Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 3 to, and Order Instituting Proceedings To Determine Whether To Approve or Disapprove, a Proposed Rule Change To List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 55743-55775 [2023-17603]
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Federal Register / Vol. 88, No. 157 / Wednesday, August 16, 2023 / Notices
investors, or otherwise in furtherance of
the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include file number SR–
NYSENAT–2023–15 on the subject line.
lotter on DSK11XQN23PROD with NOTICES1
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–NYSENAT–2023–15. 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–NYSENAT–2023–15 and should be
submitted on or before September 6,
2023.
20 17
CFR 200.30–3(a)(12).
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–17607 Filed 8–15–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98112; File No. SR–
CboeBZX–2023–028]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of Filing of
Amendment No. 3 to, and Order
Instituting Proceedings To Determine
Whether To Approve or Disapprove, a
Proposed Rule Change To List and
Trade Shares of the ARK 21Shares
Bitcoin ETF Under BZX Rule
14.11(e)(4), Commodity-Based Trust
Shares
August 11, 2023.
On April 25, 2023, Cboe BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares of the
ARK 21Shares Bitcoin ETF under BZX
Rule 14.11(e)(4), Commodity-Based
Trust Shares. The proposed rule change
was published for comment in the
Federal Register on May 15, 2023.3 On
June 15, 2023, pursuant to section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.5 On June 28, 2023, the
Exchange filed Amendment No. 1 to the
proposed rule change, which amended
and replaced the proposed rule change
in its entirety. On June 30, 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. On July 11, 2023, the Exchange
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 97461
(May 9, 2023), 88 FR 31045. Comments received on
the proposed rule change can be found at: https://
www.sec.gov/comments/SR-Cboebzx-2023-028/
srcboebzx2023028.htm.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 97732,
88 FR 40877 (June 22, 2023). The Commission
designated August 13, 2023, as the date by which
the Commission shall approve or disapprove, or
institute proceedings to determine whether to
disapprove, the proposed rule change.
2 17
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55743
filed Amendment No. 3 to the proposed
rule change as described in Items I and
II below, which Items have been
prepared by the Exchange. Amendment
No. 3 amended and replaced the
proposed rule change, as modified by
Amendment No. 2, in its entirety. The
Commission is publishing this notice
and order to solicit comments on the
proposed rule change, as modified by
Amendment No. 3, from interested
persons and to institute proceedings
pursuant to section 19(b)(2)(B) of the
Act 6 to determine whether to approve
or disapprove the proposed rule change,
as modified by Amendment No. 3.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe BZX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BZX’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to list and trade shares of the ARK
21Shares Bitcoin ETF (the ‘‘Trust’’),7
under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
equities/regulation/rule_filings/bzx/), at
the Exchange’s Office of the Secretary,
and at the Commission’s Public
Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
This Amendment No. 3 to SR–
CboeBZX–2023–028 amends and
replaces in its entirety the proposal as
originally submitted on April 25, 2023
and as amended by Amendment No. 1
6 15
U.S.C. 78s(b)(2)(B).
Trust was formed as a Delaware statutory
trust on June 22, 2021 and is operated as a grantor
trust for U.S. federal tax purposes. The Trust has
no fixed termination date.
7 The
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Federal Register / Vol. 88, No. 157 / Wednesday, August 16, 2023 / Notices
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on June 28, 2023 and Amendment No.
2 on June 30, 2023. The Exchange
submits this Amendment No. 3 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),8 which governs the listing
and trading of Commodity-Based Trust
Shares on the Exchange.9 10 21Shares US
LLC is the sponsor of the Trust (the
‘‘Sponsor’’). The Shares will be
registered with the Commission by
means of the Trust’s registration
statement on Form S–1 (the
‘‘Registration Statement’’).11 As further
discussed below, the Commission has
historically approved or disapproved
exchange filings to list and trade series
of Trust Issued Receipts, including spotbased 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.12 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.13
8 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).
9 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.
10 The Exchange notes that two different
proposals to list and trade shares of the Trust were
disapproved by the Commission on March 31, 2022
and January 26, 2023. See Exchange Act Release
Nos. 94571 (March 31, 2022), 87 FR 20014 (April
6, 2022) and 96751 (January 26, 2023), 88 FR 628
(January 31, 2023).
11 See draft Registration Statement on Form S–1,
dated June 28, 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.
12 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’’).
13 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)
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(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,
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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
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).
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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.’’ 14
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
1933.15 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, 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
14 See
Winklevoss Order at 37592.
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’’).
15 See
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against insolvency, 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 vehicles (such as
loosely regulated centralized exchanges
that have since faced bankruptcy
proceedings or other insolvencies), then
countless investors would 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.16 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,
2016.17 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.18
16 For additional information about bitcoin and
the Bitcoin Network, see https://bitcoin.org/en/
getting-started; https://www.fidelity
digitalassets.com/articles/addressing-bitcoincriticisms; and https://www.vaneck.com/education/
investment-ideas/investing-in-bitcoin-and-digitalassets/.
17 See Winklevoss Order.
18 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,
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55745
Similarly, regulated U.S. bitcoin futures
contracts did not exist. The CFTC had
determined that bitcoin is a
commodity,19 but had not engaged in
significant enforcement actions in the
space. The New York Department of
Financial Services (‘‘NYDFS’’) adopted
its final BitLicense regulatory
framework in 2015, but had only
approved four entities to engage in
activities relating to virtual currencies
(whether through granting a BitLicense
or a limited-purpose trust charter) as of
June 30, 2016.20 While the first over-thecounter bitcoin fund launched in 2013,
public trading was limited and the fund
had only $60 million in assets.21 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.22 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 23 and shares
including both digital asset securities and
cryptocurrencies, together.
19 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.’’
20 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.
21 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.
22 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.
23 See Prospectus supplement filed pursuant to
Rule 424(b)(1) for INX Tokens (Registration No.
333–233363), available at: https://www.sec.gov/
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in investment vehicles holding bitcoin
futures.24 Additionally, licensed and
regulated service providers have
emerged to provide fund custodial
services for digital assets, among other
services. For example, in February 2023,
the Commission proposed to amend
Rule 206(4)–2 under the Advisers Act of
1940 (the ‘‘custody rule’’) to expand the
scope beyond client funds and
securities to include all crypto assets,
among other assets; 25 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’’); 26 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; 27 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,28 and
multiple transfer agents who provide
services for digital asset securities
registered with the Commission.29
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.30 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.31 Open interest was over $1.4
billion for the entirety of the period and
at one point was over $2 billion. 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.32 As of
February 14, 2023 the NYDFS has
granted no fewer than thirty-four
BitLicenses,33 including to established
public payment companies like PayPal
Holdings, Inc. and Square, Inc., and
limited purpose trust charters to entities
providing cryptocurrency custody
services, including the Trust’s
Custodian.34 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.35
Archives/edgar/data/1725882/
000121390020023202/ea125858-424b1_
inxlimited.htm.
24 See Prospectus filed by Stone Ridge Trust VI
on behalf of NYDIG Bitcoin Strategy Fund
Registration, available at: https://www.sec.gov/
Archives/edgar/data/1764894/
000119312519309942/d693146d497.htm.
25 See Investment Advisers Act Release No. 6240
88 FR 14672 (March 9, 2023) (Safeguarding
Advisory Client Assets).
26 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).
27 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.
28 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.
29 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.
30 As of February 1, 2023, the total market cap of
all bitcoin in circulation was approximately $450
billion.
31 Data sourced from the CME Bitcoin Futures
Report: 30 March, 2023, available at: https://
www.cmegroup.com/markets/cryptocurrencies/
bitcoin/bitcoin.volume.htm.
32 The CFTC’s annual report for Fiscal Year 2022
(which ended on September 30, 2022) noted that
the CFTC completed the fiscal year with 18
enforcement filings related to digital assets. ‘‘Digital
asset actions included manipulation, a $1.7 billion
fraudulent scheme, and a decentralized
autonomous organization (DAO) failing to register
as a SEF or FCM or to seek DCM designation.’’ See
CFTC FY 2022 Agency Financial Report, available
at: https://www.cftc.gov/media/7941/2022afr/
download. Additionally, the CFTC filed on March
27, 2023, a civil enforcement action against the
owner/operators of the Binance centralized digital
asset trading platform, which is one of the largest
bitcoin derivative exchanges. See CFTC Release No.
8680–23 (March 27, 2023), available at: https://
www.cftc.gov/PressRoom/PressReleases/8680-23.
33 See https://www.dfs.ny.gov/virtual_currency_
businesses.
34 The ‘‘Custodian’’ is Coinbase Trust Company,
LLC.
35 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/
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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 have allocated to bitcoin. As
noted in the Financial Stability
Oversight Council (‘‘FSOC’’) Report on
Digital Asset Financial Stability Risks
and Regulation, ‘‘[i]ndustry surveys
suggest that the scale of these
investments grew quickly during the
boom in crypto-asset markets through
late 2021. 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.’’ 36 The largest over-the-counter
bitcoin fund previously filed a Form 10
registration statement, which the Staff of
the Commission reviewed and which
took effect automatically, and is now a
reporting company.37 Established
companies like Tesla, Inc.,
MicroStrategy Incorporated, and Square,
Inc., among others, announced
substantial investments in bitcoin in
amounts as large as $1.5 billion (Tesla)
and $425 million (MicroStrategy). 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
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.
36 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-DigitalAssets-Report-2022.pdf.
37 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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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; 38 (iii) purchasing shares of
operating companies that they believe
will provide proxy exposure to bitcoin
with limited disclosure about the
associated risks; 39 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
38 The premium and discount for OTC Bitcoin
Funds is known to move rapidly. For example, over
the period of 12/21/20 to 1/21/21, 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.
39 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-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.
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access to Exchange Traded Products
(issued by 21Shares, among others)
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.40
To this point, the lack of a Spot
Bitcoin ETP exposes U.S. investor assets
to significant risk because investors that
would otherwise seek cryptoasset
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,41
Celsius Network LLC,42 BlockFi Inc.43
and Voyager Digital Holdings, Inc.44
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.
40 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.
41 See FTX Trading Ltd., et al., Case No. 22–
11068.
42 See Celsius Network LLC, et al., Case No. 22–
10964.
43 See BlockFi Inc., Case No. 22–19361.
44 See Voyager Digital Holdings, Inc., et al., Case
No. 22–10943.
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55747
exchange listed ETP. 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 Investment
Company Act of 1940, as amended (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 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.45 Leaving aside the
analysis of that standard until later in
this proposal,46 the Exchange believes
45 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.
46 As further outlined below, both the Exchange
and the Sponsor believe that the CME Bitcoin
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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
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.47
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 CME Bitcoin Futures. This
was further acknowledged in the
‘‘Grayscale lawsuit’’ 48 when Judge Rao
stated ‘‘ . . . the Commission in the
Teucrium order recognizes that the
futures prices are influenced by the spot
prices, and the Commission concludes
in approving futures ETPs that any
fraud on the spot market can be
adequately addressed by the fact that
the futures market is a regulated one
. . .’’ 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
Bitcoin Futures. As further discussed
below, this view is also consistent with
the Advisor’s research.
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
Futures market represents a regulated market of
significant size and that this proposal and others
like it should be approved on this basis.
47 See Teucrium Approval at 21679.
48 Grayscale Investments, LLC v. Securities and
Exchange Commission, et al., Case No. 22–1142.
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because settlement of CME Bitcoin
Futures (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 CME
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.49
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
49 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.fjXz9eAQW9zol0qpzhXDrrlp
IVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCj
cnBszQql.
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Commission with this important
investor protection context in mind.
To the extent the Commission may
view differential treatment of Bitcoin
Futures ETFs and Spot Bitcoin ETPs as
warranted based on the Commission’s
concerns about the custody of physical
Bitcoin that a Spot Bitcoin ETP would
hold (compared to cash-settled futures
contracts),50 the Sponsor believes this
concern is mitigated to a significant
degree by the custodial arrangements
that the Trust has contracted with the
Custodian to provide, as further
outlined below. In the Custody
Statement, the Commission stated that
the fourth step that a broker-dealer
could take to shield traditional
securities customers and others from the
risks and consequences of digital asset
security fraud, theft, or loss is to
establish, maintain, and enforce
reasonably designed written policies,
procedures, and controls for safekeeping
and demonstrating the broker-dealer has
exclusive possession or control over
digital asset securities that are
consistent with industry best practices
to protect against the theft, loss, and
unauthorized and accidental use of the
private keys necessary to access and
transfer the digital asset securities the
broker-dealer holds in custody. While
bitcoin is not a security and the
Custodian is not a broker-dealer, the
Sponsor believes that similar
considerations apply to the Custodian’s
holding of the Trust’s bitcoin. After
diligent investigation, the Sponsor
believes that the Custodian’s policies,
procedures, and controls for
safekeeping, exclusively possessing, and
controlling the Trust’s bitcoin holdings
are consistent with industry best
practices to protect against the theft,
loss, and unauthorized and accidental
use of the private keys. As a trust
company chartered by the NYDFS, the
Sponsor notes that the Custodian is
subject to extensive regulation and has
among longest track records in the
industry of providing custodial services
for digital asset private keys. Under the
circumstances, therefore, to the extent
the Commission believes that its
concerns about the risks of spot bitcoin
custody justifies differential treatment
of a Bitcoin Futures ETF versus a Spot
Bitcoin ETP, the Sponsor believes that
the fact that the Custodian employs the
same types of policies, procedures, and
50 See, e.g., Division of Investment Management
Staff, Staff Statement on Funds Registered Under
the Investment Company Act Investing in the
Bitcoin Futures Market, May 11, 2021 (‘‘The Bitcoin
futures market also has not presented the custody
challenges associated with some cryptocurrencybased investing because the futures are cashsettled’’).
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safeguards in handling spot bitcoin that
the Commission has stated that brokerdealers should implement with respect
to digital asset securities would appear
to weaken the justification for treating a
Bitcoin Futures ETF compared to a Spot
Bitcoin ETP differently due to spot
bitcoin custody concerns.
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
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. Both the Exchange and
Sponsor believe that the CME Bitcoin
Futures market is a regulated market of
significant size and that such
manipulation concerns are mitigated, as
described extensively below. After
allowing and approving the listing and
trading of Bitcoin Futures ETFs that
hold primarily CME Bitcoin Futures,
however, the only consistent outcome
would be approving Spot Bitcoin ETPs
on the basis that the CME Bitcoin
Futures market is a regulated market of
significant size.
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.
51 Unless otherwise noted, all data and analysis
presented in this section and referenced elsewhere
in the filing has been provided by the Sponsor.
52 According to CME, the CME CF Bitcoin
Reference Rate aggregates the trade flow of major
bitcoin spot exchanges during a specific calculation
window into a once-a-day reference rate of the U.S.
dollar price of bitcoin. Calculation rules are geared
toward maximum transparency and real-time
replicability in underlying spot markets, including
Bitstamp, Coinbase, Gemini, itBit, and Kraken. For
additional information, refer to https://
www.cmegroup.com/trading/cryptocurrencyindices/cf-bitcoin-reference-rate.html?redirect=/
trading/cf-bitcoin-reference-rate.html.
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Bitcoin Futures 51
CME began offering trading in Bitcoin
Futures in 2017. Each contract
represents five bitcoin and is based on
the CME CF Bitcoin Reference Rate.52
The contracts trade and settle like other
cash-settled commodity futures
contracts. Nearly every measurable
metric related to Bitcoin Futures has
trended consistently up since launch.
According to the Sponsor, the
increase in the volume on CME, over the
past few years, is reflected in a higher
proportion of the bitcoin market share.
