Notice2022-14310
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares)
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
July 6, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 128 (Wednesday, July 6, 2022)</title>
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[Federal Register Volume 87, Number 128 (Wednesday, July 6, 2022)]
[Notices]
[Pages 40299-40321]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-14310]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95180; File No. SR-NYSEArca-2021-90]
Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to
List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares)
June 29, 2022.
I. Introduction
On October 19, 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 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to list and trade shares
(``Shares'') of Grayscale Bitcoin 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 8,
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. 93504 (Nov. 2,
2021), 86 FR 61804. Comments received on the proposed rule change
are available at: <a href="https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190.htm">https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190.htm</a>.
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On December 15, 2021, pursuant to Section 19(b)(2) of the Exchange
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 February 4, 2022, the Commission instituted
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to
determine whether to approve or disapprove the proposed rule change.\7\
On April 21, 2022, the Exchange filed Amendment No. 1, which replaced
and superseded the proposed rule change in its entirety, and on May 4,
2022, the Commission provided notice of Amendment No. 1 to the proposed
rule change and designated a longer period for Commission action on the
proposed rule change, as modified by Amendment No. 1.\8\
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\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 93788, 86 FR 72291
(Dec. 21, 2021).
\6\ 15 U.S.C. 78s(b)(2)(B).
\7\ See Securities Exchange Act Release No. 94151, 87 FR 7889
(Feb. 10, 2022).
\8\ See Securities Exchange Act Release No. 94844, 87 FR 28043
(May 10, 2022) (``Amendment No. 1''). Amendment No. 1 to the
proposed rule change can be found at: <a href="https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20125938-286383.pdf">https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20125938-286383.pdf</a>.
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[[Page 40300]]
This order disapproves the proposed rule change, as modified by
Amendment No. 1. The Commission concludes that NYSE Arca has not met
its burden under the Exchange Act and the Commission's Rules of
Practice to demonstrate that its proposal is consistent with the
requirements of Exchange Act Section 6(b)(5), which requires, in
relevant part, 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.'' \9\
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\9\ 15 U.S.C. 78f(b)(5).
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When considering whether NYSE Arca's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same analytical framework used in
its orders considering previous proposals to list bitcoin \10\-based
commodity trusts and bitcoin-based trust issued receipts to assess
whether a listing exchange of an exchange-traded product (``ETP'') can
meet its obligations under Exchange Act Section 6(b)(5).\11\ As the
Commission has explained, an exchange that lists bitcoin-based ETPs
\12\ can meet its obligations under Exchange Act Section 6(b)(5) by
demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to the underlying or reference bitcoin assets.\13\
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\10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Amendment No. 1, 87 FR at 28045.
\11\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares) and To List and Trade Shares of the United States Bitcoin
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1,
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024)
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the Kryptoin
Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021),
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37)
(``SkyBridge Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022)
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares),
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10,
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X
Order''); Order Disapproving a Proposed Rule Change, as Modified by
Amendment No. 1, To List and Trade Shares of the ARK 21Shares
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust
Shares, Securities Exchange Act Release No. 94571 (Mar. 31, 2022),
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2,
2022) (SR-NYSEArca-2021-67) (``One River Order''). In addition,
orders were issued by delegated authority on the following matters:
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, Relating to the Listing and Trading of Shares of the SolidX
Bitcoin Trust Under NYSE Arca Equities Rule 8.201, Securities
Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 16247 (Apr. 3,
2017) (SR-NYSEArca-2016-101) (``SolidX Order''); Order Disapproving
a Proposed Rule Change To List and Trade the Shares of the ProShares
Bitcoin ETF and the ProShares Short Bitcoin ETF, Securities Exchange
Act Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018)
(SR-NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a
Proposed Rule Change To List and Trade the Shares of the
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF,
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares, Securities Exchange Act Release No.
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck Order''); Order Granting Approval of a Proposed Rule
Change, as Modified by Amendment No. 2, To List and Trade Shares of
the Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E,
Commentary .02 (Trust Issued Receipts), Securities Exchange Act
Release No. 94620 (Apr. 6, 2022), 87 FR 21676 (Apr. 12, 2022) (SR-
NYSEArca-2021-53) (``Teucrium Order''); Order Granting Approval of a
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List
and Trade Shares of the Valkyrie XBTO Bitcoin Futures Fund Under
Nasdaq Rule 5711(g), Securities Exchange Act Release No. 94853 (May
5, 2022), 87 FR 28848 (May 11, 2022) (SR-NASDAQ-2021-066)
(``Valkyrie XBTO Order'').
\12\ As used in this order, the term ``ETFs'' refers to open-end
funds that register the offer and sale of their shares under the
Securities Act of 1933 (``Securities Act'') and are regulated as
investment companies under the Investment Company Act of 1940
(``1940 Act''). The term ``ETPs'' refers to exchange-traded products
that register the offer and sale of their shares under the
Securities Act but are not regulated under the 1940 Act, such as
commodity trusts and trust issued receipts. Commenters have
sometimes used these terms interchangeably, and it is not always
clear which type of product a commenter is referring to.
Accordingly, unless clear from the context, the Commission
interprets statements from the Exchange or a commenter to refer to
an ETP.
\13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
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In this context, 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
successfully manipulate the ETP, so that a surveillance-sharing
agreement would assist 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.\14\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \15\
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\14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order,
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322.
\15\ See USBT Order, 85 FR at 12597.
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Although surveillance-sharing agreements are not the exclusive
means by which a listing exchange of a commodity-trust ETP can meet its
obligations under Exchange Act Section 6(b)(5), such agreements have
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has
historically recognized their importance. And where, as here, a listing
exchange fails to establish that other means to prevent fraudulent and
manipulative acts and practices will be sufficient, the listing
exchange must enter into a surveillance-sharing agreement with a
regulated market of significant size because such agreements detect and
deter fraudulent and manipulative activity.\16\
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\16\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98)
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83
FR at 43924; USBT Order, 85 FR at 12596.
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[[Page 40301]]
The Commission has long recognized that surveillance-sharing
agreements ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur'' and thus ``enable the Commission
to continue to effectively protect investors and promote the public
interest.'' \17\ As the Commission has emphasized, it is essential for
an exchange listing a derivative securities product to have the ability
that surveillance-sharing agreements provide 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.\18\ 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.\19\
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\17\ See NDSP Adopting Release, 63 FR at 70954, 70959. See also
id. at 70959 (``It is essential that the SRO [self-regulatory
organization] have the ability to obtain the information necessary
to detect and deter market manipulation, illegal trading and other
abuses involving the new derivative securities product.
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative
securities product and its underlying securities in place between
the SRO listing or trading a derivative product and the markets
trading the securities underlying the new derivative securities
product.'').
\18\ See NDSP Adopting Release, 63 FR at 70959.
\19\ See Winklevoss Order, 83 FR at 37592-93 (discussing Letter
from Brandon Becker, Director, Division of Market Regulation,
Commission, to Gerard D. O'Connell, Chairman, Intermarket
Surveillance Group (June 3, 1994), available at <a href="https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm">https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm</a>).
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The Commission has explained that the ability of a national
securities exchange to enter into surveillance-sharing agreements
``furthers the protection of investors and the public interest because
it will enable the [e]xchange to conduct prompt investigations into
possible trading violations and other regulatory improprieties.'' \20\
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of
derivative security products, such as equity options, because a
surveillance-sharing agreement ``permits the sharing of information''
that is ``necessary to detect'' manipulation and ``provide[s] an
important deterrent to manipulation because [it] facilitate[s] the
availability of information needed to fully investigate a potential
manipulation if it were to occur.'' \21\ With respect to ETPs, when
approving the listing and trading of one of the first commodity-linked
ETPs--a commodity-linked exchange-traded note--on a national securities
exchange, the Commission continued to emphasize the importance of
surveillance-sharing agreements, stating that the listing exchange had
entered into surveillance-sharing agreements with each of the futures
markets on which pricing of the ETP would be based and stating that
``[t]hese agreements should help to ensure the availability of
information necessary to detect and deter potential manipulations and
other trading abuses, thereby making [the commodity-linked notes] less
readily susceptible to manipulation.'' \22\
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\20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990),
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting
Accelerated Approval to Proposed Rule Change Regarding Cooperative
Agreements With Domestic and Foreign Self-Regulatory Organizations)
(SR-NYSE-90-14).
\21\ Securities Exchange Act Release No. 33555 (Jan. 31, 1994),
59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving
listing of options on American Depositary Receipts (``ADR'')) (``ADR
Option Order''). The Commission further stated that it ``generally
believes that having a comprehensive surveillance sharing agreement
in place, between the exchange where the ADR option trades and the
exchange where the foreign security underlying the ADR primarily
trades, will ensure the integrity of the marketplace. The Commission
further believes that the ability to obtain relevant surveillance
information, including, among other things, the identity of the
ultimate purchasers and sellers of securities, is an essential and
necessary component of a comprehensive surveillance sharing
agreement.'' Id.
\22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995),
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also
Winklevoss Order, 83 FR at 37593 n.206.
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Consistent with these statements, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity and the ETP listing exchange has entered into
surveillance-sharing agreements with, or held Intermarket Surveillance
Group (``ISG'') membership in common with, that market.\23\ Moreover,
the surveillance-sharing agreements have been consistently present
whenever the Commission has approved the listing and trading of
derivative securities, even where the underlying securities were also
listed on national securities exchanges--such as options based on an
index of stocks traded on a national securities exchange--and were thus
subject to the Commission's direct regulatory authority.\24\
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\23\ See Winklevoss Order, 83 FR at 37594. Furthermore, the
Commission notes that those cases dealt with a futures market that
had been trading for a long period of time before an exchange
proposed a commodity-trust ETP based on the asset underlying those
futures. For example, silver futures and gold futures began trading
in 1933 and 1974, respectively, see <a href="https://www.cmegroup.com/media-room/historical-first-trade-dates.html">https://www.cmegroup.com/media-room/historical-first-trade-dates.html</a>, and the first ETPs based on
spot silver and gold were approved for listing and trading in 2006
and 2004. See Securities Exchange Act Release No. 53521 (Mar. 20,
2006), 71 FR 14967 (Mar. 24, 2006) (SR-Amex-2005-072) (order
approving iShares Silver Trust); Securities Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22)
(order approving streetTRACKS Gold Shares). Platinum futures and
palladium futures began trading in 1956 and 1968, respectively, see
<a href="https://www.cmegroup.com/media-room/historical-first-trade-dates.html">https://www.cmegroup.com/media-room/historical-first-trade-dates.html</a>, and the first ETPs based on spot platinum and palladium
were approved for listing and trading in 2009. See Securities
Exchange Act Release No. 61220 (Dec. 22, 2009), 74 FR 68895 (Dec.
29, 2009) (SR-NYSEArca-2009-94) (order approving ETFS Palladium
Trust); Securities Exchange Act Release No. 61219 (Dec. 22, 2009),
74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) (order approving
ETFS Platinum Trust).
\24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at
5621. The Commission has also recognized that surveillance-sharing
agreements provide a necessary deterrent to fraud and manipulation
in the context of index options even when (i) all of the underlying
index component stocks were either registered with the Commission or
exempt from registration under the Exchange Act; (ii) all of the
underlying index component stocks were traded in the U.S. either
directly or as ADRs on a national securities exchange; and (iii)
effective international ADR arbitrage alleviated concerns over the
relatively smaller ADR trading volume, helped to ensure that ADR
prices reflected the pricing on the home market, and helped to
ensure more reliable price determinations for settlement purposes,
due to the unique composition of the index and reliance on ADR
prices. See Securities Exchange Act Release No. 26653 (Mar. 21,
1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-87-25) (stating
that ``surveillance-sharing agreements between the exchange on which
the index option trades and the markets that trade the underlying
securities are necessary'' and that ``[t]he exchange of surveillance
data by the exchange trading a stock index option and the markets
for the securities comprising the index is important to the
detection and deterrence of intermarket manipulation''). And the
Commission has explained that surveillance-sharing agreements
``ensure the availability of information necessary to detect and
deter potential manipulations and other trading abuses'' even when
approving options based on an index of stocks traded on a national
securities exchange. See Securities Exchange Act Release No. 30830
(June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-Amex-91-22).
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Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin
[[Page 40302]]
market is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\25\ In response, the Commission has stated that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, the
listing market would not necessarily need to enter into a surveillance-
sharing agreement with a regulated significant market.\26\ Such
resistance to fraud and manipulation, however, must be novel and beyond
those protections that exist in traditional commodity markets or
securities markets for which surveillance-sharing agreements in the
context of listing derivative securities products have been
consistently present.\27\
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\25\ See USBT Order, 85 FR at 12597.
\26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and [spot] bitcoin markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation). See also USBT Order, 85 FR at
12597.
\27\ See USBT Order, 85 FR at 12597, 12599.
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Here, NYSE Arca contends that approval of the proposal is
consistent with Section 6(b)(5) of the Exchange Act, and, in
particular, Section 6(b)(5)'s requirement 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.\28\ As discussed in more detail below, NYSE Arca asserts that
the proposal is consistent with Section 6(b)(5) of the Exchange Act
because bitcoin offers novel protections beyond those that exist in
traditional commodity markets or equity markets and the proposal's use
of the Index (as described below) \29\ represents an effective means to
prevent fraudulent and manipulative acts and practices.\30\ In
addition, NYSE Arca asserts that the Chicago Mercantile Exchange
(``CME'') bitcoin futures market is a significant, surveilled, and
regulated market that is ``closely connected'' to the spot bitcoin
market, and that the Exchange may obtain information from the CME
bitcoin futures market and other entities that are members of the ISG
to assist in detecting and deterring potential fraud and manipulation
with respect to the Trust and the Shares.\31\ In addition, NYSE Arca
argues that the proposal would protect investors and the public
interest because, among other things, the Exchange has in place
surveillance procedures relating to trading in the Shares and the
proposal would promote competition.\32\
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\28\ See Amendment No. 1, 87 FR at 28051-54, 28059-60.
\29\ See infra note 35 and accompanying text.
\30\ See Amendment No. 1, 87 FR at 28051-53, 28059-60.
\31\ See id. at 28054; 28060.
\32\ See id. at 28060.
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In the analysis that follows, the Commission examines whether the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Exchange Act by addressing: in Section
III.B.1 assertions that other means besides surveillance-sharing
agreements will be sufficient to prevent fraudulent and manipulative
acts and practices; in Section III.B.2 assertions that NYSE Arca has
entered into a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to spot bitcoin; in
Section III.B.3 assertions that the Commission must approve the
proposal because the Commission has approved the listing and trading of
ETFs and ETPs that hold CME bitcoin futures; in Section III.C
assertions that the proposal is consistent with the protection of
investors and the public interest; and in Section III.D other arguments
raised by commenters.
Based on its analysis, the Commission concludes that NYSE Arca has
not established that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin. The Commission further
concludes that NYSE Arca has not established that it has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin, the underlying bitcoin assets
that would be held by the Trust. As a result, the Commission is unable
to find that the proposed rule change is consistent with the statutory
requirements of Exchange Act Section 6(b)(5).
The Commission emphasizes that its disapproval of this proposed
rule change, as modified by Amendment No. 1, does not rest on an
evaluation of the relative investment quality of a product holding spot
bitcoin versus a product holding CME bitcoin futures, or an assessment
of whether bitcoin, or blockchain technology more generally, has
utility or value as an innovation or an investment. Rather, the
Commission is disapproving this proposed rule change, as modified by
Amendment No. 1, because, as discussed below, NYSE Arca has not met its
burden to demonstrate that its proposal is consistent with the
requirements of Exchange Act Section 6(b)(5).
II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1
As described in more detail in Amendment No. 1,\33\ 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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\33\ See supra note 8. See also Amendment No. 1 to Registration
Statement on Form 10, dated December 31, 2019, filed with the
Commission on behalf of the Trust (``Registration Statement'');
Annual Report on Form 10-K for the fiscal year ended December 31,
2021, filed with the Commission on the behalf of the Trust (``2021
10-K'').
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The investment objective of the Trust is for the value of the
Shares (based on bitcoin per Share) to reflect the value of the
bitcoins held by the Trust, as determined by reference to the ``Index
Price,'' less the Trust's expenses and other liabilities.\34\ The
``Index Price'' is the U.S. dollar value of a bitcoin represented by
the ``Index,'' calculated at 4:00 p.m., New York time, on each business
day.\35\ According to the Exchange, the Index Provider develops,
calculates, and publishes the Index on a continuous basis using the
price at certain spot bitcoin trading platforms selected by the Index
Provider.\36\ As of December 31, 2021, the spot bitcoin trading
platforms included in the Index were: Coinbase Pro, Bitstamp, Kraken,
and LMAX Digital (``Constituent Platforms'').\37\ The Index applies an
[[Page 40303]]
algorithm to the price of bitcoin on the Constituent Platforms
calculated on a per second basis over a 24-hour period.\38\
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\34\ See Amendment No. 1, 87 FR at 28045. Grayscale Investments,
LLC (``Sponsor'') is the sponsor of the Trust and is a wholly-owned
subsidiary of Digital Currency Group, Inc. Delaware Trust Company
(``Trustee'') is the trustee of the Trust. The custodian for the
Trust is Coinbase Custody Trust Company, LLC (``Custodian''). The
administrator of the Trust is BNY Mellon Asset Servicing
(``Administrator''). The distribution and marketing agent for the
Trust is Genesis. The Trust operates pursuant to a trust agreement
(``Trust Agreement'') between the Sponsor and the Trustee. See id.
at 28044.
\35\ See id. at 28049. According to the Exchange, the index
provider for the Trust is CoinDesk Indices, Inc., formerly known as
TradeBlock, Inc. (``Index Provider''). See id. at 28044. While the
Exchange, in the proposal, does not name the Index that the Trust
would use to value the bitcoins held by the Trust, the Exchange does
provide that the value of the Index, as well as additional
information regarding the Index, may be found at: <a href="https://tradeblock.com/markets/index/xbx">https://tradeblock.com/markets/index/xbx</a>. See id. at 28058. Further, in its
letter to the Commission, the Sponsor states that the Trust values
its bitcoin holdings based on the CoinDesk Bitcoin Price Index (XBX)
(formerly known as the Tradeblock XBX Index). See Letter from Davis
Polk & Wardwell LLP, on behalf of the Sponsor, dated Nov. 29, 2021
(``Grayscale Letter I''), at 5.
\36\ See Amendment No. 1, 87 FR at 28049.
\37\ See id. at 28047, 28049, 28052 n.35. In its proposal, NYSE
Arca uses the term ``U.S.-Compliant Exchanges'' to describe
Constituent Platforms that are ``compliant with applicable U.S.
federal and state licensing requirements and practices regarding AML
and KYC regulations.'' Id. at 28052 n.35. According to NYSE Arca,
``[a]ll Constituent [Platforms] are U.S.-Compliant Exchanges.'' Id.
