Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 5 to a Proposed Rule Change To List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 2387-2413 [2024-00499]

Download as PDF Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 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. khammond on DSKJM1Z7X2PROD with NOTICES 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. 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. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 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 February 2, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.79 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–00509 Filed 1–11–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99288; File No. SRCboeBZX–2023–028] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 5 to a Proposed Rule Change To List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), CommodityBased Trust Shares January 8, 2024. On April 25, 2023, Cboe BZX Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the ARK 21Shares Bitcoin ETF under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The proposed rule change was published for comment in the Federal Register on May 15, 2023.3 On June 15, 2023, pursuant to section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.5 On June 28, 2023, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the proposed rule change in its entirety. On June 30, 2023, the Exchange filed Amendment No. 2 to the proposed rule change, which amended and replaced the proposed rule change, as modified by Amendment No. 1, in its entirety. On July 11, 2023, the Exchange filed Amendment No. 3 to the proposed rule change, which amended and replaced the proposed rule change, as modified by Amendment No. 2, in its entirety. On August 11, 2023, the Commission noticed Amendment No. 3 and instituted proceedings to determine whether to disapprove the proposed rule change, as modified by Amendment No. 3.6 On September 26, 2023, the Commission designated a longer period for Commission action on the proposed 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 97461 (May 9, 2023), 88 FR 31045. Comments received on the proposed rule change can be found at: https:// www.sec.gov/comments/sr-cboebzx-2023-028/ srcboebzx2023028.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 97732, 88 FR 40877 (June 22, 2023). 6 See Securities Exchange Act Release No. 98112, 88 FR 55743 (Aug. 16, 2023). 2 17 79 17 PO 00000 CFR 200.30–3(a)(12). Frm 00190 Fmt 4703 Sfmt 4703 2387 E:\FR\FM\12JAN1.SGM 12JAN1 2388 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices rule change, as modified by Amendment No. 3.7 On October 24, 2023, the Exchange filed Amendment No. 4 to the proposed rule change, which amended and replaced the proposed rule change, as modified by Amendment No. 3, in its entirely. On January 5, 2024, the Exchange filed Amendment No. 5 to the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. Amendment No. 5 amended and replaced the proposed rule change, as modified by Amendment No. 4, in its entirety. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 5, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (the ‘‘Exchange’’ or ‘‘BZX’’) is filing with the Securities and Exchange Commission (‘‘Commission’’) a proposed rule change to list and trade shares of the ARK 21Shares Bitcoin ETF (the ‘‘Trust’’),8 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 khammond on DSKJM1Z7X2PROD with NOTICES 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. 7 See Securities Exchange Act Release No. 98530, 88 FR 67851 (Oct. 2, 2023). The Commission designated January 10, 2024, as the date by which the Commission shall approve or disapprove the proposed rule change. 8 The Trust was formed as a Delaware statutory trust on June 22, 2021 and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose This Amendment No. 5 to SR– CboeBZX–2023–028 amends and replaces in its entirety the proposal as originally submitted on April 25, 2023 and as amended by Amendment No. 1 on June 28, 2023, Amendment No. 2 on June 30, 2023, and Amendment No. 3 on July 11, 2023, and Amendment No. 4 on October 24, 2023. The Exchange submits this Amendment No. 5 in order to clarify certain points and add additional details to the proposal. The Exchange proposes to list and trade the Shares under BZX Rule 14.11(e)(4),9 which governs the listing and trading of Commodity-Based Trust Shares on the Exchange.10 11 21Shares US LLC is the sponsor of the Trust (the ‘‘Sponsor’’). The Shares will be registered with the Commission by means of the Trust’s registration statement on Form S–1 (the ‘‘Registration Statement’’).12 As further discussed below, the Commission has historically approved or disapproved exchange filings to list and trade series of Trust Issued Receipts,13 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 9 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). 10 Any of the statements or representations regarding the index composition, the description of the portfolio or reference assets, limitations on portfolio holdings or reference assets, dissemination and availability of index, reference asset, and intraday indicative values, or the applicability of Exchange listing rules specified in this filing to list a series of Other Securities (collectively, ‘‘Continued Listing Representations’’) shall constitute continued listing requirements for the Shares listed on the Exchange. 11 The Exchange notes that two different proposals to list and trade shares of the Trust were disapproved by the Commission on March 31, 2022 and January 26, 2023. See Exchange Act Release Nos. 94571 (March 31, 2022), 87 FR 20014 (April 6, 2022) and 96751 (January 26, 2023), 88 FR 628 (January 31, 2023). 12 See draft Amendment No. 5 to the Registration Statement on Form S–1, dated December 28, 2023 submitted to the Commission by the Sponsor on behalf of the Trust. The descriptions of the Trust, the Shares, and the Index (as defined below) contained herein are based, in part, on information in the Registration Statement. The Registration Statement is not yet effective and the Shares will not trade on the Exchange until such time that the Registration Statement is effective. 13 See Exchange Rule 14.11(f)(1). PO 00000 Frm 00191 Fmt 4703 Sfmt 4703 commodity to be held.14 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.15 14 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’’). 15 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)); E:\FR\FM\12JAN1.SGM 12JAN1 khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 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 VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 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 exchange-traded products (‘‘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 16 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.’’ 17 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 Chicago Mercantile Exchange (‘‘CME’’) bitcoin futures (‘‘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 1933.18 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 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). 16 See Exchange Rule 14.11(e)(5). 17 See Winklevoss Order at 37592. 18 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’’). PO 00000 Frm 00192 Fmt 4703 Sfmt 4703 2389 Bitcoin Futures, an odd tautological truth that is also inconsistent with prior disapproval orders for ETPs that would hold actual bitcoin instead of derivatives contracts (‘‘Spot Bitcoin ETPs’’) that use the exact same pricing methodology as the CME Bitcoin Futures. As further discussed below, both the Exchange and the Sponsor believe that this proposal and the included analysis are sufficient to establish that the CME Bitcoin Futures market represents a regulated market of significant size as it relates both to the CME Bitcoin Futures market and to the spot bitcoin market and that this proposal should be approved. Finally, as discussed in greater detail below, the Trust provides investors interested in exposure to bitcoin with important protections that are not always available to investors that invest directly in bitcoin, including protection against insolvency, cyber attacks, and other risks. If U.S. investors had access to vehicles such as the Trust for their bitcoin investments, instead of directing their bitcoin investments into loosely regulated offshore vehicles (such as loosely regulated centralized trading platforms that have since faced bankruptcy proceedings or other insolvencies), then countless investors would have protected their principal investments in bitcoin and thus benefited. Background Bitcoin is a digital asset based on the decentralized, open-source protocol of the peer-to-peer computer network launched in 2009 that governs the creation, movement, and ownership of bitcoin and hosts the public ledger, or ‘‘blockchain,’’ on which all bitcoin transactions are recorded (the ‘‘Bitcoin Network’’ or ‘‘Bitcoin’’). The decentralized nature of the Bitcoin Network allows parties to transact directly with one another based on cryptographic proof instead of relying on a trusted third party. The protocol also lays out the rate of issuance of new bitcoin within the Bitcoin Network, a rate that is reduced by half approximately every four years with an eventual hard cap of 21 million. It’s generally understood that the combination of these two features—a systemic hard cap of 21 million bitcoin and the ability to transact trustlessly with anyone connected to the Bitcoin Network—gives bitcoin its value.19 The 19 For additional information about bitcoin and the Bitcoin Network, see https://bitcoin.org/en/ getting-started; https://www.fidelitydigitalassets. com/articles/addressing-bitcoin-criticisms; and E:\FR\FM\12JAN1.SGM Continued 12JAN1 2390 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES first rule filing proposing to list an ETP to provide exposure to bitcoin in the U.S. was submitted by the Exchange on June 30, 2016.20 At that time, blockchain technology, and digital assets that utilized it, were relatively new to the broader public. The market cap of all bitcoin in existence at that time was approximately $10 billion. No registered offering of digital asset securities or shares in an investment vehicle with exposure to bitcoin or any other cryptocurrency had yet been conducted, and the regulated infrastructure for conducting a digital asset securities offering had not begun to develop.21 Similarly, regulated U.S. Bitcoin Futures contracts did not exist. The CFTC had determined that bitcoin is a commodity,22 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, 2016.23 While the first over-thecounter bitcoin fund launched in 2013, public trading was limited and the fund had only $60 million in assets.24 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 https://www.vaneck.com/education/investmentideas/investing-in-bitcoin-and-digital-assets/. 20 See Winklevoss Order. 21 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. 22 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.’’ 23 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. 24 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. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Investment Company Institute (‘‘ICI’’) and Securities Industry and Financial Markets Association (‘‘SIFMA’’) that it was not aware, at that time, of a single custodian providing fund custodial services for digital assets.25 Fast forward to today and the digital assets financial ecosystem, including bitcoin, has progressed significantly. The development of a regulated market for digital asset securities has significantly evolved, with market participants having conducted registered public offerings of both digital asset securities 26 and shares in investment vehicles holding Bitcoin Futures.27 Additionally, licensed and regulated service providers have emerged to provide fund custodial services for digital assets, among other services. For example, in February 2023, the Commission proposed to amend Rule 206(4)–2 under the Advisers Act of 1940 (the ‘‘custody rule’’) to expand the scope beyond client funds and securities to include all crypto assets, among other assets; 28 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’’); 29 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; 30 in October 2019, 25 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. 26 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. 27 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. 28 See Investment Advisers Act Release No. 6240 88 FR 14672 (March 9, 2023) (Safeguarding Advisory Client Assets). 29 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). 30 See letter from Elizabeth Baird, Deputy Director, Division of Trading and Markets, U.S. Securities and Exchange Commission to Kris PO 00000 Frm 00193 Fmt 4703 Sfmt 4703 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,31 and multiple transfer agents who provide services for digital asset securities registered with the Commission.32 Outside the Commission’s purview, the regulatory landscape has changed significantly since 2016, and cryptocurrency markets have grown and evolved as well. The market for bitcoin is approximately 100 times larger, having at one point reached a market cap of over $1 trillion.33 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 CME Bitcoin Futures on a daily basis.34 Open interest was over $1.4 billion for the entirety of the period and at one point was over $2 billion. The CFTC has exercised its regulatory jurisdiction in bringing a number of enforcement actions related to bitcoin and against trading platforms that offer cryptocurrency trading.35 As of 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. 31 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. 32 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. 33 As of February 1, 2023, the total market cap of all bitcoin in circulation was approximately $450 billion. 34 Data sourced from the CME Bitcoin Futures Report: 30 March, 2023, available at: https://www. cmegroup.com/markets/cryptocurrencies/bitcoin/ bitcoin.volume.htm. 35 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 trading platforms. See CFTC Release No. 8680–23 (March 27, 2023), available at: https://www.cftc.gov/PressRoom/PressReleases/ 8680-23. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES February 14, 2023 the NYDFS has granted no fewer than thirty-four BitLicenses,36 including to established public payment companies like PayPal Holdings, Inc. and Square, Inc., and limited purpose trust charters to entities providing cryptocurrency custody services, including the Trust’s Custodian.37 In addition, the Treasury’s Office of Foreign Assets Control (‘‘OFAC’’) has brought enforcement actions over apparent violations of the sanctions laws in connection with the provision of wallet management services for digital assets.38 In addition to the regulatory developments laid out above, more traditional financial market participants have become more active in cryptocurrency: large insurance companies, asset managers, university endowments, pension funds, and even historically bitcoin skeptical fund managers have allocated to bitcoin. As noted in the Financial Stability Oversight Council (‘‘FSOC’’) report on Digital Asset Financial Stability Risks and Regulation, ‘‘[i]ndustry surveys suggest that the scale of these investments grew quickly during the boom in crypto-asset markets through late 2021. In June 2022, PwC estimated that the number of crypto-specialist hedge funds was more than 300 globally, with $4.1 billion in assets under management. In addition, in a survey PwC found that 38 percent of surveyed traditional hedge funds were currently investing in ‘digital assets,’ compared to 21 percent the year prior.’’ 39 The largest over-the-counter bitcoin fund previously filed a Form 10 registration statement, which the staff of the Commission reviewed and which 36 See https://www.dfs.ny.gov/virtual_currency_ businesses. 37 The ‘‘Custodian’’ is Coinbase Trust Company, LLC. 38 See U.S. Department of the Treasury Enforcement Release: ‘‘OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent Violations of Multiple Sanctions Programs Related to Digital Currency Transactions’’ (December 30, 2020) available at: https://home.treasury.gov/system/files/ 126/20201230_bitgo.pdf. See also U.S. Department of the Treasury Enforcement Release: ‘‘Treasury Announces Two Enforcement Actions for over $24M and $29M Against Virtual Currency Exchange, Bittrex, Inc.’’ (October 11, 2022) available at: https://home.treasury.gov/news/pressreleases/jy1006. See also U.S. Department of Treasure Enforcement Release ‘‘OFAC Settles with Virtual Currency Exchange Kraken for $362,158.70 Related to Apparent Violations of the Iranian Transactions and Sanctions Regulations’’ (November 28, 2022) available at: https://home. treasury.gov/system/files/126/20221128_ kraken.pdf. 39 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-AssetsReport-2022.pdf. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 took effect automatically, and is now a reporting company.40 Established companies like Tesla, Inc., MicroStrategy Incorporated, and Square, Inc., among others, announced substantial investments in bitcoin in amounts as large as $1.5 billion (Tesla) and $425 million (MicroStrategy). The foregoing examples demonstrate that bitcoin has gained mainstream usage and recognition. Despite these developments, access for U.S. retail investors to gain exposure to bitcoin via a transparent and U.S. regulated, U.S. exchange-traded vehicle remains limited. Instead current options include: (i) facing the counter-party risk, legal uncertainty, technical risk, and 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; 41 (iii) purchasing shares of operating companies that they believe will provide proxy exposure to bitcoin with limited disclosure about the associated risks; 42 or (iv) purchasing 40 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. 41 The premium and discount for OTC Bitcoin Funds is known to move rapidly. For example, over the period of 12/21/20 to 1/21/21, the premium for the largest OTC Bitcoin Fund went from 40.18% to 2.79%. While the price of bitcoin appreciated significantly during this period and NAV per share increased by 41.25%, the price per share increased by only 3.58%. This means that investors are buying shares of a fund that experiences significant volatility in its premium and discount outside of the fluctuations in price of the underlying asset. Even operating within the normal premium and discount range, it’s possible for an investor to buy shares of an OTC Bitcoin Fund only to have those shares quickly lose 10% or more in dollar value excluding any movement of the price of bitcoin. That is to say—the price of bitcoin could have stayed exactly the same from market close on one day to market open the next, yet the value of the shares held by the investor decreased only because of the fluctuation of the premium. As more investment vehicles, including mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest option for a buy and hold strategy for such vehicles is often an OTC Bitcoin Fund, meaning that even investors that do not directly buy OTC Bitcoin Funds can be disadvantaged by extreme premiums (or discounts) and premium volatility. 42 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 PO 00000 Frm 00194 Fmt 4703 Sfmt 4703 2391 Bitcoin Futures exchange-traded funds (‘‘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 ETFs holding physical bitcoin) to gain exposure to bitcoin. Similarly, investors in Switzerland and across Europe have access to ETPs (issued by 21Shares, among others) which trade on regulated exchanges and provide exposure to a broad array of spot crypto assets. U.S. investors, by contrast, are left with fewer and more risky means of getting bitcoin exposure, as described above.43 To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor assets to significant risk because investors that would otherwise seek crypto asset exposure through a Spot Bitcoin ETP are forced to find alternative exposure through generally riskier means. For instance, many U.S. investors that held their digital assets in accounts at FTX,44 Celsius Network LLC,45 BlockFi Inc.46 and Voyager Digital Holdings, Inc.47 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 crypto asset space. As further described below, the Trust, like all other series of Commodity-Based Trust Shares, is designed to protect investors against the 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. 43 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. 44 See FTX Trading Ltd., et al., Case No. 22– 11068. 45 See Celsius Network LLC, et al., Case No. 22– 10964. 46 See BlockFi Inc., Case No. 22–19361. 47 See Voyager Digital Holdings, Inc., et al., Case No. 22–10943. E:\FR\FM\12JAN1.SGM 12JAN1 2392 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES risk of losses through fraud and insolvency that arise by holding digital assets, including bitcoin, on centralized platforms. Additionally, investors in other countries, specifically Canada, generally pay lower fees than U.S. retail investors that invest in OTC Bitcoin Funds due to the fee pressure that results from increased competition among available bitcoin investment options. Without an approved and regulated Spot Bitcoin ETP in the U.S. as a viable alternative, U.S. investors could seek to purchase shares of non-U.S. bitcoin vehicles in order to get access to bitcoin exposure. Given the separate regulatory regime and the potential difficulties associated with any international litigation, such an arrangement would create more risk exposure for U.S. investors than they would otherwise have with a U.S. exchange listed ETP. In addition to the benefits to U.S. investors articulated throughout this proposal, approving this proposal (and others like it) would provide U.S. ETFs and mutual funds with a U.S.-listed and regulated product to provide such access rather than relying on either flawed products or products listed and primarily regulated in other countries. Bitcoin Futures ETFs The Exchange and Sponsor applaud the Commission for allowing the launch of ETFs registered under the Investment Company Act of 1940, as amended (the ‘‘1940 Act’’) and the Bitcoin Futures Approvals that provide exposure to bitcoin primarily through CME Bitcoin Futures (‘‘Bitcoin Futures ETFs’’). Allowing such products to list and trade is a productive first step in providing U.S. investors and traders with transparent, exchange-listed tools for expressing a view on bitcoin. The Bitcoin Futures Approvals, however, have created a logical inconsistency in the application of the standard the Commission applies when considering Bitcoin ETP proposals. As discussed further below, the standard applicable to Bitcoin ETPs is whether the listing exchange has in place a comprehensive surveillance sharing agreement with a regulated market of significant size in the underlying asset. Previous disapproval orders have made clear that a market that constitutes a regulated market of significant size is generally a futures and/or options market based on the underlying reference asset rather than the spot commodity markets, which are often unregulated.48 Leaving aside the 48 See Winklevoss Order at 37593, specifically footnote 202, which includes the language from VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 analysis of that standard until later in this proposal,49 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.50 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 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. 49 As further outlined below, both the Exchange and the Sponsor believe that the CME Bitcoin Futures market represents a regulated market of significant size and that this proposal and others like it should be approved on this basis. 50 See Teucrium Approval at 21679. PO 00000 Frm 00195 Fmt 4703 Sfmt 4703 ‘‘Grayscale lawsuit’’ 51 when Judge Rao stated ‘‘. . . the Commission in the Teucrium order recognizes that the futures prices are influenced by the spot prices, and the Commission concludes in approving futures ETPs that any fraud on the spot market can be adequately addressed by the fact that the futures market is a regulated one . . .’’ The Exchange agrees with the Commission on this point and notes that the pricing mechanism applicable to the Shares is similar to that of the CME Bitcoin Futures. As further discussed below, this view is also consistent with the Sponsor’s research. The structure of Bitcoin Futures ETFs provides negative outcomes for buy and hold investors as compared to a Spot Bitcoin ETP.52 Specifically, the cost of rolling CME Bitcoin Futures contracts will cause the Bitcoin Futures ETFs to lag the performance of bitcoin itself and, at over a billion dollars in assets under management, would cost U.S. investors significant amounts of money on an annual basis compared to Spot Bitcoin ETPs. Such rolling costs would not be required for Spot Bitcoin ETPs that hold bitcoin. Further, Bitcoin Futures ETFs could potentially hit CME position limits, which would force a Bitcoin Futures ETF to invest in non-futures assets for bitcoin exposure and cause potential investor confusion and lack of certainty about what such Bitcoin Futures ETFs are actually holding to try to get exposure to bitcoin, not to mention completely changing the risk profile associated with such an ETF. While Bitcoin Futures ETFs represent a useful trading tool, they are clearly a sub-optimal structure for U.S. investors that are looking for long-term exposure to bitcoin that will, based on the calculations above, unnecessarily cost U.S. investors significant amounts of money every year compared to Spot Bitcoin ETPs and the Exchange believes that any proposal to list and trade a Spot Bitcoin ETP should be reviewed by the Commission with this important investor protection context in mind. To the extent the Commission may view differential treatment of Bitcoin Futures ETFs and Spot Bitcoin ETPs as 51 Grayscale Investments, LLC v. Securities and Exchange Commission, et al., Case No. 22–1142. 52 See e.g., ‘‘Bitcoin ETF’s Success Could Come at Fundholders’ Expense,’’ Wall Street Journal (October 24, 2021), available at: https:// www.wsj.com/articles/bitcoin-etfs-success-couldcome-at-fundholders-expense-11635080580; ‘‘Physical Bitcoin ETF Prospects Accelerate,’’ ETF.com (October 25, 2021), available at: https:// www.etf.com/sections/blog/physical-bitcoin-etfprospects-shine?nopaging=1&__cf_chl_jschl_tk__ =pmd_ JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl441635476946-0-gqNtZGzNApCjcnBszQql. