[Federal Register Volume 86, Number 160 (Monday, August 23, 2021)]
[Notices]
[Pages 47176-47190]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-17965]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92689; File No. SR-CboeBZX-2021-052]


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

August 17, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the

[[Page 47177]]

``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 3, 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 Global X Bitcoin Trust (the 
``Trust''),\3\ under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares.
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    \3\ The Trust was formed as a Delaware statutory trust on July 
13, 2021 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\ Global X Digital Assets, LLC is 
the sponsor of the Trust (the ``Sponsor''). The Shares will be 
registered with the Commission by means of the Trust's registration 
statement on Form S-1 (the ``Registration Statement'').\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 Registration Statement on Form S-1, dated July 21, 2021 
submitted to the Commission by the Sponsor on behalf of the Trust. 
The descriptions of the Trust, the Shares, and the Trust's 
methodology for calculating net asset value 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 (i.e., without a trusted intermediary) with anyone 
connected to the Bitcoin Network--gives bitcoin its value.\7\ 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\ 
Fast forward to the first quarter

[[Page 47178]]

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\ and 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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    \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/.
    \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.
    \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, 
although as of July 19, 2021, it is closer to $580 billion. 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 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\

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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. As investors and advisors increasingly 
utilize ETPs to manage diversified portfolios (including equities, 
fixed income securities, commodities, and currencies) quickly, easily, 
relatively inexpensively, and without having to hold directly any of 
the underlying assets, options for bitcoin exposure for U.S. investors 
remain limited to: (i) Investing in over-the-counter bitcoin funds 
(``OTC Bitcoin Funds'') that are subject to high premium/discount 
volatility (and high management fees) to the advantage of more 
sophisticated investors that are able to create and redeem 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 riskier and more 
expensive 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, and 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 and discount 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 
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 and discount 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/Discount 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, 
which has occurred more recently with respect to one prominent OTC 
Bitcoin Fund. While that has not historically been the case, and it 
is not clear whether such discounts will continue, such a prolonged, 
significant discount 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 a discount is not unique to OTC Bitcoin 
Funds and is not in itself problematic, but the size of such premiums/
discounts and volatility thereof highlight the key differences in 
operations and market structure of OTC Bitcoin Funds as compared to 
ETPs. This, combined with the significant increase in AUM for OTC 
Bitcoin Funds over the past year, has given rise to significant and 
quantifiable investor protection issues, as further described below. In 
fact, the largest OTC Bitcoin Fund has grown to $38.3 billion in AUM 
\40\ and has historically traded at a

[[Page 47180]]

premium of between roughly five and 40%, though it has seen premiums at 
times above 100%.\41\ Recently, however, it has traded at a discount. 
As of June 18, 2021, the discount was approximately 11%, representing 
around $4.1 billion in market value less than the bitcoin actually held 
by the fund. If premium/discount numbers move back to the middle of its 
historical range to a 20% premium (which historically could occur at 
any time and overnight), it would represent a swing of approximately 
$11 billion in value unrelated to the value of bitcoin held by the 
fund. 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 March 31, 2021. See Form 10-Q submitted by on behalf 
of the Grayscale Bitcoin Trust for the quarterly period ended March 
31, 2021 at 4: https://grayscale.com/wp-content/uploads/sites/3/2021/05/gbtc_q1-2021_10q_as-filed.pdf. 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 that is not reflective 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/
discount. 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 or redeem shares with the 
issuing trust, which means that they are able to buy or sell shares 
directly with the trust at NAV (in exchange for either cash or bitcoin) 
without having to pay the premium or sell into the discount. While 
there are often minimum holding periods for shares, an investor that is 
allowed to interact directly with the trust is able to hedge their 
bitcoin exposure as needed to satisfy the holding requirements and 
collect on the premium or discount opportunity.
    As noted above, the existence of a premium or discount and the 
premium/discount collection opportunity is not unique to OTC Bitcoin 
Funds and does not in itself warrant the approval of an ETP.\42\ What 
makes this situation unique is that such significant and persistent 
premiums and discounts can exist in a product with $30+ billion in 
assets under management,\43\ that billions of retail investor dollars 
are constantly under threat of premium/discount volatility,\44\ and 
that premium/discount 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, particularly when the Trust as a bitcoin ETP is 
designed to reduce the likelihood of significant and prolonged premiums 
and discounts with its open-ended nature as well as the ability of 
market participants (i.e., market makers and authorized participants) 
to create and redeem on a daily basis.
---------------------------------------------------------------------------

