[Federal Register Volume 86, Number 52 (Friday, March 19, 2021)]
[Notices]
[Pages 15001-15015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-05670]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91326; File No. SR-CboeBZX-2021-019]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of 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

March 15, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on March 1, 2021, Cboe BZX Exchange, Inc. (the ``Exchange'' or 
``BZX'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to list and trade shares of the VanEck Bitcoin Trust (the 
``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares. The shares of the Trust are referred to herein as the 
``Shares.''
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    \3\ The Trust was formed as a Delaware statutory trust on 
December 17, 2020 and is operated as a grantor trust for U.S. 
federal tax purposes. The Trust has no fixed termination date.
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    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ VanEck Digital Assets, LLC is 
the sponsor of the Trust (``Sponsor''). The Shares will be registered 
with the Commission by means of the Trust's registration statement on 
Form S-1 (the ``Registration Statement'').\6\
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    \4\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \5\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \6\ See draft Registration Statement on Form S-1, dated December 
30, 2020 submitted to the Commission by the Sponsor on behalf of the 
Trust. The descriptions of the Trust, the Shares, and the Benchmark 
contained herein are based, in part, on information in the 
Registration Statement. The Registration Statement is not yet 
effective and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective.
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Background
    Bitcoin is a digital asset based on the decentralized, open source 
protocol of the peer-to-peer computer network launched in 2009 that 
governs the creation, movement, and ownership of bitcoin and hosts the 
public ledger, or ``blockchain,'' on which all bitcoin transactions are 
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized 
nature of the Bitcoin Network allows parties to transact directly with 
one another based on cryptographic proof instead of relying on a 
trusted third party. The protocol also lays out the rate of issuance of 
new bitcoin within the Bitcoin Network, a rate that is reduced by half 
approximately every four years with an eventual hard cap of 21 million. 
It's generally understood that the combination of these two features--a 
systemic hard cap of 21 million bitcoin and the ability to transact 
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin 
its value.\7\
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    \7\ For additional information about bitcoin and the Bitcoin 
Network, see https://bitcoin.org/en/getting-started; https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms; and https://www.vaneck.com/education/investment-ideas/investing-in-bitcoin-and-digital-assets/.

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[[Page 15002]]

    The first rule filing proposing to list an exchange-traded product 
to provide exposure to bitcoin in the U.S. was submitted by the 
Exchange on June 30, 2016.\8\ At that time, blockchain technology, and 
digital assets that utilized it, were relatively new to the broader 
public. The market cap of all bitcoin in existence at that time was 
approximately $10 billion. No registered offering of digital asset 
securities or shares in an investment vehicle with exposure to bitcoin 
or any other cryptocurrency had yet been conducted, and the regulated 
infrastructure for conducting a digital asset securities offering had 
not begun to develop.\9\ Similarly, regulated U.S. bitcoin futures 
contracts did not exist. The Commodity Futures Trading Commission (the 
``CFTC'') had determined that bitcoin is a commodity,\10\ but had not 
engaged in significant enforcement actions in the space. The New York 
Department of Financial Services (``NYDFS'') adopted its final 
BitLicense regulatory framework in 2015, but had only approved four 
entities to engage in activities relating to virtual currencies 
(whether through granting a BitLicense or a limited-purpose trust 
charter) as of June 30, 2016.\11\ While the first over-the-counter 
bitcoin fund launched in 2013, public trading was limited and the fund 
had only $60 million in assets.\12\ There were very few, if any, 
traditional financial institutions engaged in the space, whether 
through investment or providing services to digital asset companies. In 
January 2018, the Staff of the Commission noted in a letter to the 
Investment Company Institute and SIFMA that it was not aware, at that 
time, of a single custodian providing fund custodial services for 
digital assets.\13\
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    \8\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order'').
    \9\ Digital assets that are securities under U.S. law are 
referred to throughout this proposal as ``digital asset 
securities.'' All other digital assets, including bitcoin, are 
referred to interchangeably as ``cryptocurrencies'' or ``virtual 
currencies.'' The term ``digital assets'' refers to all digital 
assets, including both digital asset securities and 
cryptocurrencies, together.
    \10\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated:
     ``Section 1a(9) of the CEA defines `commodity' to include, 
among other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
    \11\ A list of virtual currency businesses that are entities 
regulated by the NYDFS is available on the NYDFS website. See 
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
    \12\ Data as of March 31, 2016 according to publicly available 
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
    \13\ See letter from Dalia Blass, Director, Division of 
Investment Management, U.S. Securities and Exchange Commission to 
Paul Schott Stevens, President & CEO, Investment Company Institute 
and Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association (January 18, 2018), 
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
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    Fast forward to the first quarter of 2021 and the digital assets 
financial ecosystem, including bitcoin, has progressed significantly. 
The development of a regulated market for digital asset securities has 
significantly evolved, with market participants having conducted 
registered public offerings of both digital asset securities \14\ and 
shares in investment vehicles holding bitcoin futures.\15\ 
Additionally, licensed and regulated service providers have emerged to 
provide fund custodial services for digital assets, among other 
services. For example, in December 2020, the Commission adopted a 
conditional no-action position permitting certain special purpose 
broker-dealers to custody digital asset securities under Rule 15c3-3 
under the Exchange Act; \16\ in September 2020, the Staff of the 
Commission released a no-action letter permitting certain broker-
dealers to operate a non-custodial Alternative Trading System (``ATS'') 
for digital asset securities, subject to specified conditions; \17\ in 
October 2019, the Staff of the Commission granted temporary relief from 
the clearing agency registration requirement to an entity seeking to 
establish a securities clearance and settlement system based on 
distributed ledger technology,\18\ and multiple transfer agents who 
provide services for digital asset securities registered with the 
Commission.\19\
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    \14\ See Prospectus supplement filed pursuant to Rule 424(b)(1) 
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \15\ See Prospectus filed by Stone Ridge Trust VI on behalf of 
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
    \16\ See Securities Exchange Act Release No. 90788, 86 FR 11627 
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset 
Securities by Special Purpose Broker-Dealers).
    \17\ See letter from Elizabeth Baird, Deputy Director, Division 
of Trading and Markets, U.S. Securities and Exchange Commission to 
Kris Dailey, Vice President, Risk Oversight & Operational 
Regulation, Financial Industry Regulatory Authority (September 25, 
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \18\ See letter from Jeffrey S. Mooney, Associate Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos 
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \19\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent 
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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    Outside the Commission's purview, the regulatory landscape has 
changed significantly since 2016, and cryptocurrency markets have grown 
and evolved as well. The market for bitcoin is approximately 100 times 
larger, having recently reached a market cap of over $1 trillion. As of 
February 27, 2021, bitcoin's market cap is greater than companies such 
as Facebook, Inc., Berkshire Hathaway Inc., and JP Morgan Chase & Co. 
CFTC regulated bitcoin futures represented approximately $28 billion in 
notional trading volume on Chicago Mercantile Exchange (``CME'') 
(``Bitcoin Futures'') in December 2020 compared to $737 million, $1.4 
billion, and $3.9 billion in total trading in December 2017, December 
2018, and December 2019, respectively. Bitcoin Futures traded over $1.2 
billion per day in December 2020 and represented $1.6 billion in open 
interest compared to $115 million in December 2019, which the Exchange 
believes represents a regulated market of significant size, as further 
discussed below.\20\ The CFTC has exercised its regulatory jurisdiction 
in bringing a number of enforcement actions related to bitcoin and 
against trading platforms that offer cryptocurrency trading.\21\ The 
U.S. Office of the Comptroller of the Currency (the ``OCC'') has made 
clear that federally-chartered banks are able