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices warranted based on the Commission’s concerns about the custody of physical bitcoin that a Spot Bitcoin ETP would hold (compared to cash-settled futures contracts),53 the Sponsor believes this concern is mitigated to a significant degree by the custodial arrangements that the Trust has contracted with the Custodian to provide, as further outlined below. In the Custody Statement, the Commission stated that the fourth step that a broker-dealer could take to shield traditional securities customers and others from the risks and consequences of digital asset security fraud, theft, or loss is to establish, maintain, and enforce reasonably designed written policies, procedures, and controls for safekeeping and demonstrating the broker-dealer has exclusive possession or control over digital asset securities that are consistent with industry best practices to protect against the theft, loss, and unauthorized and accidental use of the private keys necessary to access and transfer the digital asset securities the broker-dealer holds in custody. While bitcoin is not a security and the Custodian is not a broker-dealer, the Sponsor believes that similar considerations apply to the Custodian’s holding of the Trust’s bitcoin. After diligent investigation, the Sponsor believes that the Custodian’s policies, procedures, and controls for safekeeping, exclusively possessing, and controlling the Trust’s bitcoin holdings are consistent with industry best practices to protect against the theft, loss, and unauthorized and accidental use of the private keys. As a trust company chartered by the NYDFS, the Sponsor notes that the Custodian is subject to extensive regulation and has among longest track records in the industry of providing custodial services for digital asset private keys. Under the khammond on DSKJM1Z7X2PROD with NOTICES 53 See, e.g., Division of Investment Management Staff, Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market, May 11, 2021 (‘‘The Bitcoin Futures market also has not presented the custody challenges associated with some cryptocurrencybased investing because the futures are cashsettled’’). VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 circumstances, therefore, to the extent the Commission believes that its concerns about the risks of spot bitcoin custody justifies differential treatment of a Bitcoin Futures ETF versus a Spot Bitcoin ETP, the Sponsor believes that the fact that the Custodian employs the same types of policies, procedures, and safeguards in handling spot bitcoin that the Commission has stated that brokerdealers should implement with respect to digital asset securities would appear to weaken the justification for treating a Bitcoin Futures ETF compared to a Spot Bitcoin ETP differently due to spot bitcoin custody concerns. Based on the foregoing, the Exchange and Sponsor believe that any objective review of the proposals to list Spot Bitcoin ETPs compared to the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead to the conclusion that Spot Bitcoin ETPs should be available to U.S. investors and, as such, this proposal and other comparable proposals to list and trade Spot Bitcoin ETPs should be approved by the Commission. Stated simply, U.S. investors will continue to lose significant amounts of money from holding Bitcoin Futures ETFs as compared to Spot Bitcoin ETPs, losses which could be prevented by the Commission approving Spot Bitcoin ETPs. Additionally, any concerns related to preventing fraudulent and manipulative acts and practices related to Spot Bitcoin ETPs would apply equally to the spot markets underlying the futures contracts held by a Bitcoin Futures ETF. Both the Exchange and Sponsor believe that the CME Bitcoin Futures market is a regulated market of significant size and that such manipulation concerns are mitigated, as described extensively below. After allowing and approving the listing and trading of Bitcoin Futures ETFs that hold primarily CME Bitcoin Futures, however, the only consistent outcome would be approving Spot Bitcoin ETPs on the basis that the CME Bitcoin Futures market is a regulated market of significant size. Given the current landscape, approving this proposal (and others like PO 00000 Frm 00196 Fmt 4703 Sfmt 4703 2393 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 54 CME began offering trading in Bitcoin Futures in 2017. Each contract represents five bitcoin and is based on the CME CF Bitcoin Reference Rate.55 The contracts trade and settle like other cash-settled commodity futures contracts. Nearly every measurable metric related to Bitcoin Futures has trended consistently up since launch. According to the Sponsor, the increase in the volume on CME, over the past few years, is reflected in a higher proportion of the bitcoin market share. This is illustrated by plotting the proportion of monthly volume traded in bitcoin on the CME 56 (categorized as regulated in the chart and used as the numerator) in relation to the total bitcoin market, which is comprised of the sum of the volume of Bitcoin Futures on the CME and the spot volume on cryptocurrency trading platforms 57 (categorized as unregulated and used as the denominator) from January 1, 2018 to January 31, 2023. 54 Unless otherwise noted, all data and analysis presented in this section and referenced elsewhere in the filing has been provided by the Sponsor. 55 According to CME, the CME CF Bitcoin Reference Rate aggregates the trade flow of major bitcoin spot trading platforms during a specific calculation window into a once-a-day reference rate of the U.S. dollar price of bitcoin. Calculation rules are geared toward maximum transparency and realtime replicability in underlying spot markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken. For additional information, refer to https:// www.cmegroup.com/trading/cryptocurrencyindices/cf-bitcoin-reference-rate.html?redirect=/ trading/cf-bitcoin-reference-rate.html. 56 Data on Bitcoin Futures is available at https:// www.cmegroup.com/markets/cryptocurrencies/ bitcoin/bitcoin.volume.html. 57 Data on bitcoin volume traded on cryptocurrency trading platforms is available at https://www.cryptocompare.com. E:\FR\FM\12JAN1.SGM 12JAN1 2394 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices Proportion of Regulated BTC Market Share From January 31, 2018 to January 31, 2023 - 25 ..., $ g .. 1 I !! 20!l .c ' l Ill I.. :E: ,:: Regulated BTC ('II>) 15 § iii If 10! '15 C: 0 & ~ 5 khammond on DSKJM1Z7X2PROD with NOTICES 2020 2021 The proportion of volume traded on CME has increased from less than 1% at inception, to more than 10% over three and a half years. Furthermore, the CME market, as well as other crypto-linked markets, and the spot market are highly correlated. In markets that are globally and efficiently integrated, one would expect that changes in prices of an asset across all markets to be highly correlated. The rationale behind this is that quick and efficient arbitrageurs would capture potentially profitable opportunities, consequently converging prices to the average intrinsic value very rapidly. Bitcoin markets exhibit a high degree of correlation. Using daily bitcoin prices from centralized trading platforms, ETP providers, and the CME from January 20, 2021 to February 1, 2023,58 the Sponsor calculates the Pearson correlation of returns 59 across these markets and find a high degree of correlation. Correlations are between 57% and 99%, with the latter found mainly across centralized trading platforms due to their higher level of 58 The calculation of daily correlations used the period January 20, 2021 to February 1, 2023 as this is the common period across all the trading platforms and data sources being analyzed. 59 The Pearson correlation is a measure of linear association between two variables and indicates the magnitude as well as direction of this relationship. The value can range between ¥1 (suggesting a VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00197 Fmt 4703 Sfmt 4703 2023 2022 interconnectedness. The lower correlations pertain mainly to the ETPs, which are relatively newer products and are mainly offered by a few competing market makers who are required to trade in large blocks, thus making it economically infeasible to capture small mispricings. As additional investors and arbitrageurs enter the market and capture the mispricing opportunities between these markets, it is likely that there will be much higher levels of correlations across all markets. BILLING CODE 8011–01–P strong negative association) and 1 (suggesting a strong positive association). E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.051</GPH> E Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 2395 Pairwise Correlation of Bitcoin Daily Returns across Centralized Exchanges, ETPs, and the CME VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 among centralized trading platforms and between the CME Bitcoin Futures and centralized trading platforms on an hourly basis, and no less than 78% on a minutely basis. This suggests that bitcoin prices on centralized trading platforms and the CME markets move PO 00000 Frm 00198 Fmt 4703 Sfmt 4703 very similarly and in a very efficient manner to quickly reflect changes in market conditions, not only on a daily basis, but also at much higher intra-day frequencies. E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.052</GPH> khammond on DSKJM1Z7X2PROD with NOTICES Pair-wise correlations of bitcoin returns are also calculated on hourly and minute-by-minute sampling frequencies in order to estimate the intra-day associations across the different bitcoin markets. The results show correlations no less than 92% VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00199 Fmt 4703 Sfmt 4725 E:\FR\FM\12JAN1.SGM 12JAN1 ~rTl71/l717171717f/l71~ ~71177171717171717171~ ~7171-~·n/l/17J717171/I~, ~717171177171/1717171¥:' ~71717171177171717171~, ~71717171711771717171~ ~71717171717117717171~ ?-171717171717171177171[ ~71717171717-171711771~, ~71717171717171717ll7~r 1 1 1 1 1 3V'JQ a1.n pue sa6ue4ox3 paZ!IBJtU8Q SSOJOB SUJntaH AIJnOH U!OOt!8 JO UO!ll:?18JJOQ 8S!MJ!Bd khammond on DSKJM1Z7X2PROD with NOTICES 2396 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices EN12JA24.053</GPH> 171111111111:1-i:11111111· 2397 According to the Sponsor’s research, this relationship holds true during periods of extreme price volatility. This implies that no single bitcoin market can deviate significantly from the consensus, such that the market is sufficiently large and has an inherent unique resistance to manipulation. Hence, the Sponsor introduces a statistical co-moment called co-kurtosis, which measures to what extent two random variables change together.60 If two returns series exhibit a high degree of co-kurtosis, this means that they tend to undergo extreme positive and negative changes simultaneously. A cokurtosis value larger than +3 or less than ¥3 is considered statistically significant. The following table shows that the level of co-kurtosis is positive and very high between all market combinations of hourly returns, which suggests that bitcoin markets tend to move very similarly especially for extreme price deviations. 60 Co-skewness and Co-kurtosis are higher order cross-moments used in finance to examine how assets move together. Co-skewness measures the extent to which two variables undergo extreme deviations at the same time, whereby a positive (negative) value means that both values exhibit positive (negative) values simultaneously. While this measure is useful for estimating co-movements in one direction or the other, it does not allow us to test whether two variables comove similarly in either direction. For that, we apply the co-kurtosis, which measures the extent to which two variables undergo both extreme positive and negative deviations at the same time. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00200 Fmt 4703 Sfmt 4703 Co-Kurtosis of Bitcoin Hourly Returns Across Centralized Exchanges, ETPs, and the CME E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.054</GPH> khammond on DSKJM1Z7X2PROD with NOTICES Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 2398 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices blffiMX bi!&!Qmp BILLING CODE 8011–01–C These results present evidence of a robust global bitcoin market that quickly reacts in a unanimous manner to extreme price movements across both the spot markets, futures and ETP markets. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 QOffiba$& "'' -gemITT.i The Sponsor further believes that academic research corroborates the overall trend outlined above and supports the thesis that the Bitcoin Futures pricing leads the spot market and, thus, a person attempting to PO 00000 Frm 00201 Co-Kurtosis of Bitcoin Minutely Returns Across Centralized Exchanges, ETPs, and the CME Fmt 4703 Sfmt 4703 O\!E manipulate the Shares would also have to trade on that market to manipulate the ETP. Specifically, the Sponsor believes that such research indicates E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.056</GPH> khammond on DSKJM1Z7X2PROD with NOTICES blm:moo bitcoin markets move in tandem especially during extreme market movements. EN12JA24.055</GPH> As a robustness check, the co-kurtosis metric is also calculated using minuteby-minute returns, and the conclusion remains the same, suggesting that all Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices that Bitcoin Futures lead the bitcoin spot market in price formation.61 khammond on DSKJM1Z7X2PROD with NOTICES Section 6(b)(5) and the Applicable Standards The Commission has approved numerous series of Trust Issued Receipts,62 including Commodity-Based Trust Shares,63 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; 64 and 61 See Hu, Y., Hou, Y. and Oxley, L. (2019). ‘‘What role do futures markets play in Bitcoin pricing? Causality, cointegration and price discovery from a time-varying perspective’’ (available at: https://www.ncbi.nlm.nih.gov/pmc/ articles/PMC7481826/). This academic research paper concludes that ‘‘There exist no episodes where the Bitcoin spot markets dominates the price discovery processes with regard to Bitcoin futures. This points to a conclusion that the price formation originates solely in the Bitcoin futures market. We can, therefore, conclude that the Bitcoin futures markets dominate the dynamic price discovery process based upon time-varying information share measures. Overall, price discovery seems to occur in the Bitcoin futures markets rather than the underlying spot market based upon a time-varying perspective.’’ See also Matthew Hougan, Hong Kim, and Satyajeet Pal (2021). ‘‘Price Discovery in the Modern Bitcoin Market: Examining Lead-Lag Relationships Between the Bitcoin Spot and Bitcoin Futures Market’’ (available at https://static.bitwise investments.com/Bitwise-Bitcoin-ETP-White-Paper1.pdf). This academic research paper also concluded that ‘‘the CME bitcoin futures market is the dominant source of price discovery when compared with the bitcoin spot market, and that prices on the CME bitcoin futures market lead prices on bitcoin spot markets . . .’’ 62 See Exchange Rule 14.11(f). 63 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. 64 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 trading platforms 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 trading platforms 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 VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 (ii) the requirement that an exchange proposal be designed, in general, to protect investors and the public interest. The Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act and that this filing sufficiently demonstrates that the CME Bitcoin Futures market represents a regulated market of significant size and that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal. (i) Designed To Prevent Fraudulent and Manipulative Acts and Practices In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 65 with a regulated market of significant size. Both the Exchange and CME are members of the Intermarket Surveillance Group (‘‘ISG’’).66 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 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 trading platform 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. 65 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 constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval. 66 For a list of the current members and affiliate members of ISG, see www.isgportal.com. PO 00000 Frm 00202 Fmt 4703 Sfmt 4703 2399 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.67 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.68 (a) Manipulation of the ETP According to the Sponsor’s research presented above, the Bitcoin Futures market is the leading market for bitcoin price formation. Where Bitcoin Futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market (beyond just the constituents of the Index 69) would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because the Index is based on spot prices. As such, the Exchange believes that part (a) of the significant market test outlined above is satisfied and that common membership in ISG between the Exchange and CME would assist the listing exchange in detecting and deterring misconduct in the Shares. (b) Predominant Influence on Prices in Spot and Bitcoin Futures The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices 67 See Wilshire Phoenix Disapproval. 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. 69 As further described below, the ‘‘Index’’ for the Trust is the CME CF Bitcoin Reference Rate—New York Variant. The current trading platform composition of the Index is Coinbase, Bistamp, Kraken, itBit, LMAX Digital, and Gemini (the ‘‘Constituent Platforms’’). 68 See E:\FR\FM\12JAN1.SGM 12JAN1 2400 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices in the Bitcoin Futures market or spot market for a number of reasons, including the significant volume in the Bitcoin Futures market, the size of bitcoin’s market cap, and the significant liquidity available in the spot market. In addition to the Bitcoin Futures market data points cited above, the spot market for bitcoin is also very liquid. (c) Other Means To Prevent Fraudulent and Manipulative Acts and Practices As noted above, the Commission also permits a listing exchange to demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The Exchange and Sponsor believe that such conditions are present. According to the Sponsor, a significant portion of the considerations around crypto pricing have historically stemmed from a lack of consistent pricing across markets. However, according to the Sponsor’s research, - Spread,, The results show a clear and sharp decline in the %C-Spread, indicating that the bitcoin market has become more cross-platforms spreads in bitcoin have been declining consistently over the past several years. Based on the daily bitcoin price series from several popular centralized trading platforms 70 the Sponsor has calculated the largest crossplatform percentage spread (labelled as %C-Spread) by deducting the highest or maximum price (P) at time t from the lowest or minimum, and dividing by the lowest across all trading platforms (i). Formally, this is expressed as: - min( Pt,e) - n1a:(P1,t) min(P;,1) efficient as cross-platform prices have converged over time. C-Spread of Bitcoin Prices in Percent(%) across Exchanges From January 1, 2017 to February 1, 2023 25 20 1 C C "O 15 f (I) 0 10! !,. ! t 2019 2023 2020 In addition, the magnitude of outlier % C-spreads has also declined over time. This boxplot shows that, not only did the median value of the %C-Spread decline over time, but also the extreme outlier values. For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, 2021, 2022, and 2023 (up until February 01, 2023) are 29.14%, 14.12%, 8.54%, 6.04%, 3.65%, 5.56%, and 0.63%, respectively. The market has experienced a 38% year-on-year decline 70 The trading platforms include Binance, Bitfinex, Bithumb, Bitstamp, Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, Kraken, Kucoin, and OKEX. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 PO 00000 Frm 00203 Fmt 4703 Sfmt 4703 in the annual median %C-Spread indicating a greater degree of bitcoin price convergence across trading platforms and a more efficient market. E:\FR\FM\12JAN1.SGM EN12JA24.058</GPH> 2018 12JAN1 EN12JA24.057</GPH> khammond on DSKJM1Z7X2PROD with NOTICES 2017 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 2401 Boxplot of C-Spread (in%) of Bitcoin across Exchanges From January 1, 2017 to February 1, 2023 I a. Ill u 2018 khammond on DSKJM1Z7X2PROD with NOTICES The dispersion (s) of bitcoin Prices has also declined over the same period. This chart shows the 7-day rolling standard deviation of the %C-Spread from January 1, 2017 to February 1, 2023. The Sponsor’s research finds that the dispersion in bitcoin prices across all trading platforms has decreased over VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 l 2021 time, indicating that prices on all the considered trading platforms converge towards the intrinsic average much more efficiently. This suggests that the market has become better at quickly reaching a consensus price for bitcoin. As the pricing of the crypto market becomes increasingly efficient, pricing PO 00000 Frm 00204 Fmt 4703 Sfmt 4703 l 2022 methodologies become more accurate and less susceptible to manipulation. The clustering of prices across a variety of sources within the primary market points towards robust price discovery mechanisms and efficient arbitrage. E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.059</GPH> l 2402 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 7-0ay Standard Deviation (a) of C•Spread across Exchanges From January 1, 2017 to February 1, 2023 - a of C•Spread 12 10 1 C 8 :::;, I ~ 6- ~ I) ~ ~ 4 i 21--·· l~ { o! l 2017 2018 2019 One factor that has contributed to the overall efficiency of, and improved price discovery within the bitcoin market is the increase in the number of 2020 2021 2022 participants, and subsequently, the total dollar amount allocated to this market. This can be illustrated by the following chart, which shows the number of 2023 wallet addresses holding bitcoin from January 2016 to February 2023. r-~ VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 notional of the bid and ask order books within the first 100 price levels across several of the largest centralized crypto trading platforms from February 2022 to January 2023. Specifically, the dollar PO 00000 Frm 00205 Fmt 4703 Sfmt 4703 notional that is allocated closest to the mid price has hovered between $2.6 million and $12 million over that period. E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.061</GPH> The large number of participants in the bitcoin market has manifested itself in high liquidity in the market. This is exhibited in the following chart, which shows the daily aggregated dollar EN12JA24.060</GPH> khammond on DSKJM1Z7X2PROD with NOTICES BITCOIN ADDRESSES WITH BALANCE> 0 OVER TIME Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices 2403 Dally Aggregated Bid and Ask Order Books of BTC/USD(T) across Binance, Bltfinex, Cexio, Gemini, Huobi, 1bit, Kraken and Okex for the First 100 Price Levels 12M 10M .- -- ,... !!; ! 0 ii z SM, l .. .!? 8 i 6M 4M May2022 khammond on DSKJM1Z7X2PROD with NOTICES An increased notional order book suggests that there is a higher degree of consensus among investors regarding the price of bitcoin. Moreover, this market characteristic hampers any attempt of price manipulation by any single large entity. As a robustness check, the Sponsor investigates whether the dollar notional in the order book changes significantly prior to and post an extreme price event. Specifically, for events constituting large increases in the price of bitcoin, if the ask (or sell) side of the order book experiences a significant shrinkage in the dollar notional right before the event, then this may be an indication of market manipulation whereby the askside of the order book becomes VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Jul 2022 Sep 2022 sufficiently thin for a large order to move the price upward. Similarly, for events constituting large decreases in the price of bitcoin, if the bid (or buy) side of the order book experiences a significant shrinkage in the dollar notional prior to such events, then this may be an indication of market manipulation whereby the thinner bidside of the order book may potentially lead to significant downward price movements. Using the top and bottom 0.1% of hourly price changes from February 1, 2022 to February 1, 2023 as events of extreme upward and downward market movements, respectively, the Sponsor plotted the bid (left charts) and ask (right charts) dollar notional of the PO 00000 Frm 00206 Fmt 4703 Sfmt 4703 Nov2022 Jan 2023 bitcoin order book within a six-hour window around these events in the chart below, which shows the results for extreme upward price movements. The extreme price events (indicated by the dashed green lines) perfectly coincide with the decrease in dollar notional of the ask-side of the order book. This is indicative of an efficient market, whereby large market movements are quickly and dynamically absorbed by a thick orderbook. Moreover, the dollar notional on the ask side after the event is replenished back to its pre-event level, which implies that market participants’ reactions are quick to restore the market back to its equilibrium level. BILLING CODE 8011–01–P E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.062</GPH> Mar 2022 2404 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices Median Hourly Order Book Dollar Notional of Bid (Left Charts) and Ask (Right Charts) on Binance, Six Hours Pre and Post Extreme Price Deviations in the Top 0.1% 2022-02-28 14:00:00 2022-02-28 14:00:00 900k. 1M' 850k: 0.9M' 800k' 750k'. .. , __ 09:00 Feb 28, 2022 0.8M; 09:00 Feb 28, 2022 18:00 2022-03-09 03:00:00 1.2M, 1.lMc 1M' 0.9M 12:00 2022-03-09 03:00:00 VIM; 1.2M o.sw, 00:00 Marg, '"' __ ,__I ... ' - --- .. ' -----03:00 06:00 09:00 00:00 ~::i __ ---- _L_ 09:00 12:00 May ll, 2022 2022-os-12 15:00 --- ---- ....... ------------ 06:00 09:00 Marg, 2%2i2-05·1113:00:00 ~b2i2-05-1113:00:00 1M: 0.9M' O.SM( ....l 03:00 18:00 ~~ 09:00 12:00 May 11, 2022 14:00:00 900k; 800k: 7001<[ 15:00 18:00 2022-05-12 14:00:00 6001<' - -~s---- _ _ , __ - 09:00 May 12, 2022 2022-06-19 10:00:00 0.8M' 06:00 09:00 Jun 19' 2022 2022-06·30 ~ $ 12:00 18:00 12:00 15:00 700k; 600k;___ ______ ...L ..... ·-··· 18:00 21:00 00:00 03:00 Jun 30' 2022 2022-11:11H!