\38\ See id. at 28049. According to the Exchange, prior to
February 1, 2022, the Trust valued its bitcoins for operational
purposes by reference to the volume-weighted average Index Price
(``Old Index Price''). The Old Index Price was calculated by
applying a weighting algorithm to the price and trading volume data
for the immediately preceding 24-hour period as of 4:00 p.m., New
York time, derived from the Constituent Platforms reflected in the
Index on such trade date, and overlaying an averaging mechanism to
the price produced. Thus, whereas the Old Index Price reflected the
price of a bitcoin at 4:00 p.m., New York time, calculated by taking
the average of each price of a bitcoin produced by the Index over
the preceding 24-hour period, as of February 1, 2022, the Index
Price reflects the price of a bitcoin at 4:00 p.m., New York time,
calculated based on the price and trading volume data of the
Constituent Platforms over the preceding 24-hour period. According
to the Exchange, the Index Price differs from the Old Index Price
only in that it does not use an additional averaging mechanism; the
Index Price otherwise uses the same methodology as the Old Index
Price, and there has been no change to the Index used to determine
the Index Price or the criteria used to select the Constituent
Platforms. See id. at 28053 n.44.
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The Trust's assets will consist solely of bitcoins; Incidental
Rights; \39\ IR Virtual Currency; \40\ proceeds from the sale of
bitcoins, Incidental Rights, and IR Virtual Currency pending use of
such cash for payment of Additional Trust Expenses \41\ or distribution
to the shareholders; and any rights of the Trust pursuant to any
agreements, other than the Trust Agreement, to which the Trust is a
party. Each Share represents a proportional interest, based on the
total number of Shares outstanding, in each of the Trust's assets as
determined in the case of bitcoin by reference to the Index Price, less
the Trust's expenses and other liabilities (which include accrued but
unpaid fees and expenses).\42\
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\39\ ``Incidental Rights'' are rights to acquire, or otherwise
establish dominion and control over, any virtual currency or other
asset or right, which rights are incident to the Trust's ownership
of bitcoins and arise without any action of the Trust, or of the
Sponsor or Trustee on behalf of the Trust. See id. at 28044 n.14.
\40\ ``IR Virtual Currency'' is any virtual currency tokens, or
other asset or right, acquired by the Trust through the exercise
(subject to the applicable provisions of the Trust Agreement) of any
Incidental Right. See id. at 28045 n.15.
\41\ ``Additional Trust Expenses'' are any expenses incurred by
the Trust in addition to the Sponsor's fee that are not Sponsor-paid
expenses. See id. at 28045 n.16.
\42\ See id. at 28045, 28047.
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On each business day at 4:00 p.m., New York time, or as soon
thereafter as practicable, the Sponsor will evaluate the bitcoin held
by the Trust and calculate and publish the ``Digital Asset Holdings''
of the Trust using the Index Price.\43\ The Trust's website, as well as
one or more major market data vendors, will provide an intra-day
indicative value (``IIV'') per Share updated every 15 seconds, as
calculated by the Exchange or a third party financial data provider
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m.,
E.T.). The IIV will be calculated using the same methodology as the
Digital Asset Holdings of the Trust, specifically by using the prior
day's closing Digital Asset Holdings per Share as a base and updating
that value during the Exchange's Core Trading Session to reflect
changes in the value of the Trust's Digital Asset Holdings during the
trading day.\44\ In addition, according to the Exchange, ``each
investor will have access to the current Digital Asset Holdings of the
Trust through the Trust's website, as well as from one or more major
market data vendors.'' \45\
---------------------------------------------------------------------------
\43\ The Exchange does not define the term ``Digital Asset
Holdings'' in the proposed rule change. Additional information about
the calculation of the Digital Asset Holdings can be found in
Amendment No. 1. See id. at 28047. The Trust does not expect to take
any Incidental Rights or IR Virtual Currency it may hold into
account for purposes of determining the Trust's Digital Asset
Holdings. Id.
\44\ See id. at 28058.
\45\ Id.
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The Trust will issue Shares to authorized participants from time to
time, but only in one or more Baskets (each ``Basket'' being a block of
100 Shares). The creation of Baskets will be made only in exchange for
the delivery to the Trust of the number of whole and fractional
bitcoins represented by each Basket being created.\46\ The Trust may
redeem Shares from time to time, but only in Baskets. The redemption of
Baskets requires the distribution by the Trust of the number of
bitcoins represented by the Baskets being redeemed. The redemption of a
Basket will be made only in exchange for the distribution by the Trust
of the number of whole and fractional bitcoins represented by each
Basket being redeemed.\47\ Creation and redemption orders may be placed
either ``in-kind'' or ``in-cash.'' \48\ Although the Trust will create
Baskets only upon the receipt of bitcoins, and will redeem Baskets only
by distributing bitcoins, an authorized participant may deposit cash
with or receive cash from the Administrator, which will facilitate the
purchase or sale of bitcoins through a liquidity provider on behalf of
an authorized participant.\49\
---------------------------------------------------------------------------
\46\ See id. at 28055.
\47\ See id. at 28056.
\48\ See id. at 28056-57.
\49\ See id. at 28055-57.
---------------------------------------------------------------------------
According to the Sponsor, shares of the Trust are currently offered
to accredited investors within the meaning of Regulation D under the
Securities Act, and, once such investors have held their shares for the
requisite holding period pursuant to Rule 144 under the Securities Act,
they have the ability to resell them through transactions on the OTCQX
Best Market (``OTCQX''), an over-the-counter (``OTC'') marketplace
operated by OTC Markets Group that is not registered with the
Commission as a national securities exchange.\50\ The Sponsor states
that these shares have been quoted on OTCQX since March 2015 and are
available to investors through broker transactions.\51\ The Sponsor
also states that, in the twelve months ended October 31, 2021, trading
in these shares accounted for the most transactions by dollar volume of
any security traded on OTCQX.\52\ The Sponsor further states that the
Trust is the largest and most liquid bitcoin investment fund in the
world and that the Sponsor is the world's largest digital currency
asset manager, with more than $55 billion in assets under management as
of October 29, 2021.\53\
---------------------------------------------------------------------------
\50\ See Grayscale Letter I, at 2.
\51\ See id.
\52\ See id.
\53\ See id. at 4.
---------------------------------------------------------------------------
III. Discussion
A. The Applicable Standard for Review
The Commission must consider whether NYSE Arca's proposal is
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act
requires, in relevant part, 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.'' \54\
Under the Commission's
[[Page 40304]]
Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \55\
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\54\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are 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 regulating, clearing, settling, processing
information with respect to, and 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; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
\55\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------
The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\56\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\57\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\58\
---------------------------------------------------------------------------
\56\ See id.
\57\ See id.
\58\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------
B. Whether NYSE Arca Has Met Its Burden to Demonstrate That the
Proposal Is Designed to Prevent Fraudulent and Manipulative Acts and
Practices
(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient to Prevent Fraudulent and Manipulative Acts and
Practices
(i) Assertions Regarding the Bitcoin Market
As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with the detection and deterrence of fraud and manipulation provided by
a comprehensive surveillance-sharing agreement with a regulated market
of significant size related to the underlying bitcoin assets, including
by demonstrating that the bitcoin market as a whole or the relevant
underlying bitcoin market is uniquely and inherently resistant to fraud
and manipulation.\59\ Such resistance to fraud and manipulation,
however, must be novel and beyond those protections that exist in
traditional commodities or securities markets.\60\
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\59\ See USBT Order, 85 FR at 12597 n.23. The Commission 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. See id.
\60\ See id. at 12597.
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(a) Representations Made and Comments Received
NYSE Arca asserts that ``the fundamental features of [b]itcoin's
fungibility, transportability[,] and exchange tradability offer novel
protections beyond those that exist in traditional commodity markets or
equity markets when combined with other means.'' \61\
---------------------------------------------------------------------------
\61\ Amendment No. 1, 87 FR at 28051.
---------------------------------------------------------------------------
In addition, some commenters claim that the spot bitcoin market's
size and depth of liquidity, as well as the diversity of market
participants, limits its susceptibility to manipulation.\62\ An
affiliate of the Custodian, for example, states that bitcoin's average
daily trading volume in 2021 was approximately $45 billion, which,
according to this commenter, is significantly higher than that of the
largest equity stocks.\63\ This commenter also states that the spot
bitcoin market is comparably as large and transparent as the silver,
palladium, and platinum markets, for which the Commission has approved
spot ETPs.\64\ According to this commenter, ``[w]hen compared across
key market dimensions--trading volume, capitalization, and number of
active trading venues--the [b]itcoin spot market is more robust, a sign
of lower likelihood of successful market manipulation.'' \65\ Lastly,
this commenter states that asset managers, hedge funds, and public
companies participate in the bitcoin market and that interest from
institutional investors continues to increase.\66\
---------------------------------------------------------------------------
\62\ See, e.g., Letter from Paul Grewal, Chief Legal Officer,
Coinbase, dated Mar. 3, 2022 (``Coinbase Letter II''), at 2 (``the
[b]itcoin markets exhibit characteristics and maturity commensurate
with some of the deeply traded markets in commodities and U.S.
equities. The liquidity and transparency of the [b]itcoin markets
limits its susceptibility to manipulation . . . .''); Letter from
Cassandra Lentchner, President and Chairman, BitGo Trust Company,
Inc., dated Apr. 18, 2022 (``BitGo Letter''), at 2 (``Bitcoin is a
widely-traded asset with a market capital of over $750B and trading
volumes of tens of billions daily. The sheer size of this widely
held market demonstrates the difficulty of manipulation.''); Letter
from Mike Cammarata, dated Mar. 31, 2022 (``Cammarata Letter'')
(``the size of the [b]itcoin market (around $1 Trillion USD) has now
reached a level where price manipulation concerns are minor as any
attempt at manipulation will simply be arbitraged away by the deep
pool of robust market participants''); Letter from Kate McAllister
and James Toes, Security Traders Association, dated Apr. 20, 2022
(``STA Letter''), at 2 (``the combination of liquid markets for
[b]itcoin and the features within the ETF structure mitigate
potential price manipulation''); Letter from Michael D. Moffitt,
dated Feb. 7, 2022 (``Moffitt Letter I'') (stating that ``the
[b]itcoin as of 2021/2022 are indeed sufficiently liquid and
transparent for the purposes of an ETF'' and ``it is my belief that
widespread manipulation is simply not possible in the same way that
it might have been several years ago'').
\63\ See Coinbase Letter II, at 3.
\64\ See id. at 3, 8. See also, e.g., Letter from Douglas Shultz
(Feb. 14, 2022) (``Shultz Letter'') (``The cryptocurrency market has
passed silver in terms of total market capitalization at various
times. If silver can't be manipulated at these levels, neither can
[b]itcoin.'').
\65\ Coinbase Letter II, at 3.
\66\ See id. at 3.
---------------------------------------------------------------------------
Some commenters state that active participation by market makers
and arbitrageurs across bitcoin-related markets serves to quickly close
arbitrage opportunities, including any that may be due to attempted
price manipulation.\67\ In support of this claim, the affiliate of the
Custodian states that it has undertaken empirical research that shows
that spot bitcoin prices do not deviate significantly across digital
asset platforms.\68\ According to this commenter, in a comparison of
hour-end prices for bitcoin across the Constituent Platforms, the
platforms showed less than 20 basis point deviation 97% of the time
over a roughly three-year time horizon.\69\ This commenter states that
its observations and interpretations are consistent with those
expressed previously by the Commission--that a strong convergence
[[Page 40305]]
of pricing across a broad market is present where spot markets are deep
and liquid.\70\ This commenter concludes that, given the spot bitcoin
market's significant volume and efficiency of intermarket price
correction, manipulating the price of the Shares by manipulating the
spot bitcoin market would require a prohibitively large trading volume
and coordination across several large trading platforms, and that
activity on this scale would be readily detected via surveillance.\71\
---------------------------------------------------------------------------
\67\ See, e.g., Coinbase Letter II, at 2; Letter from Douglas A.
Cifu, Chief Executive Officer, Virtu Financial, Inc., dated Apr. 4,
2022 (``Virtu Letter''), at 3 (``we believe that the active
participation by market makers across all of these linked markets--
spot, futures, derivatives and ETP--can mitigate the risk of
manipulation through competitive liquidity provision, arbitrage and
creation/redemption transactions''); Letter from W. Graham Harper,
Head of Public Policy and Market Structure, Cumberland, a subsidiary
of DRW Trading Group, dated Apr. 1, 2022 (``Cumberland Letter''), at
2 (``[a]ny narrowly scoped attempt to manipulate the spot [b]itcoin
market would be quickly counteracted by the collective activity of
arbitrageurs and liquidity providers, ultimately facilitating
orderly price discovery potentially causing artificial prices to be
perpetuated across all [b]itcoin related products, but in any case,
forcing the arbitrage relationships to remain intact'').
\68\ See Coinbase Letter II, at 4.
\69\ See id. According to this commenter, while there were
instances where prices across Constituent Platforms experienced
higher deviations than 20 bps, the vast majority (e.g., 90% of
deviations greater than 1%) were driven by a single platform's
pricing with less than 5% of the trading volume. In the remaining
instances, price differences quickly closed by intermarket trading,
typically within one hour, with the exception of two price
deviations that lasted three hours during the onset of the Covid-19
pandemic. See id.
\70\ See id. (citing to Securities Exchange Act Release No.
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22)
(Order Granting Approval of Proposed Rule Change by the New York
Stock Exchange, Inc. Regarding Listing and Trading of
streetTRACKS[supreg] Gold Shares).
\71\ See id. at 4-5.
---------------------------------------------------------------------------
A number of commenters, however, take the opposite view, arguing,
among other things, that the price of bitcoin is subject to
manipulation on the unregulated platforms, and approval of the proposal
would invite additional manipulation.\72\
---------------------------------------------------------------------------
\72\ See, e.g., Letters from David Rosenthal (Apr. 20, 2022);
David Golumbia (Apr. 18, 2022); Elliot Kleinfelder (Apr. 19, 2022)
(``Kleinfelder Letter''); Scott S. (Feb. 20, 2022); John Carvalho
(Feb. 22, 2022); JRL Innovations (Feb. 14, 2022); Anonymous (Feb.
17, 2022); Adan (Feb. 8, 2022). Some commenters that support
approval of the proposal nevertheless state that the spot bitcoin
market is subject to manipulation. See, e.g., Letter from Noah
Dreyfuss, CIO, Dreyfuss Capital Management, dated Feb. 21, 2022
(``Dreyfuss Letter''), at 1 (``Frankly, one would find great
difficulty in claiming that the spot [b]itcoin market is free of
manipulation.''); Letter from Jonas M. Grant (Feb. 6, 2022) (``the
[b]itcoin market is no doubt susceptible to some manipulation'').
---------------------------------------------------------------------------
(b) Analysis
As with the previous proposals, the Commission here concludes that
information in the record regarding the bitcoin market does not support
a finding that the Exchange has established other means to prevent
fraudulent and manipulative acts and practices sufficient to justify
dispensing with the detection and deterrence of fraud and manipulation
that is provided by a comprehensive surveillance-sharing agreement with
a regulated market of significant size related to spot bitcoin.
Likewise, the record does not support a finding that the Exchange has
demonstrated that the bitcoin market as a whole or the relevant
underlying bitcoin market is uniquely and inherently resistant to fraud
and manipulation.
The Commission has identified in previous orders possible sources
of fraud and manipulation in the spot bitcoin market, including: (1)
``wash'' trading; \73\ (2) persons with a dominant position in bitcoin
manipulating bitcoin pricing; (3) hacking of the bitcoin network and
trading platforms; (4) malicious control of the bitcoin network; (5)
trading based on material, non-public information (for example, plans
of market participants to significantly increase or decrease their
holdings in bitcoin, new sources of demand for bitcoin, or the decision
of a bitcoin-based investment vehicle on how to respond to a ``fork''
in the bitcoin blockchain, which would create two different, non-
interchangeable types of bitcoin) or based on the dissemination of
false and misleading information; (6) manipulative activity involving
purported ``stablecoins,'' including Tether (USDT); and (7) fraud and
manipulation at bitcoin trading platforms.\74\
---------------------------------------------------------------------------
\73\ See also CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563
(S.D.N.Y. filed June 2, 2022) (alleging, among other things, failure
by Gemini personnel to disclose to the CFTC that Gemini customers
could and did engage in collusive or wash trading).
\74\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (Oct. 28, 2019),
available at <a href="https://ssrn.com/abstract=3195066">https://ssrn.com/abstract=3195066</a> and published in 75
J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86;
WisdomTree Order, 86 FR at 69326; Global X Order, 87 FR at 14916;
ARK 21Shares Order, 87 FR at 20019; One River Order, 87 FR at 33554.
---------------------------------------------------------------------------
NYSE Arca concedes that neither bitcoin itself nor the global
bitcoin markets are inherently resistant to fraud or manipulation.\75\
NYSE Arca acknowledges in its proposal that ``fraud and manipulation
may exist and that [b]itcoin trading on any given exchange may be no
more uniquely resistant to fraud and manipulation than other commodity
markets.'' \76\ NYSE Arca also states that ``[b]itcoin is not itself
inherently resistant to fraud and manipulation'' \77\ and concedes that
``the global exchange market for the trading of [b]itcoins''--which
NYSE Arca says consists of transactions on the ``electronic marketplace
where exchange participants may trade, buy and sell [b]itcoins based on
bid-ask trading''--also ``is not inherently resistant to fraud and
manipulation.'' \78\
---------------------------------------------------------------------------
\75\ See Amendment No. 1, 87 FR at 28050-51 (where the Exchange
states that ``[t]he Commission has expressed legitimate concerns
about the underlying [spot bitcoin market] due to the potential for
fraud and manipulation'' and discusses previous Commission orders
finding ``evidence of potential and actual fraud and manipulation in
the historical trading of [b]itcoin on certain marketplaces such as
(1) `wash' trading, (2) trading based on material, non-public
information, including the dissemination of false and misleading
information, (3) manipulative activity involving Tether, and (4)
fraud and manipulation''). See also id. at 28049 (where the Exchange
asserts that the proposal's use of the Index mitigates the effects
of wash trading and order book spoofing).
\76\ Id. at 28051.
\77\ Id. at 28054.
\78\ Id. at 28059 (the ``Digital Asset Exchange Market is not
inherently resistant to fraud and manipulation''). In its filing,
the Exchange uses the term ``Digital Asset Exchange Market'' as
``the global exchange market for the trading of [b]itcoins, which
consists of transactions on electronic Digital Asset Exchanges.'' A
``Digital Asset Exchange'' is defined by NYSE Arca as ``an
electronic marketplace where exchange participants may trade, buy
and sell [b]itcoins based on bid-ask trading.'' Id. at 28045 n.18.
---------------------------------------------------------------------------
Moreover, the Trust's Registration Statement acknowledges that
``[d]ue to the unregulated nature and lack of transparency surrounding
the operations of [bitcoin trading platforms], they may experience
fraud, security failures or operational problems, which may adversely
affect the value of [b]itcoin and, consequently, the value of the
Shares''; that the bitcoin network is currently vulnerable to a ``51%
attack,'' in which a bad actor or botnet that controls a majority of
the processing power dedicated to mining on the bitcoin network may be
able to gain full control of the network and the ability to manipulate
the bitcoin blockchain; that ``in 2019 there were reports claiming that
80-95% of [b]itcoin trading volume on [bitcoin platforms] was false or
non-economic in nature''; and that ``[o]ver the past several years,
some [bitcoin trading platforms] have been closed due to fraud and
manipulative activity, business failure or security breaches.'' \79\
---------------------------------------------------------------------------
\79\ See Exhibit 99.1 of the Registration Statement, at 13-14,
17-18. See also 2021 10-K, at 13, 50; Are Blockchains Decentralized?
