[Federal Register Volume 86, Number 210 (Wednesday, November 3, 2021)]
[Notices]
[Pages 60695-60717]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93445; File No. SR-NYSEArca-2021-89]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Proposed Rule Change To List and Trade Shares of the Bitwise Bitcoin 
ETP Trust Under NYSE Arca Rule 8.201-E

October 28, 2021.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on October 14, 2021, NYSE Arca, Inc. (``NYSE Arca'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``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\ 15 U.S.C. 78a.
    \3\ 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

    The Exchange proposes to list and trade shares of the Bitwise 
Bitcoin ETP Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares). The proposed change is available on the Exchange's website at 
www.nyse.com, at the principal office of the Exchange, 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 self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
Bitwise

[[Page 60696]]

Bitcoin ETP Trust (the ``Trust''),\4\ under NYSE Arca Rule 8.201-E, 
which governs the listing and trading of Commodity-Based Trust 
Shares.\5\
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    \4\ The Trust is a Delaware statutory trust that was formerly 
known as the Bitwise Bitcoin ETF Trust. On October 14, 2021, the 
Trust filed with the Commission an initial registration statement 
(the ``Registration Statement'') on Form S-1 under the Securities 
Act of 1933 (15 U.S.C. 77a). The description of the operation of the 
Trust herein is based, in part, on the Registration Statement.
    \5\ Commodity-Based Trust Shares are securities issued by a 
trust that represents investors' discrete identifiable and undivided 
beneficial ownership interest in the commodities deposited into the 
trust.
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    According to the Registration Statement, the Trust will not be 
registered as an investment company under the Investment Company Act of 
1940,\6\ and is not required to register thereunder. The Trust is not a 
commodity pool for purposes of the Commodity Exchange Act.\7\
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    \6\ 15 U.S.C. 80a-1.
    \7\ 17 U.S.C. 1.
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    The Exchange represents that the Shares satisfy the requirements of 
NYSE Arca Rule 8.201-E and thereby qualify for listing on the 
Exchange.\8\
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    \8\ With respect to the application of Rule 10A-3 (17 CFR 
240.10A-3) under the Act, the Trust relies on the exemption 
contained in Rule 10A-3(c)(7).
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Bitwise Bitcoin ETP Trust
Operation of the Trust \9\
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    \9\ The description of the operation of the Trust, the Shares 
and the bitcoin market contained herein are based, in part, on the 
Registration Statement. See note 4, supra.
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    The Trust will issue the Shares, which represent units of undivided 
beneficial ownership of the Trust. The Trust is a Delaware statutory 
trust and will operate pursuant to a trust agreement (the ``Trust 
Agreement'') between Bitwise Investment Advisers, LLC (the ``Sponsor'' 
or ``Bitwise'') and Delaware Trust Company, as the Trust's trustee (the 
``Trustee''). The Trust will engage a third party custodian to act as 
the bitcoin custodian for the Trust (the ``Bitcoin Custodian'') to 
maintain custody of the Trust's bitcoin assets.\10\ The Trust will 
engage a third party service provider to serve as the administrator and 
transfer agent (in such capacities, the ``Administrator'' and the 
``Transfer Agent'').
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    \10\ When capitalized, references to ``Bitcoin'' are to the 
Bitcoin network or the Bitcoin protocol. When lowercase, references 
to ``bitcoin'' are to the digital asset native to the Bitcoin 
network, which asset is the underlying commodity held by the Trust.
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    According to the Registration Statement, the investment objective 
of the Trust is to seek to provide exposure to the value of bitcoin 
held by the Trust, less the expenses of the Trust's operations. In 
seeking to achieve its investment objective, the Trust will hold 
bitcoin and establish its Net Asset Value (``NAV'') at the end of every 
business day by reference to the CF Bitcoin-Dollar US Settlement Price 
(``CME US Reference Rate'').\11\
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    \11\ The CME US Reference Rate is a daily reference rate of the 
US Dollar price of one bitcoin, calculated at 4:00 p.m. E.T. The CME 
US Reference Rate utilizes the same methodology as the CME CF 
Bitcoin Reference Rate (the ``CME UK Reference Rate''), which is 
calculated at 4:00 p.m. London time and was designed by the CME 
Group and Crypto Facilities Ltd to facilitate the development of 
financial products, including the cash settlement of Bitcoin Futures 
traded on the Chicago Mercantile Exchange (``CME''). Andrew Paine 
and William J. Knottenbelt, ``Analysis of the CME CF Bitcoin 
Reference Rate and CME CF Bitcoin Real Time Index,'' Imperial 
College Centre for Cryptocurrency Research and Engineering, November 
14, 2016, available at https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf.
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    Under normal circumstances, the Trust's only asset will be bitcoin, 
and, under limited circumstances, cash. The Trust will not use 
derivatives that may subject the Trust to counterparty and credit 
risks.\12\ The Trust will process all creations and redemptions in-
kind, and accrue all ordinary fees in bitcoin (rather than cash), as a 
way of seeking to ensure that the Trust holds the desired amount of 
bitcoin-per-share. The Trust will not purchase or sell bitcoin, other 
than if the Trust liquidates or must pay expenses not contractually 
assumed by the Sponsor. Instead, financial institutions authorized to 
create and redeem Shares (each, an ``Authorized Participant'') will 
deliver, or cause to be delivered, bitcoin to the Trust in exchange for 
Shares of the Trust, and the Trust will deliver bitcoin to Authorized 
Participants when those Authorized Participants redeem Shares of the 
Trust.
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    \12\ The Trust may sell bitcoin and temporarily hold cash as 
part of a liquidation of the Trust or to pay certain extraordinary 
expenses not assumed by the Sponsor. Under the Trust Agreement, the 
Sponsor has agreed to assume the normal operating expenses of the 
Trust, subject to certain limitations. For example, the Trust will 
bear any indemnification or litigation liabilities as extraordinary 
expenses.
    In addition, the Trust may, from time to time, passively 
receive, by virtue of holding bitcoin, certain additional digital 
assets (``IR Assets'') or rights to receive IR Assets (``Incidental 
Rights'') through a fork of the Blockchain or an airdrop of assets. 
The Trust Agreement requires that the Sponsor analyze as soon as 
possible, whether or not such Incidental Rights and IR Assets should 
be disclaimed. In the event the Sponsor instructs the Bitcoin 
Custodian to claim such Incidental Rights and IR Assets, it will 
immediately distribute such Incidental Rights and IR Assets to 
shareholders of record.
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Bitcoin, Bitcoin Market, Bitcoin Trading Platforms and Regulation of 
Bitcoin
    The following sections, drawn from the Registration Statement, 
describe bitcoin, including the historical development of bitcoin and 
the Bitcoin network, how a person holds bitcoin, how to use bitcoin in 
transactions, the ``exchange'' market where bitcoin can be bought, held 
and sold, and the bitcoin ``over-the-counter'' (``OTC'') market.
Bitcoin
    Bitcoin was first described in a white paper released in 2008 and 
published under the name ``Satoshi Nakamoto.'' The protocol underlying 
Bitcoin was subsequently released in 2009 as open source software and 
currently operates on a worldwide network of computers.
    The Bitcoin network utilizes a digital asset known as ``bitcoin,'' 
which can be transferred among parties via the internet. Unlike other 
means of electronic payments such as credit card transactions, one of 
the advantages of bitcoin is that it can be transferred without the use 
of a central administrator or clearing agency. As a central party is 
not necessary to administer bitcoin transactions or maintain the 
bitcoin ledger, the term decentralized is often used in descriptions of 
bitcoin. Unless it is using a third party service provider, a party 
transacting in bitcoin is generally not afforded some of the 
protections that may be offered by intermediaries.
    The first step in using the Bitcoin network for transactions is to 
download specialized software referred to as a ``bitcoin wallet.'' A 
user's bitcoin wallet can run on a computer or smartphone, and can be 
used both to send and to receive bitcoin. Within a bitcoin wallet, a 
user can generate one or more unique ``bitcoin addresses,'' which are 
conceptually similar to bank account numbers. After establishing a 
bitcoin address, a user can send or receive bitcoin from his or her 
bitcoin address to another user's bitcoin address. Sending bitcoin from 
one bitcoin address to another is similar in concept to sending a bank 
wire from one person's bank account to another person's bank account; 
however, such transactions are not managed by an intermediary and 
erroneous transactions generally may not be reversed or remedied once 
sent.
    The amount of bitcoin associated with each bitcoin address, as well 
as each bitcoin transaction to or from such bitcoin address, is 
transparently reflected in the Bitcoin network's distributed ledger 
(``Blockchain'') and can be viewed by websites that operate as 
``Blockchain explorers.'' Copies of the Blockchain exist on thousands 
of computers on the Bitcoin network throughout the internet. A user's 
bitcoin wallet will either contain a copy of the Blockchain or be able 
to connect with another computer that holds a copy of

