard
when it is exposed to the same
underlying risks of manipulation as the
CME Bitcoin Futures contracts primarily
held by Bitcoin Futures ETFs, which
have been allowed to register and list.
78 See Letter from Joseph A. Hall et al. to Vanessa
Countryman on SR–NYSE–Arca–2021–90 (Nov. 29,
2021).
79 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–2021–2019)(‘‘VanEck Order’’).
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As recently as 2020, the Commission
approved new exchange listing rules
permitting ETFs registered under the
1940 Act, including Bitcoin Futures
ETFs, to list under an exchange’s
generic listing standards without having
to submit separate rule filing pursuant
to Section 19(b).80 In determining that
the rule change was reasonably
designed to help prevent fraudulent and
manipulative acts and practice, the SEC
stated that ETFs would be required to
disclose its portfolio holdings under the
1940 Act and that the exchange rule
included requirements relating to fire
walls and procedures to prevent the use
and dissemination of material, nonpubic information regarding the
applicable ETF index and portfolio.81
Importantly, with regard to surveillance,
the Commission stated only that the rule
change required the exchange to
implement and maintain written
surveillance procedures for ETF shares
and noted that the exchange would use
its existing surveillance procedures
applicable to derivative products to
monitor trading in ETF shares. In
approving the generic listing standards,
the SEC did not require in-depth
analyses into any particular markets or
index components.82 While noting the
ability of an exchange to rely on FINRA
for information related to certain
securities held by ETPs, the
Commission focused its determination
on the exchange’s surveillance of the
market for ETF shares. As a result,
Bitcoin Futures ETFs are permitted to
list and trade under generic listing
standards based solely on the oversight
of the underlying futures by the CFTC
and futures exchanges with no
acknowledgement or assessment by the
Commission of the actual risk of fraud
or manipulation related to underlying
bitcoin spot markets referenced by such
bitcoin futures—even when such bitcoin
markets mirror those proposed as
reference markets in the Index used by
the Trust and other spot bitcoin ETP
listing proposals.
Because (i) the risks of manipulation
in the bitcoin markets impacting the
Trust are thus indistinguishable from
those same risks impacting Bitcoin
Futures ETFs; (ii) the Trust will have
the same pricing sources, and (iii) the
Trust will be subject to the same risks
of manipulation as shares of Bitcoin
80 Self-Regulatory Organizations, NYSE Arca,
Inc.; Notice of Filing of Amendment No. 2 and
Order Granting Accelerated Approval of a Proposed
Rule Change, as Modified by Amendment No. 2, to
Adopt NYSE Arca Rule 5.2–E(j)(8) Governing the
Listing and Trading of Exchange-Traded Fund
Shares (Apr. 13, 2020) (SR–NYSE–Arca–2019–81).
81 Id.
82 Id.
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Futures ETFs; the Exchange believes
that the proposed rule change is
sufficiently designed to prevent
fraudulent and manipulative acts and
practice. Approving this change is
consistent with the treatment of
substantially similar products, and the
Exchange believes that any finding to
the contrary would result in arbitrarily
disparate treatment to the Trust.
(c) Other Means To Prevent Fraudulent
and Manipulative Acts and Practices
The Commission has also recognized
that the ‘‘regulated market of significant
size’’ standard is not the only means for
satisfying Section 6(b)(5) of the act,
specifically providing that a listing
exchange could demonstrate that ‘‘other
means to prevent fraudulent and
manipulative acts and practices’’ are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement.83
The Exchange believes that such
conditions are present. Specifically, the
significant liquidity in the spot market
and the impact of market orders on the
overall price of bitcoin mean that
attempting to move the price of bitcoin
is costly and has grown more expensive
over the past year. In January 2020, for
example, the cost to buy or sell $5
million worth of bitcoin averaged
roughly 30 basis points (compared to 10
basis points in 2/2021) with a market
impact of 50 basis points (compared to
30 basis points in 2/2021).84 For a $10
million market order, the cost to buy or
sell was roughly 50 basis points
(compared to 20 basis points in 2/2021)
with a market impact of 80 basis points
(compared to 50 basis points in 2/2021).
As the liquidity in the bitcoin spot
market increases, it follows that the
impact of $5 million and $10 million
orders will continue to decrease the
overall impact in spot price.
As noted above, the Commission also
permits a listing exchange to
demonstrate that ‘‘other means to
prevent fraudulent and manipulative
acts and practices’’ are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement. The
83 See Winklevoss Order at 37580. The
Commission has also specifcally noted that it ‘‘is
not applying a ‘‘cannot be manipulated’’ standard;
instead, the Commission is examining whether the
proposal meets the requirements of the Exchange
Act and, pursuant to its Rules of Practice, places the
burden on the listing exchange to demonstrate the
validity of its contentions and to establish that the
requirements of the Exchange Act have been met.
Id. at 37582.
84 These statistics are based on samples of bitcoin
liquidity in USD (excluding stablecoins or Euro
liquidity) based on executable quotes on Coinbase
Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
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Exchange and Sponsor believe that such
conditions are present.
Surveillance Sharing Agreement
The Commission also permits a listing
exchange to demonstrate that ‘‘other
means to prevent fraudulent and
manipulative acts and practices’’ are
sufficient to justify dispensing with the
requisite surveillance-sharing
agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange is proposing to take
additional steps to those described
above to supplement its ability to obtain
information that would be helpful in
detecting, investigating, and deterring
fraud and market manipulation in the
Commodity-Based Trust Shares. On
June 21, 2023, the Exchange reached an
agreement on terms with Coinbase, Inc.
(‘‘Coinbase’’), an operator of a United
States-based spot trading platform for
Bitcoin that represents a substantial
portion of US-based and USD
denominated Bitcoin trading,85 to enter
into a surveillance-sharing agreement
(‘‘Spot BTC SSA’’) and executed an
associated term sheet. Based on this
agreement on terms, the Exchange and
Coinbase will finalize and execute a
definitive agreement that the parties
expect to be executed prior to allowing
trading of the Commodity-Based Trust
Shares.
The Spot BTC SSA is expected to be
a bilateral surveillance-sharing
agreement between the Exchange and
Coinbase that is intended to supplement
the Exchange’s market surveillance
program. The Spot BTC SSA is expected
to have the hallmarks of a surveillancesharing agreement between two
members of the ISG, which would give
the Exchange supplemental access to
data regarding spot Bitcoin trades on
Coinbase where the Exchange
determines it is necessary as part of its
surveillance program for the
Commodity-Based Trust Shares.86 This
means that the Exchange expects to
receive market data for orders and
trades from Coinbase, which it will
utilize in surveillance of the trading of
Commodity-Based Trust Shares. In
addition, the Exchange can request
further information from Coinbase
related to spot bitcoin trading activity
on the Coinbase exchange platform, if
the Exchange determines that such
information would be necessary to
detect and investigate potential
85 According to a Kaiko Research report dated
June 26, 2023, Coinbase represented roughly 50%
of exchange trading volume in USD–BTC trading on
a daily basis during May 2023.
86 For additional information regarding ISG and
the hallmarks of surveillance-sharing between ISG
members, see https://isgportal.org/overview.
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manipulation in the trading of the
Commodity-Based Trust Shares.87
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In-Kind Creation and Redemption
Further, and consistent with prior
points above, offering only in-kind
creation and redemption will provide
unique protections against potential
attempts to manipulate the Shares.
While the Sponsor believes that the
Benchmark which it uses to value the
Trust’s bitcoin is itself resistant to
manipulation based on the methodology
further described below, the fact that
creations and redemptions are only
available in-kind makes the
manipulability of the Benchmark
significantly less important.
Specifically, because the Trust will not
accept cash to buy bitcoin in order to
create new shares or, barring a forced
redemption of the Trust or under other
extraordinary circumstances, be forced
to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses
to value the Trust’s bitcoin is not
particularly important.88 When
authorized participants are creating
with the Trust, they need to deliver a
certain number of bitcoin per share
(regardless of the valuation used) and
when they’re redeeming, they can
similarly expect to receive a certain
number of bitcoin per share. As such,
even if the price used to value the
Trust’s bitcoin is manipulated (which
the Sponsor believes that its
methodology is resistant to), the ratio of
bitcoin per Share does not change and
the Trust will either accept (for
creations) or distribute (for
redemptions) the same number of
bitcoin regardless of the value. This not
only mitigates the risk associated with
potential manipulation, but also
discourages and disincentivizes
manipulation of the Benchmark because
there is little financial incentive to do
so.
Wise Origin Bitcoin Trust
The Registration Statement includes
the following description of the Trust
and its operations. The Trust will issue
Shares that represent fractional
undivided beneficial interests in and
ownership of the Trust. The Trust is a
Delaware statutory trust that operates
pursuant to the Declaration of Trust and
Trust Agreement (the ‘‘Trust
Agreement’’), between Sponsor and
Delaware Trust Company, the Delaware
87 The Exchange also notes that it already has in
place ISG-like surveillance sharing agreement with
Cboe Digital Exchange, LLC and Cboe Clear Digital,
LLC.
88 While the Benchmark will not be particularly
important for the creation and redemption process,
it will be used for calculating fees.
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trustee of the Trust (the ‘‘Trustee’’).
Sponsor manages the Trust and is
responsible for the ongoing registration
of the Shares. The Trust will engage
Fidelity Service Company, Inc. (‘‘FSC’’),
a Sponsor affiliate, to be the
administrator (‘‘Administrator’’). A
third-party transfer agent (the ‘‘Transfer
Agent’’) will facilitate the issuance and
redemption of Shares of the Trust and
respond to correspondence by Trust
Shareholders and others relating to its
duties, maintain Shareholder accounts,
and make periodic reports to the
Trust.89 Another affiliate of Sponsor,
Fidelity Distributors Corporation, will
be the marketing agent (‘‘Marketing
Agent’’) in connection with the creation
and redemption of ‘‘Baskets’’ of Shares.
The Sponsor will provide assistance in
the marketing of the Shares. FDAS,
another Sponsor affiliate, will serve as
the Custodian.
According to the Registration
Statement, the Trust is neither an
investment company registered under
the Investment Company Act of 1940, as
amended (the ‘‘1940 Act’’),90 nor a
commodity pool for purposes of the
Commodity Exchange Act (‘‘CEA’’), and
neither the Trust nor the Sponsor is
subject to regulation as a commodity
pool operator or a commodity trading
adviser in connection with the Shares.
The Trust’s investment objective is to
seek to track the performance of bitcoin,
as measured by the performance of the
Fidelity Bitcoin Index PR (the ‘‘Index’’),
less the Trust’s expenses and other
liabilities. In seeking to achieve its
investment objective, the Trust will
hold bitcoin and will value its Shares
daily as of 4:00 p.m. Eastern time using
the same methodology used to calculate
the Index and process all creations and
redemptions in transactions with
authorized participants. The Trust is not
actively managed.
serves as bitcoin custodian to
institutional and individual investors.
The Custodian maintains a substantial
portion of the private keys associated
with the Trust’s bitcoin in ‘‘cold
storage’’ or similarly secure technology.
Cold storage is a safeguarding method
with multiple layers of protections and
protocols, by which the private key(s)
corresponding to the Trust’s bitcoin is
(are) generated and stored in an offline
manner. Private keys are generated in
offline computers that are not connected
to the internet so that they are resistant
to being hacked. Cold storage of private
keys may involve keeping such keys on
a non-networked computer or electronic
device or storing the public key and
private keys on a storage device (for
example, a USB thumb drive) or printed
medium and deleting the keys from all
computers.
The Custodian may receive deposits
of bitcoin but may not send bitcoin
without use of the corresponding
private keys. In order to send bitcoin
when the private keys are kept in cold
storage, either the private keys must be
retrieved from cold storage and entered
into a software program to sign the
transaction, or the unsigned transaction
must be sent to the ‘‘cold’’ server in
which the private keys are held for
signature by the private keys. At that
point, the Custodian can transfer the
bitcoin. The Trust’s Transfer Agent will
facilitate the settlement of Shares in
response to the placement of creation
orders and redemption orders from
Authorized Participants. The Trust
generally does not intend to hold cash
or cash equivalents. However, there may
be situations where the Trust will hold
cash on a temporary basis. The Trust
will enter into a cash custody agreement
with an unaffiliated regulated bank as
custodian of the Trust’s cash and cash
equivalents.
The Bitcoin Custodian
The Sponsor has selected FDAS to be
the Trust’s Custodian. FDAS is a New
York state limited liability trust 91 that
The Index
The Index is designed to reflect the
performance of bitcoin in U.S. dollars.
The current exchange composition of
the Index is Bitstamp, Coinbase,
Gemini, itBit, Kraken, and LMAX
Digital. The Index methodology was
developed by Fidelity Product Services,
LLC (the ‘‘Index Provider’’) and is
administered by the Fidelity Index
Committee. Coin Metrics, Inc. is the
third-party calculation agent for the
Index.92
The Index is constructed using bitcoin
price feeds from eligible bitcoin spot
89 The Exchange notes that the Sponsor is
finalizing negotiations with several service
providers, and it will submit an amendment to this
proposal upon finalization of those arrangements.
90 15 U.S.C. 80a–1.
91 New York state trust companies are subject to
rigorous oversight similar to other types of entities,
such as nationally chartered banking entities, that
hold customer assets. Like national banks, they
must obtain specific approval of their primary
rgulator for the exercise of their fiduciary powers.
Moreover, limited purpose trust companies engaged
in the custody of digial assets are subject to even
more stringent requirements than national banks
which, following initial approval of trust powers,
generally can exercise those powers broadly
without further approval of the OCC. In contrast,
NYDFS requires in their approval orders that
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limited purpose trust companies obtain separate
approval for all material changes in business.
92 The Sponsor’s affiliates have an owership
interest in Coin Metrics, Inc.
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markets and a volume-weighted median
price (‘‘VWMP’’) methodology,
calculated every 15 seconds based on
VWMP spot market data over rolling 5minute increments to develop a bitcoin
price composite. The Index market
value is the volume-weighted median
price of bitcoin in U.S. dollars over the
previous five minutes, which is
calculated by (1) ordering all individual
transactions on eligible spot markets
over the previous five minutes by price,
and then (2) selecting the price
associated with the 50th percentile of
total volume. Using rolling five-minute
segments means malicious actors would
need to sustain efforts to manipulate the
market over an extended period of time,
or such malicious actors would need to
replicate efforts multiple times across
eligible bitcoin spot markets, potentially
triggering review. This extended period
also supports authorized participant
activity by capturing volume over a
longer time period, rather than forcing
authorized participants to mark an
individual close or auction. The use of
a median price reduces the ability of
outlier prices to impact the NAV, as it
systematically excludes those prices
from the NAV calculation. The use of a
volume-weighted median (as opposed to
a traditional median) serves as an
additional protection against attempts to
manipulate the NAV by executing a
large number of low-dollar trades,
because any manipulation attempt
would have to involve a majority of
global spot bitcoin volume in a threeminute window to have any influence
on the NAV. Further, removing the
highest and lowest prices further
protects against attempts to manipulate
the NAV, requiring bad actors to act on
multiple eligible bitcoin spot markets at
once to have any ability to influence the
price.
Availability of Information
In addition to the price transparency
of the Index, the Trust will provide
information regarding the Trust’s
bitcoin holdings as well as additional
data regarding the Trust. The Trust will
provide an Intraday Indicative Value
(‘‘IIV’’) per Share updated every 15
seconds, as calculated by the Exchange
or a third-party financial data provider
during the Exchange’s Regular Trading
Hours (9:30 a.m. to 4:00 p.m. Eastern
time). The IIV will be calculated by
using the prior day’s closing NAV per
Share as a base and updating that value
during Regular Trading Hours to reflect
changes in the value of the Trust’s
bitcoin holdings during the trading day.
The IIV disseminated during Regular
Trading Hours should not be viewed as
an actual real-time update of the NAV,
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which will be calculated only once at
the end of each trading day. The IIV will
be widely disseminated on a per Share
basis every 15 seconds during the
Exchange’s Regular Trading Hours by
one or more major market data vendors.
In addition, the IIV will be available
through on-line information services.
The website for the Trust, which will
be publicly accessible at no charge, will
contain the following information: (a)
the current NAV per Share daily and the
prior business day’s NAV and the
reported closing price; (b) the BZX
Official Closing Price 93 in relation to
the NAV as of the time the NAV is
calculated and a calculation of the
premium or discount of such price
against such NAV; (c) data in chart form
displaying the frequency distribution of
discounts and premiums of the Official
Closing Price against the NAV, within
appropriate ranges for each of the four
previous calendar quarters (or for the
life of the Trust, if shorter); (d) the
prospectus; and other applicable
quantitative information. The Trust will
also disseminate the Trust’s holdings on
a daily basis on the Trust’s website. The
value of the Index will be made
available by one or more major market
data vendors, updated at least every 15
seconds during Regular Trading Hours.
The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the Consolidated Tape Association
(‘‘CTA’’).
Quotation and last sale information
for bitcoin is widely disseminated
through a variety of major market data
vendors, including Bloomberg and
Reuters, as well as the Index.
Information relating to trading,
including price and volume
information, in bitcoin is available from
major market data vendors and from the
exchanges on which bitcoin are traded.
Depth of book information is also
available from bitcoin exchanges. The
normal trading hours for bitcoin
exchanges are 24 hours per day, 365
days per year.
Net Asset Value
As described in the Registration
Statement, for purposes of calculating
the Trust’s NAV per Share, the Trust’s
holdings of bitcoin will be valued using
the same methodology as used to
93 As defined in Rule 11.23(a)(3), the term ‘‘BZX
Official Closing Price’’ shall mean the price
disseminated to the consolidated tape as the market
center closing trade.
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46279
calculate the Index. NAV means the
total assets of the Trust including, but
not limited to, all bitcoin and cash, if
any, less total liabilities of the Trust,
each determined on the basis of
generally accepted accounting
principles. The NAV of the Trust is
calculated by taking the fair market
value of its total assets based on the
volume-weighted median price of
bitcoin used for the calculation of the
Index, subtracting any liabilities (which
include accrued expenses), and dividing
that total by the total number of
outstanding Shares. The Administrator
calculates the NAV of the Trust once
each Exchange trading day. The NAV
for a normal trading day will be released
after 4:00 p.m. Eastern time. Trading
during the core trading session on the
Exchange typically closes at 4:00 p.m.
Eastern time. However, NAVs are not
officially struck until later in the day
(often by 5:30 p.m. Eastern time and
almost always by 8:00 p.m. Eastern
time). The pause between 4:00 p.m.
Eastern time and 5:30 p.m. Eastern time
(or later) provides an opportunity to
algorithmically detect, flag, investigate,
and correct unusual pricing should it
occur.
Creation and Redemption of Shares
When the Trust sells or redeems its
Shares, it will do so in ‘‘in-kind’’
transactions in blocks of Shares (a
‘‘Creation Basket’’) at the Trust’s NAV.
Authorized participants will deliver, or
facilitate the delivery of, bitcoin to the
Trust’s account with the Custodian in
exchange for Shares when they
purchase Shares, and the Trust, through
the Custodian, will deliver bitcoin to
such authorized participants when they
redeem Shares with the Trust.
Authorized participants may then offer
Shares to the public at prices that
depend on various factors, including the
supply and demand for Shares, the
value of the Trust’s assets, and market
conditions at the time of a transaction.
Shareholders who buy or sell Shares
during the day from their broker may do
so at a premium or discount relative to
the NAV of the Shares of the Trust.
According to the Registration
Statement, on any business day, an
authorized participant may place an
order to create one or more baskets.
Purchase orders must be placed by the
time noted in the Authorized
Participant Agreement or as provided
separately to all Authorized
Participants. The day on which an order
is received is considered the purchase
order date. The total deposit of bitcoin
required is an amount of bitcoin that is
in the same proportion to the total assets
of the Trust, net of accrued expenses
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and other liabilities, on the date the
order to purchase is properly received,
as the number of Shares to be created
under the purchase order is in
proportion to the total number of Shares
outstanding on the date the order is
received. Each night, the Sponsor will
publish the amount of bitcoin that will
be required in exchange for each
creation order. The Administrator
determines the required deposit for a
given day by dividing the number of
bitcoin held by the Trust as of the
opening of business on that business
day, adjusted for the amount of bitcoin
constituting estimated accrued but
unpaid fees and expenses of the Trust
as of the opening of business on that
business day, by the quotient of the
number of Shares outstanding at the
opening of business divided by the
aggregation of Shares associated with a
Creation Basket. The procedures by
which an authorized participant can
redeem one or more Creation Baskets
mirror the procedures for the creation of
Creation Baskets.
Rule 14.11(e)(4)—Commodity-Based
Trust Shares
The Shares will be subject to BZX
Rule 14.11(e)(4), which sets forth the
initial and continued listing criteria
applicable to Commodity-Based Trust
Shares. The Exchange will obtain a
representation that the Trust’s NAV will
be calculated daily and that these values
and information about the assets of the
Trust will be made available to all
market participants at the same time.
The Exchange notes that, as defined in
Rule 14.11(e)(4)(C)(i), the Shares will be:
(a) issued by a trust that holds a
specified commodity 94 deposited with
the trust; (b) issued by such trust in a
specified aggregate minimum number in
return for a deposit of a quantity of the
underlying commodity; and (c) when
aggregated in the same specified
minimum number, may be redeemed at
a holder’s request by such trust which
will deliver to the redeeming holder the
quantity of the underlying commodity.
Upon termination of the Trust, the
Shares will be removed from listing.
The Trustee, Delaware Trust Company,
is a trust company having substantial
capital and surplus and the experience
and facilities for handling corporate
trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change
will be made to the trustee without prior
notice to and approval of the Exchange.
94 For purposes of Rule 14.11(e)(4), the term
community takes on the definition of the term as
provided in the Commodity Exchange Act. As noted
abobe, the CFTC has opined that Bitcoin is a
commodity as defined in Section 1a(9) of the
Commodity Exchange Act. See Coinflip.