Unintended Centralities in Distributed Ledgers, prepared by Trail of
Bits based upon work supported by the Defense Advanced Research
Projects Agency, June 2022, available at: <a href="https://assets-global.website-files.com/5fd11235b3950c2c1a3b6df4/62af6c641a672b3329b9a480_Unintended_Centralities_in_Distributed_Ledgers.pdf">https://assets-global.website-files.com/5fd11235b3950c2c1a3b6df4/62af6c641a672b3329b9a480_Unintended_Centralities_in_Distributed_Ledgers.pdf</a>.
---------------------------------------------------------------------------
NYSE Arca asserts that bitcoin's fungibility, transportability, and
exchange tradability, ``when combined with other means,'' offer novel
protections beyond those that exist in traditional commodity markets or
equity markets.\80\ The Exchange, however, does not explain how bitcoin
is fungible, transportable, or tradable; or how bitcoin's fungibility,
transportability, and tradability offer novel protections or help to
detect and deter potential fraud and manipulation. As stated above,
``unquestioning reliance'' on an SRO's representations in a proposed
rule change is not sufficient to justify the
[[Page 40306]]
Commission's approval of a proposed rule change.\81\
---------------------------------------------------------------------------
\80\ See Amendment No. 1, 87 FR at 28051. The Exchange does not
explicitly tie the asserted novel aspects of bitcoin to an argument
that such market provides sufficient means besides surveillance-
sharing agreements to prevent fraud and manipulation.
\81\ See supra note 58.
---------------------------------------------------------------------------
Further, contrary to the Exchange's assertion, fungibility,
transportability, and tradability are not a novel protection beyond
those that exist in traditional commodity or equity markets. Fungible,
``transportable,'' exchange-traded assets, such as securities and
exchange-traded derivatives, trade subject to substantial regulatory
oversight and surveillance-sharing agreements that would be unnecessary
if fungibility, transportability, and tradability were sufficient
protection against fraud and manipulation. Moreover, manipulation of
asset prices can occur through trading activity, including activity
that creates a false impression of supply and demand.\82\ Therefore,
the Exchange's assertions about fungibility, transportability, and
tradability do not inform the Commission's view with respect to the
necessity that a listing exchange have the abilities to detect and
deter fraud and manipulation that are provided by entering into a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin.\83\
---------------------------------------------------------------------------
\82\ See Winklevoss Order, 83 FR at 37585.
\83\ Further, transportation and storage costs for bitcoin are
not zero, as bitcoin mining and recording transactions to the
blockchain have costs. Bitcoin mining involves significant costs for
electrical power and computer hardware. Moreover, bitcoin trading is
subject to transaction fees charged by trading platforms, withdrawal
fees, expenses for custody arrangements, and other factors that
impose frictions on trading.
---------------------------------------------------------------------------
Likewise, the Commission is not persuaded by commenters' assertions
that the bitcoin market's size, liquidity, market participation, or
arbitrage, either individually or together, sufficiently address
concerns regarding fraud and manipulation.\84\ Although commenters
recite various metrics, including market capitalization and average
daily trading volume, or make observations concerning the growth of the
bitcoin market, including increasing institutional participation, they
offer no evidence or analysis of how these metrics or observations
serve to detect and deter potential fraud and manipulation. Further,
even if the record demonstrates that the bitcoin market's size,
liquidity, market participation, or arbitrage makes manipulation more
difficult or costly, as the Commission has stated in prior orders with
respect to similar arguments, these attributes speak to providing some
resistance to manipulation, rather than establishing a unique
resistance to manipulation that would justify dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin.\85\
---------------------------------------------------------------------------
\84\ Although a commenter claims that ``transparency'' of the
bitcoin market assists arbitrage and limits bitcoin's susceptibility
to manipulation, the commenter does not explain what is meant by
``transparency,'' how the bitcoin markets are transparent, or why
such transparency limits manipulation. See Coinbase Letter II, at 2-
4.
\85\ See USBT Order, 85 FR at 12601; Kryptoin Order, 86 FR at
74171; Global X Order, 87 FR at 14916; Wise Origin Order, 87 FR at
5531.
---------------------------------------------------------------------------
Moreover, commenters do not explain how the bitcoin market's
diversity of market participants, widely held nature, or increase in
institutional participation help mitigate concerns about fraud and
manipulation such that a surveillance-sharing agreement is unnecessary.
In addition, commenters' assertions about the diverse, broad, and
institutional nature of bitcoin's investor base do not provide any
information on the concentration of bitcoin ownership within or among
market participants, or take into account that a market participant
with a dominant ownership position may not find it prohibitively
expensive to overcome the liquidity supplied by arbitrageurs and could
use dominant market share to engage in manipulation.\86\ Indeed, the
Sponsor's own statements cast doubt on assertions that the bitcoin
market's attributes sufficiently address concerns about fraud and
manipulation. According to the Sponsor, ``[a]s of December 31, 2021,
the largest 100 [b]itcoin wallets held approximately 15% of the
[b]itcoins in circulation. Moreover, it is possible that other persons
or entities control multiple wallets that collectively hold a
significant number of [b]itcoins, even if they individually only hold a
small amount, and it is possible that some of these wallets are
controlled by the same person or entity. As a result of this
concentration of ownership, large sales or distributions by such
holders could have an adverse effect on the market price of
[b]itcoin.'' \87\
---------------------------------------------------------------------------
\86\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85
FR at 12600-01; WisdomTree Order, 86 FR at 69325; Valkyrie Order, 86
FR at 74160; Kryptoin Order, 86 FR at 74170; SkyBridge Order, 87 FR
at 3783-84; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87
FR at 20019.
\87\ 2021 10-K, at 46.
---------------------------------------------------------------------------
The Custodian affiliate's comparison of the spot bitcoin market to
the silver, palladium, and platinum markets also does not support the
finding that other means to prevent fraudulent and manipulative acts
and practices are sufficient to justify dispensing with the detection
and deterrence of fraud and manipulation provided by a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to spot bitcoin. As discussed above,\88\ for the
commodity-trust ETPs approved to date for listing and trading,
including where the underlying commodity is silver, palladium, or
platinum, there has been in every case at least one significant,
regulated market for trading futures on the underlying commodity, and
the ETP listing exchange has entered into surveillance-sharing
agreements with, or held ISG membership in common with, that market.
---------------------------------------------------------------------------
\88\ See supra note 23 and accompanying text.
---------------------------------------------------------------------------
The Commission is also not persuaded by commenters' assertion that
efficiency of intermarket price correction in the spot bitcoin markets
would make manipulating the spot market prohibitively expensive and
readily detectable. The affiliate of the Custodian provides various
statistics which purport to show that bitcoin prices are closely and
increasingly aligned across markets and that any price disparities are
quickly arbitraged away. However, such statistics are based on hour-end
bitcoin prices and do not capture intra-hour price disparities or
provide intra-hour information on how long price disparities persist.
Nor do this commenter's statistics or its assertions provide any
insight into what size or duration of price disparities would be needed
for a would-be manipulator to have an opportunity to make a profit.\89\
---------------------------------------------------------------------------
\89\ See Coinbase Letter II, at 4-5. In addition, the
Registration Statement states: ``As corresponding increases in
throughput lag behind growth in the use of digital asset networks,
average fees and settlement times may increase considerably. For
example, the Bitcoin Network has been, at times, at capacity, which
has led to increased transaction fees . . . . Increased fees and
decreased settlement speeds could . . . adversely impact the value
of the Shares.'' Exhibit 99.1 of the Registration Statement, at 13.
See also 2021 10-K, at 46. The affiliate of the Custodian does not
provide data or analysis to address, among other things, whether
such risks of increased fees and bitcoin transaction settlement
times may affect whether arbitrage is as effective as the commenter
asserts. And without such data or analysis, the Commission cannot
agree with this commenter's assertions. See Susquehanna, 866 F.3d at
447. See also ARK 21Shares Order, 87 FR at 20019 n.68.
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In any event, as the Commission has explained, efficient price
arbitrage is not sufficient to support the finding that a market is
uniquely or inherently resistant to manipulation such that the
Commission can dispense with surveillance-sharing agreements.\90\ The
Commission has stated, for example,
[[Page 40307]]
that even for equity options based on securities listed on national
securities exchanges, the Commission relies on surveillance-sharing
agreements to detect and deter fraud and manipulation.\91\ Equities
that underlie such options trade on U.S. equity markets that are deep,
liquid, highly interconnected, and almost entirely automated and
operate at high speeds measured in microseconds and even
nanoseconds.\92\ Here, the affiliate of the Custodian and other
commenters provide insufficient evidence to support their assertion of
efficient price arbitrage across bitcoin-related platforms, let alone
any evidence that price arbitrage in the bitcoin market is novel and
beyond those protections that exist in traditional commodity markets or
securities markets so as to warrant the Commission dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin.
---------------------------------------------------------------------------
\90\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at
74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 FR
at 20019.
\91\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR
at 74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87
FR at 20019.
\92\ See SEC Staff Report on Algorithmic Trading in U.S. Capital
Markets (Aug. 5, 2020), available at: <a href="https://www.sec.gov/files/Algo_Trading_Report_2020.pdf">https://www.sec.gov/files/Algo_Trading_Report_2020.pdf</a>; Market Data Infrastructure Proposing
Release, Securities Exchange Act Release No. 88216 (Feb. 14, 2020),
85 FR 16726, 16728 (Mar. 24, 2020). See also ARK 21Shares Order, 87
FR at 20019 n.70.
---------------------------------------------------------------------------
Additionally, even assuming that efficiency of intermarket price
correction in the spot bitcoin markets results in bitcoin prices
increasingly aligned across markets, such alignment is not sufficient
to support the finding that a market is uniquely or inherently
resistant to manipulation such that the Commission can dispense with
surveillance-sharing agreements.\93\ As stated above, as a general
matter, the manipulation of asset prices can occur simply through
trading activity that creates a false impression of supply and demand,
notwithstanding the presence of linkages among markets, whether these
linkages be formal (such as those with consolidated quotations or
routing requirements) or informal (such as in the context of the global
bitcoin markets).\94\
---------------------------------------------------------------------------
\93\ See WisdomTree Order, 86 FR at 69325-26; Kryptoin Order, 86
FR at 74170; SkyBridge Order, 87 FR at 3783-84; Wise Origin Order,
87 FR at 5531; ARK 21Shares Order, 87 FR at 20019.
\94\ See Winklevoss Order, 83 FR at 37585; ARK 21Shares Order,
87 FR at 20019.
---------------------------------------------------------------------------
(ii) Assertions Regarding the Index
(a) Representations Made and Comments Received
NYSE Arca asserts that the Index used by the Trust to determine the
value of its bitcoin assets ``represents an effective alternative means
to prevent fraud and manipulation[,] and the Trust's reliance on the
Index addresses the Commission's concerns with respect to potential
fraud and manipulation.'' \95\ It states that the Trust ``has used the
Index to price the Shares for more than six years, and the Index has
proven its ability to (i) mitigate the effects of fraud, manipulation
and other anomalous trading activity from impacting the [b]itcoin
reference rate, (ii) provide a real-time, volume-weighted fair value of
bitcoin and (iii) appropriately handle and adjust[ ] for non-market
related events, such that efforts to manipulate the price of [b]itcoin
would have had a negligible effect on the pricing of the Trust, due to
the controls embedded in the structure of the Index.'' \96\
---------------------------------------------------------------------------
\95\ Amendment No. 1, 87 FR at 28053. A commenter also states
that the ``Index is designed to (i) mitigate the effects of fraud,
manipulation and other anomalous trading activity from impacting the
bitcoin reference rate, (ii) provide a real-time, volume-weighted
fair value of bitcoin and (iii) appropriately handle and adjust for
non-market related events.'' Letter from Campbell R. Harvey,
Professor of Finance, Duke University, dated Mar. 26, 2022 (``Harvey
Letter''), at 3. Another commenter agrees with the Exchange that
``[h]aving the Index Price determined through a process in which
trade data is cleansed and compiled will sufficiently mitigate the
impact of manipulation.'' Letter from Robert Citrone, Founder,
Discovery Capital Management, dated Feb. 23, 2022 (``Discovery
Letter''), at 1. See also, e.g., Moffitt Letter I (``the structure
of this Index is robust enough to protect investors'').
\96\ Amendment No. 1, 87 FR at 28059. See also id. at 28053
(``Since November 1, 2014, the Trust has consistently priced its
Shares at 4:00 p.m., E.T. based on the Index Price. . . . While that
pricing would be known to the market, the Sponsor believes that,
even if efforts to manipulate the price of [b]itcoin at 4:00 p.m.,
E.T. were successful on any exchange, such activity would have had a
negligible effect on the pricing of the Trust, due to the controls
embedded in the structure of the Index.'').
---------------------------------------------------------------------------
First, NYSE Arca argues that the Index's use of Constituent
Platforms that are compliant with applicable U.S. federal and state
licensing requirements and practices regarding anti-money laundering
(``AML'') and know-your-customer (``KYC'') regulations reduces the risk
of fraud, manipulation, and other anomalous trading activity from
impacting the Index. NYSE Arca also states that Constituent Platforms
are considered to be Money Services Businesses (``MSBs'') and thus
subject to certain requirements such as reporting suspicious activities
to the U.S. Department of the Treasury's FinCEN division, having
customer identification through KYC procedures, and establishing a
formal AML policy.\97\ In addition, the Constituent Platforms that are
regulated by the New York State Department of Financial Services
(``NYSDFS'') under the BitLicense program have regulatory requirements
(1) to implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, market manipulation, and similar
wrongdoing; and (2) to monitor, control, investigate, and report back
to the NYSDFS regarding any wrongdoing.\98\ And according to NYSE Arca,
the other non-NYSDFS regulated Constituent Platforms have voluntarily
implemented measures to protect against common forms of market
manipulation.\99\ Moreover, according to NYSE Arca, the Commodity
Futures Trading Commission (``CFTC'') has the authority to police fraud
and manipulation on Constituent Platforms.\100\ In addition, certain of
the Index's Constituent Platforms ``have or have begun to implement
market surveillance infrastructure to further detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing, including
market manipulation.'' \101\
---------------------------------------------------------------------------
\97\ See id. at 28052.
\98\ See id. The Exchange also states that these platforms have
the following obligations: submission of audited financial
statements; compliance with NYSDFS's capitalization requirements;
prohibitions against the ``sale or encumbrance to protect the full
reserves of custodian assets''; fingerprints and photographs of
employees with access to customer funds; retention of a qualified
Chief Information Security Officer and annual penetration testing/
audits; documented business continuity and disaster recovery plan;
and participation in an independent exam by NYSDFS. See id.
\99\ See id. The Exchange states that, as of the date of the
filing, two of the four Constituent Platforms (Bitstamp and Coinbase
Pro) are regulated by NYSDFS. See id. at 28052 n.39.
\100\ See id. at 28052. A commenter states that the CFTC has
exercised its anti-manipulation and anti-fraud enforcement authority
over spot bitcoin markets since 2014, which is three years longer
than the CFTC has overseen bitcoin futures markets. See Letter from
Kristin Smith, Executive Director, and Jake Chervinsky, Head of
Policy, Blockchain Association, dated Nov. 29, 2021 (``Blockchain
Association Letter''), at 3. Another commenter states that the
Commission should rely on the CFTC to exercise its fraud authority
to ensure the underlying bitcoin market is free of manipulation. See
Letter from Michelle Bond, Chief Executive Officer, Association for
Digital Asset Markets, dated Apr. 19, 2022 (``ADAM Letter''), at 6.
\101\ Amendment No. 1, 87 FR at 28059-60. The affiliate of the
Custodian that operates one of the Constituent Platforms states in a
comment letter that it applies surveillance and monitoring measures
for its spot digital asset trading platform that are designed to
identify and address potential manipulative or fraudulent trading
activity, and that it believes that the other Constituent Platforms
also employ measures to counter potential fraudulent or manipulative
trading. See Coinbase Letter II, at 5. This commenter states that,
in addition to its surveillance program, it employs measures similar
to circuit breakers and trading limits used in traditional financial
markets and participates in industry initiatives meant to facilitate
cross-platform surveillance and bolster the integrity and efficiency
of digital asset markets. See id. at 6.
---------------------------------------------------------------------------
[[Page 40308]]
Second, NYSE Arca asserts that other aspects of the methodology
employed in constructing the Index mitigate the impact of fraud,
manipulation, and other anomalous trading activity.\102\ The Exchange
states that the Index is calculated once every second according to a
systematic methodology that relies on observed trading activity on the
Constituent Platforms. The key elements of this proprietary methodology
are as follows: (i) volume weighting--Constituent Platforms with
greater liquidity receive a higher weighting in the Index; (ii) price
variance weighting--the Index reflects data points that are weighted in
proportion to their variance from the rest of the Constituent Platforms
(i.e., as the price at a particular platform diverges from the prices
at the rest of the Constituent Platforms, its weight in the Index Price
decreases.); (iii) inactivity adjustment--the Index algorithm penalizes
stale activity from any given Constituent Platform; and (iv)
manipulation resistance--the Index only includes executed trades in its
calculation in order to mitigate the effects of wash trade and
spoofing, and only includes Constituent Platforms that charge trading
fees to its users in order to attach a real, quantifiable cost to any
manipulation attempts.\103\ In addition, the Exchange states that, by
referencing multiple trading venues and weighting them based on trade
activity, the Index mitigates the impact of any potential fraud,
manipulation, or anomalous trading activity occurring on any single
venue.\104\ In other words, the effects of fraud, manipulation, or
anomalous trading activity occurring on any single venue are de-
weighted and consequently diluted by non-anomalous trading activity of
other Constituent Platforms.\105\
---------------------------------------------------------------------------
\102\ See Amendment No. 1, 87 FR at 28052-53; 28059. A commenter
states that the Index Provider has published empirical evidence
identifying a number of cases in which the Index methodology has
successfully shielded the Index from anomalistic or manipulative
pricing. See Harvey Letter, at 4 (citing to <a href="https://tradeblock.com/blog/analysis-of-bitfinex-anomalies-and-xbx-performance">https://tradeblock.com/blog/analysis-of-bitfinex-anomalies-and-xbx-performance</a>; <a href="https://tradeblock.com/blog/bitfinex-flash-crash-analysis">https://tradeblock.com/blog/bitfinex-flash-crash-analysis</a>; <a href="https://tradeblock.com/blog/xbx-update-adding-okcoin-removing-btc-e-and-btcchina">https://tradeblock.com/blog/xbx-update-adding-okcoin-removing-btc-e-and-btcchina</a>; <a href="https://tradeblock.com/blog/xbx-update-adding-coinbase-removing-kraken">https://tradeblock.com/blog/xbx-update-adding-coinbase-removing-kraken</a>; <a href="https://tradeblock.com/blog/xbx-index-update-removing-okcoin">https://tradeblock.com/blog/xbx-index-update-removing-okcoin</a>; <a href="https://tradeblock.com/blog/updates-to-tradeblocks-ecx-and-xbx-indices-2">https://tradeblock.com/blog/updates-to-tradeblocks-ecx-and-xbx-indices-2</a>; <a href="https://tradeblock.com/blog/bitfinex-bitcoin-premium-reaches-widest-level-in-two-years">https://tradeblock.com/blog/bitfinex-bitcoin-premium-reaches-widest-level-in-two-years</a>; <a href="https://tradeblock.com/blog/bitcoin-futures-flash-crash-occurs-as-exchanges-show-irregular-trading-activity">https://tradeblock.com/blog/bitcoin-futures-flash-crash-occurs-as-exchanges-show-irregular-trading-activity</a>, <a href="https://tradeblock.com/blog/updates-to-all-tradeblock-indices">https://tradeblock.com/blog/updates-to-all-tradeblock-indices</a>). This commenter also states that ``this is the
highest quality benchmark being used in a bitcoin ETP proposal and
one that can substantially mitigate price manipulation to ensure a
fair, orderly, and efficient market.'' Id.