[[Page 60697]]

the Blockchain. The innovative design of the Bitcoin network protocol 
allows each Bitcoin user to trust that their copy of the Blockchain 
will generally be updated consistent with each other user's copy.
    When a Bitcoin user wishes to transfer bitcoin to another user, the 
sender must first request a Bitcoin address from the recipient. The 
sender then uses his or her Bitcoin wallet software to create a 
proposed transaction that is confirmed and settles when included in the 
Blockchain. The transaction would reduce the amount of bitcoin 
allocated to the sender's address and increase the amount allocated to 
the recipient's address, in each case by the amount of bitcoin desired 
to be transferred. The transaction is completely digital in nature, 
similar to a file on a computer, and it can be sent to other computers 
participating in the Bitcoin network; however, the use of cryptographic 
verification is believed to prevent the ability to duplicate or 
counterfeit bitcoin.
Bitcoin Protocol
    The Bitcoin protocol is built using open source software allowing 
for any developer to review the underlying code and suggest changes. 
There is no official company or group responsible for making 
modifications to Bitcoin. There are, however, a number of individual 
developers that regularly contribute to the reference software known as 
``Bitcoin Core,'' a specific distribution of Bitcoin software that 
provides the de-facto standard for the Bitcoin protocol.
    Significant changes to the Bitcoin protocol are typically 
accomplished through a so-called ``Bitcoin Improvement Proposal'' or 
BIP. Such proposals are generally posted on websites, and the proposals 
explain technical requirements for the protocol change as well as 
reasons why the change should be accepted by users. Because Bitcoin has 
no central authority, updating the reference software's Bitcoin 
protocol will not immediately change the Bitcoin network's operations. 
Instead, the implementation of a change is achieved by users (including 
transaction validators known as ``miners'') downloading and running the 
updated versions of Bitcoin Core or other Bitcoin software that abides 
by the new Bitcoin protocol. Users and miners must accept any changes 
made to the Bitcoin source code by downloading a version of their 
Bitcoin software that incorporates the proposed modification of the 
Bitcoin network's source code. A modification of the Bitcoin network's 
source code or protocol is only effective with respect to those Bitcoin 
users and miners who download it. If an incompatible modification is 
accepted by a less than overwhelming percentage of users and miners, a 
division in the Bitcoin network will occur such that one network will 
run the pre-modification source code and the other network will run the 
modified source code. Such a division is known as a ``fork'' in the 
Bitcoin network.
Bitcoin Transactions
    A bitcoin transaction is similar in concept to an irreversible 
digital check. The transaction contains the sender's bitcoin address, 
the recipient's bitcoin address, the amount of bitcoin to be sent, a 
transaction fee and the sender's digital signature. Bitcoin 
transactions are secured by cryptography known as ``public-private key 
cryptography,'' represented by the bitcoin addresses and digital 
signature in a transaction's data file. Each Bitcoin network address, 
or wallet, is associated with a unique ``public key'' and ``private 
key'' pair, both of which are lengthy alphanumeric codes, derived 
together and possessing a unique relationship.
    The use of key pairs is a cornerstone of the Bitcoin network 
technology. This is because the use of a private key is the only 
mechanism by which a bitcoin transaction can be signed. If a private 
key is lost, the corresponding bitcoin is thereafter permanently non-
transferable. Moreover, the theft of a private key provides the thief 
immediate and unfettered access to the corresponding bitcoin. Bitcoin 
users must therefore understand that in this regard, bitcoin is similar 
to cash: That is, the person or entity in control of the private key 
corresponding to a particular quantity of bitcoin has de facto control 
of the bitcoin.
    The public key is visible to the public and analogous to the 
Bitcoin network address. The private key is a secret and is used to 
digitally sign a transaction in a way that proves the transaction has 
been signed by the holder of the public-private key pair, and without 
having to reveal the private key. A user's private key must be kept 
safe in accordance with appropriate controls and procedures to ensure 
it is used only for legitimate and intended transactions. If an 
unauthorized third person learns of a user's private key, that third 
person could apply the user's digital signature without authorization 
and send the user's bitcoin to their or another bitcoin address, 
thereby stealing the user's bitcoin. Similarly, if a user loses his 
private key and cannot restore such access (e.g., through a backup), 
the user may permanently lose access to the bitcoin associated with 
that private key and bitcoin address.
    To prevent the possibility of double-spending of bitcoin, each 
validated transaction is recorded, time stamped and publicly displayed 
in a ``block'' in the Blockchain, which is publicly available. Thus, 
the Bitcoin network provides confirmation against double-spending by 
memorializing every transaction in the Blockchain, which is publicly 
accessible and downloaded in part or in whole by all users of the 
Bitcoin network software program. Any user may validate, through their 
Bitcoin wallet or a Blockchain explorer, that each transaction in the 
Bitcoin network was authorized by the holder of the applicable private 
key, and Bitcoin network mining software consistent with reference 
software requirements validates each such transaction before including 
it in the Blockchain. This cryptographic security ensures that bitcoin 
transactions may not generally be counterfeited, although it does not 
protect against the ``real world'' theft or coercion of use of a 
Bitcoin user's private key, including the hacking of a Bitcoin user's 
computer or a service provider's systems.
    A Bitcoin transaction between two parties is recorded if included 
in a valid block added to the Blockchain, when that block is accepted 
as valid through consensus formation among Bitcoin network 
participants. A block is validated by confirming the cryptographic hash 
value included in the block's data and by the block's addition to the 
longest confirmed Blockchain on the Bitcoin network. For a transaction, 
inclusion in a block in the Blockchain constitutes a ``confirmation'' 
of validity. As each block contains a reference to the immediately 
preceding block, additional blocks appended to and incorporated into 
the Blockchain constitute additional confirmations of the transactions 
in such prior blocks, and a transaction included in a block for the 
first time is confirmed once against double-spending. This layered 
confirmation process makes changing historical blocks (and reversing 
transactions) exponentially more difficult the further back one goes in 
the Blockchain.
    The process by which bitcoin are created and bitcoin transactions 
are verified is called ``mining.'' To begin mining, a user, or 
``miner,'' can download and run a mining ``client,'' which, like 
regular Bitcoin network software programs, turns the user's computer 
into a ``node'' on the Bitcoin network, and in this case has the 
ability to validate transactions and add new blocks of transactions to 
the Blockchain.