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The Exchange also notes that, pursuant
to Rule 14.11(e)(4)(F), neither the
Exchange nor any agent of the Exchange
shall have any liability for damages,
claims, losses or expenses caused by
any errors, omissions or delays in
calculating or disseminating any
underlying commodity value, the
current value of the underlying
commodity required to be deposited to
the Trust in connection with issuance of
Commodity-Based Trust Shares;
resulting from any negligent act or
omission by the Exchange, or any agent
of the Exchange, or any act, condition or
cause beyond the reasonable control of
the Exchange, its agent, including, but
not limited to, an act of God; fire; flood;
extraordinary weather conditions; war;
insurrection; riot; strike; accident;
action of government; communications
or power failure; equipment or software
malfunction; or any error, omission or
delay in the reports of transactions in an
underlying commodity. Finally, as
required in Rule 14.11(e)(4)(G), the
Exchange notes that any registered
market maker (‘‘Market Maker’’) in the
Shares must file with the Exchange in
a manner prescribed by the Exchange
and keep current a list identifying all
accounts for trading in an underlying
commodity, related commodity futures
or options on commodity futures, or any
other related commodity derivatives,
which the registered Market Maker may
have or over which it may exercise
investment discretion. No registered
Market Maker shall trade in an
underlying commodity, related
commodity futures or options on
commodity futures, or any other related
commodity derivatives, in an account in
which a registered Market Maker,
directly or indirectly, controls trading
activities, or has a direct interest in the
profits or losses thereof, which has not
been reported to the Exchange as
required by this Rule. In addition to the
existing obligations under Exchange
rules regarding the production of books
and records (see, e.g. , Rule 4.2), the
registered Market Maker in CommodityBased Trust Shares shall make available
to the Exchange such books, records or
other information pertaining to
transactions by such entity or registered
or non-registered employee affiliated
with such entity for its or their own
accounts for trading the underlying
physical commodity, related commodity
futures or options on commodity
futures, or any other related commodity
derivatives, as may be requested by the
Exchange.
Trading Halts
With respect to trading halts, the
Exchange may consider all relevant
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factors in exercising its discretion to
halt or suspend trading in the Shares.
The Exchange will halt trading in the
Shares under the conditions specified in
BZX Rule 11.18. Trading may be halted
because of market conditions or for
reasons that, in the view of the
Exchange, make trading in the Shares
inadvisable. These may include: (1) the
extent to which trading is not occurring
in the bitcoin underlying the Shares; or
(2) whether other unusual conditions or
circumstances detrimental to the
maintenance of a fair and orderly
market are present. Trading in the
Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth
circumstances under which trading in
the Shares may be halted.
Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. BZX will allow trading
in the Shares during all trading sessions
on the Exchange. The Exchange has
appropriate rules to facilitate
transactions in the Shares during all
trading sessions. As provided in BZX
Rule 11.11(a) the minimum price
variation for quoting and entry of orders
in securities traded on the Exchange is
$0.01 where the price is greater than
$1.00 per share or $0.0001 where the
price is less than $1.00 per share.
Surveillance
The Exchange believes that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
Trading of the Shares through the
Exchange will be subject to the
Exchange’s surveillance procedures for
derivative products, including
Commodity-Based Trust Shares. The
issuer has represented to the Exchange
that it will advise the Exchange of any
failure by the Trust or the Shares to
comply with the continued listing
requirements, and, pursuant to its
obligations under Section 19(g)(1) of the
Exchange Act, the Exchange will surveil
for compliance with the continued
listing requirements. If the Trust or the
Shares are not in compliance with the
applicable listing requirements, the
Exchange will commence delisting
procedures under Exchange Rule 14.12.
The Exchange may obtain information
regarding trading in the Shares and
Bitcoin Futures via ISG, from other
exchanges who are members or affiliates
of the ISG, or with which the Exchange
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has entered into a comprehensive
surveillance sharing agreement.95
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Information Circular
Prior to the commencement of
trading, the Exchange will inform its
members in an Information Circular of
the special characteristics and risks
associated with trading the Shares.
Specifically, the Information Circular
will discuss the following: (i) the
procedures for the creation and
redemption of Baskets (and that the
Shares are not individually redeemable);
(ii) BZX Rule 3.7, which imposes
suitability obligations on Exchange
members with respect to recommending
transactions in the Shares to customers;
(iii) how information regarding the IIV
and the Trust’s NAV are disseminated;
(iv) the risks involved in trading the
Shares outside of Regular Trading
Hours 96 when an updated IIV will not
be calculated or publicly disseminated;
(v) the requirement that members
deliver a prospectus to investors
purchasing newly issued Shares prior to
or concurrently with the confirmation of
a transaction; and (vi) trading
information.
In addition, the Information Circular
will advise members, prior to the
commencement of trading, of the
prospectus delivery requirements
applicable to the Shares. Members
purchasing the Shares for resale to
investors will deliver a prospectus to
such investors. The Information Circular
will also discuss any exemptive, noaction and interpretive relief granted by
the Commission from any rules under
the Act.
2. Statutory Basis
The Exchange believes that the
proposal is consistent with Section 6(b)
of the Act 97 in general and Section
6(b)(5) 98 of the Act in particular in that
it is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system and, in
general, to protect investors and the
public interest.
The Commission has approved
numerous series of Trust Issued
Receipts,99 including Commodity-Based
95 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
96 Regular Trading Hours is the time between 9:30
a.m. and 4:00 p.m. Eastern Time.
97 15 U.S.C. 78f.
98 15 U.S.C. 78f(b)(5).
99 See Exchange Rule 14.11(f).
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Trust Shares,100 to be listed on U.S.
national securities exchanges. In order
for any proposed rule change from an
exchange to be approved, the
Commission must determine that,
among other things, the proposal is
consistent with the requirements of
Section 6(b)(5) of the Act, specifically
including: (i) the requirement that a
national securities exchange’s rules are
designed to prevent fraudulent and
manipulative acts and practices; 101 and
(ii) the requirement that an exchange
proposal be designed, in general, to
protect investors and the public interest.
The Exchange believes that this
proposal is consistent with the
requirements of Section 6(b)(5) of the
and, as described and discussed above,
the Sponsor’s analysis demonstrates that
the Exchange has satisfied the
requirements under the Act that the
CME Bitcoin Futures Market (i) is a
regulated market, (ii) has a
comprehensive surveillance-sharing
agreement with the Exchange; and (iii)
satisfies the Commission’s ‘‘significant
market’’ definition.’’ In addition, the
Exchange believes that this proposal is
consistent with the requirements of
Section 6(b)(5) of the Act because this
filing sufficiently demonstrates that the
standard that has previously been
articulated by the Commission
100 Commodity-Based Trust Shares, as described
in Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
101 As the Exchange has stated in a number of
other public documents, it continues to believe that
bitcoin is resistant to price manipulation and that
‘‘other means to prevent fraudulent and
manipulative acts and practices’’ exist to justify
dispensing with the requisite surveillance sharing
agreement. The geographically diverse and
continuous nature of bitcoin trading render it
difficult and prohibitively costly to manipulate the
price of bitcoin. The fragmentation across bitcoin
platforms, the relatively slow speed of transactions,
and the capital necessary to maintain a significant
presence on each trading platform make
manipulation of bitcoin prices through continuous
trading activity challenging. To the extent that there
are bitcoin exchanges engaged in or allowing wash
trading or other activity intended to manipulate the
price of bitcoin on other markets, such pricing does
not normally impact prices on other exchange
because participants will generally ignore markets
with quotes that they deem non-executable.
Moreover, the linkage between the bitcoin markets
and the presence of arbitrageurs in those markets
means that the manipulation of the price of bitcoin
price on any single venue would require
manipulation of the global bitcoin price in order to
be effective. Arbitrageurs must have funds
distributed across multiple trading platforms in
order to take advantage of temporary price
dislocations, thereby making it unlikely that there
will be strong concentration of funds on any
particular bitcoin exchange or OTC platform. As a
result, the potential for manipulation on a trading
platform would require overcoming the liquidity
supply of such arbitrageurs who are effectively
eliminating any cross-market pricing differences.
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applicable to Commodity-Based Trust
Shares has been met as outlined below.
Designed To Prevent Fraudulent and
Manipulative Acts and Practices
In order for a proposal to list and
trade a series of Commodity-Based Trust
Shares to be deemed consistent with the
Act, the Commission requires that an
exchange demonstrate that there is a
comprehensive surveillance-sharing
agreement in place 102 with a regulated
market of significant size. Both the
Exchange and CME are members of
ISG.103 As such, the only remaining
issue to be addressed is whether the
Bitcoin Futures market constitutes a
market of significant size, which the
Exchange believes that it does. The
terms ‘‘significant market’’ and ‘‘market
of significant size’’ include a market (or
group of markets) as to which: (a) there
is a reasonable likelihood that a person
attempting to manipulate the ETP
would also have to trade on that market
to manipulate the ETP, so that a
surveillance-sharing agreement would
assist the listing exchange in detecting
and deterring misconduct; and (b) it is
unlikely that trading in the ETP would
be the predominant influence on prices
in that market.104
The Commission has also recognized
that the ‘‘regulated market of significant
size’’ standard is not the only means for
satisfying Section 6(b)(5) of the act,
specifically providing that a listing
exchange could demonstrate that ‘‘other
means to prevent fraudulent and
manipulative acts and practices’’ are
sufficient to justify dispensing with the
102 As previously articulated by the Commission,
‘‘The standard requires such surveillance-sharing
agreements since ’’they provide a necessary
deterrent to manipulation because they facilitate the
availability of information needed to fully
investigate a manipulation if it were to occur.‘‘ The
Commission has emphasized that it is essential for
an exchange listing a derivative securities product
to enter into a surveillance- sharing agreement with
markets trading underlying securities for the listing
exchange to have the ability to obtain information
necessary to detect, investigate, and deter fraud and
market manipulation, as well as violations of
exchange rules and applicable federal securities
laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides
for the sharing of information about market trading
activity, clearing activity, and customer identity;
that the parties to the agreement have reasonable
ability to obtain access to and produce requested
information; and that no existing rules, laws, or
practices would impede one party to the agreement
from obtaining this information from, or producing
it to, the other party.’’ The Commission has
historically held that joint membership in ISG
constitutes such a surveillance sharing agreement.
See Wilshire Phoenix Disapproval.
103 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
104 See Wilshire Phoenix Disapproval.
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requisite surveillance-sharing
agreement.105
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(a) Reasonable Likelihood That a Person
Attempting To Manipulate the ETP
Would Also Have To Trade on That
Market To Manipulate the ETP
Bitcoin Futures represent a growing
influence on pricing in the spot bitcoin
market as has been laid out above and
in other proposals to list and trade Spot
Bitcoin ETPs. Pricing in Bitcoin Futures
is based on pricing from spot bitcoin
markets. As noted above, the statement
from the Teucrium Approval that
‘‘CME’s surveillance can reasonably be
relied upon to capture the effects on the
CME bitcoin futures market caused by a
person attempting to manipulate the
proposed futures ETP by manipulating
the price of CME bitcoin futures
contracts.indirectly by trading outside
of the CME bitcoin futures market,’’
makes clear that the Commission
believes that CME’s surveillance can
capture the effects of trading on the
relevant spot markets on the pricing of
Bitcoin Futures. While the Commission
makes clear in the Teucrium Approval
that the analysis only applies to the
Bitcoin Futures market as it relates to an
ETP that invests in Bitcoin Futures as its
only non-cash or cash equivalent
holding, if CME’s surveillance is
sufficient to mitigate concerns related to
trading in Bitcoin Futures for which the
pricing is based directly on pricing from
spot bitcoin markets, it’s not clear how
such a conclusion could apply only to
ETPs based on Bitcoin Futures and not
extend to Spot Bitcoin ETPs.
Additionally, a Bitcoin Futures ETF is
actually potentially more susceptible to
manipulation than a Spot Bitcoin ETP
where the underlying trust offers only
in-kind creation and redemption.
Specifically, the pricing of Bitcoin
Futures is based on prices from spot
bitcoin markets, while shares of a Spot
Bitcoin ETP would represent an interest
in bitcoin directly and authorized
participants for a Spot Bitcoin ETP
would be able to source bitcoin from
any exchange and create or redeem with
the applicable trust regardless of the
price of the underlying index. Potential
manipulation of a Bitcoin Futures ETF
would require manipulation on the spot
markets on which the pricing for Bitcoin
Futures are based while the in-kind
105 See Winklevoss Order at 37580. The
Commission has also specifically noted that it ‘‘is
not applying a ‘‘cannot be manipulated’’ standard;
instead, the Commission is examining whether the
proposal meets the requirements of the Exchange
Act and, pursuant to its Rules of Practice, places the
burden on the listing exchange to demonstrate the
validity of its contentions and to establish that the
requirements of the Exchange Act have been met.
Id. at 37582.
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creation and redemption process and
fungibility of bitcoin means that a
would be manipulator of a Spot Bitcoin
ETP would need to manipulate the price
across all bitcoin markets or risk simply
providing arbitrage opportunities for
authorized participants. Further to this
point, this arbitrage opportunity also
acts to reduce any incentives to
manipulate the price of a Spot Bitcoin
ETP because the underlying trust will
create and redeem shares at set rates of
bitcoin per share without regard to the
price that the ETP is trading at in the
secondary market or the price of the
underlying index. As such, the
Exchange believes that part (a) of the
significant market test outlined above is
satisfied and that common membership
in ISG between the Exchange and CME
would assist the listing exchange in
detecting and deterring misconduct in
the Shares.
(b) Predominant Influence on Prices in
Spot and Bitcoin Futures
The Exchange and Sponsor also
believe that trading in the Shares would
not be the predominant force on prices
in the Bitcoin Futures market or spot
market for a number of reasons,
including the in-kind creation and
redemption process, the spot market
arbitrage opportunities that such in-kind
creation and redemption process
creates, the significant volume in the
Bitcoin Futures market, the size of
bitcoin’s market cap, and the significant
liquidity available in the spot market. In
addition to the Bitcoin Futures market
data points cited above, the spot market
for bitcoin is also very liquid. According
to data from Skew, the cost to buy or
sell $5 million worth of bitcoin averages
roughly 48 basis points with a market
impact of $139.08.106 Stated another
way, a market participant could enter a
market buy or sell order for $5 million
of bitcoin and only move the market
0.48%. More strategic purchases or sales
(such as using limit orders and
executing through OTC bitcoin trade
desks) would likely have less obvious
impact on the market—which is
consistent with MicroStrategy, Tesla,
and Square being able to collectively
purchase billions of dollars in bitcoin.
As such, the combination of the inkind creation and redemption process,
the Bitcoin Futures leading price
discovery, the overall size of the bitcoin
market, and the ability for market
participants, including authorized
participants creating and redeeming in106 These statistics are based on samples of
bitcoin liquidity in USD (excluding stablecoins or
Euro liquidity) based on executable quotes on
Coinbase, FTX and Kraken during the one-year
period ending May 2022.
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kind with the Trust, to buy or sell large
amounts of bitcoin without significant
market impact will help prevent the
Shares from becoming the predominant
force on pricing in either the bitcoin
spot or Bitcoin Futures markets,
satisfying part (b) of the test outlined
above.
(c) Other Means To Prevent Fraudulent
and Manipulative Acts and Practices
As noted above, the Commission also
permits a listing exchange to
demonstrate that ‘‘other means to
prevent fraudulent and manipulative
acts and practices’’ are sufficient to
justify dispensing with the requisite
surveillance-sharing agreement. The
Exchange and Sponsor believe that such
conditions are present.
The Exchange also believes that
reviewing this proposal through the lens
of the Bitcoin Futures Approvals would
also lead the Commission to approving
this proposal. Previous disapproval
orders have made clear that a market
that constitutes a regulated market of
significant size is generally a futures
and/or options market based on the
underlying reference asset rather than
the spot commodity markets, which are
often unregulated.107 The Exchange
believes that the following excerpt from
the Teucrium Approval is particular
informative:
The CME ‘‘comprehensively surveils
futures market conditions and price
movements on a real-time and ongoing basis
in order to detect and prevent price
distortions, including price distortions
caused by manipulative efforts.’’ Thus the
CME’s surveillance can reasonably be relied
upon to capture the effects on the CME
bitcoin futures market caused by a person
attempting to manipulate the proposed
futures ETP by manipulating the price of
CME bitcoin futures contracts, whether that
attempt is made by directly trading on the
CME bitcoin futures market or indirectly by
107 See Winklevoss Order at 37593, specifically
footnote 202, which includes the language from
numerous approval orders for which the underlying
futures markets formed the basis for approving
series of ETPs that hold physical metals, including
gold, silver, palladium, platinum, and precious
metals more broadly; and 37600, specifically where
the Commission provides that ‘‘when the spot
market is unregulated—the requirement of
preventing fraudulent and manipulative acts may
possibly be satisfied by showing that the ETP listing
market has entered into a surveillance-sharing
agreement with a regulated market of significant
size in derivatives related to the underlying asset.’’
As noted above, the Exchange believes that these
citations are particularly helpful in making clear
that the spot market for a spot commodity ETP need
not be ‘‘regulated’’ in order for a spot commodity
ETP to be approved by the Commission, and in fact
that it’s been the common historical practice of the
Commission to rely on such derivatives markets as
the regulated market of significant size because
such spot commodities markets are largely
unregulated.
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trading outside of the CME bitcoin futures
market. As such, when the CME shares its
surveillance information with Arca, the
information would assist in detecting and
deterring fraudulent or manipulative
misconduct related to the non-cash assets
held by the proposed ETP.108
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Bitcoin Futures pricing is based on
pricing from spot bitcoin markets. The
statement from the Teucrium Approval
that ‘‘CME’s surveillance can reasonably
be relied upon to capture the effects on
the CME bitcoin futures market caused
by a person attempting to manipulate
the proposed futures ETP by
manipulating the price of CME bitcoin
futures contracts . . . indirectly by
trading outside of the CME bitcoin
futures market,’’ makes clear that the
Commission believes that CME’s
surveillance can capture the effects of
trading on the relevant spot markets on
the pricing of Bitcoin Futures. If CME is
able to detect such attempts at
manipulation in the complex and
interconnected spot bitcoin market, how
would such an ability to detect
attempted manipulation and the utility
in sharing that information with the
listing exchange apply only to Bitcoin
Futures ETFs and not Spot Bitcoin
ETPs? Stated a different way, given that
there is significant trading volume on
numerous bitcoin exchanges that are not
part of the CME CF Bitcoin Reference
Rate and that arbitrage opportunities
across bitcoin exchanges means that
such trading volume will influence spot
bitcoin prices across the market and,
despite this, the Commission still
believes that CME can detect attempted
manipulation of the Bitcoin Futures
through ‘‘trading outside of the CME
bitcoin futures market,’’ it is clear that
such ability would apply equally to both
Bitcoin Futures ETFs and Spot Bitcoin
ETPs. To take it a step further, such an
ability would also seem to be a strong
indication that the CME Bitcoin Futures
market represents a regulated market of
significant size. To be clear, the
Exchange agrees with the Commission
on this point (and the implications of
their conclusions) and further notes that
the pricing mechanism applicable to the
Shares is similar to the CME CF Bitcoin
Reference Rate.
Surveillance Sharing Agreement
The Exchange is proposing to take
additional steps to those described
above to supplement its ability to obtain
information that would be helpful in
detecting, investigating, and deterring
fraud and market manipulation in the
Commodity-Based Trust Shares. On
June 21, 2023, the Exchange reached an
108 See
Teucrium Approval at 21679.
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agreement on terms with Coinbase, Inc.
(‘‘Coinbase’’), an operator of a United
States-based spot trading platform for
Bitcoin that represents a substantial
portion of US-based and USD
denominated Bitcoin trading,109 to enter
into a surveillance-sharing agreement
(‘‘Spot BTC SSA’’) and executed an
associated term sheet. Based on this
agreement on terms, the Exchange and
Coinbase will finalize and execute a
definitive agreement that the parties
expect to be executed prior to allowing
trading of the Commodity-Based Trust
Shares.
The Spot BTC SSA is expected to be
a bilateral surveillance-sharing
agreement between the Exchange and
Coinbase that is intended to supplement
the Exchange’s market surveillance
program. The Spot BTC SSA is expected
to have the hallmarks of a surveillancesharing agreement between two
members of the ISG, which would give
the Exchange supplemental access to
data regarding spot Bitcoin trades on
Coinbase where the Exchange
determines it is necessary as part of its
surveillance program for the
Commodity-Based Trust Shares.110 This
means that the Exchange expects to
receive market data for orders and
trades from Coinbase, which it will
utilize in surveillance of the trading of
Commodity-Based Trust Shares. In
addition, the Exchange can request
further information from Coinbase
related to spot bitcoin trading activity
on the Coinbase exchange platform, if
the Exchange determines that such
information would be necessary to
detect and investigate potential
manipulation in the trading of the
Commodity-Based Trust Shares.111
In Kind Creation and Redemption
Further, and consistent with prior
points above, offering only in-kind
creation and redemption will also
provide unique protections against
potential attempts to manipulate the
price of the Shares. While the Sponsor
believes that the Benchmark which it
uses to value the Trust’s bitcoin is itself
resistant to manipulation based on the
methodology further described below,
the fact that creations and redemptions
are only available in-kind makes the
manipulability of the Benchmark
109 According to a Kaiko Research report dated
June 26, 2023, Coinbase represented roughly 50%
of exchange trading volume in USD-BTC trading on
a daily basis during May 2023.
110 For additional information regarding ISG and
the hallmarks of surveillance-sharing between ISG
members, see https://isgportal.org/overview.
111 The Exchange also notes that it already has in
place ISG-like surveillance sharing agreement with
Cboe Digital Exchange, LLC and Cboe Clear Digital,
LLC.
PO 00000
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Fmt 4703
Sfmt 4703
46283
significantly less important.
Specifically, because the Trust will not
accept cash to buy bitcoin in order to
create new Shares or, barring a forced
redemption of the Trust or under other
extraordinary circumstances, be forced
to sell bitcoin to pay cash for redeemed
Shares, the price that the Sponsor uses
to value the Trust’s bitcoin is not
particularly important.112 When
authorized participants are creating
Shares with the Trust, they need to
deliver a certain number of bitcoin per
Share (regardless of the valuation used)
and when they’re redeeming, they can
similarly expect to receive a certain
number of bitcoin per Share. As such,
even if the price used to value the
Trust’s bitcoin is manipulated (which
the Sponsor believes that its
methodology is resistant to), the ratio of
bitcoin per Share does not change and
the Trust will either accept (for
creations) or distribute (for
redemptions) the same number of
bitcoin regardless of the value. This not
only mitigates the risk associated with
potential manipulation, but also
discourages and disincentivizes
manipulation of the Benchmark because
there is little financial incentive to do
so.