\103\ See Amendment No. 1, 87 FR at 28052-53.
\104\ See id. at 28053. A commenter states that the Trust has
``created a robust approach to managing the risk of manipulation by
relying on an index of [b]itcoin prices from various exchanges'' and
that the Index's ``use of a 24-hour VWAP should make any attempt at
manipulation prohibitively expensive.'' Letter from Peter L. Briger,
Jr., Chief Executive Officer, Fortress Investment Group LLC, dated
Apr. 25, 2022 (``Fortress Letter''), at 2-3. The Exchange states
that the Index no longer utilizes a 24-hour VWAP in its methodology.
See supra note 38.
\105\ See Amendment No. 1, 87 FR at 28053.
---------------------------------------------------------------------------
Third, NYSE Arca asserts that the Index is constructed and
maintained by an expert third-party index provider, which would allow
for prudent handling of non-market-related events.\106\ The Exchange
states that in the event that a manual intervention with respect to the
Index calculation is necessary in response to ``non-market-related
events'' (e.g., halting of deposits or withdrawals of funds,
unannounced closure of platform operations, insolvency, compromise of
user funds, etc.), the Index Provider would issue a public
announcement.\107\ NYSE Arca also asserts that the Index Provider
reviews and periodically updates which bitcoin platforms are included
in the Index by utilizing a methodology that is guided by the IOSCO
principles for financial benchmarks.\108\
---------------------------------------------------------------------------
\106\ See id. at 28053, 28059.
\107\ See id. at 28053.
\108\ See id.
---------------------------------------------------------------------------
(b) Analysis
Based on the assertions made and the information provided with
respect to the Index, the record is inadequate to conclude that NYSE
Arca has articulated other means to prevent fraud and manipulation that
are sufficient to justify dispensing with the detection and deterrence
of fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size related
to spot bitcoin.
First, NYSE Arca argues that the Index's exclusive use of prices
from particular spot bitcoin trading platforms (the Constituent
Platforms), which are subject to FinCEN's AML/KYC regulations, as well
as NYSDFS's BitLicense program for two Constituent Platforms, helps to
reduce the impact of fraud and manipulation on the Index Price. The
Exchange acknowledges, however, that it ``does not believe the
inclusion'' of these platforms is ``in and of itself sufficient to
prove that the Index is an alternative means to prevent fraud and
manipulation such that surveillance sharing agreements are not
required'' but rather that including only such platforms ``in the Index
is one significant way in which the Index is protected from the
potential impacts of fraud and manipulation.'' \109\
---------------------------------------------------------------------------
\109\ Id. at 28052.
---------------------------------------------------------------------------
The Commission does not agree that the inclusion of only certain
Constituent Platforms as described provides a significant protection
against fraud and manipulation. Any oversight afforded by FinCEN and
NYSDFS, including AML/KYC or BitLicense regulation, is not a substitute
for a surveillance-sharing agreement between the Exchange and a
regulated market of significant size related to the underlying bitcoin
assets. AML and KYC regulation, for example, do not substitute for the
sharing of information about market trading activity or clearing
activity that a surveillance-sharing agreement would afford. And
although some of the Constituent Platforms may be registered with
FinCEN or NYSDFS, these spot bitcoin trading platforms are not
comparable to a national securities exchange or futures exchange.\110\
As the Commission has explained, there are substantial differences
between NYSDFS and FinCEN regulation and the Commission's regulation of
national securities exchanges.\111\ The Commission's market oversight
of national securities exchanges includes substantial requirements,
including the requirement to have rules that are ``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 regulating, clearing, settling, processing
information with respect to, and 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.'' \112\ Moreover, national
securities exchanges must file proposed
[[Page 40309]]
rules with the Commission regarding certain material aspects of their
operations,\113\ and the Commission has the authority to disapprove any
such rule that is not consistent with the requirements of the Exchange
Act.\114\ Thus, national securities exchanges are subject to Commission
oversight of, among other things, their governance, membership
qualifications, trading rules, disciplinary procedures, recordkeeping,
and fees.\115\ The Constituent Platforms have none of these
requirements--none are registered as a national securities exchange. In
addition, NYSDFS's BitLicense program is ``guidance'' that is ``not
intended to limit the scope or applicability of any law or
regulation,'' including the Exchange Act.\116\
---------------------------------------------------------------------------
\110\ See USBT Order, 85 FR at 12603-05 and n.101; VanEck Order,
86 FR at 64545 and n.89; WisdomTree Order, 86 FR at 69328 and n.95;
Kryptoin Order, 86 FR at 74173 and n.98; ARK 21Shares Order, 87 FR
at 20021-22 and n.107.
\111\ FinCEN and NYSDFS regulation have been referenced in other
bitcoin-based ETP proposals as a purportedly alternative means by
which such ETPs would be uniquely resistant to manipulation. See
USBT Order, 85 FR at 12603 n.101 and accompanying text. See also,
e.g., WisdomTree Order, 86 FR at 69328 n.95; Kryptoin Order, 86 FR
at 74173 n.98; ARK 21Shares Order, 87 FR at 20022 n.107.
\112\ 15 U.S.C. 78f(b)(5).
\113\ 17 CFR 240.19b-4(a)(6)(i).
\114\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rule changes
with the Commission and provides the Commission with the authority
to disapprove proposed rule changes that are not consistent with the
Exchange Act. Designated contract markets (``DCMs'') (commonly
called ``futures markets'') registered with and regulated by the
CFTC must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at <a href="http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm">http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm</a>.
\115\ See Winklevoss Order, 83 FR at 37597.
\116\ Maria T. Vullo, Superintendent of Financial Services,
NYSDFS, Guidance on Prevention of Market Manipulation and Other
Wrongful Activity (Feb. 7, 2018), available at <a href="https://www.dfs.ny.gov/system/files/documents/2020/03/il180207.pdf">https://www.dfs.ny.gov/system/files/documents/2020/03/il180207.pdf</a>. See
also, e.g., WisdomTree Order, 86 FR at 69328 n.95; Kryptoin Order,
86 FR at 74173 n.98; ARK 21Shares Order, 87 FR at 20022 n.107.
---------------------------------------------------------------------------
Further, neither the Constituent Platforms' voluntary adherence to
the BitLicense program, nor the Custodian affiliate's adoption of
various surveillance, monitoring, and other measures to address
potential manipulative or fraudulent trading activity on its trading
platform, is material to the Commission's analysis. The Exchange
provides no supporting evidence to substantiate its claims that the
Constituent Platforms have voluntarily implemented measures to protect
against common forms of market manipulation and that some of the
Constituent Platforms have begun to implement market surveillance
infrastructure to further detect, prevent, and respond to fraud,
attempted fraud, and similar wrongdoing. Moreover, even taken at face
value, these measures, unlike the Exchange Act's requirements for
national securities exchanges,\117\ are entirely voluntary and
therefore have no binding force. The Constituent Platforms, including
the platform operated by an affiliate of the Custodian, could change or
cease to administer such measures at any time.
---------------------------------------------------------------------------
\117\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------
NYSE Arca's assertions regarding the CFTC's authority with respect
to the Constituent Platforms and the underlying bitcoin market also do
not establish a level of oversight sufficient to dispense with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin.\118\ While the Commission
recognizes that the CFTC maintains some jurisdiction over the spot
bitcoin market, under the Commodity Exchange Act, the CFTC does not
have regulatory authority over spot bitcoin trading platforms,
including the Constituent Platforms.\119\ Except in certain limited
circumstances, spot bitcoin trading platforms are not required to
register with the CFTC,\120\ and the CFTC does not set standards for,
approve the rules of, examine, or otherwise regulate spot bitcoin
markets.\121\ As the CFTC itself stated, while the CFTC ``has an
important role to play,'' U.S. law ``does not provide for direct,
comprehensive Federal oversight of underlying Bitcoin or virtual
currency spot markets.'' \122\
---------------------------------------------------------------------------
\118\ See Valkyrie Order, 86 FR at 74162.
\119\ See USBT Order, 85 FR at 12604.
\120\ See Winklevoss Order, 83 FR at 37599 (``Spot bitcoin
markets are not required to register with the CFTC, unless they
offer leveraged, margined, or financed trading to retail
customers.''). See Commodity Exchange Act Sections 2(c)(2)(D), 7
U.S.C. 2(c)(2)(D), and 2(c)(2)(A)(i), 7 U.S.C. 2(c)(2)(A)(i)
(defining CFTC jurisdiction to specifically cover contracts of sale
of a commodity for future delivery (or options on such contracts),
or an option on a commodity (other than foreign currency or a
security or a group or index of securities), that is executed or
traded on an organized exchange). See also Winklevoss Order, 83 FR
at 37599 n.286.
\121\ See USBT Order, 85 FR at 12604; SolidX Order, 82 FR at
16256 (concluding that there is nothing in the record to indicate
that there is currently a regulatory framework in the United States
for detecting and deterring manipulation in the spot bitcoin markets
and that ``[a]lthough the CFTC can bring enforcement actions against
manipulative conduct in spot markets for a commodity, spot markets
are not required to register with the CFTC unless they offer
leveraged, margined, or financed trading to retail customers. . . .
In all other cases, the CFTC does not set standards for, approve the
rules of, examine, or otherwise regulate bitcoin spot markets.'').
\122\ Winklevoss Order, 83 FR at 37599 (quoting CFTC
Backgrounder on Oversight of and Approach to Virtual Currency
Futures Markets (Jan. 4, 2018), at 1, available at: <a href="http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf">http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf</a>). See also Testimony of Rostin
Behnam, Chair, CFTC, Before the Senate Committee on Agriculture,
Nutrition, and Forestry (Feb. 9, 2022), available at: <a href="https://www.agriculture.senate.gov/imo/media/doc/Testimony_Behnam_020920225.pdf">https://www.agriculture.senate.gov/imo/media/doc/Testimony_Behnam_020920225.pdf</a> (``[W]hile the crystallization of our
enforcement authority through judicial interpretation has proven an
effective means of uncovering and addressing some of the regulatory
gaps presented by innovation and evolution in the financial markets
with respect to digital and related assets, it cannot be viewed as a
viable substitute for a functional regulatory oversight regime for
the cash digital asset market. . . . In fact, there is no one
regulator, either state or federal, with sufficient visibility into
digital asset commodity trading activity to fully police conflicts
of interest and deceptive trading practices impacting retail
customers.'').
---------------------------------------------------------------------------
Second, the record does not demonstrate that the proposed
methodology for calculating the Index would make the proposed ETP
resistant to fraud or manipulation such that the ability to detect and
deter fraud that is provided by a comprehensive surveillance-sharing
agreement with a regulated market of significant size related to spot
bitcoin is unnecessary. Specifically, NYSE Arca has not assessed the
possible influence that spot platforms not included among the
Constituent Platforms would have on bitcoin prices used to calculate
the Index Price. As discussed above, NYSE Arca does not contest the
presence of possible sources of fraud and manipulation in the spot
bitcoin market generally.\123\ Instead, NYSE Arca focuses its analysis
on the attributes of the Constituent Platforms, as well as the Index
methodology that calibrates the pricing input generated by the
Constituent Platforms (such as volume and price-variance weighting and
inactivity adjustment). What the Exchange ignores, however, is that to
the extent that trading on spot bitcoin platforms not directly used to
calculate the Index Price affects prices on the Constituent Platforms,
the activities on those other platforms--where various kinds of fraud
and manipulation from a variety of sources may be present and persist--
may affect whether the Index is resistant to manipulation. Importantly,
the record does not demonstrate that these possible sources of fraud
and manipulation in the broader spot bitcoin market do not affect the
Constituent Platforms that represent a slice of the spot bitcoin
market. To the extent that fraudulent and manipulative trading on the
broader bitcoin market could influence prices or trading activity on
the Constituent Platforms, the Constituent Platforms (and thus the
Index) would not be inherently resistant to manipulation.\124\
---------------------------------------------------------------------------
\123\ See supra notes 75-78 and accompanying text.
\124\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at
74161; SkyBridge Order, 87 FR at 3873.
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[[Page 40310]]
In addition, while NYSE Arca asserts that aspects of the Index
methodology mitigate the impact of fraud and manipulation on the
Shares, the Commission can find no basis to conclude that the Index
methodology constitutes a novel means beyond the protections utilized
by traditional commodity or securities markets to prevent fraud and
manipulation that is sufficient to justify dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to spot bitcoin. For example, while the Index
methodology uses an algorithm to discount prices that deviate from the
average (i.e., price variance weighting), this automatic discounting
could attenuate, but would not eliminate, the effect of manipulative
activity on one of the Constituent Platforms--just as it could
attenuate, but would not eliminate, the effect of bona fide liquidity
demand on one of those platforms.\125\
---------------------------------------------------------------------------
\125\ See SolidX Order, 82 FR at 16257.
---------------------------------------------------------------------------
Moreover, NYSE Arca's assertions that the Trust's use of the Index
helps make the Shares resistant to manipulation conflict with the
Registration Statement. Specifically, the Registration Statement
represents, among other things, that the market price of bitcoin may be
subject to ``[m]anipulative trading activity on bitcoin [trading
platforms], which are largely unregulated,'' and that, ``[d]ue to the
unregulated nature and lack of transparency surrounding the operations
of bitcoin [trading platforms], they may experience fraud, security
failures or operational problems, which may adversely affect the value
of [b]itcoin and, consequently, the value of the Shares.'' \126\
Constituent Platforms are a subset of the bitcoin trading platforms
that the Registration Statement describes.\127\ The Registration
Statement also states, specifically with respect to the Index, that
``[t]he Index has a limited history and a failure of the [Index Price]
could adversely affect the value of the Shares.'' \128\ Although the
Sponsor raises concerns regarding fraud on and the security of bitcoin
platforms, as well as concerns specific to the Index, the Exchange does
not explain how or why such concerns are consistent with its assertion
that the Index is resistant to fraud and manipulation.
---------------------------------------------------------------------------
\126\ Exhibit 99.1 of the Registration Statement, at 16-17. See
also 2021 10-K, at 50.
\127\ See Exhibit 99.1 of the Registration Statement, at 42-43.
See also 2021 10-K, at 10.
\128\ Exhibit 99.1 of the Registration Statement, at 18. See
also 2021 10-K, at 51.
---------------------------------------------------------------------------
Third, although NYSE Arca asserts that the Index Provider's
oversight of the Index, which includes updating the Constituent
Platforms from time to time and handling non-market-related events,
mitigates fraud and manipulation in calculation of the Index, the
record does not suggest that the purported oversight represents a
unique measure to resist or prevent fraud or manipulation beyond
protections that exist in traditional securities or commodities
markets.\129\ Rather, the oversight performed by the Index Provider
appears to be for the purpose of ensuring the accuracy and integrity of
the Index. Such Index accuracy and integrity oversight serves a
fundamentally different purpose as compared to the regulation of
national securities exchanges and the requirements of the Exchange Act.
While the Commission recognizes that this may be an important function
in ensuring the integrity of the Index, such requirements do not imbue
the Index Provider with regulatory authority similar to that which the
Exchange Act confers upon SROs such as national securities
exchanges.\130\ Furthermore, other commodity-based ETPs approved by the
Commission for listing and trading utilize reference rates or indices
administered by similar benchmark administrators,\131\ and the
Commission has not, in those instances, dispensed with the need for a
surveillance-sharing agreement with a significant regulated market.
---------------------------------------------------------------------------
\129\ See, e.g., Valkyrie Order, 86 FR at 74162.
\130\ See WisdomTree Order, 86 FR at 69329; One River Order, 87
FR at 33556.
\131\ See, e.g., Securities Exchange Act Release Nos. 80840
(June 1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33)
(approving the listing and trading of shares of certain trusts
seeking to track the Solactive GLD EUR Gold Index, Solactive GLD GBP
Gold Index, and the Solactive GLD JPY Gold Index).
---------------------------------------------------------------------------
Finally, NYSE Arca does not explain the significance of the Index's
purported resistance to manipulation to the overall analysis of whether
the proposal to list and trade the Shares is designed to prevent fraud
and manipulation.\132\ Even assuming that NYSE Arca's argument is that
the price of the Trust's Shares would be resistant to manipulation if
the Index is resistant to manipulation, NYSE Arca has not established
in the record a basis for this conclusion because NYSE Arca has not
established a link between the price of the Shares and the Index Price,
either in the primary or secondary market. While the Index is used by
the Trust to value its bitcoin, the Trust will create or redeem Baskets
only upon the receipt or distribution of bitcoins from/to authorized
participants, and only for the amount of bitcoin represented by the
Shares in such Baskets, without reference to the value of such bitcoin
as determined by the Index or otherwise. Furthermore, the Shares would
trade in the secondary market at market-based prices, not the Index
Price. The Exchange provides no information on the relationship between
the Index and secondary market prices generally,\133\ or how the use of
the Index would mitigate fraud and manipulation of the Shares in the
secondary market.\134\
---------------------------------------------------------------------------
\132\ The Commission has previously considered and rejected
similar arguments about the valuation of bitcoin according to a
benchmark or reference price. See, e.g., SolidX Order, 82 FR at
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at
12599-601; Valkyrie Order, 86 FR at 74162; ARK 21Shares Order, 87 FR
at 20022.
\133\ For example, as currently traded OTC, the Shares do not
reflect the value of the Index but rather trade at a significant
discount (or at other times, a significant premium). See Exhibit
99.1 of the Registration Statement, at 23 (``the value of the Shares
of the Trust may not approximate, and the Shares may trade at a
substantial premium over, or substantial discount to, the value of
the Trust's Bitcoin Holdings per Share''); 2021 10-K, at 2 (``from
May 5, 2015 to December 31, 2021, the maximum premium of the closing
price of the Shares quoted on OTCQX over the value of the Trust's
Digital Asset Holdings per Share was 142% . . . and the average
premium was 37% . . ., and the maximum discount of the closing price
of the Shares quoted on OTCQX below the value of the Trust's Digital
Asset Holdings was 21% . . . and the average discount was 13% . . .