[[Page 60698]]

    Miners, through the use of the bitcoin software program, engage in 
a set of prescribed, complex mathematical calculations in order to 
verify transactions and compete for the right to add a block of 
verified transactions to the Blockchain and thereby confirm bitcoin 
transactions included in that block's data. The miner who successfully 
``solves'' the complex mathematical calculations has the right to add a 
block of transactions to the Blockchain and is then rewarded by a grant 
of bitcoin, known as a ``coinbase,'' plus any transaction fees paid for 
the transactions included in such block. Bitcoin is created and 
allocated by the Bitcoin network protocol and distributed through 
mining, subject to a strict, well-known issuance schedule. The supply 
of bitcoin is programmatically limited to 21 million bitcoin in total. 
As of March 1, 2021, approximately 18,643,000 bitcoin had been mined.
    Confirmed and validated bitcoin transactions are recorded in blocks 
added to the Blockchain. Each block contains the details of some or all 
of the most recent transactions that are not memorialized in prior 
blocks, as well as a record of the award of bitcoin to the miner who 
added the new block. Each unique block can only be solved and added to 
the Blockchain by one miner, therefore, all individual miners and 
mining pools on the Bitcoin network must engage in a competitive 
process of constantly increasing their computing power to improve their 
likelihood of solving for new blocks. As more miners join the Bitcoin 
network and its processing power increases, the Bitcoin network adjusts 
the complexity of a block-solving equation to maintain a predetermined 
pace of adding a new block to the Blockchain approximately every ten 
minutes.
The Bitcoin Market and Bitcoin Trading Platforms
    In addition to using bitcoin to engage in transactions, investors 
may purchase and sell bitcoin to speculate as to the value of bitcoin 
in the bitcoin market, or as a long-term investment to diversify their 
portfolio. The value of bitcoin within the market is determined, in 
part, by (i) the supply of and demand for bitcoin in the bitcoin 
market, (ii) market expectations for the expansion of investor interest 
in bitcoin and the adoption of bitcoin by users, (iii) the number of 
merchants that accept bitcoin as a form of payment, and (iv) the volume 
of private end-user-to-end-user transactions.
    Although the value of bitcoin is determined by the value that two 
transacting market participants place on bitcoin through their 
transaction, the most common means of determining a reference value is 
by surveying one or more trading platforms where secondary markets for 
bitcoin exist. The most prominent bitcoin trading platforms are often 
referred to as ``exchanges'', although they neither report trade 
information nor are they regulated in the same way as a national 
securities exchange. As such, there is some difference in the form, 
transparency and reliability of trading data from bitcoin trading 
platforms. Generally speaking, bitcoin data is available from these 
trading platforms with publicly disclosed valuations for each executed 
trade, measured against a fiat currency such as the US Dollar or Euro, 
or against another digital asset (for example, bitcoin trades against 
the US Dollar are reflected in the ``USD-BTC Pair'').
    Currently, there are many bitcoin trading platforms operating 
worldwide and trading platforms represent a substantial percentage of 
bitcoin buying and selling activity, and, therefore, provide large data 
sets for the market valuation of bitcoin. A bitcoin trading platform 
provides investors with a way to purchase and sell bitcoin, similar to 
stock exchanges like the New York Stock Exchange or NASDAQ, which 
provide ways for investors to buy stocks and bonds in the so-called 
``secondary market.'' Unlike stock exchanges, which are regulated to 
monitor securities trading activity, bitcoin trading platforms are 
largely regulated as money services businesses (or a foreign regulatory 
equivalent) and are required to monitor for and detect money-laundering 
and other illicit financing activities that may take place on their 
platform. Bitcoin trading platforms operate websites designed to permit 
investors to open accounts with the trading platform and then purchase 
and sell bitcoin.
    As with conventional stock exchanges, an investor opening a trading 
account and wishing to transact at a bitcoin trading platform must 
deposit an accepted government-issued currency into their account, or a 
previously acquired digital asset. The process of establishing an 
account with a bitcoin trading platform and trading bitcoin is 
different from, and should not be confused with, the process of users 
sending bitcoin from one bitcoin address to another bitcoin address, 
such as to pay for goods and services. This latter process is an 
activity that occurs wholly within the confines of the Bitcoin network, 
while the former is an activity that occurs largely on private websites 
and databases owned by the trading platform.
    In addition to the bitcoin trading platforms that provide spot 
markets for bitcoin, an OTC trading market has emerged for digital 
assets. The bitcoin OTC market demonstrates flexibility in terms of 
quotes, price, size, and other factors. The OTC market has no formal 
structure and no open-outcry meeting place, and typically involves 
bilateral agreements on a principal-to-principal basis. Parties 
engaging in OTC transactions will agree upon a price--often via phone, 
email, or chat--and then one of the two parties will initiate the 
transaction. For example, a seller of bitcoin could initiate the 
transaction by sending the bitcoin to the buyer's bitcoin address. The 
buyer would then wire US Dollars to the seller's bank account. OTC 
trading tends to occur in large blocks of bitcoin. All risks and issues 
related to creditworthiness are between the parties directly involved 
in the transaction. OTC market participants include institutional 
entities, such as hedge funds, family offices, private wealth managers, 
high-net-worth individuals that trade bitcoin on a proprietary basis, 
and brokers that offer two-sided liquidity for bitcoin.
    Beyond the spot bitcoin trading platforms and the OTC market, a 
number of unregulated bitcoin derivatives trading platforms exist that 
offer traders the ability to gain leveraged and/or short exposure to 
the price of bitcoin through perpetual futures, quarterly futures, and 
other derivative contracts.
    Finally, the trading of regulated bitcoin futures contracts 
launched on the CME in December 2017.\13\ A further discussion of the 
CME bitcoin futures market (``CME Market'') is included in the section 
entitled ``Standard for Approval--The CME Market,'' below.
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    \13\ See note 25, infra.
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    Authorized Participants will have the option of purchasing and 
selling bitcoin used in Creation Unit transactions with the Trust 
either on bitcoin trading platforms, in the OTC markets, or in direct 
bilateral transactions. In addition, Authorized Participants may 
utilize futures to hedge bitcoin exposure relating to the purchase and 
redemption of Creation Units.
Valuation of the Trust's Bitcoin
The CME US Reference Rate, CME UK Reference Rate and CME Bitcoin Real 
Time Price
    According to the Registration Statement, the CME UK Reference Rate 
was established by the CME Group and

[[Page 60699]]