(d) Designed To Protect Investors and
the Public Interest
The Exchange believes that the
proposal is designed to protect investors
and the public interest. Over the past
several years, U.S. investor exposure to
bitcoin through OTC Bitcoin Funds has
grown into the tens of billions of
dollars, including through Bitcoin
Futures ETFs. With that growth, so too
has grown the quantifiable investor
protection issues to U.S. investors
through roll costs for Bitcoin Futures
ETFs and premium/discount volatility
and management fees for OTC Bitcoin
Funds. The Exchange believes that the
concerns related to the prevention of
fraudulent and manipulative acts and
practices have been sufficiently
addressed to be consistent with the Act
and, to the extent that the Commission
disagrees with that assertion, such
concerns are now outweighed by
investor protection concerns. As such,
the Exchange believes that approving
this proposal (and comparable
proposals) provides the Commission
with the opportunity to allow U.S.
investors with access to bitcoin in a
regulated and transparent exchangetraded vehicle that would act to limit
risk to U.S. investors by: (i) reducing
112 While the Benchmark will not be particularly
important for the creation and redemption process,
it will be used for calculating fees.
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
premium and discount volatility; (ii)
reducing management fees through
meaningful competition; (iii) reducing
risks and costs associated with investing
in Bitcoin Futures ETFs and operating
companies that are imperfect proxies for
bitcoin exposure; and (iv) providing an
alternative to custodying spot bitcoin.
ddrumheller on DSK120RN23PROD with NOTICES1
Commodity-Based Trust Shares
The Exchange believes that the
proposed rule change is designed to
prevent fraudulent and manipulative
acts and practices in that the Shares will
be listed on the Exchange pursuant to
the initial and continued listing criteria
in Exchange Rule 14.11(e)(4). The
Exchange believes that its surveillance
procedures are adequate to properly
monitor the trading of the Shares on the
Exchange during all trading sessions
and to deter and detect violations of
Exchange rules and the applicable
federal securities laws. Trading of the
Shares through the Exchange will be
subject to the Exchange’s surveillance
procedures for derivative products,
including Commodity-Based Trust
Shares. The issuer has represented to
the Exchange that it will advise the
Exchange of any failure by the Trust or
the Shares to comply with the
continued listing requirements, and,
pursuant to its obligations under
Section 19(g)(1) of the Exchange Act, the
Exchange will surveil for compliance
with the continued listing requirements.
If the Trust or the Shares are not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
Exchange Rule 14.12. The Exchange
may obtain information regarding
trading in the Shares and listed bitcoin
derivatives via the ISG, from other
exchanges who are members or affiliates
of the ISG, or with which the Exchange
has entered into a comprehensive
surveillance sharing agreement.
Availability of Information
The Exchange also believes that the
proposal promotes market transparency
in that a large amount of information is
currently available about bitcoin and
will be available regarding the Trust and
the Shares. In addition to the price
transparency of the Benchmark, the
Trust will provide information
regarding the Trust’s bitcoin holdings as
well as additional data regarding the
Trust. The Trust will provide an IIV per
Share updated every 15 seconds, as
calculated by the Exchange or a thirdparty financial data provider during the
Exchange’s Regular Trading Hours (9:30
a.m. to 4:00 p.m. E.T.). The IIV will be
calculated by using the prior day’s
closing NAV per Share as a base and
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00:36 Jul 19, 2023
Jkt 259001
updating that value during Regular
Trading Hours to reflect changes in the
value of the Trust’s bitcoin holdings
during the trading day.
The IIV disseminated during Regular
Trading Hours should not be viewed as
an actual real-time update of the NAV,
which will be calculated only once at
the end of each trading day. The IIV will
be widely disseminated on a per Share
basis every 15 seconds during the
Exchange’s Regular Trading Hours by
one or more major market data vendors.
In addition, the IIV will be available
through on-line information services.
The website for the Trust, which will
be publicly accessible at no charge, will
contain the following information: (a)
the current NAV per Share daily and the
prior business day’s NAV and the
reported closing price; (b) the BZX
Official Closing Price in relation to the
NAV as of the time the NAV is
calculated and a calculation of the
premium or discount of such price
against such NAV; (c) data in chart form
displaying the frequency distribution of
discounts and premiums of the Official
Closing Price against the NAV, within
appropriate ranges for each of the four
previous calendar quarters (or for the
life of the Trust, if shorter); (d) the
prospectus; and (e) other applicable
quantitative information. The Trust will
also disseminate the Trust’s holdings on
a daily basis on the Trust’s website. The
price of bitcoin will be made available
by one or more major market data
vendors, updated at least every 15
seconds during Regular Trading Hours.
Information about the Benchmark,
including key elements of how the
Benchmark is calculated, will be
publicly available at www.mvisindices.com/.
The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA.
Quotation and last sale information
for bitcoin is widely disseminated
through a variety of major market data
vendors, including Bloomberg and
Reuters, as well as the Benchmark.
Information relating to trading,
including price and volume
information, in bitcoin is available from
major market data vendors and from the
exchanges on which bitcoin are traded.
Depth of book information is also
available from bitcoin exchanges. The
normal trading hours for bitcoin
exchanges are 24 hours per day, 365
days per year.
PO 00000
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Fmt 4703
Sfmt 4703
In sum, the Exchange believes that
this proposal is consistent with the
requirements of Section 6(b)(5) of the
Act, that this filing sufficiently
demonstrates that the CME Bitcoin
Futures market represents a regulated
market of significant size, and that on
the whole the manipulation concerns
previously articulated by the
Commission are sufficiently mitigated to
the point that they are outweighed by
investor protection issues that would be
resolved by approving this proposal.
The Exchange believes that the
proposal is, in particular, designed to
protect investors and the public interest.
Premium and discount volatility, high
fees, rolling costs, insufficient
disclosures, and technical hurdles are
putting U.S. investor money at risk on
a daily basis that could potentially be
eliminated through access to a Spot
Bitcoin ETP. As such, the Exchange
believes that this proposal acts to limit
the risk to U.S. investors that are
increasingly seeking exposure to bitcoin
by providing direct, 1-for-1 exposure to
bitcoin in a regulated, transparent,
exchange-traded vehicle, specifically by:
(i) reducing premium volatility; (ii)
reducing management fees through
meaningful competition; (iii) providing
an alternative to Bitcoin Futures ETFs
which will eliminate roll cost; (iv)
reducing risks associated with investing
in operating companies that are
imperfect proxies for bitcoin exposure;
and (v) providing an alternative to
custodying spot bitcoin. Finally, the
Exchange notes that in addition to all of
the arguments herein which it believes
sufficiently establishes the CME Bitcoin
Futures market as a regulated market of
significant size, it is logically
inconsistent to find that the CME
Bitcoin Futures market is a significant
market as it relates to the CME Bitcoin
Futures market, but not a significant
market as it relates to the bitcoin spot
market for the numerous reasons laid
out above.
For the above reasons, the Exchange
believes that the proposed rule change
is consistent with the requirements of
Section 6(b)(5) of the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purpose of the Act. The Exchange
notes that the proposed rule change,
rather will facilitate the listing and
trading of an additional exchange-traded
product that will enhance competition
among both market participants and
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Federal Register / Vol. 88, No. 137 / Wednesday, July 19, 2023 / Notices
listing venues, to the benefit of investors
and the marketplace.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change, as modified by Amendment No.
2, is consistent with the Act. Comments
may be submitted by any of the
following methods:
ddrumheller on DSK120RN23PROD with NOTICES1
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–CboeBZX–2023–044 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to file
number SR–CboeBZX–2023–044. 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
VerDate Sep<11>2014
00:36 Jul 19, 2023
Jkt 259001
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
a.m. and 3 p.m. Copies of the filing also
will be available for inspection and
copying at the principal office of the
Exchange. Do not include personal
identifiable information in submissions;
you should submit only information
that you wish to make available
publicly. We may redact in part or
withhold entirely from publication
submitted material that is obscene or
subject to copyright protection. All
submissions should refer to file number
SR–CboeBZX–2023–044 and should be
submitted on or before August 9, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.113
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–15267 Filed 7–18–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–97893; File No. SR–MEMX–
2023–13]
Self-Regulatory Organizations; MEMX
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend the Exchange’s Fee
Schedule To Waive Membership Fees
for New Members Temporarily
July 13, 2023.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 30,
2023, MEMX LLC (‘‘MEMX’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
PO 00000
46285
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is filing with the
Commission a proposed rule change to
amend the Exchange’s fee schedule
applicable to Members 3 (the ‘‘Fee
Schedule’’) pursuant to Exchange Rules
15.1(a) and (c). The Exchange proposes
to waive the membership fees
(‘‘Membership Fees’’) for approximately
the next six months for all new
Members of the Exchange. The
Exchange will implement the
membership fee waiver (the
‘‘Membership Fee Waiver’’) for the
period of time commencing
immediately and ending on December
31, 2023. The text of the proposed rule
change is provided in Exhibit 5.
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 modify its
fee schedule in order to waive the
Membership Fees for all new Members
of the Exchange who join the Exchange
through December 31, 2023. The
Exchange will implement the
Membership Fee Waiver (as defined
above) until December 31, 2023. The
Exchange notes that the proposed
change does not amend any existing fee
or rebate for equities transactions,
market data or connectivity fees. The
sole change proposed herein is to waive
membership fees for new Members of
the Exchange, as described below.
MEMX currently charges $200 per
month to maintain active membership.
In preparation for the launch of the
Exchange’s options market (‘‘MEMX
Options’’),4 the Exchange wishes to
3 See
113 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
Frm 00159
Fmt 4703
Sfmt 4703
Exchange Rule 1.5(p).
August 8, 2022, the Commission approved
SR–MEMX–2022–10, which proposed rules for the
trading of options on the Exchange. See Securities
4 On
Continued
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]]>Agencies
[Federal Register Volume 88, Number 137 (Wednesday, July 19, 2023)]
[Notices]
[Pages 46249-46285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15267]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97899; File No. SR-CboeBZX-2023-044]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change, as Modified by Amendment No. 2, To
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares
July 13, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-114 thereunder,\2\ notice is hereby
given that on June 30, 2023, Cboe BZX Exchange, Inc. (the ``Exchange''
or ``BZX'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change to list and trade shares of the
Wise Origin Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares. On July 11, 2023, the Exchange filed Amendment No. 1 to
the proposed rule change, which amended and replaced the proposed rule
change in its entirety. On July 13, 2023, the Exchange filed Amendment
No. 2 to the proposed rule change, which amended and replaced the
proposed rule change, as modified by Amendment No. 1, in its entirety.
The proposed rule change, as modified by Amendment No. 2, is described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change, as modified by Amendment No. 2, from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the Wise Origin
Bitcoin Trust (the ``Trust''),\3\ under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
---------------------------------------------------------------------------
\3\ The Trust was formed as a Delaware statutory trust on March
17, 2021, and is operated as a grantor trust for U.S. federal tax
purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------
The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.
[[Page 46250]]
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
This Amendment No. 2 to SR-CboeBZX-2023-044 amends and replaces in
its entirety the proposal as originally submitted on June 30, 2023 and
as amended by Amendment No. 1 on July 11, 2023. The Exchange submits
this Amendment No. 2 in order to clarify certain points and add
additional details to the proposal.
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ FD Funds Management LLC is the
sponsor of the Trust (``Sponsor''). The Shares will be registered with
the Commission by means of the Trust's registration statement on Form
S-1 (the ``Registration Statement'').\6\ Fidelity Digital Assets
Services, LLC (``FDAS''), a regulated custodian licensed by the New
York Department of Financial Services, will be responsible for custody
of the Trust's bitcoin (the ``Custodian''). The Trust is not permitted
or required to register under the Investment Company Act of 1940, as
amended (the ``1940 Act''), and therefore is not subject to regulation
under the 1940 Act.\7\ Further, the Registration Statement states that
the Trust will not hold or trade in commodity interests regulated by
the Commodity Exchange Act of 1936, as amended (the ``CEA''), and
therefore is not a commodity pool for purposes of the CEA.\8\ The
Exchange represents that the Shares satisfy the requirements of BZX
Rule 14.11(e)(4) and thereby qualify for listing on the Exchange.
---------------------------------------------------------------------------
\4\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\5\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
\6\ See draft Registration Statement on Form S-1, dated March
24, 2021, submitted to the Commission by the Sponsor on behalf of
the Trust. The descriptions of the Trust, the Shares, and the Index
(as defined below) contained herein are based, in part, on
information in the Registration Statement. The Registration
Statement is not yet effective, and the Shares will not trade on the
Exchange until such time that the Registration Statement is
effective.
\7\ See above.
\8\ See above.
---------------------------------------------------------------------------
As further discussed below, the Commission has historically
approved or disapproved exchange filings to list and trade series of
Trust Issued Receipts, including spot-based Commodity-Based Trust
Shares, on the basis of whether the listing exchange has in place a
comprehensive surveillance sharing agreement with a regulated market of
significant size related to the underlying commodity to be held.\9\
Prior orders from the Commission have pointed out that in every prior
approval order for Commodity-Based Trust Shares, there has been a
derivatives market that represents the regulated market of significant
size, generally a Commodity Futures Trading Commission (the ``CFTC'')
regulated futures market.\10\
[[Page 46251]]
Further to this point, the Commission's prior orders have noted that
the spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other commodities and currencies. The
Commission specifically noted in the Winklevoss Order that the First
Gold Approval Order ``was based on an assumption that the currency
market and the spot gold market were largely unregulated.'' \11\
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release No. 83723 (July 26,
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently
disapproved by the Commission. See Securities Exchange Act Release
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the
``Winklevoss Order'').
\10\ See streetTRACKS Gold Shares, Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993,
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of
proposed rule change included NYSE Arca's representation that
``[t]he most significant palladium futures exchanges are the NYMEX
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest
exchange in the world for trading precious metals futures and
options,'' and that NYSE Arca ``may obtain trading information via
the Intermarket Surveillance Group,'' of which NYMEX is a member,
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29,
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included
NYSE Arca's representation that ``[t]he most significant platinum
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,''
that ``NYMEX is the largest exchange in the world for trading
precious metals futures and options,'' and that NYSE Arca ``may
obtain trading information via the Intermarket Surveillance Group,''
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9,
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of
proposed rule change included NYSE Arca's representation that the
COMEX is one of the ``major world gold markets,'' that NYSE Arca
``may obtain trading information via the Intermarket Surveillance
Group,'' and that NYMEX, of which COMEX is a division, is a member
of the Intermarket Surveillance Group, Exchange Act Release No.
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5,
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17,
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included
NYSE Arca's representation that ``the most significant gold, silver,
platinum and palladium futures exchanges are the COMEX and the
TOCOM'' and that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' of which COMEX is a member,
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295,
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15,
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included
NYSE Arca's representation that ``the most significant silver,
platinum and palladium futures exchanges are the COMEX and the
TOCOM'' and that NYSE Arca ``may obtain trading information via the
Intermarket Surveillance Group,'' of which COMEX is a member,
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657,
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE
Arca's representation that ``the most significant gold futures
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that
``COMEX is the largest exchange in the world for trading precious
metals futures and options,'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8,
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott
Physical Platinum and Palladium Trust, Exchange Act Release No.
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012-111) (notice of proposed rule change included NYSE
Arca's representation that ``[f]utures on platinum and palladium are
traded on two major exchanges: The New York Mercantile Exchange . .
. and Tokyo Commodities Exchange'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,'' of
which COMEX is a member, Exchange Act Release No. 68101 (Oct. 24,
2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX Physical--1
oz. Gold Redeemable Trust, Exchange Act Release No. 66930 (May 7,
2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-2012-18)
(notice of proposed rule change included NYSE Arca's representation
that NYSE Arca ``may obtain trading information via the Intermarket
Surveillance Group,'' of which COMEX is a member, and that gold
futures are traded on COMEX and the Tokyo Commodity Exchange, with a
cross-reference to the proposed rule change to list and trade shares
of the ETFS Gold Trust, in which NYSE Arca represented that COMEX is
one of the ``major world gold markets,'' Exchange Act Release No.
66627 (Mar. 20, 2012), 77 FR 17539, 17542-43, 17547 (Mar. 26,
2012)); JPM XF Physical Copper Trust, Exchange Act Release No. 68440
(Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 75485-86 (Dec. 20,
2012) (SR-NYSEArca-2012-28); iShares Copper Trust, Exchange Act
Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 13727, 13729-30,
13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); First Trust Gold
Trust, Exchange Act Release No. 70195 (Aug. 14, 2013), 78 FR 51239,
51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) (notice of proposed rule
change included NYSE Arca's representation that FINRA, on behalf of
the exchange, may obtain trading information regarding gold futures
and options on gold futures from members of the Intermarket
Surveillance Group, including COMEX, or from markets ``with which
[NYSE Arca] has in place a comprehensive surveillance sharing
agreement,'' and that gold futures are traded on COMEX and the Tokyo
Commodity Exchange, with a cross-reference to the proposed rule
change to list and trade shares of the ETFS Gold Trust, in which
NYSE Arca represented that COMEX is one of the ``major world gold
markets,'' Exchange Act Release No. 69847 (June 25, 2013), 78 FR
39399, 39400, 39405 (July 1, 2013)); Merk Gold Trust, Exchange Act
Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 4786-87 (Jan. 29,
2014) (SR-NYSEArca-2013-137) (notice of proposed rule change
included NYSE Arca's representation that ``COMEX is the largest gold
futures and options exchange'' and that NYSE Arca ``may obtain
trading information via the Intermarket Surveillance Group,''
including with respect to transactions occurring on COMEX pursuant
to CME and NYMEX's membership, or from exchanges ``with which [NYSE
Arca] has in place a comprehensive surveillance sharing agreement,''
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369,
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15,
2016) (SR-NYSEArca-2016-84).
\11\ See Winklevoss Order at 37592.
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As such, the regulated market of significant size test does not
require that the spot bitcoin market be regulated in order for the
Commission to approve this proposal, and precedent makes clear that an
underlying market for a spot commodity or currency being a regulated
market would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to surveillance
sharing agreements with the underlying futures market in order to
determine whether such products were consistent with the Act. With this
in mind, the CME Bitcoin Futures market is the proper market to
consider in determining whether there is a related regulated market of
significant size.
Further to this point, the Exchange notes that the Commission has
approved proposals related to the listing and trading of funds that
would primarily hold CME Bitcoin Futures that are registered under the
Securities Act of 1933.\12\ In the Teucrium Approval, the Commission
found the CME Bitcoin Futures market to be a regulated market of
significant size as it relates to CME Bitcoin Futures, an odd
tautological truth that is also inconsistent with prior disapproval
orders for ETPs that would hold actual bitcoin instead of derivatives
contracts (``Spot Bitcoin ETPs'') that use the exact same pricing
methodology as the CME Bitcoin Futures. As further discussed below,
both the Exchange and the Sponsor believe that this proposal and the
included analysis are sufficient to establish that the CME Bitcoin
Futures market represents a regulated market of significant size as it
relates both to the CME Bitcoin Futures market and to the spot bitcoin
market and that this proposal should be approved.
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\12\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5,
2022) (collectively, with the Teucrium Approval, the ``Bitcoin
Futures Approvals'').
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Finally, as discussed in greater detail below, by using
professional custodians and other service providers, the Trust provides
investors interested in exposure to bitcoin with important protections
that are not always available to investors that invest directly in
bitcoin, including protection against insolvency of non-qualified
custodians, cyber-attacks, and other risks. If U.S. investors had
access to vehicles such as the Trust for their bitcoin investments,
instead of directing their bitcoin investments into loosely regulated
offshore platforms (such as loosely regulated centralized exchanges
that have since faced bankruptcy proceedings or other insolvencies),
then countless investors could have protected their principal
investments in bitcoin and thus benefited.
Background
Bitcoin is a digital asset based on the decentralized, open-source
protocol of the peer-to-peer computer network launched in 2009 that
governs the creation, movement, and ownership of bitcoin and hosts the
public ledger, or ``blockchain,'' on which all bitcoin transactions are
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized
nature of the Bitcoin Network allows parties to transact directly with
one another based on cryptographic proof instead of relying on a
trusted third party. The protocol also lays out the rate of issuance of
new bitcoin within the Bitcoin Network, a rate that is reduced by half
approximately every four years with an eventual hard cap of 21 million.
It's generally understood that the combination of these two features--a
systemic hard cap of 21 million bitcoin and the ability to transact
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin
its value.
The first rule filing proposing to list an exchange-traded product
to provide exposure to bitcoin in the U.S. was submitted by the
Exchange on June 30, 2016.\13\ At that time, blockchain technology, and
digital assets that utilized it, were relatively new to the broader
public. The market cap of all bitcoin in existence at that time was
approximately $10 billion. No registered offering of digital asset
securities or shares in an investment vehicle with exposure to bitcoin
or any other cryptocurrency had yet been conducted, and the regulated
infrastructure for conducting a digital asset securities offering had
not begun to develop.\14\ Similarly, regulated U.S. bitcoin futures
contracts did not exist. The CFTC had determined that bitcoin is a
commodity,\15\ but had not engaged in significant enforcement actions
in the space. The New York Department of Financial Services (``NYDFS'')
adopted its final BitLicense regulatory framework in 2015, but had only
approved four entities to engage in activities relating to virtual
currencies (whether through granting a BitLicense or a limited-purpose
trust charter) as of
[[Page 46252]]
June 30, 2016.\16\ While the first over-the-counter bitcoin fund
launched in 2013, public trading was limited and the fund had only $60
million in assets.\17\ There were very few, if any, traditional
financial institutions engaged in the space, whether through investment
or providing services to digital asset companies. In January 2018, the
Staff of the Commission noted in a letter to the Investment Company
Institute and SIFMA that it was not aware, at that time, of a single
custodian providing fund custodial services for digital assets.\18\
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\13\ See Winklevoss Order.
\14\ Digital assets that are securities under U.S. law are
referred to throughout this proposal as ``digital asset
securities.'' All other digital assets, including bitcoin, are
referred to interchangeably as ``cryptocurrencies'' or ``virtual
currencies.'' The term ``digital assets'' refers to all digital
assets, including both digital asset securities and
cryptocurrencies, together.
