Notice2022-02433
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of the Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
February 7, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 25 (Monday, February 7, 2022)</title>
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[Federal Register Volume 87, Number 25 (Monday, February 7, 2022)]
[Notices]
[Pages 6903-6906]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-02433]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94126; File No. SR-NYSEArca-2021-89]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting
Proceedings To Determine Whether To Approve or Disapprove a Proposed
Rule Change To List and Trade Shares of the Bitwise Bitcoin ETP Trust
Under NYSE Arca Rule 8.201-E
February 1, 2022.
On October 14, 2021, NYSE Arca, Inc. (``NYSE Arca'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to list and trade shares (``Shares'') of the
Bitwise Bitcoin ETP Trust (``Trust'') under NYSE Arca Rule 8.201-E
(Commodity-Based Trust Shares). The proposed rule change was published
for comment in the Federal Register on November 3, 2021.\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 93445 (Oct. 28,
2021), 86 FR 60695 (``Notice''). No comments have been received on
the proposed rule change.
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On December 15, 2021, 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\ This order institutes proceedings under Section 19(b)(2)(B)
of the Act \6\ to determine whether to approve or disapprove the
proposed rule change.
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 93790, 86 FR 72300
(Dec. 21, 2021). The Commission designated February 1, 2022, as the
date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
\6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal
As described in more detail in the Notice,\7\ the Exchange proposes
to list and trade the Shares of the Trust under NYSE Arca Rule 8.201-E,
which governs the listing and trading of Commodity-Based Trust Shares
on the Exchange.
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\7\ See Notice, supra note 3.
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The investment objective of the Trust is to seek to provide
exposure to the value of bitcoin held by the Trust, less the expenses
of the Trust's operations.\8\
[[Page 6904]]
The Shares will represent units of undivided beneficial ownership of
the Trust.\9\ Under normal circumstances, the Trust's only asset will
be bitcoin, and, under limited circumstances, cash.\10\ The Trust will
not use derivatives that may subject the Trust to counterparty and
credit risks.\11\
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\8\ See id. at 60696. Bitwise Investment Advisers, LLC
(``Sponsor'') is the sponsor of the Trust, and Delaware Trust
Company is the trustee. The Trust will engage a third party
custodian to maintain custody of the Trust's bitcoin assets. The
Trust also will engage a third party service provider to serve as
the administrator (``Administrator'') and transfer agent of the
Trust. See id.
\9\ See id. at 60699.
\10\ See id. at 60696. The Trust may sell bitcoin and
temporarily hold cash as part of a liquidation of the Trust or to
pay certain extraordinary expenses not assumed by the Sponsor.
According to the Exchange, the Trust also may, from time to time,
passively receive, by virtue of holding bitcoin, certain additional
digital assets or rights to receive such digital assets through a
fork of the Blockchain or an airdrop of assets. See id. n.12.
\11\ See id. at 60696.
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The Trust's net asset value (``NAV'') and NAV per Share will be
determined by the Administrator once each Exchange trading day as of
4:00 p.m. E.T., or as soon thereafter as practicable, by reference to
the CF Bitcoin-Dollar US Settlement Price (``CME US Reference
Rate'').\12\ The Administrator will calculate the NAV by multiplying
the number of bitcoin held by the Trust by the CME US Reference Rate
for such day, and subtracting the accrued but unpaid expenses and
liabilities of the Trust.\13\ The CME US Reference Rate is a daily
reference rate of the U.S. dollar price of one bitcoin, calculated at
4:00 p.m. E.T.\14\
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\12\ See id. at 60696, 60699.
\13\ See id. at 60699.
\14\ The Exchange states that the CME US Reference Rate utilizes
the same methodology as the CME CF Bitcoin Reference Rate, which is
calculated at 4:00 p.m. London time and is used to settle bitcoin
futures on the CME. See id. at 60696 n.11; 60698-99.
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The CME US Reference Rate aggregates during a calculation window
the trade flow of several spot bitcoin trading platforms into the U.S.
dollar price of one bitcoin as of its calculation time. The current
constituent bitcoin platforms of the CME US Reference Rate are
Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent
Platforms''). In calculating the CME US Reference Rate, the methodology
creates a joint list of certain trade prices and sizes from the
Constituent Platforms. The methodology then divides this list into a
number of equally sized time intervals, and it calculates the volume-
weighted median trade price for each of those intervals. The CME US
Reference Rate is the equally weighted average of the volume-weighted
medians of all intervals.\15\
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\15\ See id. at 60699.
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The Trust will provide website disclosure of its holdings
daily.\16\ In addition, each trading day, the Exchange will calculate
and disseminate an intraday trust value (``ITV'') every 15 seconds
during the NYSE Arca Core Trading Session.\17\ The ITV will be
calculated throughout the trading day by using the prior day's holdings
at close of business and the most recently reported price level of the
CME Bitcoin Real Time Price \18\ as reported by Bloomberg, L.P., or
another reporting service, or another price of bitcoin derived from
updated bids and offers indicative of the spot price of bitcoin.\19\
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\16\ See id. at 60715.