[[Page 15003]]

to provide custody services for cryptocurrencies and other digital 
assets.\22\ The OCC recently granted conditional approval of two 
charter conversions by state-chartered trust companies to national 
banks, both of which provide cryptocurrency custody services.\23\ NYDFS 
has granted no fewer than twenty-five BitLicenses, including to 
established public payment companies like PayPal Holdings, Inc. and 
Square, Inc., and limited purpose trust charters to entities providing 
cryptocurrency custody services, including the Trust's Custodian. The 
U.S. Treasury Financial Crimes Enforcement Network (``FinCEN'') has 
released extensive guidance regarding the applicability of the Bank 
Secrecy Act (``BSA'') and implementing regulations to virtual currency 
businesses,\24\ and has proposed rules imposing requirements on 
entities subject to the BSA that are specific to the technological 
context of virtual currencies.\25\ In addition, the Treasury's Office 
of Foreign Assets Control (``OFAC'') has brought enforcement actions 
over apparent violations of the sanctions laws in connection with the 
provision of wallet management services for digital assets.\26\
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    \20\ All statistics and charts included in this proposal are 
sourced from https://www.cmegroup.com/trading/bitcoin-futures.html.
    \21\ The CFTC's annual report for Fiscal Year 2020 (which ended 
on September 30, 2020) noted that the CFTC ``continued to 
aggressively prosecute misconduct involving digital assets that fit 
within the CEA's definition of commodity'' and ``brought a record 
setting seven cases involving digital assets.'' See CFTC FY2020 
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download. 
Additionally, the CFTC filed on October 1, 2020, a civil enforcement 
action against the owner/operators of the BitMEX trading platform, 
which was one of the largest bitcoin derivative exchanges. See CFTC 
Release No. 8270-20 (October 1, 2020) available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
    \22\ See OCC News Release 2021-2 (January 4, 2021) available at: 
https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html.
    \23\ See OCC News Release 2021-6 (January 13, 2021) available 
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-6.html and OCC News Release 2021-19 (February 5, 2021) 
available at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-19.html.
    \24\ See FinCEN Guidance FIN-2019-G001 (May 9, 2019) 
(Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies) available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
    \25\ See U.S. Department of the Treasury Press Release: ``The 
Financial Crimes Enforcement Network Proposes Rule Aimed at Closing 
Anti-Money Laundering Regulatory Gaps for Certain Convertible 
Virtual Currency and Digital Asset Transactions'' (December 18, 
2020), available at: https://home.treasury.gov/news/press-releases/sm1216.
    \26\ See U.S. Department of the Treasury Enforcement Release: 
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent 
Violations of Multiple Sanctions Programs Related to Digital 
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
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    In addition to the regulatory developments laid out above, more 
traditional financial market participants appear to be embracing 
cryptocurrency: Large insurance companies,\27\ asset managers,\28\ 
university endowments,\29\ pension funds,\30\ and even historically 
bitcoin skeptical fund managers \31\ are allocating to bitcoin. The 
largest over-the-counter bitcoin fund previously filed a Form 10 
registration statement, which the Staff of the Commission reviewed and 
which took effect automatically, and is now a reporting company.\32\ 
Established companies like Tesla, Inc.,\33\ MicroStrategy 
Incorporated,\34\ and Square, Inc.,\35\ among others, have recently 
announced substantial investments in bitcoin in amounts as large as 
$1.5 billion (Tesla) and $425 million (MicroStrategy). Suffice to say, 
bitcoin is on its way to gaining mainstream usage.
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    \27\ On December 10, 2020, Massachusetts Mutual Life Insurance 
Company (MassMutual) announced that it had purchased $100 million in 
bitcoin for its general investment account. See MassMutual Press 
Release ``Institutional Bitcoin provider NYDIG announces minority 
stake purchase by MassMutual'' (December 10, 2020) available at: 
https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2020/12/institutional-bitcoin-provider-nydig-announces-minority-stake-purchase-by-massmutual.
    \28\ See e.g., ``BlackRock's Rick Rieder says the world's 
largest asset manager has `started to dabble' in bitcoin'' (February 
17, 2021) available at: https://www.cnbc.com/2021/02/17/blackrock-has-started-to-dabble-in-bitcoin-says-rick-rieder.html and 
``Guggenheim's Scott Minerd Says Bitcoin Should Be Worth $400,000'' 
(December 16, 2020) available at: https://www.bloomberg.com/news/articles/2020-12-16/guggenheim-s-scott-minerd-says-bitcoin-should-be-worth-400-000.
    \29\ See e.g., ``Harvard and Yale Endowments Among Those 
Reportedly Buying Crypto'' (January 25, 2021) available at: https://www.bloomberg.com/news/articles/2021-01-26/harvard-and-yale-endowments-among-those-reportedly-buying-crypto.
    \30\ See e.g., ``Virginia Police Department Reveals Why its 
Pension Fund is Betting on Bitcoin'' (February 14, 2019) available 
at: https://finance.yahoo.com/news/virginia-police-department-reveals-why-194558505.html.
    \31\ See e.g., ``Bridgewater: Our Thoughts on Bitcoin'' (January 
28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones says he 
likes bitcoin even more now, rally still in the `first inning' '' 
(October 22, 2020) available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
    \32\ See Letter from Division of Corporation Finance, Office of 
Real Estate & Construction to Barry E. Silbert, Chief Executive 
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
    \33\ See Form 10-K submitted by Tesla, Inc. for the fiscal year 
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
    \34\ See Form 10-Q submitted by MicroStrategy Incorporated for 
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
    \35\ See Form 10-Q submitted by Square, Inc. for the quarterly 
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
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    Despite these developments, access for U.S. retail investors to 
gain exposure to bitcoin via a transparent and regulated exchange-
traded vehicle remains limited. Instead current options include: (i) 
Paying a potentially extremely high premium (and high management fees) 
to buy over-the-counter bitcoin funds (``OTC Bitcoin Funds''), to the 
advantage of more sophisticated investors that are able to create 
shares at net asset value (``NAV'') directly with the issuing trust; 
(ii) facing the technical risk, complexity and generally high fees 
associated with buying spot bitcoin; or (iii) purchasing shares of 
operating companies that they believe will provide proxy exposure to 
bitcoin with limited disclosure about the associated risks. Meanwhile, 
investors in many other countries, including Canada,\36\ are able to 
use more traditional exchange listed and traded products to gain 
exposure to bitcoin, disadvantaging U.S. investors and leaving them 
with more risky means of getting bitcoin exposure.\37\
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    \36\ The Exchange notes that the Purpose Bitcoin ETF, a retail 
physical bitcoin ETP recently launched in Canada, reportedly reached 
$421.8 million in assets under management (``AUM'') in two days, 
demonstrating the demand for a North American market listed bitcoin 
exchange-traded product (``ETP''). The Purpose Bitcoin ETF also 
offers a class of units that is U.S. dollar denominated, which could 
appeal to U.S. investors. Without an approved bitcoin ETP in the 
U.S. as a viable alternative, U.S. investors could seek to purchase 
these shares in order to get access to bitcoin exposure. Given the 
separate regulatory regime and the potential difficulties associated 
with any international litigation, such an arrangement would create 
more risk exposure for U.S. investors than they would otherwise have 
with a U.S. exchange listed ETP.
    \37\ The Exchange notes that securities regulators in a number 
of other countries have either approved or otherwise allowed the 
listing and trading of bitcoin ETPs. Specifically, these funds 
include the Purpose Bitcoin ETF, Bitcoin ETF, VanEck Vectors Bitcoin 
ETN, WisdomTree Bitcoin ETP, Bitcoin Tracker One, BTCetc bitcoin 
ETP, Amun Bitcoin ETP, Amun Bitcoin Suisse ETP, 21Shares Short 
Bitcoin ETP, CoinShares Physical Bitcoin ETP.
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OTC Bitcoin Funds and Investor Protection
    Over the past year, U.S. investor exposure to bitcoin through OTC 
Bitcoin Funds has grown into the tens of billions of dollars. With that 
growth, so too has grown the potential risk to U.S. investors. As 
described below, premium volatility, high fees, insufficient 
disclosures, and technical hurdles are putting U.S. investor money at 
risk on a daily basis that could potentially be eliminated through 
access to a bitcoin ETP. The Exchange understands the Commission's 
previous focus on potential manipulation of a bitcoin ETP in prior 
disapproval orders, but now believes that such concerns have been 
sufficiently mitigated and that the growing and quantifiable investor 
protection concerns should be the central consideration as the