\15\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'')
(CFTC Docket 15-29 (September 17, 2015)) (order instituting
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making
findings and imposing remedial sanctions), in which the CFTC stated:
``Section 1a(9) of the CEA defines `commodity' to include, among
other things, `all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See,
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142
(7th Cir. 1982). Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.''
\16\ A list of virtual currency businesses that are entities
regulated by the NYDFS is available on the NYDFS website. See
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
\17\ Data as of March 31, 2016 according to publicly available
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016,
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
\18\ See letter from Dalia Blass, Director, Division of
Investment Management, U.S. Securities and Exchange Commission to
Paul Schott Stevens, President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management Group--Head, Securities
Industry and Financial Markets Association (January 18, 2018),
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
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Fast forward to today and the digital assets financial ecosystem,
including bitcoin, has progressed significantly. The development of a
regulated market for digital asset securities has significantly
evolved, with market participants having conducted registered public
offerings of both digital asset securities \19\ and shares in
investment vehicles holding bitcoin futures, including Bitcoin Futures
ETFs (as defined below). Additionally, licensed and regulated service
providers have emerged to provide fund custodial services for digital
assets, among other services. For example, in May 2021, the Staff of
the Commission released a statement permitting open-end mutual funds to
invest in cash-settled bitcoin futures; in December 2020, the
Commission adopted a conditional no-action position permitting certain
special purpose broker-dealers to custody digital asset securities
under Rule 15c3-3 under the Exchange Act (the ``Custody Statement'');
\20\ in September 2020, the Staff of the Commission released a no-
action letter permitting certain broker-dealers to operate a non-
custodial Alternative Trading System (``ATS'') for digital asset
securities, subject to specified conditions; \21\ in October 2019, the
Staff of the Commission granted temporary relief from the clearing
agency registration requirement to an entity seeking to establish a
securities clearance and settlement system based on distributed ledger
technology,\22\ and multiple transfer agents who provide services for
digital asset securities registered with the Commission.\23\
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\19\ See Prospectus supplement filed pursuant to Rule 424(b)(1)
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
\20\ See Securities Exchange Act Release No. 90788, 86 FR 11627
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset
Securities by Special Purpose Broker-Dealers).
\21\ See letter from Elizabeth Baird, Deputy Director, Division
of Trading and Markets, U.S. Securities and Exchange Commission to
Kris Dailey, Vice President, Risk Oversight & Operational
Regulation, Financial Industry Regulatory Authority (September 25,
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
\22\ See letter from Jeffrey S. Mooney, Associate Director,
Division of Trading and Markets, U.S. Securities and Exchange
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
\23\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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Outside the Commission's purview, the regulatory landscape has
changed significantly since 2016, and cryptocurrency markets have grown
and evolved as well. The market for bitcoin is approximately 100 times
larger, having at one point reached a market cap of over $1
trillion.\24\ According to the CME Bitcoin Futures Report, from
February 13, 2023 through March 27, 2023, CFTC regulated bitcoin
futures represented between $750 million and $3.2 billion in notional
trading volume on Chicago Mercantile Exchange (``CME'') (``Bitcoin
Futures'') on a daily basis and notional volume was never below $670
million.\25\ Open interest was over $1.4 billion for the entirety of
the period and at one point was over $2 billion. ETPs that primarily
hold CME Bitcoin Futures have raised over $1 billion dollars in assets.
The CFTC has exercised its regulatory jurisdiction in bringing a number
of enforcement actions related to bitcoin and against trading platforms
that offer cryptocurrency trading.\26\ As of February 14, 2023 the
NYDFS has granted no fewer than thirty-four BitLicenses,\27\ including
to established public payment companies like PayPal Holdings, Inc. and
Square, Inc., and limited purpose trust charters to entities providing
cryptocurrency custody services. In addition, the Treasury's Office of
Foreign Assets Control (``OFAC'') has brought enforcement actions over
apparent violations of the sanctions laws in connection with the
provision of wallet management services for digital assets.\28\
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\24\ As of December 1, 2021, the total market cap of all bitcoin
in circulation was approximately $1.08 trillion.
\25\ Data sourced from the CME Bitcoin Futures Report: 19 Nov
2021, available at: https://www.cmegroup.com/ftp/bitcoinfutures/Bitcoin_Futures_Liquidity_Report.pdf.
\26\ The CFTC's annual report for Fiscal Year 2020 (which ended
on September 30, 2020) noted that the CFTC ``continued to
aggressively prosecute misconduct involving digital assets that fit
within the CEA's definition of commodity'' and ``brought a record
setting seven cases involving digital assets.'' See CFTC FY2020
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download.
Additionally, the CFTC filed on October 1, 2020, a civil enforcement
action against the owner/operators of the BitMEX trading platform,
which was one of the largest bitcoin derivative exchanges. See CFTC
Release No. 8270-20 (October 1, 2020) available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
\27\ See https://www.dfs.ny.gov/virtual_currency_businesses.
\28\ See U.S. Department of the Treasury Enforcement Release:
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent
Violations of Multiple Sanctions Programs Related to Digital
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf. See also U.S.
Department of the Treasury Enforcement Release: ``Treasury Announces
Two Enforcement Actions for over $24M and $29M Against Virtual
Currency Exchange, Bittrex, Inc.'' (October 11, 2022) available at:
https://home.treasury.gov/news/press-releases/jy1006. See also U.S.
Department of Treasure Enforcement Release ``OFAC Settles with
Virtual Currency Exchange Kraken for $362,158.70 Related to Apparent
Violations of the Iranian Transactions and Sanctions Regulations''
(November 28, 2022) available at: https://home.treasury.gov/system/files/126/20221128_kraken.pdf.
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In addition to the regulatory developments laid out above, more
traditional financial market participants have become more active in
cryptocurrency: large insurance companies, asset managers, university
endowments, pension funds, and even historically bitcoin skeptical fund
managers \29\ have allocated to bitcoin. In June 2022, PwC estimated
that the number of crypto-specialist hedge funds was more than 300
globally, with $4.1 billion in assets under management. In addition, in
a survey PwC found that 38 percent of surveyed traditional hedge funds
were currently investing in `digital assets,' compared to 21 percent
the year prior.'' \30\ The largest over-the-
[[Page 46253]]
counter bitcoin fund previously filed a Form 10 registration statement,
which the Staff of the Commission reviewed and which took effect
automatically, and is now a reporting company.\31\ Established
companies like Tesla, Inc., MicroStrategy Incorporated, and Square,
Inc., among others, have made substantial investments in bitcoin. The
foregoing examples demonstrate that bitcoin has gained mainstream usage
and recognition.
---------------------------------------------------------------------------
\29\ See e.g., ``Bridgewater: Our Thoughts on Bitcoin'' (January
28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones says he
likes bitcoin even more now, rally still in the `first inning'''
(October 22, 2020) available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
\30\ See the FSOC ``Report on Digital Asset Financial Stability
Risks and Regulation 2022'' (October 3, 2022) (at footnote 26) at
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
\31\ See Letter from Division of Corporation Finance, Office of
Real Estate & Construction to Barry E. Silbert, Chief Executive
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
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Despite these developments, access for U.S. retail investors to
gain exposure to bitcoin via a transparent and U.S. regulated, U.S.
exchange-traded vehicle remains limited. Instead current options
include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot bitcoin;
(ii) over-the-counter bitcoin funds (``OTC Bitcoin Funds'') with high
management fees and potentially volatile premiums and discounts; \32\
(iii) purchasing shares of operating companies that they believe will
provide proxy exposure to bitcoin with limited disclosure about the
associated risks; \33\ or (iv) purchasing Bitcoin Futures ETFs, as
defined below, which represent a sub-optimal structure for long-term
investors that will cost them significant amounts of money every year
compared to Spot Bitcoin ETPs, as further discussed below. Meanwhile,
investors in many other countries, including Canada and Brazil, are
able to use more traditional exchange listed and traded products
(including exchange-traded funds holding physical bitcoin) to gain
exposure to bitcoin. Similarly, investors in Switzerland and across
Europe have access to Exchange Traded Products which trade on regulated
exchanges and provide exposure to a broad array of spot crypto assets.
U.S. investors, by contrast, are left with fewer and more risky means
of getting bitcoin exposure, as described above.\34\
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\32\ The largest OTC Bitcoin Fund has an AUM of $23 billion. The
premium and discount for OTC Bitcoin Funds is known to move rapidly.
For example, over the period of 12/21/20 to 1/21/20, the premium for
the largest OTC Bitcoin Fund went from 40.18% to 2.79%. While the
price of bitcoin appreciated significantly during this period and
NAV per share increased by 41.25%, the price per share increased by
only 3.58%. This means that investors are buying shares of a fund
that experiences significant volatility in its premium and discount
outside of the fluctuations in price of the underlying asset. Even
operating within the normal premium and discount range, it's
possible for an investor to buy shares of an OTC Bitcoin Fund only
to have those shares quickly lose 10% or more in dollar value
excluding any movement of the price of bitcoin. That is to say--the
price of bitcoin could have stayed exactly the same from market
close on one day to market open the next, yet the value of the
shares held by the investor decreased only because of the
fluctuation of the premium. As more investment vehicles, including
mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest
option for a buy and hold strategy for such vehicles is often an OTC
Bitcoin Fund, meaning that even investors that do not directly buy
OTC Bitcoin Funds can be disadvantaged by extreme premiums (or
discounts) and premium volatility.
\33\ A number of operating companies engaged in unrelated
businesses--such as Tesla (a car manufacturer) and MicroStrategy (an
enterprise software company)--have announced investments as large as
$5.3 billion in bitcoin. Without access to bitcoin exchange-traded
products, retail investors seeking investment exposure to bitcoin
may end up purchasing shares in these companies in order to gain the
exposure to bitcoin that they seek. In fact, mainstream financial
news networks have written a number of articles providing investors
with guidance for obtaining bitcoin exposure through publicly traded
companies (such as MicroStrategy, Tesla, and bitcoin mining
companies, among others) instead of dealing with the complications
associated with buying spot bitcoin in the absence of a bitcoin ETP.
See e.g., ``7 public companies with exposure to bitcoin'' (February
8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want to get
in the crypto trade without holding bitcoin yourself? Here are some
investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html. Such operating companies,
however, are imperfect bitcoin proxies and provide investors with
partial bitcoin exposure paired with a host of additional risks
associated with whichever operating company they decide to purchase.
Additionally, the disclosures provided by such operating companies
with respect to risks relating to their bitcoin holdings are
generally substantially smaller than the registration statement of a
bitcoin ETP, including the Registration Statement, typically
amounting to a few sentences of narrative description and a handful
of risk factors. In other words, investors seeking bitcoin exposure
through publicly traded companies are gaining only partial exposure
to bitcoin and are not fully benefitting from the risk disclosures
and associated investor protections that come from the securities
registration process.
\34\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot Bitcoin ETPs.
---------------------------------------------------------------------------
To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor
assets to significant risk because investors that would otherwise seek
crypto asset exposure through a Spot Bitcoin ETP are forced to find
alternative exposure through generally riskier means. For instance,
many U.S. investors that held their digital assets in accounts at
FTX,\35\ Celsius Network LLC,\36\ BlockFi Inc.\37\ and Voyager Digital
Holdings, Inc.\38\ have become unsecured creditors in the insolvencies
of those entities. If a Spot Bitcoin ETP was available, it is likely
that at least a portion of the billions of dollars tied up in those
proceedings would still reside in the brokerage accounts of U.S.
investors, having instead been invested in a transparent, regulated,
and well-understood structure--a Spot Bitcoin ETP. To this point,
approval of a Spot Bitcoin ETP would represent a major win for the
protection of U.S. investors in the cryptoasset space. As further
described below, the Trust, like all other series of Commodity-Based
Trust Shares, is designed to protect investors against the risk of
losses through fraud and insolvency that arise by holding digital
assets, including bitcoin, on centralized platforms.
---------------------------------------------------------------------------
\35\ See FTX Trading Ltd., et al., Case No. 22-11068.
\36\ See Celsius Network LLC, et al., Case No. 22-10964.
\37\ See BlockFi Inc., Case No. 22-19361.
\38\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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Additionally, investors in other countries, specifically Canada,
generally pay lower fees than U.S. retail investors that invest in OTC
Bitcoin Funds due to the fee pressure that results from increased
competition among available bitcoin investment options. Without an
approved and regulated Spot Bitcoin ETP in the U.S. as a viable
alternative, U.S. investors could seek to purchase shares of non-U.S.
bitcoin vehicles in order to get access to bitcoin exposure. Given the
separate regulatory regime and the potential difficulties associated
with any international litigation, such an arrangement would create
more risk exposure for U.S. investors than they would otherwise have
with a U.S. exchange listed ETP. Further to this point, the lack of a
U.S.-listed Spot Bitcoin ETP is not preventing U.S. funds from gaining
exposure to bitcoin--several U.S. exchange-traded funds are using
Canadian bitcoin ETPs to gain exposure to spot bitcoin. In addition to
the benefits to U.S. investors articulated throughout this proposal,
approving this proposal (and others like it) would provide U.S.
exchange-traded funds and mutual funds with a U.S.-listed and regulated
product to provide such access rather than relying on either flawed
products or products listed and primarily regulated in other countries.
Bitcoin Futures ETFs
The Exchange and Sponsor applaud the Commission for allowing the
launch of ETFs registered under the 1940 Act and the Bitcoin Futures
Approvals that provide exposure to bitcoin primarily through CME
Bitcoin Futures (``Bitcoin Futures ETFs''). Allowing such products to
list and trade is a productive first step
[[Page 46254]]
in providing U.S. investors and traders with transparent, exchange-
listed tools for expressing a view on bitcoin. The Bitcoin Futures
Approvals, however, have created a logical inconsistency in the
application of the standard the Commission applies when considering
bitcoin ETP proposals.
As discussed further below, the standard applicable to bitcoin ETPs
is whether the listing exchange has in place a comprehensive
surveillance sharing agreement with a regulated market of significant
size in the underlying asset. Previous disapproval orders have made
clear that a market that constitutes a regulated market of significant
size is generally a futures and/or options market based on the
underlying reference asset rather than the spot commodity markets,
which are often unregulated.\39\ Leaving aside the analysis of that
standard until later in this proposal,\40\ the Exchange believes that
the following rationale the Commission applied to a Bitcoin Futures ETF
should result in the Commission approving this and other Spot Bitcoin
ETP proposals:
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\39\ See Winklevoss Order at 37593, specifically footnote 202,
which includes the language from numerous approval orders for which
the underlying futures markets formed the basis for approving series
of ETPs that hold physical metals, including gold, silver,
palladium, platinum, and precious metals more broadly; and 37600,
specifically where the Commission provides that ``when the spot
market is unregulated--the requirement of preventing fraudulent and
manipulative acts may possibly be satisfied by showing that the ETP
listing market has entered into a surveillance-sharing agreement
with a regulated market of significant size in derivatives related
to the underlying asset.'' As noted above, the Exchange believes
that these citations are particularly helpful in making clear that
the spot market for a spot commodity ETP need not be ``regulated''
in order for a spot commodity ETP to be approved by the Commission,
and in fact that it's been the common historical practice of the
Commission to rely on such derivatives markets as the regulated
market of significant size because such spot commodities markets are
largely unregulated.
\40\ As further outlined below, both the Exchange and the
Sponsor believe that the Bitcoin Futures market represents a
regulated market of significant size and that this proposal and
others like it should be approved on this basis.
The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably
be relied upon to capture the effects on the CME bitcoin futures
market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures
contracts, whether that attempt is made by directly trading on the
CME bitcoin futures market or indirectly by trading outside of the
CME bitcoin futures market. As such, when the CME shares its
surveillance information with Arca, the information would assist in
detecting and deterring fraudulent or manipulative misconduct
related to the non-cash assets held by the proposed ETP.\41\
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\41\ See Teucrium Approval at 21679.
CME Bitcoin Futures pricing is based on pricing from spot bitcoin
markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME bitcoin futures market caused by a person attempting to
manipulate the proposed futures ETP by manipulating the price of CME
bitcoin futures contracts . . . indirectly by trading outside of the
CME bitcoin futures market,'' makes clear that the Commission believes
that CME's surveillance can capture the effects of trading on the
relevant spot markets on the pricing of Bitcoin Futures. If CME is able
to detect such attempts at manipulation in the complex and
interconnected spot bitcoin market, how would such an ability to detect
attempted manipulation and the utility in sharing that information with
the listing exchange apply only to Bitcoin Futures ETFs and not Spot
Bitcoin ETPs? Stated a different way, given that there is significant
trading volume on numerous bitcoin exchanges that are not part of the
CME CF Bitcoin Reference Rate and that arbitrage opportunities across
bitcoin exchanges means that such trading volume will influence spot
bitcoin prices across the market and, despite this, the Commission
still believes that CME can detect attempted manipulation of the
Bitcoin Futures through ``trading outside of the CME bitcoin futures
market,'' it is clear that such ability would apply equally to both
Bitcoin Futures ETFs and Spot Bitcoin ETPs. To take it a step further,
such an ability would also seem to be a strong indication that the CME
Bitcoin Futures market represents a regulated market of significant
size. The Exchange agrees with the Commission on this point and notes
that the pricing mechanism applicable to the Shares is similar to that
of the CME CF Bitcoin Futures.
Further to this point, a Bitcoin Futures ETF is potentially more
susceptible to potential manipulation than a Spot Bitcoin ETP that
offers only in-kind creation and redemption because settlement of CME
Bitcoin Futures pricing (and thus the value of the underlying holdings
of a Bitcoin Futures ETF) occurs at a single price derived from spot
bitcoin pricing, while shares of a Spot Bitcoin ETP would represent
interest in bitcoin directly and authorized participants for a Spot
Bitcoin ETP (as proposed herein) would be able to source bitcoin from
any exchange and create or redeem with the applicable trust regardless
of the price of the underlying index. It is not logically possible to
conclude that the CME Bitcoin Futures market represents a significant
market for a futures-based product, but also conclude that the CMR
Bitcoin Futures market does not represent a significant market for a
spot-based product.
In addition to potentially being more susceptible to manipulation
than a Spot Bitcoin ETP, the structure of Bitcoin Futures ETFs provides
negative outcomes for buy and hold investors as compared to a Spot
Bitcoin ETP.\42\ Specifically, the cost of rolling CME Bitcoin Futures
contracts will cause the Bitcoin Futures ETFs to lag the performance of
bitcoin itself and, at over a billion dollars in assets under
management, would cost U.S. investors significant amounts of money on
an annual basis compared to Spot Bitcoin ETPs. Such rolling costs would
not be required for Spot Bitcoin ETPs that hold bitcoin. Further,
Bitcoin Futures ETFs could potentially hit CME position limits, which
would force a Bitcoin Futures ETF to invest in non-futures assets for
bitcoin exposure and cause potential investor confusion and lack of
certainty about what such Bitcoin Futures ETFs are actually holding to
try to get exposure to bitcoin, not to mention completely changing the
risk profile associated with such an ETF. While Bitcoin Futures ETFs
represent a useful trading tool, they are clearly a sub-optimal
structure for U.S. investors that are looking for long-term exposure to
bitcoin that will, based on the calculations above, unnecessarily cost
U.S. investors significant amounts of money every year compared to Spot
Bitcoin ETPs and the Exchange believes that any proposal to list and
trade a Spot Bitcoin ETP should be reviewed by the Commission with this
important investor protection context in mind.
---------------------------------------------------------------------------
\42\ See e.g., ``Bitcoin ETF's Success Could Come at
Fundholders' Expense,'' Wall Street Journal (October 24, 2021),
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&__cf_chl_jschl_tk__=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
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Based on the foregoing, the Exchange and Sponsor believe that any
objective review of the proposals to list Spot Bitcoin ETPs compared to
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead
to the conclusion that Spot Bitcoin ETPs should be
[[Page 46255]]
available to U.S. investors and, as such, this proposal and other
comparable proposals to list and trade Spot Bitcoin ETPs should be
approved by the Commission. Stated simply, U.S. investors will continue
to lose significant amounts of money from holding Bitcoin Futures ETFs
as compared to Spot Bitcoin ETPs, losses which could be prevented by
the Commission approving Spot Bitcoin ETPs. Additionally, any concerns
related to preventing fraudulent and manipulative acts and practices
related to Spot Bitcoin ETPs would apply equally to the spot markets
underlying the futures contracts held by a Bitcoin Futures ETF. While
the 1940 Act does offer certain investor protections, those protections
do not relate to mitigating potential manipulation of the holdings of
an ETF in a way that warrants distinction between Bitcoin Futures ETFs
and Spot Bitcoin ETPs. To be clear, both the Exchange and Sponsor
believe that the Bitcoin Futures market is a regulated market of
significant size and that such manipulation concerns are mitigated as
described throughout this proposal. After issuing the Bitcoin Futures
Approvals which conclude the CME Bitcoin Futures market is a regulated
market of significant size as it relates to Bitcoin Futures, the only
consistent outcome would be approving Spot Bitcoin ETPs on the basis
that the CME Bitcoin Futures market is also a regulated market of
significant size as it relates to the bitcoin spot market. Given the
current landscape, approving this proposal (and others like it) and
allowing Spot Bitcoin ETPs to be listed and traded alongside Bitcoin
Futures ETFs would establish a consistent regulatory approach, provide
U.S. investors with choice in product structures for bitcoin exposure,
and offer flexibility in the means of gaining exposure to bitcoin
through transparent, regulated, U.S. exchange-listed vehicles.
Spot and Proxy Exposure to Bitcoin
Exposure to bitcoin through an ETP also presents certain advantages
for retail investors compared to buying spot bitcoin directly. The most
notable advantage from the Sponsor's perspective is the elimination of
the need for an individual retail investor to either manage their own
private keys or to hold bitcoin through a cryptocurrency exchange that
lacks sufficient protections. Typically, retail exchanges hold most, if
not all, retail investors' bitcoin in ``hot'' (internet-connected)
storage and do not make any commitments to indemnify retail investors
or to observe any particular cybersecurity standard. Meanwhile, a
retail investor holding spot bitcoin directly in a self-hosted wallet
may suffer from inexperience in private key management (e.g.,
insufficient password protection, lost key, etc.), which could cause
them to lose some or all of their bitcoin holdings. Thus, with respect
to custody of the Trust's bitcoin assets, the Trust presents advantages
from an investment protection standpoint for retail investors compared
to owning spot bitcoin directly.