    \42\ The Exchange notes, for example, that similar premiums/
discounts and premium/discount 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%.
---------------------------------------------------------------------------

(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 
third party custodian that carries insurance covering both hot and cold 
storage and is chartered as a trust company and will custody the 
Trust's bitcoin assets in a manner so that it meets the definition of 
qualified custodian under the Investment Advisers Act of 1940, as 
amended. 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 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

[[Page 47181]]

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.
---------------------------------------------------------------------------

    \45\ In addition to numerous debt offerings, MicroStrategy 
recently filed with the SEC to offer for sale up to $1 billion in 
additional common stock, the proceeds of which may at least be 
partially used to acquire more bitcoin. See Form S-3 submitted by 
MicroStrategy Incorporated on June 14, 2021: https://www.sec.gov/Archives/edgar/data/1050446/000119312521190150/d159028ds3asr.htm#tocb159028_8.
    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN23AU21.000

    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.
---------------------------------------------------------------------------

    \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 47182]]

[GRAPHIC] [TIFF OMITTED] TN23AU21.001

    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\
---------------------------------------------------------------------------

    \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.''
[GRAPHIC] [TIFF OMITTED] TN23AU21.002

BILLING CODE 8011-01-C

[[Page 47183]]

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 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 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/discount 
volatility and management fees, should be the central consideration as 
the Commission determines whether to approve this proposal.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

    \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. The Exchange also notes that it has 
surveillance sharing agreements in place with several spot bitcoin 
exchanges.
    \56\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \57\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\58\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

(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 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 NAV is based on 
the price of bitcoin on the principal market, which identified market 
must be an active market with orderly transactions. 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 Trust's methodology for calculating NAV 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, together with comprehensive surveillance 
sharing agreements between the Exchange and spot markets with material 
volume, would assist the

[[Page 47184]]

listing exchange in detecting and deterring misconduct in the Shares.
(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.\59\ 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.
---------------------------------------------------------------------------

    \59\ 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).\60\ 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 methodology 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 valuation methodology 
significantly less important. Specifically, because the Trust will not 
accept cash to buy bitcoin in order to create new shares, will charge 
fees as a percentage of the Trust's bitcoin holdings measure in bitcoin 
and not in dollars, and, barring a forced redemption of the Trust or 
under other extraordinary circumstances, will not 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. 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 valuation methodology because there is little 
financial incentive to do so.
Global X Bitcoin Trust
    Delaware Trust Company is the trustee (``Trustee''). The Sponsor 
selects the administrator, transfer agent, marketing agent in 
connection with the creation and redemption of ``Baskets'' of Shares, 
and third-party regulated custodian that will be responsible for 
custody of the Trust's bitcoin.\61\
---------------------------------------------------------------------------

    \61\ The Exchange notes that the Sponsor is finalizing 
negotiations with each of the administrator, transfer agent, 
marketing agent, and custodian, and it will submit an amendment to 
this proposal upon execution of agreements with the administrator, 
transfer agent, marketing agent, and custodian.
---------------------------------------------------------------------------

    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the bitcoin held by the 
Trust. 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 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,\62\ 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.
---------------------------------------------------------------------------

    \62\ 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 Shares of a size to be determined (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 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

[[Page 47185]]

