Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Franklin Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 68240-68255 [2023-21787]

Download as PDF 68240 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– CBOE–2023–055 on the subject line. ddrumheller on DSK120RN23PROD 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–CBOE–2023–055. 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–CBOE–2023–055 and should be VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 submitted on or before October 24, 2023. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–21795 Filed 10–2–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98573; File No. SR–ICEEU– 2023–021] Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Designation of Longer Period for Commission Action on Proposed Rule Change, as Modified by Amendment No. 1, Relating to Amendments to Its Operational Risk and Resilience Policy September 27, 2023. On August 15, 2023, ICE Clear Europe Limited (‘‘ICE Clear Europe’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–ICEEU–2023– 021 pursuant to Section 19(b) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 2 thereunder to amend its Operational Risk and Resilience Policy to make certain updates and enhancements.3 On August 24, 2023, ICE Clear Europe filed Amendment No. 1 to the proposed rule change to make certain changes to the Exhibits 5.4 The proposed rule change, as modified by Amendment No. 1 (hereafter ‘‘the Proposed Rule Change’’), was published for public comment in the Federal Register on September 5, 2023.5 The Commission has not received comments regarding the proposal described in the Proposed Rule change. Section 19(b)(2) of the Exchange Act 6 provides that, within 45 days of the publication of notice of the filing of a proposed rule change, or within such 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Notice of Filing infra note 5, 88 FR 60001. 4 Amendment No. 1 corrects the presentation of changes in Exhibit 5 by reflecting the deletion of the prior ‘‘Oversight of the Policy’’ section as part of the updated governance and oversight provisions. This amendment was filed with the Commission on August 24, 2023. 5 Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, Relating to Amendments to its Operational Risk and Resilience Policy, Exchange Act Release No. 98237 (August 29, 2023); 88 FR 60727 (September 5, 2023) (SR– ICEEU–2023–021) (‘‘Notice’’). 6 15 U.S.C. 78s(b)(2). 1 15 PO 00000 Frm 00147 Fmt 4703 Sfmt 4703 longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding, or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day after publication of the Notice of Filing is October 20, 2023. The Commission is extending this 45-day time period. In order to provide the Commission with sufficient time to consider the Proposed Rule Change, the Commission finds that it is appropriate to designate a longer period within which to take action on the Proposed Rule Change. Accordingly, the Commission, pursuant to Section 19(b)(2) of the Exchange Act,7 designates December 4, 2023, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove proposed rule change SR–ICEEU–2023– 021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.8 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–21780 Filed 10–2–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98562; File No. SR– CboeBZX–2023–072] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of a Proposed Rule Change To List and Trade Shares of the Franklin Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares September 27, 2023. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on September 26, 2023, Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the Exchange. The 7 Id. 8 17 CFR 200.30–3(a)(31). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) a proposed rule change to list and trade shares of the Franklin Bitcoin ETF (the ‘‘Fund’’), a series of Franklin Templeton Digital Holdings Trust (the ‘‘Trust’’),3 under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change ddrumheller on DSK120RN23PROD with NOTICES1 1. Purpose The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4),4 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.5 Franklin Holdings, LLC is the sponsor of the Fund (‘‘Sponsor’’). The Shares will be registered with the Commission by 3 The Trust was formed as a Delaware statutory trust on September 6, 2023, and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. 4 The Commission approved BZX Rule 14.11(e)(4) in Securities Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 (September 6, 2011) (SR–BATS–2011–018). 5 All statements and representations made in this filing regarding (a) the description of the portfolio, (b) limitations on portfolio holdings or reference assets, or (c) the applicability of Exchange rules and surveillance procedures shall constitute continued listing requirements for listing the Shares on the Exchange. means of the Trust’s registration statement on Form S–1 (the ‘‘Registration Statement’’).6 Coinbase Custody Trust Company, LLC (the ‘‘Bitcoin Custodian’’), which is a thirdparty U.S.-based trust company and qualified custodian, will be responsible for custody of the Fund’s bitcoin holdings and Bank of New York Mellon will be the custodian for the Fund’s cash holdings, if any (the ‘‘Cash Custodian’’ and together with the Bitcoin Custodian, the ‘‘Custodians’’). 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.7 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.8 6 See Form S–1 Registration Statement filed on September 12, 2023 (Registration No. 333–274474). The Registration Statement is not yet effective, and the Shares will not trade on the Exchange until such time that the Registration Statement is effective. 7 See 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’’). 8 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 68241 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 Continued VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 PO 00000 Frm 00148 Fmt 4703 Sfmt 4703 E:\FR\FM\03OCN1.SGM 03OCN1 68242 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 Further to this point, the Commission’s prior orders have noted that the spot commodities and currency markets for which it has previously approved spot ETPs are generally unregulated and that the Commission relied on the underlying futures market as the regulated market of significant size that formed the basis for approving the series of Currency and Commodity-Based Trust Shares, including gold, silver, platinum, palladium, copper, and other commodities and currencies. The Commission specifically noted in the Winklevoss Order that the First Gold Approval Order ‘‘was based on an assumption that the currency market and the spot gold market were largely unregulated.’’ 9 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 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). 9 See Winklevoss Order at 37592. VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 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 1933.10 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; a position that represents a departure from 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. In the recently decided Grayscale Investments, LLC v. Securities and Exchange Commission,11 however, the court addressed this conflict by finding that the SEC had failed to provide a coherent explanation as to why it had approved the Bitcoin Futures ETPs while disapproving the proposal to list and trade shares of the Grayscale Bitcoin Trust and vacating the disapproval order.12 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, consistent with the Teucrium precedent and in view of the court’s findings relating to the Grayscale Order. Finally, as discussed in greater detail below, by using professional custodians and other service providers, the Fund provides investors interested in exposure to bitcoin via the securities markets with important protections that are not always available to investors that invest directly in bitcoin, including 10 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’’). 11 Grayscale Investments, LLC v. Securities and Exchange Commission, et al., Case No. 22–1142 (the ‘‘Grayscale Order’’). 12 Id. PO 00000 Frm 00149 Fmt 4703 Sfmt 4703 protection against counterparty insolvency, cyber attacks, and other risks. For example, an exchange-traded vehicle such as the Fund, which will be subject to the registration and periodic reporting requirements of the 1933 Act and the 1934 Act, would offer U.S. investors an alternative to directing their bitcoin investments into loosely regulated offshore vehicles (including loosely regulated centralized exchanges that have since faced bankruptcy proceedings or other insolvencies). Background Bitcoin is a digital asset based on the decentralized, open source protocol of the peer-to-peer computer network launched in 2009 that governs the creation, movement, and ownership of bitcoin and hosts the public ledger, or ‘‘blockchain,’’ on which all bitcoin transactions are recorded (the ‘‘Bitcoin Network’’ or ‘‘Bitcoin’’). The decentralized nature of the Bitcoin Network allows parties to transact directly with one another based on cryptographic proof instead of relying on a trusted third party. The protocol also lays out the rate of issuance of new bitcoin within the Bitcoin Network, a rate that is reduced by half approximately every four years with an eventual hard cap of 21 million. It’s generally understood that the combination of these two features—a systemic hard cap of 21 million bitcoin and the ability to transact trustlessly with anyone connected to the Bitcoin Network—gives bitcoin its value. The first rule filing proposing to list an exchange-traded product to provide exposure to bitcoin in the U.S. was submitted by the Exchange on June 30, 2016.13 At that time, blockchain technology, and digital assets that utilized it, were relatively new to the broader public. The market capitalization of all bitcoin in existence at that time was approximately $10 billion. No registered offering of digital asset securities or shares in an investment vehicle with exposure to bitcoin or any other cryptocurrency had yet been conducted, and the regulated infrastructure for conducting a digital asset securities offering had not begun to develop.14 Similarly, regulated U.S. Bitcoin Futures contracts did not exist. The CFTC had determined that bitcoin 13 See Winklevoss Order. assets that are securities under U.S. law are referred to throughout this proposal as ‘‘digital asset securities.’’ All other digital assets, including bitcoin, are referred to interchangeably as ‘‘cryptocurrencies’’ or ‘‘virtual currencies.’’ The term ‘‘digital assets’’ refers to all digital assets, including both digital asset securities and cryptocurrencies, together. 14 Digital E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 is a commodity,15 but had not engaged in significant enforcement actions in the space. The New York Department of Financial Services (‘‘NYDFS’’) adopted its final BitLicense regulatory framework in 2015, but had only approved four entities to engage in activities relating to virtual currencies (whether through granting a BitLicense or a limited-purpose trust charter) as of June 30, 2016.16 While the first over-thecounter bitcoin fund launched in 2013, public trading was limited and the fund had only $60 million in assets.17 There were very few, if any, traditional financial institutions engaged in the space, whether through investment or providing services to digital asset companies. In January 2018, the Staff of the Commission noted in a letter to the Investment Company Institute and SIFMA that it was not aware, at that time, of a single custodian providing fund custodial services for digital assets.18 The digital assets financial ecosystem, including bitcoin, has progressed significantly in the intervening years. The development of a regulated market for digital asset securities has significantly evolved, with market participants having conducted registered public offerings of both digital asset securities 19 and shares in investment vehicles holding Bitcoin Futures.20 Additionally, licensed and 15 See ‘‘In the Matter of Coinflip, Inc.’’ (‘‘Coinflip’’) (CFTC Docket 15–29 (September 17, 2015)) (order instituting proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making findings and imposing remedial sanctions), in which the CFTC stated: ‘‘Section 1a(9) of the CEA defines ‘commodity’ to include, among other things, ‘all services, rights, and interests in which contracts for future delivery are presently or in the future dealt in.’ 7 U.S.C. 1a(9). The definition of a ‘commodity’ is broad. See, e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 (7th Cir. 1982). Bitcoin and other virtual currencies are encompassed in the definition and properly defined as commodities.’’ 16 A list of virtual currency businesses that are entities regulated by the NYDFS is available on the NYDFS website. See https://www.dfs.ny.gov/apps_ and_licensing/virtual_currency_businesses/ regulated_entities 17 Data as of March 31, 2016 according to publicly available filings. See Bitcoin Investment Trust Form S–1, dated May 27, 2016, available: https:// www.sec.gov/Archives/edgar/data/1588489/ 000095012316017801/filename1.htm. 18 See letter from Dalia Blass, Director, Division of Investment Management, U.S. Securities and Exchange Commission to Paul Schott Stevens, President & CEO, Investment Company Institute and Timothy W. Cameron, Asset Management Group—Head, Securities Industry and Financial Markets Association (January 18, 2018), available at https://www.sec.gov/divisions/investment/ noaction/2018/cryptocurrency-011818.htm. 19 See Prospectus supplement filed pursuant to Rule 424(b)(1) for INX Tokens (Registration No. 333–233363), available at: https://www.sec.gov/ Archives/edgar/data/1725882/00012139 0020023202/ea125858-424b1_inxlimited.htm. 20 See Prospectus filed by Stone Ridge Trust VI on behalf of NYDIG Bitcoin Strategy Fund VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 regulated service providers have emerged to provide fund custodial services for digital assets, among other services, including the Bitcoin Custodian. 