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Commission reviews this proposal. As such, the Exchange believes that 
approving this proposal (and comparable proposals submitted hereafter) 
provides the Commission with the opportunity to allow U.S. investors 
with access to bitcoin in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) Reducing 
premium volatility; (ii) reducing management fees through meaningful 
competition; (iii) reducing risks associated with investing in 
operating companies that are imperfect proxies for bitcoin exposure; 
and (iv) providing an alternative to custodying spot bitcoin.
(i) OTC Bitcoin Funds and Premium Volatility
    OTC Bitcoin Funds are generally designed to provide exposure to 
bitcoin in a manner similar to the Shares. However, unlike the Shares, 
OTC Bitcoin Funds are unable to freely offer creation and redemption in 
a way that incentivizes market participants to keep their shares 
trading in line with their NAV \38\ and, as such, frequently trade at a 
price that is out of line with the value of their assets held. 
Historically, OTC Bitcoin Funds have traded at a significant premium to 
NAV.\39\
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    \38\ Because OTC Bitcoin Funds are not listed on an exchange, 
they are also not subject to the same transparency and regulatory 
oversight by a listing exchange as the Shares would be. In the case 
of the Trust, the existence of a surveillance-sharing agreement 
between the Exchange and the Bitcoin Futures market results in 
increased investor protections compared to OTC Bitcoin Funds.
    \39\ The inability to trade in line with NAV may at some point 
result in OTC Bitcoin Funds trading at a discount to their NAV. 
While that has not historically been the case, such a scenario would 
give rise to nearly identical potential issues related to trading at 
a premium as described below.
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    Trading at a premium (or potentially a discount) is not unique to 
OTC Bitcoin Funds and is not in itself problematic, however the AUM for 
OTC Bitcoin Funds has grown significantly in the past year. In fact, 
the largest OTC Bitcoin Fund has grown to $35.0 billion in AUM \40\ and 
has historically traded at a premium of between roughly five and forty 
percent, though it has seen premiums at times above one hundred 
percent.\41\ As of February 17, 2021, the premium was approximately 5%, 
representing around $1.4 billion in market value in excess of the 
bitcoin actually held by the fund. If premium numbers move back to the 
middle of that range to 20% (which historically could occur at any time 
and overnight), there would be $7 billion worth of shares outstanding 
above the value of the bitcoin actually held by the fund and if the 
premium returns to the upper end of its typical range, that number 
increases to $14 billion. These numbers are only associated with a 
single OTC Bitcoin Fund--as more and more OTC Bitcoin Funds come to 
market and more investor assets flood into them to get access to 
bitcoin exposure, the potential dollars at risk will only increase.
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    \40\ As of February 19, 2021. Compare to an AUM of approximately 
$2.6 billion on February 26, 2020, the date on which the Commission 
issued the most recent disapproval order for a bitcoin ETP. See 
Securities Exchange Act Release No. 88284 (February 26, 2020), 85 FR 
12595 (March 3, 2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix 
Disapproval''). While the price of one bitcoin has increased 
approximately 400% in the intervening period, the total AUM has 
increased by approximately 1240%, indicating that the increase in 
AUM was created beyond just price appreciation in bitcoin.
    \41\ See ``Traders Piling Into Overvalued Crypto Funds Risk a 
Painful Exit'' (February 4, 2021) available at: https://www.bloomberg.com/news/articles/2021-02-04/bitcoin-one-big-risk-when-investing-in-crypto-funds
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    This raises significant investor protection issues in several ways. 
First, the most obvious issue is that investors are buying shares of a 
fund for a price in excess of the per share value of the fund's 
underlying assets. Even operating within the normal premium range, it's 
possible for an investor to buy shares of an OTC Bitcoin Fund only to 
have those shares quickly lose 10% or more in dollar value excluding 
any movement of the price of bitcoin. That is to say--the price of 
bitcoin could have stayed exactly the same from market close on one day 
to market open the next, yet the value of the shares held by the 
investor decreased only because of the fluctuation of the premium. As 
more investment vehicles, including mutual funds and ETFs, seek to gain 
exposure to bitcoin, the easiest option for a buy and hold strategy is 
often an OTC Bitcoin Fund, meaning that even investors that do not 
directly buy OTC Bitcoin Funds can be disadvantaged by extreme premiums 
(or discounts) and premium volatility.
    The second issue is related to the first and explains how the 
premium in OTC Bitcoin Funds essentially creates a direct payment from 
retail investors to more sophisticated investors. Generally speaking, 
only accredited investors are able to create shares with the issuing 
trust, which means that they are able to buy shares directly from the 
trust at NAV (by either delivering cash or bitcoin) without having to 
pay the premium. While they are forced to hold the shares for at least 
six months before selling, in reality they can immediately hedge any 
exposure to the price of bitcoin and simply wait six months to sell the 
shares to a retail investor and collect the premium.
    As noted above, the existence of the premium and premium collection 
opportunity is not unique to OTC Bitcoin Funds and does not in itself 
warrant the approval of an exchange traded product.\42\ What makes this 
situation unique is that such a premium can exist in a product with $35 
billion in assets under management,\43\ that billions of retail 
investor dollars are constantly under threat of premium volatility,\44\ 
and that premium volatility is generally captured by more sophisticated 
investors on a riskless basis. The Exchange understands the 
Commission's focus on potential manipulation of a bitcoin ETP in prior 
disapproval orders, but now believes that current circumstances warrant 
that this direct, quantifiable investor protection issue should be the 
central consideration as the Commission determines whether to approve 
this proposal.
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    \42\ The Exchange notes, for example, that similar premiums and 
premium volatility exist for other non-bitcoin cryptocurrency 
related over-the-counter funds, but that the size and investor 
interest in those funds does not give rise to the same investor 
protection concerns that exist for OTC Bitcoin Funds.
    \43\ At $35 billion in AUM, the largest OTC Bitcoin Fund would 
be the 32nd largest out of roughly 2,400 U.S. listed ETPs.
    \44\ The Exchange notes that in two recent incidents, the 
premium dropped from 28.28% to 12.29% from the close on 3/19/20 to 
the close on 3/20/20 and from 38.40% to 21.05% from the close on 5/
13/19 to the close on 5/14/19. Similarly, over the period of 12/21/
20 to 1/21/20, the premium went from 40.18% to 2.79%. While the 
price of bitcoin appreciated significantly during this period and 
NAV per share increased by 41.25%, the price per share increased by 
only 3.58%.
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(ii) Spot and Proxy Exposure
    Exposure to bitcoin through an ETP also presents certain advantages 
for retail investors compared to buying spot bitcoin directly. The most 
notable advantage is the use of the Custodian to custody the Trust's 
bitcoin assets. The Sponsor has carefully selected the Custodian, a 
trust company chartered and regulated by NYDFS, due to its manner of 
holding the Trust's bitcoin. This includes, among others, the use of 
``cold'' (offline) storage to hold private keys and the employment by 
the Custodian of a certain degree of cybersecurity measures and 
operational best practices. By contrast, an individual retail investor 
holding bitcoin through a cryptocurrency exchange lacks these 
protections. Typically, retail exchanges hold most, if not all, retail 
investors' bitcoin in ``hot'' (internet-connected) storage and do not 
make any commitments to indemnify