Crypto Facilities Ltd. to be used in the creation of financial products 
tied to bitcoin. The CME UK Reference Rate is fixed once per day at 
4:00 p.m. London time, based on the methodology set forth below and 
applying data from constituent trading platforms (``Constituent 
Platforms''). The CME US Reference Rate was introduced in February 2021 
and is designed to apply the CME UK Reference Rate methodology, but 
with a fix once per day at 4:00 p.m. Eastern time (``E.T.''). Although 
the CME UK Reference Rate has a longer history and is used to settle 
bitcoin futures on the CME Market, the Trust has determined to utilize 
the CME US Reference Rate to establish the NAV because the CME US 
Reference Rate is calculated as of the same time as the NAV and is 
based on the same methodology and data sources as the CME UK Reference 
Rate.
    The CME Group and Crypto Facilities Ltd. also publish a continuous 
real-time bitcoin price index, known as the ``CME Bitcoin Real Time 
Price,'' using data from the Constituent Platforms.
    The CME US Reference Rate, CME UK Reference Rate and CME Bitcoin 
Real Time Price are administered by Crypto Facilities Ltd., with the 
selection of Constituent Platforms performed by an oversight 
committee.\14\ A trading platform is eligible to be selected as a 
Constituent Platform if it facilitates spot trading of bitcoin against 
the USD-BTC Pair and makes trade data and order data available through 
an Automatic Programming Interface with sufficient reliability, detail 
and timeliness. Additional initial and continuing eligibility 
requirements apply to the Constituent Platforms.
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    \14\ This summary does not represent a complete description of 
the CME US Reference Rate, the CME UK Reference Rate and CME Bitcoin 
Real Time Price. Additional information on administration and 
methodologies, may be found at CF Benchmarks' website, available at 
https://www.cfbenchmarks.com/indices/XBTUSD_US_RR, https://www.cfbenchmarks.com/indices/BRR, and https://www.cfbenchmarks.com/indices/BRTI. The CME US Reference Rate, the CME UK Reference Rate 
and CME Bitcoin Real Time Price are registered benchmarks under the 
European Benchmarks Regulation.
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    Each of the CME US Reference Rate, which has been calculated and 
published since February 2021, and CME UK Reference Rate, which has 
been calculated and published since November 2016, aggregates during a 
calculation window the trade flow of several spot bitcoin trading 
platforms into the US Dollar price of one bitcoin as of their 
respective calculation time. Specifically, the CME US Reference Rate is 
calculated based on the ``Relevant Transactions'' (as defined below) of 
each of its Constituent Platforms, which are currently Bitstamp, 
Coinbase, Gemini, itBit and Kraken, as follows:
    1. All Relevant Transactions are added to a joint list, recording 
the trade price and size for each transaction.
    2. The list is partitioned into a number of equally-sized time 
intervals.
    3. For each partition separately, the volume-weighted median trade 
price is calculated from the trade prices and sizes of all Relevant 
Transactions. A volume-weighted median differs from a standard median 
in that a weighting factor, in this case trade size, is factored into 
the calculation.
    4. The CME US Reference Rate or CME UK Reference Rate, as 
applicable, is then determined by the equally-weighted average of the 
volume-weighted medians of all partitions.
    The CME Bitcoin Real Time Price uses similar data sources, but is 
calculated once per second based on the weighted mid-price-volume 
curve, which is a measure of the active bid and ask volume present on a 
Constituent Platform's order book.
    The CME US Reference Rate, CME UK Reference Rate, and CME Bitcoin 
Real Time Price do not include any bitcoin futures prices in their 
respective methodologies. A ``Relevant Transaction'' is any 
``cryptocurrency versus legal tender spot trade that occurs during the 
TWAP [Time Weighted Average Price] Period'' on a Constituent Platform 
in the USD-BTC Pair that is reported and disseminated by Crypto 
Facilities Ltd., as calculation agent for the CME US Reference Rate, 
CME UK Reference Rate and CME Bitcoin Real Time Price.
Net Asset Value
    Under normal circumstances, the Trust's only asset will be bitcoin. 
The Trust's bitcoin are carried, for financial statement purposes, at 
fair value, as required by the U.S. generally accepted accounting 
principles (``GAAP''). The Trust's NAV and NAV per Share will be 
determined by the Administrator once each Exchange trading day as of 
4:00 p.m. E.T., or as soon thereafter as practicable. The Administrator 
will calculate the NAV by multiplying the number of bitcoin held by the 
Trust by the CME US Reference Rate for such day, and subtracting the 
accrued but unpaid expenses and liabilities of the Trust. The NAV per 
Share is calculated by dividing the NAV by the number of Shares then 
outstanding. The Administrator will determine the price of the Trust's 
bitcoin by reference to the CME US Reference Rate, which is published 
and calculated as set forth above.
Intraday Trust Value
    In order to provide updated pricing information relating to the 
Shares for use by investors and market professionals throughout the 
domestic trading day, the Exchange will calculate and disseminate 
throughout the core trading session, every 15 seconds each trading day, 
an intraday trust value (``ITV''). The ITV will be calculated 
throughout the trading day by using the prior day's holdings at close 
of business and the most recently reported price level of the CME 
Bitcoin Real Time Price as reported by Bloomberg, L.P. or another 
reporting service, or another price of bitcoin derived from updated 
bids and offers indicative of the spot price of bitcoin. The ITV will 
be widely disseminated by one or more major market data vendors during 
the NYSE Arca Core Trading Session.
Creation and Redemption of Shares; In-Kind Transaction Activity
The Trust Shares
    According to the Registration Statement, the Shares shall represent 
undivided beneficial ownership of the Trust. The Trust creates and 
redeems Shares from time to time, but only in one or more Creation 
Units. A Creation Unit is only made in exchange for delivery to the 
Trust or the distribution by the Trust of the amount of bitcoin 
represented by the Creation Unit being created or redeemed, the amount 
of which is representative of the combined NAV of the number of Shares 
included in the Creation Units being created or redeemed determined as 
of 4:00 p.m. E.T. on the day the order to create or redeem Creation 
Units is properly received. Except when aggregated in Creation Units or 
under extraordinary circumstances permitted under the Trust Agreement, 
the Shares are not redeemable securities. A Creation Unit will 
initially consist of at least 25,000 Shares, but may be subject to 
change.
    Authorized Participants are the only persons that may place orders 
to create and redeem Creation Units. Authorized Participants must be 
(i) registered broker-dealers or other securities market participants, 
such as banks and other financial institutions, that are not required 
to register as broker-dealers to engage in securities transactions 
described below, and (ii) Depository Trust Company (``DTC'') 
Participants. To become an Authorized Participant, a person must enter 
into an Authorized Participant Agreement with the Trust and/or the 
Trust's marketing agent (the ``Marketing Agent'').

[[Page 60700]]