Finally, as described in the Background section above, a number of
operating companies largely engaged in unrelated businesses--such as
Tesla (a car manufacturer) and MicroStrategy (an enterprise software
company)--have announced significant investments in bitcoin. Without
access to bitcoin exchange-traded products, retail investors seeking
investment exposure to bitcoin may end up purchasing shares in these
companies in order to gain the exposure to bitcoin that they seek.\43\
In fact, mainstream financial news networks have written a number of
articles providing investors with guidance for obtaining bitcoin
exposure through publicly traded companies (such as MicroStrategy,
Tesla, and bitcoin mining companies, among others) instead of dealing
with the complications associated with buying spot bitcoin in the
absence of a bitcoin ETP.\44\ Such operating companies, however, are
imperfect bitcoin proxies and provide investors with partial bitcoin
exposure paired with a host of additional risks associated with
whichever operating company they decide to purchase. Additionally, the
disclosures provided by the aforementioned operating companies with
respect to risks relating to their bitcoin holdings are generally
substantially smaller than the registration statement of a bitcoin ETP,
including the Registration Statement, typically amounting to a few
sentences of narrative description and a handful of risk factors.\45\
In other words, investors seeking bitcoin exposure through publicly
traded companies are gaining only partial exposure to bitcoin and are
not fully benefitting from the risk disclosures and associated investor
protections that come from the securities registration process.
---------------------------------------------------------------------------
\43\ In August 2017, the Commission's Office of Investor
Education and Advocacy warned investors about situations where
companies were publicly announcing events relating to digital coins
or tokens in an effort to affect the price of the company's publicly
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
\44\ See, e.g., ``7 public companies with exposure to bitcoin''
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want
to get in the crypto trade without holding bitcoin yourself? Here
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
\45\ See, e.g., Tesla 10-K for the year ended December 31, 2020,
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
---------------------------------------------------------------------------
Bitcoin Futures
CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate.\46\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric
related to Bitcoin Futures has generally trended up since launch,
although certain notional volume calculations have decreased roughly in
line with the decrease in the price of bitcoin. For example, there were
143,215 Bitcoin Futures contracts traded in April 2023 (approximately
$20.07 billion) compared to 193,182 ($5 billion), 104,713 ($3.9
billion) 118714 ($42.7b billion), and 111,964 ($23.2b billion)
contracts traded in April 2019, April 2020, and April 2021, and April
2022, respectively.\47\
---------------------------------------------------------------------------
\46\ The CME CF Bitcoin Reference Rate is based on a publicly
available calculation methodology based on pricing sourced from
several crypto exchanges and trading platforms, including Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
\47\ Source: CME, Yahoo Finance 4/30/23.
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The number of large open interest holders \48\ and unique accounts
trading Bitcoin Futures have both increased, even in the face of
heightened Bitcoin price volatility.
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\48\ A large open interest holder in Bitcoin Futures is an
entity that holds at least 25 contracts, which is the equivalent of
125 bitcoin. At a price of approximately $29,268.81 per bitcoin on
4/30/2023, more than 100 firms had outstanding positions of greater
than $3.65 million in Bitcoin Futures.
[GRAPHIC] [TIFF OMITTED] TN19JY23.168
[[Page 46257]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.169
BILLING CODE 8011-01-C
The Sponsor further believes that publicly available research,
including research done as part of rule filings proposing to list and
trade shares of Spot Bitcoin ETPs, corroborates the overall trend
outlined above and supports the thesis that the Bitcoin Futures pricing
leads the spot market and, thus, a person attempting to manipulate the
Shares would also have to trade on that market to manipulate the ETP.
Specifically, the Sponsor believes that such research indicates that
bitcoin futures lead the bitcoin spot market in price formation.\49\
---------------------------------------------------------------------------
\49\ See Exchange Act Releases No. 94080 (January 27, 2022), 87
FR 5527 (April 12, 2022) (specifically ``Amendment No. 1 to the
Proposed Rule Change To List and Trade Shares of the Wise Origin
Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity-Based Trust
Shares''); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844
(May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28,
2021), 86 FR 60695 (November 3, 2021). See also Hu, Y., Hou, Y. and
Oxley, L. (2019). ``What role do futures markets play in Bitcoin
pricing? Causality, cointegration and price discovery from a time-
varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This academic research paper concludes
that ``There exist no episodes where the Bitcoin spot markets
dominates the price discovery processes with regard to Bitcoin
futures. This points to a conclusion that the price formation
originates solely in the Bitcoin futures market. We can, therefore,
conclude that the Bitcoin futures markets dominate the dynamic price
discovery process based upon time-varying information share
measures. Overall, price discovery seems to occur in the Bitcoin
futures markets rather than the underlying spot market based upon a
time-varying perspective.''
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Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\50\ including Commodity-Based Trust Shares,\51\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\52\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that the CME Bitcoin Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to the point that they are outweighed by quantifiable
investor protection issues that would be resolved by approving this
proposal.
---------------------------------------------------------------------------
\50\ See Exchange Rule 14.11(f).
\51\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\52\ As the Exchange has stated in a number of other public
documents, it continues to believe that bitcoin is resistant to
price manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of bitcoin trading render it difficult
and prohibitively costly to manipulate the price of bitcoin. The
fragmentation across bitcoin platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin
prices through continuous trading activity challenging. To the
extent that there are bitcoin exchanges engaged in or allowing wash
trading or other activity intended to manipulate the price of
bitcoin on other markets, such pricing does not normally impact
prices on other exchange because participants will generally ignore
markets with quotes that they deem non-executable. Moreover, the
linkage between the bitcoin markets and the presence of arbitrageurs
in those markets means that the manipulation of the price of bitcoin
price on any single venue would require manipulation of the global
bitcoin price in order to be effective. Arbitrageurs must have funds
distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular bitcoin exchange or OTC platform. As a result, the
potential for manipulation on a trading platform would require
overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \53\ with a regulated
[[Page 46258]]
market of significant size. Specifically, the Commission has previously
stated that:
---------------------------------------------------------------------------
\53\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the
Intermarket Surveillance Group (``ISG'') constitutes such a
surveillance sharing agreement. See Securities Exchange Act Release
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval'').
. . . when the spot market is unregulated--the requirement of
preventing fraudulent and manipulative acts may possibly be
satisfied by showing that the ETP listing market has entered into a
surveillance-sharing agreement with a regulated market of
significant size in derivatives related to the underlying asset.
That is because, where a market of significant size exists with
respect to derivatives on the asset underlying the commodity-trust
ETP, the Commission believes that there is a reasonable likelihood
that a person attempting to manipulate the ETP by manipulating the
underlying spot market would also have to trade in the derivatives
market in order to succeed, since arbitrage between the derivative
and spot markets would tend to counter an attempt to manipulate the
spot market alone.\54\
---------------------------------------------------------------------------
\54\ Self-Regulatory Organizations; Bats BZX Exchange, Inc.;
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, 83 FR 37579, 37600
(Aug 1, 2018).
The Commission has provided illustrative guidance in interpreting
the terms ``significant market'' and ``market of significant size'' to
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 a surveillance-sharing agreement would assist the ETP listing
market in detecting and deterring misconduct, and (b) it is unlikely
that trading in the ETP would be the predominant influence on prices in
that market.'' \55\
---------------------------------------------------------------------------
\55\ Id.
---------------------------------------------------------------------------
The Commission has stated in a prior disapproval order that ``the
lead-lag relationship between the bitcoin futures market and the spot
market . . . is central to understanding whether it is reasonably
likely that a would-be manipulator of the ETP would need to trade on
the bitcoin futures market to successfully manipulate prices on those
spot platforms that feed into the proposed ETP's pricing mechanism.''
\56\ The Commission further noted that ``in particular, if the spot
market leads the futures market, this would indicate that it would not
be necessary to trade on the futures market to manipulate the proposed
ETP, even if arbitrage worked efficiently, because the futures price
would move to meet the spot price.'' \57\
---------------------------------------------------------------------------
\56\ Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin
ETF Trust Under NYSE Arca Rule 8.201-E, 84-FR 55382, 55411 (Oct 16,
2019).
\57\ Id.
---------------------------------------------------------------------------
The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\58\
---------------------------------------------------------------------------
\58\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------
The Exchange believes that this proposal is consistent with the
requirements of Section 6(b)(5) of the Act and that the Sponsor's
analysis demonstrates that the Exchange can meet such requirements in
that the CME Bitcoin Futures Market (i) is a regulated market; (ii) has
a comprehensive surveillance-sharing agreement with the Exchange; and
(iii) satisfies the Commission's ``significant market'' definition.
1.The CME Bitcoin Futures Market Is a Regulated Market and ISG Member
The CME is regulated by the CFTC and is a member of the Intermarket
Surveillance Group (``ISG''), which was established to provide a
framework for sharing information and coordinating regulatory efforts
among exchanges trading securities and related products and to address
potential intermarket manipulations and trading abuses. The Commission
has previously stated that membership by a regulated futures exchange
in ISG is sufficient to meet the surveillance-sharing requirement.\59\
Both the Exchange and CME are members of the Intermarket Surveillance
Group (the ``ISG'').\60\
---------------------------------------------------------------------------
\59\ See Winklevoss Order at 37594.
\60\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
_____________________________________-
2.The CME Bitcoin Futures Market Is a Market of Significant Size
Based on the Commission's prior guidance, Sponsor conducted a
detailed price discovery study through its lead-lag analysis of bitcoin
spot and futures trading across markets located globally. As discussed
below, Sponsor's analysis concludes that the CME Bitcoin Futures market
is consistently the leading market for price discovery across USD
bitcoin markets located globally, including bitcoin spot markets and
offshore, unregulated bitcoin futures markets. Thus, Sponsor's analysis
supports the conclusion that there is a reasonable likelihood that a
person attempting to manipulate the Shares would also have to trade on
the CME Bitcoin Futures market to manipulate the Trust. Sponsor also
conducted an additional lead-lag analysis including data from a
recently launched bitcoin futures-based ETF to evaluate the likelihood
of whether trading in the Trust could become the predominant influence
on prices in the CME Bitcoin Futures market and concluded that it is
unlikely that trading in the Trust would be the predominant influence
on prices in the CME Bitcoin Futures market.
Sponsor's analysis on price discovery in the Bitcoin spot and
futures markets is described below.
Data Description and Sources
Sponsor obtained tick level trade data for Bitcoin spot prices and
futures prices used in its analysis from Coin Metrics for the period
spanning from January 1, 2019, to March 31, 2021. Table 1 summarizes
the dataset by exchange, market type, and quote currency.
Sponsor aggregated the tick level trades to the one second floor
level using a volume weighted average price (VWAP) approach. Compared
to the daily/minute level granularity of timestamps, Sponsor believes
the second level can capture more intra-day price dynamics and is more
useful here to investigate price discovery, as both arbitrage and
manipulative activities can occur within a matter of seconds. To
preprocess the tick level trade data to second level granularity, two
typical methods are often used. One is to use the last observed trade
price within a second, and the other is to use VWAP within a second.
Since multiple trades can occur with simultaneous timestamps but with
different transaction prices, a VWAP can represent the price
information from each trade instead of randomly selecting the last
price. It is worth mentioning that although the price time series' have
second level resolution (timestamped to seconds), this does not mean
that the price time series' values are evenly spaced at each second
since a market may not have trades within every second. Given this non-
synchronous nature of trading and the potential model issues arising
from utilizing data
[[Page 46259]]
with numerous imputed values, Sponsor's analysis leverages a method
that eliminates the need for imputation for the timestamps without
trades. This approach allows the model inputs of price time series from
different markets to stay non-synchronous without further data
processing.
In order to exclude any impacts caused by exchange rate movements,
Sponsor limited the dataset to BTC-USD and BTC-USDT trades. Markets
with an average correlation lower than 0.1 to other bitcoin markets, in
any given quarter, were removed from the analysis. For futures markets,
Sponsor included both ordinary futures and perpetuals. Contract
frequencies were validated and recorded via respective exchange
websites, and, for CME data, the sponsor compared data from the
exchange directly with data provided by Coin Metrics to verify
accuracy.
Within the ordinary futures market, one exchange, quote and
contract lifespan combination can often have same-day trading on
contracts with different expiration dates. To remove price gaps in this
market, Sponsor constructed a continuous time-series of prices by
choosing the contract with the highest volume per day within an
exchange, quote, and contract lifespan combination. For each
combination, successive contracts are backwards adjusted using the
price difference between the two contracts at the time of rollover.
BILLING CODE 8011-01-P
[[Page 46260]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.170
Research Design
Price discovery between spot and futures markets plays an important
role in financial research due to its association with market maturity.
In theory, the futures market is expected to lead price discovery in
established asset classes due to its inherent features, such as lower
transaction fees, built-in leverage, unconstrained short-selling, and
greater transparency. Since bitcoin futures contracts began trading on
regulated exchanges in December 2017, several academic and market
research papers have studied spot-futures price discovery in bitcoin
markets. Sponsor started its research by reviewing the existing
literature. Table 2 summarizes the metrics, data ranges, frequency
levels, and conclusions for thirteen papers.
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[GRAPHIC] [TIFF OMITTED] TN19JY23.172
BILLING CODE 8011-01-C
Sponsor noted that each of the studies reviewed used metrics
derived from the Vector Error Correction Model (VECM) or an extension
of VECM to examine price discovery. Within the column of metrics,
Information Share (IS) proposed by Hasbrouk (1995) and Component Share
(CS) pioneered by Gonzalo and Granger (1995) are mostly used. Hasbrouk
transforms the VECM into a vector moving average with a common factor
component and transitory component and defines the metric IS to measure
the proportion of the variance of the permanent component of prices
coming from each market with Cholesky factorization. The IS is not
unique if switching the order of input price data of the underlying two
markets. To overcome it, Lien and Shrestha (2009) use eigenvalue
decomposition instead of Cholesky factorization--this metric is called
Modified Information Share. Both Information Share and Modified
Information Share are used for pair-wise analysis. The extension of
Modified Information Share to more than two markets is called
Generalized Information Share (Lien and Shrestha, 2014). Component
Share is calculated from the normalized orthogonal coefficients to the
vector of the lagged error correlation term in the VECM. Fractional
Component Share is derived similarly to CS but from a version of VECM
that uses a fractional difference operator instead of the first order
difference operator. Information Leadership Share (Yan and Zivot, 2010)
and Information Leadership Share (Putnins, 2013) combine Information
Share and Component Share non-linearly.
Although the metrics used in reviewed studies are similar, the
conclusions from these papers are mixed as to which markets lead or lag
in price discovery. Buccheri (2021) \61\ discussed the limitations for
VECM derived metrics and noted that when price observations are sparse
(See CME price observations in Figure 1 as an example), a lot of zero
returns are produced through imputation; therefore, the time series of
prices strongly deviate from the standard semi-martingale assumption
and sample covariances can be downward biased. The authors in Buccheri
(2021) conclude that when the prices have a high level of sparsity, the
VECM is clearly mis-specified and the estimates are potentially biased.
---------------------------------------------------------------------------
\61\ Buccheri, Giuseppe, Giacomo Bormetti, Fulvio Corsi, and
Fabrizio Lillo. ``Comment on: Price discovery in high resolution.''
Journal of Financial Econometrics 19, no. 3 (2021): 439-451. https://doi.org/10.1093/jjfinec/nbz008. The authors comment on the
limitations of using information share within markets with trades on
high resolution frequencies. The paper illustrates why the
application of a VECM methodology like information share would be
mis-specified and the OLS estimates could be biased because of high
sparsity in the data.
---------------------------------------------------------------------------
[[Page 46263]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.173
This conclusion in Buccheri (2021) provides theorical support on
why VECM derived metrics are not suitable to use when the underlying
data has high level of sparsity but does not quantify the actual impact
in practice. In ``Suitable Price Discovery Measurement of Bitcoin Spot
and Futures Markets'' \62\ (Robertson and Zhang, 2022), the authors
demonstrate that the conclusions of Buccheri (2019) are of high
importance by quantifying the impact of sparsity. within bitcoin
markets.
---------------------------------------------------------------------------
\62\ Robertson, Kevin, and Jiani Zhang. (2022) ``Suitable Price
Discovery Measurement of Bitcoin Spot and Futures Markets.''
Available at SSRN: https://ssrn.com/abstract=4012165 or https://dx.doi.org/10.2139/ssrn.4012165.
---------------------------------------------------------------------------
The authors show IS and CS are sensitive to input data's level of
sparsity with numerical experiments. When the sparsity level is about
10% for a designed-to-lead market, IS and CS show the known-leading
market clearly contributes a majority to price discovery. However, as
the sparsity is increased, the known-leading market begins to
contribute less to price discovery and, when the level of sparsity is
higher than 30%, using IS and CS produces mixed results or the opposite
conclusion of what is true.
Buccheri explains the effect of using VECM based metrics with
violation of model assumptions from theorical perspective, and
Robertson and Zhang show the effect with numerical experiments and
provide empirical evidence about to what extent using VECM can give
unreliable results. Both emphasize that sparsity level is important
regarding price discovery measurement using VECM based metrics.
Although Robertson and Zhang state that the choice of market to
create the experiment data does not change the conclusion, Sponsor
replicated their experiment using a different market to provide
additional evidence on the impact of sparsity on VECM based metrics.
Sponsor calculates the IS and CS every day from Q1 2019 through Q1 2021
(821 days) between the artificially leading (by 3 seconds) version of
the BitMEX USD perpetual futures market at 9 different levels of
sparsity (measured by the percent of random data removed, 10%
increments starting at 10% and ending at 90%) and the original BitMEX
USD perpetual futures market. To satisfy the VECM assumption that
prices/returns are synchronous, Sponsor used the typical and commonly
used form of forward filling using previous second values. Figure 2
shows the distributions of daily IS and CS values for the designed-to-
lead market. The x axis is the sparsity level, and the y axis is IS/CS.
The plotted results show that, as the level of sparsity is increased,
the known leading market begins to contribute less to price discovery
causing mixed results (both IS and CS dropped from above 0.8 to less
than 0.2) and the opposite conclusion of what is true. The market is
considered leading when IS/CS is above 0.5.
[[Page 46264]]
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The observations from Sponsor's experiment confirm the conclusions
of Buccheri (2019) and Robertson and Zhang (2022) that VECM derived
metrics are sensitive to the level of sparsity within market data.
Robertson and Zhang (2022) show that only about half of the markets
included in the quarter of 2021 have trades for every second increment.
Taking the CME USD futures market, Coinbase USD spot market, and BitMEX
USD perpetual futures markets as representatives of bitcoin futures
market, spot market, and perpetual market, Table 3 shows their
comparison in average time in seconds between trades in each quarter.
In the first quarter of 2019, on average, CME records a trade every 111
seconds (~2 minutes) while Coinbase records a trade every 3 seconds. In
more recent time periods, the sparsity level decreases for CME, but is
still 25 times higher than the Coinbase USD spot market and BitMEX USD
perpetual futures market in the first quarter of 2021.
[GRAPHIC] [TIFF OMITTED] TN19JY23.175
Due to the high sparsity of CME Bitcoin futures data, the Sponsor
attributes the ``mixed results'' in previous academic studies that have
failed to demonstrate that the CME bitcoin futures market constitutes a
market of significant size to the problems associated with using
econometric models without considering the suitability. When analyzing
information flow with daily data that has low sparsity level, the
analysis using metrics derived from VECM (e.g., Hu, et al., 2019) is
convincing. However, for analyzing intraday information flow and
accounting for the varying levels of sparsity among the bitcoin market,
the sponsor believes the framework of correlation-based lead-lag
analysis using the Hayashi-Yoshida (HY) estimator \63\ to compute
correlation and its extension by other academic researchers, including
Hoffman (2013) \64\ and Huth (2011),\65\ to obtain the lead-lag seconds
and lead-lag ratio is more suitable.
---------------------------------------------------------------------------
\63\ Hayashi, Takaki, and Nakahiro Yoshida. ``On covariance
estimation of non-synchronously observed diffusion processes.''
Bernoulli 11, no. 2 (2005): 359-379. https://www.jstor.org/stable/3318933. The authors proposed a novel method (HY estimator) of
estimating the covariance of two diffusion processes when they are
observed only at discrete times in a non-synchronous manner. This
methodology addresses the issue that the traditional realized
covariance estimator encounters, which is that the choice of regular
interval size and data interpolation scheme can lead to unreliable
estimation. The new method Hayashi and Yoshida introduced in this
paper is free from any interpolation and therefore avoids the bias
and other problems caused by it.
\64\ Hoffmann, Marc, Mathieu Rosenbaum, and Nakahiro Yoshida.
``Estimation of the lead-lag parameter from non-synchronous data.''
Bernoulli 19, no. 2 (2013): 426-461. https://www.jstor.org/stable/23525731. The authors propose a methodology for modeling the lead-
lag effect between two financial assets with non-synchronous data
based on Hayashi and Yoshida's work (2015). It has been applied in
various price discovery research publications. The Sponsor's
analysis utilized this methodology to obtain pairwise lead-lag
seconds between two markets.
\65\ Huth, Nicolas, and Fr[eacute]d[eacute]ric Abergel. ``High
frequency lead/lag relationships--empirical facts.'' Journal of
Empirical Finance 26 (2014): 41-58. https://doi.org/10.1016/j.jempfin.2014.01.003.
---------------------------------------------------------------------------
Lead-lag seconds and lead-lag ratio are the typical output metrics
in correlation-based lead-lag analysis. The former measures the
relative time in lead or lag between two markets and the latter
measures the relative strength of the lead-lag relationship between two
markets. They are both free from any imputation or sampling within non-
synchronous and/or infrequent data and have proven to be useful in
price discovery research in other markets. Dao (2018) \66\ applied the
Hayashi-Yoshida estimator in a lead-lag framework with these two
metrics on price discovery
[[Page 46265]]
research of the S&P 500 index and the two most liquid ETFs that track
it. This academic study is the first to analyze the effect of
information arrival on the lead-lag relationship among related spot
instruments and concludes that sophisticated investors have a more
significant effect on the lead-lag relationship. The analysis from this
study confirms that using the Hayashi-Yoshida estimator in a lead-lag
framework is suitable for analyzing high frequency, tick level, non-
synchronous data even timestamped to milliseconds. Sponsor notes that
there is academic research studying high-frequency lead-lag
relationships between multiple bitcoin spot markets using the Hayashi-
Yoshida estimator with lead-lag seconds and lead-lag ratio from Schei
(2019).\67\ The suitability test performed by Robertson and Zhang
(2022) shows that these two metrics are not sensitive to the level of
sparsity within markets. Their experiment shows that the accuracy of
lead-lag seconds is consistent across the varying levels of sparsity
and the lead-lag ratio moves closer to 1 (i.e., provides less certainty
about the result) when the level of sparsity increases. Lead-lag ratio
quantifies how strong the relationship is, and the strength can be
considered as the confidence level associated with the conclusion that
one market leads or lags another. The closer the lead-lag ratio is to
1, the less certain one can conclude the relationship is of one
market's lead/lag over the other market.