~bo:oo 2022-11-10 13:00:00 300k; 250k' 200k' 300!< . L.. 12:00 15:00 09:00 Nov lO, 2022 2022-11-14 260k 240k 220!<: 250k: 200k'... 18:00 03:00 Nov 14' ' ---- ....---..•-· ---·~----· - ..... __....., ... 06:00 09:00 ---- _______ ..,. __-___-: __ 1t'-_______.,,,. _ _ _ _ _ _ _,,,, 09:00 12:00 Nov lO, 2022 2022-11-14 06:00:00 280k' 260k' 240k f :wok' ... 12:00 03:00 15:00 18:00 06:00:00 L ......... ------------06:00 09:00 Nov 14• ~°6h-01-14 '6h-01-14 00:00:00 12:00 00:00:00 350k: I .............. _____________ , } 21:00 00:00 Jan 13, 2023 Jan 14, 2023 The same results and conclusions are found for extreme downward price movements. The charts below show that such price events perfectly coincide khammond on DSKJM1Z7X2PROD with NOTICES 09:00 2022-06-30 23:00:00 800!<' I ........ ,L. .. ---21:00 00:00 03:00 Jul 1, 2022 Jun 30, 2022 350k 300k' 250!<' 06:00 Jun 19, 2022 23:00:00 800k; ~ 7001( O 600k' VerDate Sep<11>2014 15:00 00:38 Jan 12, 2024 Jkt 262001 03:00 ---------- ' 06:00 I 300k' ····-··-·J · 21:00 00:00 Jan 13, 2023 Jan 14, 2023 with shrinkages on the bid side of the order book (left charts), indicating an efficient and dynamic bitcoin market. Moreover, the bid-side of the order book PO 00000 Frm 00207 Fmt 4703 Sfmt 4703 03:00 06:00 after the event is also restored back to its pre-event level, which suggests that the market is symmetrically efficient in moving back to equilibrium. E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.063</GPH> ~ 2405 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices Median Hourly Order Book Dollar Notional of Bid (Left Charts) and Ask (Right Charts) on Binance, Six Hours Pre and Post Extreme Price Deviations in the Bottom 0.1% 2022-03-16 03:00:00 2022-03-16 03:00:00 1M 0.95M'. 0.9M: 0.85M'. 0.8M 900k 800k; ................·1 .................... 00:00 03:00 06:00 Mar 16' lM, 0.95M' 0.9M 0.85M; 0.8M' ..... 00:00 Mar 16' ,fih-os-1112:00:00 12:00 May 11• 16h-06-14 06:00 09:00 . ........... 1...... 18:00 15:00 03:00 ,<1h-os-11 12:00:00 1.1M; 1M 0.9M 0.8M' - - - -... L 09:00 ..l .. ................ 700k'....._. 09:00 09:00 12:00 15:00 18:00 May 11, 2022 01:00:00 2022-06·14 01:00:00 1.lM 1.2M' 1W . . .. ...J. .... ___ ....... .. 21:00 00:00 03:00 Jun 13, 2022 Jun 14, 2022 0.8M'... 06:00 2022-06-18 06:00:00 1.<IM, .-.. 1.2W lM' ::::' 0.8M• ~ MM'. 0 ls 03:00 Jun 18, 2022 09:00 ~ 220!< 200k 180k; 180k; 170k . 03:00 Aug 19, 2022 .L 06:00 09:00 . .. ............. .... ..L. . . ..... ........ 09:00 12:00 15:00 Sep 13' 1fih-o9-27 16:00:00 12:00 18:00 Sep 13' 300k, 15:00 18:00 21:00 12:00 15:00 18:00 'fih-09-27 16:00:00 200k ............ . 12:00 Nova, 2022 12:00 15:00 Sep 27' 2022 2022-11-08 2022-11-08 17:00:00 2022-11-08 18:00:00 21:00 2022-11-08 18:00:00 3001<' 250k' 2001::. 250k; 200k; . . ........ . 15:00 Nov 8, 2022 21:00 00:00 15:00 Novl!,2022 Nov 9, 2022 BILLING CODE 8011–01–C (ii) Designed To Protect Investors and the Public Interest The Exchange believes that the proposal is designed to protect investors and the public interest. Over the past several years, U.S. investor exposure to bitcoin through OTC Bitcoin Funds has grown into the tens of billions of dollars, including through Bitcoin Futures ETFs. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Bitcoin Futures ETFs and premium/discount volatility and management fees for OTC Bitcoin Funds. The Exchange believes that the Jkt 262001 18:00 17:00:00 300k 250ki 200k ...........~.... ---•------l. ...................._ ...... 21:00 12:00 15:00 18:00 Nov 8, 2022 250k; khammond on DSKJM1Z7X2PROD with NOTICES 09:00 09:00 ---- 12:00 Sep27,2022 00:38 Jan 12, 2024 06:00 500k' 450!<; 400!<' 3501<:. 500k 450k' 400k: 3SOkL .. VerDate Sep<11>2014 03:00 Aug 19, 2022 2022-09-13 12:00:00 1:! 300!<; 12:00 .......L ... 12:00 2022-09-13 12:00:00 ~ 450k, 400k: 0 350k: 09:00 2022-08-19 06:00:00 200k: j 06:00 ioi1'!.-rf~~is 06:00:00 03:00 Jun 18, 2022 12:00 2022-0&-19 06:00:00 .J!! 190k 8 ..... L . . 00:00 03:00 1.2M' lM; 0.8Mi. ~ ~ 21:00 Jun n, 2022 concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, such concerns are now outweighed by investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to bitcoin in a regulated and transparent exchangetraded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through PO 00000 Frm 00208 Fmt 4703 Sfmt 4703 21:00 00:00 Nov 9, 2022 meaningful competition; (iii) reducing risks and costs associated with investing in Bitcoin Futures ETFs and operating companies that are imperfect proxies for bitcoin exposure; and (iv) providing an alternative to custodying spot bitcoin. ARK 21Shares Bitcoin ETF Delaware Trust Company is the trustee (‘‘Trustee’’). The Bank of New York Mellon will be the administrator (‘‘Administrator’’) and transfer agent (‘‘Transfer Agent’’). Foreside Global Services, LLC will be the marketing agent (‘‘Marketing Agent’’) in connection with the creation and redemption of ‘‘Baskets’’ of Shares. ARK Investment Management LLC (the E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.064</GPH> 0.9M 2406 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES ‘‘Subadviser’’) 71 is the sub-adviser of the Trust and will provide data, research, and, as needed, operational support to the Trust, including with respect to assistance in the marketing of the Shares. As noted above, Coinbase Custody Trust Company, LLC, is the Custodian and will be responsible for custody of the Trust’s bitcoin. The Bank of New York Mellon (the ‘‘Cash Custodian’’) will act as custodian of the Trust’s cash and cash equivalents. According to the Registration Statement, each Share will represent a fractional undivided beneficial interest in the Trust. The Trust’s assets will only consist of bitcoin, cash, and cash equivalents.72 According to the Registration Statement, the Trust is neither an investment company registered under the Investment Company Act of 1940, as amended,73 nor a commodity pool for purposes of the Commodity Exchange Act (‘‘CEA’’), and neither the Trust nor the Sponsor is subject to regulation as a commodity pool operator or a commodity trading adviser in connection with the Shares. When the Trust creates or redeems its Shares, it will do so in cash transactions in blocks of 5,000 Shares (a ‘‘Creation Basket’’) at the Trust’s net asset value (‘‘NAV’’). Authorized participants will deliver, or facilitate the delivery of, cash to the Trust’s account with the Cash Custodian, in exchange for Shares when they create Shares, and the Trust, through the Cash Custodian, will deliver cash to such authorized participants when they redeem Shares with the 71 The Subadviser is an investment adviser. An investment adviser to an open-end fund is required to be registered under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). As a result, the Adviser and its related personnel are subject to the provisions of Rule 204A–1 under the Advisers Act relating to codes of ethics. This Rule requires investment advisers to adopt a code of ethics that reflects the fiduciary nature of the relationship to clients as well as compliance with other applicable securities laws. Accordingly, procedures designed to prevent the communication and misuse of nonpublic information by an investment adviser must be consistent with Rule 204A–1 under the Advisers Act. In addition, Rule 206(4)–7 under the Advisers Act makes it unlawful for an investment adviser to provide investment advice to clients unless such investment adviser has (i) adopted and implemented written policies and procedures reasonably designed to prevent violation, by the investment adviser and its supervised persons, of the Advisers Act and the Commission rules adopted thereunder; (ii) implemented, at a minimum, an annual review regarding the adequacy of the policies and procedures established pursuant to subparagraph (i) above and the effectiveness of their implementation; and (iii) designated an individual (who is a supervised person) responsible for administering the policies and procedures adopted under subparagraph (i) above. 72 Cash equivalents are short-term instruments with maturities of less than 3 months. 73 15 U.S.C. 80a–1. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Trust. Authorized participants may then offer Shares to the public at prices that depend on various factors, including the supply and demand for Shares, the value of the Trust’s assets, and market conditions at the time of a transaction. As noted above, the Trust is designed to protect investors against the risk of losses through fraud and insolvency that arise by holding bitcoin on centralized platforms. Specifically, the Trust is designed to protect investors as follows: (i) Assets of the Trust Protected From Insolvency The Trust’s bitcoin will be held by its Custodian,74 which is a New York chartered trust company overseen by the NYDFS and a qualified custodian under Rule 206–4 of the Investment Adviser Act. The Custodian will custody the Trust’s bitcoin pursuant to a custody agreement, which requires the Custodian to maintain the Trust’s bitcoin in segregated accounts that clearly identify the Trust as owner of the accounts and assets held on those accounts; the segregation will be both from the proprietary property of the Custodian and the assets of any other customer. Such an arrangement is generally deemed to be ‘‘bankruptcy remote,’’ that is, in the event of an insolvency of the Custodian, assets held in such segregated accounts would not become property of the Custodian’s estate and would not be available to satisfy claims of creditors of the Custodian. In addition, according to the Registration Statement, the Custodian carries fidelity insurance, which covers assets held by the Custodian in custody from risks such as theft of funds. These arrangements provide significant protections to investors and could have mitigated the type of losses incurred by investors in the numerous cryptorelated insolvencies, including Celsius, Voyager, BlockFi and FTX. (ii) Trust’s Transfer Agent Will Instruct Disposition of Trust’s Bitcoin According to the Registration Statement, except with respect to sale of bitcoin from time to time to cover expenses of the Trust, the only time bitcoin will move into or out from the Trust will be with respect to creations or redemptions of Shares of the Trust. In such cases, a third party will use cash to buy and deliver bitcoin to create Shares or withdraw and sell bitcoin for cash to redeem Shares, on behalf of the Trust. Authorized participants will deliver cash to the Trust’s account with 74 According to the Registration Statement, the Trust’s cash will be held at The Bank of New York Mellon pursuant to a cash custody agreement. PO 00000 Frm 00209 Fmt 4703 Sfmt 4703 the Cash Custodian in exchange for Shares of the Trust, and the Trust, through the Cash Custodian, will deliver cash to authorized participants when those authorized participants redeem Shares of the Trust. The Transfer Agent will facilitate the settlement of Shares in response to the placement of creation orders and redemption orders from authorized participants. The creation and redemption procedures are administered by the Transfer Agent, an independent third party. Specifically, Shares are issued in registered form in accordance with the Trust agreement.75 The Transfer Agent has been appointed registrar and transfer agent for the purpose of transferring Shares in certificated form. The Transfer Agent keeps a record of all shareholders and holder of the Shares in certified form in the registry. The Sponsor recognizes transfers of Shares in certified form only if done in accordance with the Trust agreement. In other words, according to the Registration Statement, with very limited exceptions, the Sponsor will not give instructions with respect to the transfer or disposition of the Trust’s bitcoin. Bitcoin owned by the Trust will at all times be held by, and in the control of, the Custodian, and transfer of such bitcoin to or from the Custodian will occur only in connection with creation and redemptions of Shares. This will provide safeguards against the movement of bitcoin owned by the Trust by or to the Sponsor or affiliates of the Sponsor. (iii) Trust’s Assets Are Subject to Regular Audit According to the Registration Statement, audit trails exist for all movement of bitcoin within Custodiancontrolled bitcoin wallets and are audited annually for accuracy and completeness by an independent external audit firm. In addition, the Trust will be audited by an independent registered public accounting firm on a regular basis. (iv) Trust is Subject to the Exchange’s Obligations of Companies Listed on the Exchange and Applicable Corporate Governance Requirements The Trust will be subject to the obligations of companies listed on the Exchange set forth in BZX Rule 14.6, which require the listed companies to make public disclosure of material events and any notifications of deficiency by the Exchange, file and distribute period financial reports, 75 The Trust agreement refers to the ‘‘Amended and Restated Trust Agreement of Ark 21Shares Bitcoin ETF.’’ E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices engage independent public accountants registered with the Exchange, among other things. Such disclosures serve a key investor protection role. In addition, the Trust will be subject to the corporate governance requirements for companies listed on the Exchange set forth in BZX Rule 14.10. khammond on DSKJM1Z7X2PROD with NOTICES Investment Objective According to the Registration Statement and as further described below, the investment objective of the Trust is to seek to track the performance of bitcoin, as measured by the performance of the CME CF Bitcoin Reference Rate—New York Variant (the ‘‘Index’’), adjusted for the Trust’s expenses and other liabilities. In seeking to achieve its investment objective, the Trust will hold bitcoin and will value the Shares daily based on the Index. The Trust will process all creations and redemptions in cash transactions with authorized participants. The Trust is not actively managed. The Index As described in the Registration Statement, the Trust will use the Index to calculate the Trust’s NAV. The Trust will determine the bitcoin Index price and value its Shares daily based on the value of bitcoin as reflected by the Index. The Index is calculated daily and aggregates the notional value of bitcoin trading activity across major bitcoin spot trading platforms. The Index currently uses substantially the same methodology as the CME CF Bitcoin Reference Rate (‘‘BRR’’), including utilizing the same constituent bitcoin trading platforms, which is the underlying rate to determine settlement of CME Bitcoin Futures contracts, except that the Index is calculated as of 4 p.m. ET, whereas the BRR is calculated as of 4 p.m. London time. The Index is designed based on the International Organization of Securities Commissions (‘‘IOSCO’’) Principals for Financial Benchmarks. The administrator of the Index is CF Benchmarks Ltd. (the ‘‘Index Provider’’). The Trust also uses the bitcoin Index price to calculate its bitcoin holdings, which is the aggregate U.S. Dollar value of bitcoins in the Trust, based on the bitcoin Index price, less its liabilities and expenses. The Index 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. ET. The Index, which has been calculated and published since February 28, 2022, aggregates the trade flow of several bitcoin trading platforms, during an VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S. dollar price of one bitcoin at 4:00 p.m. ET. Specifically, the Index is calculated based on the ‘‘Relevant Transactions’’ (as defined below) of all of its constituent bitcoin trading platforms, which are currently Coinbase, Bitstamp, Kraken, itBit, LMAX Digital and Gemini (the ‘‘Constituent Platforms’’), 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 Platforms. 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 Index is then determined by the equally-weighted average of the volume medians of all partitions. Description of the Index, Index Construction and Maintenance The Index does not include any futures prices in its methodology. A ‘‘Relevant Transaction’’ is any cryptocurrency versus U.S. dollar spot trade that occurs during the observation window between 3:00 p.m. and 4:00 p.m. ET on a Constituent Platform in the BTC/USD pair that is reported and disseminated by a Constituent Platform through its publicly available Application Programming Interface (‘‘API’’) and observed by the Index Provider. An oversight function is implemented by the Index Provider in seeking to ensure that the Index is administered through the Index Provider’s codified policies for Index integrity, which include a conflicts of interest policy, a control framework, an accountability framework, and an input data policy. The Index is subject to oversight by the CME CF Oversight Committee. The CME CF Oversight Committee shall be comprised of at least five members, including at least: (i) two who are representatives of CME (‘‘CME Members’’); (ii) one who is a representative of CF (‘‘CF Member’’); and (iii) two who bring expertise and industry knowledge relating to benchmark determination, issuance and operations. The CME CF Oversight Committee meets no less frequently than quarterly. The CME CF Oversight Committee’s Founding Charter and PO 00000 Frm 00210 Fmt 4703 Sfmt 4703 2407 quarterly meeting minutes are publicly available. The Sponsor believes that the use of the Index is reflective of a reasonable valuation of the average spot price of bitcoin and that resistance to manipulation is a priority aim of its design methodology. The methodology: (i) takes an observation period and divides it into equal partitions of time; (ii) then calculates the volume-weighted median of all transactions within each partition; and (iii) the value is determined from the arithmetic mean of the volume-weighted medians, equally weighted. By employing the foregoing steps, the Index thereby seeks to ensure that transactions in bitcoin conducted at outlying prices do not have an undue effect on the value of a specific partition, large trades or clusters of trades transacted over a short period of time will not have an undue influence on the index level, and the effect of large trades at prices that deviate from the prevailing price are mitigated from having an undue influence on the benchmark level. Index data and the description of the Index are based on information made publicly available by the Index Provider on its website at https:// www.cfbenchmarks.com. Net Asset Value NAV means the total assets of the Trust (which includes all bitcoin and cash and cash equivalents) less total liabilities of the Trust. The Administrator determines the NAV of the Trust on each day that the Exchange is open for regular trading, as promptly as practical after 4:00 p.m. EST. The NAV of the Trust is the aggregate value of the Trust’s assets less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the Trust’s NAV, the Administrator values the bitcoin held by the Trust based on the price set by the Index as of 4:00 p.m. EST. The Administrator also determines the NAV per Share. The NAV for the Trust will be calculated by the Administrator once a day and will be disseminated daily to all market participants at the same time. If the Index is not available, or if the Sponsor determines in good faith that the Index does not reflect an accurate bitcoin price, then the Administrator will employ an alternative method to determine the fair value of the Trust’s assets.76 76 Such alternative method will only be employed on an ad hoc basis. Any permanent change to the calculation of the NAV would require a proposed rule change under Rule 19b–4. E:\FR\FM\12JAN1.SGM 12JAN1 2408 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices khammond on DSKJM1Z7X2PROD with NOTICES Availability of Information In addition to the price transparency of the Index, the Trust will provide information regarding the Trust’s bitcoin holdings as well as additional data regarding the Trust. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) the current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the BZX Official Closing Price 77 in relation to the NAV as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Official Closing Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The aforementioned information will be published as of the close of business and available on the Sponsor’s website at www.21shares.com, or any successor thereto. The Intraday Indicative Value (‘‘IIV’’) will be calculated by using the prior day’s closing NAV per Share as a base and updating that value during Regular Trading Hours to reflect changes in the value of the Trust’s bitcoin holdings during the trading day. The IIV disseminated during Regular Trading Hours should not be viewed as an actual real-time update of the NAV, which will be calculated only once at the end of each trading day. The IIV may differ from the NAV due to the differences in the time window of trades used to calculate each price (the NAV uses the Index price as of 4 p.m. ET, whereas the IIV draws prices from the last trade on each Constituent Platform in an effort to produce a relevant, real-time price). The Trust will provide an IIV per Share updated every 15 seconds, as calculated by the Exchange or a third-party financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be widely disseminated on a per Share basis every 15 seconds during the Exchange’s Regular Trading Hours through the facilities of the consolidated tape association (CTA) and Consolidated Quotation System (CQS) high speed lines. In addition, the IIV will be available through on-line 77 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. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 information services such as Bloomberg and Reuters. 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. As noted above, the Index is calculated daily and aggregates the notional value of bitcoin trading activity across major bitcoin spot trading platforms. Index data, value, and the description of the Index are based on information made publicly available by the Index Provider on its website at https://www.cfbenchmarks.com. Quotation and last sale information for bitcoin is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in bitcoin is available from major market data vendors and from the trading platforms on which bitcoin are traded. Depth of book information is also available from bitcoin trading platforms. The normal trading hours for bitcoin trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). The Bitcoin Custodian The Custodian carefully considers the design of the physical, operational and cryptographic systems for secure storage of the Trust’s private keys in an effort to lower the risk of loss or theft. The Custodian utilizes a variety of security measures to ensure that private keys necessary to transfer digital assets remain uncompromised and that the Trust maintains exclusive ownership of its assets. The operational procedures of the Custodian are reviewed by thirdparty advisors with specific expertise in physical security. The devices that store the keys will never be connected to the internet or any other public or private distributed network—this is colloquially known as ‘‘cold storage.’’ Only specific individuals are authorized to participate in the custody process, and no individual acting alone will be able to access or use any of the private keys. In addition, no combination of the executive officers of the Sponsor or the PO 00000 Frm 00211 Fmt 4703 Sfmt 4703 investment professionals managing the Trust, acting alone or together, will be able to access or use any of the private keys that hold the Trust’s bitcoin. Creation and Redemption of Shares When the Trust creates or redeems its Shares, it will do so in cash transactions in blocks of 5,000 Shares that are based on the quantity of bitcoin attributable to each Share of the Trust (e.g., a Creation Basket) at the Trust’s NAV. The authorized participants will deliver only cash to create shares and will receive only cash when redeeming shares. Further, authorized participants will not directly or indirectly purchase, hold, deliver, or receive bitcoin as part of the creation or redemption process or otherwise direct the Trust or a third party with respect to purchasing, holding, delivering, or receiving bitcoin as part of the creation or redemption process. The Trust will create shares by receiving bitcoin from a third party that is not the authorized participant and the Trust—not the authorized participant— is responsible for selecting the third party to deliver the bitcoin. Further, the third party will not be acting as an agent of the authorized participant with respect to the delivery of the bitcoin to the Trust or acting at the direction of the authorized participant with respect to the delivery of the bitcoin to the Trust. The Trust will redeem shares by delivering bitcoin to a third party that is not the authorized participant and the Trust—not the authorized participant— is responsible for selecting the third party to receive the bitcoin. Further, the third party will not be acting as an agent of the authorized participant with respect to the receipt of the bitcoin from the Trust or acting at the direction of the authorized participant with respect to the receipt of the bitcoin from the Trust. According to the Registration Statement, on any business day, an authorized participant may place an order to create one or more Creation Basket. Purchase orders must be placed by 12:00 p.m. Eastern Time, the close of regular trading on the Exchange, or another time determined by the Sponsor. The day on which an order is received is considered the purchase order date. The total deposit of cash required is an amount of cash sufficient to purchase such amount of bitcoin, the amount of which is equal to the combined NAV of the number of Shares included in the Creation Baskets being created determined as promptly as practicable after 4:00 p.m. ET on the date the order to purchase is properly received. The Administrator determines the quantity of bitcoin used to calculate the cash deposit in the Creation Basket E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices as of the opening of business on that business day, by the quotient of the number of Shares outstanding at the opening of business divided by 5,000. For example, assume the total bitcoin held by the Trust less any estimated 1,000BTC (10,000 Shares S,000 ) khammond on DSKJM1Z7X2PROD with NOTICES Total deposited cash as described in the example above would be 500 multiplied by the purchase price of bitcoin. The procedures by which an authorized participant can redeem one or more Creation Baskets mirror the procedures for the creation of Creation Baskets. A third party, that is unaffiliated with the Trust and the Sponsor, will use cash to buy and deliver bitcoin to create Shares or withdraw and sell bitcoin for cash to redeem Shares, on behalf of the Trust. The Sponsor will maintain ownership and control of bitcoin in a manner consistent with good delivery requirements for spot commodity transactions. 