\17\ See id. at 60699. The ITV will also be widely disseminated
by one or more major market data vendors during the NYSE Arca Core
Trading Session. See id.
\18\ The CME Bitcoin Real Time Price is a continuous real-time
bitcoin price index published by the CME Group and Crypto Facilities
Ltd. using data from the Constituent Platforms. See id.
\19\ See id.
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The Trust will create and redeem Shares from time to time, but only
in one or more Creation Units. A Creation Unit will initially consist
of at least 25,000 Shares, but may be subject to change.\20\ The Trust
will process all creations and redemptions in-kind, and accrue all
ordinary fees in bitcoin (rather than cash), as a way of seeking to
ensure that the Trust holds the desired amount of bitcoin-per-share.
The Trust will not purchase or sell bitcoin, other than if the Trust
liquidates or must pay expenses not contractually assumed by the
Sponsor. Instead, financial institutions authorized to create and
redeem Shares (``Authorized Participants'') will deliver, or cause to
be delivered, bitcoin to the Trust in exchange for Shares of the Trust,
and the Trust will deliver bitcoin to Authorized Participants when
those Authorized Participants redeem Shares of the Trust.\21\
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\20\ See id.
\21\ See id. at 60696.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2021-89 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule
change should be approved or disapproved. Institution of proceedings is
appropriate at this time in view of the legal and policy issues raised
by the proposed rule change, as discussed below. Institution of
proceedings does not indicate that the Commission has reached any
conclusions with respect to any of the issues involved. Rather, as
described below, the Commission seeks and encourages interested persons
to provide comments on the proposed rule change.
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\22\ 15 U.S.C. 78s(b)(2)(B).
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Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \24\
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\23\ Id.
\24\ 15 U.S.C. 78f(b)(5).
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The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice,\25\ in addition to any other comments they may wish to
submit about the proposed rule change. In particular, the Commission
seeks comment on the following questions and asks commenters to submit
data where appropriate to support their views:
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\25\ See Notice, supra note 3.
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1. What are commenters' views on whether the proposed Trust and
Shares would be susceptible to manipulation? What are commenters' views
generally on whether the Exchange's proposal is designed to prevent
fraudulent and manipulative acts and practices? What are commenters'
views generally with respect to the liquidity and transparency of the
bitcoin markets, the bitcoin markets' susceptibility to manipulation,
and thus the suitability of bitcoin as an underlying asset for an
exchange-traded product (``ETP'')?
2. The Exchange asserts that ``the exclusive use of in-kind
creations, redemptions and fee accruals, in all situations except when
the Trust is required to liquidate or to pay extraordinary expenses,
provides long-term investors in the Trust with redundant but strong
protection.'' \26\ The Exchange further asserts that ``[t]he in-kind
structure ensures that the Trust maintains the appropriate amount of
bitcoin-per-Share in all scenarios, regardless of the U.S. dollar
calculation of NAV or the CME US Reference Rate.'' \27\ What are
commenters' views of these assertions?
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\26\ See id. at 60700.
\27\ See id.
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3. The Exchange asserts that, ``through extensive statistical
analysis and careful
[[Page 6905]]
consideration of third-party evaluations of these markets, the Sponsor
has demonstrated that the CME [bitcoin futures] Market leads the
bitcoin spot market and the unregulated bitcoin futures market, such
that it is reasonably likely that a person attempting to manipulate the
ETP would also have to trade on the CME [bitcoin futures] Market.''
\28\ The Exchange further asserts ``both existing academic literature
and the Sponsor's own studies show that the CME [bitcoin futures]
Market leads price discovery relative to the bitcoin spot market.''
\29\ Do commenters agree or disagree?
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\28\ See id. at 60704.
\29\ See id. at 60716.
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<bullet> Specifically, what are commenters' views of the Sponsor's
methodology used to arrive at this conclusion? The Exchange describes
how the Sponsor used data from the CME Group and Coin Metrics,
supplemented with data from CoinAPI, to perform pairwise information
share/component share (``IS/CS'') price discovery analysis and pairwise
time-shift lead-lag (``TSLL'') analysis between the CME bitcoin futures
market and 10 bitcoin spot markets and seven unregulated futures
markets.\30\ What are commenters' views on, for example, the Sponsor's
choices for, and level of explanation of: The sources for the tick-
level trade data; the aggregation (if any) the Sponsor performed on the
tick-level trade data; the spot and unregulated futures trading
platforms the Sponsor included in its pairwise analyses; the particular
IS/CS and TSLL paradigms used to perform its pairwise analyses; the
full-period and monthly results of its pairwise analyses; the
statistical significance of the results; and the sensitivity of the
results to the Sponsor's methodological choices?
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\30\ See id. at 60704-11.