---------------------------------------------------------------------------
\66\ Dao, Thong Minh, Frank McGroarty, and Andrew Urquhart.
``Ultra-high-frequency lead-lag relationship and information
arrival.'' Quantitative Finance 18, no. 5 (2018): 725-735. https://doi.org/10.1080/14697688.2017.1414484.
\67\ Schei, Norheim Schei. ``High Frequency Lead-Lag
Relationships in the Bitcoin Market.'' (unpublished master's thesis,
2019). Copenhagen Business School, Copenhagen, Denmark.
---------------------------------------------------------------------------
Again, Sponsor replicated the suitability test using the HY
estimator in a lead-lag framework performed by Robertson and Zhang
(2022) but on the BitMEX USD perpetual futures market. As mentioned by
the authors, no interpolation is needed in this version of the
experiment because the HY estimator computes directly from non-
synchronous data. Figure 3 shows the distribution of daily lead-lag
seconds and daily lead-lag ratios between the artificially leading and
sparse versions of the BitMEX USD perpetual futures market and the
original BitMEX USD perpetual futures market.
[GRAPHIC] [TIFF OMITTED] TN19JY23.176
The observations from Sponsor's experiment match those of Robertson
and Zhang (2022) that the HY estimator used in a lead-lag framework is
not sensitive to the level of sparsity within market data. The
distribution of lead-lag seconds shows that the time shift parameter
that maximizes the HY estimator is consistently +3 seconds--which is
the amount of time the artificial market was advanced by. The
distribution of the lead-lag ratios are consistently above 1, showing
that the leading relationship of the artificial market over the
original is strong. As Robertson and Zhang also noted, the lead-lag
ratios decay towards the level of 1 with increasing levels of sparsity,
which matches the expectation that the lead-lag relationship becomes
weak when one of the markets rarely has data.
Sponsor's analysis expands the research of Schei by using the
Hayashi-Yoshida estimator with a lead-lag framework and the same
metrics but on both bitcoin spot and futures markets. It is worth
mentioning, the lead-lag framework is different than a VECM based
approach. A VECM based approach, for example IS, measures the
proportion of the variance of the permanent component of prices coming
from each market and the total variance and the variance proportion
change when the number of markets included changes. Therefore,
``omitting substantial information flows from other markets [by using a
two-dimensional methodology] can produce misleading results'', which
Alexander and Heck (2020) \68\ state in their study as the motivation
to use Generalized Information Share instead of the original
Information Share metric. This is a limitation for two-dimensional VECM
based metrics and does not apply to Sponsor's correlation-based lead-
lag analysis. This is because VECM based metrics measure the proportion
of price discovery among markets while a lead-lag framework measures
how much time one market leads/lags another without the need to compute
the total variance of the permanent component of prices.
---------------------------------------------------------------------------
\68\ C. Alexander & D. Heck ``Price discovery in Bitcoin: The
impact of unregulated markets'', 50 J. Financial Stability 100776
(2020).
---------------------------------------------------------------------------
Lead-Lag Analysis
In the lead-lag analysis, Sponsor examined the pairwise lead-lag
relationship within the spot market and futures market, as well as
across them. For each pair, Sponsor computed the correlation
coefficients using the HY estimator between one market price time
series and a second market price time series as well as timestamp-
adjusted (leading/lagging) versions of the second market to find the
time delta that maximizes their correlation. The range of time deltas
is from -N seconds to N seconds in one second increments. In the
Sponsor's analysis, the parameter N is set as 15. In the Sponsor's
analysis, the parameter N is set as 15. For illustration below, Sponsor
uses the pair of CME USD Futures (denoted as price
[[Page 46266]]
time series X) and Coinbase USD Spot (denoted as price time series Y)
as an example to describe the process.
Step 1: Fix the timestamp of CME and adjust the timestamps of
Coinbase from N seconds lagging to N seconds leading. Figure 4 shows
this process with time deltas equal to 1 and -1 for illustration
purpose.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN19JY23.177
Step 2: Compute the correlation coefficients between CME price time
series and each of timestamp-adjusted time series of Coinbase with l
seconds (l [isin] [-N, N]) lead/lag using HY estimator. The correlation
coefficient is defined as (Hayashi & Yoshida 2005):
[GRAPHIC] [TIFF OMITTED] TN19JY23.178
The numerator of p is the covariance between CME and Coinbase,
which equates to the sum pf every product of price changes that share a
time overlap. Figure 5 shows this process with a simple example.
[[Page 46267]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.179
Step 3: Collect the correlation coefficients with different lead-
lag seconds as a correlation curve and search for the value lmax from -
N to N that maximizes their correlation. Meanwhile, compute the lead-
lag ratio between CME and Coinbase, llr, to measure the strength of the
lead-lag relationship (Huth & Abergel 2012). It is defined as
[GRAPHIC] [TIFF OMITTED] TN19JY23.180
The further the llr is from 1, the stronger the relationship is of
one market's lead/lag over the other market. The llr is used in
conjuntion with the HY correlation coefficient and the lead-lag seconds
to provide a more comprehensive analysis. If llr [isin] [0.95, 1.05] or
lmax is zero, we conclude neither market leads. If llr is not in the
range [0.95, 1.05] and lmax is positive, CME leads Coinbase by lmax
seconds and vice versa. Figure 6 shows an example of the correlation
curve.
[GRAPHIC] [TIFF OMITTED] TN19JY23.181
These three steps provide the pairwise lead-lag seconds between two
markets. To measure a market's overall price discovery leadership, the
results are aggregated by taking the average
[[Page 46268]]
lead-lag seconds it has with all other markets included in a quarter.
Conclusion of Reasonable Likelihood-Lead Lag Analysis
Sponsor's results suggest that, out of the 20 spot markets and 26
futures markets analyzed, the CME bitcoin futures market plays the most
important role in price discovery during each quarter spanning from the
first quarter of 2019 to the first quarter of 2021. Figure 7 shows the
average pairwise lead-lag seconds between CME bitcoin futures and other
bitcoin markets with 95% confidence intervals using the calculations
introduced in previous session. The blue dots represent the CME's
average leading time in seconds and the black line represents the
confidence interval. All the blue dots are above 0 and only 6 markets
have lower confidence bounds slightly below 0; therefore, Sponsor
concludes the CME bitcoin futures market leads all other markets
included in the analysis.
[GRAPHIC] [TIFF OMITTED] TN19JY23.182
Table 4 lists the detailed results for every pair of CME against
other markets with lead-lag seconds used to create Figure 7 along with
lead-lag ratios.
[[Page 46269]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.183
Additionally, Sponsor compared the CME bitcoin futures market's
leadership with other markets by aggregating each market's lead-lag by
taking the average of each markets lead-lag seconds over all other
markets in a quarter.
Figure 8 shows that, while other category leaders can change rank
each quarter, they consistently rank below CME futures in average
seconds leading. This consistency, along with the Sponsor's inclusion
standards of strict overall average market correlations and
demonstrative lead-lag ratios, speaks to the strength of CME futures'
leadership
[[Page 46270]]
across spot and futures markets globally.\69\
---------------------------------------------------------------------------
\69\ For more information, see Memorandum from the Division of
Trading and Markets regarding a September 8, 2021 meeting with
representatives from Fidelity Digital Assets, et al. (Sept. 8, 2021)
available at https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
[GRAPHIC] [TIFF OMITTED] TN19JY23.185
Figure 9 shows the average lead over all other markets for each
market category leader by quarter. For example, the market leader
within the USD Futures category (which is consistently CME) leads all
other markets by an average of 5.8 seconds in Q1 2019.
[GRAPHIC] [TIFF OMITTED] TN19JY23.186
Another observation from Figure 9 is that there is a clear decline
in seconds-leading through time for these market category leaders. As
discussed further below (Figure 10 & 11), this declining lead-lag time
does not mean that a particular market category leader's strength in
leadership is deteriorating, as it is not only evident for market
category leaders, but all markets, and suggests efficiency within the
bitcoin markets has continued to improve.
The lead-lag relationships between and among bitcoin futures and
spot markets provide insights into the directional influences of
markets on price discovery, with the CME Bitcoin futures market playing
the most
[[Page 46271]]
important role in price discovery during each quarter spanning from the
first quarter of 2019 to the first quarter of 2021, as noted above.
Arbitrage between the CME Bitcoin futures market and spot markets would
tend to counter an attempt to manipulate the spot market alone. Thus,
the Sponsor's analysis supports the conclusion that there is a
reasonable likelihood that a person attempting to manipulate the Shares
would also have to trade on the CME Bitcoin futures market to
manipulate the ETP.
Figure 10 shows that the absolute average of every market's overall
lead-lag seconds (average lead-lag seconds over all other markets) has
steadily decreased from the first quarter of 2019 to the first quarter
of 2021. This suggests that the efficiency within bitcoin markets has
continued to improve, and the window of arbitrage opportunity has
closed with increasing speed.
[GRAPHIC] [TIFF OMITTED] TN19JY23.187
While average lead/lag among markets has decreased over time, this
does not mean that relative leadership among markets has decreased over
time. To understand relative leadership among markets during different
time periods, Sponsor standardizes each market's average lead/lag with
other markets by dividing the market's average lead with other markets
by the average of every market's absolute average lead with other
markets. This relative leadership score (RLS) of market x is defined
as:
[GRAPHIC] [TIFF OMITTED] TN19JY23.188
The RLS of the CME bitcoin futures market indicates that the
strength of CME leadership has not deteriorated, shown in Figure 11.
The RLS for the CME USD futures market is relatively stable--indicating
that there is no deterioration in the strength of this market and even
a slight increase in strength during the last three quarters observed--
even the average lead/lag (the denominator of RLS plotted in Figure 10)
among markets has decreased over time.
[[Page 46272]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.189
To summarize, the top rank in average leading seconds and the
pairwise leading results with confidence intervals for the CME bitcoin
futures market, support the conclusion that there is a reasonable
likelihood that a person attempting to manipulate the Shares would also
have to trade on the CME bitcoin futures market to manipulate the ETP.
The RLS of the CME bitcoin futures market provides evidence that that
likelihood has stayed consistent while the efficiency within the
bitcoin markets has continued to improve.
3. Trading in the Shares Unlikely to be Predominant Influence on Prices
in CME Bitcoin Futures Market
As described above, the Commission requires the Exchange to
conclude that it is unlikely that trading in the Shares would become
the predominant influence on prices in the CME Bitcoin Futures market.
In a recent approval order \70\ of a bitcoin-futures ETP, the
Commission concluded that it is unlikely that trading in the proposed
bitcoin-futures ETP would be the predominant influence on prices in the
CME bitcoin futures market. The Commission specifies as reasons for its
conclusion ``the maturation of the CME bitcoin futures market since its
inception in 2017-including, but not limited to, the overall size,
volume, liquidity, and number of years of trading in the CME bitcoin
futures market and evidence from the 1940 Act-registered Bitcoin
Futures ETFs''. Sponsor agrees with the Commission's remarks on the
maturation of the CME bitcoin futures market and would also add ``price
discovery leadership'', as discussed above, to the list of maturation
evidence. As evidence from the 1940 Act-registered Bitcoin Futures
ETFs, the Commission states it ``has neither observed any disruption to
the CME bitcoin futures market, nor any evidence that the Bitcoin
Futures ETFs have exerted dominant influence on CME bitcoin futures
prices.'' Through its own analysis, Sponsor again agrees with the
Commission's remarks and, as discussed below, also found that the level
of price discovery leadership associated with the CME bitcoin futures
market remained unchanged since the launch of Bitcoin Futures ETFs.
---------------------------------------------------------------------------
\70\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5,
2022) (collectively, with the Teucrium Approval, the ``Bitcoin
Futures Approvals'').
---------------------------------------------------------------------------
In considering the question of whether the proposed bitcoin-spot
ETP would be the predominant influence on prices in the CME bitcoin
futures market, Sponsor conducted a numerical experiment to best
estimate the effect since it is not feasible to directly evaluate the
effect for the proposed ETP before its existence. The experiment is
designed to observe whether the price discovery leadership of the CME
bitcoin futures market can be changed by a new market (specifically an
ETP) entering with high trade activity. If it is, it is reasonable to
assume that the proposed bitcoin-spot ETP could be the predominant
influence on prices in the CME bitcoin futures market if it has high
trade activity. However, if it is not, it is also reasonable to assume
that the proposed bitcoin-spot ETP would not be the predominant
influence. From the numerical experiment, Sponsor aims to demonstrate
that high trade activity or volume is not the key factor in price
discovery.
Sponsor used trade data from a recently launched bitcoin futures-
based ETF, ProShares Bitcoin Strategy ETF (``BITO''), which caused high
trading activity after its launch, as the model in its experiment. BITO
is a Commission-registered ETF that is listed and traded on a U.S.
regulated national securities exchange and was launched on October 18,
2021. As described in its prospectus, BITO seeks to invest primarily in
CME Bitcoin futures contracts.
Sponsor selected two periods, representing a regular period with
normal trading activity and a period with new information and
heightened trading activity (from approximately $15 billion to $34
billion) in the CME Bitcoin futures market as seen from Figure 12. The
experiment is to compare whether the leadership of CME increased during
the second period. If not, it is reasonable to conclude the heightened
trading activity in the futures market did not increase the leadership
of the futures market. With that same logic, the potential heightened
trading activity in the spot market would not increase the leadership
of the spot market.
Sponsor obtained tick level data from Coin Metrics for all markets
included in the lead-lag analysis described above spanning two specific
periods: 11 days before the launch of BITO (10/8/2021--10/18/2021) and
11 days after the launch (10/19/2021-10/29/2021). For the 11 days after
the launch of BITO, Sponsor obtained tick-level trade data on BITO via
Bloomberg and aggregated to the one second floor level using the same
method described above.
[[Page 46273]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.190
Sponsor examined the pairwise lead-lag relationship between CME
bitcoin futures and all other markets included. For each pair, Sponsor
computed the correlation coefficients using the same lead-lag framework
and HY estimator between CME bitcoin futures and the second market
price timeseries as well as timestamp-adjusted (leading/lagging)
versions of the second market to find the time delta that maximized
their correlation. The only differences between Sponsor's BITO analysis
and the quarterly analysis spanning Q1 2019 through Q1 2021 discussed
above are the timeframes and a stricter average correlation threshold
(.2 instead of.1) in the BITO analysis given the shorter timeframe.
The results of this experiment in Figure 13 show the CME bitcoin
futures market leading all markets for the period of 11 days prior to
the launch of BITO. The price discovery leadership of the CME bitcoin
futures market still leads after BITO's launch in the period of 10/19/
2021 to 10/29/2020, but CME's leadership does not become stronger even
though the trading volume increased significantly.
[[Page 46274]]
[GRAPHIC] [TIFF OMITTED] TN19JY23.191
Given that the CME bitcoin futures market did not see an increase
in price discovery leadership even during a period of heightened
activity (trading volume increased from 15 billion to 34 billion) on
that market after BITO's launch, Sponsor believes it would be
unreasonable to assume that the level of the spot markets' leadership
would increase (CME bitcoin futures market price leadership would
deteriorate) due to the potential heightened trade activity in the spot
markets after the proposed spot-based ETP launch. This dynamic is
illustrated in Figure 14.
[GRAPHIC] [TIFF OMITTED] TN19JY23.192
BILLING CODE 8011-01-C
Based on the experiment, Sponsor concludes the inherent features of
futures are more important factors in price discovery and allow this
market to dominate even with lower or changing levels of volume. This
conclusion is also supported in academic research \71\
[[Page 46275]]
studying similar patterns in other asset classes. It is worth
mentioning that it is not feasible to directly evaluate the effect for
the proposed ETP before its existence. The numerical experiment above
is to best estimate the effect and eliminate the concern on the
potential high trade activity in spot markets caused by the proposed
ETP.
---------------------------------------------------------------------------
\71\ Futures with much smaller trading volumes compared to the
underlying spot market can still dominate price discovery. See
Hauptfleisch, Martin, Talis J. Putni[ncedil][scirc], and Brian
Lucey. ``Who sets the price of gold?'' ``London or New York.''
Journal of Futures Markets 36, no. 6 (2016): 564-586. https://doi.org/10.1002/fut.21775 for more information.
---------------------------------------------------------------------------
Moreover, Sponsor believes that there will be no material effect of
the Shares' trade prices on CME bitcoin futures prices from secondary
market trading activities. To estimate this effect, Sponsor uses BITO
in its analysis as the first ETP launched in U.S. and a reasonable
example of a general ETP. Sponsor examined the pairwise lead-lag
relationship between BITO and all other markets included in previous
analysis. As seen in Table 5, only four markets have a lead-lag ratio
(the strength measurement of the lead-lag relationship) outside the
range of [.95,1.05] and non-zero lead-lag seconds to conclude they are
leading or lagging. Sponsor interprets this result as BITO's lead-lag
relationship with other bitcoin markets is not significant.
Table 5--Markets With Significant Lead/Lag Relationships to BITO
------------------------------------------------------------------------
BITO
leadership
(lead-lag Lead-lag ratio
seconds)
------------------------------------------------------------------------
CME USD Ordinary Futures................ -1 0.909
Kraken USD Ordinary Futures............. -1 0.926
Huobi USD Ordinary Futures (Bi- -1 0.933
Quarterly).............................
CEX.IO USD Spot......................... 12 1.067
------------------------------------------------------------------------
Regarding BITO's price discovery contribution measured by lead-lag
seconds, it does not lead any bitcoin markets except CEX.IO USD spot
market, which not only lags BITO but also lags all other bitcoin
markets. More importantly, the CME bitcoin futures market leads BITO
with the highest level of certainty as seen from the lead-lag ratio. As
such, Sponsor concludes that the proposed ETP would have no material
impact on CME bitcoin futures prices.
The gold market shares certain characteristics with the bitcoin
market--both gold and bitcoin have a finite supply, are traded globally
in various market venues against various currency pairs and have a
robust futures market. In addition, many investors view bitcoin as a
form of digital gold and in looking to determine the potential impact
of price discovery in trading in the ETP shares on the secondary
market, the Sponsor looks to the gold market as an analogous market to
bitcoin when looking to determine the impact of price discovery.
According to a previous study \72\ the Sponsor reviewed, the authors
analyzed intraday data on gold prices from 1997-2014 and concluded that
futures markets tend to lead price discovery in the gold market despite
the spot market having ten times more volume than the U.S. futures
market. A second \73\ study that the sponsor analyzed, came to the same
conclusion that futures are the global leader in price discovery for
gold, with a growing influence of ETPs.
---------------------------------------------------------------------------
\72\ See Hauptfleisch, et. al.
\73\ Sehgal, Sanjay, Neharika Sobti, and Florent Diesting. ``Who
leads in intraday gold price discovery and volatility connectedness:
Spot, futures, or exchange-traded fund?'' Journal of Futures Markets
41, no. 7 (2021): 1092-1123. https://doi.org/10.1002/fut.22208.
---------------------------------------------------------------------------
Further, Sponsor believes that Shares of the Trust trading on the
secondary market could have a positive impact on the CME Bitcoin
Futures market leading position. Sponsor believes this due to the use
of CME Bitcoin Futures in hedging activities by market participants.
One such example, is when Authorized Participants transact on both the
secondary and primary markets. In order to arbitrage or fulfill large
basket trades on behalf of clients, Authorized Participants may
transact in the primary market with the ETP by creating and/or
redeeming and then immediately offsetting that transaction in the
secondary market. Because the primary market is settled in-kind
(meaning the exchange of shares and bitcoin) and the secondary market
is settled in cash (meaning the exchange of shares and fiat currency),
the Authorized Participant needs to transact in the bitcoin spot
market. Given there is a lag between the secondary market transaction,
the striking of the NAV per Share in the primary market and the
settlement of the primary market transaction, the Authorized
Participants will look to hedge their exposure to the bitcoin market
using bitcoin futures. For the reasons discussed throughout this
document such as the transparency, low fees, and leverage capabilities,
many market participants look to hedge themselves using futures and
Sponsor believes that will be the case with Authorized Participant
transactions in respect of the Trust as well.
The Exchange also believes that trading in the Shares would not be
the predominant force on prices in the Bitcoin Futures market (or spot
market) for several additional reasons, including the significant
volume in the Bitcoin Futures market, the size of bitcoin's market cap
(approximately $1 trillion), and the significant liquidity available in
the spot market. According to the Sponsor's analysis, in the second
quarter of 2021, bitcoin futures volume greatly exceeded volumes in the
spot markets. The volume of the bitcoin futures market was
approximately $7.1 trillion where the volume of the bitcoin spot
markets was approximately $1.4 trillion.\74\ In addition to the Bitcoin
Futures market data points cited above, the spot market for bitcoin is
also very liquid. According to data from CoinRoutes from February 2021,
the cost to buy or sell $5 million worth of bitcoin averages roughly 10
basis points with a market impact of 30 basis points.\75\ For a $10
million market order, the cost to buy or sell is roughly 20 basis
points with a market impact of 50 basis points. Stated another way, a
market participant could enter a market buy or sell order for $10
million of bitcoin and only move the market 0.5%. More strategic
purchases or sales (such as using limit orders and executing through
OTC bitcoin trade desks) would
[[Page 46276]]
likely have less obvious impact on the market--which is consistent with
MicroStrategy, Tesla, and Square being able to collectively purchase
billions of dollars in bitcoin. As such, the combination of Bitcoin
Futures leading price discovery, the overall size of the bitcoin
market, and the ability for market participants, including authorized
participants creating and redeeming with the Trust, to buy or sell
large amounts of bitcoin without significant market impact will help
prevent the Shares from becoming the predominant force on pricing in
either the bitcoin spot or Bitcoin Futures markets, satisfying part (b)
of the test outlined above.