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 represents that, for initial and continued listing, the Trust must be in compliance with Rule 10A–3 under the Act. A minimum of 10,000 Shares will be outstanding at the commencement of listing on the Exchange. The Exchange will obtain a representation that the NAV will be calculated daily and information about the NAV and the assets of the Trust will be made available to all market participants at the same time. The Exchange notes that, as defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a trust that holds (1) a specified commodity 78 deposited with the trust, or (2) a specified commodity and, in addition to such specified commodity, cash; (b) issued by such trust in a specified aggregate minimum number in return for a deposit of a quantity of the underlying commodity and/or cash; and (c) when aggregated in 78 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. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 = SOO BTC per Creation Basket 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 and/or cash. Upon termination of the Trust, the Shares will be removed from listing. The Trustee, Delaware Trust Company, is a trust company having substantial capital and surplus and the experience and facilities for handling corporate trust business, as required under Rule 14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee without prior notice to and approval of the Exchange. The Exchange also notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor any agent of the Exchange shall have any liability for damages, claims, losses or expenses caused by any errors, omissions or delays in calculating or disseminating any underlying commodity value, the current value of the underlying commodity required to be deposited to the Trust in connection with issuance of Commodity-Based Trust Shares; resulting from any negligent act or omission by the Exchange, or any agent of the Exchange, or any act, condition or cause beyond the reasonable control of the Exchange, its agent, including, but not limited to, an act of God; fire; flood; extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government; communications or power failure; equipment or software malfunction; or any error, omission or delay in the reports of transactions in an underlying commodity. Finally, as required in Rule 14.11(e)(4)(G), the Exchange notes that any registered market maker (‘‘Market Maker’’) in the Shares must file with the Exchange in a manner prescribed by the Exchange and keep current a list identifying all accounts for trading in an underlying commodity, related commodity futures or options on commodity futures, or any other related commodity derivatives, which the registered Market Maker may have or over which it may exercise investment discretion. No registered Market Maker shall trade in an underlying commodity, related PO 00000 accrued but unpaid fees and expenses is 1,000 bitcoin and the total number of Shares outstanding is 10,000. The Administrator would determine the required deposit as follows: Frm 00212 Fmt 4703 Sfmt 4703 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. The Exchange is able to obtain information regarding trading in the Shares and the underlying bitcoin, Bitcoin Futures contracts, options on Bitcoin Futures, or any other bitcoin derivative through members acting as registered Market Makers, in connection with their proprietary or customer trades. As a general matter, the Exchange has regulatory jurisdiction over its members, and their associated persons. The Exchange also has regulatory jurisdiction over any person or entity controlling a member, as well as a subsidiary or affiliate of a member that is in the securities business. A subsidiary or affiliate of a member organization that does business only in commodities would not be subject to Exchange jurisdiction, but the Exchange could obtain information regarding the activities of such subsidiary or affiliate through surveillance sharing agreements with regulatory organizations of which such subsidiary or affiliate is a member. Trading Halts With respect to trading halts, the Exchange may consider all relevant E:\FR\FM\12JAN1.SGM 12JAN1 EN12JA24.065</GPH> for a given day by dividing the number of bitcoin held by the Trust as of the opening of business on that business day, adjusted for the amount of bitcoin constituting estimated accrued but unpaid fees and expenses of the Trust 2409 2410 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices factors in exercising its discretion to halt or suspend trading in the Shares. The Exchange will halt trading in the Shares under the conditions specified in BZX Rule 11.18. Trading may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in the Shares inadvisable. These may include: (1) the extent to which trading is not occurring in the bitcoin underlying the Shares; or (2) whether other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present. Trading in the Shares also will be subject to Rule 14.11(e)(4)(E)(ii), which sets forth circumstances under which trading in the Shares may be halted. If the IIV or the value of the Index is not being disseminated as required, the Exchange may halt trading during the day in which the interruption to the dissemination of the IIV or the value of the Index occurs. If the interruption to the dissemination of the IIV or the value of the Index persists past the trading day in which it occurred, the Exchange will halt trading no later than the beginning of the trading day following the interruption. In addition, if the Exchange becomes aware that the NAV with respect to the Shares is not disseminated to all market participants at the same time, it will halt trading in the Shares until such time as the NAV is available to all market participants. khammond on DSKJM1Z7X2PROD with NOTICES 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. The Shares of the Trust will conform to the initial and continued listing criteria set forth in BZX Rule 14.11(e)(4). Surveillance The Exchange represents 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 VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. FINRA conducts certain cross-market surveillances on behalf of the Exchange pursuant to a regulatory services agreement. The Exchange is responsible for FINRA’s performance under this regulatory services agreement. The Exchange or FINRA, on behalf of the Exchange, or both, will communicate as needed regarding trading in the Shares and Bitcoin Futures with other markets and other entities that are members of the ISG, and the Exchange, or FINRA, on behalf of the Exchange, or both, may obtain trading information regarding trading in the Shares and Bitcoin Futures from such markets and other entities.79 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. In addition, the Exchange also has a general policy prohibiting the distribution of material, non-public information by its employees. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. Information Circular Prior to the commencement of trading, the Exchange will inform its members in an Information Circular of the special characteristics and risks associated with trading the Shares. Specifically, the Information Circular will discuss the following: (i) the procedures for the creation and redemption of Baskets (and that the Shares are not individually redeemable); (ii) BZX Rule 3.7, which imposes suitability obligations on Exchange members with respect to recommending transactions in the Shares to customers; (iii) how information regarding the IIV and the Trust’s NAV are disseminated; (iv) the risks involved in trading the Shares outside of Regular Trading 79 For a list of the current members and affiliate members of ISG, see www.isgportal.com. PO 00000 Frm 00213 Fmt 4703 Sfmt 4703 Hours 80 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. The Information Circular will also reference the fact that there is no regulated source of last sale information regarding bitcoin, that the Commission has no jurisdiction over the trading of bitcoin as a commodity, and that the CFTC has regulatory jurisdiction over the trading of Bitcoin Futures contracts and options on Bitcoin Futures contracts. 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 81 in general and section 6(b)(5) of the Act 82 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,83 including Commodity-Based Trust Shares,84 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 80 Regular Trading Hours is the time between 9:30 a.m. and 4:00 p.m. Eastern Time. 81 15 U.S.C. 78f. 82 15 U.S.C. 78f(b)(5). 83 See Exchange Rule 14.11(f). 84 Commodity-Based Trust Shares, as described in Exchange Rule 14.11(e)(4), are a type of Trust Issued Receipt. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices manipulative acts and practices; 85 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. khammond on DSKJM1Z7X2PROD with NOTICES (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 85 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 trading platforms engaged in or allowing wash trading or other activity intended to manipulate the price of bitcoin on other markets, such activity does not normally impact prices on other trading platforms because participants will generally ignore markets with quotes that they deem non-executable. The reason is that wash trading aims to manipulate the volume rather than the price of an asset to give the impression of heightened market activity in hopes of attracting investors to that asset. Moreover, wash trades are executed within a trading platform rather than cross trading platforms since the entity executing the wash trades would aim to trade against itself, and as such, this can only happen within a trading platform. Should the wash trades of that entity result in a deviation of the price on that trading platform relative to others, arbitrageurs would then be able to capitalize on this mispricing, and bring the manipulated price back to equilibrium, resulting in a loss to the entity executing the wash trades. Moreover, the linkage between the bitcoin markets and the presence of arbitrageurs in those markets means that the manipulation of the price of bitcoin price on any single venue would require manipulation of the global bitcoin price in order to be effective. Arbitrageurs must have funds distributed across multiple trading platforms in order to take advantage of temporary price dislocations, thereby making it unlikely that there will be strong concentration of funds on any particular bitcoin trading platform 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. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 comprehensive surveillance-sharing agreement in place 86 with a regulated market of significant size. Both the Exchange and CME are members of ISG.87 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.88 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.89 86 As previously articulated by the Commission, ‘‘The standard requires such surveillance-sharing agreements since ‘‘they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur.’’ The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance- sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity; that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party.’’ The Commission has historically held that joint membership in ISG constitutes such a surveillance sharing agreement. See Wilshire Phoenix Disapproval. 87 For a list of the current members and affiliate members of ISG, see www.isgportal.com. 88 See Wilshire Phoenix Disapproval. 89 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. PO 00000 Frm 00214 Fmt 4703 Sfmt 4703 2411 (a) Manipulation of the ETP According to the Sponsor’s research presented above, the Bitcoin Futures market is the leading market for bitcoin price formation. Where Bitcoin Futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market (beyond just the constituents of the Index 90) would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because the Index is based on spot prices. As such, the Exchange believes that part (a) of the significant market test outlined above is satisfied and that common membership in ISG between the Exchange and CME would assist the listing exchange in detecting and deterring misconduct in the Shares. (b) Predominant Influence on Prices in Spot and Bitcoin Futures The Exchange and Sponsor also believe that trading in the Shares would not be the predominant force on prices in the Bitcoin Futures market or spot market for a number of reasons, including the significant volume in the Bitcoin Futures market, the size of bitcoin’s market cap, and the significant liquidity available in the spot market. In addition to the Bitcoin Futures market data points cited above, the spot market for bitcoin is also very liquid. (c) Other Means To Prevent Fraudulent and Manipulative Acts and Practices As noted above, the Commission also permits a listing exchange to demonstrate that ‘‘other means to prevent fraudulent and manipulative acts and practices’’ are sufficient to justify dispensing with the requisite surveillance-sharing agreement. The Exchange and Sponsor believe that such conditions are present. The Exchange believes that the proposal is designed to protect investors and the public interest. Over the past several years, U.S. investor exposure to bitcoin through OTC Bitcoin Funds has grown into the tens of billions of dollars and more than a billion dollars of exposure through Bitcoin Futures ETFs. With that growth, so too has grown the quantifiable investor protection issues to U.S. investors through roll costs for Bitcoin Futures ETFs and premium/ discount volatility and management fees for OTC Bitcoin Funds. The Exchange 90 As further described below, the ‘‘Index’’ for the Trust is the CME CF Bitcoin Reference Rate—New York Variant. The current trading platform composition of the Index is Coinbase, Bistamp, Kraken, itBit, LMAX Digital, and Gemini (the ‘‘Constituent Platforms’’). E:\FR\FM\12JAN1.SGM 12JAN1 2412 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices believes that the concerns related to the prevention of fraudulent and manipulative acts and practices have been sufficiently addressed to be consistent with the Act and, to the extent that the Commission disagrees with that assertion, also believes that such concerns are now outweighed by these investor protection concerns. As such, the Exchange believes that approving this proposal (and comparable proposals) provides the Commission with the opportunity to allow U.S. investors with access to bitcoin in a regulated and transparent exchange-traded vehicle that would act to limit risk to U.S. investors by: (i) reducing premium and discount volatility; (ii) reducing management fees through meaningful competition; (iii) reducing risks and costs associated with investing in Bitcoin Futures ETFs and operating companies that are imperfect proxies for bitcoin exposure; and (iv) providing an alternative to custodying spot bitcoin. khammond on DSKJM1Z7X2PROD with NOTICES Commodity-Based Trust Shares The Exchange believes that the proposed rule change is designed to prevent fraudulent and manipulative acts and practices in that the Shares will be listed on the Exchange pursuant to the initial and continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange believes that its surveillance procedures are adequate to properly monitor the trading of the Shares on the Exchange during all trading sessions and to deter and detect violations of Exchange rules and the applicable federal securities laws. Trading of the Shares through the Exchange will be subject to the Exchange’s surveillance procedures for derivative products, including Commodity-Based Trust Shares. The issuer has represented to the Exchange that it will advise the Exchange of any failure by the Trust or the Shares to comply with the continued listing requirements, and, pursuant to its obligations under section 19(g)(1) of the Exchange Act, the Exchange will surveil for compliance with the continued listing requirements. If the Trust or the Shares are not in compliance with the applicable listing requirements, the Exchange will commence delisting procedures under Exchange Rule 14.12. The Exchange may obtain information regarding trading in the Shares and listed bitcoin derivatives via the ISG, from other exchanges who are members or affiliates of the ISG, or with which the Exchange has entered into a comprehensive surveillance sharing agreement. VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 Availability of Information The Exchange also believes that the proposal promotes market transparency in that a large amount of information is currently available about bitcoin and will be available regarding the Trust and the Shares. In addition to the price transparency of the Index, the Trust will provide information regarding the Trust’s bitcoin holdings as well as additional data regarding the Trust. The website for the Trust, which will be publicly accessible at no charge, will contain the following information: (a) the current NAV per Share daily and the prior business day’s NAV and the reported closing price; (b) the BZX Official Closing Price 91 in relation to the NAV as of the time the NAV is calculated and a calculation of the premium or discount of such price against such NAV; (c) data in chart form displaying the frequency distribution of discounts and premiums of the Official Closing Price against the NAV, within appropriate ranges for each of the four previous calendar quarters (or for the life of the Trust, if shorter); (d) the prospectus; and (e) other applicable quantitative information. The aforementioned information will be published as of the close of business and available on the Sponsor’s website at www.21shares.com, or any successor thereto. The Trust will provide an IIV per Share updated every 15 seconds, as calculated by the Exchange or a thirdparty financial data provider during the Exchange’s Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be widely disseminated on a per Share basis every 15 seconds during the Exchange’s Regular Trading Hours through the facilities of the consolidated tape association (CTA) and Consolidated Quotation System (CQS) high speed lines. In addition, the IIV will be available through on-line information services such as Bloomberg and Reuters. 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. As noted above, the Index is calculated daily and aggregates the notional value of bitcoin trading activity across major bitcoin spot trading platforms. Index data, value, and the description of the Index are based on information made publicly available by the Index Provider on its website at https://www.cfbenchmarks.com. 91 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 00215 Fmt 4703 Sfmt 4703 Quotation and last sale information for bitcoin is widely disseminated through a variety of major market data vendors, including Bloomberg and Reuters. Information relating to trading, including price and volume information, in bitcoin is available from major market data vendors and from the trading platforms on which bitcoin are traded. Depth of book information is also available from bitcoin trading platforms. The normal trading hours for bitcoin trading platforms are 24 hours per day, 365 days per year. Information regarding market price and trading volume of the Shares will be continually available on a real-time basis throughout the day on brokers’ computer screens and other electronic services. Information regarding the previous day’s closing price and trading volume information for the Shares will be published daily in the financial section of newspapers. Quotation and last-sale information regarding the Shares will be disseminated through the facilities of the Consolidated Tape Association (‘‘CTA’’). In sum, the Exchange believes that this proposal is consistent with the requirements of section 6(b)(5) of the Act, that this filing sufficiently demonstrates that the CME Bitcoin Futures market represents a regulated market of significant size, and that on the whole the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by investor protection issues that would be resolved by approving this proposal. The Exchange believes that the proposal is, in particular, designed to protect investors and the public interest. The investor protection issues for U.S. investors has grown significantly over the last several years, through roll costs for Bitcoin Futures ETFs and premium/ discount volatility and management fees for OTC Bitcoin Funds. As discussed throughout, this growth investor protection concerns need to be reevaluated and rebalanced with the prevention of fraudulent and manipulative acts and practices concerns that previous disapproval orders have relied upon. Finally, the Exchange notes that in addition to all of the arguments herein which it believes sufficiently establish the CME Bitcoin Futures market as a regulated market of significant size, it is logically inconsistent to find that the CME 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. E:\FR\FM\12JAN1.SGM 12JAN1 Federal Register / Vol. 89, No. 9 / Friday, January 12, 2024 / Notices For the above reasons, the Exchange believes that the proposed rule change is consistent with the requirements of section 6(b)(5) of the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purpose of the Act. The Exchange notes that the proposed rule change, rather will facilitate the listing and trading of an additional exchange-traded product that will enhance competition among both market participants and listing venues, to the benefit of investors and the marketplace. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. 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: khammond on DSKJM1Z7X2PROD with NOTICES Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include file number SR– CboeBZX–2023–028 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to file number SR–CboeBZX–2023–028. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the VerDate Sep<11>2014 00:38 Jan 12, 2024 Jkt 262001 public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to file number SR–CboeBZX–2023–028 and should be submitted on or before February 2, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.92 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–00499 Filed 1–11–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99289; File No. SR– CboeBZX–2023–040] Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of Filing of Amendment No. 2 to a Proposed Rule Change To List and Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares January 8, 2024. On June 30, 2023, Cboe BZX Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to list and trade shares (‘‘Shares’’) of the VanEck Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. On July 11, 2023, the Exchange filed Amendment No. 1 to the proposed rule change, which amended and replaced the proposed rule change in its entirety. The proposed rule change, as modified by Amendment No. 1, was published for comment in the Federal Register on July 19, 2023.3 On August 31, 2023, pursuant 92 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 See Securities Exchange Act Release No. 97903 (July 13, 2023), 88 FR 46320. Comments on the 1 15 PO 00000 Frm 00216 Fmt 4703 Sfmt 4703 2413 to section 19(b)(2) of the Act,4 the Commission designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change, as modified by Amendment No. 1.5 On September 28, 2023, the Commission instituted proceedings to determine whether to disapprove the proposed rule change, as modified by Amendment No. 1.6 On January 5, 2024, the Exchange filed Amendment No. 2 to the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. Amendment No. 2 amended and replaced the proposed rule change, as modified by Amendment No. 1, in its entirety. The Commission is publishing this notice to solicit comments on the proposed rule change, as modified by Amendment No. 2, from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe BZX Exchange, Inc. (‘‘BZX’’ or the ‘‘Exchange’’) is filing with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) a proposed rule change to list and trade shares of the VanEck Bitcoin Trust (the ‘‘Trust’’),7 under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. The text of the proposed rule change is also available on the Exchange’s website (https://markets.cboe.com/us/ equities/regulation/rule_filings/bzx/), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set proposed rule change, as modified by Amendment No. 1, are available at: https://www.sec.gov/ comments/sr-cboebzx-2023-040/ srcboebzx2023040.htm. 4 15 U.S.C. 78s(b)(2). 5 See Securities Exchange Act Release No. 98265, 88 FR 61641 (Sept. 7, 2023). 6 See Securities Exchange Act Release No. 98614, 88 FR 68785 (Oct. 4, 2023). 7 The Trust was formed as a Delaware statutory trust on December 17, 2020 and is operated as a grantor trust for U.S. federal tax purposes. The Trust has no fixed termination date. E:\FR\FM\12JAN1.SGM 12JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Notices]
[Pages 2387-2413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00499]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99288; File No. SR-CboeBZX-2023-028]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 5 to a Proposed Rule Change To List and Trade
Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares

January 8, 2024.
On April 25, 2023, Cboe BZX Exchange, Inc. (``BZX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the ARK
21Shares Bitcoin ETF under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares. The proposed rule change was published for comment in the
Federal Register on May 15, 2023.\3\ On June 15, 2023, pursuant to
section 19(b)(2) of the Act,\4\ the Commission designated a longer
period within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\5\ On June 28, 2023, the Exchange
filed Amendment No. 1 to the proposed rule change, which amended and
replaced the proposed rule change in its entirety. On June 30, 2023,
the Exchange filed Amendment No. 2 to the proposed rule change, which
amended and replaced the proposed rule change, as modified by Amendment
No. 1, in its entirety. On July 11, 2023, the Exchange filed Amendment
No. 3 to the proposed rule change, which amended and replaced the
proposed rule change, as modified by Amendment No. 2, in its entirety.
On August 11, 2023, the Commission noticed Amendment No. 3 and
instituted proceedings to determine whether to disapprove the proposed
rule change, as modified by Amendment No. 3.\6\ On September 26, 2023,
the Commission designated a longer period for Commission action on the
proposed

[[Page 2388]]

rule change, as modified by Amendment No. 3.\7\ On October 24, 2023,
the Exchange filed Amendment No. 4 to the proposed rule change, which
amended and replaced the proposed rule change, as modified by Amendment
No. 3, in its entirely. On January 5, 2024, the Exchange filed
Amendment No. 5 to the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. Amendment No.
5 amended and replaced the proposed rule change, as modified by
Amendment No. 4, in its entirety. The Commission is publishing this
notice to solicit comments on the proposed rule change, as modified by
Amendment No. 5, from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 97461 (May 9, 2023),
88 FR 31045. Comments received on the proposed rule change can be
found at: https://www.sec.gov/comments/sr-cboebzx-2023-028/srcboebzx2023028.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 97732, 88 FR 40877
(June 22, 2023).
\6\ See Securities Exchange Act Release No. 98112, 88 FR 55743
(Aug. 16, 2023).
\7\ See Securities Exchange Act Release No. 98530, 88 FR 67851
(Oct. 2, 2023). The Commission designated January 10, 2024, as the
date by which the Commission shall approve or disapprove the
proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing
with the Securities and Exchange Commission (``Commission'') a proposed
rule change to list and trade shares of the ARK 21Shares Bitcoin ETF
(the ``Trust''),\8\ under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares.
---------------------------------------------------------------------------

\8\ The Trust was formed as a Delaware statutory trust on June
22, 2021 and is operated as a grantor trust for U.S. federal tax
purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------

The text of the proposed rule change is also available on the
Exchange's website (https://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
This Amendment No. 5 to SR-CboeBZX-2023-028 amends and replaces in
its entirety the proposal as originally submitted on April 25, 2023 and
as amended by Amendment No. 1 on June 28, 2023, Amendment No. 2 on June
30, 2023, and Amendment No. 3 on July 11, 2023, and Amendment No. 4 on
October 24, 2023. The Exchange submits this Amendment No. 5 in order to
clarify certain points and add additional details to the proposal.
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\9\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.^{10 11} 21Shares US LLC is
the sponsor of the Trust (the ``Sponsor''). The Shares will be
registered with the Commission by means of the Trust's registration
statement on Form S-1 (the ``Registration Statement'').\12\ As further
discussed below, the Commission has historically approved or
disapproved exchange filings to list and trade series of Trust Issued
Receipts,\13\ 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.\14\ 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.\15\

[[Page 2389]]

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 exchange-traded products (``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 \16\ 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.'' \17\
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\9\ 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).
\10\ Any of the statements or representations regarding the
index composition, the description of the portfolio or reference
assets, limitations on portfolio holdings or reference assets,
dissemination and availability of index, reference asset, and
intraday indicative values, or the applicability of Exchange listing
rules specified in this filing to list a series of Other Securities
(collectively, ``Continued Listing Representations'') shall
constitute continued listing requirements for the Shares listed on
the Exchange.
\11\ The Exchange notes that two different proposals to list and
trade shares of the Trust were disapproved by the Commission on
March 31, 2022 and January 26, 2023. See Exchange Act Release Nos.
94571 (March 31, 2022), 87 FR 20014 (April 6, 2022) and 96751
(January 26, 2023), 88 FR 628 (January 31, 2023).
\12\ See draft Amendment No. 5 to the Registration Statement on
Form S-1, dated December 28, 2023 submitted to the Commission by the
Sponsor on behalf of the Trust. The descriptions of the Trust, the
Shares, and the Index (as defined below) contained herein are based,
in part, on information in the Registration Statement. The
Registration Statement is not yet effective and the Shares will not
trade on the Exchange until such time that the Registration
Statement is effective.
\13\ See Exchange Rule 14.11(f)(1).
\14\ 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'').
\15\ 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).
\16\ See Exchange Rule 14.11(e)(5).
\17\ See Winklevoss Order at 37592.
---------------------------------------------------------------------------

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 Chicago Mercantile Exchange (``CME'') bitcoin futures
(``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.\18\ In the Teucrium Approval, the Commission
found the CME Bitcoin Futures market to be a regulated market of
significant size as it relates to CME Bitcoin Futures, an odd
tautological truth that is also inconsistent with prior disapproval
orders for ETPs that would hold actual bitcoin instead of derivatives
contracts (``Spot Bitcoin ETPs'') that use the exact same pricing
methodology as the CME Bitcoin Futures. As further discussed below,
both the Exchange and the Sponsor believe that this proposal and the
included analysis are sufficient to establish that the CME Bitcoin
Futures market represents a regulated market of significant size as it
relates both to the CME Bitcoin Futures market and to the spot bitcoin
market and that this proposal should be approved.
---------------------------------------------------------------------------

\18\ 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'').
---------------------------------------------------------------------------

Finally, as discussed in greater detail below, the Trust provides
investors interested in exposure to bitcoin with important protections
that are not always available to investors that invest directly in
bitcoin, including protection against insolvency, cyber attacks, and
other risks. If U.S. investors had access to vehicles such as the Trust
for their bitcoin investments, instead of directing their bitcoin
investments into loosely regulated offshore vehicles (such as loosely
regulated centralized trading platforms that have since faced
bankruptcy proceedings or other insolvencies), then countless investors
would have protected their principal investments in bitcoin and thus
benefited.
Background
Bitcoin is a digital asset based on the decentralized, open-source
protocol of the peer-to-peer computer network launched in 2009 that
governs the creation, movement, and ownership of bitcoin and hosts the
public ledger, or ``blockchain,'' on which all bitcoin transactions are
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized
nature of the Bitcoin Network allows parties to transact directly with
one another based on cryptographic proof instead of relying on a
trusted third party. The protocol also lays out the rate of issuance of
new bitcoin within the Bitcoin Network, a rate that is reduced by half
approximately every four years with an eventual hard cap of 21 million.
It's generally understood that the combination of these two features--a
systemic hard cap of 21 million bitcoin and the ability to transact
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin
its value.\19\ The

[[Page 2390]]

first rule filing proposing to list an ETP to provide exposure to
bitcoin in the U.S. was submitted by the Exchange on June 30, 2016.\20\
At that time, blockchain technology, and digital assets that utilized
it, were relatively new to the broader public. The market cap of all
bitcoin in existence at that time was approximately $10 billion. No
registered offering of digital asset securities or shares in an
investment vehicle with exposure to bitcoin or any other cryptocurrency
had yet been conducted, and the regulated infrastructure for conducting
a digital asset securities offering had not begun to develop.\21\
Similarly, regulated U.S. Bitcoin Futures contracts did not exist. The
CFTC had determined that bitcoin is a commodity,\22\ 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.\23\ While the first over-the-counter
bitcoin fund launched in 2013, public trading was limited and the fund
had only $60 million in assets.\24\ 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 (``ICI'') and Securities Industry and
Financial Markets Association (``SIFMA'') that it was not aware, at
that time, of a single custodian providing fund custodial services for
digital assets.\25\ Fast forward to today and the digital assets
financial ecosystem, including bitcoin, has progressed significantly.
The development of a regulated market for digital asset securities has
significantly evolved, with market participants having conducted
registered public offerings of both digital asset securities \26\ and
shares in investment vehicles holding Bitcoin Futures.\27\
Additionally, licensed and regulated service providers have emerged to
provide fund custodial services for digital assets, among other
services. For example, in February 2023, the Commission proposed to
amend Rule 206(4)-2 under the Advisers Act of 1940 (the ``custody
rule'') to expand the scope beyond client funds and securities to
include all crypto assets, among other assets; \28\ 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'');
\29\ 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; \30\ 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,\31\ and multiple transfer agents who provide services for
digital asset securities registered with the Commission.\32\
---------------------------------------------------------------------------

\19\ For additional information about bitcoin and the Bitcoin
Network, see https://bitcoin.org/en/getting-started; https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms; and https://www.vaneck.com/education/investment-ideas/investing-in-bitcoin-and-digital-assets/.
\20\ See Winklevoss Order.
\21\ 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.
\22\ 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.''
\23\ 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.
\24\ 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.
\25\ 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.
\26\ 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.
\27\ 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.
\28\ See Investment Advisers Act Release No. 6240 88 FR 14672
(March 9, 2023) (Safeguarding Advisory Client Assets).
\29\ 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).
\30\ 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.
\31\ 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.
\32\ 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
changed significantly since 2016, and cryptocurrency markets have grown
and evolved as well. The market for bitcoin is approximately 100 times
larger, having at one point reached a market cap of over $1
trillion.\33\ 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 CME Bitcoin Futures on a daily basis.\34\ Open
interest was over $1.4 billion for the entirety of the period and at
one point was over $2 billion. The CFTC has exercised its regulatory
jurisdiction in bringing a number of enforcement actions related to
bitcoin and against trading platforms that offer cryptocurrency
trading.\35\ As of

[[Page 2391]]

February 14, 2023 the NYDFS has granted no fewer than thirty-four
BitLicenses,\36\ including to established public payment companies like
PayPal Holdings, Inc. and Square, Inc., and limited purpose trust
charters to entities providing cryptocurrency custody services,
including the Trust's Custodian.\37\ In addition, the Treasury's Office
of Foreign Assets Control (``OFAC'') has brought enforcement actions
over apparent violations of the sanctions laws in connection with the
provision of wallet management services for digital assets.\38\
---------------------------------------------------------------------------

\33\ As of February 1, 2023, the total market cap of all bitcoin
in circulation was approximately $450 billion.
\34\ Data sourced from the CME Bitcoin Futures Report: 30 March,
2023, available at: https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.htm.
\35\ 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 trading platforms. See CFTC
Release No. 8680-23 (March 27, 2023), available at: https://www.cftc.gov/PressRoom/PressReleases/8680-23.
\36\ See https://www.dfs.ny.gov/virtual_currency_businesses.
\37\ The ``Custodian'' is Coinbase Trust Company, LLC.
\38\ 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.
---------------------------------------------------------------------------

In addition to the regulatory developments laid out above, more
traditional financial market participants have become more active in
cryptocurrency: large insurance companies, asset managers, university
endowments, pension funds, and even historically bitcoin skeptical fund
managers have allocated to bitcoin. As noted in the Financial Stability
Oversight Council (``FSOC'') report on Digital Asset Financial
Stability Risks and Regulation, ``[i]ndustry surveys suggest that the
scale of these investments grew quickly during the boom in crypto-asset
markets through late 2021. In June 2022, PwC estimated that the number
of crypto-specialist hedge funds was more than 300 globally, with $4.1
billion in assets under management. In addition, in a survey PwC found
that 38 percent of surveyed traditional hedge funds were currently
investing in `digital assets,' compared to 21 percent the year prior.''
\39\ 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.\40\ Established companies like Tesla, Inc., MicroStrategy
Incorporated, and Square, Inc., among others, announced substantial
investments in bitcoin in amounts as large as $1.5 billion (Tesla) and
$425 million (MicroStrategy). The foregoing examples demonstrate that
bitcoin has gained mainstream usage and recognition.
---------------------------------------------------------------------------

\39\ 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.
\40\ 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; \41\
(iii) purchasing shares of operating companies that they believe will
provide proxy exposure to bitcoin with limited disclosure about the
associated risks; \42\ or (iv) purchasing Bitcoin Futures exchange-
traded funds (``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 ETFs holding
physical bitcoin) to gain exposure to bitcoin. Similarly, investors in
Switzerland and across Europe have access to ETPs (issued by 21Shares,
among others) which trade on regulated exchanges and provide exposure
to a broad array of spot crypto assets. U.S. investors, by contrast,
are left with fewer and more risky means of getting bitcoin exposure,
as described above.\43\
---------------------------------------------------------------------------