below, the investment objective of the Trust is to reflect the 
performance of the price of bitcoin less the expenses of the Trust's 
operations. The Trust will not seek to reflect the performance of any 
benchmark or index.
    In seeking to achieve its investment objective, the Trust will hold 
bitcoin. The Trust will value its assets daily in accordance with 
Generally Accepted Accounting Principles (``GAAP''), which generally 
value bitcoin by reference to orderly transactions in the principal 
active market for bitcoin, as further described in the ``Calculation of 
NAV'' section below. The Trust will process all creations and 
redemptions in-kind in transactions with authorized participants. The 
Trust is not actively managed.
Calculation of NAV
    As described in the Registration Statement, the Sponsor has adopted 
a policy pursuant to which the Trust will value its assets and 
liabilities. Under this policy, the Sponsor uses fair value standards 
according to GAAP.
    Generally, the fair value of an asset that is traded on a market is 
measured by reference to the orderly transactions on an active market. 
Among all active markets with orderly transactions, the market that is 
used to determine the fair value of an asset is the principal market 
(with exceptions described in more detail below), which is either the 
market on which the Trust actually transacts, or if there is sufficient 
evidence, the market with the most trading volume and level of activity 
for the asset. Where there is no active market with orderly 
transactions for an asset, the Sponsor's valuation committee follows 
policies and procedures described in more detail below to determine the 
fair value.
    The Sponsor first determines which markets are likely to be active 
markets with orderly transactions for bitcoin. Currently, the Sponsor 
has determined that active markets with orderly transactions are those 
that provide relevant and reliable price and volume information because 
the venues supporting such markets:
     Conduct trading for bitcoin in U.S. dollars;
     are appropriately licensed to engage in bitcoin trading 
involving New York-based customers (and therefore, among other things, 
have programs to effectively detect, prevent, and respond to fraud); 
and
     otherwise have sufficient indicia of an active market with 
orderly transactions: Quality of execution (overall costs of a trade, 
accurate and timely execution, clearance and error/dispute resolution); 
reputation, financial strength, compliance with laws and regulations, 
and stability; hours of operation and willingness to transact; 
confidentiality of trading activity; and integrity of trade and price 
data.
    The Sponsor has determined that both certain bitcoin venues and the 
OTC market meet these criteria. Among the venues supporting active 
markets with orderly transactions, the Sponsor determines to which such 
venues the Trust has access and refers to these as eligible venues. 
Eligible venues consist of eligible OTC venues and eligible exchanges.
    The Sponsor then determines the principal market for bitcoin as 
either the market that the Trust normally transacts in for bitcoin, or, 
if the Trust does not normally transact in any market or the Sponsor 
has sufficient evidence that a particular market has the highest 
trading volume and level of activity, such market.
    The Trust will not purchase or, barring the liquidation of the 
Trust or the Trust incurring certain extraordinary expenses or 
liabilities not contractually assumed by the Sponsor, sell bitcoin 
directly. As a result, the Sponsor expects that the principal market 
will generally be the market with the highest trading volume and level 
of activity, which the Sponsor expects will typically be an eligible 
exchange. The Sponsor determines the principal market for bitcoin at 
least quarterly and more frequently as circumstances warrant. 
Circumstances in which the Sponsor may re-determine the principal 
market include but are not limited to the following: Where the market 
is no longer an eligible market or when the trading volume for bitcoin 
on another eligible market increases such that that eligible market has 
the highest trading volume for the digital asset by a material margin.
    Whether the principal market for bitcoin is an eligible exchange or 
the OTC market, the price on such principal market may not always 
represent fair value or the transactions on such market may not always 
represent orderly transactions. Thus, the Sponsor will not use the 
principal market to determine the fair value of bitcoin on a 
measurement date if the Sponsor determines, at the time of valuation, 
that transactions on the principal market are not orderly (e.g., 
indicative of forced liquidations or distress sales). To make this 
determination, the Sponsor reviews criteria including:
     A comparison of the prices on the principal market against 
the prices on other eligible venues that the Sponsor believes have the 
strongest regulatory compliance, surveillance, and enforcement 
mechanisms;
     trading volume and prices on the principal market at and 
around the time of valuation relative to historical activity on the 
principal market and eligible venues;
     the Sponsor's understanding of the market's regulatory 
compliance, including with applicable federal and state licensing 
requirements, and practices regarding anti-money laundering;
     the degree of intraday price fluctuations the market 
experiences at and around the time of valuation; and
     the ability of the Trust to trade on the market.
    If the Sponsor determines that transactions on the principal market 
are not orderly, the Sponsor will determine the fair value of bitcoin 
based on the eligible exchange with the next-highest volume, as long as 
the Sponsor determines that that market has orderly transactions at the 
time of the valuation.
    If market quotations are not readily available (including in cases 
in which available market quotations are deemed to be unreliable or 
infrequent), the Trust's bitcoin will be valued as determined in good 
faith pursuant to policies and procedures approved by the Sponsor's 
valuation committee (``fair value pricing''). In these circumstances, 
the Trust determines fair value in a manner that seeks to reflect the 
market value of the investment at the time of valuation based on 
consideration of any information or factors the Sponsor's valuation 
committee deems appropriate, as further described below. The Sponsor's 
valuation committee is responsible for overseeing the implementation of 
the Trust's valuation procedures and fair value determinations. For 
purposes of determining the fair value of bitcoin, the valuation 
committee may consider, without limitation: (i) Indications or quotes 
from brokers, (ii) valuations provided by a third-party pricing agent, 
(iii) internal models that take into consideration different factors 
determined to be relevant by the Sponsor or (iv) any combination of the 
above.
Availability of Information
    In addition to the price transparency related to the price of 
bitcoin, 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