. As of December 31, 2021, the Trust's Shares were quoted on OTCQX
at a discount of 20% . . . to the Trust's Digital Asset Holdings per
Share.''); Grayscale Letter I, at 2 n.11 (``From May 5, 2015 to
October 31, 2021, the maximum single-day premium of the closing
price of BTC shares quoted on OTCQX over the value of its Bitcoin
holdings was 142% and the average of all daily premiums was 37%; the
maximum single-day discount below the value of its Bitcoin holdings
was 21% and the average of all daily discounts was 12%; and the
average of all single-day premiums and discounts was a premium of
32%.''); Coinbase Letter I, at 2 (``GBTC has traded over-the-counter
at a premium to its net-asset value that has ranged as high as 142%
and a discount to its net-asset value of 21%'').
\134\ See WisdomTree Order, 86 FR at 69329 and n.108; Valkyrie
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022.
---------------------------------------------------------------------------
(2) Assertions That NYSE Arca Has Entered Into a Comprehensive
Surveillance-Sharing Agreement With a Regulated Market of Significant
Size Related to the Underlying Bitcoin Assets
As NYSE Arca has not demonstrated that other means besides
surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices, the Commission next
examines whether the record supports the conclusion that NYSE Arca has
entered into a comprehensive surveillance-sharing agreement with a
regulated market of significant size related to the underlying bitcoin
assets. In this context, the term ``market of
[[Page 40311]]
significant size'' includes a market (or group of markets) as to which
(i) there is a reasonable likelihood that a person attempting to
manipulate the ETP would also have to trade on that market to
successfully manipulate the ETP, so that a surveillance-sharing
agreement would assist in detecting and deterring misconduct, and (ii)
it is unlikely that trading in the ETP would be the predominant
influence on prices in that market.\135\
---------------------------------------------------------------------------
\135\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------
As the Commission has explained, it considers two markets that are
members of the ISG to have a comprehensive surveillance-sharing
agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\136\ Accordingly, based on
the common membership of NYSE Arca and the CME in the ISG,\137\ NYSE
Arca has the equivalent of a comprehensive surveillance-sharing
agreement with the CME. However, while the Commission recognizes that
the CFTC regulates the CME futures market,\138\ including the CME
bitcoin futures market, and thus such market is ``regulated,'' in the
context of the proposed ETP, the record does not, as explained further
below, establish that the CME bitcoin futures market is a ``market of
significant size'' related to spot bitcoin, the underlying bitcoin
assets that would be held by the Trust.
---------------------------------------------------------------------------
\136\ See id. at 37580 n.19.
\137\ See Amendment No. 1, 87 FR at 28054.
\138\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying spot bitcoin market. See Winklevoss
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order,
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93; ARK
21Shares Order, 87 FR at 20023 n.121.
---------------------------------------------------------------------------
(i) Whether There is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market to Successfully Manipulate the ETP
The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' related to spot
bitcoin is the determination that there is a reasonable likelihood that
a person attempting to manipulate the ETP would have to trade on the
CME bitcoin futures market to successfully manipulate the ETP. In
previous Commission orders, the Commission explained that the lead/lag
relationship between the bitcoin futures market and the spot market is
``central'' to understanding this first prong.\139\
---------------------------------------------------------------------------
\139\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a
lead-lag relationship between the bitcoin futures market and the
spot market is central to understanding whether it is reasonably
likely that a would-be manipulator of the ETP would need to trade on
the bitcoin futures market to successfully manipulate prices on
those spot platforms that feed into the proposed ETP's pricing
mechanism. In particular, if the spot market leads the futures
market, this would indicate that it would not be necessary to trade
on the futures market to manipulate the proposed ETP, even if
arbitrage worked efficiently, because the futures price would move
to meet the spot price.''). When considering past proposals for spot
bitcoin ETPs, the Commission has discussed whether there is a lead/
lag relationship between the regulated market (e.g., the CME) and
the market on which the assets held by the ETP would have traded
(i.e., spot bitcoin platforms), as part of an analysis of whether a
would-be manipulator of the spot bitcoin ETP would need to trade on
the regulated market to effect such manipulation. See, e.g., USBT
Order, 85 FR at 12612. See also VanEck Order, 86 FR at 64547;
WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 74176
n.144; SkyBridge Order, 87 FR at 3876 n.101; Wise Origin Order, 87
FR at 5535 n.107; ARK 21Shares Order, 87 FR at 20024 n.138.
---------------------------------------------------------------------------
(a) Assertions Made and Comments Received
The Exchange asserts in its proposal that the CME bitcoin futures
market is a ``large, surveilled and regulated market that is closely
connected with the spot market for [b]itcoin and through which the
Exchange could obtain information to assist in detecting and deterring
potential fraud or manipulation.'' \140\ The Exchange, however,
concedes that the Sponsor did not find a significant lead/lag
relationship between the spot and the CME bitcoin futures markets.
Specifically, according to NYSE Arca, the Sponsor ``conducted a lead/
lag analysis of per minute data comparing the [b]itcoin futures market,
as represented by the CME futures market, to the [b]itcoin spot market,
as represented by the Index.'' However, for the period of November 1,
2019, to August 31, 2021, the analysis showed that ``there does not
appear to be a significant lead/lag relationship between the two
instruments.'' \141\ The Sponsor's analysis notwithstanding, NYSE Arca
states that ``other studies prior to and since such date have found
that the CME futures market does lead the [b]itcoin spot market.''
\142\
---------------------------------------------------------------------------
\140\ Amendment No. 1, 87 FR at 28060. A commenter also states
its belief that the Trust ``has strong links to a regulated market
of significant size (i.e., the CME).'' Fortress Letter, at 2. Based
on arguments articulated in the proposal, the Commission understands
that the Exchange is arguing that CME is the regulated market of
significant size with which it has the relevant surveillance-sharing
agreement.
\141\ Amendment No. 1, 87 FR at 28054.
\142\ Id. at 28054 and n.50 (citing Memorandum to File from Neel
Maitra, Senior Special Counsel (Fintech & Crypto Specialist),
Division of Trading and Markets, U.S. Securities and Exchange
Commission re: Meeting with Representatives from Fidelity Digital
Assets, et al. and attachment (SR-CboeBZX-2021-039) (Sept. 8, 2021),
available at: <a href="https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf">https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf</a>; Letter from Bitwise Asset Management,
Inc. re: File Number SR-NYSEArca-2021-89 (Feb. 25, 2022), available
at: <a href="https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20117902-270822.pdf">https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20117902-270822.pdf</a>; Letter from Wilson Sonsini
Goodrich and Rosati, P.C. and Chapman and Cutler LLP, on behalf of
Bitwise Asset Management, Inc. re: File No. SR-NYSEArca-2021-89
(Mar. 7, 2022), available at: <a href="https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20118794-271630.pdf">https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20118794-271630.pdf</a>). See also
Submission by the Sponsor to the Commission in connection with a
meeting between representatives of the Sponsor, the Sponsor's
counsel, Davis Polk & Wardwell LLP, and Commission staff on April
26, 2022 (``Grayscale Submission''), at 21-22, available at: <a href="https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20128860-294707.pdf">https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20128860-294707.pdf</a>). A commenter states that ``there is ample historical
data to demonstrate how closely the CME futures contracts track the
spot market (and in fact as BitWise's research has shown, lead the
spot market a majority of the time.).'' Letter from Ben Davenport,
dated Feb. 10, 2022 (``Davenport Letter'').
---------------------------------------------------------------------------
NYSE Arca goes on to assert that, ``[a]lthough there have been
mixed findings regarding the lead/lag relationship between the CME
futures and [b]itcoin spot markets, . . . the CME futures market
represents a large, surveilled[,] and regulated market.'' \143\ As
evidence of its assertion that the CME constitutes a market of
significant size related to spot bitcoin, the Exchange states that,
from November 1, 2019, to August 31, 2021, the CME futures market
trading volume was over $432 billion, compared to $624 billion in
trading volume across the Constituent Platforms included in the
Index.\144\ The Exchange also points to the CME futures market trading
volume from November 1, 2019, to August 31, 2021, which it states was
approximately 50% of the trading volume of certain U.S. dollar-
denominated spot bitcoin platforms, including Binance, Coinbase Pro,
Bitfinex, Kraken, Bitstamp, BitFlyer, Poloniex, Bittrex, and
itBit.\145\ The Exchange, therefore, concludes that, ``[g]iven the
significant size of the CME futures markets, . . . there is a
[[Page 40312]]
reasonable likelihood that a person attempting to manipulate the ETP
would also have to trade on that market to successfully manipulate the
ETP, since arbitrage between the derivative and spot markets would tend
to counter an attempt to manipulate the spot market alone.'' \146\
---------------------------------------------------------------------------
\143\ Amendment No. 1, 87 FR at 28054.
\144\ See id.
\145\ See id. at 28054 and n.51. See also Grayscale Submission,
at 16, citing to <a href="https://www.bitcointradingvolume.com/">https://www.bitcointradingvolume.com/</a> (``CME
represents >50% of all [b]itcoin trading volume''). But see Letter
from Robert E. Whaley, Professor of Management (Finance), Director,
Financial Markets Research Center, Vanderbilt University Owen
Graduate School of Management, dated May 25, 2022 (``Whaley
Letter''), at 2 (``In terms of USD value, the market cap in the
CME's bitcoin futures market averages less than one-quarter of one
percent of the bitcoin spot market.''). This commenter nonetheless
concludes that, ``[s]ince the Commission is comfortable with the
viability of futures-based ETF investing in an environment in which
the spot market dominates (in terms of both dollar value and trading
volume), it follows logically that spot-based ETPs are warranted.''
Whaley Letter, at 2.
\146\ Amendment No. 1, 87 FR at 28054. A commenter also states
its belief that ``any attempt to manipulate the price of [the Trust]
would likely also require manipulation of the CME futures markets'';
that ``arbitrage between the spot and derivative markets would
quickly counteract the attempted manipulation''; and that ``the CME
would undoubtedly assist in monitoring and stopping the
misconduct.'' Fortress Letter, at 3.
---------------------------------------------------------------------------
Similar to the Sponsor's analysis, a commenter concludes that the
relationship between spot and futures prices is ``complex and
interrelated with no clear winner.'' \147\ According to the commenter,
the ``results of the test of which market is leading depends on the
time period of testing.'' \148\ Despite the commenter's lead/lag
conclusion, the commenter argues that a would-be manipulator would be
unable to manipulate the proposed ETP without also trading in the CME
bitcoin futures market, ``[g]iven the relative size of trading volumes
of bitcoin futures relative to spot, the strong dependence of spot
prices on futures prices and vice versa, and the inefficiency of
attempting to manipulate the [proposed] ETP through offshore trading.''
\149\ Regarding the relative size of trading volumes, the commenter
states that it examined Bloomberg trading data for the 365 days ended
February 4, 2022, across all spot bitcoin trading venues and all CME
bitcoin futures contract maturities, and found that the aggregate
futures volume ($579 billion) was 31% higher than aggregate spot volume
($442 billion), a result that the commenter found to be statistically
significant.\150\ Regarding offshore trading, the commenter states that
they believe it unlikely ``a bad actor would attempt to manipulate the
[proposed] ETP through trading on offshore cryptocurrency trading
venues'' because ``offshore trading venues generally do not support
fiat trading and instead only support trading between different
cryptocurrencies.'' \151\ The commenter further states that ``offshore
trading venues generally offer trading in bitcoin derivatives such as
quarterly futures and perpetual futures; however, both would be poor
choices for a bad actor seeking to manipulate the [proposed] ETP
because both are known to deviate from the bitcoin spot price much more
than CME futures,'' and thus any actor seeking to manipulate the
proposed ETP ``would risk expanding or contracting the premium of the
derivative being used as a manipulation tool rather than influencing
bitcoin spot prices.'' \152\
---------------------------------------------------------------------------
\147\ Letter from Hunting Hill Global Capital, LLC, dated Mar.
3, 2022 (``Hunting Hill Letter''), at 2. The commenter makes this
conclusion based on its own lead/lag analysis, ``using minute-by-
minute last-price data over the [365 days ended February 4, 2022],
converted to percentage price changes, based on the first lagged
term for both markets.'' Id.
\148\ Id.
\149\ Id. at 3.
\150\ See id. at 1-2. Although the observed time periods are
different, the Commission observes that the relative trading volume
data provided by this commenter is significantly different than the
relative trading volume data provided by the Exchange. See supra
notes 144-145 and accompanying text.
\151\ Hunting Hill Letter, at 2-3. To the extent some offshore
trading venues allow for bitcoin to be exchanged to Tether, the
commenter states that ``it would not be economically practical for a
bad actor to manipulate the [proposed] ETP using Tether-denominated
bitcoin prices'' because ``manipulation in the bitcoin/USD exchange
pair would likely result in a widening of Tether premiums and
discounts.'' Id.
\152\ Id. at 3.
---------------------------------------------------------------------------
(b) Analysis
The record does not demonstrate that there is a reasonable
likelihood that a person attempting to manipulate the proposed ETP
would have to trade on the CME bitcoin futures market to successfully
manipulate the proposed ETP. The Exchange's and commenters' assertions
about the size of the CME bitcoin futures market in comparison to the
Constituent Platforms in particular and/or spot bitcoin markets in
general do not establish that the CME bitcoin futures market is of
significant size related to spot bitcoin. As the Commission has
previously stated, the interpretation of the term ``market of
significant size'' or ``significant market'' depends on the
interrelationship between the market with which the listing exchange
has a surveillance-sharing agreement and the proposed ETP.\153\
Recitations of data reflecting the size of the CME bitcoin futures
market and the size of the spot bitcoin market are not sufficient to
establish an interrelationship between the CME bitcoin futures market
and the proposed ETP.\154\
---------------------------------------------------------------------------
\153\ See USBT Order, 85 FR at 12611.
\154\ See id. at 12612; Wise Origin Order, 87 FR at 5534-35.
---------------------------------------------------------------------------
NYSE Arca asserts that there is a reasonable likelihood that a
person would have to trade on the CME bitcoin futures market to
successfully manipulate the proposed ETP, because ``arbitrage between
the derivative and spot markets would tend to counter an attempt to
manipulate the spot market alone.'' \155\ However, the record does not
demonstrate the existence of efficient price arbitrage across bitcoin-
related platforms, either generally or specifically as it relates to
the bitcoin derivative and spot markets.\156\ The Exchange also does
not provide any additional data or analysis to support its conclusion
that the arbitrage that may exist between the bitcoin derivatives
markets and spot markets would counter an attempt to manipulate the
spot market alone, or to demonstrate that such arbitrage would occur
quickly enough to prevent a would-be manipulator of the proposed ETP
from profiting off of movements in the spot price. Moreover, even
assuming that the Commission concurred with the Exchange's premise that
efficient arbitrage exists between the bitcoin derivatives markets and
spot markets, the Exchange does not explain why the presence of
efficient arbitrage implies that a would-be manipulator would be
reasonably likely to trade specifically on the CME bitcoin futures
market rather than on unregulated bitcoin futures markets or other
bitcoin derivatives markets.\157\
---------------------------------------------------------------------------
\155\ Amendment No. 1, 87 FR at 28054.
\156\ See also supra note 89 and accompanying text.
\157\ See WisdomTree Order, 86 FR at 69332; NYDIG Order, 87 FR
at 14939.
---------------------------------------------------------------------------
In addition, while a commenter asserts that it is unlikely a would-
be manipulator would use offshore bitcoin futures as their manipulation
tool,\158\ this commenter has not sufficiently explained or supported
its assertions. The commenter provides no data or other evidence to
support its assertions that, because Tether often trades at a premium
or discount to USD, it is not ``economically practical''--and therefore
``unlikely''--for a bad actor to manipulate the proposed ETP using
Tether-denominated bitcoin prices. The commenter also does not provide
any data regarding the deviation of offshore futures prices from spot
bitcoin prices, or on how much (or how long) attempted manipulation of
offshore futures affects this deviation, that would allow for
assessment of whether offshore futures would be a ``poor choice'' for a
manipulation tool.
---------------------------------------------------------------------------
\158\ See supra notes 151-152 and accompanying text.
---------------------------------------------------------------------------
Finally, the econometric evidence in the record for the proposal
does not support the conclusion that an interrelationship exists
between the CME bitcoin futures market and the spot bitcoin market such
that it is reasonably likely that a person attempting to manipulate the
proposed ETP would also have to trade on the CME bitcoin futures
market.\159\ As the Commission
[[Page 40313]]
has stated in previous orders, if the spot market leads the futures
market, this would indicate that it would not be necessary to trade on
the futures market to manipulate the proposed ETP.\160\ But as NYSE
Arca concedes, there have been ``mixed'' findings regarding the lead/
lag relationship between the CME futures and spot bitcoin markets.\161\
Moreover, based on the Sponsor's own analysis--the data, methodology,
results, and statistical significance of which were not described in
the filing--``there does not appear to be a significant lead/lag
relationship between'' the CME bitcoin futures market and the spot
bitcoin market.\162\ In addition, a commenter's lead/lag analysis
purportedly finds ``no clear winner'' and a bi-directional relationship
between spot bitcoin prices and CME futures prices.\163\ And while the
Exchange and the Sponsor highlight previous papers and analyses
submitted to the Commission in connection with other proposals to list
and trade spot bitcoin ETPs to support the premise that the CME bitcoin
futures market leads the spot bitcoin market,\164\ the Commission
disapproved the proposals related to these submissions, and the
Commission raised issues and criticisms with respect to these
submissions that the Exchange does not address. The Exchange does not
provide any additional evidence of an interrelationship between the CME
bitcoin futures market, which is the regulated market, and spot bitcoin
platforms, which are the markets on which the assets held by the
proposed ETP would trade. As in previous disapprovals, because the
lead/lag analysis regarding whether the CME bitcoin futures market
leads the spot market remains inconclusive,\165\ the Commission
determines that the evidence in the record is inadequate to conclude
that an interrelationship exists between the CME bitcoin futures market
and the spot bitcoin market such that it is reasonably likely that a
person attempting to manipulate the proposed ETP would have to trade on
the CME bitcoin futures market to successfully manipulate the proposed
ETP.
---------------------------------------------------------------------------
\159\ See USBT Order, 85 FR at 12611; Wise Origin Order, 87 FR
at 5535; NYDIG Order, 87 FR at 14938; Global X Order, 87 FR at
14920; ARK 21Shares, 87 FR at 20024.
\160\ See, e.g., USBT Order, 85 FR at 12612.
\161\ See Amendment No. 1, 87 FR at 28054.
\162\ Id.
\163\ See Hunting Hill Letter, at 2. The Commission considers
the lead/lag relationship between the CME bitcoin futures market and
the spot bitcoin market to be central to understanding whether it is
reasonably likely that a would-be manipulator of a spot bitcoin ETP
would need to trade on the CME bitcoin futures market to
successfully manipulate the proposed ETP. See USBT Order, 85 FR at
12612. This commenter, however, does not explain its data,
methodology (such as why using only the first lag for each time
series was the appropriate model specification), or results to an
extent that can be assessed and/or verified. The commenter also
argues that the Commission should not require that the CME bitcoin
futures market ``always'' lead the spot market, as the commenter
believes that would be ``tantamount to requiring that an obvious
statistical arbitrage opportunity exists between two highly liquid
and automated markets'' from which any trader could ``profit
immensely,'' and would ``be the same as a declaration that bitcoin
ETPs will never be approved in the United States.'' See Hunting Hill
Letter, at 2. The Commission disagrees. A lead/lag statistical
result that CME bitcoin futures prices ``lead'' spot prices does not
mean that CME bitcoin futures prices ``always'' move before spot
prices--which would be the ``obvious'' and exploitable arbitrage
opportunity--or that there would never be a situation where the spot
price moves before the CME bitcoin futures price.