\41\ The premium and discount for OTC Bitcoin Funds is known to
move rapidly. For example, over the period of 12/21/20 to 1/21/21,
the premium for the largest OTC Bitcoin Fund went from 40.18% to
2.79%. While the price of bitcoin appreciated significantly during
this period and NAV per share increased by 41.25%, the price per
share increased by only 3.58%. This means that investors are buying
shares of a fund that experiences significant volatility in its
premium and discount outside of the fluctuations in price of the
underlying asset. Even operating within the normal premium and
discount range, it's possible for an investor to buy shares of an
OTC Bitcoin Fund only to have those shares quickly lose 10% or more
in dollar value excluding any movement of the price of bitcoin. That
is to say--the price of bitcoin could have stayed exactly the same
from market close on one day to market open the next, yet the value
of the shares held by the investor decreased only because of the
fluctuation of the premium. As more investment vehicles, including
mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest
option for a buy and hold strategy for such vehicles is often an OTC
Bitcoin Fund, meaning that even investors that do not directly buy
OTC Bitcoin Funds can be disadvantaged by extreme premiums (or
discounts) and premium volatility.
\42\ 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.
\43\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot Bitcoin ETPs.
---------------------------------------------------------------------------

To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor
assets to significant risk because investors that would otherwise seek
crypto asset exposure through a Spot Bitcoin ETP are forced to find
alternative exposure through generally riskier means. For instance,
many U.S. investors that held their digital assets in accounts at
FTX,\44\ Celsius Network LLC,\45\ BlockFi Inc.\46\ and Voyager Digital
Holdings, Inc.\47\ 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 crypto asset space. As further
described below, the Trust, like all other series of Commodity-Based
Trust Shares, is designed to protect investors against the

[[Page 2392]]

risk of losses through fraud and insolvency that arise by holding
digital assets, including bitcoin, on centralized platforms.
---------------------------------------------------------------------------

\44\ See FTX Trading Ltd., et al., Case No. 22-11068.
\45\ See Celsius Network LLC, et al., Case No. 22-10964.
\46\ See BlockFi Inc., Case No. 22-19361.
\47\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

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. ETFs and mutual funds with a
U.S.-listed and regulated product to provide such access rather than
relying on either flawed products or products listed and primarily
regulated in other countries.
Bitcoin Futures ETFs
The Exchange and Sponsor applaud the Commission for allowing the
launch of ETFs registered under the Investment Company Act of 1940, as
amended (the ``1940 Act'') and the Bitcoin Futures Approvals that
provide exposure to bitcoin primarily through CME Bitcoin Futures
(``Bitcoin Futures ETFs''). Allowing such products to list and trade is
a productive first step in providing U.S. investors and traders with
transparent, exchange-listed tools for expressing a view on bitcoin.
The Bitcoin Futures Approvals, however, have created a logical
inconsistency in the application of the standard the Commission applies
when considering Bitcoin ETP proposals.
As discussed further below, the standard applicable to Bitcoin ETPs
is whether the listing exchange has in place a comprehensive
surveillance sharing agreement with a regulated market of significant
size in the underlying asset. Previous disapproval orders have made
clear that a market that constitutes a regulated market of significant
size is generally a futures and/or options market based on the
underlying reference asset rather than the spot commodity markets,
which are often unregulated.\48\ Leaving aside the analysis of that
standard until later in this proposal,\49\ 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:
---------------------------------------------------------------------------

\48\ 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.
\49\ As further outlined below, both the Exchange and the
Sponsor believe that the CME Bitcoin Futures market represents a
regulated market of significant size and that this proposal and
others like it should be approved on this basis.

The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably
be relied upon to capture the effects on the CME bitcoin futures
market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures
contracts, whether that attempt is made by directly trading on the
CME bitcoin futures market or indirectly by trading outside of the
CME bitcoin futures market. As such, when the CME shares its
surveillance information with Arca, the information would assist in
detecting and deterring fraudulent or manipulative misconduct
related to the non-cash assets held by the proposed ETP.\50\
---------------------------------------------------------------------------

\50\ 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'' \51\ when Judge Rao
stated ``. . . the Commission in the Teucrium order recognizes that the
futures prices are influenced by the spot prices, and the Commission
concludes in approving futures ETPs that any fraud on the spot market
can be adequately addressed by the fact that the futures market is a
regulated one . . .'' The Exchange agrees with the Commission on this
point and notes that the pricing mechanism applicable to the Shares is
similar to that of the CME Bitcoin Futures. As further discussed below,
this view is also consistent with the Sponsor's research.
---------------------------------------------------------------------------

\51\ Grayscale Investments, LLC v. Securities and Exchange
Commission, et al., Case No. 22-1142.
---------------------------------------------------------------------------

The structure of Bitcoin Futures ETFs provides negative outcomes
for buy and hold investors as compared to a Spot Bitcoin ETP.\52\
Specifically, the cost of rolling CME Bitcoin Futures contracts will
cause the Bitcoin Futures ETFs to lag the performance of bitcoin itself
and, at over a billion dollars in assets under management, would cost
U.S. investors significant amounts of money on an annual basis compared
to Spot Bitcoin ETPs. Such rolling costs would not be required for Spot
Bitcoin ETPs that hold bitcoin. Further, Bitcoin Futures ETFs could
potentially hit CME position limits, which would force a Bitcoin
Futures ETF to invest in non-futures assets for bitcoin exposure and
cause potential investor confusion and lack of certainty about what
such Bitcoin Futures ETFs are actually holding to try to get exposure
to bitcoin, not to mention completely changing the risk profile
associated with such an ETF. While Bitcoin Futures ETFs represent a
useful trading tool, they are clearly a sub-optimal structure for U.S.
investors that are looking for long-term exposure to bitcoin that will,
based on the calculations above, unnecessarily cost U.S. investors
significant amounts of money every year compared to Spot Bitcoin ETPs
and the Exchange believes that any proposal to list and trade a Spot
Bitcoin ETP should be reviewed by the Commission with this important
investor protection context in mind.
---------------------------------------------------------------------------

\52\ See e.g., ``Bitcoin ETF's Success Could Come at
Fundholders' Expense,'' Wall Street Journal (October 24, 2021),
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&__cf_chl_jschl_tk__=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
---------------------------------------------------------------------------

To the extent the Commission may view differential treatment of
Bitcoin Futures ETFs and Spot Bitcoin ETPs as

[[Page 2393]]

warranted based on the Commission's concerns about the custody of
physical bitcoin that a Spot Bitcoin ETP would hold (compared to cash-
settled futures contracts),\53\ the Sponsor believes this concern is
mitigated to a significant degree by the custodial arrangements that
the Trust has contracted with the Custodian to provide, as further
outlined below. In the Custody Statement, the Commission stated that
the fourth step that a broker-dealer could take to shield traditional
securities customers and others from the risks and consequences of
digital asset security fraud, theft, or loss is to establish, maintain,
and enforce reasonably designed written policies, procedures, and
controls for safekeeping and demonstrating the broker-dealer has
exclusive possession or control over digital asset securities that are
consistent with industry best practices to protect against the theft,
loss, and unauthorized and accidental use of the private keys necessary
to access and transfer the digital asset securities the broker-dealer
holds in custody. While bitcoin is not a security and the Custodian is
not a broker-dealer, the Sponsor believes that similar considerations
apply to the Custodian's holding of the Trust's bitcoin. After diligent
investigation, the Sponsor believes that the Custodian's policies,
procedures, and controls for safekeeping, exclusively possessing, and
controlling the Trust's bitcoin holdings are consistent with industry
best practices to protect against the theft, loss, and unauthorized and
accidental use of the private keys. As a trust company chartered by the
NYDFS, the Sponsor notes that the Custodian is subject to extensive
regulation and has among longest track records in the industry of
providing custodial services for digital asset private keys. Under the
circumstances, therefore, to the extent the Commission believes that
its concerns about the risks of spot bitcoin custody justifies
differential treatment of a Bitcoin Futures ETF versus a Spot Bitcoin
ETP, the Sponsor believes that the fact that the Custodian employs the
same types of policies, procedures, and safeguards in handling spot
bitcoin that the Commission has stated that broker-dealers should
implement with respect to digital asset securities would appear to
weaken the justification for treating a Bitcoin Futures ETF compared to
a Spot Bitcoin ETP differently due to spot bitcoin custody concerns.
---------------------------------------------------------------------------

\53\ See, e.g., Division of Investment Management Staff, Staff
Statement on Funds Registered Under the Investment Company Act
Investing in the Bitcoin Futures Market, May 11, 2021 (``The Bitcoin
Futures market also has not presented the custody challenges
associated with some cryptocurrency-based investing because the
futures are cash-settled'').
---------------------------------------------------------------------------

Based on the foregoing, the Exchange and Sponsor believe that any
objective review of the proposals to list Spot Bitcoin ETPs compared to
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead
to the conclusion that Spot Bitcoin ETPs should be available to U.S.
investors and, as such, this proposal and other comparable proposals to
list and trade Spot Bitcoin ETPs should be approved by the Commission.
Stated simply, U.S. investors will continue to lose significant amounts
of money from holding Bitcoin Futures ETFs as compared to Spot Bitcoin
ETPs, losses which could be prevented by the Commission approving Spot
Bitcoin ETPs. Additionally, any concerns related to preventing
fraudulent and manipulative acts and practices related to Spot Bitcoin
ETPs would apply equally to the spot markets underlying the futures
contracts held by a Bitcoin Futures ETF. Both the Exchange and Sponsor
believe that the CME Bitcoin Futures market is a regulated market of
significant size and that such manipulation concerns are mitigated, as
described extensively below. After allowing and approving the listing
and trading of Bitcoin Futures ETFs that hold primarily CME Bitcoin
Futures, however, the only consistent outcome would be approving Spot
Bitcoin ETPs on the basis that the CME Bitcoin Futures market is a
regulated market of significant size.
Given the current landscape, approving this proposal (and others
like it) and allowing Spot Bitcoin ETPs to be listed and traded
alongside Bitcoin Futures ETFs would establish a consistent regulatory
approach, provide U.S. investors with choice in product structures for
bitcoin exposure, and offer flexibility in the means of gaining
exposure to bitcoin through transparent, regulated, U.S. exchange-
listed vehicles.
Bitcoin Futures \54\
---------------------------------------------------------------------------

\54\ Unless otherwise noted, all data and analysis presented in
this section and referenced elsewhere in the filing has been
provided by the Sponsor.
---------------------------------------------------------------------------

CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate.\55\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric
related to Bitcoin Futures has trended consistently up since launch.
---------------------------------------------------------------------------

\55\ According to CME, the CME CF Bitcoin Reference Rate
aggregates the trade flow of major bitcoin spot trading platforms
during a specific calculation window into a once-a-day reference
rate of the U.S. dollar price of bitcoin. Calculation rules are
geared toward maximum transparency and real-time replicability in
underlying spot markets, including Bitstamp, Coinbase, Gemini,
itBit, and Kraken. For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
---------------------------------------------------------------------------

According to the Sponsor, the increase in the volume on CME, over
the past few years, is reflected in a higher proportion of the bitcoin
market share. This is illustrated by plotting the proportion of monthly
volume traded in bitcoin on the CME \56\ (categorized as regulated in
the chart and used as the numerator) in relation to the total bitcoin
market, which is comprised of the sum of the volume of Bitcoin Futures
on the CME and the spot volume on cryptocurrency trading platforms \57\
(categorized as unregulated and used as the denominator) from January
1, 2018 to January 31, 2023.
---------------------------------------------------------------------------

\56\ Data on Bitcoin Futures is available at https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html.
\57\ Data on bitcoin volume traded on cryptocurrency trading
platforms is available at https://www.cryptocompare.com.

---------------------------------------------------------------------------

[[Page 2394]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.051

The proportion of volume traded on CME has increased from less than
1% at inception, to more than 10% over three and a half years.
Furthermore, the CME market, as well as other crypto-linked markets,
and the spot market are highly correlated. In markets that are globally
and efficiently integrated, one would expect that changes in prices of
an asset across all markets to be highly correlated. The rationale
behind this is that quick and efficient arbitrageurs would capture
potentially profitable opportunities, consequently converging prices to
the average intrinsic value very rapidly.
Bitcoin markets exhibit a high degree of correlation. Using daily
bitcoin prices from centralized trading platforms, ETP providers, and
the CME from January 20, 2021 to February 1, 2023,\58\ the Sponsor
calculates the Pearson correlation of returns \59\ across these markets
and find a high degree of correlation.
---------------------------------------------------------------------------

\58\ The calculation of daily correlations used the period
January 20, 2021 to February 1, 2023 as this is the common period
across all the trading platforms and data sources being analyzed.
\59\ The Pearson correlation is a measure of linear association
between two variables and indicates the magnitude as well as
direction of this relationship. The value can range between -1
(suggesting a strong negative association) and 1 (suggesting a
strong positive association).
---------------------------------------------------------------------------

Correlations are between 57% and 99%, with the latter found mainly
across centralized trading platforms due to their higher level of
interconnectedness. The lower correlations pertain mainly to the ETPs,
which are relatively newer products and are mainly offered by a few
competing market makers who are required to trade in large blocks, thus
making it economically infeasible to capture small mispricings. As
additional investors and arbitrageurs enter the market and capture the
mispricing opportunities between these markets, it is likely that there
will be much higher levels of correlations across all markets.
BILLING CODE 8011-01-P

[[Page 2395]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.052

Pair-wise correlations of bitcoin returns are also calculated on
hourly and minute-by-minute sampling frequencies in order to estimate
the intra-day associations across the different bitcoin markets. The
results show correlations no less than 92% among centralized trading
platforms and between the CME Bitcoin Futures and centralized trading
platforms on an hourly basis, and no less than 78% on a minutely basis.
This suggests that bitcoin prices on centralized trading platforms and
the CME markets move very similarly and in a very efficient manner to
quickly reflect changes in market conditions, not only on a daily
basis, but also at much higher intra-day frequencies.

[[Page 2396]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.053

[[Page 2397]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.054

According to the Sponsor's research, this relationship holds true
during periods of extreme price volatility. This implies that no single
bitcoin market can deviate significantly from the consensus, such that
the market is sufficiently large and has an inherent unique resistance
to manipulation. Hence, the Sponsor introduces a statistical co-moment
called co-kurtosis, which measures to what extent two random variables
change together.\60\ If two returns series exhibit a high degree of co-
kurtosis, this means that they tend to undergo extreme positive and
negative changes simultaneously. A co-kurtosis value larger than +3 or
less than -3 is considered statistically significant. The following
table shows that the level of co-kurtosis is positive and very high
between all market combinations of hourly returns, which suggests that
bitcoin markets tend to move very similarly especially for extreme
price deviations.
---------------------------------------------------------------------------

\60\ Co-skewness and Co-kurtosis are higher order cross-moments
used in finance to examine how assets move together. Co-skewness
measures the extent to which two variables undergo extreme
deviations at the same time, whereby a positive (negative) value
means that both values exhibit positive (negative) values
simultaneously. While this measure is useful for estimating co-
movements in one direction or the other, it does not allow us to
test whether two variables comove similarly in either direction. For
that, we apply the co-kurtosis, which measures the extent to which
two variables undergo both extreme positive and negative deviations
at the same time.
---------------------------------------------------------------------------

Co-Kurtosis of Bitcoin Hourly Returns Across Centralized Exchanges,
ETPs, and the CME

[[Page 2398]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.055

As a robustness check, the co-kurtosis metric is also calculated
using minute-by-minute returns, and the conclusion remains the same,
suggesting that all bitcoin markets move in tandem especially during
extreme market movements.
Co-Kurtosis of Bitcoin Minutely Returns Across Centralized Exchanges,
ETPs, and the CME
[GRAPHIC] [TIFF OMITTED] TN12JA24.056

BILLING CODE 8011-01-C
These results present evidence of a robust global bitcoin market
that quickly reacts in a unanimous manner to extreme price movements
across both the spot markets, futures and ETP markets.
The Sponsor further believes that academic research corroborates
the overall trend outlined above and supports the thesis that the
Bitcoin Futures pricing leads the spot market and, thus, a person
attempting to manipulate the Shares would also have to trade on that
market to manipulate the ETP. Specifically, the Sponsor believes that
such research indicates

[[Page 2399]]

that Bitcoin Futures lead the bitcoin spot market in price
formation.\61\
---------------------------------------------------------------------------

\61\ See Hu, Y., Hou, Y. and Oxley, L. (2019). ``What role do
futures markets play in Bitcoin pricing? Causality, cointegration
and price discovery from a time-varying perspective'' (available at:
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This
academic research paper concludes that ``There exist no episodes
where the Bitcoin spot markets dominates the price discovery
processes with regard to Bitcoin futures. This points to a
conclusion that the price formation originates solely in the Bitcoin
futures market. We can, therefore, conclude that the Bitcoin futures
markets dominate the dynamic price discovery process based upon
time-varying information share measures. Overall, price discovery
seems to occur in the Bitcoin futures markets rather than the
underlying spot market based upon a time-varying perspective.'' See
also Matthew Hougan, Hong Kim, and Satyajeet Pal (2021). ``Price
Discovery in the Modern Bitcoin Market: Examining Lead-Lag
Relationships Between the Bitcoin Spot and Bitcoin Futures Market''
(available at https://static.bitwiseinvestments.com/Bitwise-Bitcoin-ETP-White-Paper-1.pdf). This academic research paper also concluded
that ``the CME bitcoin futures market is the dominant source of
price discovery when compared with the bitcoin spot market, and that
prices on the CME bitcoin futures market lead prices on bitcoin spot
markets . . .''
---------------------------------------------------------------------------

Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\62\ including Commodity-Based Trust Shares,\63\ 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;
\64\ 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.
---------------------------------------------------------------------------

\62\ See Exchange Rule 14.11(f).
\63\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\64\ 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 trading platforms 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 trading platforms 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 trading platform or
OTC platform. As a result, the potential for manipulation on a
trading platform would require overcoming the liquidity supply of
such arbitrageurs who are effectively eliminating any cross-market
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \65\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\66\ 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.\67\
---------------------------------------------------------------------------

\65\ 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 constitutes such a surveillance
sharing agreement. See Wilshire Phoenix Disapproval.
\66\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\67\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\68\
---------------------------------------------------------------------------

\68\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
According to the Sponsor's research presented above, the Bitcoin
Futures market is the leading market for bitcoin price formation. Where
Bitcoin Futures lead the price in the spot market such that a potential
manipulator of the bitcoin spot market (beyond just the constituents of
the Index \69\) would have to participate in the Bitcoin Futures
market, it follows that a potential manipulator of the Shares would
similarly have to transact in the Bitcoin Futures market because the
Index is based on spot prices. 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.
---------------------------------------------------------------------------

\69\ As further described below, the ``Index'' for the Trust is
the CME CF Bitcoin Reference Rate--New York Variant. The current
trading platform composition of the Index is Coinbase, Bistamp,
Kraken, itBit, LMAX Digital, and Gemini (the ``Constituent
Platforms'').
---------------------------------------------------------------------------

(b) Predominant Influence on Prices in Spot and Bitcoin Futures
The Exchange and Sponsor also believe that trading in the Shares
would not be the predominant force on prices

[[Page 2400]]

in the Bitcoin Futures market or spot market for a number of reasons,
including the significant volume in the Bitcoin Futures market, the
size of bitcoin's market cap, and the significant liquidity available
in the spot market. In addition to the Bitcoin Futures market data
points cited above, the spot market for bitcoin is also very liquid.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
According to the Sponsor, a significant portion of the
considerations around crypto pricing have historically stemmed from a
lack of consistent pricing across markets. However, according to the
Sponsor's research, cross-platforms spreads in bitcoin have been
declining consistently over the past several years. Based on the daily
bitcoin price series from several popular centralized trading platforms
\70\ the Sponsor has calculated the largest cross-platform percentage
spread (labelled as %C-Spread) by deducting the highest or maximum
price (P) at time t from the lowest or minimum, and dividing by the
lowest across all trading platforms (i). Formally, this is expressed
as:
---------------------------------------------------------------------------

\70\ The trading platforms include Binance, Bitfinex, Bithumb,
Bitstamp, Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit,
Kraken, Kucoin, and OKEX.
[GRAPHIC] [TIFF OMITTED] TN12JA24.057

The results show a clear and sharp decline in the %C-Spread,
indicating that the bitcoin market has become more efficient as cross-
platform prices have converged over time.
[GRAPHIC] [TIFF OMITTED] TN12JA24.058

In addition, the magnitude of outlier % C-spreads has also declined
over time. This boxplot shows that, not only did the median value of
the %C-Spread decline over time, but also the extreme outlier values.
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, 2021,
2022, and 2023 (up until February 01, 2023) are 29.14%, 14.12%, 8.54%,
6.04%, 3.65%, 5.56%, and 0.63%, respectively. The market has
experienced a 38% year-on-year decline in the annual median %C-Spread
indicating a greater degree of bitcoin price convergence across trading
platforms and a more efficient market.