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; 21 in May 2021, the Staff of the Commission released a statement permitting openend mutual funds to invest in cashsettled 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’’); 22 in September 2020, the Staff of the Commission released a noaction letter permitting certain brokerdealers to operate a non-custodial Alternative Trading System (‘‘ATS’’) for digital asset securities, subject to specified conditions; 23 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,24 and multiple transfer agents who provide services for digital asset securities registered with the Commission.25 Outside the Commission’s purview, the regulatory landscape has also changed significantly since 2016, and cryptocurrency markets have grown and Registration, available at: https://www.sec.gov/ Archives/edgar/data/1764894/00011931 2519309942/d693146d497.htm. 21 See Investment Advisers Act Release No. 6240 88 FR 14672 (March 9, 2023) (Safeguarding Advisory Client Assets). 22 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). 23 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. 24 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. 25 See, e.g., Form TA–1/A filed by Tokensoft Transfer Agent LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/ edgar/data/1794142/000179414219000001/ xslFTA1X01/primary_doc.xml. PO 00000 Frm 00150 Fmt 4703 Sfmt 4703 68243 evolved as well. The market for bitcoin is approximately 100 times larger, having at one point reached a market capitalization of over $1 trillion.26 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.27 Open interest was over $1.4 billion for the entirety of the period and at one point was over $2 billion.28 ETPs that primarily hold CME Bitcoin Futures have raised over $1 billion dollars in assets. The CFTC has exercised its regulatory jurisdiction in bringing a number of enforcement actions related to bitcoin and against trading platforms that offer cryptocurrency trading.29 As of February 14, 2023, the NYDFS has granted no fewer than thirty-four BitLicenses,30 including to established public payment companies like PayPal Holdings, Inc. and Square, Inc., and limited purpose trust charters to entities providing cryptocurrency custody services. In addition, the Treasury’s Office of Foreign Assets Control (‘‘OFAC’’) has brought enforcement actions over apparent violations of applicable sanctions laws in connection with the provision of wallet management services for digital assets.31 26 As of December 1, 2021, the total market capitalization of all bitcoin in circulation was approximately $1.08 trillion. 27 Data sourced from the CME Bitcoin Futures Report: 30 March 2023, available at: https:// www.cmegroup.com/markets/cryptocurrencies/ bitcoin/bitcoin.volume.htm. 28 See, e.g., Id. 29 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. 30 See https://www.dfs.ny.gov/virtual_currency_ businesses. 31 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) E:\FR\FM\03OCN1.SGM Continued 03OCN1 68244 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 In addition to the regulatory developments laid out above, more traditional financial market participants have become more active in cryptocurrency trading and investment activity: large insurance companies, asset managers, university endowments, pension funds, and even historically bitcoin skeptical fund managers have allocated to bitcoin investments. 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.’’ 32 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.33 Established U.S. exchange-traded companies like Tesla, Inc., MicroStrategy Incorporated, and Square, Inc., among others, have 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 across the U.S. market. Despite these developments, access for U.S. retail investors to gain exposure to bitcoin via a transparent and U.S. 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. 32 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. 33 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. VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 regulated, U.S. exchange-traded vehicle remains limited. Instead current options include: (i) facing the counter-party risk, legal uncertainty, technical risk, and complexity associated with accessing spot bitcoin; (ii) over-the-counter bitcoin funds (‘‘OTC Bitcoin Funds’’) with high management fees and potentially volatile premiums and discounts; 34 (iii) purchasing shares of operating companies that they believe will provide proxy exposure to bitcoin with limited disclosure about the associated risks; 35 or (iv) purchasing Bitcoin Futures ETFs, as defined below, which represent a sub-optimal structure for long-term investors that will cost 34 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/discount volatility. 35 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. PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 them significant amounts of money every year compared to Spot Bitcoin ETPs, as further discussed below. Meanwhile, investors in many other countries, including Canada and Brazil, are able to use more traditional exchange listed and traded products (including exchange-traded funds holding physical bitcoin) to gain exposure to bitcoin. Similarly, investors in Switzerland and across Europe have access to Exchange Traded Products which trade on regulated exchanges and provide exposure to a broad array of spot crypto assets. U.S. investors, by contrast, are left with fewer and more risky means of getting bitcoin exposure, as described above.36 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,37 Celsius Network LLC,38 BlockFi Inc.39 and Voyager Digital Holdings, Inc.40 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 Fund, 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. 36 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. 37 See FTX Trading Ltd., et al., Case No. 22– 11068. 38 See Celsius Network LLC, et al., Case No. 22– 10964. 39 See BlockFi Inc., Case No. 22–19361. 40 See Voyager Digital Holdings, Inc., et al., Case No. 22–10943. E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 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 more expensive, riskier U.S. based 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 an investment 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.41 Leaving aside the 41 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 VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 analysis of that standard until later in this proposal,42 the Exchange believes that the following rationale the Commission applied to a Bitcoin Futures ETF should result in the Commission approving this and other Spot Bitcoin ETP proposals: 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.43 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’’ 44 when Judge Rao stated ‘‘. . . the Commission in the Teucrium order recognizes that the 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. 42 As further outlined below, both the Exchange and the Sponsor believe that the Bitcoin Futures market represents a regulated market of significant size and that this proposal and others like it should be approved on this basis. 43 See Teucrium Approval at 21679. 44 Grayscale Investments, LLC v. Securities and Exchange Commission, et al., Case No. 22–1142. PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 68245 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. Further to this point, a Spot Bitcoin ETP that offers only in-kind creation and redemption may be less susceptible to potential manipulation than a Bitcoin Futures ETF 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 an 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/fund regardless of the price of the underlying index or reference rate. It is not logically supportable to conclude that the CME Bitcoin Futures market represents a significant market for a futures-based product, but 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.45 Specifically, the cost of rolling CME Bitcoin Futures contracts will cause the Bitcoin Futures ETFs to lag the performance of bitcoin itself and 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 nonfutures 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, which would also materially change the 45 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.fjXz9eAQW9zol0qpzhXDrrlpIVdoClo LXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql. E:\FR\FM\03OCN1.SGM 03OCN1 68246 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices risk profile associated with such an ETF. While Bitcoin Futures ETFs represent a useful trading tool, they are clearly sub-optimal as the sole exchange traded vehicle structure for U.S. investors that are looking for long-term exposure to bitcoin and could, based on the calculations above, unnecessarily cost U.S. investors significant amounts of money every year compared to Spot Bitcoin ETPs. The Exchange believes that any proposal to list and trade a Spot Bitcoin ETP should be reviewed by the Commission with this important investor protection context in mind. Based on the foregoing, the Exchange and Sponsor believe that an objective review of the proposals to list Spot Bitcoin ETPs compared to and in view of the Bitcoin Futures ETFs and the Bitcoin Futures Approvals as well as limitations of existing approved product structures, would lead to the conclusion that Spot Bitcoin ETPs would benefit U.S. investors and should be available to U.S. investors. As such, this proposal and other comparable proposals to list and trade Spot Bitcoin ETPs should be approved by the Commission. In summary, U.S. investors 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 CME began offering trading in Bitcoin Futures in 2017. Each contract represents five bitcoin and is based on the CME CF Bitcoin Reference Rate.46 The contracts trade and settle like other cash-settled commodity futures contracts. Nearly every measurable metric related to Bitcoin Futures has generally trended up since launch, although certain notional volume calculations have decreased roughly in line with the decrease in the price of bitcoin. For example, there were 143,215 Bitcoin Futures contracts traded in April 2023 (approximately $20.7 billion) compared to 193,182 ($5 billion), 104,713 ($3.9 billion), 118,714 ($42.7 billion), and 111,964 ($23.2 billion) contracts traded in April 2019, April 2020, April 2021, and April 2022, respectively.47 BILLING CODE 8011–01–P CME Bitcoin Futures Open Interest (01) 80K 16K 701< 60K 12K c 8.... - SOK iii 0 # . 40K i: ., ,. iii 6K 30K j w 20K 10K : _ru111111111ll ll111I I 2019 46 The CME CF Bitcoin Reference Rate is based on a publicly available calculation methodology based on pricing sourced from several crypto exchanges VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 OK 2021 .2020 2022 and trading platforms, including Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. PO 00000 Frm 00153 Fmt 4703 Sfmt 4725 2023. 47 Source: E:\FR\FM\03OCN1.SGM CME, Yahoo Finance 4/30/23. 03OCN1 EN03OC23.011</GPH> ddrumheller on DSK120RN23PROD with NOTICES1 :201c! 68247 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices The number of large open interest holders 48 and unique accounts trading Bitcoin Futures have both increased, even in the face of heightened Bitcoin price volatility. CME Bitcoin Futures Large Open Interest Holders (LOIH) 120 110 100 fIll -0 0 :c ti # 90 80 70 60 50 40 30 20 10 2019 2020 2021 2023 2022 ·CMEBitcoinfutures.Average,DaJtyVolurne{ADV) · Elsi< &Oi( C:i:ik; '121< 11R • • ·······'•$511t. ·. ··· ,sok.:: ······1=i •.·.··•·:••··1:::j • ·· -·· 25R0j, 201{ ·W • isk ······· )1ok • ISK ddrumheller on DSK120RN23PROD with NOTICES1 The Sponsor further believes that publicly available research, including research done as part of rule filings proposing to list and trade shares of Spot Bitcoin ETPs, corroborates the 48 A large open interest holder in Bitcoin Futures is an entity that holds at least 25 contracts, which is the equivalent of 125 bitcoin. At a price of approximately $29,268.81 per bitcoin on 4/30/2023, more than 100 firms had outstanding positions of greater than $3.65 million in Bitcoin Futures. 49 See Exchange Act Releases No. 94080 (January 27, 2022), 87 FR 5527 (April 12, 2022) (specifically ‘‘Amendment No. 1 to the Proposed Rule Change To List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity- VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 overall trend outlined above and supports the thesis that the Bitcoin Futures pricing leads the spot market and, thus, a person attempting to manipulate the Shares would also have to trade on that market to manipulate the ETP. Specifically, the Sponsor believes that such research indicates that Bitcoin Futures lead the bitcoin spot market in price formation.49 Based Trust Shares’’); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844 (May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28, 2021), 86 FR 60695 (November 3, 2021). See also Hu, Y., Hou, Y. and Oxley, L. (2019). ‘‘What role do futures markets play in Bitcoin pricing? Causality, cointegration and price discovery from a time-varying perspective’’ (available at: https:// www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This academic research paper concludes that ‘‘There exist no episodes where the Bitcoin spot markets dominates the price discovery processes with regard to Bitcoin futures. This points to a conclusion that the price formation originates solely in the Bitcoin futures market. We can, therefore, conclude that the Bitcoin futures markets dominate the dynamic price discovery process based upon time-varying information share measures. Overall, price discovery seems to occur in the Bitcoin futures markets rather than the underlying spot market based upon a time-varying perspective.’’ PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 E:\FR\FM\03OCN1.SGM 03OCN1 EN03OC23.012</GPH> BILLING CODE 8011–01–C EN03OC23.013</GPH> 2023 68248 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices Section 6(b)(5) and the Applicable Standards (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices requisite surveillance-sharing agreement.56 The Commission has approved numerous series of Trust Issued Receipts,50 including Commodity-Based Trust Shares,51 to be listed on U.S. national securities exchanges. In order for any proposed rule change from an exchange to be approved, the Commission must determine that, among other things, the proposal is consistent with the requirements of Section 6(b)(5) of the Act, specifically including: (i) the requirement that a national securities exchange’s rules are designed to prevent fraudulent and manipulative acts and practices; 52 and (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that this proposal is consistent with the requirements of Section 6(b)(5) of the Act and that this filing sufficiently demonstrates that the CME Bitcoin Futures market represents a regulated market of significant size and that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal. In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 53 with a regulated market of significant size. Both the Exchange and CME are members of ISG.54 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.55 The Commission has also recognized that the ‘‘regulated market of significant size’’ standard is not the only means for satisfying Section 6(b)(5) of the act, specifically providing that a listing exchange could demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the (a) Manipulation of the ETP According to the research and analysis 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 Reference Rate) 57 would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because the Reference Rate is based on spot prices. Further, the Fund only allows for inkind creation and redemption, which, as further described below, reduces the potential for manipulation of the price of the Shares through manipulation of the Reference Rate 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 trading of the Shares. 50 See Exchange Rule 14.11(f). Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 52 As the Exchange has stated in a number of other public documents, it continues to believe that bitcoin is resistant to price manipulation and that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ exist to justify dispensing with the requisite surveillance sharing agreement. The geographically diverse and continuous nature of bitcoin trading render it difficult and prohibitively costly to manipulate the price of bitcoin. The fragmentation across bitcoin platforms, the relatively slow speed of transactions, and the capital necessary to maintain a significant presence on each trading platform make manipulation of bitcoin prices through continuous trading activity challenging. To the extent that there are bitcoin exchanges engaged in or allowing wash trading or other activity intended to manipulate the price of bitcoin on other markets, such pricing does not normally impact prices on other exchange because participants will generally ignore markets with quotes that they deem non-executable. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin exchange or OTC platform. As a result, the potential for manipulation on a trading platform would require overcoming the liquidity supply of such arbitrageurs who are effectively eliminating any cross-market pricing differences. ddrumheller on DSK120RN23PROD with NOTICES1 51 Commodity-Based VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 53 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in the Intermarket Surveillance Group (‘‘ISG’’) constitutes such a surveillance sharing agreement. See Securities Exchange Act Release No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR–NYSEArca–2019–39) (the ‘‘Wilshire Phoenix Disapproval’’). 54 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 55 See Wilshire Phoenix Disapproval. PO 00000 Frm 00155 Fmt 4703 Sfmt 4703 (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 influencing prices in the Bitcoin Futures market or spot market for a number of reasons, including the significant daily trading volume in the Bitcoin Futures market, the size of bitcoin’s market capitalization, 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. As the court found in the Grayscale Order, the Exchange and the Sponsor submit that ‘‘[b]ecause the spot market is deeper and more liquid than the futures market, 56 See Winklevoss Order at 37580. The Commission has also specifically noted that it ‘‘is not applying a ‘cannot be manipulated’ standard; instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.’’ Id. at 37582. 57 As further described below, the ‘‘Reference Rate’’ for the Fund is the CME CF Bitcoin Reference Rate. E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 manipulation should be more difficult, not less.’’ (c) Other Means To Prevent Fraudulent and Manipulative Acts and Practices 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 in this case, in addition to the existence of a surveillance sharing agreement that meets the Commission’s previously articulated standards. 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 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,58 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 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 Shares.59 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 the 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 58 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. 59 For additional information regarding ISG and the hallmarks of surveillance-sharing between ISG members, see https://isgportal.org/overview. VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 necessary to detect and investigate potential manipulation in the trading of the Shares.60 Further, and consistent with prior points above, offering only in-kind creation and redemption will also provide unique protections against potential attempts to manipulate the price of the Shares. While the Sponsor believes that the Reference Rate which it uses to value the Fund’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 Reference Rate significantly less important. Specifically, because the Fund will not accept cash to buy bitcoin in order to create new Shares or, barring extraordinary circumstances including as described in the Registration Statement, be forced to sell bitcoin to pay cash for redeemed Shares, the price that the Sponsor uses to value the Fund’s bitcoin is not a particularly important tool to prevent price manipulation in the Shares.61 When authorized participants are creating Shares with the Fund, 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 Fund’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 Fund 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 Reference Rate because there is little financial incentive to do so. (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 60 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. 61 While the Reference Rate will not be particularly important for the creation and redemption process, it will be used for calculating fees. PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 68249 has grown the quantifiable investor protection issues to U.S. investors including in connection with 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 for this proposal 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 to access bitcoin in a regulated and transparent exchange-traded vehicle that would act to limit risk and benefit U.S. investors by: (i) reducing premium and discount volatility as compared to OTC investment vehicles; (ii) increasing competitive pressure on management fees resulting in fee compression/ reductions; (iii) reducing risks and costs as compared to those associated with investing in Bitcoin Futures ETFs and operating companies that represent imperfect proxies for bitcoin exposure; and (iv) providing an alternative to custodying spot bitcoin. Franklin Templeton Digital Holdings Trust Delaware Trust Company is the trustee (‘‘Trustee’’). Bank of New York Mellon serves as the Trust’s administrator (the ‘‘Administrator’’) and transfer agent (‘‘Transfer Agent’’). The Bitcoin Custodian will be responsible for safekeeping of the Fund’s bitcoin. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest and ownership in the Fund . The Fund’s assets will consist of bitcoin held by the Bitcoin Custodian on behalf of the Fund and cash holdings, if any, held by the Cash Custodian. According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as amended,62 nor a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’), and none of the Trust, the Fund or the Sponsor is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. When the Fund sells or redeems its Shares, it will do so in ‘‘in-kind’’ transactions in large blocks of Shares (a ‘‘Creation Basket’’) at the Fund’s NAV. 62 15 E:\FR\FM\03OCN1.SGM U.S.C. 80a–1. 03OCN1 68250 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices Authorized participants will deliver, or facilitate the delivery of, bitcoin to the Fund’s account with the Bitcoin Custodian in exchange for Shares when they purchase Shares, and the Fund, through the Bitcoin Custodian, will deliver bitcoin to such authorized participants when they redeem Shares. 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 Fund’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 Fund. ddrumheller on DSK120RN23PROD with NOTICES1 Investment Objective According to the Registration Statement and as further described below, the investment objective of the Fund is to generally reflect the performance of the price of bitcoin before payment of the Fund’s expenses. In seeking to achieve its investment objective, the Fund will hold bitcoin and may hold cash or cash equivalents. The Fund will value its Shares daily based on the value of bitcoin as reflected by the CME CF Bitcoin Reference Rate (the ‘‘Reference Rate’’), which is an independently calculated value based on an aggregation of executed trade flow of major bitcoin spot exchanges. Specifically, the Reference Rate is calculated based on certain transactions of all of its constituent bitcoin exchanges, which are currently Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX Digital, and which may change from time to time. If the Reference Rate is not available or the Sponsor determines, in its sole discretion, that the Reference Rate should not be used, the Fund’s holdings may be fair valued in accordance with the policy approved by the Sponsor. The Reference Rate As described in the Registration Statement, the Fund will use the Reference Rate to calculate the Fund’s NAV. The Reference Rate was created to facilitate financial products based on bitcoin. It serves as a once-a-day benchmark rate of the U.S. dollar price of bitcoin (USD/BTC), calculated as of 4 p.m. Eastern time. The Reference Rate aggregates the trade flow of several bitcoin exchanges, during an observation window between 3:00 p.m. and 4:00 p.m. Eastern time into the U.S. dollar price of one bitcoin at 4:00 p.m. Eastern time. Specifically, the Reference Rate is calculated based on the ‘‘Relevant Transactions’’ (as defined below) of all of its constituent bitcoin VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 exchanges, which are currently Bitstamp, Coinbase, itBit, Kraken, Gemini, and LMAX Digital (the ‘‘Constituent Bitcoin Exchanges’’), as follows: • All Relevant Transactions are added to a joint list, recording the time of execution, trade price and size for each transaction. • The list is partitioned by timestamp into 12 equally sized time intervals of 5 (five) minute length. • For each partition separately, the volume-weighted median trade price is calculated from the trade prices and sizes of all Relevant Transactions, i.e., across all Constituent Bitcoin Exchanges. A volume-weighted median differs from a standard median in that a weighting factor, in this case trade size, is factored into the calculation. • The Reference Rate is then determined by the arithmetic mean of the volume-weighted medians of all partitions. Availability of Information In addition to the price transparency of the Reference Rate, the Fund will provide information regarding the Fund’s bitcoin holdings as well as additional data regarding the Fund. The Fund 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 Fund’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 Fund, 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 63 in relation to the NAV as of the time the NAV is 63 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. PO 00000 Frm 00157 Fmt 4703 Sfmt 4703 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 Fund, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Fund will also disseminate the Fund’s holdings on a daily basis on the Fund’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 Reference Rate, including key elements of how the Reference Rate is calculated, will be publicly available at https:// www.cfbenchmarks.com. The NAV for the Fund 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 Reference Rate. 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. The Bitcoin Custodian The Bitcoin Custodian carefully considers the design of the physical, operational and cryptographic systems for secure storage of the Fund’s private keys in an effort to lower the risk of loss or theft. The Bitcoin Custodian utilizes a variety of security measures to ensure that private keys necessary to transfer digital assets remain uncompromised and that the Fund maintains exclusive ownership of its assets. The Bitcoin Custodian will keep a substantial portion of the private keys associated with the Trust’s bitcoin in ‘‘cold storage’’ 64 or similarly secure 64 The term ‘‘cold storage’’ refers to a safeguarding method by which the private keys corresponding to bitcoins stored on a digital wallet are removed from any computers actively connected to the internet. Cold storage of private keys may involve keeping such wallet on a non-networked computer or E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices technology (the ‘‘Cold Vault Balance’’). The hardware, software, systems, and procedures of the Bitcoin Custodian may not be available or cost-effective for many investors to access directly. 