\164\ See supra note 142.
\165\ As the academic literature and listing exchanges' analyses
pertaining to the pricing relationship between the CME bitcoin
futures market and spot bitcoin market have developed, the
Commission has critically reviewed those materials. See ARK 21Shares
Order, 87 FR at 20024; Global X Order, 87 FR at 14920; Wise Origin
Order, 87 FR at 5535-36, 5539-40; Kryptoin Order, 86 FR at 74176;
WisdomTree Order, 86 FR at 69330-32; VanEck Order, 86 FR at 64547-
48; USBT Order, 85 FR at 12613.
---------------------------------------------------------------------------
The Commission thus concludes that the information that NYSE Arca
provides is not sufficient to support a determination that it is
reasonably likely 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. Therefore, the information in the record
also does not establish that the CME bitcoin futures market is a
``market of significant size'' related to the assets to be held by the
proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' related to spot
bitcoin is the determination that it is unlikely that trading in the
proposed ETP would be the predominant influence on prices in the CME
bitcoin futures market.\166\
---------------------------------------------------------------------------
\166\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at
12596-97.
---------------------------------------------------------------------------
(a) Assertions Made and Comments Received
NYSE Arca asserts that ``it is unlikely that the ETP would become
the predominant influence on prices in the market.'' \167\ In support,
NYSE Arca states that the Sponsor examined the change in ``market
capitalization of bitcoin'' with net inflows into the Trust, which
currently trades OTC,\168\ and found that from November 1, 2019, to
August 31, 2021, the market capitalization of bitcoin grew by $721
billion, while the Trust experienced $6.6 billion of inflows over the
same period.\169\ The Exchange states that the cumulative inflow into
the Trust over the stated time period was only 0.9% of the aggregate
growth of bitcoin's market capitalization.\170\ The Exchange also
states that ``the Trust experienced approximately $98.5 billion of
trading volume from November 1, 2019[,] to August 31, 2021, only 23% of
the CME futures market and 16% of the Index over the same period.''
\171\
---------------------------------------------------------------------------
\167\ Amendment No. 1, 87 FR at 28054.
\168\ The Exchange states that, compared with global commodity
ETPs, the Trust would rank fourth among global commodity ETPs in
assets under management and seventh in notional trading volume for
the period from November 1, 2019, to October 31, 2020. See id. at
28054 n.52.
\169\ See id. at 28054.
\170\ See id.
\171\ Id.
---------------------------------------------------------------------------
(b) Analysis
The record does not demonstrate that it is unlikely that trading in
the proposed ETP would be the predominant influence on prices in the
CME bitcoin futures market. First, the Sponsor's comparison of the
Trust's historical inflows to the growth of bitcoin's market
capitalization misapplies the second prong of the Commission's
analysis. As stated above, the second prong in establishing whether the
CME bitcoin futures market constitutes a ``market of significant size''
is the determination that it is unlikely that trading in the proposed
ETP would be the predominant influence on prices in the CME bitcoin
futures market. The Sponsor's analysis of the Trust's historical
inflows vis-[agrave]-vis the capitalization of the spot bitcoin market
considers neither the CME bitcoin futures market nor the CME bitcoin
futures market's prices. Accordingly, such statistics, without more,
are not relevant to the Commission's consideration of whether trading
in the ETP would be the predominant influence on prices in the CME
bitcoin futures market.
Second, putting aside the question of the spot bitcoin market's
relevance to the second prong of the analysis, neither the Sponsor nor
the Exchange has adequately explained why historical inflows into the
OTC Trust is an appropriate proxy for trading in what would be
exchange-listed Shares. There is no limit on the amount of mined
bitcoins that the Trust may hold. Yet the Sponsor relies on the Trust's
historical inflows and does not provide any information on the expected
growth in the size of the Trust if the proposal is approved and the
resultant increase in
[[Page 40314]]
the amount of bitcoin that may be held by the Trust over time, or on
the overall expected number, size, and frequency of creations and
redemptions--or how any of the foregoing could (if at all) influence
prices in the CME bitcoin futures market. Moreover, the Trust's trading
volume cited by the Exchange only relates to the Trust as it trades OTC
and does not contemplate what may happen if the Trust converts to an
ETP.\172\ Commenters state that approval of a spot bitcoin ETP would
provide a simpler, safer, and more efficient way to obtain exposure to
bitcoin than the products that are currently available to retail
investors; \173\ and converting the Trust into an ETP would allow for
daily creations and redemptions.\174\ Further, the Sponsor itself
acknowledges that converting the Trust into an ETP would allow the
Shares to better track the Trust's net asset value (``NAV'') and reduce
discounts and premiums.\175\ Therefore, the Sponsor's use of historical
inflow data is questionable as a way to approximate trading that may
ensue in the proposed ETP.
---------------------------------------------------------------------------
\172\ In addition, neither the Exchange nor the Sponsor
addresses the likely impact, if any, of the conversion itself on CME
bitcoin futures prices, such as whether there may be rapid inflows
into, or outflows from, the Trust upon conversion, and how long any
such impacts are expected to last.
\173\ See infra note 237.
\174\ See infra note 245 and accompanying text.
\175\ See infra notes 245-246 and accompanying text.
---------------------------------------------------------------------------
Third, NYSE Arca's assertions are general and conclusory. While
NYSE Arca recites data relating to the market capitalization of bitcoin
and inflows to the Trust, and trading volume of the Trust as compared
to the CME bitcoin futures market and the Constituent Platforms, NYSE
Arca provides no meaningful analysis of such data to support its
conclusion. For example, setting aside the issues with the relevance of
the data that the Sponsor chose to consider, the analysis performed on
such data is merely a comparison of the size of one data point (e.g.,
change in market capitalization) to the size of another (e.g., net
inflows). Such an analysis is, at best, a simple correlation between
the two data points; it provides no information relating to the impact
of one on the other--e.g., no information on the impact of the Trust's
historical inflows on market capitalization, or of the Trust's trading
volume on the CME bitcoin futures market (let alone, on the CME bitcoin
futures market's prices). In short, the analysis performed provides no
information on the influence that is central to the second prong.
Fourth, the data that NYSE Arca provides indicate that the Trust's
trading volume from November 1, 2019, to August 31, 2021, was ``only''
23% of that of the CME bitcoin futures market.\176\ Even assuming that
this historical data is an accurate predictor of the future percentage,
neither the Sponsor nor the Exchange directly addresses why a single
bitcoin ETP with trading volume close to one-quarter that of the CME
bitcoin futures market is not likely to be the predominant influence on
prices in that market. Moreover, the Sponsor describes the Trust, as of
April 26, 2022, as holding approximately $30 billion in bitcoin, an
amount that constitutes 3.4% of all outstanding bitcoin \177\ and that
far exceeds the value of all open interest in CME bitcoin futures
contracts.\178\ Yet neither the Sponsor nor the Exchange directly
addresses why a spot bitcoin ETP whose assets under management would
similarly exceed the value of all open interest in CME bitcoin futures
contracts is not likely to be the predominant influence on prices in
that market.
---------------------------------------------------------------------------
\176\ See Amendment No. 1, 87 FR at 28054.
\177\ See Grayscale Submission, at 2.
\178\ As of May 31, 2022, the value of open interest in the
front two month CME BTC contracts was approximately $1.7 billion
(source: CME Group).
---------------------------------------------------------------------------
Thus, the Commission cannot conclude, based on the assertions in
the filing and absent sufficient evidence or analysis in support of
these assertions, that it is unlikely that trading in the proposed ETP
would be the predominant influence on prices in the CME bitcoin futures
market.\179\
---------------------------------------------------------------------------
\179\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86
FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87
FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87
FR at 20025.
---------------------------------------------------------------------------
Therefore, because NYSE Arca has not provided sufficient
information to establish both prongs of the ``market of significant
size'' determination, the Commission cannot conclude that the CME
bitcoin futures market is a ``market of significant size'' related to
spot bitcoin such that NYSE Arca would be able to rely on a
surveillance-sharing agreement with the CME to provide sufficient
protection against fraudulent and manipulative acts and practices.
(3) Assertions That the Proposed Spot Bitcoin ETP Is Comparable to
Bitcoin Futures-Based ETFs and ETPs
(i) Assertions Made and Comments Received
The Exchange and the Sponsor argue that it would be inconsistent
for the Commission to allow the listing and trading of ETFs and ETPs
that provide exposure to bitcoin through CME bitcoin futures while
disapproving the current proposal.\180\
---------------------------------------------------------------------------
\180\ See Amendment No. 1, 87 FR at 28055; Grayscale Letter I,
at 7-13; Letter from Davis Polk & Wardwell LLP, on behalf of the
Sponsor, dated Apr. 18, 2022 (``Grayscale Letter II'').
---------------------------------------------------------------------------
The Sponsor asserts that CME bitcoin futures ETFs and ETPs and spot
bitcoin ETPs ``are the same in all relevant respects.'' \181\ In
support of this assertion, the Sponsor claims that CME bitcoin futures
ETFs and ETPs are ``priced according to the CME CF Bitcoin Reference
Rate'' (``BRR''), which, ``in turn, is determined according to pricing
data collected from digital asset trading platforms that include all
but one of those currently incorporated into [the Index].'' \182\ NYSE
Arca also states that spot bitcoin ETPs, including the Trust, ``would
be priced by referencing [spot bitcoin platforms] included in the BRR,
such as through the Index.'' \183\
---------------------------------------------------------------------------
\181\ Grayscale Letter I, at 4.
\182\ Id. at 7. See also Amendment No. 1, 87 FR at 28055;
Grayscale Letter II, at 2; Grayscale Submission, at 13-14; STA
Letter, at 2 (``both types of products use similar processes for
determining price on the underlying spot cash [b]itcoin markets'').
\183\ Amendment No. 1, 87 FR at 28055. See also Grayscale Letter
I, at 7; Grayscale Letter II, at 2; Grayscale Submission, at 13;
Fortress Letter, at 2; Virtu Letter, at 3; Letter from Adam
Kornfield, dated Feb. 15, 2022 (``Kornfield Letter''), at 1; Letter
from Hashem Dezhbakhsh, Narasimhan Jegadeesh, and Juan Rubio-
Ramirez, Emory University, dated April 24, 2022, at 2 (``Emory
Letter''). The Sponsor states that the BRR and the Index have
significant overlap in constituents, resulting in prices that track
each other closely, with an average daily price difference over
trailing 12 months of 0.04%. See Grayscale Submission, at 13. See
also Whaley Letter, at 2-3 (presenting summary data relating to the
Index and the BRR and concluding that ``XBX and BRR are near perfect
substitutes'').
---------------------------------------------------------------------------
The Sponsor further asserts that, because the BRR is based upon
``substantially the same [b]itcoin pricing data'' as the Index, both
CME bitcoin futures ETFs and ETPs and spot bitcoin ETPs are exposed to
the ``same risks relating to pricing data quality'' (``same data, same
risks'').\184\ Moreover, because of the ``almost complete overlap'' in
the platforms underlying the BRR and the Index, the Sponsor claims that
``the risks of fraud and manipulation in the [b]itcoin market impacting
spot [b]itcoin ETPs are indistinguishable from those same risks
impacting futures [b]itcoin ETPs.'' \185\ The Exchange also asserts
[[Page 40315]]
that, because of this overlap, any potential fraud or manipulation in
the underlying spot bitcoin market would impact both CME bitcoin
futures ETFs and ETPs and spot bitcoin ETPs.\186\ The Sponsor goes
further, asserting that ``any'' fraud or manipulation in the underlying
market ``will affect both products in the same way.'' \187\
---------------------------------------------------------------------------
\184\ See Grayscale Letter I, at 7. See also, e.g., Letter from
Paul Grewal, Chief Legal Officer, Coinbase, dated Dec. 14, 2021
(``Coinbase Letter I''), at 4 (``the reference rate used to price
[b]itcoin contracts underlying futures-based ETPs is subject to the
same pricing quality risks as the index used to price spot [b]itcoin
and calculate net-asset value in spot ETPs.''); Letter from James J.
Angel, Associate Professor of Finance, Georgetown University, dated
Apr. 17, 2022 (``Angel Letter I''), at 6; Blockchain Association
Letter, at 3.
\185\ Grayscale Letter I, at 9.
\186\ See Amendment No. 1, 87 FR at 28055. See also Grayscale
Submission, at 14. Some commenters agree that bitcoin futures ETFs
and ETPs pose identical risks of fraud and manipulation as spot
bitcoin ETPs given their views that both products are priced based
on the spot bitcoin price. See, e.g., Blockchain Association Letter,
at 2; Coinbase Letter I, at 3; Coinbase Letter II, at 7; Virtu
Letter, at 3; Angel Letter I, at 5; BitGo Letter, at 2; Cumberland
Letter, at 2; Letter from Carol R. Goforth, University Professor and
Clayton N. Little Professor of Law, University of Arkansas, dated
May 3, 2022 (``Goforth Letter''), at 1; Kornfield Letter, at 2;
Letters from Brandon Gunderson (Feb. 4, 2022) (``Gunderson
Letter''), at 2; Kenneth L. Keiffer, dated May 3, 2022 (``Keiffer
Letter''), at 1; Robert L. DiLonardo and Donna S. DiLonardo, dated
May 3, 2022 (``DiLonardo Letter''); Bridget Metzger (May 9, 2022)
(``Metzger Letter''); Emory Letter, at 2; Letter from Sigal
Mandelker and Jessi Brooks, Ribbit Capital, dated June 20, 2022
(``Ribbit Capital Letter''), at 5. An affiliate of the Custodian
also states that prices and volumes in the bitcoin futures and spot
bitcoin markets ``are highly correlated, indicating very similar
market dynamics between the futures market, for which the Commission
has approved a [CME bitcoin futures ETF], and the spot market.''
Coinbase Letter II, at 3.
\187\ Grayscale Letter II, at 2.
---------------------------------------------------------------------------
Moreover, the Sponsor states that the Commission itself has
recognized that ``the CME bitcoin futures market is not insulated from
potential risks of fraud and manipulation in the underlying [b]itcoin
market.'' \188\ The Sponsor even asserts that, ``[i]f anything,
derivatives markets present additional opportunities for manipulation
on top of spot markets--which is why the derivatives markets have an
additional layer of federal regulation to begin with.'' \189\ According
to the Sponsor, the Commission has never found there to be any
meaningful difference in the risk of fraud or manipulation between spot
bitcoin and bitcoin futures markets.\190\ The Sponsor further asserts
that, ``[e]ven with regulation by the CFTC, limiting ETP exposure to
[b]itcoin futures does not address the risk of manipulation of
underlying [b]itcoin spot market prices--unless the Commission's view
is that CFTC regulation is adequate for all [b]itcoin spot markets,
including those in which [the Trust] invests.'' \191\
---------------------------------------------------------------------------
\188\ Id. (referring to the Teucrium Order, supra note 11). See
also Grayscale Submission, at 14.
\189\ See Grayscale Letter I, at 11. Some commenters make
similar arguments. For example, a commenter states that ``spot
markets may be less prone to manipulation given their daily notional
volumes in the range of $35 billion, with futures volumes in the
range of $1 billion daily notional.'' Virtu Letter, at 3. Another
commenter states that an ETP that actually holds bitcoin would be
less vulnerable to manipulation than an ETP that holds futures
contracts because, with respect to bitcoin futures, there is the
possibility of manipulation on the CME itself in addition to the
spot bitcoin trading platforms. See Angel Letter I, at 6. Another
commenter states that having a bitcoin futures ETF actually makes
the derivatives markets more liquid and easy to manipulate than the
spot market. See Dreyfuss Letter, at 2. See also, e.g., Letter from
Mary L. Holsinger, dated May 8, 2022.
\190\ See Grayscale Letter I, at 11-12; Grayscale Letter II, at
2 (``The Commission's prior disapprovals of spot bitcoin ETPs have
not identified any distinct and significant additional risk of fraud
and manipulation that is somehow specific to spot [b]itcoin ETPs,
and none exists.''). See also, e.g., Blockchain Association Letter,
at 3.
\191\ Grayscale Letter I, at 11. See also, e.g., Blockchain
Association Letter, at 3; Coinbase Letter I, at 3; Ribbit Capital
Letter, at 5.
---------------------------------------------------------------------------
Given that CME bitcoin futures ETFs currently trade, the Sponsor
believes that the Commission's disapproval of the proposal would
violate Section 6(b)(5) of the Exchange Act's prohibition against
unfair discrimination among issuers, and would constitute an arbitrary
and capricious administrative action in violation of the Administrative
Procedure Act (``APA'').\192\ According to the Sponsor, ``[t]he
Commission has not offered any meaningful explanation for its
differential treatment of these competing products.'' \193\ The Sponsor
argues that regulation of bitcoin futures ETFs under the 1940 Act
offers no protections against fraudulent and manipulative trading in
the underlying bitcoin market and provides no basis for treating
bitcoin futures ETFs and spot bitcoin ETPs registered under the
Securities Act differently.\194\
---------------------------------------------------------------------------
\192\ See Grayscale Letter I, at 8-9; 12-13; Grayscale
Submission, at 23; Grayscale Letter II, at 2-4 (stating, among other
things, that if the proposal ``were disapproved based on the
`significant market' test, without an independent evaluation of the
proposal's compliance with Section 6(b)(5) in light of the [Teucrium
Order], we believe the action would be inconsistent with the
requirements of both the Exchange Act and the [APA]''). Some
commenters agree that the Commission's disparate treatment of
bitcoin futures ETFs and ETPs and spot bitcoin ETPs results in
unfair discrimination amongst issuers in contravention of the
Exchange Act and/or is arbitrary and capricious in violation of the
APA. See, e.g., Blockchain Association Letter, at 3-4, Coinbase
Letter I, at 4; Virtu Letter, at 3; Angel Letter I, at 5; Fortress
Letter, at 3; Kornfield Letter; Keiffer Letter; Metzger Letter;
Goforth Letter, at 2; DiLonardo Letter; Letter from Michael D.
Moffitt, dated Mar. 13, 2022 (``Moffitt Letter II) (citing
transcript of Joseph Grundfest, former SEC Commissioner); Davenport
Letter; Letter from John Carlson, dated Feb. 22, 2022; Ribbit
Capital Letter, at 6; Letter from Alan J. Lane, Chief Executive
Officer, Silvergate Capital Corporation, dated June 21, 2022. See
also, e.g., ADAM Letter, at 6 (``a disapproval of Arca's proposal
would lead to the Commission picking winners based on its
preferential treatment of one product over another''). A commenter
asserts that ``it is not within [the Commission's mandate to
regulate the spot commodity markets upon which ETPs are based[,]''
that ``Section 6(b)(5) neither mentions underlying markets, nor an
exchange's obligations with respect to fraud within them[,]'' and
``[t]he Commission's apparent position that an exchange must
mitigate fraud and manipulation in an underlying market, or be
prohibited from listing a product based on a commodity in an
underlying market subject to fraud and manipulation not in the
exchange's control, stretches the Commission's authority beyond
existing statutory language.'' See Ribbit Capital Letter, at 5.