[[Page 15005]]

retail investors or to observe any particular cybersecurity standard. 
Meanwhile, a retail investor holding spot bitcoin directly in a self-
hosted wallet may suffer from inexperience in private key management 
(e.g., insufficient password protection, lost key, etc.), which could 
cause them to lose some or all of their bitcoin holdings. In the 
Custodian, the Trust has engaged a regulated and licensed entity highly 
experienced in bitcoin custody, with dedicated, trained employees and 
procedures to manage the private keys to the Trust's bitcoin, and which 
is accountable for failures. Thus, with respect to custody of the 
Trust's bitcoin assets, the Trust presents advantages from an 
investment protection standpoint for retail investors compared to 
owning spot bitcoin directly.
    Finally, as described in the Background section above, recently a 
number of operating companies engaged in unrelated businesses--such as 
Tesla (a car manufacturer) and MicroStrategy (an enterprise software 
company)--have announced investments as large as $1.5 billion in 
bitcoin.\45\ Without access to bitcoin exchange-traded products, retail 
investors seeking investment exposure to bitcoin may end up purchasing 
shares in these companies in order to gain the exposure to bitcoin that 
they seek.\46\ In fact, mainstream financial news networks have written 
a number of articles providing investors with guidance for obtaining 
bitcoin exposure through publicly traded companies (such as 
MicroStrategy, Tesla, and bitcoin mining companies, among others) 
instead of dealing with the complications associated with buying spot 
bitcoin in the absence of a bitcoin ETP.\47\ Such operating companies, 
however, are imperfect bitcoin proxies and provide investors with 
partial bitcoin exposure paired with a host of additional risks 
associated with whichever operating company they decide to purchase. 
Additionally, the disclosures provided by the aforementioned operating 
companies with respect to risks relating to their bitcoin holdings are 
generally substantially smaller than the registration statement of a 
bitcoin ETP, including the Registration Statement, typically amounting 
to a few sentences of narrative description and a handful of risk 
factors.\48\ In other words, investors seeking bitcoin exposure through 
publicly traded companies are gaining only partial exposure to bitcoin 
and are not fully benefitting from the risk disclosures and associated 
investor protections that come from the securities registration 
process.
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    \45\ It's been announced that MicroStrategy is currently 
contemplating a $600 million convertible note offering for the 
purpose of acquiring bitcoin. See: https://www.cnbc.com/2021/02/16/microstrategy-shares-rise-after-revealing-plans-to-buy-more-bitcoin.html.
    \46\ In August 2017, the Commission's Office of Investor 
Education and Advocacy warned investors about situations where 
companies were publicly announcing events relating to digital coins 
or tokens in an effort to affect the price of the company's publicly 
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
    \47\ See e.g., ``7 public companies with exposure to bitcoin'' 
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want 
to get in the crypto trade without holding bitcoin yourself? Here 
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
    \48\ See, e.g., Tesla 10-K for the year ended December 31, 2020, 
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
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Bitcoin Futures
    CME began offering trading in Bitcoin Futures in 2017. Each 
contract represents five bitcoin and is based on the CME CF Bitcoin 
Reference Rate.\49\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric 
related to Bitcoin Futures has trended consistently up since launch 
and/or accelerated upward in the past year. For example, there was 
approximately $28 billion in trading in Bitcoin Futures in December 
2020 compared to $737 million, $1.4 billion, and $3.9 billion in total 
trading in December 2017, December 2018, and December 2019, 
respectively. Bitcoin Futures traded over $1.2 billion per day on the 
CME in December 2020 and represented $1.6 billion in open interest 
compared to $115 million in December 2019. This general upward trend in 
trading volume and open interest is captured in the following chart.
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    \49\ According to CME, the CME CF Bitcoin Reference Rate 
aggregates the trade flow of major bitcoin spot exchanges during a 
specific calculation window into a once-a-day reference rate of the 
U.S. dollar price of bitcoin. Calculation rules are geared toward 
maximum transparency and real-time replicability in underlying spot 
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken. 
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.