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, acting alone or together, will be able to access or use any of the private keys that hold the Fund’s bitcoin. ddrumheller on DSK120RN23PROD with NOTICES1 Net Asset Value NAV means the total assets of the Fund including, but not limited to, all bitcoin and cash, if any, less total liabilities of the Fund, each determined on the basis of generally accepted accounting principles. The Administrator will determine the NAV of the Fund 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 Fund is the aggregate value of the Fund’s assets less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the Fund’s NAV, the Administrator values the bitcoin held by the Fund based on the price set by the Reference Rate 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 Fund, 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 Fund as of the electronic device or storing the public key and private keys relating to the digital wallet on a storage device (for example, a USB thumb drive) or printed medium (for example, papyrus or paper) and deleting the digital wallet from all computers. VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 opening of business on that business day, adjusted for the amount of bitcoin constituting estimated accrued but unpaid fees and expenses of the Fund as of the opening of business on that business day, by the quotient of the number of Shares outstanding at the opening of business divided by the number of Shares in a Creation Unit. The procedures by which an authorized participant can redeem one or more Creation Units mirror the procedures for the creation of Creation Units. 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 Fund’s NAV will be calculated daily and that these values and information about the assets of the Fund will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a trust that holds a specified commodity 65 deposited with the trust; (b) issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity; and (c) when aggregated in the same specified minimum number, may be redeemed at a holder’s request by such trust which will deliver to the redeeming holder the quantity of the underlying commodity. Upon termination of the Fund, 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 Fund in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent 65 For purposes of Rule 14.11(e)(4), the term commodity takes on the definition of the term as provided in the Commodity Exchange Act. As noted above, the CFTC has opined that Bitcoin is a commodity as defined in Section 1a(9) of the Commodity Exchange Act. See Coinflip. PO 00000 Frm 00158 Fmt 4703 Sfmt 4703 68251 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 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 E:\FR\FM\03OCN1.SGM 03OCN1 68252 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices 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. ddrumheller on DSK120RN23PROD with NOTICES1 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 Fund 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 Fund or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and Bitcoin Futures via ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement.66 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 66 For a list of the current members and affiliate members of ISG, see www.isgportal.com. VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 procedures for the creation and redemption of Creation Units (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 Fund’s NAV are disseminated; (iv) the risks involved in trading the Shares outside of Regular Trading Hours 67 when an updated IIV will not be calculated or publicly disseminated; (v) the requirement that members deliver a prospectus to investors purchasing newly issued Shares prior to or concurrently with the confirmation of a transaction; and (vi) trading information. In addition, the Information Circular will advise members, prior to the commencement of trading, of the prospectus delivery requirements applicable to the Shares. Members purchasing the Shares for resale to investors will deliver a prospectus to such investors. The Information Circular will also discuss any exemptive, noaction and interpretive relief granted by the Commission from any rules under the Act. 2. Statutory Basis The Exchange believes that the proposal is consistent with Section 6(b) of the Act 68 in general and Section 6(b)(5) of the Act 69 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. The Commission has approved numerous series of Trust Issued Receipts, including Commodity-Based Trust Shares, 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 67 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern time. 68 15 U.S.C. 78f. 69 15 U.S.C. 78f(b)(5). PO 00000 Frm 00159 Fmt 4703 Sfmt 4703 manipulative acts and practices; 70 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, in conjunction with precedent filings, 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 71 with a regulated 70 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 and impractical. 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 nonexecutable. 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. 71 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 E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices market of significant size. Both the Exchange and CME are members of ISG. 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.72 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.73 ddrumheller on DSK120RN23PROD with NOTICES1 (a) Manipulation of the ETP According to the research and analysis 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 Reference Rate) 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 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 ISG constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval). 72 Id. 73 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. VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 Reference Rate is based on spot prices. Further, the Fund only allows for inkind creation and redemption, which, as further described below, reduces the potential for manipulation of the Shares through manipulation of the Reference Rate 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 influence on prices in the Bitcoin Futures market or spot market for a number of reasons, including the significant daily trading volume in the Bitcoin Futures market, the size of bitcoin’s market capitalization, 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. As the court found in the Grayscale Order, the Exchange and the Sponsor submit that ‘‘[b]ecause the spot market is deeper and more liquid than the futures market, manipulation should be more difficult, not less.’’ (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 in this case, in addition to the existence of a surveillance sharing agreement that meets the Commission’s previously articulated standards. The Exchange is further proposing to take additional steps beyond 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 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 PO 00000 Frm 00160 Fmt 4703 Sfmt 4703 68253 USD denominated Bitcoin trading,74 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 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 Shares.75 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 the 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 Shares.76 Further, and consistent with prior points above, offering only in-kind creation and redemption will also provide unique protections against potential attempts to manipulate the price of the Shares. While the Sponsor believes that the Reference Rate which it uses to value the Fund’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 Reference Rate significantly less important. Specifically, because the Fund will not accept cash to buy bitcoin in order to create new Shares or, barring extraordinary circumstances, be forced to sell bitcoin to pay cash for redeemed Shares, the price that the Sponsor uses to value the Fund’s bitcoin is not particularly important. When authorized participants are creating 74 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. 75 For additional information regarding ISG and the hallmarks of surveillance-sharing between ISG members, see https://isgportal.org/overview. 76 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. E:\FR\FM\03OCN1.SGM 03OCN1 68254 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 Shares, 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 Fund’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 Fund 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 Reference Rate because there is little financial incentive to do so. (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 including in connection with 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 for this proposal 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 to access bitcoin in a regulated and transparent exchange-traded vehicle that would act to limit risk and benefit U.S. investors by: (i) reducing premium and discount volatility as compared to OTC investment vehicles; (ii) increasing competitive pressure on management fees resulting in fee compression/ reductions; (iii) reducing risks and costs as compared to those associated with investing in Bitcoin Futures ETFs and operating companies that represent 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 VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 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 Fund 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 Fund and the Shares. In addition to the price transparency of the Reference Rate, the Fund will provide information regarding the Fund’s bitcoin holdings as well as additional data regarding the Fund. The Fund will provide an IIV per Share updated every 15 seconds, as calculated by the Exchange or a thirdparty financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Fund’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 PO 00000 Frm 00161 Fmt 4703 Sfmt 4703 one or more major market data vendors. In addition, the IIV will be available through on-line information services. The website for the Fund, 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 Fund, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The Fund will also disseminate the Fund’s holdings on a daily basis on the Fund’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 Reference Rate, including key elements of how the Reference Rate is calculated, will be publicly available at www.cfbenchmarks.com. The NAV for the Fund 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 Reference Rate. 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. E:\FR\FM\03OCN1.SGM 03OCN1 Federal Register / Vol. 88, No. 190 / Tuesday, October 3, 2023 / Notices 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 herein, 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 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. ddrumheller on DSK120RN23PROD with NOTICES1 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. by order approve or disapprove such proposed rule change, or VerDate Sep<11>2014 20:04 Oct 02, 2023 Jkt 262001 B. institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– CboeBZX–2023–072 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–2023–072. 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–2023–072 and should be submitted on or before October 24, 2023. PO 00000 Frm 00162 Fmt 4703 Sfmt 4703 68255 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.77 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2023–21787 Filed 10–2–23; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–98570; File No. SR–ICEEU– 2023–019] Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the Model Risk Policy September 27, 2023. I. Introduction On August 4, 2023, ICE Clear Europe Limited (‘‘ICE Clear Europe’’ or ‘‘the Clearing House’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4,2 a proposed rule change to amend its Model Risk Policy (the ‘‘Policy’’). The proposed rule change was published for comment in the Federal Register on August 21, 2023.3 The Commission did not receive comments regarding the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. II. Description of the Proposed Rule Change A. Background ICE Clear Europe is registered with the Commission as a clearing agency for the purpose of clearing security-based swaps. In its role as a clearing agency for security-based swaps, ICE Clear Europe maintains the Policy. The purpose of the Policy is to establish standards and principles for managing and mitigating the impact to ICE Clear Europe’s business caused by model error, model failure or inappropriate model use. The proposed rule change would make updates and amendments to the Policy. ICE Clear Europe is making these changes to implement the results of internal and external reviews of the Policy. The Policy has five sections that 77 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to Amendments to the Model Risk Policy, Exchange Act Release No. 98138 (August 15, 2023); 88 FR 56901 (August 21, 2023) (SR–ICEEU–2023– 019) (‘‘Notice’’). 1 15 E:\FR\FM\03OCN1.SGM 03OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68240-68255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21787]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98562; File No. SR-CboeBZX-2023-072]