This is illustrated by plotting the
proportion of monthly volume traded in
bitcoin on the CME 53 (categorized as
regulated in the chart and used as the
numerator) in relation to the total
bitcoin market, which is comprised of
the sum of the volume of bitcoin futures
on the CME and the spot volume on
cryptocurrency exchanges 54
(categorized as unregulated and used as
the denominator) from January 1, 2018
to January 31, 2023.
53 Data on Bitcoin futures is available at https://
www.cmegroup.com/markets/cryptocurrencies/
bitcoin/bitcoin.volume.html.
54 Data on Bitcoin volume traded on
cryptocurrency exchanges is available at https://
www.cryptocompare.com.
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The proportion of volume traded on
CME has increased from less than 1% at
inception, to more than 10% over three
and a half years. Furthermore, the CME
market, as well as other crypto-linked
markets, and the spot market are highly
correlated. In markets that are globally
and efficiently integrated, one would
expect that changes in prices of an asset
across all markets to be highly
correlated. The rationale behind this is
that quick and efficient arbitrageurs
would capture potentially profitable
opportunities, consequently converging
prices to the average intrinsic value very
rapidly.
Bitcoin markets exhibit a high degree
of correlation. Using daily Bitcoin prices
from centralized exchanges, ETP
providers, and the CME from January
20, 2021 to February 1, 2023,55 the
Sponsor calculates the Pearson
correlation of returns 56 across these
markets and find a high degree of
correlation.
Correlations are between 57% and
99%, with the latter found mainly
across centralized exchanges due to
55 The calculation of daily correlations used the
period January 20, 2021 to February 1, 2023 as this
is the common period across all the exchanges and
data sources being analyzed.
56 The Pearson correlation is a measure of linear
association between two variables and indicates the
magnitude as well as direction of this relationship.
The value can range between ¥1 (suggesting a
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their higher level of interconnectedness.
The lower correlations pertain mainly to
the ETPs, which are relatively newer
products and are mainly offered by a
few competing market makers who are
required to trade in large blocks, thus
making it economically infeasible to
capture small mispricings. As additional
investors and arbitrageurs enter the
market and capture the mispricing
opportunities between these markets, it
is likely that there will be much higher
levels of correlations across all markets.
BILLING CODE 8011–01–P
strong negative association) and 1 (suggesting a
strong positive association).
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among centralized exchanges and
between the Bitcoin CME futures and
centralized exchanges on an hourly
basis, and no less than 78% on a
minutely basis. This suggests that
Bitcoin prices on centralized exchanges
and the CME markets move very
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similarly and in a very efficient manner
to quickly reflect changes in market
conditions, not only on a daily basis,
but also at much higher intra-day
frequencies.
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Pair-wise correlations of Bitcoin
returns are also calculated on hourly
and minute-by-minute sampling
frequencies in order to estimate the
intra-day associations across the
different Bitcoin markets. The results
show correlations no less than 92%
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According to the Sponsor’s research,
this relationship holds true during
periods of extreme price volatility. This
implies that no single Bitcoin market
can deviate significantly from the
consensus, such that the market is
sufficiently large and has an inherent
unique resistance to manipulation.
Hence, the Sponsor introduces a
statistical co-moment called co-kurtosis,
which measures to what extent two
random variables change together.57 If
two returns series exhibit a high degree
of co-kurtosis, this means that they tend
to undergo extreme positive and
negative changes simultaneously. A cokurtosis value larger than +3 or less than
¥3 is considered statistically
significant. The following table shows
that the level of co-kurtosis is positive
and very high between all market
combinations of hourly returns, which
suggests that Bitcoin markets tend to
move very similarly especially for
extreme price deviations.
57 Co-skewness and Co-kurtosis are higher order
cross-moments used in finance to examine how
assets move together. Co-skewness measures the
extent to which two variables undergo extreme
deviations at the same time, whereby a positive
(negative) value means that both values exhibit
positive (negative) values simultaneously. While
this measure is useful for estimating co-movements
in one direction or the other, it does not allow us
to test whether two variables comove similarly in
either direction. For that, we apply the co-kurtosis,
which measures the extent to which two variables
undergo both extreme positive and negative
deviations at the same time.
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Co-Kurtosis of Bitcoin Hourly Returns
Across Centralized Exchanges, ETPs,
and the CME
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As a robustness check, the co-kurtosis
metric is also calculated using minuteby-minute returns, and the conclusion
remains the same, suggesting that all
Bitcoin markets move in tandem
especially during extreme market
movements.
Co-Kurtosis of Bitcoin Minutely Returns
Across Centralized Exchanges, ETPs,
and the CME
BILLING CODE 8011–01–C
The Sponsor further believes that
academic research corroborates the
overall trend outlined above and
supports the thesis that the Bitcoin
Futures pricing leads the spot market
and, thus, a person attempting to
manipulate the Shares would also have
to trade on that market to manipulate
the ETP. Specifically, the Sponsor
believes that such research indicates
These results present evidence of a
robust global Bitcoin market that
quickly reacts in a unanimous manner
to extreme price movements across both
the spot markets, futures and ETP
markets.
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that bitcoin futures lead the bitcoin spot
market in price formation.58
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Section 6(b)(5) and the Applicable
Standards
The Commission has approved
numerous series of Trust Issued
Receipts,59 including Commodity-Based
Trust Shares,60 to be listed on U.S.
national securities exchanges. In order
for any proposed rule change from an
exchange to be approved, the
58 See Hu, Y., Hou, Y. and Oxley, L. (2019).
‘‘What role do futures markets play in Bitcoin
pricing? Causality, cointegration and price
discovery from a time-varying perspective’’
(available at: https://www.ncbi.nlm./nih.gov/pmc/
articles/PMC7481826/). This academic research
paper concludes that ‘‘There exist no episodes
where the Bitcoin spot markets dominates the price
discovery processes with regard to Bitcoin futures.
This points to a conclusion that the price formation
originates solely in the Bitcoin futures market. We
can, therefore, conclude that the Bitcoin futures
markets dominate the dynamic price discovery
process based upon time-varying information share
measures. Overall, price discovery seems to occur
in the Bitcoin futures markets rather than the
underlying spot market based upon a time-varying
perspective.’’ See also Matthew Hougan, Hong Kim,
and Satyajeet Pal (2021). ‘‘Price Discovery in the
Modern Bitcoin Market: Examining Lead-Lag
Relationships Between the Bitcoin Spot and Bitcoin
Futures Market’’ (available at https://static.bitwise
investments.com/Bitwise-Bitcoin-ETP-White-Paper1.pdf). This academic research paper also
concluded that ‘‘the CME bitcoin futures market is
the dominant source of price discovery when
compared with the bitcoin spot market, and that
prices on the CME bitcoin futures market lead
prices on bitcoin spot markets. . .’’
59 See Exchange Rule 14.11(f).
60 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
61 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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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; 61 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.
(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 62 with a regulated
market of significant size. Both the
Exchange and CME are members of
ISG.63 The only remaining issue to be
addressed is whether the Bitcoin
Futures market constitutes a market of
significant size, which both the
Exchange and the Sponsor believe that
it does. The terms ‘‘significant market’’
62 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 the
Intermarket Surveillance Group (‘‘ISG’’) constitutes
such a surveillance sharing agreement. See Wilshire
Phoenix Disapproval.
63 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
64 See Wilshire Phoenix Disapproval.
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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.64
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.65
(a) Manipulation of the ETP
According to the Sponsor’s research
presented above, the Bitcoin Futures
market is the leading market for bitcoin
price formation. Where Bitcoin Futures
lead the price in the spot market such
that a potential manipulator of the
bitcoin spot market (beyond just the
constituents of the Index 66) would have
to participate in the Bitcoin Futures
market, it follows that a potential
manipulator of the Shares would
similarly have to transact in the Bitcoin
Futures market because the Index is
based on spot prices. Further, the Trust
only allows for in-kind creation and
redemption, which, as further described
below, reduces the potential for
manipulation of the Shares through
manipulation of the Index or any of its
individual constituents, again
emphasizing that a potential
manipulator of the Shares would have
to manipulate the entirety of the bitcoin
spot market, which is led by the Bitcoin
Futures market. As such, the Exchange
believes that part (a) of the significant
market test outlined above is satisfied
and that common membership in ISG
between the Exchange and CME would
65 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.
66 As further described below, the ‘‘Index’’ for the
Fund is the S&P Bitcoin Index. The current
exchange composition of the Index is Binance,
Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro,
Gemini, HitBTC, Huobi, Kraken, KuCoin, and
Poloniex.
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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 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.
(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 is proposing to take
additional steps to those described
above to supplement its ability to obtain
information that would be helpful in
more efficient as cross-exchange prices
have converged over time.
BILLING CODE 8011–01–P
67 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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Commodity-Based Trust Shares.68 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.69
According to the Sponsor, a
significant portion of the considerations
around crypto pricing have historically
stemmed from a lack of consistent
pricing across markets. However,
according to the Sponsor’s research,
cross-exchange spreads in Bitcoin have
been declining consistently over the
past several years. Based on the daily
Bitcoin price series from several popular
centralized exchanges 70 the Sponsor
has calculated the largest crossexchange percentage spread (labelled as
%C-Spread) by deducting the highest or
maximum price (P) at time t from the
lowest or minimum, and dividing by the
lowest across all exchanges (i).
Formally, this is expressed as:
68 For additional information regarding ISG and
the hallmarks of surveillance-sharing between ISG
members, see https://isgportal.org/overview.
69 The Exchange also notes that it already has in
place ISG-like surveillance sharing agreement with
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Cboe Digital Exchange, LLC and Cboe Clear Digital,
LLC.
70 The exchanges include Binance, Bitfinex,
Bithumb, Bitstamp, Cexio, Coinbase, Coinone,
Gateio, Gemini, HuobiPro, itBit, Kraken, Kucoin,
and OKEX.
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The results show a clear and sharp
decline in the %C-Spread, indicating
that the Bitcoin market has become
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,67 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
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in the annual median %C-Spread
indicating a greater degree of Bitcoin
price convergence across exchanges and
a more efficient market.
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maximum %C-Spread for 2017, 2018,
2019, 2020, 2021, 2022, and 2023 (up
until February 01, 2023) are 29.14%,
14.12%, 8.54%, 6.04%, 3.65%, 5.56%,
and 0.63%, respectively. The market has
experienced a 38% year-on-year decline
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In addition, the magnitude of outlier
% C-spreads has also declined over
time. This boxplot shows that, not only
did the median value of the %C-Spread
decline over time, but also the extreme
outlier values. For instance, the
55757
The dispersion (s) of Bitcoin Prices
has also declined over the same period.
This chart shows the 7-day rolling
standard deviation of the %C-Spread
from January 1, 2017 to February 1,
2023. The Sponsor’s research finds that
the dispersion in Bitcoin prices across
all exchanges has decreased over time,
indicating that prices on all the
considered exchanges converge towards
the intrinsic average much more
efficiently. This suggests that the market
has become better at quickly reaching a
consensus price for Bitcoin.
As the pricing of the crypto market
becomes increasingly efficient, pricing
methodologies become more accurate
and less susceptible to manipulation.
The clustering of prices across a variety
of sources within the primary market
points towards robust price discovery
mechanisms and efficient arbitrage.
One factor that has contributed to the
overall efficiency of, and improved
price discovery within the Bitcoin
market is the increase in the number of
participants, and subsequently, the total
dollar amount allocated to this market.
This can be illustrated by the following
chart, which shows the number of
wallet addresses holding Bitcoin from
January 2016 to February 2023.
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The large number of participants in
the Bitcoin market has manifested itself
in high liquidity in the market. This is
exhibited in the following chart, which
shows the daily aggregated dollar
notional of the bid and ask order books
within the first 100 price levels across
several of the largest centralized crypto
exchanges from February 2022 to
January 2023. Specifically, the dollar
notional that is allocated closest to the
mid price has hovered between $2.6
million and $12 million over that
period.
An increased notional order book
suggests that there is a higher degree of
consensus among investors regarding
the price of Bitcoin. Moreover, this
market characteristic hampers any
attempt of price manipulation by any
single large entity.
As a robustness check, the Sponsor
investigates whether the dollar notional
in the order book changes significantly
prior to and post an extreme price event.
Specifically, for events constituting
large increases in the price of Bitcoin, if
the ask (or sell) side of the order book
experiences a significant shrinkage in
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the dollar notional right before the
event, then this may be an indication of
market manipulation whereby the askside of the order book becomes
sufficiently thin for a large order to
move the price upward. Similarly, for
events constituting large decreases in
the price of Bitcoin, if the bid (or buy)
side of the order book experiences a
significant shrinkage in the dollar
notional prior to such events, then this
may be an indication of market
manipulation whereby the thinner bidside of the order book may potentially
lead to significant downward price
movements.
Using the top and bottom 0.1% of
hourly price changes from February 1,
2022 to February 1, 2023 as events of
extreme upward and downward market
movements, respectively, the Sponsor
plotted the bid (left charts) and ask
(right charts) dollar notional of the
Bitcoin order book within a six-hour
window around these events in the
chart below, which shows the results for
extreme upward price movements. The
extreme price events (indicated by the
dashed green lines) perfectly coincide
with the decrease in dollar notional of
the ask-side of the order book. This is
indicative of an efficient market,
whereby large market movements are
quickly and dynamically absorbed by a
thick orderbook. Moreover, the dollar
notional on the ask side after the event
is replenished back to its pre-event
level, which implies that market
participants’ reactions are quick to
restore the market back to its
equilibrium level.
The same results and conclusions are
found for extreme downward price
movements. The charts below show that
such price events perfectly coincide
with shrinkages on the bid side of the
order book (left charts), indicating an
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efficient and dynamic Bitcoin market.
Moreover, the bid-side of the order book
after the event is also restored back to
its pre-event level, which suggests that
the market is symmetrically efficient in
moving back to equilibrium.
BILLING CODE 8011–01–C
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.71 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
Finally, offering only in-kind creation
and redemption will provide unique
protections against potential attempts to
manipulate the Shares. While the
Sponsor believes that the Index which
it uses to value the Trust’s bitcoin is
itself resistant to manipulation based on
the methodology further described
below, the fact that creations and
redemptions are only available in-kind
makes the manipulability of the Index
significantly less important.
Specifically, because the Trust will not
accept cash to buy bitcoin in order to
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71 While the Index will not be particularly
important for the creation and redemption process,
it will be used for calculating fees.
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discourages and disincentivizes
manipulation of the Index because there
is little financial incentive to do so.
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(ii) 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
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.
ARK 21Shares Bitcoin ETF
Delaware Trust Company is the
trustee (‘‘Trustee’’). The Bank of New
York Mellon will be the administrator
(‘‘Administrator’’) and transfer agent
(‘‘Transfer Agent’’). Foreside Global
Services, LLC will be the marketing
agent (‘‘Marketing Agent’’) in
connection with the creation and
redemption of ‘‘Baskets’’ of Shares. ARK
Investment Management LLC (‘‘ARK’’)
will provide assistance in the marketing
of the Shares. Coinbase Custody Trust
Company, LLC, a third-party regulated
custodian (the ‘‘Custodian’’), will be
responsible for custody of the Trust’s
bitcoin.
According to the Registration
Statement, each Share will represent a
fractional undivided beneficial interest
in the bitcoin held by the Trust. The
Trust’s assets will consist of bitcoin
held by the Custodian on behalf of the
Trust. The Trust generally does not
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intend to hold cash or cash equivalents.
However, there may be situations where
the Trust will unexpectedly hold cash
on a temporary basis.