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[[Page 15006]]

[GRAPHIC] [TIFF OMITTED] TN19MR21.000

    Similarly, the number of large open interest holders \50\ has 
continued to increase even as the price of bitcoin has risen, as have 
the number of unique accounts trading Bitcoin Futures.
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    \50\ A large open interest holder in Bitcoin Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
125 bitcoin. At a price of approximately $30,000 per bitcoin on 12/
31/20, more than 80 firms had outstanding positions of greater than 
$3.8 million in Bitcoin Futures.

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[[Page 15007]]

[GRAPHIC] [TIFF OMITTED] TN19MR21.001

    The Sponsor further believes that academic research corroborates 
the overall trend outlined above and supports the thesis that the 
Bitcoin Futures pricing leads the spot market and, thus, a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP. Specifically, the Sponsor believes that 
such research indicates that bitcoin futures lead the bitcoin spot 
market in price formation.\51\
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    \51\ See Hu, Y., Hou, Y. and Oxley, L. (2019). ``What role do 
futures markets play in Bitcoin pricing? Causality, cointegration 
and price discovery from a time-varying perspective'' (available at: 
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This 
academic research paper concludes that ``There exist no episodes 
where the Bitcoin spot markets dominates the price discovery 
processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective.''
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Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\52\ including Commodity-Based Trust Shares,\53\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
The requirement that a national securities exchange's rules are 
designed to prevent fraudulent and

[[Page 15008]]

manipulative acts and practices; \54\ and (ii) the requirement that an 
exchange proposal be designed, in general, to protect investors and the 
public interest. The Exchange believes that this proposal is consistent 
with the requirements of Section 6(b)(5) of the Act and that it has 
sufficiently demonstrated that, on the whole, the manipulation concerns 
previously articulated by the Commission are sufficiently mitigated to 
the point that they are outweighed by quantifiable investor protection 
issues that would be resolved by approving this proposal. Specifically, 
the Exchange lays out below why it believes that the significant 
increase in trading volume in Bitcoin Futures, the growth of liquidity 
at the inside in the spot market for bitcoin, and certain features of 
the Shares and the Benchmark mitigate potential manipulation concerns 
to the point that the investor protection issues that have arisen from 
the rapid growth of over-the-counter bitcoin funds since the Commission 
last reviewed an exchange proposal to list and trade a bitcoin ETP, 
including premium volatility and management fees, should be the central 
consideration as the Commission determines whether to approve this 
proposal.
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    \52\ See Exchange Rule 14.11(f).
    \53\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \54\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
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    (i) Designed To Prevent Fraudulent and Manipulative Acts and 
Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \55\ with a regulated market of significant size. 
Both the Exchange and CME are members of the Intermarket Surveillance 
Group (the ``ISG'').\56\ The only remaining issue to be addressed is 
whether the Bitcoin Futures market constitutes a market of significant 
size, which the Exchange believes that it does. The terms ``significant 
market'' and ``market of significant size'' include a market (or group 
of markets) as to which: (a) There is a reasonable likelihood that a 
person attempting to manipulate the ETP would also have to trade on 
that market to manipulate the ETP, so that a surveillance-sharing 
agreement would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\57\
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    \55\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in ISG 
constitutes such a surveillance sharing agreement. See Wilshire 
Phoenix Disapproval.
    \56\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \57\ See Wilshire Phoenix Disapproval.
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    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\58\
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    \58\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
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(a) Manipulation of the ETP
    The significant growth in Bitcoin Futures across each of trading 
volumes, open interest, large open interest holders, and total market 
participants since the Wilshire Phoenix Disapproval was issued are 
reflective of that market's growing influence on the spot price, which 
according to the academic research cited above, was already leading the 
spot price in 2018 and 2019. Where Bitcoin Futures lead the price in 
the spot market such that a potential manipulator of the bitcoin spot 
market (beyond just the constituents of the Benchmark \59\) would have 
to participate in the Bitcoin Futures market, it follows that a 
potential manipulator of the Shares would similarly have to transact in 
the Bitcoin Futures market because the Benchmark is based on spot 
prices. Further, the Trust only allows for in-kind creation and 
redemption, which, as further described below, reduces the potential 
for manipulation of the Shares through manipulation of the Benchmark or 
any of its individual constituents, again emphasizing that a potential 
manipulator of the Shares would have to manipulate the entirety of the 
bitcoin spot market, which is led by the Bitcoin Futures market. As 
such, the Exchange believes that part (a) of the significant market 
test outlined above is satisfied and that common membership in ISG 
between the Exchange and CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares.
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    \59\ As further described below, the ``Benchmark'' for the Fund 
is the MVIS[supreg] CryptoCompare Bitcoin Benchmark Rate. The 
current exchange composition of the Benchmark is Bitstamp, Coinbase, 
Gemini, itBit and Kraken, which are the same constituents that 
compose the CME CF Bitcoin Reference Rate.
---------------------------------------------------------------------------

(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange also believes that trading in the Shares would not be 
the predominant force on prices in the Bitcoin Futures market (or spot 
market) for a number of reasons, including the significant volume in 
the Bitcoin Futures market, the size of bitcoin's market cap 
(approximately $1 trillion), and the significant liquidity available in 
the spot market. In addition to the Bitcoin Futures market data points 
cited above, the spot market for bitcoin is also very liquid. According 
to data from CoinRoutes from February 2021, the cost to buy or sell $5 
million worth of bitcoin averages roughly 10 basis points with a market 
impact of 30 basis points.\60\ For a $10 million market order,

[[Page 15009]]

the cost to buy or sell is roughly 20 basis points with a market impact 
of 50 basis points. Stated another way, a market participant could 
enter a market buy or sell order for $10 million of bitcoin and only 
move the market 0.5%. More strategic purchases or sales (such as using 
limit orders and executing through OTC bitcoin trade desks) would 
likely have less obvious impact on the market--which is consistent with 
MicroStrategy, Tesla, and Square being able to collectively purchase 
billions of dollars in bitcoin. As such, the combination of Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants, including authorized 
participants creating and redeeming in-kind with the Trust, to buy or 
sell large amounts of bitcoin without significant market impact will 
help prevent the Shares from becoming the predominant force on pricing 
in either the bitcoin spot or Bitcoin Futures markets, satisfying part 
(b) of the test outlined above.
---------------------------------------------------------------------------