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

September 27, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on September 26, 2023, Cboe BZX Exchange, Inc. (the ``Exchange''
or ``BZX'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the Exchange. The

[[Page 68241]]

Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the Franklin Bitcoin
ETF (the ``Fund''), a series of Franklin Templeton Digital Holdings
Trust (the ``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares.
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\3\ The Trust was formed as a Delaware statutory trust on
September 6, 2023, 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
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ Franklin Holdings, LLC is the
sponsor of the Fund (``Sponsor''). The Shares will be registered with
the Commission by means of the Trust's registration statement on Form
S-1 (the ``Registration Statement'').\6\ Coinbase Custody Trust
Company, LLC (the ``Bitcoin Custodian''), which is a third-party U.S.-
based trust company and qualified custodian, will be responsible for
custody of the Fund's bitcoin holdings and Bank of New York Mellon will
be the custodian for the Fund's cash holdings, if any (the ``Cash
Custodian'' and together with the Bitcoin Custodian, the
``Custodians'').
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\4\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\5\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
\6\ See Form S-1 Registration Statement filed on September 12,
2023 (Registration No. 333-274474). The Registration Statement is
not yet effective, and the Shares will not trade on the Exchange
until such time that the Registration Statement is effective.
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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.\7\
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.\8\

[[Page 68242]]

Further to this point, the Commission's prior orders have noted that
the spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other commodities and currencies. The
Commission specifically noted in the Winklevoss Order that the First
Gold Approval Order ``was based on an assumption that the currency
market and the spot gold market were largely unregulated.'' \9\
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\7\ 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'').
\8\ 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).
\9\ 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.\10\ 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; a position that
represents a departure from 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. In the recently decided Grayscale Investments, LLC v.
Securities and Exchange Commission,\11\ however, the court addressed
this conflict by finding that the SEC had failed to provide a coherent
explanation as to why it had approved the Bitcoin Futures ETPs while
disapproving the proposal to list and trade shares of the Grayscale
Bitcoin Trust and vacating the disapproval order.\12\ 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,
consistent with the Teucrium precedent and in view of the court's
findings relating to the Grayscale Order.
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\10\ 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'').
\11\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142 (the ``Grayscale Order'').
\12\ Id.
---------------------------------------------------------------------------

Finally, as discussed in greater detail below, by using
professional custodians and other service providers, the Fund provides
investors interested in exposure to bitcoin via the securities markets
with important protections that are not always available to investors
that invest directly in bitcoin, including protection against
counterparty insolvency, cyber attacks, and other risks. For example,
an exchange-traded vehicle such as the Fund, which will be subject to
the registration and periodic reporting requirements of the 1933 Act
and the 1934 Act, would offer U.S. investors an alternative to
directing their bitcoin investments into loosely regulated offshore
vehicles (including loosely regulated centralized exchanges that have
since faced bankruptcy proceedings or other insolvencies).