\193\ Grayscale Letter I, at 8. Some commenters agree that the
Commission has not articulated a valid justification for treating
bitcoin futures ETFs and ETPs and spot bitcoin ETPs differently.
See, e.g., Blockchain Association Letter, at 3-4; Coinbase Letter I,
at 4; Cumberland Letter, at 2; STA Letter, at 2; Moffitt Letter II
(citing transcript of Joseph Grundfest, former SEC Commissioner);
Kornfield Letter; Goforth Letter; Chilson Letter, at 4.
\194\ See Grayscale Letter I, at 9-11; Grayscale Submission, at
14. See also, e.g., Blockchain Association Letter, at 3; Coinbase
Letter I, at 5 n.11. The Sponsor states that the Commission's recent
approval of bitcoin futures ETPs registered under the Securities Act
``confirms that 1940 Act registration is not a basis for the
Commission to approve one product and reject another.'' See
Grayscale Letter II, at 1 (referring to the Teucrium Order, supra
note 11). See also Amendment No. 1, 87 FR at 28055; Goforth Letter,
at 1-2.
---------------------------------------------------------------------------
The Sponsor also argues that the Commission's standard violates the
APA because it is illusory and cannot be satisfied.\195\ According to
the Sponsor, the framework that the Commission has articulated for
assessing whether a proposal to list and trade any bitcoin-based ETP
complies with the requirements of Exchange Act Section 6(b)(5) is ``so
ill-defined and unachievable as to be arbitrary.'' \196\ The Sponsor
continues to state that ``[t]he Commission has never quantified a
`significant market' or `market of significant size.' '' \197\
Moreover, according to the Sponsor, the Commission ``has never defined
or specified what would actually constitute `unique resistance to
manipulation' that is `beyond the protections of the traditional
commodities and equities markets,' nor has the Commission explained
what it
[[Page 40316]]
means for resistance to be `inherent' or `novel' in this context.''
\198\
---------------------------------------------------------------------------
\195\ See Grayscale Letter I, at 12-13.
\196\ See id. at 12. For a summary of the Commission's approach
to considering proposals to list bitcoin-based ETPs, see supra notes
11-27 and accompanying text. Some commenters agree that the
Commission's evaluation of spot bitcoin ETPs and bitcoin futures
ETFs and ETPs is ambiguous and inconsistent. See, e.g., Coinbase
Letter I, at 4 (``when market participants compare the Commission's
evaluation and approval of a futures-based [b]itcoin ETP to its
treatment of spot [bitcoin] ETP proposals, they will see a lack of
well-defined criteria and inconsistent application of the
criteria''); Fortress Letter, at 2 (``While the Commission has
stated that it considered each [spot bitcoin ETP] rule application
`on its own merits and under the standards applicable to it', the
Commission has itself devised those standards ambiguously and
inconsistently.'').
\197\ Grayscale Letter I, at 12. See also Grayscale Letter II,
at 3 (``the Commission's reluctance to quantify the size a market
must achieve to be `significant,' and its reluctance to articulate
discernible standards for determining whether the market has the
requisite linkage to the ETP's assets, renders this test subjective,
arbitrary and effectively unachievable'').
\198\ Grayscale Letter I, at 13.
---------------------------------------------------------------------------
(ii) Analysis
The Commission disagrees with these assertions and conclusions. The
proposed rule change does not relate to the same underlying holdings as
either ETFs regulated under the 1940 Act that provide exposure to
bitcoin through CME bitcoin futures, or CME bitcoin futures-based ETPs
registered under the Securities Act but not regulated under the 1940
Act. The Commission considers the proposed rule change on its own
merits and under the standards applicable to it. Namely, with respect
to this proposed rule change, the Commission must apply the standards
as provided by Section 6(b)(5) of the Exchange Act, which it has
applied in connection with its orders considering previous proposals to
list bitcoin-based commodity trusts and bitcoin-based trust issued
receipts.\199\
---------------------------------------------------------------------------
\199\ See supra note 11 and accompanying text. The Sponsor also
mischaracterizes the Teucrium Order. For example, the Sponsor states
that the Teucrium Order ``reflects plainly the Commission's
recognition that the CME bitcoin futures market is not insulated
from potential risks of fraud and manipulation in the underlying
[b]itcoin market,'' and that ``the Commission took pains to
`disagree[ ] with much of [NYSE] Arca's reasoning' about the
[b]itcoin futures market's separation from the underlying [b]itcoin
market.'' Grayscale Letter II, at 2. However, this discussion in the
Teucrium Order addresses whether NYSE Arca had supported its claim
that it is reasonably likely that a would-be manipulator of the CME
bitcoin futures ETP that was the subject of the Teucrium Order would
have to trade on the CME to manipulate that ETP. See Teucrium Order,
87 FR at 21679. In that context, NYSE Arca had not sufficiently
supported its statements that the CME bitcoin futures market
``stands alone'' or that ``[b]itcoin futures prices are not
specifically materially influenced by other [b]itcoin markets'' for
the Commission to be persuaded by such statements. See id. at 21680.
---------------------------------------------------------------------------
In asserting that, for purposes of making a determination to
approve or disapprove proposals to list and trade bitcoin futures and
spot bitcoin ETPs, the Commission is drawing a distinction about the
potential for fraud and manipulation in the CME bitcoin futures market
vis-[agrave]-vis the spot bitcoin markets, the Exchange, Sponsor, and
commenters mischaracterize the framework that the Commission has
articulated in the Winklevoss Order. As stated in the Winklevoss Order,
the Commission is not applying a ``cannot be manipulated'' standard--
either on the CME bitcoin futures market or the spot bitcoin markets.
Rather, as the Commission has repeatedly emphasized, and also
summarized above, the Commission is examining whether the proposal
meets the requirements of the Exchange Act and, pursuant to its Rules
of Practice, is placing the burden on NYSE Arca to demonstrate the
validity of its contentions that bitcoin markets ``offer novel
protections beyond those that exist in traditional commodity markets or
equity markets'' such that the detection and deterrence of fraud and
manipulation provided by a comprehensive surveillance-sharing agreement
with a regulated market of significant size related to spot bitcoin is
unnecessary,\200\ or to establish that it has entered into such a
surveillance-sharing agreement.\201\
---------------------------------------------------------------------------
\200\ See supra note 60 and accompanying text.
\201\ Although the Sponsor claims that the Commission has never
defined or specified what would constitute ``unique resistance to
manipulation'' that is ``beyond the protections of the traditional
commodities and equities markets,'' or explained what it means for
resistance to be ``inherent'' or ``novel,'' the Sponsor
mischaracterizes the premise of its own argument. Listing exchanges,
not the Commission, have argued that other means besides
surveillance-sharing agreements may be sufficient to prevent
fraudulent and manipulative acts and practices, including by
asserting that the bitcoin market as a whole or the relevant
underlying bitcoin market is ``uniquely'' and ``inherently''
resistant to fraud and manipulation. In response, the Commission has
agreed with listing exchanges' posited hypothetical: that, if a
listing exchange could establish that the underlying market
inherently possesses a unique resistance to manipulation beyond the
protections that are utilized by traditional commodity or securities
markets--for which surveillance-sharing agreements in the context of
listing derivative securities products have been consistently
present--the exchange would not necessarily need to enter into a
surveillance-sharing agreement with a regulated significant market
related to the underlying bitcoin assets. See Winklevoss Order, 83
FR at 37580, 37582-91 (addressing assertions that ``bitcoin and
bitcoin [spot] markets'' generally, as well as one bitcoin trading
platform specifically, have unique resistance to fraud and
manipulation). See also USBT Order, 85 FR at 12597. Furthermore, a
listing exchange need not substantiate its claim that the underlying
bitcoin market is uniquely and inherently resistant to fraud in
addition to demonstrating that the listing exchange has a
surveillance-sharing agreement with a regulated significant market
related to the underlying bitcoin assets.
---------------------------------------------------------------------------
Consistent with this approach, contrary to the Exchange's, the
Sponsor's, and some commenters' assertions, the Commission's
consideration (and approval) of proposals to list and trade CME bitcoin
futures ETPs, as well as the Commission's consideration (and thus far,
disapproval) of proposals to list and trade spot bitcoin ETPs, does not
focus on an assessment of the overall risk of fraud and manipulation in
the spot bitcoin or futures markets, or on the extent to which such
risks are similar.\202\ Rather, the Commission's focus has been
consistently on whether the listing exchange has a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to the underlying bitcoin assets of the ETP under
consideration, so that it would have the necessary ability to detect
and deter manipulative activity. For reasons articulated in the orders
approving proposals to list and trade CME bitcoin futures-based ETPs
(i.e., the Teucrium Order and the Valkyrie XBTO Order), the Commission
found that in each such case the listing exchange has entered into such
a surveillance-sharing agreement.\203\ Making the same assessment with
respect to this proposed spot bitcoin ETP, however, as discussed and
explained above, the Commission finds that NYSE Arca has not.
---------------------------------------------------------------------------
\202\ The Commission's general discussion on the risk of fraud
and manipulation in the spot bitcoin or futures markets is only in
response to arguments raised by the proposing listing exchanges (or
commenters) that mitigating factors against fraud and manipulation
in the spot bitcoin or futures markets should compel the Commission
to dispense with the detection and deterrence of fraud and
manipulation provided by a comprehensive surveillance-sharing
agreement with a regulated market of significant size related to the
underlying bitcoin assets. But even in such instance, the central
issue is about the necessity of such a surveillance-sharing
agreement, not the overall risk of fraud and manipulation in the
spot bitcoin or futures markets, or the extent to which such risks
are similar.
\203\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------
Specifically, for the CME bitcoin futures ETPs under consideration
in the Teucrium Order and the Valkyrie XBTO Order, the proposed
``significant'' regulated market (i.e., the CME) with which the listing
exchange has a surveillance-sharing agreement is the same market on
which the underlying bitcoin assets (i.e., CME bitcoin futures
contracts) trade. As explained in those Orders, 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 CME
bitcoin 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.\204\ Regarding the approved Teucrium Bitcoin
Futures Fund in the Teucrium Order (``Fund''), for example, when the
CME shares its surveillance information with NYSE Arca (the listing
exchange for the Fund), the information would assist in detecting and
deterring fraudulent or manipulative misconduct related to the non-cash
assets held by the Fund.\205\ Accordingly, the Commission explains in
the Teucrium Order and the Valkyrie XBTO Order that it is unnecessary
for a listing exchange to establish a
[[Page 40317]]
reasonable likelihood that a would-be manipulator would have to trade
on the CME itself to manipulate a proposed ETP whose only non-cash
holdings would be CME bitcoin futures contracts.\206\
---------------------------------------------------------------------------
\204\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order,
87 FR at 28851.
\205\ See Teucrium Order, 87 FR at 21679.
\206\ See id.
---------------------------------------------------------------------------
However, as the Commission also states in those Orders, this
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets
are not currently ``regulated.'' \207\ If an exchange seeking to list a
spot bitcoin ETP relies on the CME as the regulated market with which
it has a comprehensive surveillance-sharing agreement, the assets held
by the spot bitcoin ETP would not be traded on the CME. Because of this
significant difference, with respect to a spot bitcoin ETP, there would
be reason to question whether a surveillance-sharing agreement with the
CME would, in fact, assist in detecting and deterring fraudulent and
manipulative misconduct affecting the price of the spot bitcoin held by
that ETP. If, however, an exchange proposing to list and trade a spot
bitcoin ETP identifies the CME as the regulated market with which it
has a comprehensive surveillance-sharing agreement, the exchange could
overcome the Commission's concern by demonstrating that there is a
reasonable likelihood that a person attempting to manipulate the spot
bitcoin ETP would have to trade on the CME in order to manipulate the
ETP, because such demonstration would help establish that the
exchange's surveillance-sharing agreement with the CME would have the
intended effect of aiding in the detection and deterrence of fraudulent
and manipulative misconduct related to the spot bitcoin held by the
ETP.\208\
---------------------------------------------------------------------------
\207\ See Teucrium Order, 87 FR at 21679 n.46 (citing USBT
Order, 85 FR at 12604; NYDIG Order, 87 FR at 14936 nn.65-67). See
also Valkyrie XBTO Order, 87 FR at 28851 n.42.
\208\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO
Order, 87 FR at 28851 n.42.
---------------------------------------------------------------------------
Because, here, NYSE Arca is seeking to list a spot bitcoin ETP that
relies on the CME as the purported ``significant'' regulated market
with which it has a comprehensive surveillance-sharing agreement, the
assets held by the proposed ETP would not be traded on the CME. Thus
there is reason to question whether a surveillance-sharing agreement
with the CME would, in fact, assist in detecting and deterring
fraudulent and manipulative misconduct affecting the price of the spot
bitcoin held by the proposed ETP.\209\ The Exchange could have overcome
this concern by demonstrating that there is a reasonable likelihood
that a person attempting to manipulate the proposed ETP would have to
trade on the CME in order to manipulate the ETP because such
demonstration would help establish that the Exchange's surveillance-
sharing agreement with the CME would have the intended effect of aiding
in the detection and deterrence of fraudulent and manipulative
misconduct related to the spot bitcoin held by the proposed ETP.\210\
As discussed and explained above,\211\ the Commission finds that NYSE
Arca has not made such demonstration.
---------------------------------------------------------------------------
\209\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO
Order, 87 FR at 28851 n.42. There is reason to question whether the
CME's surveillance would capture manipulation of spot bitcoin that
occurs off of the CME, if, for example, off-CME manipulation of spot
bitcoin does not also similarly impact CME bitcoin futures
contracts. As discussed further below, see infra notes 224-225 and
accompanying text, the information in the record for this filing
does not sufficiently demonstrate that attempted manipulation of
spot bitcoin would also similarly impact CME bitcoin futures
contracts.
\210\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO
Order, 87 FR at 28851 n.42.
\211\ See Section III.B.2.i, supra.
---------------------------------------------------------------------------
To the extent that the Sponsor--by way of claiming that,
``[b]ecause both spot and futures-based [b]itcoin products face
exposure to the same underlying [b]itcoin market, any fraud or
manipulation in the underlying market will affect both products in the
same way'' \212\--is arguing that the CME's surveillance would, in
fact, assist in detecting and deterring fraudulent and manipulative
misconduct that impacts spot bitcoin ETPs in the same way as it would
for misconduct that impacts the CME bitcoin futures ETFs/ETPs, the
information in the record for this filing does not support such a
claim. Specifically, the Sponsor claims that (i) CME bitcoin futures
ETFs/ETPs are ``priced according to the [BRR];'' (ii) the proposed spot
bitcoin ETP would be priced based on the Index; and (iii) because of
the ``almost complete overlap'' between the spot platforms whose prices
are used to calculate the BRR and the Index, bitcoin futures ETFs/ETPs
and the proposed ETP are subject to the ``same risks relating to
pricing data quality.'' \213\ This logic, however, is flawed for the
following reasons.
---------------------------------------------------------------------------
\212\ Grayscale Letter II, at 2.
\213\ See id. at 7, 9.
---------------------------------------------------------------------------
First, there is no evidence in the record that CME bitcoin futures
ETFs/ETPs are ``priced according to the [BRR].'' The BRR is a once-a-
day reference rate of the U.S. dollar price of one bitcoin as of 4
p.m., London time.\214\ The BRR aggregates the trade flow of its
constituent spot bitcoin platforms--Coinbase, Gemini, LMAX Digital,
itBit, Kraken, and Bitstamp \215\--during a specific one-hour
calculation window.\216\ While the BRR is used to value the final cash
settlement of CME bitcoin futures contracts, it is not generally used
for daily cash settlement of such contracts,\217\ nor is it claimed to
be used for any intra-day trading of such contracts. In addition, CME
bitcoin futures ETFs/ETPs do not hold their CME bitcoin futures
contracts to final cash settlement; rather, the contracts are rolled
prior to their settlement dates. Moreover, the shares of CME bitcoin
futures ETFs/ETPs trade in secondary markets, and there is no evidence
in the record for this filing that such intra-day, secondary market
trading prices are determined by the BRR.
---------------------------------------------------------------------------
\214\ See <a href="https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf">https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf</a>.
\215\ See <a href="https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges.pdf">https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges.pdf</a>.
\216\ See <a href="https://www.cmegroup.com/education/courses/introduction-to-bitcoin/introduction-to-bitcoin-reference-rate.html">https://www.cmegroup.com/education/courses/introduction-to-bitcoin/introduction-to-bitcoin-reference-rate.html</a>.
This one-hour window is partitioned into 12, five-minute intervals,
where the BRR is calculated as the equally-weighted average of the
volume-weighted medians of all 12 partitions. See id.
\217\ Under normal procedures, daily cash settlements are
generally based on the volume-weighted average price of trading
activity on CME Globex between 2:59 p.m. and 3:00 p.m., Central
Time). See <a href="https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin">https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin</a> for a description of CME bitcoin futures daily settlement
procedures.
---------------------------------------------------------------------------
Second, there is no evidence in the record that the Shares' prices
would be determined by the Index. The Index is a U.S. dollar-
denominated composite reference rate for the price of bitcoin
calculated at 4:00 p.m. New York time.\218\ As described above, the
Index applies an algorithm to the price of bitcoin on the Constituent
Platforms--Coinbase Pro, LMAX Digital, Kraken, and Bitstamp--calculated
on a per second basis over a 24-hour period. While the Index is used
daily to value the bitcoins held by the Trust,\219\ as discussed
above,\220\ the Index would not be used for the creation or redemption
of Shares, nor is the Index claimed to be used for any intra-day
secondary market trading of the Shares, either currently on the OTC
market or in the future on the Exchange. Rather, the Share price is
discovered through continuous intra-day, secondary market interactions
of buy and sell interests.\221\
---------------------------------------------------------------------------
\218\ See Amendment No. 1, 87 FR at 28047.
\219\ See id. at 28047, 28049.
\220\ See supra notes 132-133 and accompanying text.
\221\ As discussed above, the use of the Index by the Trust to
determine the value of its bitcoin does not support the finding that
the Exchange has established other means to prevent fraud and
manipulation that are sufficient to justify dispensing with the
detection and deterrence of fraud and manipulation provided by a
comprehensive surveillance-sharing agreement with a regulated market
of significant size related to spot bitcoin. See Section III.B.1.ii,
supra. Likewise, the Commission has previously rejected arguments by
listing exchanges that the use of a reference rate similar to the
BRR to value bitcoin held by proposed spot bitcoin ETPs provides
other means to prevent fraud and manipulation that are sufficient to
justify dispensing with the detection and deterrence of fraud and
manipulation provided by a comprehensive surveillance-sharing
agreement with a regulated market of significant size related to
spot bitcoin. See Wise Origin Order, 87 FR at 5532-33; SkyBridge
Order, 87 FR at 3877. Accordingly, the Index and the BRR, and the
similarities between the BRR and the Index, are not informative in
the Commission's determination of whether the Exchange has
established other means to prevent fraud and manipulation.