    \60\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange believes that 
such conditions are present. Specifically, the significant liquidity in 
the spot market and the impact of market orders on the overall price of 
bitcoin mean that attempting to move the price of bitcoin is costly and 
has grown more expensive over the past year. In January 2020, for 
example, the cost to buy or sell $5 million worth of bitcoin averaged 
roughly 30 basis points (compared to 10 basis points in 2/2021) with a 
market impact of 50 basis points (compared to 30 basis points in 2/
2021).\61\ For a $10 million market order, the cost to buy or sell was 
roughly 50 basis points (compared to 20 basis points in 2/2021) with a 
market impact of 80 basis points (compared to 50 basis points in 2/
2021). As the liquidity in the bitcoin spot market increases, it 
follows that the impact of $5 million and $10 million orders will 
continue to decrease the overall impact in spot price.
---------------------------------------------------------------------------

    \61\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

    Additionally, offering only in-kind creation and redemption will 
provide unique protections against potential attempts to manipulate the 
Shares. While the Sponsor believes that the Benchmark which it uses to 
value the Trust's bitcoin is itself resistant to manipulation based on 
the methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Benchmark significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\62\ When authorized participants are 
creating with the Trust, they need to deliver a certain number of 
bitcoin per share (regardless of the valuation used) and when they're 
redeeming, they can similarly expect to receive a certain number of 
bitcoin per share. As such, even if the price used to value the Trust's 
bitcoin is manipulated (which the Sponsor believes that its methodology 
is resistant to), the ratio of bitcoin per Share does not change and 
the Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Benchmark 
because there is little financial incentive to do so.
---------------------------------------------------------------------------

    \62\ While the Benchmark will not be particularly important for 
the creation and redemption process, it will be used for calculating 
fees.
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VanEck Bitcoin Trust
    Delaware Trust Company is the trustee (``Trustee''). The State 
Street Bank and Trust Company will be the administrator 
(``Administrator'') and transfer agent (``Transfer Agent''). Van Eck 
Securities Corporation will be the marketing agent (``Marketing 
Agent'') in connection with the creation and redemption of ``Baskets'' 
of Shares. Van Eck Securities Corporation (``VanEck'') provides 
assistance in the marketing of the Shares. A third-party regulated 
custodian (the ``Custodian'') will be responsible for custody of the 
Trust's bitcoin.\63\
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    \63\ The Exchange notes that the Sponsor is finalizing 
negotiations with the Custodian and it will submit an amendment to 
this proposal upon execution of an agreement with the Custodian.
---------------------------------------------------------------------------

    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the Trust's net assets. 
The Trust's assets will consist of bitcoin held by the Custodian on 
behalf of the Trust. The Trust generally does not intend to hold cash 
or cash equivalents. However, there may be situations where the Trust 
will unexpectedly hold cash on a temporary basis.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\64\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 50,000 Shares (a ``Creation Basket'') 
at the Trust's NAV. Authorized participants will deliver, or facilitate 
the delivery of, bitcoin to the Trust's account with the Custodian in 
exchange for Shares when they purchase Shares, and the Trust, through 
the Bitcoin Custodian, will deliver bitcoin to such authorized 
participants when they redeem Shares with the Trust. Authorized 
participants may then offer Shares to the public at prices that depend 
on various factors, including the supply and demand for Shares, the 
value of the Trust's assets, and market conditions at the time of a 
transaction. Shareholders who buy or sell Shares during the day from 
their broker may do so at a premium or discount relative to the NAV of 
the Shares of the Trust.
Investment Objective
    According to the Registration Statement and as further described 
below, the investment objective of the Trust is for the Shares to 
reflect the performance of the MVIS[supreg] CryptoCompare Bitcoin 
Benchmark Rate less the expenses of the Trust's operations. In seeking 
to achieve its investment objective, the Trust will hold bitcoin and 
will value its Shares daily based on the reported MVIS[supreg] 
CryptoCompare Bitcoin Benchmark Rate and process all creations and 
redemptions in-kind in transactions with authorized participants. The 
Trust is not actively managed.
The Benchmark
    As described in the Registration Statement, the Fund will use the 
Benchmark to calculate the Trust's NAV. The Benchmark is designed to be 
a robust price for bitcoin in USD and

[[Page 15010]]

there is no component other than bitcoin in the index. The underlying 
exchanges are sourced from the industry leading CryptoCompare Exchange 
Benchmark review report. CryptoCompare Exchange Benchmark was 
established in 2019 as a tool designed to bring clarity to the digital 
asset exchange sector by providing a framework for assessing risk and 
in turn bringing transparency and accountability to a complex and 
rapidly evolving market.\65\ The current exchange composition of the 
Benchmark is Bitstamp, Coinbase, Gemini, itBit and Kraken, which are 
the same constituents that compose the CME CF Bitcoin Reference Rate.
---------------------------------------------------------------------------

    \65\ The CryptoCompare Exchange Benchmark methodology utilizes a 
combination of qualitative and quantitative metrics to analyze a 
comprehensive data set across eight categories of evaluation legal/
regulation, KYC/transaction risk, data provision, security, team/
exchange, asset quality/diversity, market quality and negative 
events. The CryptoCompare Exchange Benchmark review report assigns a 
grade to each exchange which helps identify what it believes to be 
the lowest risk exchanges in the industry. Based on the 
CryptoCompare Exchange Benchmark, MVIS initially selects the top 
five exchanges by rank for inclusion in the MVIS[supreg] 
CryptoCompare Bitcoin Benchmark Rate. If an eligible exchange is 
downgraded by two or more notches in a semi-annual review and is no 
longer in the top five by rank, it is replaced by the highest ranked 
non-component exchange. Adjustments to exchange coverage are 
announced four business days prior to the first business day of each 
of March and September at 23:00 CET. The MVIS[supreg] CryptoCompare 
Bitcoin Benchmark Rate is rebalanced at 16:00:00 GMT/BST on the last 
business day of each of February and August.
---------------------------------------------------------------------------