Background

Bitcoin is a digital asset based on the decentralized, open source
protocol of the peer-to-peer computer network launched in 2009 that
governs the creation, movement, and ownership of bitcoin and hosts the
public ledger, or ``blockchain,'' on which all bitcoin transactions are
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized
nature of the Bitcoin Network allows parties to transact directly with
one another based on cryptographic proof instead of relying on a
trusted third party. The protocol also lays out the rate of issuance of
new bitcoin within the Bitcoin Network, a rate that is reduced by half
approximately every four years with an eventual hard cap of 21 million.
It's generally understood that the combination of these two features--a
systemic hard cap of 21 million bitcoin and the ability to transact
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin
its value. The first rule filing proposing to list an exchange-traded
product to provide exposure to bitcoin in the U.S. was submitted by the
Exchange on June 30, 2016.\13\ At that time, blockchain technology, and
digital assets that utilized it, were relatively new to the broader
public. The market capitalization of all bitcoin in existence at that
time was approximately $10 billion. No registered offering of digital
asset securities or shares in an investment vehicle with exposure to
bitcoin or any other cryptocurrency had yet been conducted, and the
regulated infrastructure for conducting a digital asset securities
offering had not begun to develop.\14\ Similarly, regulated U.S.
Bitcoin Futures contracts did not exist. The CFTC had determined that
bitcoin

[[Page 68243]]

is a commodity,\15\ but had not engaged in significant enforcement
actions in the space. The New York Department of Financial Services
(``NYDFS'') adopted its final BitLicense regulatory framework in 2015,
but had only approved four entities to engage in activities relating to
virtual currencies (whether through granting a BitLicense or a limited-
purpose trust charter) as of June 30, 2016.\16\ While the first over-
the-counter bitcoin fund launched in 2013, public trading was limited
and the fund had only $60 million in assets.\17\ There were very few,
if any, traditional financial institutions engaged in the space,
whether through investment or providing services to digital asset
companies. In January 2018, the Staff of the Commission noted in a
letter to the Investment Company Institute and SIFMA that it was not
aware, at that time, of a single custodian providing fund custodial
services for digital assets.\18\ The digital assets financial
ecosystem, including bitcoin, has progressed significantly in the
intervening years. The development of a regulated market for digital
asset securities has significantly evolved, with market participants
having conducted registered public offerings of both digital asset
securities \19\ and shares in investment vehicles holding Bitcoin
Futures.\20\ Additionally, licensed and regulated service providers
have emerged to provide fund custodial services for digital assets,
among other services, including the Bitcoin Custodian. 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; \21\ 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''); \22\ 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; \23\ 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,\24\ and multiple transfer agents who
provide services for digital asset securities registered with the
Commission.\25\
---------------------------------------------------------------------------

\13\ See Winklevoss Order.
\14\ Digital assets that are securities under U.S. law are
referred to throughout this proposal as ``digital asset
securities.'' All other digital assets, including bitcoin, are
referred to interchangeably as ``cryptocurrencies'' or ``virtual
currencies.'' The term ``digital assets'' refers to all digital
assets, including both digital asset securities and
cryptocurrencies, together.
\15\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'')
(CFTC Docket 15-29 (September 17, 2015)) (order instituting
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making
findings and imposing remedial sanctions), in which the CFTC stated:
``Section 1a(9) of the CEA defines `commodity' to include, among
other things, `all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See,
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142
(7th Cir. 1982). Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.''
\16\ A list of virtual currency businesses that are entities
regulated by the NYDFS is available on the NYDFS website. See
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities
\17\ Data as of March 31, 2016 according to publicly available
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016,
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
\18\ See letter from Dalia Blass, Director, Division of
Investment Management, U.S. Securities and Exchange Commission to
Paul Schott Stevens, President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management Group--Head, Securities
Industry and Financial Markets Association (January 18, 2018),
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
\19\ See Prospectus supplement filed pursuant to Rule 424(b)(1)
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
\20\ See 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.
\21\ See Investment Advisers Act Release No. 6240 88 FR 14672
(March 9, 2023) (Safeguarding Advisory Client Assets).
\22\ 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).
\23\ 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.
\24\ 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.
\25\ 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.
---------------------------------------------------------------------------

Outside the Commission's purview, the regulatory landscape has also
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 capitalization of over $1
trillion.\26\ 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.\27\ Open interest was over $1.4 billion
for the entirety of the period and at one point was over $2
billion.\28\ ETPs that primarily hold CME Bitcoin Futures have raised
over $1 billion dollars in assets. The CFTC has exercised its
regulatory jurisdiction in bringing a number of enforcement actions
related to bitcoin and against trading platforms that offer
cryptocurrency trading.\29\ As of February 14, 2023, the NYDFS has
granted no fewer than thirty-four BitLicenses,\30\ including to
established public payment companies like PayPal Holdings, Inc. and
Square, Inc., and limited purpose trust charters to entities providing
cryptocurrency custody services. In addition, the Treasury's Office of
Foreign Assets Control (``OFAC'') has brought enforcement actions over
apparent violations of applicable sanctions laws in connection with the
provision of wallet management services for digital assets.\31\
---------------------------------------------------------------------------

\26\ As of December 1, 2021, the total market capitalization of
all bitcoin in circulation was approximately $1.08 trillion.
\27\ Data sourced from the CME Bitcoin Futures Report: 30 March
2023, available at: https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.htm.
\28\ See, e.g., Id.
\29\ 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.
\30\ See https://www.dfs.ny.gov/virtual_currency_businesses.
\31\ 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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[[Page 68244]]

In addition to the regulatory developments laid out above, more
traditional financial market participants have become more active in
cryptocurrency trading and investment activity: large insurance
companies, asset managers, university endowments, pension funds, and
even historically bitcoin skeptical fund managers have allocated to
bitcoin investments. 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.''
\32\ 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.\33\ Established U.S. exchange-traded companies like Tesla,
Inc., MicroStrategy Incorporated, and Square, Inc., among others, have
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 across the U.S. market.
---------------------------------------------------------------------------

\32\ 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.
\33\ 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.
---------------------------------------------------------------------------

Despite these developments, access for U.S. retail investors to
gain exposure to bitcoin via a transparent and U.S. regulated, U.S.
exchange-traded vehicle remains limited. Instead current options
include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot bitcoin;
(ii) over-the-counter bitcoin funds (``OTC Bitcoin Funds'') with high
management fees and potentially volatile premiums and discounts; \34\
(iii) purchasing shares of operating companies that they believe will
provide proxy exposure to bitcoin with limited disclosure about the
associated risks; \35\ or (iv) purchasing Bitcoin Futures ETFs, as
defined below, which represent a sub-optimal structure for long-term
investors that will cost them significant amounts of money every year
compared to Spot Bitcoin ETPs, as further discussed below. Meanwhile,
investors in many other countries, including Canada and Brazil, are
able to use more traditional exchange listed and traded products
(including exchange-traded funds holding physical bitcoin) to gain
exposure to bitcoin. Similarly, investors in Switzerland and across
Europe have access to Exchange Traded Products which trade on regulated
exchanges and provide exposure to a broad array of spot crypto assets.
U.S. investors, by contrast, are left with fewer and more risky means
of getting bitcoin exposure, as described above.\36\
---------------------------------------------------------------------------

\34\ 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/discount volatility.
\35\ 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.
\36\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot Bitcoin ETPs.
---------------------------------------------------------------------------

To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor
assets to significant risk because investors that would otherwise seek
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,\37\ Celsius Network LLC,\38\ BlockFi Inc.\39\ and Voyager Digital
Holdings, Inc.\40\ 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 Fund, 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.
---------------------------------------------------------------------------

\37\ See FTX Trading Ltd., et al., Case No. 22-11068.
\38\ See Celsius Network LLC, et al., Case No. 22-10964.
\39\ See BlockFi Inc., Case No. 22-19361.
\40\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.

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[[Page 68245]]

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 more expensive, riskier U.S. based
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 an investment 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.\41\ Leaving aside the analysis of that
standard until later in this proposal,\42\ the Exchange believes that
the following rationale the Commission applied to a Bitcoin Futures ETF
should result in the Commission approving this and other Spot Bitcoin
ETP proposals:
---------------------------------------------------------------------------

\41\ 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.
\42\ As further outlined below, both the Exchange and the
Sponsor believe that the Bitcoin Futures market represents a
regulated market of significant size and that this proposal and
others like it should be approved on this basis.

The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably
be relied upon to capture the effects on the CME Bitcoin Futures
market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME Bitcoin Futures
contracts, whether that attempt is made by directly trading on the
CME Bitcoin Futures market or indirectly by trading outside of the
CME Bitcoin Futures market. As such, when the CME shares its
surveillance information with Arca, the information would assist in
detecting and deterring fraudulent or manipulative misconduct
related to the non-cash assets held by the proposed ETP.\43\
---------------------------------------------------------------------------

\43\ 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'' \44\
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.
---------------------------------------------------------------------------

\44\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142.
---------------------------------------------------------------------------

Further to this point, a Spot Bitcoin ETP that offers only in-kind
creation and redemption may be less susceptible to potential
manipulation than a Bitcoin Futures ETF 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 an 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/fund regardless of the
price of the underlying index or reference rate. It is not logically
supportable to conclude that the CME Bitcoin Futures market represents
a significant market for a futures-based product, but 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.\45\ Specifically, the cost of rolling CME Bitcoin Futures
contracts will cause the Bitcoin Futures ETFs to lag the performance of
bitcoin itself and 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, which would
also materially change the

[[Page 68246]]

risk profile associated with such an ETF. While Bitcoin Futures ETFs
represent a useful trading tool, they are clearly sub-optimal as the
sole exchange traded vehicle structure for U.S. investors that are
looking for long-term exposure to bitcoin and could, based on the
calculations above, unnecessarily cost U.S. investors significant
amounts of money every year compared to Spot Bitcoin ETPs. 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.
---------------------------------------------------------------------------

\45\ 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.
---------------------------------------------------------------------------