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\74\ For more information, see Memorandum from the Division of
Trading and Markets regarding a September 8, 2021 meeting with
representatives from Fidelity Digital Assets, et al. (Sept. 8, 2021)
available at https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
\75\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
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(b) SEC Approval of Bitcoin Futures ETFs and CME Surveillance
Bitcoin Futures represent a growing influence on pricing in the
spot bitcoin market as has been laid out above and in other proposals
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is
based on pricing from spot bitcoin markets. As noted above, the
statement from the Teucrium Approval that ``CME's surveillance can
reasonably be relied upon to capture the effects on the CME bitcoin
futures market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures contracts
. . . indirectly by trading outside of the CME bitcoin futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of Bitcoin Futures. While the Commission makes
clear in the Teucrium Approval that the analysis only applies to the
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin
Futures as its only non-cash or cash equivalent holding, if CME's
surveillance is sufficient to mitigate concerns related to trading in
Bitcoin Futures for which the pricing is based directly on pricing from
spot bitcoin markets, it's not clear how such a conclusion could apply
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin
ETPs.
Additionally, a Bitcoin Futures ETF is actually potentially more
susceptible to manipulation than a Spot Bitcoin ETP where the
underlying trust offers only in-kind creation and redemption.
Specifically, the pricing of Bitcoin Futures is based on prices from
spot bitcoin markets, while shares of a Spot Bitcoin ETP would
represent an interest in bitcoin directly and authorized participants
for a Spot Bitcoin ETP would be able to source bitcoin from any
exchange and create or redeem with the applicable trust regardless of
the price of the underlying index. Potential manipulation of a Bitcoin
Futures ETF would require manipulation on the spot markets on which the
pricing for Bitcoin Futures are based while the in-kind creation and
redemption process and fungibility of bitcoin means that a would be
manipulator of a Spot Bitcoin ETP would need to manipulate the price
across all bitcoin markets or risk simply providing arbitrage
opportunities for authorized participants. Further to this point, this
arbitrage opportunity also acts to reduce any incentives to manipulate
the price of a Spot Bitcoin ETP because the underlying trust will
create and redeem shares at set rates of bitcoin per share without
regard to the price that the ETP is trading at in the secondary market
or the price of the underlying index. As such, the Exchange believes
that part (a) of the significant market test outlined above is
satisfied and that common membership in ISG between the Exchange and
CME would assist the listing exchange in detecting and deterring
misconduct in the Shares.
Recently, the Commission allowed three ETFs primarily invested in
CME Bitcoin futures to register and list on a national securities
exchange (``Bitcoin Futures ETFs'').\76\ As described in its
prospectus, BITO does not invest directly in bitcoin but rather seeks
to provide capital appreciation primarily through managed exposure to
cash-settled bitcoin futures contracts traded on commodity exchanges
registered with the Commodity Futures Trading Commission (``CFTC'').
Currently, the only such contracts that are traded on, or subject to
the rules of, the CME. CME Bitcoin futures are cash-settled in U.S.
dollars based on the CME DF Bitcoin Reference Rate (``BRR''), which is
a volume-weighted composite of U.S. dollar-bitcoin trading activity on
certain constituent exchanges including Bitstamp, Coinbase, Gemini,
itBit, Kraken, and LMAX Digital.\77\
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\76\ ProShares Bitcoin Strategy ETF (BITO); VanEck Bitcoin
Strategy ETF (XBTF); Valkyrie Bitcoin Strategy ETF (BTF).
\77\ See CME CF Bitcoin Reference Rate Index data at https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html.
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The CME reference rate is based on substantially the same pricing
data from digital asset trading platforms as the Index used by the
Trust. The Index is designed to reflect the performance of bitcoin in
U.S. dollars and the current constituent exchange composition of the
Index is Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
As noted recently by a commenter on another Rule 19b-4 application for
a bitcoin spot ETP, Bitcoin Futures ETFs and the Trust are exposed to
the same underlying pricing data and the same risks of
manipulation.\78\
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\78\ See Letter from Joseph A. Hall et al. to Vanessa Countryman
on SR-NYSE-Arca-2021-90 (Nov. 29, 2021).
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There is no basis, in law or in fact, for determining that the
Bitcoin Futures ETFs satisfy the standards of Section 6(b)(5) of the
Exchange Act while the Trust does not. Bitcoin pricing, whether in the
spot market or the futures market, is determined in the digital asset
trading platforms where supply and demand interact; and there is almost
complete overlap in the underlying digital asset trading platforms that
supply pricing information for the reference indices used by both the
CME Bitcoin futures market and the Trust.
Just three weeks after the Bitcoin Futures ETFs began trading, the
Commission again rejected a 19b-4 application filed by a spot bitcoin
ETP on the grounds that the listing exchange had failed to demonstrate
satisfaction of the Section 6(b)(5) standard.\79\ The Commission
specifically disagreed with the exchange's premises that (i) it is
inconsistent with the Section 6(b)(5) standard for the Commission to
permit a Bitcoin Futures ETF registered under the 1940 Act to launch
but to disapprove the approval of a bitcoin spot ETP; (ii) it is
inconsistent for the Commission to approve a Bitcoin Futures ETF that
trades exclusively in CME Bitcoin Futures contracts and conclude that
the CME Bitcoin Futures market is not a ``market of significant size''
under the Section 6(b)(5) standard; and (iii) there is no basis of fact
or law that the 1940 Act is designed to prevent market manipulation in
the markets in which the Bitcoin Futures ETF trades. Instead, the
Commission stated that it considers each proposed rule change on its
own merits and noted that the proposed rule did not relate to a product
regulated under the 1940 Act and did not relate to the same underlying
holdings as the Bitcoin Futures ETFs. In practice, however, the
Commission did not address why a bitcoin spot ETP fails to satisfy the
Section 6(b)(5) standard when it is exposed to the same underlying
risks of manipulation as the CME Bitcoin Futures contracts primarily
held by Bitcoin Futures ETFs, which have been allowed to register and
list.
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\79\ 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-
2019)(``VanEck Order'').
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[[Page 46277]]
As recently as 2020, the Commission approved new exchange listing
rules permitting ETFs registered under the 1940 Act, including Bitcoin
Futures ETFs, to list under an exchange's generic listing standards
without having to submit separate rule filing pursuant to Section
19(b).\80\ In determining that the rule change was reasonably designed
to help prevent fraudulent and manipulative acts and practice, the SEC
stated that ETFs would be required to disclose its portfolio holdings
under the 1940 Act and that the exchange rule included requirements
relating to fire walls and procedures to prevent the use and
dissemination of material, non-pubic information regarding the
applicable ETF index and portfolio.\81\ Importantly, with regard to
surveillance, the Commission stated only that the rule change required
the exchange to implement and maintain written surveillance procedures
for ETF shares and noted that the exchange would use its existing
surveillance procedures applicable to derivative products to monitor
trading in ETF shares. In approving the generic listing standards, the
SEC did not require in-depth analyses into any particular markets or
index components.\82\ While noting the ability of an exchange to rely
on FINRA for information related to certain securities held by ETPs,
the Commission focused its determination on the exchange's surveillance
of the market for ETF shares. As a result, Bitcoin Futures ETFs are
permitted to list and trade under generic listing standards based
solely on the oversight of the underlying futures by the CFTC and
futures exchanges with no acknowledgement or assessment by the
Commission of the actual risk of fraud or manipulation related to
underlying bitcoin spot markets referenced by such bitcoin futures--
even when such bitcoin markets mirror those proposed as reference
markets in the Index used by the Trust and other spot bitcoin ETP
listing proposals.
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\80\ Self-Regulatory Organizations, NYSE Arca, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 2, to Adopt
NYSE Arca Rule 5.2-E(j)(8) Governing the Listing and Trading of
Exchange-Traded Fund Shares (Apr. 13, 2020) (SR-NYSE-Arca-2019-81).
\81\ Id.
\82\ Id.
---------------------------------------------------------------------------
Because (i) the risks of manipulation in the bitcoin markets
impacting the Trust are thus indistinguishable from those same risks
impacting Bitcoin Futures ETFs; (ii) the Trust will have the same
pricing sources, and (iii) the Trust will be subject to the same risks
of manipulation as shares of Bitcoin Futures ETFs; the Exchange
believes that the proposed rule change is sufficiently designed to
prevent fraudulent and manipulative acts and practice. Approving this
change is consistent with the treatment of substantially similar
products, and the Exchange believes that any finding to the contrary
would result in arbitrarily disparate treatment to the Trust.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\83\
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\83\ See Winklevoss Order at 37580. The Commission has also
specifcally noted that it ``is not applying a ``cannot be
manipulated'' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.
Id. at 37582.
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The Exchange believes that such conditions are present.
Specifically, the significant liquidity in the spot market and the
impact of market orders on the overall price of bitcoin mean that
attempting to move the price of bitcoin is costly and has grown more
expensive over the past year. In January 2020, for example, the cost to
buy or sell $5 million worth of bitcoin averaged roughly 30 basis
points (compared to 10 basis points in 2/2021) with a market impact of
50 basis points (compared to 30 basis points in 2/2021).\84\ For a $10
million market order, the cost to buy or sell was roughly 50 basis
points (compared to 20 basis points in 2/2021) with a market impact of
80 basis points (compared to 50 basis points in 2/2021). As the
liquidity in the bitcoin spot market increases, it follows that the
impact of $5 million and $10 million orders will continue to decrease
the overall impact in spot price.
---------------------------------------------------------------------------
\84\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
Surveillance Sharing Agreement
The Commission also permits a listing exchange to demonstrate that
``other means to prevent fraudulent and manipulative acts and
practices'' are sufficient to justify dispensing with the requisite
surveillance-sharing agreement. The Exchange and Sponsor believe that
such conditions are present. The Exchange is proposing to take
additional steps to those described above to supplement its ability to
obtain information that would be helpful in detecting, investigating,
and deterring fraud and market manipulation in the Commodity-Based
Trust Shares. On June 21, 2023, the Exchange reached an agreement on
terms with Coinbase, Inc. (``Coinbase''), an operator of a United
States-based spot trading platform for Bitcoin that represents a
substantial portion of US-based and USD denominated Bitcoin
trading,\85\ to enter into a surveillance-sharing agreement (``Spot BTC
SSA'') and executed an associated term sheet. Based on this agreement
on terms, the Exchange and Coinbase will finalize and execute a
definitive agreement that the parties expect to be executed prior to
allowing trading of the Commodity-Based Trust Shares.
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\85\ According to a Kaiko Research report dated June 26, 2023,
Coinbase represented roughly 50% of exchange trading volume in USD-
BTC trading on a daily basis during May 2023.
---------------------------------------------------------------------------
The Spot BTC SSA is expected to be a bilateral surveillance-sharing
agreement between the Exchange and Coinbase that is intended to
supplement the Exchange's market surveillance program. The Spot BTC SSA
is expected to have the hallmarks of a surveillance-sharing agreement
between two members of the ISG, which would give the Exchange
supplemental access to data regarding spot Bitcoin trades on Coinbase
where the Exchange determines it is necessary as part of its
surveillance program for the Commodity-Based Trust Shares.\86\ This
means that the Exchange expects to receive market data for orders and
trades from Coinbase, which it will utilize in surveillance of the
trading of Commodity-Based Trust Shares. In addition, the Exchange can
request further information from Coinbase related to spot bitcoin
trading activity on the Coinbase exchange platform, if the Exchange
determines that such information would be necessary to detect and
investigate potential
[[Page 46278]]
manipulation in the trading of the Commodity-Based Trust Shares.\87\
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\86\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\87\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC
and Cboe Clear Digital, LLC.
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In-Kind Creation and Redemption
Further, and consistent with prior points above, offering only in-
kind creation and redemption will provide unique protections against
potential attempts to manipulate the Shares. While the Sponsor believes
that the Benchmark which it uses to value the Trust's bitcoin is itself
resistant to manipulation based on the methodology further described
below, the fact that creations and redemptions are only available in-
kind makes the manipulability of the Benchmark significantly less
important. Specifically, because the Trust will not accept cash to buy
bitcoin in order to create new shares or, barring a forced redemption
of the Trust or under other extraordinary circumstances, be forced to
sell bitcoin to pay cash for redeemed shares, the price that the
Sponsor uses to value the Trust's bitcoin is not particularly
important.\88\ When authorized participants are creating with the
Trust, they need to deliver a certain number of bitcoin per share
(regardless of the valuation used) and when they're redeeming, they can
similarly expect to receive a certain number of bitcoin per share. As
such, even if the price used to value the Trust's bitcoin is
manipulated (which the Sponsor believes that its methodology is
resistant to), the ratio of bitcoin per Share does not change and the
Trust will either accept (for creations) or distribute (for
redemptions) the same number of bitcoin regardless of the value. This
not only mitigates the risk associated with potential manipulation, but
also discourages and disincentivizes manipulation of the Benchmark
because there is little financial incentive to do so.
---------------------------------------------------------------------------
\88\ While the Benchmark will not be particularly important for
the creation and redemption process, it will be used for calculating
fees.
---------------------------------------------------------------------------
Wise Origin Bitcoin Trust
The Registration Statement includes the following description of
the Trust and its operations. The Trust will issue Shares that
represent fractional undivided beneficial interests in and ownership of
the Trust. The Trust is a Delaware statutory trust that operates
pursuant to the Declaration of Trust and Trust Agreement (the ``Trust
Agreement''), between Sponsor and Delaware Trust Company, the Delaware
trustee of the Trust (the ``Trustee''). Sponsor manages the Trust and
is responsible for the ongoing registration of the Shares. The Trust
will engage Fidelity Service Company, Inc. (``FSC''), a Sponsor
affiliate, to be the administrator (``Administrator''). A third-party
transfer agent (the ``Transfer Agent'') will facilitate the issuance
and redemption of Shares of the Trust and respond to correspondence by
Trust Shareholders and others relating to its duties, maintain
Shareholder accounts, and make periodic reports to the Trust.\89\
Another affiliate of Sponsor, Fidelity Distributors Corporation, will
be the marketing agent (``Marketing Agent'') in connection with the
creation and redemption of ``Baskets'' of Shares. The Sponsor will
provide assistance in the marketing of the Shares. FDAS, another
Sponsor affiliate, will serve as the Custodian.
---------------------------------------------------------------------------
\89\ The Exchange notes that the Sponsor is finalizing
negotiations with several service providers, and it will submit an
amendment to this proposal upon finalization of those arrangements.
---------------------------------------------------------------------------
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended (the ``1940 Act''),\90\ nor a commodity pool for purposes of
the Commodity Exchange Act (``CEA''), and neither the Trust nor the
Sponsor is subject to regulation as a commodity pool operator or a
commodity trading adviser in connection with the Shares.
---------------------------------------------------------------------------
\90\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------
The Trust's investment objective is to seek to track the
performance of bitcoin, as measured by the performance of the Fidelity
Bitcoin Index PR (the ``Index''), less the Trust's expenses and other
liabilities. In seeking to achieve its investment objective, the Trust
will hold bitcoin and will value its Shares daily as of 4:00 p.m.
Eastern time using the same methodology used to calculate the Index and
process all creations and redemptions in transactions with authorized
participants. The Trust is not actively managed.
The Bitcoin Custodian
The Sponsor has selected FDAS to be the Trust's Custodian. FDAS is
a New York state limited liability trust \91\ that serves as bitcoin
custodian to institutional and individual investors. The Custodian
maintains a substantial portion of the private keys associated with the
Trust's bitcoin in ``cold storage'' or similarly secure technology.
Cold storage is a safeguarding method with multiple layers of
protections and protocols, by which the private key(s) corresponding to
the Trust's bitcoin is (are) generated and stored in an offline manner.
Private keys are generated in offline computers that are not connected
to the internet so that they are resistant to being hacked. Cold
storage of private keys may involve keeping such keys on a non-
networked computer or electronic device or storing the public key and
private keys on a storage device (for example, a USB thumb drive) or
printed medium and deleting the keys from all computers.
---------------------------------------------------------------------------
\91\ New York state trust companies are subject to rigorous
oversight similar to other types of entities, such as nationally
chartered banking entities, that hold customer assets. Like national
banks, they must obtain specific approval of their primary rgulator
for the exercise of their fiduciary powers. Moreover, limited
purpose trust companies engaged in the custody of digial assets are
subject to even more stringent requirements than national banks
which, following initial approval of trust powers, generally can
exercise those powers broadly without further approval of the OCC.
In contrast, NYDFS requires in their approval orders that limited
purpose trust companies obtain separate approval for all material
changes in business.
---------------------------------------------------------------------------
The Custodian may receive deposits of bitcoin but may not send
bitcoin without use of the corresponding private keys. In order to send
bitcoin when the private keys are kept in cold storage, either the
private keys must be retrieved from cold storage and entered into a
software program to sign the transaction, or the unsigned transaction
must be sent to the ``cold'' server in which the private keys are held
for signature by the private keys. At that point, the Custodian can
transfer the bitcoin. The Trust's Transfer Agent will facilitate the
settlement of Shares in response to the placement of creation orders
and redemption orders from Authorized Participants. The Trust generally
does not intend to hold cash or cash equivalents. However, there may be
situations where the Trust will hold cash on a temporary basis. The
Trust will enter into a cash custody agreement with an unaffiliated
regulated bank as custodian of the Trust's cash and cash equivalents.
The Index
The Index is designed to reflect the performance of bitcoin in U.S.
dollars. The current exchange composition of the Index is Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital. The Index
methodology was developed by Fidelity Product Services, LLC (the
``Index Provider'') and is administered by the Fidelity Index
Committee. Coin Metrics, Inc. is the third-party calculation agent for
the Index.\92\
---------------------------------------------------------------------------
\92\ The Sponsor's affiliates have an owership interest in Coin
Metrics, Inc.
---------------------------------------------------------------------------
The Index is constructed using bitcoin price feeds from eligible
bitcoin spot
[[Page 46279]]
markets and a volume-weighted median price (``VWMP'') methodology,
calculated every 15 seconds based on VWMP spot market data over rolling
5-minute increments to develop a bitcoin price composite. The Index
market value is the volume-weighted median price of bitcoin in U.S.
dollars over the previous five minutes, which is calculated by (1)
ordering all individual transactions on eligible spot markets over the
previous five minutes by price, and then (2) selecting the price
associated with the 50th percentile of total volume. Using rolling
five-minute segments means malicious actors would need to sustain
efforts to manipulate the market over an extended period of time, or
such malicious actors would need to replicate efforts multiple times
across eligible bitcoin spot markets, potentially triggering review.
This extended period also supports authorized participant activity by
capturing volume over a longer time period, rather than forcing
authorized participants to mark an individual close or auction. The use
of a median price reduces the ability of outlier prices to impact the
NAV, as it systematically excludes those prices from the NAV
calculation. The use of a volume-weighted median (as opposed to a
traditional median) serves as an additional protection against attempts
to manipulate the NAV by executing a large number of low-dollar trades,
because any manipulation attempt would have to involve a majority of
global spot bitcoin volume in a three-minute window to have any
influence on the NAV. Further, removing the highest and lowest prices
further protects against attempts to manipulate the NAV, requiring bad
actors to act on multiple eligible bitcoin spot markets at once to have
any ability to influence the price.
Availability of Information
In addition to the price transparency of the Index, the Trust will
provide information regarding the Trust's bitcoin holdings as well as
additional data regarding the Trust. The Trust will provide an Intraday
Indicative Value (``IIV'') per Share updated every 15 seconds, as
calculated by the Exchange or a third-party financial data provider
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m.
Eastern time). The IIV will be calculated by using the prior day's
closing NAV per Share as a base and updating that value during Regular
Trading Hours to reflect changes in the value of the Trust's bitcoin
holdings during the trading day.
The IIV disseminated during Regular Trading Hours should not be
viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours by one or more major market data
vendors. In addition, the IIV will be available through on-line
information services.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the BZX Official Closing Price \93\ in relation to the NAV
as of the time the NAV is calculated and a calculation of the premium
or discount of such price against such NAV; (c) data in chart form
displaying the frequency distribution of discounts and premiums of the
Official Closing Price against the NAV, within appropriate ranges for
each of the four previous calendar quarters (or for the life of the
Trust, if shorter); (d) the prospectus; and other applicable
quantitative information. The Trust will also disseminate the Trust's
holdings on a daily basis on the Trust's website. The value of the
Index will be made available by one or more major market data vendors,
updated at least every 15 seconds during Regular Trading Hours.
---------------------------------------------------------------------------
\93\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as the Index.
Information relating to trading, including price and volume
information, in bitcoin is available from major market data vendors and
from the exchanges on which bitcoin are traded. Depth of book
information is also available from bitcoin exchanges. The normal
trading hours for bitcoin exchanges are 24 hours per day, 365 days per
year.
Net Asset Value
As described in the Registration Statement, for purposes of
calculating the Trust's NAV per Share, the Trust's holdings of bitcoin
will be valued using the same methodology as used to calculate the
Index. NAV means the total assets of the Trust including, but not
limited to, all bitcoin and cash, if any, less total liabilities of the
Trust, each determined on the basis of generally accepted accounting
principles. The NAV of the Trust is calculated by taking the fair
market value of its total assets based on the volume-weighted median
price of bitcoin used for the calculation of the Index, subtracting any
liabilities (which include accrued expenses), and dividing that total
by the total number of outstanding Shares. The Administrator calculates
the NAV of the Trust once each Exchange trading day. The NAV for a
normal trading day will be released after 4:00 p.m. Eastern time.
Trading during the core trading session on the Exchange typically
closes at 4:00 p.m. Eastern time. However, NAVs are not officially
struck until later in the day (often by 5:30 p.m. Eastern time and
almost always by 8:00 p.m. Eastern time). The pause between 4:00 p.m.
Eastern time and 5:30 p.m. Eastern time (or later) provides an
opportunity to algorithmically detect, flag, investigate, and correct
unusual pricing should it occur.
Creation and Redemption of Shares
When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of Shares (a ``Creation Basket'') at the
Trust's NAV. Authorized participants will deliver, or facilitate the
delivery of, bitcoin to the Trust's account with the Custodian in
exchange for Shares when they purchase Shares, and the Trust, through
the Custodian, will deliver bitcoin to such authorized participants
when they redeem Shares with the Trust. Authorized participants may
then offer Shares to the public at prices that depend on various
factors, including the supply and demand for Shares, the value of the
Trust's assets, and market conditions at the time of a transaction.