---------------------------------------------------------------------------
[[Page 40318]]
Third, despite the Sponsor's claim of ``almost complete overlap''
between the spot platforms whose prices are used to calculate the BRR
and those platforms whose prices are used for the Index, the BRR
includes trade flow from Gemini and itBit, neither of which are
included as Constituent Platforms of the Index.\222\
---------------------------------------------------------------------------
\222\ Although the Sponsor states that the BRR is ``determined
according to pricing data collected from digital asset trading
platforms that include all but one of those currently incorporated
into [the Index]'' (Grayscale Letter I, at 7), based on information
provided on the CME's website, the Sponsor's statement does not
appear to be correct. See <a href="https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html">https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html</a>. It is
also unclear from the record whether Coinbase (used by the BRR) and
Coinbase Pro (used by the Index) are the same platform. Based on
recent press articles, it appears that Coinbase Pro will be
discontinued. See, e.g., <a href="https://cointelegraph.com/news/coinbase-to-shut-down-coinbase-pro-to-merge-trading-services">https://cointelegraph.com/news/coinbase-to-shut-down-coinbase-pro-to-merge-trading-services</a>; https://
www.forbesindia.com/article/crypto-made-easy/coinbase-to-shut-down-
coinbase-pro-to-merge-trading-services/77585/
1#:~:text=Coinbase%20Pro%2C%20the%20professional,them%20into%20a%20si
ngle%20platform.
---------------------------------------------------------------------------
In short, and importantly, although the Exchange and the Sponsor
focus heavily on the similarities between the BRR and the Index, there
is no evidence in the record that the shares of any CME bitcoin futures
ETF/ETP, or the Shares of the proposed spot bitcoin ETP, would trade in
the secondary market at a price related to (or informed by) the BRR or
the Index.\223\
---------------------------------------------------------------------------
\223\ A commenter provides a correlation analysis, using daily
price information between November 2021 and February 2022, which
purports to show high correlation (99.9%) between the price of CME
bitcoin futures contracts and a Coinbase spot price. See Coinbase
Letter II, at 7 and Figure 6. The same commenter also provides
correlation analysis, using daily price information between December
2021 and February 2022, which purports to show high correlation
between the prices of various non-U.S. spot bitcoin ETPs and a
Coinbase spot price. See id. at 8-9 and Figures 11-16. The
commenter, however, does not provide evidence with respect to price
correlation between shares of CME bitcoin futures ETFs and the BRR
or between the prices of various non-U.S. spot bitcoin ETPs and the
Index. Nor does correlation analysis, at daily intervals, provide
evidence of the causal economic relationship of interest: namely,
whether fraud or manipulation that impacts spot bitcoin would also
similarly impact CME bitcoin futures contracts. See infra notes 224-
225 and accompanying text.
---------------------------------------------------------------------------
Fourth, the Commission's determination in the Teucrium Order and
the Valkyrie XBTO Order to approve the listing and trading of the
relevant CME bitcoin futures ETPs was not based on the ETPs' use--or
lack of use--of the BRR (or any other similar pricing mechanism) for
the calculation of NAV, or on the fact that the BRR is used for the
final cash settlement of CME bitcoin futures contracts. Rather, as
discussed above, the Commission approved the listing and trading of
such CME bitcoin futures ETPs, not because of the BRR, but because the
Commission found that the listing exchanges satisfy the requirement
pertaining to a surveillance-sharing agreement with a regulated market
of significant size related to the underlying bitcoin assets--which for
such ETPs are CME bitcoin futures contracts, not spot bitcoin.
Fifth, even if the Exchange or the Sponsor had demonstrated a link
between the BRR and/or the Index and the prices of CME bitcoin futures
ETFs/ETPs and/or the proposed ETP, which they have not, it does not
necessarily follow that the CME's surveillance would, in fact, assist
in detecting and deterring fraudulent and manipulative misconduct that
impacts spot bitcoin ETPs in the same way as it would for misconduct
that impacts the CME bitcoin futures ETFs/ETPs--particularly when such
misconduct occurs off of the CME itself.\224\ For example, even
assuming, for the sake of argument, that the BRR and/or the Index is a
potential link between prices on certain spot bitcoin platforms and CME
bitcoin futures prices, it does not--absent supporting data--
necessarily follow that any manipulation that impacts spot bitcoin also
similarly impacts CME bitcoin futures contracts. Neither the Sponsor
nor the Exchange has provided any analysis or data that assesses the
reaction (if any) of CME bitcoin futures contracts to instances of
fraud and manipulation in spot bitcoin markets. Indeed, the only
analysis that the Sponsor itself provides is a summary of its lead/lag
analysis comparing CME bitcoin futures prices with the Index, from
which the Sponsor concludes that ``there does not appear to be a
significant lead/lag relationship between the two instruments.'' \225\
---------------------------------------------------------------------------
\224\ See also supra note 209.
\225\ See Amendment No. 1, 87 FR at 28054.
---------------------------------------------------------------------------
In addition, the disapproval of the proposal would not violate the
requirement in Section 6(b)(5) of the Exchange Act \226\ that the rules
of an exchange not be designed to permit unfair discrimination between
issuers, nor would it constitute an arbitrary and capricious
administrative action in violation of the APA.\227\ Importantly, the
issuers are not similarly situated. The issuers of CME bitcoin futures-
based ETPs propose to hold only CME bitcoin futures contracts (which
are traded on the CME itself) as their only non-cash holdings, and the
Trust proposes to hold only spot bitcoin (which is not traded on the
CME). As explained in detail above and in the Teucrium Order and the
Valkyrie XBTO Order, because of this important difference, for a spot
bitcoin ETP, there is reason to question whether a surveillance-sharing
agreement with the CME would, in fact, assist in detecting and
deterring fraudulent and manipulative misconduct affecting the price of
the spot bitcoin held by that ETP.\228\ And as discussed above, neither
the Exchange, nor the Sponsor, nor any other evidence in the record for
this filing, sufficiently demonstrates that the CME's surveillance can
be reasonably relied upon to capture the effects of manipulation of the
spot bitcoin assets underlying the proposed ETP when such manipulation
is not attempted on the CME itself.
---------------------------------------------------------------------------
\226\ 15 U.S.C. 78f(b)(5).
\227\ The Sponsor argues that disapproval of the proposal would
constitute merit regulation, which is not authorized under the
Exchange Act. See Grayscale Letter I at 14-15. In addition, the
affiliate of the Custodian states that ``the Commission's role is
not to evaluate the characteristics and quality of the underlying
[b]itcoin market but instead to evaluate the [proposed] ETP, and the
role that [NYSE] Arca would play in monitoring trading in [the
Shares].'' Coinbase Letter I, at 5. See also, e.g., ADAM Letter, at
6; Ribbit Capital Letter, at 5. As previously stated, the Commission
is disapproving this proposed rule change because NYSE Arca has not
met its burden to demonstrate that its proposal is consistent with
the requirements of Exchange Act Section 6(b)(5). The Commission's
disapproval of this proposed rule change does not rest on an
evaluation of the relative investment quality of a product holding
spot bitcoin versus a product holding CME bitcoin futures, or an
assessment of whether bitcoin, or blockchain technology more
generally, has utility or value as an innovation or an investment.
See, e.g., Winklevoss Order, 83 FR at 37580; USBT Order, 85 FR at
12597; One River Order, 87 FR at 33550.
\228\ See supra notes 208-209 and accompanying text.
---------------------------------------------------------------------------
Moreover, the analytical framework for assessing compliance with
the requirements of Exchange Act Section 6(b)(5) that the Commission
applies here (i.e., comprehensive surveillance-sharing agreement with a
regulated market of significant size related to the underlying bitcoin
assets) is the same one that the Commission has applied in each of its
orders considering previous proposals to list bitcoin-based
[[Page 40319]]
commodity trusts and trust issued receipts.\229\ The Commission has
applied this framework to each proposal by analyzing the evidence
presented by the listing exchange and statements made by
commenters.\230\ Although the Sponsor states that the Commission's
approach to assessing compliance with Section 6(b)(5) has created a
standard that cannot be satisfied and therefore violates the APA, the
Commission has in fact recently approved proposals by the Exchange and
the Nasdaq Stock Market to list and trade shares of ETPs holding CME
bitcoin futures as their only non-cash holdings.\231\ And in the orders
approving these CME bitcoin futures-based ETPs, the Commission
explicitly discussed how an exchange seeking to list and trade a spot
bitcoin ETP could overcome the lack of a one-to-one relationship
between the regulated market with which it has a surveillance-sharing
agreement and the market(s) on which the assets held by a spot bitcoin
ETP could be traded: by demonstrating that there is a reasonable
likelihood that a person attempting to manipulate the spot bitcoin ETP
would have to trade on the regulated market (i.e., on the CME) to
manipulate the spot bitcoin ETP.\232\
---------------------------------------------------------------------------
\229\ See supra notes 11-24 and accompanying text.
\230\ See supra note 11.
\231\ See Teucrium Order and Valkyrie XBTO Order, supra note 11.
\232\ See supra note 208 and accompanying text.
---------------------------------------------------------------------------
When considering past proposals for spot bitcoin ETPs, the
Commission has, in particular, reviewed the econometric and/or
statistical evidence in the record to determine whether the listing
exchange's proposal has met the applicable standard.\233\ The
Commission's assessment fundamentally presents quantitative, empirical
questions, but, as discussed above, the Exchange has not provided
evidence sufficient to support its arguments. Instead, the Exchange and
the Sponsor make various assertions that are not supported by the
limited data in the record regarding, among other things, trading
volume and bitcoin market capitalization, or the relationship between
spot bitcoin prices and CME bitcoin futures prices (including the lead/
lag relationship between the spot market and the CME bitcoin futures
market), and the record contains insufficient empirical analysis or
quantitative evidence of any such data to support the Exchange's
conclusions.\234\
---------------------------------------------------------------------------
\233\ See, e.g., USBT Order, 85 FR at 12612-13; VanEck Order, 86
FR at 64547-48; WisdomTree Order, 86 FR at 69330-32; Kryptoin Order,
86 FR at 74175-76; NYDIG Order, 87 FR at 14938-39; Wise Origin
Order, 87 FR at 5534-36; Global X Order, 87 FR at 14919-20; ARK
21Shares Order, 87 FR at 20023-24.
\234\ See Sections III.B.1 & III.B.2, supra.
---------------------------------------------------------------------------
The requirements of Section 6(b)(5) of the Exchange Act apply to
the rules of national securities exchanges. Accordingly, the relevant
obligation to have a comprehensive surveillance-sharing agreement with
a regulated market of significant size related to spot bitcoin, or
other means to prevent fraudulent and manipulative acts and practices
that are sufficient to justify dispensing with such a surveillance-
sharing agreement, resides with the listing exchange. Because there is
insufficient evidence in the record demonstrating that NYSE Arca has
satisfied this obligation, the Commission cannot approve the proposed
ETP for listing and trading on NYSE Arca.
C. Whether NYSE Arca Has Met Its Burden to Demonstrate That the
Proposal Is Designed to Protect Investors and the Public Interest
NYSE Arca contends that, if approved, the proposed ETP would
protect investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\235\ Because NYSE Arca has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------
\235\ See Winklevoss Order, 83 FR at 37602. See also
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at
43941; USBT Order, 85 FR at 12615; WisdomTree Order, 86 FR at 69333;
Valkyrie Order, 86 FR at 74163; Kryptoin Order, 86 FR at 74178;
SkyBridge Order, 87 FR at 3880; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------
(1) Assertions Made and Comments Received
Commenters argue that the Commission should approve the proposal
because doing so would satisfy investor demand for a U.S. regulated
investment vehicle with direct exposure to bitcoin.\236\ Commenters
state that approval of a spot bitcoin ETP would provide a simpler,
safer, and more efficient way to obtain exposure to bitcoin than the
products that are currently available to retail investors, such as
holding spot bitcoin, OTC bitcoin funds, bitcoin futures funds, or
foreign bitcoin funds.\237\ Some commenters state that approving a spot
bitcoin ETP would reduce the custody and cybersecurity risks to
investors of holding physical bitcoin.\238\
---------------------------------------------------------------------------
\236\ See, e.g., Blockchain Association Letter, at 1-2; Virtu
Letter, at 2-4; BitGo Letter, at 1-2; STA Letter, at 2-3; ADAM
Letter, at 3-4; Harvey Letter, at 1-3; Shultz Letter; Letter from
Neil Chilson and Jonathan M. Zalewski, dated May 31, 2022 (``Chilson
Letter''), at 3; Letter from Jody Cryder, dated Apr. 25, 2022;
Letter from Rich Seils, dated Apr. 25, 2022 (``Seils Letter'');
Letter from Grant Johnson, dated Mar. 4, 2022 (``Johnson Letter'');
Letter from Evelyne Dandurand, dated Feb. 18, 2022; Letter from
David Brown, dated Apr. 19, 2022; Letter from Mark Reid, dated Feb.
28, 2022; Letter from William McPherson, dated Mar. 1, 2022; Letter
from Jalen Rose, dated Mar. 2, 2022; Letter from Brandon Gillet,
dated Feb. 22, 2022; Letter from Clint Jasperson, dated Feb. 18,
2022; Letter from Jason Miller, dated Feb. 17, 2022 (``Miller
Letter''); Letter from Michael Bielik, dated Feb. 18, 2022; Letter
from Joseph DeFilippis, dated Feb. 15, 2022; Letter from Peter C.,
dated Feb. 15, 2022; Letter from James P. Scofield, dated Feb. 14,
2022; Letter from Chris Smalley, dated Feb. 10, 2022; Letter from
Nico Peruzzi, dated Feb. 5, 2022; Letter from Matt Robins, dated May
10, 2022. See also Grayscale Submission, at 10.
\237\ See, e.g., ADAM Letter, at 3-4; Harvey Letter, at 1-3;
BitGo Letter, at 1-2; Discovery Letter, at 2; Angel Letter, at 6-7;
Johnson Letter; Letter from Logan Kane, Writer, Seeking Alpha, dated
Feb. 19, 2022 (``Kane Letter''); Letter from Michael Falk, dated
Feb. 15, 2022; Letter from Andrew Farinelli, dated Feb. 10, 2022
(``Farinelli Letter''); Letter from Boris Hristov, dated May 18,
2022; Letter from Paul Smith, dated Feb. 28, 2022; Letter from Luke
Groom, dated Feb. 22, 2022; Emory Letter, at 2. In addition, some
commenters state that a spot bitcoin ETP would be just as, or less
risky than, other investments already trading in the U.S. See, e.g.,
Dreyfuss Letter; Miller Letter; Letter from Derek Serlet, dated Apr.
27, 2022; Letter from Monty Henry, dated Feb. 7, 2022 (``Henry
Letter''); Letter from Alexander, dated Feb. 22, 2022; Letter from
Martin Baer, dated Feb. 15, 2022; Letter from Gage Gorda, dated Feb.
14, 2022; Letter from Branon White, dated Feb. 10, 2022; Letter from
Nikolas Garcia, dated Mar. 4, 2022 (``Garcia Letter'').
\238\ See, e.g., Angel Letter I, at 8; ADAM Letter; Kane Letter;
Henry Letter; Letter from Tim Crick, dated Mar. 21, 2022; Letter
from Michael David Spadaccini, dated Feb. 7, 2022; Letter from
Michael A. Rheintgen, dated Feb. 24, 2022; Letter from Richard
Arrett, dated Feb. 22, 2022 (``Arrett Letter''); Letter from Brian
Boerner, dated Feb. 14, 2022; Letter from William Perez, dated Feb.
12, 2022 (``Perez Letter''); Letter from Henry Chen, dated Feb. 26,
2022 (``Chen Letter'').
---------------------------------------------------------------------------
Several commenters argue that a spot bitcoin ETP would provide
lower costs and less risk than bitcoin futures ETPs.\239\ The Sponsor
and some
[[Page 40320]]
commenters assert that disapproving spot bitcoin ETPs after approving
bitcoin futures ETFs and ETPs harms investors.\240\ In addition, the
Sponsor states that bitcoin futures ETPs present certain structural
disadvantages over spot bitcoin ETPs, such as monthly roll-costs \241\
and risks due to position limits.\242\
---------------------------------------------------------------------------
\239\ See, e.g., Blockchain Association Letter, at 2 (``while
bitcoin futures ETPs have certain useful features, they are inferior
investment products for many Americans due to their relatively
higher cost and risk profile''); Angel Letter I, at 6-7 (stating
that ``[a] physical-based product in which the fund actually holds
the bitcoin is far less vulnerable to manipulation than the futures
contracts'' and that CME futures contracts experience roll costs,
lack liquidity, and have wide bid-ask spreads); Letter from Murray
Stahl, Chief Investment Officer, Horizon Kinetics Asset Management
LLC, dated Apr. 8, 2022 (``Horizon Kinetics Letter''), at 1-2
(stating that a futures-based bitcoin ETP is not suitable for long-
term investors since the performance deviates greatly from the
underlying asset and that a spot bitcoin ETP would eliminate such a
tracking error); Fortress Letter, at 2-3 (``Futures ETFs present
investors with a more costly and complex means of gaining exposure
to [b]itcoin while reflecting only a small portion of the actual
market for the digital asset''); Letter from Benjamin T. Fulton,
CEO, Elkhorn Consulting, LLC, dated Apr. 27, 2022 (``Elkhorn
Letter''), at 2-3; Harvey Letter, at 3; Whaley Letter, at 3-7;
Letter from Charles Hwang, Jason Albanese, Jock Percy, General
Partners, Lightning Capital, dated Mar. 21, 2022 (``Lightning
Capital Letter''), at 2-3; Discovery Letter, at 2 (``a spot
[b]itcoin ETP would provide a much better vehicle for investors due
to the vast liquidity, lower cost, and transparent Index pricing
than the current [f]utures based ETPs''); Kane Letter; Letter from
Ryan Wilday, dated Feb. 17, 2022; Letter from Michael Douglas Magee,
dated Apr. 19, 2022; Letter from Bryan Kelley, dated May 10, 2022.
\240\ See, e.g., Grayscale Letter I, at 13-14 (``Continued
disparate treatment of [b]itcoin futures ETPs and spot [b]itcoin
ETPs would harm--rather than protect--investors by limiting their
choices without a reasoned basis.''); Cumberland Letter, at 1-2;
Harvey Letter, at 2-3; Lightning Capital Letter, at 1-3; ADAM
Letter, at 6; Fortress Letter, at 2; Letter from Justin Valdata,
dated Apr. 22, 2022 (``Valdata Letter''). A commenter argues that
such disparate treatment may undermine confidence in the Commission
and stifle innovation in the bitcoin and securities markets. See
Coinbase Letter I, at 4.
\241\ See Grayscale Letter I, at 14. The Sponsor states that one
analysis showed that over the last year, a bitcoin futures ETP would
have lost 28% of its value just on roll costs (effectively, fees and
exp
[…truncated; see source link]Indexed from Federal Register on July 6, 2022.
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