[[Page 2401]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.059

The dispersion ([sigma]) of bitcoin Prices has also declined over
the same period. This chart shows the 7-day rolling standard deviation
of the %C-Spread from January 1, 2017 to February 1, 2023. The
Sponsor's research finds that the dispersion in bitcoin prices across
all trading platforms has decreased over time, indicating that prices
on all the considered trading platforms converge towards the intrinsic
average much more efficiently. This suggests that the market has become
better at quickly reaching a consensus price for bitcoin.
As the pricing of the crypto market becomes increasingly efficient,
pricing methodologies become more accurate and less susceptible to
manipulation. The clustering of prices across a variety of sources
within the primary market points towards robust price discovery
mechanisms and efficient arbitrage.

[[Page 2402]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.060

One factor that has contributed to the overall efficiency of, and
improved price discovery within the bitcoin market is the increase in
the number of participants, and subsequently, the total dollar amount
allocated to this market. This can be illustrated by the following
chart, which shows the number of wallet addresses holding bitcoin from
January 2016 to February 2023.
[GRAPHIC] [TIFF OMITTED] TN12JA24.061

The large number of participants in the bitcoin market has
manifested itself in high liquidity in the market. This is exhibited in
the following chart, which shows the daily aggregated dollar notional
of the bid and ask order books within the first 100 price levels across
several of the largest centralized crypto trading platforms from
February 2022 to January 2023. Specifically, the dollar notional that
is allocated closest to the mid price has hovered between $2.6 million
and $12 million over that period.

[[Page 2403]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.062

An increased notional order book suggests that there is a higher
degree of consensus among investors regarding the price of bitcoin.
Moreover, this market characteristic hampers any attempt of price
manipulation by any single large entity.
As a robustness check, the Sponsor investigates whether the dollar
notional in the order book changes significantly prior to and post an
extreme price event. Specifically, for events constituting large
increases in the price of bitcoin, if the ask (or sell) side of the
order book experiences a significant shrinkage in the dollar notional
right before the event, then this may be an indication of market
manipulation whereby the ask-side of the order book becomes
sufficiently thin for a large order to move the price upward.
Similarly, for events constituting large decreases in the price of
bitcoin, if the bid (or buy) side of the order book experiences a
significant shrinkage in the dollar notional prior to such events, then
this may be an indication of market manipulation whereby the thinner
bid-side of the order book may potentially lead to significant downward
price movements.
Using the top and bottom 0.1% of hourly price changes from February
1, 2022 to February 1, 2023 as events of extreme upward and downward
market movements, respectively, the Sponsor plotted the bid (left
charts) and ask (right charts) dollar notional of the bitcoin order
book within a six-hour window around these events in the chart below,
which shows the results for extreme upward price movements. The extreme
price events (indicated by the dashed green lines) perfectly coincide
with the decrease in dollar notional of the ask-side of the order book.
This is indicative of an efficient market, whereby large market
movements are quickly and dynamically absorbed by a thick orderbook.
Moreover, the dollar notional on the ask side after the event is
replenished back to its pre-event level, which implies that market
participants' reactions are quick to restore the market back to its
equilibrium level.
BILLING CODE 8011-01-P

[[Page 2404]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.063

The same results and conclusions are found for extreme downward
price movements. The charts below show that such price events perfectly
coincide with shrinkages on the bid side of the order book (left
charts), indicating an efficient and dynamic bitcoin market. Moreover,
the bid-side of the order book after the event is also restored back to
its pre-event level, which suggests that the market is symmetrically
efficient in moving back to equilibrium.

[[Page 2405]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.064

BILLING CODE 8011-01-C
(ii) Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to bitcoin through OTC Bitcoin Funds has grown into
the tens of billions of dollars, including through Bitcoin Futures
ETFs. With that growth, so too has grown the quantifiable investor
protection issues to U.S. investors through roll costs for Bitcoin
Futures ETFs and premium/discount volatility and management fees for
OTC Bitcoin Funds. The Exchange believes that the concerns related to
the prevention of fraudulent and manipulative acts and practices have
been sufficiently addressed to be consistent with the Act and, to the
extent that the Commission disagrees with that assertion, such concerns
are now outweighed by investor protection concerns. As such, the
Exchange believes that approving this proposal (and comparable
proposals) provides the Commission with the opportunity to allow U.S.
investors with access to bitcoin in a regulated and transparent
exchange-traded vehicle that would act to limit risk to U.S. investors
by: (i) reducing premium and discount volatility; (ii) reducing
management fees through meaningful competition; (iii) reducing risks
and costs associated with investing in Bitcoin Futures ETFs and
operating companies that are imperfect proxies for bitcoin exposure;
and (iv) providing an alternative to custodying spot bitcoin.
ARK 21Shares Bitcoin ETF
Delaware Trust Company is the trustee (``Trustee''). The Bank of
New York Mellon will be the administrator (``Administrator'') and
transfer agent (``Transfer Agent''). Foreside Global Services, LLC will
be the marketing agent (``Marketing Agent'') in connection with the
creation and redemption of ``Baskets'' of Shares. ARK Investment
Management LLC (the

[[Page 2406]]

``Subadviser'') \71\ is the sub-adviser of the Trust and will provide
data, research, and, as needed, operational support to the Trust,
including with respect to assistance in the marketing of the Shares. As
noted above, Coinbase Custody Trust Company, LLC, is the Custodian and
will be responsible for custody of the Trust's bitcoin. The Bank of New
York Mellon (the ``Cash Custodian'') will act as custodian of the
Trust's cash and cash equivalents.
---------------------------------------------------------------------------

\71\ The Subadviser is an investment adviser. An investment
adviser to an open-end fund is required to be registered under the
Investment Advisers Act of 1940 (the ``Advisers Act''). As a result,
the Adviser and its related personnel are subject to the provisions
of Rule 204A-1 under the Advisers Act relating to codes of ethics.
This Rule requires investment advisers to adopt a code of ethics
that reflects the fiduciary nature of the relationship to clients as
well as compliance with other applicable securities laws.
Accordingly, procedures designed to prevent the communication and
misuse of non-public information by an investment adviser must be
consistent with Rule 204A-1 under the Advisers Act. In addition,
Rule 206(4)-7 under the Advisers Act makes it unlawful for an
investment adviser to provide investment advice to clients unless
such investment adviser has (i) adopted and implemented written
policies and procedures reasonably designed to prevent violation, by
the investment adviser and its supervised persons, of the Advisers
Act and the Commission rules adopted thereunder; (ii) implemented,
at a minimum, an annual review regarding the adequacy of the
policies and procedures established pursuant to subparagraph (i)
above and the effectiveness of their implementation; and (iii)
designated an individual (who is a supervised person) responsible
for administering the policies and procedures adopted under
subparagraph (i) above.
---------------------------------------------------------------------------

According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust. The Trust's
assets will only consist of bitcoin, cash, and cash equivalents.\72\
---------------------------------------------------------------------------

\72\ Cash equivalents are short-term instruments with maturities
of less than 3 months.
---------------------------------------------------------------------------

According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\73\ nor a commodity pool for purposes of the Commodity
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is
subject to regulation as a commodity pool operator or a commodity
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

\73\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

When the Trust creates or redeems its Shares, it will do so in cash
transactions in blocks of 5,000 Shares (a ``Creation Basket'') at the
Trust's net asset value (``NAV''). Authorized participants will
deliver, or facilitate the delivery of, cash to the Trust's account
with the Cash Custodian, in exchange for Shares when they create
Shares, and the Trust, through the Cash Custodian, will deliver cash to
such authorized participants when they redeem Shares with the Trust.
Authorized participants may then offer Shares to the public at prices
that depend on various factors, including the supply and demand for
Shares, the value of the Trust's assets, and market conditions at the
time of a transaction.
As noted above, the Trust is designed to protect investors against
the risk of losses through fraud and insolvency that arise by holding
bitcoin on centralized platforms. Specifically, the Trust is designed
to protect investors as follows:
(i) Assets of the Trust Protected From Insolvency
The Trust's bitcoin will be held by its Custodian,\74\ which is a
New York chartered trust company overseen by the NYDFS and a qualified
custodian under Rule 206-4 of the Investment Adviser Act. The Custodian
will custody the Trust's bitcoin pursuant to a custody agreement, which
requires the Custodian to maintain the Trust's bitcoin in segregated
accounts that clearly identify the Trust as owner of the accounts and
assets held on those accounts; the segregation will be both from the
proprietary property of the Custodian and the assets of any other
customer. Such an arrangement is generally deemed to be ``bankruptcy
remote,'' that is, in the event of an insolvency of the Custodian,
assets held in such segregated accounts would not become property of
the Custodian's estate and would not be available to satisfy claims of
creditors of the Custodian. In addition, according to the Registration
Statement, the Custodian carries fidelity insurance, which covers
assets held by the Custodian in custody from risks such as theft of
funds. These arrangements provide significant protections to investors
and could have mitigated the type of losses incurred by investors in
the numerous crypto-related insolvencies, including Celsius, Voyager,
BlockFi and FTX.
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\74\ According to the Registration Statement, the Trust's cash
will be held at The Bank of New York Mellon pursuant to a cash
custody agreement.
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(ii) Trust's Transfer Agent Will Instruct Disposition of Trust's
Bitcoin
According to the Registration Statement, except with respect to
sale of bitcoin from time to time to cover expenses of the Trust, the
only time bitcoin will move into or out from the Trust will be with
respect to creations or redemptions of Shares of the Trust. In such
cases, a third party will use cash to buy and deliver bitcoin to create
Shares or withdraw and sell bitcoin for cash to redeem Shares, on
behalf of the Trust. Authorized participants will deliver cash to the
Trust's account with the Cash Custodian in exchange for Shares of the
Trust, and the Trust, through the Cash Custodian, will deliver cash to
authorized participants when those authorized participants redeem
Shares of the Trust. The Transfer Agent will facilitate the settlement
of Shares in response to the placement of creation orders and
redemption orders from authorized participants. The creation and
redemption procedures are administered by the Transfer Agent, an
independent third party. Specifically, Shares are issued in registered
form in accordance with the Trust agreement.\75\ The Transfer Agent has
been appointed registrar and transfer agent for the purpose of
transferring Shares in certificated form. The Transfer Agent keeps a
record of all shareholders and holder of the Shares in certified form
in the registry. The Sponsor recognizes transfers of Shares in
certified form only if done in accordance with the Trust agreement. In
other words, according to the Registration Statement, with very limited
exceptions, the Sponsor will not give instructions with respect to the
transfer or disposition of the Trust's bitcoin. Bitcoin owned by the
Trust will at all times be held by, and in the control of, the
Custodian, and transfer of such bitcoin to or from the Custodian will
occur only in connection with creation and redemptions of Shares. This
will provide safeguards against the movement of bitcoin owned by the
Trust by or to the Sponsor or affiliates of the Sponsor.
---------------------------------------------------------------------------

\75\ The Trust agreement refers to the ``Amended and Restated
Trust Agreement of Ark 21Shares Bitcoin ETF.''
---------------------------------------------------------------------------

(iii) Trust's Assets Are Subject to Regular Audit
According to the Registration Statement, audit trails exist for all
movement of bitcoin within Custodian-controlled bitcoin wallets and are
audited annually for accuracy and completeness by an independent
external audit firm. In addition, the Trust will be audited by an
independent registered public accounting firm on a regular basis.
(iv) Trust is Subject to the Exchange's Obligations of Companies Listed
on the Exchange and Applicable Corporate Governance Requirements
The Trust will be subject to the obligations of companies listed on
the Exchange set forth in BZX Rule 14.6, which require the listed
companies to make public disclosure of material events and any
notifications of deficiency by the Exchange, file and distribute period
financial reports,

[[Page 2407]]

engage independent public accountants registered with the Exchange,
among other things. Such disclosures serve a key investor protection
role. In addition, the Trust will be subject to the corporate
governance requirements for companies listed on the Exchange set forth
in BZX Rule 14.10.
Investment Objective
According to the Registration Statement and as further described
below, the investment objective of the Trust is to seek to track the
performance of bitcoin, as measured by the performance of the CME CF
Bitcoin Reference Rate--New York Variant (the ``Index''), adjusted for
the Trust's expenses and other liabilities. In seeking to achieve its
investment objective, the Trust will hold bitcoin and will value the
Shares daily based on the Index. The Trust will process all creations
and redemptions in cash transactions with authorized participants. The
Trust is not actively managed.
The Index
As described in the Registration Statement, the Trust will use the
Index to calculate the Trust's NAV. The Trust will determine the
bitcoin Index price and value its Shares daily based on the value of
bitcoin as reflected by the Index. The Index is calculated daily and
aggregates the notional value of bitcoin trading activity across major
bitcoin spot trading platforms. The Index currently uses substantially
the same methodology as the CME CF Bitcoin Reference Rate (``BRR''),
including utilizing the same constituent bitcoin trading platforms,
which is the underlying rate to determine settlement of CME Bitcoin
Futures contracts, except that the Index is calculated as of 4 p.m. ET,
whereas the BRR is calculated as of 4 p.m. London time. The Index is
designed based on the International Organization of Securities
Commissions (``IOSCO'') Principals for Financial Benchmarks. The
administrator of the Index is CF Benchmarks Ltd. (the ``Index
Provider''). The Trust also uses the bitcoin Index price to calculate
its bitcoin holdings, which is the aggregate U.S. Dollar value of
bitcoins in the Trust, based on the bitcoin Index price, less its
liabilities and expenses.
The Index 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. ET. The Index,
which has been calculated and published since February 28, 2022,
aggregates the trade flow of several bitcoin trading platforms, during
an observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S.
dollar price of one bitcoin at 4:00 p.m. ET. Specifically, the Index is
calculated based on the ``Relevant Transactions'' (as defined below) of
all of its constituent bitcoin trading platforms, which are currently
Coinbase, Bitstamp, Kraken, itBit, LMAX Digital and Gemini (the
``Constituent Platforms''), 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 Platforms. 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 Index is then determined by the equally-weighted
average of the volume medians of all partitions.
Description of the Index, Index Construction and Maintenance
The Index does not include any futures prices in its methodology. A
``Relevant Transaction'' is any cryptocurrency versus U.S. dollar spot
trade that occurs during the observation window between 3:00 p.m. and
4:00 p.m. ET on a Constituent Platform in the BTC/USD pair that is
reported and disseminated by a Constituent Platform through its
publicly available Application Programming Interface (``API'') and
observed by the Index Provider.
An oversight function is implemented by the Index Provider in
seeking to ensure that the Index is administered through the Index
Provider's codified policies for Index integrity, which include a
conflicts of interest policy, a control framework, an accountability
framework, and an input data policy. The Index is subject to oversight
by the CME CF Oversight Committee. The CME CF Oversight Committee shall
be comprised of at least five members, including at least: (i) two who
are representatives of CME (``CME Members''); (ii) one who is a
representative of CF (``CF Member''); and (iii) two who bring expertise
and industry knowledge relating to benchmark determination, issuance
and operations. The CME CF Oversight Committee meets no less frequently
than quarterly. The CME CF Oversight Committee's Founding Charter and
quarterly meeting minutes are publicly available.
The Sponsor believes that the use of the Index is reflective of a
reasonable valuation of the average spot price of bitcoin and that
resistance to manipulation is a priority aim of its design methodology.
The methodology: (i) takes an observation period and divides it into
equal partitions of time; (ii) then calculates the volume-weighted
median of all transactions within each partition; and (iii) the value
is determined from the arithmetic mean of the volume-weighted medians,
equally weighted. By employing the foregoing steps, the Index thereby
seeks to ensure that transactions in bitcoin conducted at outlying
prices do not have an undue effect on the value of a specific
partition, large trades or clusters of trades transacted over a short
period of time will not have an undue influence on the index level, and
the effect of large trades at prices that deviate from the prevailing
price are mitigated from having an undue influence on the benchmark
level.
Index data and the description of the Index are based on
information made publicly available by the Index Provider on its
website at https://www.cfbenchmarks.com.
Net Asset Value
NAV means the total assets of the Trust (which includes all bitcoin
and cash and cash equivalents) less total liabilities of the Trust. The
Administrator determines the NAV of the Trust on each day that the
Exchange is open for regular trading, as promptly as practical after
4:00 p.m. EST. The NAV of the Trust is the aggregate value of the
Trust's assets less its estimated accrued but unpaid liabilities (which
include accrued expenses). In determining the Trust's NAV, the
Administrator values the bitcoin held by the Trust based on the price
set by the Index as of 4:00 p.m. EST. The Administrator also determines
the NAV per Share.
The NAV for the Trust will be calculated by the Administrator once
a day and will be disseminated daily to all market participants at the
same time.
If the Index is not available, or if the Sponsor determines in good
faith that the Index does not reflect an accurate bitcoin price, then
the Administrator will employ an alternative method to determine the
fair value of the Trust's assets.\76\
---------------------------------------------------------------------------

\76\ Such alternative method will only be employed on an ad hoc
basis. Any permanent change to the calculation of the NAV would
require a proposed rule change under Rule 19b-4.