According to the Registration
Statement, the Trust is neither an
investment company registered under
the Investment Company Act of 1940, as
amended,72 nor a commodity pool for
purposes of the Commodity Exchange
Act (‘‘CEA’’), and neither the Trust nor
the Sponsor is subject to regulation as
a commodity pool operator or a
commodity trading adviser in
connection with the Shares.
When the Trust sells or redeems its
Shares, it will do so in ‘‘in-kind’’
transactions in blocks of 5,000 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.
As noted above, the Trust 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.
Specifically, the Trust is designed to
protect investors as follows:
(i) Assets of the Trust Protected From
Insolvency
The Trust’s bitcoin will be held by its
Custodian,73 which is a New York
chartered trust company overseen by the
NYDFS and a qualified custodian under
Rule 206–4 of the Investment Adviser
Act. The Custodian will custody the
Trust’s bitcoin pursuant to a custody
agreement, which requires the
Custodian to maintain the Trust’s
bitcoin in segregated accounts that
clearly identify the Trust as owner of
the accounts and assets held on those
accounts; the segregation will be both
from the proprietary property of the
Custodian and the assets of any other
customer. Such an arrangement is
generally deemed to be ‘‘bankruptcy
72 15
U.S.C. 80a–1.
to the Registration Statement, the
Trust’s cash will be held at The Bank of New York
Mellon pursuant to a cash custody agreement.
73 According
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remote,’’ that is, in the event of an
insolvency of the Custodian, assets held
in such segregated accounts would not
become property of the Custodian’s
estate and would not be available to
satisfy claims of creditors of the
Custodian. In addition, according to the
Registration Statement, the Custodian
carries fidelity insurance, which covers
assets held by the Custodian in custody
from risks such as theft of funds. These
arrangements provide significant
protections to investors and could have
mitigated the type of losses incurred by
investors in the numerous cryptorelated insolvencies, including Celsius,
Voyager, BlockFi and FTX.
(ii) Trust’s Transfer Agent Will Instruct
Disposition of Trust’s Bitcoin
According to the Registration
Statement, except with respect to sale of
bitcoin from time to time to cover
expenses of the Trust, the only time
bitcoin will move into or out from the
Trust will be with respect to creations
or redemptions of Shares of the Trust.
Authorized Participants will deliver
bitcoin to the Trust’s account with the
Custodian or Subcustodian, as
applicable, in exchange for Shares of the
Trust, and the Trust, through the
Custodian, will deliver bitcoin to
Authorized Participants when those
Authorized Participants redeem Shares
of the Trust. The creation and
redemption procedures are
administered by the Transfer Agent, the
Bank of New York Mellon, an
independent third party. In other words,
according to the Registration Statement,
with very limited exceptions, the
Sponsor will not give instructions with
respect to the transfer or disposition of
the Trust’s bitcoin. Bitcoin owned by
the Trust will at all times be held by,
and in the control of, the Custodian (or
Subcustodian, as applicable), and
transfer of such bitcoin to or from the
Custodian (or Subcustodian) will occur
only in connection with creation and
redemptions of Shares. This will
provide safeguards against the
movement of bitcoin owned by the
Trust by or to the Sponsor or affiliates
of the Sponsor.
(iii) Trust’s Assets Are Subject to
Regular Audit
According to the Registration
Statement, audit trails exist for all
movement of bitcoin within Custodiancontrolled bitcoin wallets and are
audited annually for accuracy and
completeness by an independent
external audit firm. In addition, the
Trust will be audited by an independent
registered public accounting firm on a
regular basis.
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(iv) Trust is Subject to the Exchange’s
Obligations of Companies Listed on the
Exchange and Applicable Corporate
Governance Requirements
The Trust will be subject to the
obligations of companies listed on the
Exchange set forth in BZX Rule 14.6,
which require the listed companies to
make public disclosure of material
events and any notifications of
deficiency by the Exchange, file and
distribute period financial reports,
engage independent public accountants
registered with the Exchange, among
other things. Such disclosures serve a
key investor protection role. In addition,
the Trust will be subject to the corporate
governance requirements for companies
listed on the Exchange set forth in BZX
Rule 14.10.
Investment Objective
According to the Registration
Statement and as further described
below, the investment objective of the
Trust is to seek to track the performance
of bitcoin, as measured by the
performance of the S&P Bitcoin Index
(the ‘‘Index’’), adjusted for the Trust’s
expenses and other liabilities. In seeking
to achieve its investment objective, the
Trust will hold bitcoin and will value
the Shares daily based on the Index. The
Trust will process all creations and
redemptions in-kind in transactions
with authorized participants. The Trust
is not actively managed.
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The Index
As described in the Registration
Statement, the Fund will use the Index
to calculate the Trust’s NAV. The Index
is a U.S. dollar-denominated composite
reference rate for the price of bitcoin.
There is no component other than
bitcoin in the Index. The underlying
exchanges are sourced by Lukka Inc.
(the ‘‘Data Provider’’) 74 based on a
combination of qualitative and
quantitative metrics to analyze a
comprehensive data set and evaluate
factors including legal/regulation, KYC/
transaction risk, data provision,
security, team/exchange, asset quality/
diversity, market quality and negative
events. The Index price is currently
sourced from the following set of
exchanges: Binance, Bitfinex, Bitflyer,
Bittrex, Bitstamp, Coinbase Pro, Gemini,
HitBTC, Huobi, Kraken, KuCoin, and
74 Lukka is an independent third-party digital
asset data company engaged by the Sponsor to
provide fair market value (FMV) bitcoin prices. This
price, commercially available from Lukka, will form
the basis for determining the value of the Trust’s
Bitcoin Holdings. Lukka is not affiliated with the
Trust or the Sponsor other than through a
commercial relationship. All of Lukka’s products
are also SOC 1 and 2 Type 2 certified.
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Poloniex. As the digital ecosystem
continues to evolve, the Data Provider
can add additional or remove exchanges
based on the processes established by
Lukka’s Pricing Integrity Oversight
Board.75
The Index methodology is intended to
determine the fair market value
(‘‘FMV’’) for bitcoin by determining the
principal market for bitcoin as of 4pm
ET daily. The Index methodology uses
a ranking approach that considers
several exchange characteristics
including oversight and intra-day
trading volume. Specifically, to rank the
credibility and quality of each exchange,
the Data Provider dynamically assigns a
Base Exchange Score (‘‘BES’’) score to
the key characteristics for each
exchange.
The BES reflects the fundamentals of
an exchange and determines which
exchange should be designated as the
principal market at a given point of
time. This score is determined by
computing a weighted average of the
values assigned to four different
exchange characteristics. The exchange
characteristics are as follows: (i)
oversight; (ii) microstructure efficiency;
(iii) data transparency and (iv) data
integrity.
Oversight
This score reflects the rules in place
to protect and to give access to the
investor. The score assigned for
exchange oversight will depend on
parameters such as jurisdiction,
regulation, ‘‘Know Your Customer and
Anti-Money Laundering Compliance’’
(KYC/AML), among other proprietary
factors.
Microstructure Efficiency
The effective bid ask spread is used as
a proxy for efficiency. For example, for
each exchange and currency pair, the
Data Provider takes an estimate of the
‘‘effective spread’’ relative to the price.
Data Transparency
Transparency is the term used for a
quality score that is determined by the
level of detail of the data offered by an
exchange. The most transparent
exchanges offer order-level data,
followed by order book, trade-level, and
then candles.
Data Integrity
Data integrity reconstructs orders to
ensure the transaction amounts that
75 The purpose of Lukka’s Pricing Integrity
Oversight Board is to ensure (i) the integrity and
validity of the Lukka pricing and valuation
products and (ii) the Lukka pricing and valuation
products remain fit for purpose in the rapidly
evolving market and corresponding regulatory
environments.
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make up an order equal the overall
order amount matching on both a
minute and daily basis. This data would
help expose nefarious actions such as
wash trading or other potential
manipulation of data.
The methodology then applies a fivestep weighting process for identifying a
principal exchange and the last price on
that exchange. Following this weighting
process, an executed exchange price is
assigned for bitcoin as of 4pm ET. The
Index price is determined according to
the following procedure:
• Step 1: Assign each exchange a Base
Exchange Score (‘‘BES’’) reflecting static
exchange characteristics such as
oversight, microstructure and
technology, as discussed below.
• Step 2: Adjust the BES based on the
relative monthly volume each exchange
services. This new score is the Volume
Adjusted Score (‘‘VAS’’).
• Step 3: Decay the VAS based on the
time passed since the last trade on the
exchange. Here, the Data Provider is
assessing the level of activity in the
market by considering the frequency
(volume) of trades. The decay factor
reflects the time since the last trade on
the exchange. This is the final Decayed
Volume Adjusted Score (‘‘DVAS’’),
which tracks the freshness of the data by
tracking most recent trades.
• Step 4: Rank the exchanges by the
DVAS score and designate the highestranking exchange as the principal
market for that point in time. The
principal market is the exchange with
the highest DVAS.
• Step 5: After selecting a primary
exchange, an executed exchange price is
used for bitcoin representing FMV at
4pm ET. The Data Provider takes the
last traded prices at that moment in time
on that trading venue for the relevant
pair (Bitcoin/USD) when determining
the Index price.
As discussed in the Registration
Statement, the fact that there are
multiple bitcoin spot markets that may
contribute prices to the Index price
makes manipulation more difficult in a
well-arbitraged and fractured market, as
a malicious actor would need to
manipulate multiple spot markets
simultaneously to impact the Index
price, or dramatically skew the
historical distribution of volume
between the various exchanges.
The Data Provider has designed a
series of automated algorithms designed
to supplement the core Lukka Prime
Methodology in enhancing the ability to
detect potentially anomalous price
activity which could be detrimental to
the goal of obtaining a Fair Market
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Value price that is representative of the
market at a point in time.76
In addition to the automated
algorithms, the Data Provider has
dedicated resources and has established
committees to ensure all prices are
representative of the market. Any price
challenges will result in an independent
analysis of the price. This includes
assessing whether the price from the
selected exchange is biased according to
analyses designed to recognize patterns
consistent with manipulative activity,
such as a quick reversion to previous
traded levels following a sharp price
change or any significant deviations
from the volume weighted average price
on a particular exchange or pricing on
any other exchange included in the
Lukka Prime eligibility universe.
Policies and procedures for any
adjustments to prices or changes to core
parameters (e.g., exchange selection) are
described in the Lukka Price Integrity
Manual.77
Upon detection or external referral of
suspect manipulative activities, the case
is raised to the Price Integrity Oversight
Board. These checks occur on an ongoing, intraday basis and any
investigations are typically resolved
promptly, in clear cases within minutes
and in more complex cases same
business day. The evidence uncovered
shall be turned over to the Data
Provider’s Price Integrity Oversight
Board for final decision and action. The
Price Integrity Oversight Board may
choose to pick an alternative primary
market and may exclude such market
from future inclusion in the Index
methodology or choose to stand by the
original published price upon fully
evaluating all available evidence. It may
also initiate an investigation of prior
prices from such markets and shall
evaluate evidence presented on a caseby-case basis.
After the Lukka Prime price is
generated, the S&P DJI (‘‘The Index
Provider’’) performs independent
quality checks as a second layer of
validation to those employed by the
Data Provider, including checks against
assets with large price movements,
assets with missing prices, assets with
zero prices, assets with unchanged
prices, assets that have ceased pricing
and assets where the price does not
match the Lukka Prime primary
exchange. The Index Provider may
submit a price challenge to Lukka if any
76 Upon request, Lukka can provide additional
information and detail to the Commission regarding
the algorithms and data quality checks that are put
in place, with confidential treatment requested.
77 Upon request, Lukka can provide the
Commission the Lukka Pricing Integrity Manual,
with confidential treatment requested.
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of the checks listed above are found to
be material. Lukka will perform an
independent review of the price
challenge to ensure the price is
representative of the fair value of a
particular cryptocurrency. If there is a
change, the process will follow that
described in the Recalculation Policy
found on The Index Provider Digital
Assets Indices Policies & Practices and
Index Mathematics Methodology.
In addition, The Index Provider
currently provides the below additional
quality assurance mechanisms with
respect to crypto price validation. These
checks are based on current market
conditions, internal system processes
and other assessments. The Index
Provider reserves the right within its
sole discretion to supplement, modify
and/or remove individual checks and/or
the parameters used within the checks,
at any time without notice.
Crypto Price and Exchange Validation
• Check for any assets with no price
received from Lukka;
• Check for any assets with a zero
price received from Lukka;
• Check for any assets with a large
change from the previous day. (Outliers
± 40%);
• Check for any assets with a stale
price, aggregating the number of days
the price remains stale;
• Confirm the Lukka price matches
the Lukka Prime primary exchange
price;
• Confirm the Lukka price is
consistent with other Lukka Prime
exchange prices;
• Check the volume of the Lukka
Prime exchanges and challenge the
Lukka primary exchange if the exchange
is not within the top percentile of the
trading volume for that asset;
• Aggregation of Lukka Prime
primary exchange changes.
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. 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
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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 78 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 Index, including
key elements of how the Index is
calculated, will be publicly available at
https://www.spglobal.com/spdji/en/
indices/digital-assets/sp-bitcoin-index//.
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.
78 As defined in Rule 11.23(a)(3), the term ‘‘BZX
Official Closing Price’’ shall mean the price
disseminated to the consolidated tape as the market
center closing trade.
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The Bitcoin Custodian
The Custodian carefully considers the
design of the physical, operational and
cryptographic systems for secure storage
of the Trust’s private keys in an effort
to lower the risk of loss or theft. The
Custodian utilizes a variety of security
measures to ensure that private keys
necessary to transfer digital assets
remain uncompromised and that the
Trust maintains exclusive ownership of
its assets. The operational procedures of
the Custodian are reviewed by thirdparty advisors with specific expertise in
physical security. The devices that store
the keys will never be connected to the
internet or any other public or private
distributed network—this is colloquially
known as ‘‘cold storage.’’ Only specific
individuals are authorized to participate
in the custody process, and no
individual acting alone will be able to
access or use any of the private keys. In
addition, no combination of the
executive officers of the Sponsor or the
investment professionals managing the
Trust, acting alone or together, will be
able to access or use any of the private
keys that hold the Trust’s bitcoin.
Net Asset Value
NAV means the total assets of the
Trust including, but not limited to, all
bitcoin and cash less total liabilities of
the Trust, each determined on the basis
of generally accepted accounting
principles. The Administrator
determines the NAV of the Trust on
each day that the Exchange is open for
regular trading, as promptly as practical
after 4:00 p.m. EST. The NAV of the
Trust is the aggregate value of the
Trust’s assets less its estimated accrued
but unpaid liabilities (which include
accrued expenses). In determining the
Trust’s NAV, the Administrator values
the bitcoin held by the Trust based on
the price set by the Index as of 4:00 p.m.
EST. The Administrator also determines
the NAV per Share.
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Creation and Redemption of Shares
According to the Registration
Statement, on any business day, an
authorized participant may place an
order to create one or more baskets.
Purchase orders must be placed by 4:00
p.m. Eastern Time, or the close of
regular trading on the Exchange,
whichever is earlier. The day on which
an order is received is considered the
purchase order date. The total deposit of
bitcoin required is an amount of bitcoin
that is in the same proportion to the
total assets of the Trust, net of accrued
expenses and other liabilities, on the
date the order to purchase is properly
received, as the number of Shares to be
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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 5,000.
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 79 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.
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
79 For purposes of Rule 14.11(e)(4), the term
commodity takes on the definition of the term as
provided in the Commodity Exchange Act. As noted
above, the CFTC has opined that Bitcoin is a
commodity as defined in section 1a(9) of the
Commodity Exchange Act. See Coinflip.