    In calculating the MVIS[supreg] CryptoCompare Bitcoin Benchmark 
Rate, the methodology captures trade prices and sizes from exchanges 
and examines twenty three-minute periods leading up to 4:00 p.m. EST. 
It then calculates an equal-weighted average of the volume-weighted 
median price of these twenty three-minute periods, removing the highest 
and lowest contributed prices. Using twenty consecutive three-minute 
segments over a sixty-minute period means malicious actors would need 
to sustain efforts to manipulate the market over an extended period of 
time, or would need to replicate efforts multiple times across 
exchanges, potentially triggering review. This extended period also 
supports authorized participant activity by capturing volume over a 
longer time period, rather than forcing authorized participants to mark 
an individual close or auction. The use of a median price reduces the 
ability of outlier prices to impact the NAV, as it systematically 
excludes those prices from the NAV calculation. The use of a volume-
weighted median (as opposed to a traditional median) serves as an 
additional protection against attempts to manipulate the NAV by 
executing a large number of low-dollar trades, because, any 
manipulation attempt would have to involve a majority of global spot 
bitcoin volume in a three-minute window to have any influence on the 
NAV. As discussed in the Registration Statement, removing the highest 
and lowest prices further protects against attempts to manipulate the 
NAV, requiring bad actors to act on multiple exchanges at once to have 
any ability to influence the price.
Availability of Information
    In addition to the price transparency of the Benchmark, the Trust 
will provide information regarding the Trust's bitcoin holdings as well 
as additional data regarding the Trust. The Trust will provide an 
Intraday Indicative Value (``IIV'') per Share updated every 15 seconds, 
as calculated by the Exchange or a third-party financial data provider 
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m. 
E.T.). The IIV will be calculated by using the prior day's closing NAV 
per Share as a base and updating that value during Regular Trading 
Hours to reflect changes in the value of the Trust's bitcoin holdings 
during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price \66\ in relation to the NAV 
as of the time the NAV is calculated and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The price of bitcoin 
will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours. 
Information about the Benchmark, including key elements of how the 
Benchmark is calculated, will be publicly available at www.mvis-indices.com/.
---------------------------------------------------------------------------

    \66\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the Consolidated Tape 
Association (``CTA'').
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Benchmark. Information relating 
to trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
Net Asset Value
    NAV means the total assets of the Trust including, but not limited 
to, all bitcoin and cash, if any, less total liabilities of the Trust, 
each determined on the basis of generally accepted accounting 
principles. The Administrator will determine the NAV of the Trust on 
each day that the Exchange is open for regular trading, as promptly as 
practical after 4:00 p.m. EST. The NAV of the Trust is the aggregate 
value of the Trust's assets less its estimated accrued but unpaid 
liabilities (which include accrued expenses). In determining the 
Trust's NAV, the Administrator values the bitcoin held by the Trust 
based on the price set by the MVIS[supreg] CryptoCompare Bitcoin 
Benchmark Rate as of 4:00 p.m. EST. The Administrator also determines 
the NAV per Share.
Creation and Redemption of Shares
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or 
the close of regular trading on the Exchange, whichever is earlier. The 
day on which an order is received is considered the

[[Page 15011]]

purchase order date. The total deposit of bitcoin required is an amount 
of bitcoin that is in the same proportion to the total assets of the 
Trust, net of accrued expenses and other liabilities, on the date the 
order to purchase is properly received, as the number of Shares to be 
created under the purchase order is in proportion to the total number 
of Shares outstanding on the date the order is received. Each night, 
the Sponsor will publish the amount of bitcoin that will be required in 
exchange for each creation order. The Administrator determines the 
required deposit for a given day by dividing the number of bitcoin held 
by the Trust as of the opening of business on that business day, 
adjusted for the amount of bitcoin constituting estimated accrued but 
unpaid fees and expenses of the Trust as of the opening of business on 
that business day, by the quotient of the number of Shares outstanding 
at the opening of business divided by 50,000. The procedures by which 
an authorized participant can redeem one or more Creation Baskets 
mirror the procedures for the creation of Creation Baskets.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a 
trust that holds a specified commodity \67\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity.
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    \67\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted above, the CFTC has opined that Bitcoin is a commodity 
as defined in Section 1a(9) of the Commodity Exchange Act. See 
Coinflip.
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    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g., Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information

[[Page 15012]]

regarding trading in the Shares and Bitcoin Futures via ISG, from other 
exchanges who are members or affiliates of the ISG, or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.\68\
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    \68\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
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Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) The procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares outside of Regular Trading Hours \69\ 
when an updated IIV will not be calculated or publicly disseminated; 
(v) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (vi) trading information.
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    \69\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \70\ in general and Section 6(b)(5) of the Act \71\ in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
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    \70\ 15 U.S.C. 78f.
    \71\ 15 U.S.C. 78f(b)(5).
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    The Commission has approved numerous series of Trust Issued 
Receipts,\72\ including Commodity-Based Trust Shares,\73\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
The requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\74\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest.
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    \72\ See Exchange Rule 14.11(f).
    \73\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \74\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

    The Exchange believes that the proposal is, in particular, designed 
to protect investors and the public interest. With the growth of OTC 
Bitcoin Funds over the past year, so too has grown the potential risk 
to U.S. investors. Premium volatility, high fees, insufficient 
disclosures, and technical hurdles are putting U.S. investor money at 
risk on a daily basis that could potentially be eliminated through 
access to a bitcoin ETP. As such, the Exchange believes that this 
proposal acts to limit the risk to U.S. investors that are increasingly 
seeking exposure to bitcoin through the elimination of premium 
volatility, the reduction of management fees through meaningful 
competition, the avoidance of risks associated with investing in 
operating companies that are imperfect proxies for bitcoin exposure, 
and protection from risk associated with custodying spot bitcoin by 
providing direct, 1-for-1 exposure to bitcoin in a regulated, 
transparent, exchange-traded vehicle.
    The Exchange also believes that this proposal is consistent with 
the requirements of Section 6(b)(5) of the Act and that it has 
sufficiently demonstrated that, on the whole, the manipulation concerns 
previously articulated by the Commission are sufficiently mitigated to 
the point that they are outweighed by quantifiable investor protection 
issues that would be resolved by approving this proposal. Specifically, 
the Exchange believes that the significant increase in trading volume 
in Bitcoin Futures, the growth of liquidity at the inside in the spot 
market for bitcoin, and certain features of the Shares and the 
Benchmark mitigate potential manipulation concerns to the point that 
the investor protection issues that have arisen from the rapid growth 
of over-the-counter bitcoin funds since the Commission last reviewed an 
exchange proposal to list and trade a bitcoin ETP, including premium 
volatility and management fees, should be the central consideration as 
the Commission determines whether to approve this proposal.
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place\75\ with a regulated