---------------------------------------------------------------------------

[[Page 2408]]

Availability of Information
In addition to the price transparency of the Index, the Trust will
provide information regarding the Trust's bitcoin holdings as well as
additional data regarding the Trust. The website for the Trust, which
will be publicly accessible at no charge, will contain the following
information: (a) the current NAV per Share daily and the prior business
day's NAV and the reported closing price; (b) the BZX Official Closing
Price \77\ in relation to the NAV as of the time the NAV is calculated
and a calculation of the premium or discount of such price against such
NAV; (c) data in chart form displaying the frequency distribution of
discounts and premiums of the Official Closing Price against the NAV,
within appropriate ranges for each of the four previous calendar
quarters (or for the life of the Trust, if shorter); (d) the
prospectus; and (e) other applicable quantitative information. The
aforementioned information will be published as of the close of
business and available on the Sponsor's website at www.21shares.com, or
any successor thereto.
---------------------------------------------------------------------------

\77\ 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 Intraday Indicative Value (``IIV'') will be calculated by using
the prior day's closing NAV per Share as a base and updating that value
during Regular Trading Hours to reflect changes in the value of the
Trust's bitcoin holdings during the trading day. The IIV disseminated
during Regular Trading Hours should not be viewed as an actual real-
time update of the NAV, which will be calculated only once at the end
of each trading day. The IIV may differ from the NAV due to the
differences in the time window of trades used to calculate each price
(the NAV uses the Index price as of 4 p.m. ET, whereas the IIV draws
prices from the last trade on each Constituent Platform in an effort to
produce a relevant, real-time price). The Trust will provide an IIV per
Share updated every 15 seconds, as calculated by the Exchange or a
third-party financial data provider during the Exchange's Regular
Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be widely
disseminated on a per Share basis every 15 seconds during the
Exchange's Regular Trading Hours through the facilities of the
consolidated tape association (CTA) and Consolidated Quotation System
(CQS) high speed lines. In addition, the IIV will be available through
on-line information services such as Bloomberg and Reuters.
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.
As noted above, the Index is calculated daily and aggregates the
notional value of bitcoin trading activity across major bitcoin spot
trading platforms. Index data, value, and the description of the Index
are based on information made publicly available by the Index Provider
on its website at https://www.cfbenchmarks.com.
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. Information relating to trading, including price
and volume information, in bitcoin is available from major market data
vendors and from the trading platforms on which bitcoin are traded.
Depth of book information is also available from bitcoin trading
platforms. The normal trading hours for bitcoin trading platforms are
24 hours per day, 365 days per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA'').
The Bitcoin Custodian
The Custodian carefully considers the design of the physical,
operational and cryptographic systems for secure storage of the Trust's
private keys in an effort to lower the risk of loss or theft. The
Custodian utilizes a variety of security measures to ensure that
private keys necessary to transfer digital assets remain uncompromised
and that the Trust maintains exclusive ownership of its assets. The
operational procedures of the Custodian are reviewed by third-party
advisors with specific expertise in physical security. The devices that
store the keys will never be connected to the internet or any other
public or private distributed network--this is colloquially known as
``cold storage.'' Only specific individuals are authorized to
participate in the custody process, and no individual acting alone will
be able to access or use any of the private keys. In addition, no
combination of the executive officers of the Sponsor or the investment
professionals managing the Trust, acting alone or together, will be
able to access or use any of the private keys that hold the Trust's
bitcoin.
Creation and Redemption of Shares
When the Trust creates or redeems its Shares, it will do so in cash
transactions in blocks of 5,000 Shares that are based on the quantity
of bitcoin attributable to each Share of the Trust (e.g., a Creation
Basket) at the Trust's NAV. The authorized participants will deliver
only cash to create shares and will receive only cash when redeeming
shares. Further, authorized participants will not directly or
indirectly purchase, hold, deliver, or receive bitcoin as part of the
creation or redemption process or otherwise direct the Trust or a third
party with respect to purchasing, holding, delivering, or receiving
bitcoin as part of the creation or redemption process. The Trust will
create shares by receiving bitcoin from a third party that is not the
authorized participant and the Trust--not the authorized participant--
is responsible for selecting the third party to deliver the bitcoin.
Further, the third party will not be acting as an agent of the
authorized participant with respect to the delivery of the bitcoin to
the Trust or acting at the direction of the authorized participant with
respect to the delivery of the bitcoin to the Trust. The Trust will
redeem shares by delivering bitcoin to a third party that is not the
authorized participant and the Trust--not the authorized participant--
is responsible for selecting the third party to receive the bitcoin.
Further, the third party will not be acting as an agent of the
authorized participant with respect to the receipt of the bitcoin from
the Trust or acting at the direction of the authorized participant with
respect to the receipt of the bitcoin from the Trust.
According to the Registration Statement, on any business day, an
authorized participant may place an order to create one or more
Creation Basket. Purchase orders must be placed by 12:00 p.m. Eastern
Time, the close of regular trading on the Exchange, or another time
determined by the Sponsor. The day on which an order is received is
considered the purchase order date. The total deposit of cash required
is an amount of cash sufficient to purchase such amount of bitcoin, the
amount of which is equal to the combined NAV of the number of Shares
included in the Creation Baskets being created determined as promptly
as practicable after 4:00 p.m. ET on the date the order to purchase is
properly received. The Administrator determines the quantity of bitcoin
used to calculate the cash deposit in the Creation Basket

[[Page 2409]]

for a given day by dividing the number of bitcoin held by the Trust as
of the opening of business on that business day, adjusted for the
amount of bitcoin constituting estimated accrued but unpaid fees and
expenses of the Trust as of the opening of business on that business
day, by the quotient of the number of Shares outstanding at the opening
of business divided by 5,000. For example, assume the total bitcoin
held by the Trust less any estimated accrued but unpaid fees and
expenses is 1,000 bitcoin and the total number of Shares outstanding is
10,000. The Administrator would determine the required deposit as
follows:
[GRAPHIC] [TIFF OMITTED] TN12JA24.065

Total deposited cash as described in the example above would be 500
multiplied by the purchase price of bitcoin.
The procedures by which an authorized participant can redeem one or
more Creation Baskets mirror the procedures for the creation of
Creation Baskets. A third party, that is unaffiliated with the Trust
and the Sponsor, will use cash to buy and deliver bitcoin to create
Shares or withdraw and sell bitcoin for cash to redeem Shares, on
behalf of the Trust.
The Sponsor will maintain ownership and control of bitcoin in a
manner consistent with good delivery requirements for spot commodity
transactions.
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 represents that, for initial
and continued listing, the Trust must be in compliance with Rule 10A-3
under the Act. A minimum of 10,000 Shares will be outstanding at the
commencement of listing on the Exchange. The Exchange will obtain a
representation that the NAV will be calculated daily and information
about the NAV and the assets of the Trust will be made available to all
market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a
trust that holds (1) a specified commodity \78\ deposited with the
trust, or (2) a specified commodity and, in addition to such specified
commodity, cash; (b) issued by such trust in a specified aggregate
minimum number in return for a deposit of a quantity of the underlying
commodity and/or cash; 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 and/or cash.
---------------------------------------------------------------------------

\78\ 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 Trust, the Shares will be removed from
listing. The Trustee, Delaware Trust Company, is a trust company having
substantial capital and surplus and the experience and facilities for
handling corporate trust business, as required under Rule
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee
without prior notice to and approval of the Exchange. The Exchange also
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor
any agent of the Exchange shall have any liability for damages, claims,
losses or expenses caused by any errors, omissions or delays in
calculating or disseminating any underlying commodity value, the
current value of the underlying commodity required to be deposited to
the Trust in connection with issuance of Commodity-Based Trust Shares;
resulting from any negligent act or omission by the Exchange, or any
agent of the Exchange, or any act, condition or cause beyond the
reasonable control of the Exchange, its agent, including, but not
limited to, an act of God; fire; flood; extraordinary weather
conditions; war; insurrection; riot; strike; accident; action of
government; communications or power failure; equipment or software
malfunction; or any error, omission or delay in the reports of
transactions in an underlying commodity. Finally, as required in Rule
14.11(e)(4)(G), the Exchange notes that any registered market maker
(``Market Maker'') in the Shares must file with the Exchange in a
manner prescribed by the Exchange and keep current a list identifying
all accounts for trading in an underlying commodity, related commodity
futures or options on commodity futures, or any other related commodity
derivatives, which the registered Market Maker may have or over which
it may exercise investment discretion. No registered Market Maker shall
trade in an underlying commodity, related commodity futures or options
on commodity futures, or any other related commodity derivatives, in an
account in which a registered Market Maker, directly or indirectly,
controls trading activities, or has a direct interest in the profits or
losses thereof, which has not been reported to the Exchange as required
by this Rule. In addition to the existing obligations under Exchange
rules regarding the production of books and records (see, e.g., Rule
4.2), the registered Market Maker in Commodity-Based Trust Shares shall
make available to the Exchange such books, records or other information
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own
accounts for trading the underlying physical commodity, related
commodity futures or options on commodity futures, or any other related
commodity derivatives, as may be requested by the Exchange.
The Exchange is able to obtain information regarding trading in the
Shares and the underlying bitcoin, Bitcoin Futures contracts, options
on Bitcoin Futures, or any other bitcoin derivative through members
acting as registered Market Makers, in connection with their
proprietary or customer trades.
As a general matter, the Exchange has regulatory jurisdiction over
its members, and their associated persons. The Exchange also has
regulatory jurisdiction over any person or entity controlling a member,
as well as a subsidiary or affiliate of a member that is in the
securities business. A subsidiary or affiliate of a member organization
that does business only in commodities would not be subject to Exchange
jurisdiction, but the Exchange could obtain information regarding the
activities of such subsidiary or affiliate through surveillance sharing
agreements with regulatory organizations of which such subsidiary or
affiliate is a member.
Trading Halts
With respect to trading halts, the Exchange may consider all
relevant

[[Page 2410]]

factors in exercising its discretion to halt or suspend trading in the
Shares. The Exchange will halt trading in the Shares under the
conditions specified in BZX Rule 11.18. Trading may be halted because
of market conditions or for reasons that, in the view of the Exchange,
make trading in the Shares inadvisable. These may include: (1) the
extent to which trading is not occurring in the bitcoin underlying the
Shares; or (2) whether other unusual conditions or circumstances
detrimental to the maintenance of a fair and orderly market are
present. Trading in the Shares also will be subject to Rule
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading
in the Shares may be halted.
If the IIV or the value of the Index is not being disseminated as
required, the Exchange may halt trading during the day in which the
interruption to the dissemination of the IIV or the value of the Index
occurs. If the interruption to the dissemination of the IIV or the
value of the Index persists past the trading day in which it occurred,
the Exchange will halt trading no later than the beginning of the
trading day following the interruption.
In addition, if the Exchange becomes aware that the NAV with
respect to the Shares is not disseminated to all market participants at
the same time, it will halt trading in the Shares until such time as
the NAV is available to all market participants.
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. The
Shares of the Trust will conform to the initial and continued listing
criteria set forth in BZX Rule 14.11(e)(4).
Surveillance
The Exchange represents 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. FINRA conducts certain cross-market surveillances
on behalf of the Exchange pursuant to a regulatory services agreement.
The Exchange is responsible for FINRA's performance under this
regulatory services agreement.
The Exchange or FINRA, on behalf of the Exchange, or both, will
communicate as needed regarding trading in the Shares and Bitcoin
Futures with other markets and other entities that are members of the
ISG, and the Exchange, or FINRA, on behalf of the Exchange, or both,
may obtain trading information regarding trading in the Shares and
Bitcoin Futures from such markets and other entities.\79\ 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.
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\79\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

In addition, the Exchange also has a general policy prohibiting the
distribution of material, non-public information by its employees.
The issuer has represented to the Exchange that it will advise the
Exchange of any failure by the Trust or the Shares to comply with the
continued listing requirements, and, pursuant to its obligations under
section 19(g)(1) of the Exchange Act, the Exchange will surveil for
compliance with the continued listing requirements. If the Trust or the
Shares are not in compliance with the applicable listing requirements,
the Exchange will commence delisting procedures under Exchange Rule
14.12.
Information Circular
Prior to the commencement of trading, the Exchange will inform its
members in an Information Circular of the special characteristics and
risks associated with trading the Shares. Specifically, the Information
Circular will discuss the following: (i) the procedures for the
creation and redemption of Baskets (and that the Shares are not
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability
obligations on Exchange members with respect to recommending
transactions in the Shares to customers; (iii) how information
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks
involved in trading the Shares outside of Regular Trading Hours \80\
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. The
Information Circular will also reference the fact that there is no
regulated source of last sale information regarding bitcoin, that the
Commission has no jurisdiction over the trading of bitcoin as a
commodity, and that the CFTC has regulatory jurisdiction over the
trading of Bitcoin Futures contracts and options on Bitcoin Futures
contracts.
---------------------------------------------------------------------------

\80\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

In addition, the Information Circular will advise members, prior to
the commencement of trading, of the prospectus delivery requirements
applicable to the Shares. Members purchasing the Shares for resale to
investors will deliver a prospectus to such investors. The Information
Circular will also discuss any exemptive, no-action and interpretive
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \81\ in general and section 6(b)(5) of the Act \82\ 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.
---------------------------------------------------------------------------

\81\ 15 U.S.C. 78f.
\82\ 15 U.S.C. 78f(b)(5).
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The Commission has approved numerous series of Trust Issued
Receipts,\83\ including Commodity-Based Trust Shares,\84\ 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

[[Page 2411]]

manipulative acts and practices; \85\ 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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\83\ See Exchange Rule 14.11(f).
\84\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\85\ 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 trading platforms engaged in or
allowing wash trading or other activity intended to manipulate the
price of bitcoin on other markets, such activity does not normally
impact prices on other trading platforms because participants will
generally ignore markets with quotes that they deem non-executable.
The reason is that wash trading aims to manipulate the volume rather
than the price of an asset to give the impression of heightened
market activity in hopes of attracting investors to that asset.
Moreover, wash trades are executed within a trading platform rather
than cross trading platforms since the entity executing the wash
trades would aim to trade against itself, and as such, this can only
happen within a trading platform. Should the wash trades of that
entity result in a deviation of the price on that trading platform
relative to others, arbitrageurs would then be able to capitalize on
this mispricing, and bring the manipulated price back to
equilibrium, resulting in a loss to the entity executing the wash
trades. Moreover, the linkage between the bitcoin markets and the
presence of arbitrageurs in those markets means that the
manipulation of the price of bitcoin price on any single venue would
require manipulation of the global bitcoin price in order to be
effective. Arbitrageurs must have funds distributed across multiple
trading platforms in order to take advantage of temporary price
dislocations, thereby making it unlikely that there will be strong
concentration of funds on any particular bitcoin trading platform 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 \86\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\87\ 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.\88\
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\86\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in ISG
constitutes such a surveillance sharing agreement. See Wilshire
Phoenix Disapproval.
\87\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\88\ 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.\89\
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\89\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
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(a) Manipulation of the ETP
According to the Sponsor's research presented above, the Bitcoin
Futures market is the leading market for bitcoin price formation. Where
Bitcoin Futures lead the price in the spot market such that a potential
manipulator of the bitcoin spot market (beyond just the constituents of
the Index \90\) would have to participate in the Bitcoin Futures
market, it follows that a potential manipulator of the Shares would
similarly have to transact in the Bitcoin Futures market because the
Index is based on spot prices. As such, the Exchange believes that part
(a) of the significant market test outlined above is satisfied and that
common membership in ISG between the Exchange and CME would assist the
listing exchange in detecting and deterring misconduct in the Shares.
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\90\ As further described below, the ``Index'' for the Trust is
the CME CF Bitcoin Reference Rate--New York Variant. The current
trading platform composition of the Index is Coinbase, Bistamp,
Kraken, itBit, LMAX Digital, and Gemini (the ``Constituent
Platforms'').
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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 on prices in the Bitcoin Futures
market or spot market for a number of reasons, including the
significant volume in the Bitcoin Futures market, the size of bitcoin's
market cap, and the significant liquidity available in the spot market.
In addition to the Bitcoin Futures market data points cited above, the
spot market for bitcoin is also very liquid.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
As noted above, the Commission also permits a listing exchange to
demonstrate that ``other means to prevent fraudulent and manipulative
acts and practices'' are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Exchange and Sponsor
believe that such conditions are present.
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to bitcoin through OTC Bitcoin Funds has grown into
the tens of billions of dollars and more than a billion dollars of
exposure through Bitcoin Futures ETFs. With that growth, so too has
grown the quantifiable investor protection issues to U.S. investors
through roll costs for Bitcoin Futures ETFs and premium/discount
volatility and management fees for OTC Bitcoin Funds. The Exchange

[[Page 2412]]

believes that the concerns related to the prevention of fraudulent and
manipulative acts and practices have been sufficiently addressed to be
consistent with the Act and, to the extent that the Commission
disagrees with that assertion, also believes that such concerns are now
outweighed by these investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to bitcoin in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in Bitcoin Futures ETFs and operating companies that are
imperfect proxies for bitcoin exposure; and (iv) providing an
alternative to custodying spot bitcoin.
Commodity-Based Trust Shares
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange
may obtain information regarding trading in the Shares and listed
bitcoin derivatives via the ISG, from other exchanges who are members
or affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement.
Availability of Information
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about bitcoin and will be available regarding the Trust and
the Shares. In addition to the price transparency of the Index, the
Trust will provide information regarding the Trust's bitcoin holdings
as well as additional data regarding the Trust. The website for the
Trust, which will be publicly accessible at no charge, will contain the
following information: (a) the current NAV per Share daily and the
prior business day's NAV and the reported closing price; (b) the BZX
Official Closing Price \91\ in relation to the NAV as of the time the
NAV is calculated and a calculation of the premium or discount of such
price against such NAV; (c) data in chart form displaying the frequency
distribution of discounts and premiums of the Official Closing Price
against the NAV, within appropriate ranges for each of the four
previous calendar quarters (or for the life of the Trust, if shorter);
(d) the prospectus; and (e) other applicable quantitative information.
The aforementioned information will be published as of the close of
business and available on the Sponsor's website at www.21shares.com, or
any successor thereto.
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\91\ As defined in Rule 11.23(a)(3), the term ``BZX Official
Closing Price'' shall mean the price disseminated to the
consolidated tape as the market center closing trade.
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The Trust will provide an IIV per Share updated every 15 seconds,
as calculated by the Exchange or a third-party financial data provider
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m.
E.T.). The IIV will be widely disseminated on a per Share basis every
15 seconds during the Exchange's Regular Trading Hours through the
facilities of the consolidated tape association (CTA) and Consolidated
Quotation System (CQS) high speed lines. In addition, the IIV will be
available through on-line information services such as Bloomberg and
Reuters.
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.
As noted above, the Index is calculated daily and aggregates the
notional value of bitcoin trading activity across major bitcoin spot
trading platforms. Index data, value, and the description of the Index
are based on information made publicly available by the Index Provider
on its website at https://www.cfbenchmarks.com.
Quotation and last sale information for bitcoin is widely
disseminated through a variety of major market data vendors, including
Bloomberg and Reuters. Information relating to trading, including price
and volume information, in bitcoin is available from major market data
vendors and from the trading platforms on which bitcoin are traded.
Depth of book information is also available from bitcoin trading
platforms. The normal trading hours for bitcoin trading platforms are
24 hours per day, 365 days per year.
Information regarding market price and trading volume of the Shares
will be continually available on a real-time basis throughout the day
on brokers' computer screens and other electronic services. Information
regarding the previous day's closing price and trading volume
information for the Shares will be published daily in the financial
section of newspapers. Quotation and last-sale information regarding
the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA'').
In sum, the Exchange believes that this proposal is consistent with
the requirements of section 6(b)(5) of the Act, that this filing
sufficiently demonstrates that the CME Bitcoin Futures market
represents a regulated market of significant size, and that on the
whole the manipulation concerns previously articulated by the
Commission are sufficiently mitigated to the point that they are
outweighed by investor protection issues that would be resolved by
approving this proposal.
The Exchange believes that the proposal is, in particular, designed
to protect investors and the public interest. The investor protection
issues for U.S. investors has grown significantly over the last several
years, through roll costs for Bitcoin Futures ETFs and premium/discount
volatility and management fees for OTC Bitcoin Funds. As discussed
throughout, this growth investor protection concerns need to be re-
evaluated and rebalanced with the prevention of fraudulent and
manipulative acts and practices concerns that previous disapproval
orders have relied upon. Finally, the Exchange notes that in addition
to all of the arguments herein which it believes sufficiently establish
the CME Bitcoin Futures market as a regulated market of significant
size, it is logically inconsistent to find that the CME Bitcoin Futures
market is a significant market as it relates to the CME Bitcoin Futures
market, but not a significant market as it relates to the bitcoin spot
market for the numerous reasons laid out above.

[[Page 2413]]

For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
Act.

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

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

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

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

III. 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-2023-028 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to file number SR-CboeBZX-2023-028. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. Do not
include personal identifiable information in submissions; you should
submit only information that you wish to make available publicly. We
may redact in part or withhold entirely from publication submitted
material that is obscene or subject to copyright protection. All
submissions should refer to file number SR-CboeBZX-2023-028 and should
be submitted on or before February 2, 2024.
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\92\ 17 CFR 200.30-3(a)(12).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\92\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00499 Filed 1-11-24; 8:45 am]
BILLING CODE 8011-01-P

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