Creation Procedures
    On any business day, an Authorized Participant may create Shares by 
placing an order to purchase one or more Creation Units with the 
Transfer Agent through the Marketing Agent. Such orders are subject to 
approval by the Marketing Agent and the Transfer Agent. For purposes of 
processing creation and redemption orders, a ``business day'' means any 
day other than a day when the Exchange is closed for regular trading. 
To be processed on the date submitted, creation orders generally must 
be placed before 4 p.m. E.T. or the close of regular trading on the 
Exchange, whichever is earlier. The day on which an order is received 
by the Transfer Agent and approved by the Marketing Agent, is 
considered the creation order date.
    All Creation Units are processed in-kind. By placing a creation 
order, an Authorized Participant agrees to deposit, or cause to be 
deposited, bitcoin with the Trust by initiating a Bitcoin transaction 
to a Bitcoin network address identified by the Trust. Prior to the 
delivery of Creation Units for a creation order, the Authorized 
Participant must also have wired to the Transfer Agent the 
nonrefundable transaction fee due for the creation order. Authorized 
Participants may not withdraw a creation request. If an Authorized 
Participant fails to consummate the foregoing, the order may be 
cancelled.
    The total creation deposit amount required to create each Creation 
Unit 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 creation order is in 
proportion to the total number of Shares outstanding on the date the 
order is received. The Sponsor causes to be published each business day 
morning, prior to the commencement of trading on the Exchange, the 
amount of bitcoin that will be required to be deposited in exchange for 
one Creation Unit for such business day.
Redemption Procedures
    According to the Registration Statement, the procedures by which an 
Authorized Participant can redeem one or more Creation Units mirror the 
procedures for the creation of Creation Units. On any business day, an 
Authorized Participant may place an order with the Transfer Agent 
through the Marketing Agent to redeem one or more Creation Units. To be 
processed on the date submitted, redemption orders generally must be 
placed before 4 p.m. E.T. or the close of regular trading on the 
Exchange, whichever is earlier. A redemption order will be effective on 
the date it is received by the Administrator and approved by the 
Marketing Agent (``Redemption Order Date''). The redemption procedures 
allow Authorized Participants to redeem Creation Units and do not 
entitle an individual shareholder to redeem any Shares in an amount 
less than a Creation Unit, or to redeem Creation Units other than 
through an Authorized Participant.
    The redemption distribution from the Trust will consist of a 
transfer to the redeeming Authorized Participant, or its agent, of an 
amount of bitcoin representing the amount of bitcoin held by the Trust 
evidenced by the Shares being redeemed. The redemption distribution 
amount is determined in the same manner as the determination of the 
bitcoin deposit amount discussed above. The Sponsor causes to be 
published each business day morning, prior to the commencement of 
trading on the Exchange, the redemption distribution amount relating to 
a Creation Unit applicable for such business day.
    The redemption distribution due from the Trust will be delivered 
once the Transfer Agent notifies the Bitcoin Custodian and the Sponsor 
that the Authorized Participant has delivered the Shares represented by 
the Creation Units to be redeemed to the Trust's DTC account. If the 
Trust's DTC account has not been credited with all of the Shares of the 
Creation Units to be redeemed, the redemption distribution will be 
delayed until such time as the Transfer Agent confirms receipt of all 
such Shares.
    Once the Transfer Agent notifies the Bitcoin Custodian and the 
Sponsor that the Shares have been received in the Trust's DTC account, 
the Sponsor will instruct the Bitcoin Custodian to transfer the 
redemption bitcoin amount from the Trust Bitcoin Account to the 
Authorized Participant's bitcoin custody account. All redemption orders 
are processed in-kind. By placing a redemption order, an Authorized 
Participant agrees to receive bitcoin. If an Authorized Participant 
fails to consummate the foregoing, the order may be cancelled.
Fee Accrual
    According to the Registration Statement, the only ordinary expense 
of the Trust is expected to be the Sponsor's fee, which shall accrue 
daily in bitcoin and be payable monthly in bitcoin.
Impact of the Exclusive Use of In-Kind Creations, Redemptions and Fee 
Accruals
    The Sponsor believes that the exclusive use of in-kind creations, 
redemptions and fee accruals, in all situations except when the Trust 
is required to liquidate or to pay extraordinary expenses, provides 
long-term investors in the Trust with redundant but strong protection. 
The in-kind structure ensures that the Trust maintains the appropriate 
amount of bitcoin-per-Share in all scenarios, regardless of the US 
Dollar calculation of NAV or the CME US Reference Rate.
Standard for Approval
How the Exchange's Proposed Rule Conforms to the Requirements of the 
Act
    To date, the Commission has considered and published disapproval 
orders relating to numerous proposed exchange-traded products 
(``ETPs'') providing exposure to the price of bitcoin, including a 
prior proposal in respect of the Trust.\15\ In each of these 
disapprovals, the Commission

[[Page 60701]]

determined that the filing failed to demonstrate that the proposal was 
consistent with the requirements of Section 6(b)(5) of the Act \16\ 
and, in particular, the requirement that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices.\17\
---------------------------------------------------------------------------

    \15\ See, e.g., Order Disapproving a Proposed Rule Change, as 
Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares, to List and Trade Shares Issued by the 
Winklevoss Bitcoin Trust, Release No. 34-80206 (Mar. 10, 2017), 82 
FR 14076 (March 16, 2017); Order Disapproving a Proposed Rule 
Change, as Modified by Amendment No. 1, Relating to the Listing and 
Trading of Shares of the SolidX Bitcoin Trust under NYSE Arca 
Equities Rule 8.201, Release No. 34-80319 (Mar. 28, 2017), 82 FR 
16247 (April 3, 2017); Order Setting Aside Action by Delegated 
Authority and Disapproving a Proposed Rule Change, as Modified by 
Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss 
Bitcoin Trust (``Second Winklevoss Order''), Release No. 34-83723 
(July 26, 2018), 83 FR 37579 (August 1, 2018); Order Disapproving a 
Proposed Rule Change to List and Trade the Shares of the ProShares 
Bitcoin ETF and the ProShares Short Bitcoin ETF, Release No. 34-
83904 (Aug. 22, 2018), 83 FR 43934 (August 28, 2018); Order 
Disapproving a Proposed Rule Change Relating to Listing and Trading 
of the Direxion Daily Bitcoin Shares, Release No. 34-83912 (Aug. 22, 
2018), 83 FR 43912 (August 28, 2018); Order Disapproving a Proposed 
Rule Change to List and Trade the Shares of the GraniteShares 
Bitcoin ETF and the GraniteShares Short Bitcoin ETF (``GraniteShares 
Order''), Release No. 34-83913 (Aug. 22, 2018), 83 FR 43923 (August 
28, 2018); Order Disapproving a Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to the Listing and Trading of Shares of 
the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E 
(``Bitwise Order''), Release No. 34-87267 (Oct. 9, 2019), 84 FR 
55382 (October 16, 2019) (subsequently withdrawn while the delegated 
action was under review by the Commission on Jan. 13, 2020; see SR-
NYSEArca-2019-01, 85 FR 73819 (November 19, 2020); Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
to Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares) and 
to List and Trade Shares of the United States Bitcoin and Treasury 
Investment Trust Under NYSE Arca Rule 8.201-E, Release No. 34-88284 
(February 26, 2020), 85 FR 12595 (March 3, 2020) (``USBT Order'').
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ In the Second Winklevoss Order, Bitwise Order and USBT 
Order, the Commission determined that the proposing exchange had not 
established that bitcoin markets were uniquely resistant to fraud or 
manipulation, which unique resistance might provide protections such 
that the proposing exchange ``would not necessarily need to enter 
into a surveillance sharing agreement with a regulated significant 
market.'' Second Winklevoss Order 83 FR at 37591, Bitwise Order 84 
FR at 55386, and USBT Order 85 FR at 12597. In the Second Winklevoss 
Order, GraniteShares Order, Bitwise Order and USBT Order, the 
Commission determined that, while the existing, regulated 
derivatives markets (including the CME Market) was a regulated 
market, the proposing exchanges had not demonstrated that the 
regulated derivatives markets had achieved significant size. See 
Second Winklevoss Order 83 FR at 37601, Bitwise Order 84 FR at 
55410, and USBT Order 85 FR at 12597. In the Second Winklevoss 
Order, Bitwise Order and USBT Order, the Commission determined that 
a proposing exchange had established neither that it had a 
surveillance sharing agreement with a group of underlying bitcoin 
trading platforms, nor that such bitcoin trading platforms 
constituted regulated markets of significant size with respect to 
bitcoin. See Second Winklevoss Order 83 FR 37590-37591, Bitwise 
Order 84 FR at 55407 and USBT Order 85 FR at 12615.
---------------------------------------------------------------------------