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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
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
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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.
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Trading Rules
The Exchange deems the Shares to be
equity securities, thus rendering trading
in the Shares subject to the Exchange’s
existing rules governing the trading of
equity securities. 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
has entered into a comprehensive
surveillance sharing agreement.80
80 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 81 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 82 in general and section
6(b)(5) of the Act 83 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,84 including Commodity-Based
Trust Shares,85 to be listed on U.S.
national securities exchanges. In order
81 Regular Trading Hours is the time between 9:30
a.m. and 4:00 p.m. Eastern Time.
82 15 U.S.C. 78f.
83 15 U.S.C. 78f(b)(5).
84 See Exchange Rule 14.11(f).
85 Commodity-Based Trust Shares, as described in
Exchange Rule 14.11(e)(4), are a type of Trust
Issued Receipt.
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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; 86 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.
86 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 activity does
not normally impact prices on other exchange
because participants will generally ignore markets
with quotes that they deem non-executable. The
reason is that wash trading aims to manipulate the
volume rather than the price of an asset to give the
impression of heightened market activity in hopes
of attracting investors to that asset. Moreover, wash
trades are executed within an exchange rather than
cross exchange since the entity executing the wash
trades would aim to trade against itself, and as
such, this can only happen within an exchange.
Should the wash trades of that entity result in a
deviation of the price on that exchange relative to
others, arbitrageurs would then be able to capitalize
on this mispricing, and bring the manipulated price
back to equilibrium, resulting in a loss to the entity
executing the wash trades. 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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(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 87 with a regulated
market of significant size. Both the
Exchange and CME are members of
ISG.88 The only remaining issue to be
addressed is whether the Bitcoin
Futures market constitutes a market of
significant size, which both the
Exchange and the Sponsor believe 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.89
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.90
(a) Manipulation of the ETP
According to the Sponsor’s research
presented above, the Bitcoin Futures
market is the leading market for bitcoin
price formation. Where Bitcoin Futures
lead the price in the spot market such
that a potential manipulator of the
bitcoin spot market (beyond just the
constituents of the Index 91) would have
to participate in the Bitcoin Futures
market, it follows that a potential
manipulator of the Shares would
similarly have to transact in the Bitcoin
Futures market because the Index is
based on spot prices. Further, the Trust
only allows for in-kind creation and
redemption, which, as further described
below, reduces the potential for
manipulation of the Shares through
manipulation of the Index or any of its
individual constituents, again
emphasizing that a potential
manipulator of the Shares would have
to manipulate the entirety of the bitcoin
spot market, which is led by the Bitcoin
Futures market. As such, the Exchange
believes that part (a) of the significant
market test outlined above is satisfied
and that common membership in ISG
between the Exchange and CME would
assist the listing exchange in detecting
and deterring misconduct in the Shares.
(b) Predominant Influence on Prices in
Spot and Bitcoin Futures
The Exchange 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 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.
(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. According to the
Sponsor, a significant portion of the
considerations around crypto pricing
have historically stemmed from a lack of
consistent pricing across markets.
However, according to the Sponsor’s
research, cross-exchange spreads in
Bitcoin have been declining consistently
over the past several years. Based on the
daily Bitcoin price series from several
popular centralized exchanges 92 the
Sponsor has calculated the largest crossexchange percentage spread (labelled as
%C-Spread) by deducting the highest or
maximum price
BILLING CODE 8011–01–P
(P) at time t from the lowest or
minimum, and dividing by the lowest
across all exchanges (i). Formally, this is
expressed as:
The results show a clear and sharp
decline in the %C-Spread, indicating
that the Bitcoin market has become
more efficient as cross-exchange prices
have converged over time.
87 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.
88 For a list of the current members and affiliate
members of ISG, see www.isgportal.com.
89 See Wilshire Phoenix Disapproval.
90 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.
91 As further described below, the ‘‘Index’’ for the
Fund is the S&P Bitcoin Index. The current
exchange composition of the Index is Binance,
Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro,
Gemini, HitBTC, Huobi, Kraken, KuCoin, and
Poloniex.
92 The exchanges include Binance, Bitfinex,
Bithumb, Bitstamp, Cexio, Coinbase, Coinone,
Gateio, Gemini, HuobiPro, itBit, Kraken, Kucoin,
and OKEX.
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market has experienced a 22.68% yearon-year decline in the annual median
%C-Spread indicating a greater degree
of Bitcoin price convergence across
exchanges and a more efficient market.
EN16AU23.020</GPH>
outlier values. For instance, the
maximum %C-Spread for 2017, 2018,
2019, 2020, 2021, 2022 and 2023 are
29.14%, 14.12%, 8.54%, 6.04%, 3.65%,
5.56% and 0.63%, respectively. The
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In addition, the magnitude of outlier
% C-spreads has also declined over
time. This boxplot shows that, not only
did the median value of the %C-Spread
decline over time, but also the extreme
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The dispersion (s) of Bitcoin Prices
has also declined over the same period.
This chart shows the 7-day rolling
standard deviation of the %C-Spread
from January 1, 2017 to February 1,
2023. The Sponsor’s research finds that
the dispersion in Bitcoin prices across
all exchanges has decreased over time,
indicating that prices on all the
considered exchanges converge towards
the intrinsic average much more
efficiently. This suggests that the market
has become better at quickly reaching a
consensus price for Bitcoin.
As the pricing of the crypto market
becomes increasingly efficient, pricing
methodologies become more accurate
and less susceptible to manipulation.
The clustering of prices across a variety
of sources within the primary market
points towards robust price discovery
mechanisms and efficient arbitrage.
It is very important to note that the
cross-exchange spreads, and therefore
the process of price discovery in the
Bitcoin market has improved
significantly over time despite the
market experiencing rather uniform
albeit sinusoidal volatility. This can be
shown in the graphs below where we
can clearly observe a slightly decreasing
yet consistent level of volatility in the
Bitcoin market based on daily and
hourly returns across the considered
exchanges. Again, this further supports
the argument that the Bitcoin market
has exhibited significant improvements
in terms of price discovery over time,
irrespective and despite of the volatility
of the asset itself, which can be
attributed to efficient arbitrage
operations.
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One factor that has contributed to the
overall efficiency of, and improved
price discovery within the Bitcoin
market is the increase in the number of
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participants, and subsequently, the total
dollar amount allocated to this market.
This can be illustrated by the following
chart, which shows the number of
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wallet addresses holding Bitcoin from
January 2016 to February 2023.
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The large number of participants in
the Bitcoin market has manifested itself
in high liquidity in the market. This is
exhibited in the following chart, which
shows the daily aggregated dollar
notional of the bid and ask order books
within the first 100 price levels across
several of the largest centralized crypto
exchanges from February 2022 to
January 2023. Specifically, the dollar
notional that is allocated closest to the
mid price has hovered between $2.6
million and $12 million over that
period.
An increased notional order book
suggests that there is a higher degree of
consensus among investors regarding
the price of Bitcoin. Moreover, this
market characteristic hampers any
attempt of price manipulation by any
single large entity.
As a robustness check, the Sponsor
investigates whether the dollar notional
in the order book changes significantly
prior to and post an extreme price event.
Specifically, for events constituting
large increases in the price of Bitcoin, if
the ask (or sell) side of the order book
experiences a significant shrinkage in
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dashed green lines) perfectly coincide
with the decrease in dollar notional of
the ask-side of the order book. This is
indicative of an efficient market,
whereby large market movements are
quickly and dynamically absorbed by a
thick orderbook. Moreover, the dollar
notional on the ask side after the event
is replenished back to its pre-event
level, which implies that market
participants’ reactions are quick to
restore the market back to its
equilibrium level.
the dollar notional right before the
event, then this may be an indication of
market manipulation whereby the askside of the order book becomes
sufficiently thin for a large order to
move the price upward. Similarly, for
events constituting large decreases in
the price of Bitcoin, if the bid (or buy)
side of the order book experiences a
significant shrinkage in the dollar
notional prior to such events, then this
may be an indication of market
manipulation whereby the thinner bidside of the order book may potentially
lead to significant downward price
movements.
Using the top and bottom 0.1% of
hourly price changes from February
2022 to February 2023 as events of
extreme upward and downward market
movements, respectively, the Sponsor
plotted the bid (left charts) and ask
(right charts) dollar notional of the
Bitcoin order book within a six-hour
window around these events in the
chart below, which shows the results for
extreme upward price movements. The
extreme price events (indicated by the
BILLING CODE 8011–01–P
The same results and conclusions are
found for extreme downward price
movements. The charts below show that
such price events perfectly coincide
with shrinkages on the bid side of the
order book (left charts), indicating an
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efficient and dynamic Bitcoin market.
Moreover, the bid-side of the order book
after the event is also restored back to
its pre-event level, which suggests that
the market is symmetrically efficient in
moving back to equilibrium.
BILLING CODE 8011–01–C
denominated Bitcoin trading,93 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
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
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93 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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Commodity-Based Trust Shares.94 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.95
Finally, offering only in-kind creation
and redemption will provide unique
protections against potential attempts to
manipulate the Shares. While the
Sponsor believes that the Index which
it uses to value the Trust’s bitcoin is
itself resistant to manipulation based on
the methodology further described
below, the fact that creations and
redemptions are only available in-kind
makes the manipulability of the Index
significantly less important.
Specifically, because the Trust will not
accept cash to buy bitcoin in order to
create new shares or, barring a forced
redemption of the Trust or under other
extraordinary circumstances, be forced
to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses
to value the Trust’s bitcoin is not
particularly important.96 When
authorized participants are creating
with the Trust, they need to deliver a
certain number of bitcoin per share
(regardless of the valuation used) and
when they’re redeeming, they can
similarly expect to receive a certain
number of bitcoin per share. As such,
even if the price used to value the
Trust’s bitcoin is manipulated (which
the Sponsor believes that its
methodology is resistant to), the ratio of
bitcoin per Share does not change and
the Trust will either accept (for
creations) or distribute (for
redemptions) the same number of
bitcoin regardless of the value. This not
only mitigates the risk associated with
potential manipulation, but also
discourages and disincentivizes
manipulation of the Index because there
is little financial incentive to do so.
94 For additional information regarding ISG and
the hallmarks of surveillance-sharing between ISG
members, see https://isgportal.org/overview.
95 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.
96 While the Index will not be particularly
important for the creation and redemption process,
it will be used for calculating fees.
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(ii) 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
and more than a billion dollars of
exposure 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, also believes that
such concerns are now outweighed by
these 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 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
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Frm 00113
Fmt 4703
Sfmt 4703
55773
19(g)(1) of the Exchange Act, the
Exchange will surveil for compliance
with the continued listing requirements.
If the Trust or the Shares are not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
Exchange Rule 14.12. The Exchange
may obtain information regarding
trading in the Shares and listed bitcoin
derivatives via the ISG, from other
exchanges who are members or affiliates
of the ISG, or with which the Exchange
has entered into a comprehensive
surveillance sharing agreement.
Availability of Information
The Exchange also believes that the
proposal promotes market transparency
in that a large amount of information is
currently available about bitcoin and
will be available regarding the Trust and
the Shares. In addition to the price
transparency of the Index, the Trust will
provide information regarding the
Trust’s bitcoin holdings as well as
additional data regarding the Trust. The
Trust will provide an IIV per Share
updated every 15 seconds, as calculated
by the Exchange or a third-party
financial data provider during the
Exchange’s Regular Trading Hours (9:30
a.m. to 4:00 p.m. 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
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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 Index, including
key elements of how the Index is
calculated, will be publicly available at
https://www.spglobal.com/spdji/en/
indices/digital-assets/sp-bitcoin-index/.
The NAV for the Trust will be
calculated by the Administrator once a
day and will be disseminated daily to
all market participants at the same time.
Quotation and last-sale information
regarding the Shares will be
disseminated through the facilities of
the CTA.
Quotation and last sale information
for bitcoin is widely disseminated
through a variety of major market data
vendors, including Bloomberg and
Reuters, as well as the Index.
Information relating to trading,
including price and volume
information, in bitcoin is available from
major market data vendors and from the
exchanges on which bitcoin are traded.
Depth of book information is also
available from bitcoin exchanges. The
normal trading hours for bitcoin
exchanges are 24 hours per day, 365
days per year.
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.
The investor protection issues for U.S.
investors has grown significantly over
the last several years, through roll costs
for Bitcoin Futures ETFs and premium/
discount volatility and management fees
for OTC Bitcoin Funds. As discussed
throughout, this growth investor
protection concerns need to be reevaluated and rebalanced with the
prevention of fraudulent and
manipulative acts and practices
concerns that previous disapproval
orders have relied upon. Finally, the
Exchange notes that in addition to all of
the arguments herein which it believes
sufficiently establish the CME Bitcoin
Futures market as a regulated market of
significant size, it is logically
inconsistent to find that the CME
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19:39 Aug 15, 2023
Jkt 259001
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 has neither solicited
nor received written comments on the
proposed rule change.
III. Proceedings To Determine Whether
To Approve or Disapprove SR–
CboeBZX–2023–028, as Modified by
Amendment No. 3, and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to section
19(b)(2)(B) of the Act 97 to determine
whether the proposed rule change, as
modified by Amendment No. 3, should
be approved or disapproved. Institution
of proceedings is appropriate at this
time in view of the legal and policy
issues raised by the proposed rule
change, as discussed below. Institution
of proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change, as modified by Amendment No.
3.
Pursuant to section 19(b)(2)(B) of the
Act,98 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with section
6(b)(5) of the Act, which requires,
97 15
U.S.C. 78s(b)(2)(B).
98 Id.
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Fmt 4703
Sfmt 4703
among other things, that the rules of a
national securities exchange be
‘‘designed to prevent fraudulent and
manipulative acts and practices’’ and
‘‘to protect investors and the public
interest.’’ 99
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, which are set forth in
Amendment No. 3, in addition to any
other comments they may wish to
submit about the proposed rule change,
as modified by Amendment No. 3. In
particular, the Commission seeks
comment on the following questions
and asks commenters to submit data
where appropriate to support their
views:
1. What are commenters’ views on
whether the proposed Trust and Shares
would be susceptible to manipulation?
What are commenters’ views generally
on whether the Exchange’s proposal is
designed to prevent fraudulent and
manipulative acts and practices? What
are commenters’ views generally with
respect to the liquidity and transparency
of the bitcoin markets, the bitcoin
markets’ susceptibility to manipulation,
and thus the suitability of bitcoin as an
underlying asset for an exchange-traded
product?
2. Based on data and analysis
provided and the academic research
cited by the Exchange,100 do
commenters agree with the Exchange
that the CME, on which CME Bitcoin
Futures trade, represents a regulated
market of significant size related to spot
bitcoin?101 What are commenters’ views
on whether there is a reasonable
likelihood that a person attempting to
manipulate the Shares would also have
to trade on the CME to manipulate the
Shares? Do commenters agree with the
Exchange’s assertion that trading in the
Shares would not be the predominant
force on prices in the CME Bitcoin
Futures market or spot market, due to
‘‘the significant volume in the Bitcoin
Futures market, the size of bitcoin’s
market cap, and the significant liquidity
available in the spot market’’? 102
3. The Exchange states 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’’ with a
regulated market of significant size
related to spot bitcoin.103 In support of
its assertion, the Exchange provides data
99 15
U.S.C. 78f(b)(5).
supra Item II.A.