Shareholders who buy or sell Shares during the day from their broker
may do so at a premium or discount relative to the NAV of the Shares of
the Trust.
According to the Registration Statement, on any business day, an
authorized participant may place an order to create one or more
baskets. Purchase orders must be placed by the time noted in the
Authorized Participant Agreement or as provided separately to all
Authorized Participants. The day on which an order is received is
considered the purchase order date. The total deposit of bitcoin
required is an amount of bitcoin that is in the same proportion to the
total assets of the Trust, net of accrued expenses
[[Page 46280]]
and other liabilities, on the date the order to purchase is properly
received, as the number of Shares to be created under the purchase
order is in proportion to the total number of Shares outstanding on the
date the order is received. Each night, the Sponsor will publish the
amount of bitcoin that will be required in exchange for each creation
order. The Administrator determines the required deposit for a given
day by dividing the number of bitcoin held by the Trust as of the
opening of business on that business day, adjusted for the amount of
bitcoin constituting estimated accrued but unpaid fees and expenses of
the Trust as of the opening of business on that business day, by the
quotient of the number of Shares outstanding at the opening of business
divided by the aggregation of Shares associated with a Creation Basket.
The procedures by which an authorized participant can redeem one or
more Creation Baskets mirror the procedures for the creation of
Creation Baskets.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
The Shares will be subject to BZX Rule 14.11(e)(4), which sets
forth the initial and continued listing criteria applicable to
Commodity-Based Trust Shares. The Exchange will obtain a representation
that the Trust's NAV will be calculated daily and that these values and
information about the assets of the Trust will be made available to all
market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a
trust that holds a specified commodity \94\ deposited with the trust;
(b) issued by such trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and (c)
when aggregated in the same specified minimum number, may be redeemed
at a holder's request by such trust which will deliver to the redeeming
holder the quantity of the underlying commodity.
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\94\ For purposes of Rule 14.11(e)(4), the term community takes
on the definition of the term as provided in the Commodity Exchange
Act. As noted abobe, the CFTC has opined that Bitcoin is a commodity
as defined in Section 1a(9) of the Commodity Exchange Act. See
Coinflip.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g. , Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18. Trading may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) the extent to which trading is not occurring in the bitcoin
underlying the Shares; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly
market are present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
Trading Rules
The Exchange deems the Shares to be equity securities, thus
rendering trading in the Shares subject to the Exchange's existing
rules governing the trading of equity securities. BZX will allow
trading in the Shares during all trading sessions on the Exchange. The
Exchange has appropriate rules to facilitate transactions in the Shares
during all trading sessions. As provided in BZX Rule 11.11(a) the
minimum price variation for quoting and entry of orders in securities
traded on the Exchange is $0.01 where the price is greater than $1.00
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
The Exchange believes that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. Trading of the Shares
through the Exchange will be subject to the Exchange's surveillance
procedures for derivative products, including Commodity-Based Trust
Shares. The issuer has represented to the Exchange that it will advise
the Exchange of any failure by the Trust or the Shares to comply with
the continued listing requirements, and, pursuant to its obligations
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil
for compliance with the continued listing requirements. If the Trust or
the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 14.12. The Exchange may obtain information regarding
trading in the Shares and Bitcoin Futures via ISG, from other exchanges
who are members or affiliates of the ISG, or with which the Exchange
[[Page 46281]]
has entered into a comprehensive surveillance sharing agreement.\95\
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\95\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) the procedures for the
creation and redemption of Baskets (and that the Shares are not
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (iii) how information
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks
involved in trading the Shares outside of Regular Trading Hours \96\
when an updated IIV will not be calculated or publicly disseminated;
(v) the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (vi) trading information.
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\96\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
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In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \97\ in general and Section 6(b)(5) \98\ of the Act in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\97\ 15 U.S.C. 78f.
\98\ 15 U.S.C. 78f(b)(5).
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The Commission has approved numerous series of Trust Issued
Receipts,\99\ including Commodity-Based Trust Shares,\100\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\101\ and (ii) the requirement that an exchange proposal be designed,
in general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the and, as described and discussed above, the
Sponsor's analysis demonstrates that the Exchange has satisfied the
requirements under the Act that the CME Bitcoin Futures Market (i) is a
regulated market, (ii) has a comprehensive surveillance-sharing
agreement with the Exchange; and (iii) satisfies the Commission's
``significant market'' definition.'' In addition, the Exchange believes
that this proposal is consistent with the requirements of Section
6(b)(5) of the Act because this filing sufficiently demonstrates that
the standard that has previously been articulated by the Commission
applicable to Commodity-Based Trust Shares has been met as outlined
below.
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\99\ See Exchange Rule 14.11(f).
\100\ Commodity-Based Trust Shares, as described in Exchange
Rule 14.11(e)(4), are a type of Trust Issued Receipt.
\101\ As the Exchange has stated in a number of other public
documents, it continues to believe that bitcoin is resistant to
price manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of bitcoin trading render it difficult
and prohibitively costly to manipulate the price of bitcoin. The
fragmentation across bitcoin platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin
prices through continuous trading activity challenging. To the
extent that there are bitcoin exchanges engaged in or allowing wash
trading or other activity intended to manipulate the price of
bitcoin on other markets, such pricing does not normally impact
prices on other exchange because participants will generally ignore
markets with quotes that they deem non-executable. Moreover, the
linkage between the bitcoin markets and the presence of arbitrageurs
in those markets means that the manipulation of the price of bitcoin
price on any single venue would require manipulation of the global
bitcoin price in order to be effective. Arbitrageurs must have funds
distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular bitcoin exchange or OTC platform. As a result, the
potential for manipulation on a trading platform would require
overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences.
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Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, the Commission
requires that an exchange demonstrate that there is a comprehensive
surveillance-sharing agreement in place \102\ with a regulated market
of significant size. Both the Exchange and CME are members of ISG.\103\
As such, the only remaining issue to be addressed is whether the
Bitcoin Futures market constitutes a market of significant size, which
the Exchange believes that it does. The terms ``significant market''
and ``market of significant size'' include a market (or group of
markets) as to which: (a) there is a reasonable likelihood that a
person attempting to manipulate the ETP would also have to trade on
that market to manipulate the ETP, so that a surveillance-sharing
agreement would assist the listing exchange in detecting and deterring
misconduct; and (b) it is unlikely that trading in the ETP would be the
predominant influence on prices in that market.\104\
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\102\ As previously articulated by the Commission, ``The
standard requires such surveillance-sharing agreements since ''they
provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully
investigate a manipulation if it were to occur.`` The Commission has
emphasized that it is essential for an exchange listing a derivative
securities product to enter into a surveillance- sharing agreement
with markets trading underlying securities for the listing exchange
to have the ability to obtain information necessary to detect,
investigate, and deter fraud and market manipulation, as well as
violations of exchange rules and applicable federal securities laws
and rules. The hallmarks of a surveillance-sharing agreement are
that the agreement provides for the sharing of information about
market trading activity, clearing activity, and customer identity;
that the parties to the agreement have reasonable ability to obtain
access to and produce requested information; and that no existing
rules, laws, or practices would impede one party to the agreement
from obtaining this information from, or producing it to, the other
party.'' The Commission has historically held that joint membership
in ISG constitutes such a surveillance sharing agreement. See
Wilshire Phoenix Disapproval.
\103\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\104\ See Wilshire Phoenix Disapproval.
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The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the
[[Page 46282]]
requisite surveillance-sharing agreement.\105\
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\105\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a ``cannot be
manipulated'' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.
Id. at 37582.
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(a) Reasonable Likelihood That a Person Attempting To Manipulate the
ETP Would Also Have To Trade on That Market To Manipulate the ETP
Bitcoin Futures represent a growing influence on pricing in the
spot bitcoin market as has been laid out above and in other proposals
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is
based on pricing from spot bitcoin markets. As noted above, the
statement from the Teucrium Approval that ``CME's surveillance can
reasonably be relied upon to capture the effects on the CME bitcoin
futures market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures
contracts.indirectly by trading outside of the CME bitcoin futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of Bitcoin Futures. While the Commission makes
clear in the Teucrium Approval that the analysis only applies to the
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin
Futures as its only non-cash or cash equivalent holding, if CME's
surveillance is sufficient to mitigate concerns related to trading in
Bitcoin Futures for which the pricing is based directly on pricing from
spot bitcoin markets, it's not clear how such a conclusion could apply
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin
ETPs.
Additionally, a Bitcoin Futures ETF is actually potentially more
susceptible to manipulation than a Spot Bitcoin ETP where the
underlying trust offers only in-kind creation and redemption.
Specifically, the pricing of Bitcoin Futures is based on prices from
spot bitcoin markets, while shares of a Spot Bitcoin ETP would
represent an interest in bitcoin directly and authorized participants
for a Spot Bitcoin ETP would be able to source bitcoin from any
exchange and create or redeem with the applicable trust regardless of
the price of the underlying index. Potential manipulation of a Bitcoin
Futures ETF would require manipulation on the spot markets on which the
pricing for Bitcoin Futures are based while the in-kind creation and
redemption process and fungibility of bitcoin means that a would be
manipulator of a Spot Bitcoin ETP would need to manipulate the price
across all bitcoin markets or risk simply providing arbitrage
opportunities for authorized participants. Further to this point, this
arbitrage opportunity also acts to reduce any incentives to manipulate
the price of a Spot Bitcoin ETP because the underlying trust will
create and redeem shares at set rates of bitcoin per share without
regard to the price that the ETP is trading at in the secondary market
or the price of the underlying index. As such, the Exchange believes
that part (a) of the significant market test outlined above is
satisfied and that common membership in ISG between the Exchange and
CME would assist the listing exchange in detecting and deterring
misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices in the Bitcoin Futures
market or spot market for a number of reasons, including the in-kind
creation and redemption process, the spot market arbitrage
opportunities that such in-kind creation and redemption process
creates, the significant volume in the Bitcoin Futures market, the size
of bitcoin's market cap, and the significant liquidity available in the
spot market. In addition to the Bitcoin Futures market data points
cited above, the spot market for bitcoin is also very liquid. According
to data from Skew, the cost to buy or sell $5 million worth of bitcoin
averages roughly 48 basis points with a market impact of $139.08.\106\
Stated another way, a market participant could enter a market buy or
sell order for $5 million of bitcoin and only move the market 0.48%.
More strategic purchases or sales (such as using limit orders and
executing through OTC bitcoin trade desks) would likely have less
obvious impact on the market--which is consistent with MicroStrategy,
Tesla, and Square being able to collectively purchase billions of
dollars in bitcoin.
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\106\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase, FTX and Kraken during the one-year period ending
May 2022.
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As such, the combination of the in-kind creation and redemption
process, the Bitcoin Futures leading price discovery, the overall size
of the bitcoin market, and the ability for market participants,
including authorized participants creating and redeeming in-kind with
the Trust, to buy or sell large amounts of bitcoin without significant
market impact will help prevent the Shares from becoming the
predominant force on pricing in either the bitcoin spot or Bitcoin
Futures markets, satisfying part (b) of the test outlined above.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange also believes that reviewing this proposal through the
lens of the Bitcoin Futures Approvals would also lead the Commission to
approving this proposal. Previous disapproval orders have made clear
that a market that constitutes a regulated market of significant size
is generally a futures and/or options market based on the underlying
reference asset rather than the spot commodity markets, which are often
unregulated.\107\ The Exchange believes that the following excerpt from
the Teucrium Approval is particular informative:
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\107\ See Winklevoss Order at 37593, specifically footnote 202,
which includes the language from numerous approval orders for which
the underlying futures markets formed the basis for approving series
of ETPs that hold physical metals, including gold, silver,
palladium, platinum, and precious metals more broadly; and 37600,
specifically where the Commission provides that ``when the spot
market is unregulated--the requirement of preventing fraudulent and
manipulative acts may possibly be satisfied by showing that the ETP
listing market has entered into a surveillance-sharing agreement
with a regulated market of significant size in derivatives related
to the underlying asset.'' As noted above, the Exchange believes
that these citations are particularly helpful in making clear that
the spot market for a spot commodity ETP need not be ``regulated''
in order for a spot commodity ETP to be approved by the Commission,
and in fact that it's been the common historical practice of the
Commission to rely on such derivatives markets as the regulated
market of significant size because such spot commodities markets are
largely unregulated.
The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus the CME's surveillance can reasonably
be relied upon to capture the effects on the CME bitcoin futures
market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures
contracts, whether that attempt is made by directly trading on the
CME bitcoin futures market or indirectly by
[[Page 46283]]
trading outside of the CME bitcoin futures market. As such, when the
CME shares its surveillance information with Arca, the information
would assist in detecting and deterring fraudulent or manipulative
misconduct related to the non-cash assets held by the proposed
ETP.\108\
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\108\ See Teucrium Approval at 21679.
Bitcoin Futures pricing is based on pricing from spot bitcoin
markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME bitcoin futures market caused by a person attempting to
manipulate the proposed futures ETP by manipulating the price of CME
bitcoin futures contracts . . . indirectly by trading outside of the
CME bitcoin futures market,'' makes clear that the Commission believes
that CME's surveillance can capture the effects of trading on the
relevant spot markets on the pricing of Bitcoin Futures. If CME is able
to detect such attempts at manipulation in the complex and
interconnected spot bitcoin market, how would such an ability to detect
attempted manipulation and the utility in sharing that information with
the listing exchange apply only to Bitcoin Futures ETFs and not Spot
Bitcoin ETPs? Stated a different way, given that there is significant
trading volume on numerous bitcoin exchanges that are not part of the
CME CF Bitcoin Reference Rate and that arbitrage opportunities across
bitcoin exchanges means that such trading volume will influence spot
bitcoin prices across the market and, despite this, the Commission
still believes that CME can detect attempted manipulation of the
Bitcoin Futures through ``trading outside of the CME bitcoin futures
market,'' it is clear that such ability would apply equally to both
Bitcoin Futures ETFs and Spot Bitcoin ETPs. To take it a step further,
such an ability would also seem to be a strong indication that the CME
Bitcoin Futures market represents a regulated market of significant
size. To be clear, the Exchange agrees with the Commission on this
point (and the implications of their conclusions) and further notes
that the pricing mechanism applicable to the Shares is similar to the
CME CF Bitcoin Reference Rate.
Surveillance Sharing Agreement
The Exchange is proposing to take additional steps to those
described above to supplement its ability to obtain information that
would be helpful in detecting, investigating, and deterring fraud and
market manipulation in the Commodity-Based Trust Shares. On June 21,
2023, the Exchange reached an agreement on terms with Coinbase, Inc.
(``Coinbase''), an operator of a United States-based spot trading
platform for Bitcoin that represents a substantial portion of US-based
and USD denominated Bitcoin trading,\109\ to enter into a surveillance-
sharing agreement (``Spot BTC SSA'') and executed an associated term
sheet. Based on this agreement on terms, the Exchange and Coinbase will
finalize and execute a definitive agreement that the parties expect to
be executed prior to allowing trading of the Commodity-Based Trust
Shares.
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\109\ According to a Kaiko Research report dated June 26, 2023,
Coinbase represented roughly 50% of exchange trading volume in USD-
BTC trading on a daily basis during May 2023.
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The Spot BTC SSA is expected to be a bilateral surveillance-sharing
agreement between the Exchange and Coinbase that is intended to
supplement the Exchange's market surveillance program. The Spot BTC SSA
is expected to have the hallmarks of a surveillance-sharing agreement
between two members of the ISG, which would give the Exchange
supplemental access to data regarding spot Bitcoin trades on Coinbase
where the Exchange determines it is necessary as part of its
surveillance program for the Commodity-Based Trust Shares.\110\ This
means that the Exchange expects to receive market data for orders and
trades from Coinbase, which it will utilize in surveillance of the
trading of Commodity-Based Trust Shares. In addition, the Exchange can
request further information from Coinbase related to spot bitcoin
trading activity on the Coinbase exchange platform, if the Exchange
determines that such information would be necessary to detect and
investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.\111\
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\110\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\111\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC
and Cboe Clear Digital, LLC.
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In Kind Creation and Redemption
Further, and consistent with prior points above, offering only in-
kind creation and redemption will also provide unique protections
against potential attempts to manipulate the price of the Shares. While
the Sponsor believes that the Benchmark which it uses to value the
Trust's bitcoin is itself resistant to manipulation based on the
methodology further described below, the fact that creations and
redemptions are only available in-kind makes the manipulability of the
Benchmark significantly less important. Specifically, because the Trust
will not accept cash to buy bitcoin in order to create new Shares or,
barring a forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
Shares, the price that the Sponsor uses to value the Trust's bitcoin is
not particularly important.\112\ When authorized participants are
creating Shares with the Trust, they need to deliver a certain number
of bitcoin per Share (regardless of the valuation used) and when
they're redeeming, they can similarly expect to receive a certain
number of bitcoin per Share. As such, even if the price used to value
the Trust's bitcoin is manipulated (which the Sponsor believes that its
methodology is resistant to), the ratio of bitcoin per Share does not
change and the Trust will either accept (for creations) or distribute
(for redemptions) the same number of bitcoin regardless of the value.
This not only mitigates the risk associated with potential
manipulation, but also discourages and disincentivizes manipulation of
the Benchmark because there is little financial incentive to do so.
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\112\ While the Benchmark will not be particularly important for
the creation and redemption process, it will be used for calculating
fees.
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(d) Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to bitcoin through OTC Bitcoin Funds has grown into
the tens of billions of dollars, including through Bitcoin Futures
ETFs. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through roll costs for Bitcoin
Futures ETFs and premium/discount volatility and management fees for
OTC Bitcoin Funds. The Exchange believes that the concerns related to
the prevention of fraudulent and manipulative acts and practices have
been sufficiently addressed to be consistent with the Act and, to the
extent that the Commission disagrees with that assertion, such concerns
are now outweighed by investor protection concerns. As such, the
Exchange believes that approving this proposal (and comparable
proposals) provides the Commission with the opportunity to allow U.S.
investors with access to bitcoin in a regulated and transparent
exchange-traded vehicle that would act to limit risk to U.S. investors
by: (i) reducing
[[Page 46284]]
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in Bitcoin Futures ETFs and operating companies that are
imperfect proxies for bitcoin exposure; and (iv) providing an
alternative to custodying spot bitcoin.
Commodity-Based Trust Shares
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under Section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange
may obtain information regarding trading in the Shares and listed
bitcoin derivatives via the ISG, from other exchanges who are members
or affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement.
Availability of Information
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about bitcoin and will be available regarding the Trust and
the Shares. In addition to the price transparency of the Benchmark, the
Trust will provide information regarding the Trust's bitcoin holdings
as well as additional data regarding the Trust. The Trust will provide
an IIV per Share updated every 15 seconds, as calculated by the
Exchange or a third-party financial data provider during the Exchange's
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be
calculated by using the prior day's closing NAV per Share as a base and
updating that value during Regular Trading Hours to reflect changes in
the value of the Trust's bitcoin holdings during the trading day.
The IIV disseminated during Regular Trading Hours should not be
viewed as an actual real-time update of the NAV, which will be
calculated only once at the end of each trading day. The IIV will be
widely disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours by one or more major market data
vendors. In addition, the IIV will be available through on-line
information services.
The website for the Trust, which will be publicly accessible at no
charge, will contain the following information: (a) the current NAV per
Share daily and the prior business day's NAV and the reported closing
price; (b) the BZX Official Closing Price in relation to the NAV as of
the time the NAV is calculated and a calculation of the premium or
discount of such price against such NAV; (c) data in chart form
displaying the frequency distribution of discounts and premiums of the
Official Closing Price against the NAV, within appropriate ranges for
each of the four previous calendar quarters (or for the life of the
Trust, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The Trust will also disseminate the Trust's
holdings on a daily basis on the Trust's website. The price of bitcoin
will be made available by one or more major market data vendors,
updated at least every 15 seconds during Regular Trading Hours.
Information about the Benchmark, including key elements of how the
Benchmark is calculated, will be publicly available at www.mvis-indices.com/.
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the CTA.
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as the Benchmark. Information relating
to trading, including price and volume information, in bitcoin is
available from major market data vendors and from the exchanges on
which bitcoin are traded. Depth of book information is also available
from bitcoin exchanges. The normal trading hours for bitcoin exchanges
are 24 hours per day, 365 days per year.
In sum, the Exchange believes that this proposal is consistent with
the requirements of Section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the CME Bitcoin Futures market
represents a regulated market of significant size, and that on the
whole the manipulation concerns previously articulated by the
Commission are sufficiently mitigated to the point that they are
outweighed by investor protection issues that would be resolved by
approving this proposal.
The Exchange believes that the proposal is, in particular, designed
to protect investors and the public interest. Premium and discount
volatility, high fees, rolling costs, insufficient disclosures, and
technical hurdles are putting U.S. investor money at risk on a daily
basis that could potentially be eliminated through access to a Spot
Bitcoin ETP. As such, the Exchange believes that this proposal acts to
limit the risk to U.S. investors that are increasingly seeking exposure
to bitcoin by providing direct, 1-for-1 exposure to bitcoin in a
regulated, transparent, exchange-traded vehicle, specifically by: (i)
reducing premium volatility; (ii) reducing management fees through
meaningful competition; (iii) providing an alternative to Bitcoin
Futures ETFs which will eliminate roll cost; (iv) reducing risks
associated with investing in operating companies that are imperfect
proxies for bitcoin exposure; and (v) providing an alternative to
custodying spot bitcoin. Finally, the Exchange notes that in addition
to all of the arguments herein which it believes sufficiently
establishes the CME Bitcoin Futures market as a regulated market of
significant size, it is logically inconsistent to find that the CME
Bitcoin Futures market is a significant market as it relates to the CME
Bitcoin Futures market, but not a significant market as it relates to
the bitcoin spot market for the numerous reasons laid out above.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather will facilitate the listing and trading of
an additional exchange-traded product that will enhance competition
among both market participants and
[[Page 46285]]
listing venues, to the benefit of investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as modified by Amendment No. 2, is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBZX-2023-044 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to file number SR-CboeBZX-2023-044. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeBZX-2023-044 and should
be submitted on or before August 9, 2023.
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\113\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\113\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15267 Filed 7-18-23; 8:45 am]
BILLING CODE 8011-01-P