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<bullet> What are commenters' views on how the Commission should
weigh the Sponsor's pairwise results compared to the previous academic
and industry lead-lag studies that the Sponsor cites? \31\ What are
commenters' views on the accuracy of the Sponsor's summaries of such
past studies?
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\31\ See id. at 60705-07.
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<bullet> What are commenters' views on the robustness of the
Sponsor's two-dimensional, pairwise results? Do commenters believe the
Exchange has adequately addressed the extent of any relationship
between prices on unregulated bitcoin futures markets and the CME
bitcoin futures market, the bitcoin spot markets, and/or the
Constituent Platforms, or where price formation occurs when the
entirety of bitcoin futures markets, not just the CME, is considered?
<bullet> What are commenters' views on whether the Sponsor's lead-
lag results sufficiently demonstrate a reasonable likelihood that a
would-be manipulator of the proposed ETP would have to trade on the CME
bitcoin futures market to successfully manipulate the proposed ETP? Do
commenters believe that the Exchange has adequately explained and/or
demonstrated how the Sponsor's market-level, statistical results
provide sufficient evidence of the likely trading behavior of a would-
be manipulator?
4. The Exchange asserts that ``the Sponsor's analysis shows that
trading in the Trust is unlikely to become the predominant influence on
prices in the CME [bitcoin futures] Market, even when assuming
aggressive estimates of first-year flows of $4.7 billion and average
daily trading volume of $143 million.'' \32\ Do commenters agree or
disagree?
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\32\ See id. at 60711.
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<bullet> Specifically, what are commenters' views of the Exchange's
estimates of the Trust's first-year flows? What are commenters' views
of the methodology used to arrive at those estimates? \33\ Do
commenters agree with the Exchange that ``it is unlikely that a bitcoin
ETP will experience the highest first-year flows in history,'' \34\ and
that the 2020 inflows to the Grayscale Bitcoin Trust (GBTC) of $4.7
billion is an ``aggressive'' working estimate for first-year flows into
a new bitcoin ETP? \35\
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\33\ See id. at 60711-12.
\34\ See id. at 60711.
\35\ See id. at 60712.
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<bullet> The Exchange describes how the Sponsor correlated the
daily and weekly flows into GBTC with the corresponding daily or weekly
price of bitcoin (calculated using the 4:00 p.m. E.T. bitcoin reference
rate from Coin Metrics), and concludes that ``there is no meaningful
relationship between daily and weekly flows into GBTC and changes in
the price of bitcoin.'' \36\ What are commenters' views on the data
sources used, methodology selected, and results obtained by the
Sponsor? The Exchange states that the Sponsor concluded from this
analysis that ``it is unlikely that the aggressive estimate of first-
year flows into a bitcoin ETP ($4.7 billion) would cause it to become
the predominant influence on prices in the CME [bitcoin futures]
Market.'' \37\ What are commenters' views on how well the Sponsor's
analysis of the historical correlation between GBTC inflows and the
spot price of bitcoin predicts the future impact of inflows into the
proposed ETP on prices in the CME bitcoin futures market?
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\36\ See id. at 60712-13.
\37\ See id. at 60713.
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<bullet> What are commenters' views of the Exchange's estimate of
the likely average daily trading volume of the Shares ($143 million)?
What are commenters' views on the methodology used to arrive at that
estimate (which was based on an assessment of GBTC's and SPDR Gold
(GLD)'s ratios of average daily trading volume to assets under
management)? \38\ Do commenters agree with the Exchange that $143
million is an ``aggressive'' working estimate for average daily trading
volume of a new bitcoin ETP? \39\
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\38\ See id. at 60713-14.
\39\ See id. at 60714.
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<bullet> The Exchange states that ``[g]iven that the average daily
trading volume of the CME [bitcoin futures] Market in 2020 was 174%
higher at $392 million than the Sponsor's aggressive estimate of a new
bitcoin ETP's potential trading volume of $143 million, the Sponsor
found that it is unlikely that trading in a new bitcoin ETP will cause
such ETP to become the predominant influence on prices in the CME
[bitcoin futures] Market.'' \40\ Do commenters agree or disagree with
the Sponsor's conclusion? Why or why not?
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\40\ See id. at 60715.
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III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, and
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\41\
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\41\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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[[Page 6906]]
Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by February 28, 2022. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
March 14, 2022.
Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f587809990d8969a9898909b8186b5869096db929a83"><span class="__cf_email__" data-cfemail="6a181f060f47090507070f041e192a190f09440d051c">[email protected]</span></a>. Please include
File Number SR-NYSEArca-2021-89 on the subject line.
Paper Comments
<bullet> 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-NYSEArca-2021-89. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-NYSEArca-2021-89 and should be submitted
by February 28, 2022. Rebuttal comments should be submitted by March
14, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
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\42\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02433 Filed 2-4-22; 8:45 am]
BILLING CODE 8011-01-P
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