101 See id.
102 See id.
103 See id.
100 See
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and analysis 104 to indicate that the spot
bitcoin market is ‘‘increasingly
efficient,’’ with ‘‘high liquidity’’ and a
‘‘higher degree of consensus among
investors regarding the price of
[b]itcoin,’’ making it ‘‘less susceptible to
manipulation.’’ 105 Do commenters
believe the Exchange has shown that the
bitcoin market is resistant to price
manipulation?
4. The Exchange also states that it will
execute a surveillance-sharing
agreement with Coinbase that is
intended to supplement the Exchange’s
market surveillance program. According
to the Exchange, the agreement 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 [b]itcoin trades on
Coinbase where the Exchange
determines it is necessary as part of its
surveillance program for the
Commodity-Based Trust Shares.’’ 106
Based on the description of the
surveillance-sharing agreement as
provided by the Exchange herein, what
are commenters’ views of such an
agreement if finalized and executed? Do
commenters agree with the Exchange’s
assertion that such an agreement with
Coinbase would be ‘‘helpful in
detecting, investigating, and deterring
fraud and manipulation in the
Commodity-Based Trust Shares’’? 107
IV. Procedure: Request for Written
Comments
lotter on DSK11XQN23PROD with NOTICES1
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with section
6(b)(5) or any other provision of the Act,
and the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval that would be
facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b–4, any request for an
104 See
id.
id.
106 See id. The Exchange states that ‘‘[t]his 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 CommodityBased Trust Shares.’’ Id.
107 See id.
105 See
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opportunity to make an oral
presentation.108
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposed rule change, as modified by
Amendment No. 3, should be approved
or disapproved by September 6, 2023.
Any person who wishes to file a rebuttal
to any other person’s submission must
file that rebuttal by September 20, 2023.
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 rule-comments@
sec.gov. Please include file number SR–
CboeBZX–2023–028 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–2023–028. 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
108 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
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55775
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–2023–028 and should be
submitted on or before September 6,
2023. Rebuttal comments should be
submitted by September 20, 2023.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.109
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023–17603 Filed 8–15–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98101; File No. SR–OCC–
2022–012]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Approving Proposed Rule Change
Concerning Collateral Haircuts and
Standards for Clearing Banks and
Letters of Credit
August 10, 2023.
I. Introduction
On December 19, 2022, the Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
Proposed Rule Change SR–OCC–2022–
012 (‘‘Proposed Rule Change’’) pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 2 thereunder to
amend OCC’s rules, policies, and
procedures regarding (i) the valuation of
Government securities and governmentsponsored enterprise (‘‘GSE’’) debt
securities deposited as margin or
Clearing Fund collateral; (ii) minimum
standards for OCC’s Clearing Bank
relationships; and (iii) letters of credit as
margin collateral.3 The Proposed Rule
Change was published for public
comment in the Federal Register on
December 23, 2022.4 The Commission
received comments regarding the
Proposed Rule Change.5 The
109 17 CFR 200.30–3(a)(12); 17 CFR 200.30–
3(a)(57).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Notice of Filing infra note 4, 87 FR at 79015.
4 Securities Exchange Act Release No. 96533 (Dec.
19, 2022), 87 FR 79015 (Dec. 23, 2022) (File No. SR–
OCC–2022–012) (‘‘Notice of Filing’’).
5 Comments on the proposed rule change are
available at https://www.sec.gov/comments/sr-occ2022-012/srocc2022012.htm.
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]]>Agencies
[Federal Register Volume 88, Number 157 (Wednesday, August 16, 2023)]
[Notices]
[Pages 55743-55775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17603]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98112; File No. SR-CboeBZX-2023-028]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 3 to, and Order Instituting Proceedings To
Determine Whether To Approve or Disapprove, a Proposed Rule Change To
List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares
August 11, 2023.
On April 25, 2023, Cboe BZX Exchange, Inc. (``BZX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares of the ARK 21Shares
Bitcoin ETF under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares.
The proposed rule change was published for comment in the Federal
Register on May 15, 2023.\3\ On June 15, 2023, pursuant to section
19(b)(2) of the Act,\4\ the Commission designated a longer period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\5\ On June 28, 2023, the Exchange
filed Amendment No. 1 to the proposed rule change, which amended and
replaced the proposed rule change in its entirety. On June 30, 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. On July 11, 2023, the Exchange filed Amendment
No. 3 to the proposed rule change as described in Items I and II below,
which Items have been prepared by the Exchange. Amendment No. 3 amended
and replaced the proposed rule change, as modified by Amendment No. 2,
in its entirety. The Commission is publishing this notice and order to
solicit comments on the proposed rule change, as modified by Amendment
No. 3, from interested persons and to institute proceedings pursuant to
section 19(b)(2)(B) of the Act \6\ to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 3.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 97461 (May 9, 2023),
88 FR 31045. Comments received on the proposed rule change can be
found at: https://www.sec.gov/comments/SR-Cboebzx-2023-028/srcboebzx2023028.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 97732, 88 FR 40877
(June 22, 2023). The Commission designated August 13, 2023, as the
date by which the Commission shall approve or disapprove, or
institute proceedings to determine whether to disapprove, the
proposed rule change.
\6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to list and trade shares of the ARK 21Shares Bitcoin ETF
(the ``Trust''),\7\ under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares.
---------------------------------------------------------------------------
\7\ The Trust was formed as a Delaware statutory trust on June
22, 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.
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. 3 to SR-CboeBZX-2023-028 amends and replaces in
its entirety the proposal as originally submitted on April 25, 2023 and
as amended by Amendment No. 1
[[Page 55744]]
on June 28, 2023 and Amendment No. 2 on June 30, 2023. The Exchange
submits this Amendment No. 3 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),\8\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.9 10 21Shares US LLC is
the sponsor of the Trust (the ``Sponsor''). The Shares will be
registered with the Commission by means of the Trust's registration
statement on Form S-1 (the ``Registration Statement'').\11\ 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.\12\ 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.\13\ 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
[[Page 55745]]
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.'' \14\
---------------------------------------------------------------------------
\8\ 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).
\9\ 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.
\10\ The Exchange notes that two different proposals to list and
trade shares of the Trust were disapproved by the Commission on
March 31, 2022 and January 26, 2023. See Exchange Act Release Nos.
94571 (March 31, 2022), 87 FR 20014 (April 6, 2022) and 96751
(January 26, 2023), 88 FR 628 (January 31, 2023).
\11\ See draft Registration Statement on Form S-1, dated June
28, 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.
\12\ 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'').
\13\ 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).
\14\ 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.\15\ 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.
---------------------------------------------------------------------------
\15\ 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, 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, 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 vehicles (such as loosely
regulated centralized exchanges that have since faced bankruptcy
proceedings or other insolvencies), then countless investors would 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.\16\ 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.\17\ 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.\18\ Similarly, regulated U.S.
bitcoin futures contracts did not exist. The CFTC had determined that
bitcoin is a commodity,\19\ but had not engaged in significant
enforcement actions in the space. The New York Department of Financial
Services (``NYDFS'') adopted its final BitLicense regulatory framework
in 2015, but had only approved four entities to engage in activities
relating to virtual currencies (whether through granting a BitLicense
or a limited-purpose trust charter) as of June 30, 2016.\20\ While the
first over-the-counter bitcoin fund launched in 2013, public trading
was limited and the fund had only $60 million in assets.\21\ 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.\22\ 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
\23\ and shares
[[Page 55746]]
in investment vehicles holding bitcoin futures.\24\ Additionally,
licensed and regulated service providers have emerged to provide fund
custodial services for digital assets, among other services. For
example, in February 2023, the Commission proposed to amend Rule
206(4)-2 under the Advisers Act of 1940 (the ``custody rule'') to
expand the scope beyond client funds and securities to include all
crypto assets, among other assets; \25\ 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'');
\26\ 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; \27\ 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,\28\ and multiple transfer agents who provide services for
digital asset securities registered with the Commission.\29\
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\16\ For additional information about bitcoin and the Bitcoin
Network, see https://bitcoin.org/en/getting-started; https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms; and https://www.vaneck.com/education/investment-ideas/investing-in-bitcoin-and-digital-assets/.
\17\ See Winklevoss Order.
\18\ 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.
\19\ 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.''
\20\ 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.
\21\ 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.
\22\ 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.
\23\ 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.
\24\ See Prospectus filed by Stone Ridge Trust VI on behalf of
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
\25\ See Investment Advisers Act Release No. 6240 88 FR 14672
(March 9, 2023) (Safeguarding Advisory Client Assets).
\26\ 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).
\27\ 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.
\28\ 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.
\29\ 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.\30\ 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.\31\ Open interest was over $1.4 billion
for the entirety of the period and at one point was over $2 billion.
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.\32\ As of February 14, 2023 the
NYDFS has granted no fewer than thirty-four BitLicenses,\33\ including
to established public payment companies like PayPal Holdings, Inc. and
Square, Inc., and limited purpose trust charters to entities providing
cryptocurrency custody services, including the Trust's Custodian.\34\
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.\35\
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\30\ As of February 1, 2023, the total market cap of all bitcoin
in circulation was approximately $450 billion.
\31\ Data sourced from the CME Bitcoin Futures Report: 30 March,
2023, available at: https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.htm.
\32\ The CFTC's annual report for Fiscal Year 2022 (which ended
on September 30, 2022) noted that the CFTC completed the fiscal year
with 18 enforcement filings related to digital assets. ``Digital
asset actions included manipulation, a $1.7 billion fraudulent
scheme, and a decentralized autonomous organization (DAO) failing to
register as a SEF or FCM or to seek DCM designation.'' See CFTC FY
2022 Agency Financial Report, available at: https://www.cftc.gov/media/7941/2022afr/download. Additionally, the CFTC filed on March
27, 2023, a civil enforcement action against the owner/operators of
the Binance centralized digital asset trading platform, which is one
of the largest bitcoin derivative exchanges. See CFTC Release No.
8680-23 (March 27, 2023), available at: https://www.cftc.gov/PressRoom/PressReleases/8680-23.
\33\ See https://www.dfs.ny.gov/virtual_currency_businesses.
\34\ The ``Custodian'' is Coinbase Trust Company, LLC.
\35\ 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 have allocated to bitcoin. As noted in the Financial Stability
Oversight Council (``FSOC'') Report on Digital Asset Financial
Stability Risks and Regulation, ``[i]ndustry surveys suggest that the
scale of these investments grew quickly during the boom in crypto-asset
markets through late 2021. 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.''
\36\ The largest over-the-counter bitcoin fund previously filed a Form
10 registration statement, which the Staff of the Commission reviewed
and which took effect automatically, and is now a reporting
company.\37\ Established companies like Tesla, Inc., MicroStrategy
Incorporated, and Square, Inc., among others, announced substantial
investments in bitcoin in amounts as large as $1.5 billion (Tesla) and
$425 million (MicroStrategy). The foregoing examples demonstrate that
bitcoin has gained mainstream usage and recognition.
---------------------------------------------------------------------------
\36\ 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.
\37\ 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
[[Page 55747]]
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; \38\ (iii) purchasing
shares of operating companies that they believe will provide proxy
exposure to bitcoin with limited disclosure about the associated risks;
\39\ 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 (issued by 21Shares, among others) 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.\40\
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\38\ The premium and discount for OTC Bitcoin Funds is known to
move rapidly. For example, over the period of 12/21/20 to 1/21/21,
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.
\39\ 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.
\40\ 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.
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To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor
assets to significant risk because investors that would otherwise seek
cryptoasset 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,\41\ Celsius Network LLC,\42\ BlockFi Inc.\43\ and Voyager Digital
Holdings, Inc.\44\ 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.
---------------------------------------------------------------------------
\41\ See FTX Trading Ltd., et al., Case No. 22-11068.
\42\ See Celsius Network LLC, et al., Case No. 22-10964.
\43\ See BlockFi Inc., Case No. 22-19361.
\44\ 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. 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 Investment Company Act of 1940, as
amended (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 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.\45\ Leaving aside the analysis of that
standard until later in this proposal,\46\ the Exchange believes
[[Page 55748]]
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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\45\ 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.
\46\ As further outlined below, both the Exchange and the
Sponsor believe that the CME 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.\47\
---------------------------------------------------------------------------
\47\ 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 CME Bitcoin Futures. This was
further acknowledged in the ``Grayscale lawsuit'' \48\ when Judge Rao
stated `` . . . the Commission in the Teucrium order recognizes that
the futures prices are influenced by the spot prices, and the
Commission concludes in approving futures ETPs that any fraud on the
spot market can be adequately addressed by the fact that the futures
market is a regulated one . . .'' 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 Bitcoin Futures.
As further discussed below, this view is also consistent with the
Advisor's research.
---------------------------------------------------------------------------
\48\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142.
---------------------------------------------------------------------------
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 (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 CME 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.\49\ 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.
---------------------------------------------------------------------------
\49\ 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.
---------------------------------------------------------------------------
To the extent the Commission may view differential treatment of
Bitcoin Futures ETFs and Spot Bitcoin ETPs as warranted based on the
Commission's concerns about the custody of physical Bitcoin that a Spot
Bitcoin ETP would hold (compared to cash-settled futures
contracts),\50\ the Sponsor believes this concern is mitigated to a
significant degree by the custodial arrangements that the Trust has
contracted with the Custodian to provide, as further outlined below. In
the Custody Statement, the Commission stated that the fourth step that
a broker-dealer could take to shield traditional securities customers
and others from the risks and consequences of digital asset security
fraud, theft, or loss is to establish, maintain, and enforce reasonably
designed written policies, procedures, and controls for safekeeping and
demonstrating the broker-dealer has exclusive possession or control
over digital asset securities that are consistent with industry best
practices to protect against the theft, loss, and unauthorized and
accidental use of the private keys necessary to access and transfer the
digital asset securities the broker-dealer holds in custody. While
bitcoin is not a security and the Custodian is not a broker-dealer, the
Sponsor believes that similar considerations apply to the Custodian's
holding of the Trust's bitcoin. After diligent investigation, the
Sponsor believes that the Custodian's policies, procedures, and
controls for safekeeping, exclusively possessing, and controlling the
Trust's bitcoin holdings are consistent with industry best practices to
protect against the theft, loss, and unauthorized and accidental use of
the private keys. As a trust company chartered by the NYDFS, the
Sponsor notes that the Custodian is subject to extensive regulation and
has among longest track records in the industry of providing custodial
services for digital asset private keys. Under the circumstances,
therefore, to the extent the Commission believes that its concerns
about the risks of spot bitcoin custody justifies differential
treatment of a Bitcoin Futures ETF versus a Spot Bitcoin ETP, the
Sponsor believes that the fact that the Custodian employs the same
types of policies, procedures, and
[[Page 55749]]
safeguards in handling spot bitcoin that the Commission has stated that
broker-dealers should implement with respect to digital asset
securities would appear to weaken the justification for treating a
Bitcoin Futures ETF compared to a Spot Bitcoin ETP differently due to
spot bitcoin custody concerns.
---------------------------------------------------------------------------
\50\ See, e.g., Division of Investment Management Staff, Staff
Statement on Funds Registered Under the Investment Company Act
Investing in the Bitcoin Futures Market, May 11, 2021 (``The Bitcoin
futures market also has not presented the custody challenges
associated with some cryptocurrency-based investing because the
futures are cash-settled'').
---------------------------------------------------------------------------
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 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. Both the Exchange and Sponsor
believe that the CME Bitcoin Futures market is a regulated market of
significant size and that such manipulation concerns are mitigated, as
described extensively below. After allowing and approving the listing
and trading of Bitcoin Futures ETFs that hold primarily CME Bitcoin
Futures, however, the only consistent outcome would be approving Spot
Bitcoin ETPs on the basis that the CME Bitcoin Futures market is a
regulated market of significant size.