Based on the foregoing, the Exchange and Sponsor believe that an
objective review of the proposals to list Spot Bitcoin ETPs compared to
and in view of the Bitcoin Futures ETFs and the Bitcoin Futures
Approvals as well as limitations of existing approved product
structures, would lead to the conclusion that Spot Bitcoin ETPs would
benefit U.S. investors and should be available to U.S. investors. As
such, this proposal and other comparable proposals to list and trade
Spot Bitcoin ETPs should be approved by the Commission. In summary,
U.S. investors 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
CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate.\46\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric
related to Bitcoin Futures has generally trended up since launch,
although certain notional volume calculations have decreased roughly in
line with the decrease in the price of bitcoin. For example, there were
143,215 Bitcoin Futures contracts traded in April 2023 (approximately
$20.7 billion) compared to 193,182 ($5 billion), 104,713 ($3.9
billion), 118,714 ($42.7 billion), and 111,964 ($23.2 billion)
contracts traded in April 2019, April 2020, April 2021, and April 2022,
respectively.\47\
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\46\ The CME CF Bitcoin Reference Rate is based on a publicly
available calculation methodology based on pricing sourced from
several crypto exchanges and trading platforms, including Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
\47\ Source: CME, Yahoo Finance 4/30/23.
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BILLING CODE 8011-01-P
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[[Page 68247]]

The number of large open interest holders \48\ and unique accounts
trading Bitcoin Futures have both increased, even in the face of
heightened Bitcoin price volatility.
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\48\ A large open interest holder in Bitcoin Futures is an
entity that holds at least 25 contracts, which is the equivalent of
125 bitcoin. At a price of approximately $29,268.81 per bitcoin on
4/30/2023, more than 100 firms had outstanding positions of greater
than $3.65 million in Bitcoin Futures.
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[GRAPHIC] [TIFF OMITTED] TN03OC23.013

BILLING CODE 8011-01-C
The Sponsor further believes that publicly available research,
including research done as part of rule filings proposing to list and
trade shares of Spot Bitcoin ETPs, corroborates the overall trend
outlined above and supports the thesis that the Bitcoin Futures pricing
leads the spot market and, thus, a person attempting to manipulate the
Shares would also have to trade on that market to manipulate the ETP.
Specifically, the Sponsor believes that such research indicates that
Bitcoin Futures lead the bitcoin spot market in price formation.\49\
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\49\ See Exchange Act Releases No. 94080 (January 27, 2022), 87
FR 5527 (April 12, 2022) (specifically ``Amendment No. 1 to the
Proposed Rule Change To List and Trade Shares of the Wise Origin
Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity-Based Trust
Shares''); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844
(May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28,
2021), 86 FR 60695 (November 3, 2021). See also Hu, Y., Hou, Y. and
Oxley, L. (2019). ``What role do futures markets play in Bitcoin
pricing? Causality, cointegration and price discovery from a time-
varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This academic research paper concludes
that ``There exist no episodes where the Bitcoin spot markets
dominates the price discovery processes with regard to Bitcoin
futures. This points to a conclusion that the price formation
originates solely in the Bitcoin futures market. We can, therefore,
conclude that the Bitcoin futures markets dominate the dynamic price
discovery process based upon time-varying information share
measures. Overall, price discovery seems to occur in the Bitcoin
futures markets rather than the underlying spot market based upon a
time-varying perspective.''

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[[Page 68248]]

Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\50\ including Commodity-Based Trust Shares,\51\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\52\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that the CME Bitcoin Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to the point that they are outweighed by quantifiable
investor protection issues that would be resolved by approving this
proposal.
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\50\ See Exchange Rule 14.11(f).
\51\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\52\ As the Exchange has stated in a number of other public
documents, it continues to believe that bitcoin is resistant to
price manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of bitcoin trading render it difficult
and prohibitively costly to manipulate the price of bitcoin. The
fragmentation across bitcoin platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin
prices through continuous trading activity challenging. To the
extent that there are bitcoin exchanges engaged in or allowing wash
trading or other activity intended to manipulate the price of
bitcoin on other markets, such pricing does not normally impact
prices on other exchange because participants will generally ignore
markets with quotes that they deem non-executable. Moreover, the
linkage between the bitcoin markets and the presence of arbitrageurs
in those markets means that the manipulation of the price of bitcoin
price on any single venue would require manipulation of the global
bitcoin price in order to be effective. Arbitrageurs must have funds
distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular bitcoin exchange or OTC platform. As a result, the
potential for manipulation on a trading platform would require
overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences.
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(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \53\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\54\ 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.\55\
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\53\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance-sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the
Intermarket Surveillance Group (``ISG'') constitutes such a
surveillance sharing agreement. See Securities Exchange Act Release
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval'').
\54\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\55\ See Wilshire Phoenix Disapproval.
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The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\56\
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\56\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
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\57\ As further described below, the ``Reference Rate'' for the
Fund is the CME CF Bitcoin Reference Rate.
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(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 influencing prices in the Bitcoin
Futures market or spot market for a number of reasons, including the
significant daily trading volume in the Bitcoin Futures market, the
size of bitcoin's market capitalization, 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. As the court found in the Grayscale Order, the Exchange and the
Sponsor submit that ``[b]ecause the spot market is deeper and more
liquid than the futures market,

[[Page 68249]]

manipulation should be more difficult, not less.''
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
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 in this case, in addition to the existence
of a surveillance sharing agreement that meets the Commission's
previously articulated standards. 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 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,\58\ 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 Shares.
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\58\ 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 Shares.\59\ 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 the 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 Shares.\60\
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\59\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\60\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC
and Cboe Clear Digital, LLC.
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Further, and consistent with prior points above, offering only in-
kind creation and redemption will also provide unique protections
against potential attempts to manipulate the price of the Shares. While
the Sponsor believes that the Reference Rate which it uses to value the
Fund'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
Reference Rate significantly less important. Specifically, because the
Fund will not accept cash to buy bitcoin in order to create new Shares
or, barring extraordinary circumstances including as described in the
Registration Statement, be forced to sell bitcoin to pay cash for
redeemed Shares, the price that the Sponsor uses to value the Fund's
bitcoin is not a particularly important tool to prevent price
manipulation in the Shares.\61\ When authorized participants are
creating Shares with the Fund, 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 Fund'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 Fund 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 Reference Rate
because there is little financial incentive to do so.
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\61\ While the Reference Rate 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, including through Bitcoin Futures
ETFs. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors including in connection with 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 for this proposal 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 to access
bitcoin in a regulated and transparent exchange-traded vehicle that
would act to limit risk and benefit U.S. investors by: (i) reducing
premium and discount volatility as compared to OTC investment vehicles;
(ii) increasing competitive pressure on management fees resulting in
fee compression/reductions; (iii) reducing risks and costs as compared
to those associated with investing in Bitcoin Futures ETFs and
operating companies that represent imperfect proxies for bitcoin
exposure; and (iv) providing an alternative to custodying spot bitcoin.
Franklin Templeton Digital Holdings Trust
Delaware Trust Company is the trustee (``Trustee''). Bank of New
York Mellon serves as the Trust's administrator (the ``Administrator'')
and transfer agent (``Transfer Agent''). The Bitcoin Custodian will be
responsible for safekeeping of the Fund's bitcoin.
According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest and ownership in the Fund .
The Fund's assets will consist of bitcoin held by the Bitcoin Custodian
on behalf of the Fund and cash holdings, if any, held by the Cash
Custodian.
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\62\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''), and none of the Trust, the Fund or the Sponsor
is subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

\62\ 15 U.S.C. 80a-1.
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When the Fund sells or redeems its Shares, it will do so in ``in-
kind'' transactions in large blocks of Shares (a ``Creation Basket'')
at the Fund's NAV.

[[Page 68250]]