    The principal means by which a national securities exchange may 
satisfy the requirements of Section 6(b)(5) of the Act \18\ is through 
entry into comprehensive surveillance-sharing agreements that ``help to 
ensure the availability of information necessary to detect and deter 
potential manipulations and other trading abuses, thereby making [the 
ETP] less readily susceptible to manipulation.'' \19\ These 
comprehensive surveillance-sharing agreements enable the Exchange to 
obtain information necessary to detect and deter market manipulation 
and other trading abuses upon request of information from one party to 
the other.\20\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b)(5).
    \19\ See Notice of Filing and Order Granting Immediate 
Effectiveness of Proposed Rule Change by American Stock Exchange, 
Incorporated Relating to the Listing of Commodity Indexed Preferred 
or Debt Securities, Exchange Act Release No. 35518 (Mar. 21, 1995), 
60 FR 15804, 15807, 15807 n.21 (Mar. 27, 1995) (SR-Amex-94-30). See 
also Notice of Filing and Order Granting Immediate Effectiveness of 
Proposed Rule Change by American Stock Exchange, Incorporated 
Relating to the Listing of Commodity Indexed Preferred or Debt 
Securities, Exchange Act Release No. 36885 (Feb. 26, 1996), 61 FR 
8315, 8319 n.17 (Mar. 4, 1996) (SR-Amex-95-50).
    \20\ The Commission has described a comprehensive surveillance 
sharing agreement as including an agreement under which a self-
regulatory organization may expressly obtain information on (i) 
market trading activity, (ii) clearing activity and (iii) customer 
identity, and where existing rules, laws or practices would not 
impede access to such information. See Letter from Brandon Becker, 
Director, Division of Market Regulation, Commission, to Gerard D. 
O'Connell, Chairman, Intermarket Surveillance Group (June 3, 1994), 
available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm (``ISG Letter'').
    The Commission has emphasized the importance of surveillance 
sharing agreements, noting that ``[s]uch agreements provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' Amendment to Rule Filing 
Requirements for Self-Regulatory Organizations Regarding New 
Derivative Securities Products, Exchange Act Release No. 40761 (Dec. 
8, 1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-
98) (``NDSP Adopting Release'').
---------------------------------------------------------------------------

    In the Second Winklevoss Order, the Commission laid out both the 
importance and definition of a surveilled, regulated market of 
significant size. Specifically, the Commission explained that:

[for all] commodity-trust ETPs approved to date for listing and 
trading, there has been in every case at least one significant, 
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP 
listing exchange has entered into surveillance-sharing agreements 
with, or held Intermarket Surveillance Group membership in common 
with, that market.\21\
---------------------------------------------------------------------------

    \21\ Second Winklevoss Order, 83 FR 37594.

    Further, on an illustrative and not exclusive basis, the Commission 
interpreted the terms `significant market' and `market of significant 
size' to include a market (or group of markets) as to which (a) there 
is a reasonable likelihood that a person attempting to manipulate the 
ETP would also have to trade on that market to successfully manipulate 
the ETP, so that a surveillance-sharing agreement would assist the ETP 
listing market 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.\22\
---------------------------------------------------------------------------

    \22\ Id. The Commission further noted that ``[t]here could be 
other types of ``significant markets'' and ``markets of significant 
size,'' but this definition is an example that will provide guidance 
to market participants.''
---------------------------------------------------------------------------

    This two-prong definition of the term ``significant market'' came 
to be known as the ``Winklevoss Standard,'' and will be referred to as 
such in this proposal. In the Bitwise Order, the Commission built upon 
the Winklevoss Standard and provided important additional guidance on 
how a listing exchange might demonstrate that a bitcoin derivatives 
market meets the Commission's definition of ``significant'':

    [T]he lead-lag relationship between the bitcoin futures market 
and the spot market . . . is central to understanding whether it is 
reasonably likely that a would-be manipulator of the ETP would need 
to trade on the bitcoin futures market to successfully manipulate 
prices on those spot platforms that feed into the proposed ETP's 
pricing mechanism. In particular, if the spot market leads the 
futures market, this would indicate that it would not be necessary 
to trade on the futures market to manipulate the proposed ETP, even 
if arbitrage worked efficiently, because the futures price would 
move to meet the spot price.\23\
---------------------------------------------------------------------------

    \23\ Bitwise Order, 84 FR at 55411. See also USBT Order 85 FR at 
12612.

    In response to this, in the rule proposal disapproved in the USBT 
Order, the sponsor and listing exchange attempted to establish that the 
CME Market satisfied the requirements of a regulated market of 
significant size as laid out in the Bitwise Order. The rule change 
proposal referenced, among other items, a statistical analysis 
conducted by the Sponsor examining whether the CME Market led the 
bitcoin spot market from a price discovery perspective. The Commission 
rejected this argument for specific reasons, noting (among other 
---------------------------------------------------------------------------
things) that:

the [s]ponsor has not provided sufficient details supporting this 
conclusion, and unquestioning reliance by the Commission on 
representations in the record is an insufficient basis for approving 
a proposed rule change in circumstances where, as here, the 
proponent's assertion would form such an integral role in the 
Commission's analysis and the assertion is subject to several 
challenges. For example, the [s]ponsor has not provided sufficient 
information explaining its underlying analysis, including detailed 
information on the analytic methodology used, the specific time 
period analyzed, or any information that would enable the Commission 
to evaluate whether the findings are statistically significant or 
time varying.

    Nonetheless, the Commission made it clear that a future ETP 
application could potentially meet the Winklevoss Standard through 
identifying a regulated market of significant size. Specifically, the 
Commission noted that an existing or new bitcoin futures market could 
achieve significant size such that an Exchange might demonstrate, 
through a surveillance sharing agreement, that a proposed rule change 
could satisfy the requirements of the Act.\24\
---------------------------------------------------------------------------

    \24\ In past disapproval orders for bitcoin ETPs, the Commission 
acknowledged that the CME, and therefore the CME Market, is 
regulated by the CFTC, but that the proposing exchanges had not 
demonstrated that the CME Market represented a significant market. 
See note17, supra.

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

[[Page 60702]]

    As discussed in detail below, the Sponsor's analysis demonstrates 
that the Exchange can meet the burden presented by Section 6(b)(5) of 
the Act and, in particular, the requirement that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices by demonstrating that the CME Market 
(i) is a regulated market; (ii) participates in a surveillance sharing 
agreement with the Exchange; and (iii) satisfies the Commission's 
``significant market'' definition under the Winklevoss Standard.
The CME Market
    The CME Group announced the planned launch of bitcoin futures on 
October 31, 2017, the trading of which began on December 17, 2017.\25\ 
The futures are cash-settled based on the CME UK Reference Rate, the 
methodology of which is described above. Since inception, the CME 
Market has seen significant growth in average daily volume traded, open 
interest, and the number of large participants, as demonstrated in the 
charts below.\26\
---------------------------------------------------------------------------