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.
Bitcoin Futures \51\
---------------------------------------------------------------------------
\51\ Unless otherwise noted, all data and analysis presented in
this section and referenced elsewhere in the filing has been
provided by the Sponsor.
---------------------------------------------------------------------------
CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate.\52\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric
related to Bitcoin Futures has trended consistently up since launch.
---------------------------------------------------------------------------
\52\ According to CME, the CME CF Bitcoin Reference Rate
aggregates the trade flow of major bitcoin spot exchanges during a
specific calculation window into a once-a-day reference rate of the
U.S. dollar price of bitcoin. Calculation rules are geared toward
maximum transparency and real-time replicability in underlying spot
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken.
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
---------------------------------------------------------------------------
According to the Sponsor, the increase in the volume on CME, over
the past few years, is reflected in a higher proportion of the bitcoin
market share. This is illustrated by plotting the proportion of monthly
volume traded in bitcoin on the CME \53\ (categorized as regulated in
the chart and used as the numerator) in relation to the total bitcoin
market, which is comprised of the sum of the volume of bitcoin futures
on the CME and the spot volume on cryptocurrency exchanges \54\
(categorized as unregulated and used as the denominator) from January
1, 2018 to January 31, 2023.
---------------------------------------------------------------------------
\53\ Data on Bitcoin futures is available at https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html.
\54\ Data on Bitcoin volume traded on cryptocurrency exchanges
is available at https://www.cryptocompare.com.
[GRAPHIC] [TIFF OMITTED] TN16AU23.004
[[Page 55750]]
The proportion of volume traded on CME has increased from less than
1% at inception, to more than 10% over three and a half years.
Furthermore, the CME market, as well as other crypto-linked markets,
and the spot market are highly correlated. In markets that are globally
and efficiently integrated, one would expect that changes in prices of
an asset across all markets to be highly correlated. The rationale
behind this is that quick and efficient arbitrageurs would capture
potentially profitable opportunities, consequently converging prices to
the average intrinsic value very rapidly.
Bitcoin markets exhibit a high degree of correlation. Using daily
Bitcoin prices from centralized exchanges, ETP providers, and the CME
from January 20, 2021 to February 1, 2023,\55\ the Sponsor calculates
the Pearson correlation of returns \56\ across these markets and find a
high degree of correlation.
---------------------------------------------------------------------------
\55\ The calculation of daily correlations used the period
January 20, 2021 to February 1, 2023 as this is the common period
across all the exchanges and data sources being analyzed.
\56\ The Pearson correlation is a measure of linear association
between two variables and indicates the magnitude as well as
direction of this relationship. The value can range between -1
(suggesting a strong negative association) and 1 (suggesting a
strong positive association).
---------------------------------------------------------------------------
Correlations are between 57% and 99%, with the latter found mainly
across centralized exchanges due to their higher level of
interconnectedness. The lower correlations pertain mainly to the ETPs,
which are relatively newer products and are mainly offered by a few
competing market makers who are required to trade in large blocks, thus
making it economically infeasible to capture small mispricings. As
additional investors and arbitrageurs enter the market and capture the
mispricing opportunities between these markets, it is likely that there
will be much higher levels of correlations across all markets.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN16AU23.005
[[Page 55751]]
Pair-wise correlations of Bitcoin returns are also calculated on
hourly and minute-by-minute sampling frequencies in order to estimate
the intra-day associations across the different Bitcoin markets. The
results show correlations no less than 92% among centralized exchanges
and between the Bitcoin CME futures and centralized exchanges on an
hourly basis, and no less than 78% on a minutely basis. This suggests
that Bitcoin prices on centralized exchanges and the CME markets move
very similarly and in a very efficient manner to quickly reflect
changes in market conditions, not only on a daily basis, but also at
much higher intra-day frequencies.
[GRAPHIC] [TIFF OMITTED] TN16AU23.006
[[Page 55752]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.007
According to the Sponsor's research, this relationship holds true
during periods of extreme price volatility. This implies that no single
Bitcoin market can deviate significantly from the consensus, such that
the market is sufficiently large and has an inherent unique resistance
to manipulation. Hence, the Sponsor introduces a statistical co-moment
called co-kurtosis, which measures to what extent two random variables
change together.\57\ If two returns series exhibit a high degree of co-
kurtosis, this means that they tend to undergo extreme positive and
negative changes simultaneously. A co-kurtosis value larger than +3 or
less than -3 is considered statistically significant. The following
table shows that the level of co-kurtosis is positive and very high
between all market combinations of hourly returns, which suggests that
Bitcoin markets tend to move very similarly especially for extreme
price deviations.
---------------------------------------------------------------------------
\57\ Co-skewness and Co-kurtosis are higher order cross-moments
used in finance to examine how assets move together. Co-skewness
measures the extent to which two variables undergo extreme
deviations at the same time, whereby a positive (negative) value
means that both values exhibit positive (negative) values
simultaneously. While this measure is useful for estimating co-
movements in one direction or the other, it does not allow us to
test whether two variables comove similarly in either direction. For
that, we apply the co-kurtosis, which measures the extent to which
two variables undergo both extreme positive and negative deviations
at the same time.
---------------------------------------------------------------------------
Co-Kurtosis of Bitcoin Hourly Returns Across Centralized Exchanges,
ETPs, and the CME
[[Page 55753]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.008
As a robustness check, the co-kurtosis metric is also calculated
using minute-by-minute returns, and the conclusion remains the same,
suggesting that all Bitcoin markets move in tandem especially during
extreme market movements.
Co-Kurtosis of Bitcoin Minutely Returns Across Centralized Exchanges,
ETPs, and the CME
[GRAPHIC] [TIFF OMITTED] TN16AU23.009
BILLING CODE 8011-01-C
These results present evidence of a robust global Bitcoin market
that quickly reacts in a unanimous manner to extreme price movements
across both the spot markets, futures and ETP markets.
The Sponsor further believes that academic research corroborates
the overall trend outlined above and supports the thesis that the
Bitcoin Futures pricing leads the spot market and, thus, a person
attempting to manipulate the Shares would also have to trade on that
market to manipulate the ETP. Specifically, the Sponsor believes that
such research indicates
[[Page 55754]]
that bitcoin futures lead the bitcoin spot market in price
formation.\58\
---------------------------------------------------------------------------
\58\ See Hu, Y., Hou, Y. and Oxley, L. (2019). ``What role do
futures markets play in Bitcoin pricing? Causality, cointegration
and price discovery from a time-varying perspective'' (available at:
https://www.ncbi.nlm./nih.gov/pmc/articles/PMC7481826/). This
academic research paper concludes that ``There exist no episodes
where the Bitcoin spot markets dominates the price discovery
processes with regard to Bitcoin futures. This points to a
conclusion that the price formation originates solely in the Bitcoin
futures market. We can, therefore, conclude that the Bitcoin futures
markets dominate the dynamic price discovery process based upon
time-varying information share measures. Overall, price discovery
seems to occur in the Bitcoin futures markets rather than the
underlying spot market based upon a time-varying perspective.'' See
also Matthew Hougan, Hong Kim, and Satyajeet Pal (2021). ``Price
Discovery in the Modern Bitcoin Market: Examining Lead-Lag
Relationships Between the Bitcoin Spot and Bitcoin Futures Market''
(available at https://static.bitwiseinvestments.com/Bitwise-Bitcoin-ETP-White-Paper-1.pdf). This academic research paper also concluded
that ``the CME bitcoin futures market is the dominant source of
price discovery when compared with the bitcoin spot market, and that
prices on the CME bitcoin futures market lead prices on bitcoin spot
markets. . .''
\59\ See Exchange Rule 14.11(f).
\60\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\61\ 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.
---------------------------------------------------------------------------
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\59\ including Commodity-Based Trust Shares,\60\ 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;
\61\ 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.
(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 \62\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\63\ The only remaining
issue to be addressed is whether the Bitcoin Futures market constitutes
a market of significant size, which both the Exchange and the Sponsor
believe 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.\64\
---------------------------------------------------------------------------
\62\ 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 Wilshire Phoenix Disapproval.
\63\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\64\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
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.\65\
---------------------------------------------------------------------------
\65\ 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.
---------------------------------------------------------------------------
(a) Manipulation of the ETP
According to the Sponsor's research presented above, the Bitcoin
Futures market is the leading market for bitcoin price formation. Where
Bitcoin Futures lead the price in the spot market such that a potential
manipulator of the bitcoin spot market (beyond just the constituents of
the Index \66\) would have to participate in the Bitcoin Futures
market, it follows that a potential manipulator of the Shares would
similarly have to transact in the Bitcoin
---------------------------------------------------------------------------
\66\ As further described below, the ``Index'' for the Fund is
the S&P Bitcoin Index. The current exchange composition of the Index
is Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro,
Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.
---------------------------------------------------------------------------
Futures market because the Index is based on spot prices. Further, the
Trust only allows for in-kind creation and redemption, which, as
further described below, reduces the potential for manipulation of the
Shares through manipulation of the Index or any of its individual
constituents, again emphasizing that a potential manipulator of the
Shares would have to manipulate the entirety of the bitcoin spot
market, which is led by the Bitcoin Futures market. As such, the
Exchange believes that part (a) of the significant market test outlined
above is satisfied and that common membership in ISG between the
Exchange and CME would
[[Page 55755]]
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
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.
(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 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,\67\ 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.
---------------------------------------------------------------------------
\67\ 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.\68\ 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.\69\
---------------------------------------------------------------------------
\68\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\69\ 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.
---------------------------------------------------------------------------
According to the Sponsor, a significant portion of the
considerations around crypto pricing have historically stemmed from a
lack of consistent pricing across markets. However, according to the
Sponsor's research, cross-exchange spreads in Bitcoin have been
declining consistently over the past several years. Based on the daily
Bitcoin price series from several popular centralized exchanges \70\
the Sponsor has calculated the largest cross-exchange percentage spread
(labelled as %C-Spread) by deducting the highest or maximum price (P)
at time t from the lowest or minimum, and dividing by the lowest across
all exchanges (i). Formally, this is expressed as:
---------------------------------------------------------------------------
\70\ The exchanges include Binance, Bitfinex, Bithumb, Bitstamp,
Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, Kraken,
Kucoin, and OKEX.
[GRAPHIC] [TIFF OMITTED] TN16AU23.010
The results show a clear and sharp decline in the %C-Spread,
indicating that the Bitcoin market has become more efficient as cross-
exchange prices have converged over time.
BILLING CODE 8011-01-P
[[Page 55756]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.011
In addition, the magnitude of outlier % C-spreads has also declined
over time. This boxplot shows that, not only did the median value of
the %C-Spread decline over time, but also the extreme outlier values.
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, 2021,
2022, and 2023 (up until February 01, 2023) are 29.14%, 14.12%, 8.54%,
6.04%, 3.65%, 5.56%, and 0.63%, respectively. The market has
experienced a 38% year-on-year decline in the annual median %C-Spread
indicating a greater degree of Bitcoin price convergence across
exchanges and a more efficient market.
[GRAPHIC] [TIFF OMITTED] TN16AU23.012
[[Page 55757]]
The dispersion ([sigma]) of Bitcoin Prices has also declined over
the same period. This chart shows the 7-day rolling standard deviation
of the %C-Spread from January 1, 2017 to February 1, 2023. The
Sponsor's research finds that the dispersion in Bitcoin prices across
all exchanges has decreased over time, indicating that prices on all
the considered exchanges converge towards the intrinsic average much
more efficiently. This suggests that the market has become better at
quickly reaching a consensus price for Bitcoin.
As the pricing of the crypto market becomes increasingly efficient,
pricing methodologies become more accurate and less susceptible to
manipulation. The clustering of prices across a variety of sources
within the primary market points towards robust price discovery
mechanisms and efficient arbitrage.
[GRAPHIC] [TIFF OMITTED] TN16AU23.013
One factor that has contributed to the overall efficiency of, and
improved price discovery within the Bitcoin market is the increase in
the number of participants, and subsequently, the total dollar amount
allocated to this market. This can be illustrated by the following
chart, which shows the number of wallet addresses holding Bitcoin from
January 2016 to February 2023.
[[Page 55758]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.014
The large number of participants in the Bitcoin market has
manifested itself in high liquidity in the market. This is exhibited in
the following chart, which shows the daily aggregated dollar notional
of the bid and ask order books within the first 100 price levels across
several of the largest centralized crypto exchanges from February 2022
to January 2023. Specifically, the dollar notional that is allocated
closest to the mid price has hovered between $2.6 million and $12
million over that period.
[GRAPHIC] [TIFF OMITTED] TN16AU23.015
An increased notional order book suggests that there is a higher
degree of consensus among investors regarding the price of Bitcoin.
Moreover, this market characteristic hampers any attempt of price
manipulation by any single large entity.
As a robustness check, the Sponsor investigates whether the dollar
notional in the order book changes significantly prior to and post an
extreme price event. Specifically, for events constituting large
increases in the price of Bitcoin, if the ask (or sell) side of the
order book experiences a significant shrinkage in
[[Page 55759]]
the dollar notional right before the event, then this may be an
indication of market manipulation whereby the ask-side of the order
book becomes sufficiently thin for a large order to move the price
upward. Similarly, for events constituting large decreases in the price
of Bitcoin, if the bid (or buy) side of the order book experiences a
significant shrinkage in the dollar notional prior to such events, then
this may be an indication of market manipulation whereby the thinner
bid-side of the order book may potentially lead to significant downward
price movements.
Using the top and bottom 0.1% of hourly price changes from February
1, 2022 to February 1, 2023 as events of extreme upward and downward
market movements, respectively, the Sponsor plotted the bid (left
charts) and ask (right charts) dollar notional of the Bitcoin order
book within a six-hour window around these events in the chart below,
which shows the results for extreme upward price movements. The extreme
price events (indicated by the dashed green lines) perfectly coincide
with the decrease in dollar notional of the ask-side of the order book.
This is indicative of an efficient market, whereby large market
movements are quickly and dynamically absorbed by a thick orderbook.
Moreover, the dollar notional on the ask side after the event is
replenished back to its pre-event level, which implies that market
participants' reactions are quick to restore the market back to its
equilibrium level.
[GRAPHIC] [TIFF OMITTED] TN16AU23.016
The same results and conclusions are found for extreme downward
price movements. The charts below show that such price events perfectly
coincide with shrinkages on the bid side of the order book (left
charts), indicating an
[[Page 55760]]
efficient and dynamic Bitcoin market. Moreover, the bid-side of the
order book after the event is also restored back to its pre-event
level, which suggests that the market is symmetrically efficient in
moving back to equilibrium.
[GRAPHIC] [TIFF OMITTED] TN16AU23.017
BILLING CODE 8011-01-C
Finally, offering only in-kind creation and redemption will provide
unique protections against potential attempts to manipulate the Shares.
While the Sponsor believes that the Index which it uses to value the
Trust's bitcoin is itself resistant to manipulation based on the
methodology further described below, the fact that creations and
redemptions are only available in-kind makes the manipulability of the
Index significantly less important. Specifically, because the Trust
will not accept cash to buy bitcoin in order to create new shares or,
barring a forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin is
not particularly important.\71\ 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
[[Page 55761]]
discourages and disincentivizes manipulation of the Index because there
is little financial incentive to do so.
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\71\ While the Index will not be particularly important for the
creation and redemption process, it will be used for calculating
fees.
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(ii) 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 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.