Authorized participants will deliver, or facilitate the delivery of,
bitcoin to the Fund's account with the Bitcoin Custodian in exchange
for Shares when they purchase Shares, and the Fund, through the Bitcoin
Custodian, will deliver bitcoin to such authorized participants when
they redeem Shares. 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 Fund'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 Fund.
Investment Objective
According to the Registration Statement and as further described
below, the investment objective of the Fund is to generally reflect the
performance of the price of bitcoin before payment of the Fund's
expenses. In seeking to achieve its investment objective, the Fund will
hold bitcoin and may hold cash or cash equivalents. The Fund will value
its Shares daily based on the value of bitcoin as reflected by the CME
CF Bitcoin Reference Rate (the ``Reference Rate''), which is an
independently calculated value based on an aggregation of executed
trade flow of major bitcoin spot exchanges. Specifically, the Reference
Rate is calculated based on certain transactions of all of its
constituent bitcoin exchanges, which are currently Bitstamp, Coinbase,
itBit, Kraken, Gemini, and LMAX Digital, and which may change from time
to time. If the Reference Rate is not available or the Sponsor
determines, in its sole discretion, that the Reference Rate should not
be used, the Fund's holdings may be fair valued in accordance with the
policy approved by the Sponsor.
The Reference Rate
As described in the Registration Statement, the Fund will use the
Reference Rate to calculate the Fund's NAV. The Reference Rate was
created to facilitate financial products based on bitcoin. It serves as
a once-a-day benchmark rate of the U.S. dollar price of bitcoin (USD/
BTC), calculated as of 4 p.m. Eastern time. The Reference Rate
aggregates the trade flow of several bitcoin exchanges, during an
observation window between 3:00 p.m. and 4:00 p.m. Eastern time into
the U.S. dollar price of one bitcoin at 4:00 p.m. Eastern time.
Specifically, the Reference Rate is calculated based on the ``Relevant
Transactions'' (as defined below) of all of its constituent bitcoin
exchanges, which are currently Bitstamp, Coinbase, itBit, Kraken,
Gemini, and LMAX Digital (the ``Constituent Bitcoin Exchanges''), as
follows:
All Relevant Transactions are added to a joint list,
recording the time of execution, trade price and size for each
transaction.
The list is partitioned by timestamp into 12 equally sized
time intervals of 5 (five) minute length.
For each partition separately, the volume-weighted median
trade price is calculated from the trade prices and sizes of all
Relevant Transactions, i.e., across all Constituent Bitcoin Exchanges.
A volume-weighted median differs from a standard median in that a
weighting factor, in this case trade size, is factored into the
calculation.
The Reference Rate is then determined by the arithmetic
mean of the volume-weighted medians of all partitions.
Availability of Information
In addition to the price transparency of the Reference Rate, the
Fund will provide information regarding the Fund's bitcoin holdings as
well as additional data regarding the Fund. The Fund 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 Fund'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 Fund, 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 \63\ 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
Fund, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The Fund will also disseminate the Fund's
holdings on a daily basis on the Fund'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 Reference Rate, including key elements of how the
Reference Rate is calculated, will be publicly available at https://www.cfbenchmarks.com.
---------------------------------------------------------------------------

\63\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

The NAV for the Fund 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 Reference Rate. 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.
The Bitcoin Custodian
The Bitcoin Custodian carefully considers the design of the
physical, operational and cryptographic systems for secure storage of
the Fund's private keys in an effort to lower the risk of loss or
theft. The Bitcoin Custodian utilizes a variety of security measures to
ensure that private keys necessary to transfer digital assets remain
uncompromised and that the Fund maintains exclusive ownership of its
assets. The Bitcoin Custodian will keep a substantial portion of the
private keys associated with the Trust's bitcoin in ``cold storage''
\64\ or similarly secure

[[Page 68251]]

technology (the ``Cold Vault Balance''). The hardware, software,
systems, and procedures of the Bitcoin Custodian may not be available
or cost-effective for many investors to access directly. 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, acting alone or together, will be able to access or use
any of the private keys that hold the Fund's bitcoin.
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\64\ The term ``cold storage'' refers to a safeguarding method
by which the private keys corresponding to bitcoins stored on a
digital wallet are removed from any computers actively connected to
the internet. Cold storage of private keys may involve keeping such
wallet on a non-networked computer or electronic device or storing
the public key and private keys relating to the digital wallet on a
storage device (for example, a USB thumb drive) or printed medium
(for example, papyrus or paper) and deleting the digital wallet from
all computers.
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Net Asset Value
NAV means the total assets of the Fund including, but not limited
to, all bitcoin and cash, if any, less total liabilities of the Fund,
each determined on the basis of generally accepted accounting
principles. The Administrator will determine the NAV of the Fund 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 Fund is the aggregate
value of the Fund's assets less its estimated accrued but unpaid
liabilities (which include accrued expenses). In determining the Fund's
NAV, the Administrator values the bitcoin held by the Fund based on the
price set by the Reference Rate 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 Fund, 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
Fund 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 Fund as of the opening of business on that business
day, by the quotient of the number of Shares outstanding at the opening
of business divided by the number of Shares in a Creation Unit. The
procedures by which an authorized participant can redeem one or more
Creation Units mirror the procedures for the creation of Creation
Units.
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 Fund's NAV will be calculated daily and that these values and
information about the assets of the Fund will be made available to all
market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a
trust that holds a specified commodity \65\ deposited with the trust;
(b) issued by such trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and (c)
when aggregated in the same specified minimum number, may be redeemed
at a holder's request by such trust which will deliver to the redeeming
holder the quantity of the underlying commodity.
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\65\ For purposes of Rule 14.11(e)(4), the term commodity takes
on the definition of the term as provided in the Commodity Exchange
Act. As noted above, the CFTC has opined that Bitcoin is a commodity
as defined in Section 1a(9) of the Commodity Exchange Act. See
Coinflip.
---------------------------------------------------------------------------

Upon termination of the Fund, 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 Fund in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant factors in exercising its discretion to halt or suspend
trading in the Shares. The Exchange will halt trading in the Shares
under the conditions specified in BZX Rule 11.18. Trading may be halted
because of market conditions or for reasons that, in the view of the
Exchange, make trading in the Shares inadvisable. These may include:
(1) the extent to which trading is not occurring in the bitcoin
underlying the Shares; or (2) whether other unusual conditions or
circumstances detrimental to the maintenance of a fair and orderly

[[Page 68252]]

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 Fund 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 Fund or
the Shares are not in compliance with the applicable listing
requirements, the Exchange will commence delisting procedures under
Exchange Rule 14.12. The Exchange may obtain information regarding
trading in the Shares and Bitcoin Futures via ISG, from other exchanges
who are members or affiliates of the ISG, or with which the Exchange
has entered into a comprehensive surveillance sharing agreement.\66\
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\66\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) the procedures for the
creation and redemption of Creation Units (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 Fund's NAV are disseminated; (iv) the risks
involved in trading the Shares outside of Regular Trading Hours \67\
when an updated IIV will not be calculated or publicly disseminated;
(v) the requirement that members deliver a prospectus to investors
purchasing newly issued Shares prior to or concurrently with the
confirmation of a transaction; and (vi) trading information.
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\67\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern time.
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In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with Section
6(b) of the Act \68\ in general and Section 6(b)(5) of the Act \69\ in
particular in that it is designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in facilitating transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest.
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\68\ 15 U.S.C. 78f.
\69\ 15 U.S.C. 78f(b)(5).
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The Commission has approved numerous series of Trust Issued
Receipts, including Commodity-Based Trust Shares, 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; \70\ 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, in conjunction with precedent filings,
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.
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\70\ 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 and
impractical. 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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[[Page 68253]]

market of significant size. Both the Exchange and CME are members of
ISG. 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.\72\
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\71\ 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 ISG
constitutes such a surveillance sharing agreement. See Wilshire
Phoenix Disapproval).
\72\ Id.
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The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\73\
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\73\ 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 research and analysis 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 Reference Rate) 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
Reference Rate is based on spot prices. Further, the Fund 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 Reference Rate 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 influence on prices in the Bitcoin Futures
market or spot market for a number of reasons, including the
significant daily trading volume in the Bitcoin Futures market, the
size of bitcoin's market capitalization, 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. As the court found in the Grayscale Order, the Exchange and the
Sponsor submit that ``[b]ecause the spot market is deeper and more
liquid than the futures market, manipulation should be more difficult,
not less.''
(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 in this case, in addition to
the existence of a surveillance sharing agreement that meets the
Commission's previously articulated standards. The Exchange is further
proposing to take additional steps beyond 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 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,\74\ 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 Shares.
---------------------------------------------------------------------------

\74\ 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 Shares.\75\ 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 the 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 Shares.\76\
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\75\ For additional information regarding ISG and the hallmarks
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
\76\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC
and Cboe Clear Digital, LLC.
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[[Page 68254]]

Shares, 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 Fund'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 Fund 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 Reference Rate because there is
little financial incentive to do so.
(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 including in connection with 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 for this proposal 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 to access
bitcoin in a regulated and transparent exchange-traded vehicle that
would act to limit risk and benefit U.S. investors by: (i) reducing
premium and discount volatility as compared to OTC investment vehicles;
(ii) increasing competitive pressure on management fees resulting in
fee compression/reductions; (iii) reducing risks and costs as compared
to those associated with investing in Bitcoin Futures ETFs and
operating companies that represent 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 Fund 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 Fund and
the Shares. In addition to the price transparency of the Reference
Rate, the Fund will provide information regarding the Fund's bitcoin
holdings as well as additional data regarding the Fund. The Fund 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 Fund'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 Fund, 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
Fund, if shorter); (d) the prospectus; and (e) other applicable
quantitative information. The Fund will also disseminate the Fund's
holdings on a daily basis on the Fund'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 Reference Rate, including key elements of how the
Reference Rate is calculated, will be publicly available at
www.cfbenchmarks.com.
The NAV for the Fund 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 Reference Rate. 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.

[[Page 68255]]

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
herein, 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 Bitcoin Futures market is a
significant market as it relates to the CME Bitcoin Futures market, but
not a significant market as it relates to the bitcoin spot market for
the numerous reasons laid out above.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of Section 6(b)(5) of the
Act.

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

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

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

The Exchange neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
file number SR-CboeBZX-2023-072 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-2023-072. 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-2023-072 and should
be submitted on or before October 24, 2023.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\77\
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\77\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21787 Filed 10-2-23; 8:45 am]
BILLING CODE 8011-01-P

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