    \25\ ``CME Group Announces Launch of Bitcoin Futures,'' October 
31, 2017, available at https://www.cmegroup.com/media-room/press-releases/2017/10/31/cme_group_announceslaunchofbitcoinfutures.html. 
At the same time as the launch of the CME Market, the Cboe Futures 
Exchange, LLC announced and subsequently launched Cboe bitcoin 
futures. See ``CFE to Commence Trading in Cboe Bitcoin (USD) Futures 
Soon,'' December 01, 2017, available at cdn.cboe.com/resources/release_notes/2017/Cboe-Bitcoin-USD-Futures-Launch-Notification.pdf. 
Each future was cash settled, with the CME Market tracking the CME 
UK Reference Rate and the Cboe bitcoin futures tracking a bitcoin 
trading platform daily auction price. The Cboe Futures Exchange, LLC 
subsequently discontinued its bitcoin futures market effective June 
2019. ``Cboe put the brakes on bitcoin futures,'' March 15, 2019, 
available at https://www.reuters.com/article/us-cboe-bitcoin/cboe-puts-the-brakes-on-bitcoin-futures-idUSKCN1QW261. The Trust uses the 
CME US Reference Rate to calculate its NAV.
    \26\ CME Group, CME bitcoin futures celebrate third anniversary: 
The year in review (December 31, 2020). ``Cumulative unique 
accounts'' refers to the number of unique accounts that had, prior 
to or on the date measured, entered on a CME Group venue into at 
least one bitcoin futures contract. ``Large open interest holders'' 
refers to a party that has entered into at least twenty-five (25) 
bitcoin futures contracts that have not yet offset by delivery.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 60703]]

[GRAPHIC] [TIFF OMITTED] TN03NO21.002

BILLING CODE 8011-01-C
    The Commission has previously recognized that the CME Market 
qualifies as a regulated market \27\ and that surveillance-sharing 
agreements are in place with the CME by virtue of common membership in 
the Intermarket Surveillance Group (``ISG'').\28\ Both the Exchange and 
the CME are members of the ISG.\29\
---------------------------------------------------------------------------

    \27\ See Bitwise Order, 84 FR at 55410, n. 456 (``the Commission 
recognizes that the CFTC comprehensively regulates CME . . .''). See 
also Second Winklevoss Order, 83 FR at 37594 & at note 202, 
GraniteShares Order 83 FR at 43929, and USBT Order, 85 FR at 12597.
    \28\ As the Commission explained in the Bitwise Order, common 
membership between a proposing exchange and a futures market such as 
the CME (and therefore the CME Market) in the ISG functions as ``the 
equivalent of a comprehensive surveillance sharing agreement.'' See 
Bitwise Order, 84 FR at 55410, n.456.
    \29\ A list of the current members of ISG is available at 
https://www.isgportal.org.
---------------------------------------------------------------------------

The CME Market Meets the Commission's Definition of a ``Significant 
Market''
    As the following analysis based on the Sponsor's research 
demonstrates, the CME Market satisfies the Commission's definition of a 
``significant market.'' \30\ Specifically, the Sponsor's analysis shows 
that prices on the CME Market consistently lead prices on the bitcoin 
spot market and the unregulated bitcoin

[[Page 60704]]

futures market, such that it is reasonably likely that a would-be 
manipulator of the ETP would need to trade bitcoin futures on the CME 
Market. The Sponsor's analysis also demonstrates that it is unlikely 
that trading in the ETP would be the predominant influence on prices in 
the CME Market.
---------------------------------------------------------------------------

    \30\ This proposal details the data sources, time periods, and 
statistical methods used by the Sponsor to demonstrate that the CME 
Market qualifies as a significant market relative to the Trust. As 
such, the surveillance sharing agreement, in place through common 
membership in the ISG, will allow the Exchange to detect and deter 
potential manipulations and other misconduct and to satisfy its 
obligations under Section 6(b)(5) of the Act. See 15 U.S.C. 
78f(b)(5).
---------------------------------------------------------------------------

Data Sources for Evaluating the Bitcoin Market
    In evaluating whether the CME Market qualifies as a significant 
market, the Sponsor has engaged in an extensive research effort to 
evaluate the lead-lag relationship between the CME Market and both the 
bitcoin spot market and the unregulated bitcoin futures market. Given 
that lead-lag and price discovery research is sensitive to data 
quality, it was critical from the beginning that the Sponsor gather 
high-quality bitcoin trading data on a historical and an ongoing basis.
    Bitcoin trading platforms exist in multiple countries and operate 
under a variety of regulatory regimes. There are generally no 
requirements for these platforms to provide data on their trading 
activity in a uniform fashion to a centralized database. As a result, 
there currently is no equivalent to the Consolidated Tape Association 
(``CTA'') in the US, which offers a single source of agreed upon 
trading data for publicly traded equities in the US.
    Over the years, however, a variety of private data providers have 
emerged that consolidate trading data from large numbers of bitcoin 
trading platforms. The Sponsor undertook a detailed survey of these 
data providers in May 2020, evaluating them on metrics including data 
quality, trading platform coverage, cost, service quality, and 
reputation. The goal of this survey was to determine which provider or 
set of providers the Sponsor would use in its research.
    The Sponsor cataloged bitcoin data providers commonly referenced in 
the industry, and supplemented this list by conducting broad web 
searches to identify additional bitcoin data providers and by 
consulting a third-party survey.\31\ Aggregating these steps resulted 
in a total of 29 firms examined by the Sponsor, of which 14 offered the 
specific type of data (bitcoin tick data) needed to conduct lead-lag 
analysis. The Sponsor evaluated these 14 firms on four separate 
criteria:
---------------------------------------------------------------------------

    \31\ See The Block, ``The State of Digital Asset Data and 
Infrastructure,'' May 14, 2020, available at https://www.theblockcrypto.com/post/63689/research-report-the-state-of-the-digital-asset-data-and-infrastructure-commissioned-by-blockset.
---------------------------------------------------------------------------

     Data coverage. All else equal, more trading platforms are 
better than fewer.
     Data quality. Data gathered by third-party providers 
should match the actual activity that takes place on each trading 
platform, with as few errors as possible.
     Cost. The cost of licensing the data from a given provider 
should be reasonable.
     Corporate Factors. Available facts should give confidence 
that the provider in question will continue to operate in a robust 
manner over a meaningful period of time.
    Data quality was weighted heavily in the assessment of data 
providers, as it has a direct impact on the output of price discovery 
research. Still, the other three factors were important as well. Based 
on this analysis, the Sponsor elected to use Coin Metrics as the core 
data provider. At the time, Coin Metrics offered coverage of 26 trading 
platforms, and had exceptionally high data quality based on the 
statistical analysis performed by the Sponsor.\32\
---------------------------------------------------------------------------

    \32\ For instance, in one portion of the study, the Sponsor 
downloaded the full record of trades (2,523,481 trades) directly 
from Bitfinex, a spot bitcoin trading platform, for the month of 
March 2020. It then compared these trades with data pulled from 
participating data providers, looking for three types of data 
errors: duplicated trades, erroneous trades, and missing trades. 
Coin Metrics had zero data errors; its competitors had between two 
and 4,929 errors in their data samples. The Sponsor repeated the 
analysis using trade data from Coinbase and LBank, two additional 
bitcoin trading platforms; Coin Metrics again had zero data errors.
---------------------------------------------------------------------------

    To supplement Coin Metrics' data, the Sponsor evaluated data 
providers that covered a large number (>100) of bitcoin trading 
platforms. Of these providers, CoinAPI scored the best on its four-
factor evaluation system, including scoring well on data quality. Based 
on this analysis, the Sponsor elected to use CoinAPI data to supplement 
Coin Metrics data where necessary to conduct its analysis.
    Data on the CME Market was obtained directly from the CME Group.
Winklevoss Standard Prong 1: Reasonable Likelihood
    The first prong of the Winklevoss Standard requires demonstrating a 
reasonable likelihood that a person attempting to manipulate a bitcoin 
ETP would also have to trade on the CME Market.\33\ In prior 
disapproval orders, the Commission stated that demonstrating a ``lead-
lag relationship'' between prices on the CME Market and the underlying 
bitcoin spot market is ``central'' to understanding this reasonable 
likelihood.\34\
---------------------------------------------------------------------------