ARK 21Shares Bitcoin ETF
Delaware Trust Company is the trustee (``Trustee''). The Bank of
New York Mellon will be the administrator (``Administrator'') and
transfer agent (``Transfer Agent''). Foreside Global Services, LLC will
be the marketing agent (``Marketing Agent'') in connection with the
creation and redemption of ``Baskets'' of Shares. ARK Investment
Management LLC (``ARK'') will provide assistance in the marketing of
the Shares. Coinbase Custody Trust Company, LLC, a third-party
regulated custodian (the ``Custodian''), will be responsible for
custody of the Trust's bitcoin.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the bitcoin held by the
Trust. The Trust's assets will consist of bitcoin held by the Custodian
on behalf of the Trust. The Trust generally does not intend to hold
cash or cash equivalents. However, there may be situations where the
Trust will unexpectedly hold cash on a temporary basis.
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\72\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is
subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
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\72\ 15 U.S.C. 80a-1.
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When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 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.
As noted above, the Trust 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.
Specifically, the Trust is designed to protect investors as follows:
(i) Assets of the Trust Protected From Insolvency
The Trust's bitcoin will be held by its Custodian,\73\ which is a
New York chartered trust company overseen by the NYDFS and a qualified
custodian under Rule 206-4 of the Investment Adviser Act. The Custodian
will custody the Trust's bitcoin pursuant to a custody agreement, which
requires the Custodian to maintain the Trust's bitcoin in segregated
accounts that clearly identify the Trust as owner of the accounts and
assets held on those accounts; the segregation will be both from the
proprietary property of the Custodian and the assets of any other
customer. Such an arrangement is generally deemed to be ``bankruptcy
remote,'' that is, in the event of an insolvency of the Custodian,
assets held in such segregated accounts would not become property of
the Custodian's estate and would not be available to satisfy claims of
creditors of the Custodian. In addition, according to the Registration
Statement, the Custodian carries fidelity insurance, which covers
assets held by the Custodian in custody from risks such as theft of
funds. These arrangements provide significant protections to investors
and could have mitigated the type of losses incurred by investors in
the numerous crypto-related insolvencies, including Celsius, Voyager,
BlockFi and FTX.
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\73\ According to the Registration Statement, the Trust's cash
will be held at The Bank of New York Mellon pursuant to a cash
custody agreement.
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(ii) Trust's Transfer Agent Will Instruct Disposition of Trust's
Bitcoin
According to the Registration Statement, except with respect to
sale of bitcoin from time to time to cover expenses of the Trust, the
only time bitcoin will move into or out from the Trust will be with
respect to creations or redemptions of Shares of the Trust. Authorized
Participants will deliver bitcoin to the Trust's account with the
Custodian or Subcustodian, as applicable, in exchange for Shares of the
Trust, and the Trust, through the Custodian, will deliver bitcoin to
Authorized Participants when those Authorized Participants redeem
Shares of the Trust. The creation and redemption procedures are
administered by the Transfer Agent, the Bank of New York Mellon, an
independent third party. In other words, according to the Registration
Statement, with very limited exceptions, the Sponsor will not give
instructions with respect to the transfer or disposition of the Trust's
bitcoin. Bitcoin owned by the Trust will at all times be held by, and
in the control of, the Custodian (or Subcustodian, as applicable), and
transfer of such bitcoin to or from the Custodian (or Subcustodian)
will occur only in connection with creation and redemptions of Shares.
This will provide safeguards against the movement of bitcoin owned by
the Trust by or to the Sponsor or affiliates of the Sponsor.
(iii) Trust's Assets Are Subject to Regular Audit
According to the Registration Statement, audit trails exist for all
movement of bitcoin within Custodian-controlled bitcoin wallets and are
audited annually for accuracy and completeness by an independent
external audit firm. In addition, the Trust will be audited by an
independent registered public accounting firm on a regular basis.
[[Page 55762]]
(iv) Trust is Subject to the Exchange's Obligations of Companies Listed
on the Exchange and Applicable Corporate Governance Requirements
The Trust will be subject to the obligations of companies listed on
the Exchange set forth in BZX Rule 14.6, which require the listed
companies to make public disclosure of material events and any
notifications of deficiency by the Exchange, file and distribute period
financial reports, engage independent public accountants registered
with the Exchange, among other things. Such disclosures serve a key
investor protection role. In addition, the Trust will be subject to the
corporate governance requirements for companies listed on the Exchange
set forth in BZX Rule 14.10.
Investment Objective
According to the Registration Statement and as further described
below, the investment objective of the Trust is to seek to track the
performance of bitcoin, as measured by the performance of the S&P
Bitcoin Index (the ``Index''), adjusted for the Trust's expenses and
other liabilities. In seeking to achieve its investment objective, the
Trust will hold bitcoin and will value the Shares daily based on the
Index. The Trust will process all creations and redemptions in-kind in
transactions with authorized participants. The Trust is not actively
managed.
The Index
As described in the Registration Statement, the Fund will use the
Index to calculate the Trust's NAV. The Index is a U.S. dollar-
denominated composite reference rate for the price of bitcoin. There is
no component other than bitcoin in the Index. The underlying exchanges
are sourced by Lukka Inc. (the ``Data Provider'') \74\ based on a
combination of qualitative and quantitative metrics to analyze a
comprehensive data set and evaluate factors including legal/regulation,
KYC/transaction risk, data provision, security, team/exchange, asset
quality/diversity, market quality and negative events. The Index price
is currently sourced from the following set of exchanges: Binance,
Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, Gemini, HitBTC,
Huobi, Kraken, KuCoin, and Poloniex. As the digital ecosystem continues
to evolve, the Data Provider can add additional or remove exchanges
based on the processes established by Lukka's Pricing Integrity
Oversight Board.\75\
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\74\ Lukka is an independent third-party digital asset data
company engaged by the Sponsor to provide fair market value (FMV)
bitcoin prices. This price, commercially available from Lukka, will
form the basis for determining the value of the Trust's Bitcoin
Holdings. Lukka is not affiliated with the Trust or the Sponsor
other than through a commercial relationship. All of Lukka's
products are also SOC 1 and 2 Type 2 certified.
\75\ The purpose of Lukka's Pricing Integrity Oversight Board is
to ensure (i) the integrity and validity of the Lukka pricing and
valuation products and (ii) the Lukka pricing and valuation products
remain fit for purpose in the rapidly evolving market and
corresponding regulatory environments.
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The Index methodology is intended to determine the fair market
value (``FMV'') for bitcoin by determining the principal market for
bitcoin as of 4pm ET daily. The Index methodology uses a ranking
approach that considers several exchange characteristics including
oversight and intra-day trading volume. Specifically, to rank the
credibility and quality of each exchange, the Data Provider dynamically
assigns a Base Exchange Score (``BES'') score to the key
characteristics for each exchange.
The BES reflects the fundamentals of an exchange and determines
which exchange should be designated as the principal market at a given
point of time. This score is determined by computing a weighted average
of the values assigned to four different exchange characteristics. The
exchange characteristics are as follows: (i) oversight; (ii)
microstructure efficiency; (iii) data transparency and (iv) data
integrity.
Oversight
This score reflects the rules in place to protect and to give
access to the investor. The score assigned for exchange oversight will
depend on parameters such as jurisdiction, regulation, ``Know Your
Customer and Anti-Money Laundering Compliance'' (KYC/AML), among other
proprietary factors.
Microstructure Efficiency
The effective bid ask spread is used as a proxy for efficiency. For
example, for each exchange and currency pair, the Data Provider takes
an estimate of the ``effective spread'' relative to the price.
Data Transparency
Transparency is the term used for a quality score that is
determined by the level of detail of the data offered by an exchange.
The most transparent exchanges offer order-level data, followed by
order book, trade-level, and then candles.
Data Integrity
Data integrity reconstructs orders to ensure the transaction
amounts that make up an order equal the overall order amount matching
on both a minute and daily basis. This data would help expose nefarious
actions such as wash trading or other potential manipulation of data.
The methodology then applies a five-step weighting process for
identifying a principal exchange and the last price on that exchange.
Following this weighting process, an executed exchange price is
assigned for bitcoin as of 4pm ET. The Index price is determined
according to the following procedure:
Step 1: Assign each exchange a Base Exchange Score
(``BES'') reflecting static exchange characteristics such as oversight,
microstructure and technology, as discussed below.
Step 2: Adjust the BES based on the relative monthly
volume each exchange services. This new score is the Volume Adjusted
Score (``VAS'').
Step 3: Decay the VAS based on the time passed since the
last trade on the exchange. Here, the Data Provider is assessing the
level of activity in the market by considering the frequency (volume)
of trades. The decay factor reflects the time since the last trade on
the exchange. This is the final Decayed Volume Adjusted Score
(``DVAS''), which tracks the freshness of the data by tracking most
recent trades.
Step 4: Rank the exchanges by the DVAS score and designate
the highest-ranking exchange as the principal market for that point in
time. The principal market is the exchange with the highest DVAS.
Step 5: After selecting a primary exchange, an executed
exchange price is used for bitcoin representing FMV at 4pm ET. The Data
Provider takes the last traded prices at that moment in time on that
trading venue for the relevant pair (Bitcoin/USD) when determining the
Index price.
As discussed in the Registration Statement, the fact that there are
multiple bitcoin spot markets that may contribute prices to the Index
price makes manipulation more difficult in a well-arbitraged and
fractured market, as a malicious actor would need to manipulate
multiple spot markets simultaneously to impact the Index price, or
dramatically skew the historical distribution of volume between the
various exchanges.
The Data Provider has designed a series of automated algorithms
designed to supplement the core Lukka Prime Methodology in enhancing
the ability to detect potentially anomalous price activity which could
be detrimental to the goal of obtaining a Fair Market
[[Page 55763]]
Value price that is representative of the market at a point in
time.\76\
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\76\ Upon request, Lukka can provide additional information and
detail to the Commission regarding the algorithms and data quality
checks that are put in place, with confidential treatment requested.
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In addition to the automated algorithms, the Data Provider has
dedicated resources and has established committees to ensure all prices
are representative of the market. Any price challenges will result in
an independent analysis of the price. This includes assessing whether
the price from the selected exchange is biased according to analyses
designed to recognize patterns consistent with manipulative activity,
such as a quick reversion to previous traded levels following a sharp
price change or any significant deviations from the volume weighted
average price on a particular exchange or pricing on any other exchange
included in the Lukka Prime eligibility universe. Policies and
procedures for any adjustments to prices or changes to core parameters
(e.g., exchange selection) are described in the Lukka Price Integrity
Manual.\77\
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\77\ Upon request, Lukka can provide the Commission the Lukka
Pricing Integrity Manual, with confidential treatment requested.
---------------------------------------------------------------------------
Upon detection or external referral of suspect manipulative
activities, the case is raised to the Price Integrity Oversight Board.
These checks occur on an on-going, intraday basis and any
investigations are typically resolved promptly, in clear cases within
minutes and in more complex cases same business day. The evidence
uncovered shall be turned over to the Data Provider's Price Integrity
Oversight Board for final decision and action. The Price Integrity
Oversight Board may choose to pick an alternative primary market and
may exclude such market from future inclusion in the Index methodology
or choose to stand by the original published price upon fully
evaluating all available evidence. It may also initiate an
investigation of prior prices from such markets and shall evaluate
evidence presented on a case-by-case basis.
After the Lukka Prime price is generated, the S&P DJI (``The Index
Provider'') performs independent quality checks as a second layer of
validation to those employed by the Data Provider, including checks
against assets with large price movements, assets with missing prices,
assets with zero prices, assets with unchanged prices, assets that have
ceased pricing and assets where the price does not match the Lukka
Prime primary exchange. The Index Provider may submit a price challenge
to Lukka if any of the checks listed above are found to be material.
Lukka will perform an independent review of the price challenge to
ensure the price is representative of the fair value of a particular
cryptocurrency. If there is a change, the process will follow that
described in the Recalculation Policy found on The Index Provider
Digital Assets Indices Policies & Practices and Index Mathematics
Methodology.
In addition, The Index Provider currently provides the below
additional quality assurance mechanisms with respect to crypto price
validation. These checks are based on current market conditions,
internal system processes and other assessments. The Index Provider
reserves the right within its sole discretion to supplement, modify
and/or remove individual checks and/or the parameters used within the
checks, at any time without notice.
Crypto Price and Exchange Validation
Check for any assets with no price received from Lukka;
Check for any assets with a zero price received from
Lukka;
Check for any assets with a large change from the previous
day. (Outliers 40%);
Check for any assets with a stale price, aggregating the
number of days the price remains stale;
Confirm the Lukka price matches the Lukka Prime primary
exchange price;
Confirm the Lukka price is consistent with other Lukka
Prime exchange prices;
Check the volume of the Lukka Prime exchanges and
challenge the Lukka primary exchange if the exchange is not within the
top percentile of the trading volume for that asset;
Aggregation of Lukka Prime primary exchange changes.
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.
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 \78\ 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 Index, including key elements of how the Index is
calculated, will be publicly available at https://www.spglobal.com/spdji/en/indices/digital-assets/sp-bitcoin-index//.
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\78\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
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The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the Consolidated Tape
Association (``CTA'').
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as the Index. Information relating to
trading, including price and volume information, in bitcoin is
available from major market data vendors and from the exchanges on
which bitcoin are traded. Depth of book information is also available
from bitcoin exchanges. The normal trading hours for bitcoin exchanges
are 24 hours per day, 365 days per year.
[[Page 55764]]
The Bitcoin Custodian
The Custodian carefully considers the design of the physical,
operational and cryptographic systems for secure storage of the Trust's
private keys in an effort to lower the risk of loss or theft. The
Custodian utilizes a variety of security measures to ensure that
private keys necessary to transfer digital assets remain uncompromised
and that the Trust maintains exclusive ownership of its assets. The
operational procedures of the Custodian are reviewed by third-party
advisors with specific expertise in physical security. The devices that
store the keys will never be connected to the internet or any other
public or private distributed network--this is colloquially known as
``cold storage.'' Only specific individuals are authorized to
participate in the custody process, and no individual acting alone will
be able to access or use any of the private keys. In addition, no
combination of the executive officers of the Sponsor or the investment
professionals managing the Trust, acting alone or together, will be
able to access or use any of the private keys that hold the Trust's
bitcoin.
Net Asset Value
NAV means the total assets of the Trust including, but not limited
to, all bitcoin and cash less total liabilities of the Trust, each
determined on the basis of generally accepted accounting principles.
The Administrator determines the NAV of the Trust on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. EST. The NAV of the Trust is the aggregate value of the
Trust's assets less its estimated accrued but unpaid liabilities (which
include accrued expenses). In determining the Trust's NAV, the
Administrator values the bitcoin held by the Trust based on the price
set by the Index as of 4:00 p.m. EST. The Administrator also determines
the NAV per Share.
Creation and Redemption of Shares
According to the Registration Statement, on any business day, an
authorized participant may place an order to create one or more
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or
the close of regular trading on the Exchange, whichever is earlier. The
day on which an order is received is considered the purchase order
date. The total deposit of bitcoin required is an amount of bitcoin
that is in the same proportion to the total assets of the Trust, net of
accrued expenses and other liabilities, on the date the order to
purchase is properly received, as the number of Shares to be created
under the purchase order is in proportion to the total number of Shares
outstanding on the date the order is received. Each night, the Sponsor
will publish the amount of bitcoin that will be required in exchange
for each creation order. The Administrator determines the required
deposit for a given day by dividing the number of bitcoin held by the
Trust as of the opening of business on that business day, adjusted for
the amount of bitcoin constituting estimated accrued but unpaid fees
and expenses of the Trust as of the opening of business on that
business day, by the quotient of the number of Shares outstanding at
the opening of business divided by 5,000. 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 \79\ 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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\79\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act. As noted above, the CFTC has opined that Bitcoin is a commodity
as defined in section 1a(9) of the Commodity Exchange Act. See
Coinflip.