[[Page 47186]]

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 \63\ in relation to the NAV 
as of the time the NAV is calculated and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
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.
---------------------------------------------------------------------------

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

    The NAV for the 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. 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.
Creation and Redemption of Shares
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or 
the close of regular trading on the Exchange, whichever is earlier. The 
day on which an order is received is considered the purchase order 
date. The total deposit of bitcoin required is an amount of bitcoin 
that is in the same proportion to the total assets of the 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 the size of a Creation Basket. 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 \64\ 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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    \64\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted above, the CFTC has opined that Bitcoin is a commodity 
as defined in Section 1a(9) of the Commodity Exchange Act. See 
Coinflip.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange or 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

[[Page 47187]]

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 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.\65\
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    \65\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

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 \66\ 
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.
---------------------------------------------------------------------------

    \66\ 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 \67\ in general and Section 6(b)(5) of the Act \68\ 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.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78f.
    \68\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\69\ including Commodity-Based Trust Shares,\70\ 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; 
\71\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \69\ See Exchange Rule 14.11(f).
    \70\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \71\ See note 54.
---------------------------------------------------------------------------

    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. Significant and prolonged premiums and discounts, 
significant premium/discount volatility, high fees, insufficient 
disclosures, and technical hurdles are putting U.S. investor money at 
risk on a daily basis, via risks 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 
significant and prolonged premiums and discounts, significant premium/
discount 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 designed to reduce the 
likelihood of

[[Page 47188]]

significant and prolonged premiums and discounts with its open-ended 
nature as well as the ability of market participants (i.e., market 
makers and authorized participants) to create and redeem on a daily 
basis.
    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 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/discount 
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 \72\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\73\ 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.\74\
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    \72\ 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. The Exchange also notes that it has 
surveillance sharing agreements in place with several spot bitcoin 
exchanges.
    \73\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \74\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\75\
---------------------------------------------------------------------------

    \75\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    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 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 NAV is based on 
the price of bitcoin on the principal market, which identified market 
must be an active market with orderly transactions. Further, the Trust 
only allows for in-kind creation and redemption, which, as further 
described above, reduces the potential for manipulation of the Shares 
through manipulation of the Trust's methodology for calculating NAV or 
any of its individual constituents, again emphasizing that a potential 
manipulator of the Shares would have to manipulate the entirety of the 
bitcoin spot market, which is led by the Bitcoin Futures market. As 
such, the Exchange believes that part (a) of the significant market 
test outlined above is satisfied and that common membership in ISG 
between the Exchange and CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange 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.\76\ 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

[[Page 47189]]

Futures markets, satisfying part (b) of the test outlined above.
---------------------------------------------------------------------------

    \76\ 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).\77\ 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.
---------------------------------------------------------------------------

    \77\ 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 methodology 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 valuation methodology 
significantly less important. Specifically, because the Trust will not 
accept cash to buy bitcoin in order to create new shares, will charge 
fees as a percentage of the Trust's bitcoin holdings measure in bitcoin 
and not in dollars, and, barring a forced redemption of the Trust or 
under other extraordinary circumstances, will not 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. 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 valuation methodology because there is little 
financial incentive to do so.
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 related to the price 
of bitcoin, 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.
    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. 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

[[Page 47190]]

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:

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-2021-052 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-2021-052. 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-2021-052 and should be submitted 
on or before September 13, 2021.
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    \78\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\78\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-17965 Filed 8-20-21; 8:45 am]
BILLING CODE 8011-01-P