[[Page 15013]]

market of significant size. Both the Exchange and CME are members of 
ISG.\76\ The only remaining issue to be addressed is whether the 
Bitcoin Futures market constitutes a market of significant size, which 
the Exchange believes that it does. The terms ``significant market'' 
and ``market of significant size'' include a market (or group of 
markets) as to which: (a) There is a reasonable likelihood that a 
person attempting to manipulate the ETP would also have to trade on 
that market to manipulate the ETP, so that a surveillance-sharing 
agreement would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\77\
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    \75\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance- sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in ISG 
constitutes such a surveillance sharing agreement. See Wilshire 
Phoenix Disapproval.
    \76\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \77\ See Wilshire Phoenix Disapproval.
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    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\78\
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    \78\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
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(a) Manipulation of the ETP
    The significant growth in Bitcoin Futures across each of trading 
volumes, open interest, large open interest holders, and total market 
participants since the Wilshire Phoenix Disapproval was issued are 
reflective of that market's growing influence on the spot price, which 
according to the academic research cited above, was already leading the 
spot price in 2018 and 2019. Where Bitcoin Futures lead the price in 
the spot market such that a potential manipulator of the bitcoin spot 
market (beyond just the constituents of the Benchmark \79\) would have 
to participate in the Bitcoin Futures market, it follows that a 
potential manipulator of the Shares would similarly have to transact in 
the Bitcoin Futures market because the Benchmark is based on spot 
prices. Further, the Trust only allows for in-kind creation and 
redemption, which, as further described below, reduces the potential 
for manipulation of the Shares through manipulation of the Benchmark or 
any of its individual constituents, again emphasizing that a potential 
manipulator of the Shares would have to manipulate the entirety of the 
bitcoin spot market, which is led by the Bitcoin Futures market. As 
such, the Exchange believes that part (a) of the significant market 
test outlined above is satisfied and that common membership in ISG 
between the Exchange and CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares.
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    \79\ As further described below, the ``Benchmark'' for the Fund 
is the MVIS[supreg] CryptoCompare Bitcoin Benchmark Rate. The 
current exchange composition of the Benchmark is Bitstamp, Coinbase, 
Gemini, itBit and Kraken, which are the same constituents that 
compose the CME CF Bitcoin Reference Rate.
---------------------------------------------------------------------------

(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange also believes that trading in the Shares would not be 
the predominant force on prices in the Bitcoin Futures market (or spot 
market) for a number of reasons, including the significant volume in 
the Bitcoin Futures market, the size of bitcoin's market cap 
(approximately $1 trillion), and the significant liquidity available in 
the spot market. In addition to the Bitcoin Futures market data points 
cited above, the spot market for bitcoin is also very liquid. According 
to data from CoinRoutes from February 2021, the cost to buy or sell $5 
million worth of bitcoin averages roughly 10 basis points with a market 
impact of 30 basis points.\80\ For a $10 million market order, the cost 
to buy or sell is roughly 20 basis points with a market impact of 50 
basis points. Stated another way, a market participant could enter a 
market buy or sell order for $10 million of bitcoin and only move the 
market 0.5%. More strategic purchases or sales (such as using limit 
orders and executing through OTC bitcoin trade desks) would likely have 
less obvious impact on the market--which is consistent with 
MicroStrategy, Tesla, and Square being able to collectively purchase 
billions of dollars in bitcoin. As such, the combination of Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants, including authorized 
participants creating and redeeming in-kind with the Trust, to buy or 
sell large amounts of bitcoin without significant market impact will 
help prevent the Shares from becoming the predominant force on pricing 
in either the bitcoin spot or Bitcoin Futures markets, satisfying part 
(b) of the test outlined above.
---------------------------------------------------------------------------

    \80\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange believes that 
such conditions are present. Specifically, the significant liquidity in 
the spot market and the impact of market orders on the overall price of 
bitcoin mean that attempting to move the price of bitcoin is costly and 
has grown more expensive over the past year. In January 2020, for 
example, the cost to buy or sell $5 million worth of bitcoin averaged 
roughly 30 basis points (compared to 10 basis points in 2/2021) with a 
market impact of 50 basis points (compared to 30 basis points in 2/
2021).\81\ For a $10 million market order, the cost to buy or sell was 
roughly 50 basis points (compared to 20 basis points in 2/2021) with a 
market impact of 80 basis points (compared to 50 basis points in 2/
2021). As the liquidity in the bitcoin spot market increases, it 
follows that the impact of $5 million and $10 million orders will 
continue to decrease the overall impact in spot price.
---------------------------------------------------------------------------

    \81\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

    Additionally, offering only in-kind creation and redemption will 
provide unique protections against potential attempts to manipulate the 
Shares. While the Sponsor believes that the Benchmark which it uses to 
value the Trust's bitcoin is itself resistant to manipulation based on 
the methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Benchmark significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\82\ When

[[Page 15014]]

authorized participants are creating with the Trust, they need to 
deliver a certain number of bitcoin per share (regardless of the 
valuation used) and when they're redeeming, they can similarly expect 
to receive a certain number of bitcoin per share. As such, even if the 
price used to value the Trust's bitcoin is manipulated (which the 
Sponsor believes that its methodology is resistant to), the ratio of 
bitcoin per Share does not change and the Trust will either accept (for 
creations) or distribute (for redemptions) the same number of bitcoin 
regardless of the value. This not only mitigates the risk associated 
with potential manipulation, but also discourages and disincentivizes 
manipulation of the Benchmark because there is little financial 
incentive to do so.
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    \82\ While the Benchmark will not be particularly important for 
the creation and redemption process, it will be used for calculating 
fees.
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Commodity-Based Trust Shares
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed 
bitcoin derivatives via the ISG, from other exchanges who are members 
or affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about bitcoin and will be available regarding the Trust and 
the Shares. In addition to the price transparency of the Benchmark, the 
Trust will provide information regarding the Trust's bitcoin holdings 
as well as additional data regarding the Trust. The Trust will provide 
an IIV per Share updated every 15 seconds, as calculated by the 
Exchange or a third-party financial data provider during the Exchange's 
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be 
calculated by using the prior day's closing NAV per Share as a base and 
updating that value during Regular Trading Hours to reflect changes in 
the value of the Trust's bitcoin holdings during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price in relation to the NAV as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The price of bitcoin 
will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours. 
Information about the Benchmark, including key elements of how the 
Benchmark is calculated, will be publicly available at www.mvis-indices.com/.
    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the CTA.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Benchmark. Information relating 
to trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

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

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

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

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

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

IV. Solicitation of Comments

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

[[Page 15015]]

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-CboeBZX-2021-019 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2021-019. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2021-019, and should be 
submitted on or before April 9, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\83\
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    \83\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-05670 Filed 3-18-21; 8:45 am]
 BILLING CODE 8011-01-P