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Upon termination of the Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus 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
[[Page 55765]]
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
has entered into a comprehensive surveillance sharing agreement.\80\
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\80\ 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 \81\
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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\81\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------
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 \82\ in general and section 6(b)(5) of the Act \83\ 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.
---------------------------------------------------------------------------
\82\ 15 U.S.C. 78f.
\83\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission has approved numerous series of Trust Issued
Receipts,\84\ including Commodity-Based Trust Shares,\85\ 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;
\86\ 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.
---------------------------------------------------------------------------
\84\ See Exchange Rule 14.11(f).
\85\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\86\ 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 activity does not normally impact
prices on other exchange because participants will generally ignore
markets with quotes that they deem non-executable. The reason is
that wash trading aims to manipulate the volume rather than the
price of an asset to give the impression of heightened market
activity in hopes of attracting investors to that asset. Moreover,
wash trades are executed within an exchange rather than cross
exchange since the entity executing the wash trades would aim to
trade against itself, and as such, this can only happen within an
exchange. Should the wash trades of that entity result in a
deviation of the price on that exchange relative to others,
arbitrageurs would then be able to capitalize on this mispricing,
and bring the manipulated price back to equilibrium, resulting in a
loss to the entity executing the wash trades. 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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[[Page 55766]]
(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 \87\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\88\ The only remaining
issue to be addressed is whether the Bitcoin Futures market constitutes
a market of significant size, which both the Exchange and the Sponsor
believe 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.\89\
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\87\ 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.
\88\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\89\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------
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.\90\
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\90\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
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(a) Manipulation of the ETP
According to the Sponsor's research presented above, the Bitcoin
Futures market is the leading market for bitcoin price formation. Where
Bitcoin Futures lead the price in the spot market such that a potential
manipulator of the bitcoin spot market (beyond just the constituents of
the Index \91\) would have to participate in the Bitcoin Futures
market, it follows that a potential manipulator of the Shares would
similarly have to transact in the Bitcoin Futures market because the
Index is based on spot prices. Further, the Trust only allows for in-
kind creation and redemption, which, as further described below,
reduces the potential for manipulation of the Shares through
manipulation of the Index or any of its individual constituents, again
emphasizing that a potential manipulator of the Shares would have to
manipulate the entirety of the bitcoin spot market, which is led by the
Bitcoin Futures market. As such, the Exchange believes that part (a) of
the significant market test outlined above is satisfied and that common
membership in ISG between the Exchange and CME would assist the listing
exchange in detecting and deterring misconduct in the Shares.
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\91\ As further described below, the ``Index'' for the Fund is
the S&P Bitcoin Index. The current exchange composition of the Index
is Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro,
Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.
---------------------------------------------------------------------------
(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
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.
(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. According to the Sponsor, a
significant portion of the considerations around crypto pricing have
historically stemmed from a lack of consistent pricing across markets.
However, according to the Sponsor's research, cross-exchange spreads in
Bitcoin have been declining consistently over the past several years.
Based on the daily Bitcoin price series from several popular
centralized exchanges \92\ the Sponsor has calculated the largest
cross-exchange percentage spread (labelled as %C-Spread) by deducting
the highest or maximum price
---------------------------------------------------------------------------
\92\ The exchanges include Binance, Bitfinex, Bithumb, Bitstamp,
Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, Kraken,
Kucoin, and OKEX.
---------------------------------------------------------------------------
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN16AU23.018
(P) at time t from the lowest or minimum, and dividing by the
lowest across all exchanges (i). Formally, this is expressed as:
The results show a clear and sharp decline in the %C-Spread,
indicating that the Bitcoin market has become more efficient as cross-
exchange prices have converged over time.
[[Page 55767]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.019
In addition, the magnitude of outlier % C-spreads has also declined
over time. This boxplot shows that, not only did the median value of
the %C-Spread decline over time, but also the extreme outlier values.
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, 2021,
2022 and 2023 are 29.14%, 14.12%, 8.54%, 6.04%, 3.65%, 5.56% and 0.63%,
respectively. The market has experienced a 22.68% year-on-year decline
in the annual median %C-Spread indicating a greater degree of Bitcoin
price convergence across exchanges and a more efficient market.
[GRAPHIC] [TIFF OMITTED] TN16AU23.020
[[Page 55768]]
The dispersion ([sigma]) of Bitcoin Prices has also declined over
the same period. This chart shows the 7-day rolling standard deviation
of the %C-Spread from January 1, 2017 to February 1, 2023. The
Sponsor's research finds that the dispersion in Bitcoin prices across
all exchanges has decreased over time, indicating that prices on all
the considered exchanges converge towards the intrinsic average much
more efficiently. This suggests that the market has become better at
quickly reaching a consensus price for Bitcoin.
As the pricing of the crypto market becomes increasingly efficient,
pricing methodologies become more accurate and less susceptible to
manipulation. The clustering of prices across a variety of sources
within the primary market points towards robust price discovery
mechanisms and efficient arbitrage.
[GRAPHIC] [TIFF OMITTED] TN16AU23.021
It is very important to note that the cross-exchange spreads, and
therefore the process of price discovery in the Bitcoin market has
improved significantly over time despite the market experiencing rather
uniform albeit sinusoidal volatility. This can be shown in the graphs
below where we can clearly observe a slightly decreasing yet consistent
level of volatility in the Bitcoin market based on daily and hourly
returns across the considered exchanges. Again, this further supports
the argument that the Bitcoin market has exhibited significant
improvements in terms of price discovery over time, irrespective and
despite of the volatility of the asset itself, which can be attributed
to efficient arbitrage operations.
[[Page 55769]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.022
One factor that has contributed to the overall efficiency of, and
improved price discovery within the Bitcoin market is the increase in
the number of participants, and subsequently, the total dollar amount
allocated to this market. This can be illustrated by the following
chart, which shows the number of wallet addresses holding Bitcoin from
January 2016 to February 2023.
[[Page 55770]]
[GRAPHIC] [TIFF OMITTED] TN16AU23.023
The large number of participants in the Bitcoin market has
manifested itself in high liquidity in the market. This is exhibited in
the following chart, which shows the daily aggregated dollar notional
of the bid and ask order books within the first 100 price levels across
several of the largest centralized crypto exchanges from February 2022
to January 2023. Specifically, the dollar notional that is allocated
closest to the mid price has hovered between $2.6 million and $12
million over that period.
[GRAPHIC] [TIFF OMITTED] TN16AU23.024
An increased notional order book suggests that there is a higher
degree of consensus among investors regarding the price of Bitcoin.
Moreover, this market characteristic hampers any attempt of price
manipulation by any single large entity.
As a robustness check, the Sponsor investigates whether the dollar
notional in the order book changes significantly prior to and post an
extreme price event. Specifically, for events constituting large
increases in the price of Bitcoin, if the ask (or sell) side of the
order book experiences a significant shrinkage in
[[Page 55771]]
the dollar notional right before the event, then this may be an
indication of market manipulation whereby the ask-side of the order
book becomes sufficiently thin for a large order to move the price
upward. Similarly, for events constituting large decreases in the price
of Bitcoin, if the bid (or buy) side of the order book experiences a
significant shrinkage in the dollar notional prior to such events, then
this may be an indication of market manipulation whereby the thinner
bid-side of the order book may potentially lead to significant downward
price movements.
Using the top and bottom 0.1% of hourly price changes from February
2022 to February 2023 as events of extreme upward and downward market
movements, respectively, the Sponsor plotted the bid (left charts) and
ask (right charts) dollar notional of the Bitcoin order book within a
six-hour window around these events in the chart below, which shows the
results for extreme upward price movements. The extreme price events
(indicated by the dashed green lines) perfectly coincide with the
decrease in dollar notional of the ask-side of the order book. This is
indicative of an efficient market, whereby large market movements are
quickly and dynamically absorbed by a thick orderbook. Moreover, the
dollar notional on the ask side after the event is replenished back to
its pre-event level, which implies that market participants' reactions
are quick to restore the market back to its equilibrium level.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN16AU23.025
The same results and conclusions are found for extreme downward
price movements. The charts below show that such price events perfectly
coincide with shrinkages on the bid side of the order book (left
charts), indicating an
[[Page 55772]]
efficient and dynamic Bitcoin market. Moreover, the bid-side of the
order book after the event is also restored back to its pre-event
level, which suggests that the market is symmetrically efficient in
moving back to equilibrium.
[GRAPHIC] [TIFF OMITTED] TN16AU23.026
BILLING CODE 8011-01-C
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,\93\ 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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\93\ 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
[[Page 55773]]
Commodity-Based Trust Shares.\94\ 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.\95\
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\94\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\95\ 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.
---------------------------------------------------------------------------
Finally, offering only in-kind creation and redemption will provide
unique protections against potential attempts to manipulate the Shares.
While the Sponsor believes that the Index which it uses to value the
Trust's bitcoin is itself resistant to manipulation based on the
methodology further described below, the fact that creations and
redemptions are only available in-kind makes the manipulability of the
Index significantly less important. Specifically, because the Trust
will not accept cash to buy bitcoin in order to create new shares or,
barring a forced redemption of the Trust or under other extraordinary
circumstances, be forced to sell bitcoin to pay cash for redeemed
shares, the price that the Sponsor uses to value the Trust's bitcoin is
not particularly important.\96\ When authorized participants are
creating with the Trust, they need to deliver a certain number of
bitcoin per share (regardless of the valuation used) and when they're
redeeming, they can similarly expect to receive a certain number of
bitcoin per share. As such, even if the price used to value the Trust's
bitcoin is manipulated (which the Sponsor believes that its methodology
is resistant to), the ratio of bitcoin per Share does not change and
the Trust will either accept (for creations) or distribute (for
redemptions) the same number of bitcoin regardless of the value. This
not only mitigates the risk associated with potential manipulation, but
also discourages and disincentivizes manipulation of the Index because
there is little financial incentive to do so.
---------------------------------------------------------------------------
\96\ While the Index will not be particularly important for the
creation and redemption process, it will be used for calculating
fees.
---------------------------------------------------------------------------
(ii) 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 and more than a billion dollars of
exposure 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, also believes that such concerns are now
outweighed by these 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
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 Index, the
Trust will provide information regarding the Trust's bitcoin holdings
as well as additional data regarding the Trust. The Trust will provide
an IIV per Share updated every 15 seconds, as calculated by the
Exchange or a third-party financial data provider during the Exchange's
Regular Trading Hours (9:30 a.m. to 4:00 p.m. 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
[[Page 55774]]
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 Index, including key
elements of how the Index is calculated, will be publicly available at
https://www.spglobal.com/spdji/en/indices/digital-assets/sp-bitcoin-index/.
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time. Quotation and last-sale information regarding the Shares
will be disseminated through the facilities of the CTA.
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters, as well as the Index. Information relating to
trading, including price and volume information, in bitcoin is
available from major market data vendors and from the exchanges on
which bitcoin are traded. Depth of book information is also available
from bitcoin exchanges. The normal trading hours for bitcoin exchanges
are 24 hours per day, 365 days per year.
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. The investor protection
issues for U.S. investors has grown significantly over the last several
years, through roll costs for Bitcoin Futures ETFs and premium/discount
volatility and management fees for OTC Bitcoin Funds. As discussed
throughout, this growth investor protection concerns need to be re-
evaluated and rebalanced with the prevention of fraudulent and
manipulative acts and practices concerns that previous disapproval
orders have relied upon. Finally, the Exchange notes that in addition
to all of the arguments herein which it believes sufficiently establish
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 listing venues, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2023-028, as Modified by Amendment No. 3, and Grounds for
Disapproval Under Consideration
The Commission is instituting proceedings pursuant to section
19(b)(2)(B) of the Act \97\ to determine whether the proposed rule
change, as modified by Amendment No. 3, should be approved or
disapproved. Institution of proceedings is appropriate at this time in
view of the legal and policy issues raised by the proposed rule change,
as discussed below. Institution of proceedings does not indicate that
the Commission has reached any conclusions with respect to any of the
issues involved. Rather, as described below, the Commission seeks and
encourages interested persons to provide comments on the proposed rule
change, as modified by Amendment No. 3.
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\97\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to section 19(b)(2)(B) of the Act,\98\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \99\
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\98\ Id.
\99\ 15 U.S.C. 78f(b)(5).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in Amendment No. 3, in addition to any other comments they may wish to
submit about the proposed rule change, as modified by Amendment No. 3.
In particular, the Commission seeks comment on the following questions
and asks commenters to submit data where appropriate to support their
views:
1. What are commenters' views on whether the proposed Trust and
Shares would be susceptible to manipulation? What are commenters' views
generally on whether the Exchange's proposal is designed to prevent
fraudulent and manipulative acts and practices? What are commenters'
views generally with respect to the liquidity and transparency of the
bitcoin markets, the bitcoin markets' susceptibility to manipulation,
and thus the suitability of bitcoin as an underlying asset for an
exchange-traded product?
2. Based on data and analysis provided and the academic research
cited by the Exchange,\100\ do commenters agree with the Exchange that
the CME, on which CME Bitcoin Futures trade, represents a regulated
market of significant size related to spot bitcoin?\101\ What are
commenters' views on whether there is a reasonable likelihood that a
person attempting to manipulate the Shares would also have to trade on
the CME to manipulate the Shares? Do commenters agree with the
Exchange's assertion that trading in the Shares would not be the
predominant force on prices in the CME Bitcoin Futures market or spot
market, due to ``the significant volume in the Bitcoin Futures market,
the size of bitcoin's market cap, and the significant liquidity
available in the spot market''? \102\
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\100\ See supra Item II.A.
\101\ See id.
\102\ See id.
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3. The Exchange states 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'' with a regulated market of
significant size related to spot bitcoin.\103\ In support of its
assertion, the Exchange provides data
[[Page 55775]]
and analysis \104\ to indicate that the spot bitcoin market is
``increasingly efficient,'' with ``high liquidity'' and a ``higher
degree of consensus among investors regarding the price of [b]itcoin,''
making it ``less susceptible to manipulation.'' \105\ Do commenters
believe the Exchange has shown that the bitcoin market is resistant to
price manipulation?
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\103\ See id.
\104\ See id.
\105\ See id.
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4. The Exchange also states that it will execute a surveillance-
sharing agreement with Coinbase that is intended to supplement the
Exchange's market surveillance program. According to the Exchange, the
agreement 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 [b]itcoin trades on Coinbase
where the Exchange determines it is necessary as part of its
surveillance program for the Commodity-Based Trust Shares.'' \106\
Based on the description of the surveillance-sharing agreement as
provided by the Exchange herein, what are commenters' views of such an
agreement if finalized and executed? Do commenters agree with the
Exchange's assertion that such an agreement with Coinbase would be
``helpful in detecting, investigating, and deterring fraud and
manipulation in the Commodity-Based Trust Shares''? \107\
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\106\ See id. The Exchange states that ``[t]his 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.'' Id.
\107\ See id.
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IV. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with section 6(b)(5) or any other provision of the Act, and
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\108\
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\108\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposed rule change, as modified by
Amendment No. 3, should be approved or disapproved by September 6,
2023. Any person who wishes to file a rebuttal to any other person's
submission must file that rebuttal by September 20, 2023.
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-2023-028 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-2023-028. 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-2023-028 and should
be submitted on or before September 6, 2023. Rebuttal comments should
be submitted by September 20, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\109\
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\109\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-17603 Filed 8-15-23; 8:45 am]
BILLING CODE 8011-01-P