    \33\ See note 22, supra, and accompanying text.
    \34\ See note 23, supra, and accompanying text.
---------------------------------------------------------------------------

    As detailed below, through extensive statistical analysis and 
careful consideration of third-party evaluations of these markets, the 
Sponsor has demonstrated that the CME Market leads the bitcoin spot 
market and the unregulated bitcoin futures market, such that it is 
reasonably likely that a person attempting to manipulate the ETP would 
also have to trade on the CME Market, thus satisfying the first prong 
of the Winklevoss Standard.
The Statistical Approaches to Demonstrating a Lead-Lag Relationship
    The Sponsor conducted a detailed review of both academic and 
practitioner papers that focus on lead-lag relationships in financial 
markets. The literature review revealed that there are two primary 
approaches to conducting such analysis:
     Information Share (IS)/Component Shares (CS) Price 
Discovery Analysis. This type of analysis is based on the principle 
that there is a common ``efficient'' price for any asset being traded 
on multiple platforms. It allows you to construct a model of the 
relationship between different platforms by comparing their price 
series against this common efficient price, and testing which price 
series is faster to incorporate new information; and
     Time-Shift Lead-Lag Analysis (TSLL). TSLL is a more 
intuitive approach to evaluating lead-lag relationships between 
markets. It involves taking two time series of price data and 
offsetting (or ``shifting'') them against each other to determine what 
offset, or ``lag,'' produces the highest cross-correlation between the 
two series.
    Both IS/CS price discovery analysis and TSLL have an extensive 
history in the financial literature, and each comes with its own 
strengths and weaknesses. As such, the Sponsor has evaluated the CME 
Market using both of the major academic approaches.
IC/CS Price Discovery Research on the Bitcoin Spot Market vs. the CME 
Market
    Information share (IS) and component share (CS) are two variants of 
a core analytical approach to price discovery research that traces its 
roots back to 1995.\35\ It is sometimes referred to in the literature 
as ``common efficient price''-based analysis, ``fundamental price''-
based analysis, or simply ``price discovery'' analysis.
---------------------------------------------------------------------------

    \35\ Hasbrouck, J. (1995), One security, many markets: 
Determining the contributions to price discovery. The Journal of 
Finance, 5050(4), 1175-1199. Gonzalo, J., and Granger, C. (1995), 
Estimation of common long-memory components in cointegrated systems. 
Journal of Business & Economic Statistics, 13(1), 27-35.
---------------------------------------------------------------------------

    Price discovery analysis is based on the idea that, in a perfectly 
efficient

[[Page 60705]]

market, new information should be reflected simultaneously in the price 
of an asset as it trades on different platforms. In practice, however, 
this is not the case; some platforms move before others. In addition, 
some market moves are simply ``noise'' that do not reflect a change in 
the fundamental price at all. Price discovery analysis attempts to 
measure the speed and accuracy with which each trading platform 
incorporates new information into its price. Platforms that are faster 
to incorporate new information while being better at avoiding noise are 
considered to have a ``higher share'' of price discovery.
    Despite the paired nature of IS/CS values, the convention in the 
literature is to present only one value in the results tables, leaving 
the other implied. The Sponsor followed that convention, only reporting 
the IS/CS value of the CME Market, as it is compared to each spot 
bitcoin trading platform. Therefore, an IS/CS value above 50% indicates 
that the CME Market leads price discovery compared with the spot 
bitcoin trading platform in question.
    The Sponsor's review of the historical literature surrounding IS/CS 
price discovery analysis comparing the CME Market and the bitcoin spot 
market identified ten academic and practitioner studies evaluating the 
two markets, which are itemized and summarized in the table below (a 
single long horizontal table has been divided here into two parts).\36\
---------------------------------------------------------------------------

    \36\ This table is replicated from material previously provided 
to the Commission. See Matthew Hougan, Hong Kim and Satyajeet Pal, 
Price discovery in the modern bitcoin market: Examining lead-lag 
relationships between the bitcoin spot and bitcoin futures market, 
February 16, 2021, as amended and supplemented (``Bitwise Prong One 
Paper'').
    \37\ Corbet, S., Lucey, B., Peat, M., and Vigne, S. (2018), 
Bitcoin futures--What use are they? Economics Letters (172), 23-27.
    \38\ Baur, D.G., and Dimpfl, T. (2019), Price discovery in 
bitcoin spot or futures? The Journal of Futures Markets (39)7, 803-
817.
    \39\ Kapar, B., and Olmo, J. (2019). An analysis of price 
discovery between bitcoin futures and spot markets. Economics 
Letters, (174), 62-64.
    \40\ Alexander, C., and Heck, D. (2019), Price discovery, high-
frequency trading and jumps in bitcoin markets. SSRN Electronic 
Journal.
    \41\ Hu, Y., Hou, Y.G., Oxley, L. (2020), What role do futures 
markets play in bitcoin pricing? Causality, cointegration and price 
discovery from a time-varying perspective. International Review of 
Financial Analysis (72).
    \42\ Akyildirim, E., Corbet, S., Katsiampa, P., Kellard, N., and 
Sensoy, A. (2020), The development of bitcoin futures: Exploring the 
interactions between cryptocurrency derivatives. Finance Research 
Letters (34).
    \43\ Fassas, A., Papadamou, S., Koulis, A. (2020), Price 
discovery in bitcoin futures. Research in International Business and 
Finance (52).
    \44\ Entrop, O., Frijns B., Seruset, M. (2020), The determinants 
of price discovery on bitcoin markets. The Journal of Futures 
Markets, (40)5, 816-837.
    \45\ Aleti, S., and Mizrach, B. (2020), Bitcoin spot and futures 
market microstructure. The Journal of Futures Markets (41)2, 194-
225.
    \46\ Chang, A., Herrmann, W, and Cai, W. (2020), Efficient price 
discovery in the bitcoin markets. Wilshire Phoenix, October 14, 
2020, available at https://www.wilshirephoenix.com/efficient-price-discovery-in-the-bitcoin-markets/.

----------------------------------------------------------------------------------------------------------------
          #                        Title                Year                         Authors
----------------------------------------------------------------------------------------------------------------
1....................  Bitcoin futures--What use          2018  Corbet, Lucey, et al.
                        are they? \37\.
2....................  Price discovery in bitcoin         2019  Baur and Dimpfl.
                        spot or futures? \38\.
3....................  An analysis of price               2019  Kapar and Olmo.
                        discovery between bitcoin
                        futures and spot markets
                        \39\.
4....................  Price discovery, high-             2019  Alexander and Heck.
                        frequency trading and jumps
                        in bitcoin markets \40\.
5....................  What role do futures markets       2019  Hu, Hou, and Oxley.
                        play in bitcoin pricing?
                        Causality, cointegration
                        and price discovery from a
                        time-varying perspective
                        \41\.
6....................  The development of bitcoin         2019  Akyildirim, Corbet, et al.
                        futures: Exploring the
                        interactions between
                        cryptocurrency derivatives
                        \42\.
7....................  Price discovery in bitcoin         2020  Fassas, Papadamou, and Koulis.
                        futures \43\.
8....................  The determinants of price          2020  Entrop, Frijns, and Seruset.
                        discovery on bitcoin
                        markets \44\.
9....................  Bitcoin spot and futures           2020  Aleti and Mizrach.
                        market microstructure \45\.
10...................  Efficient price discovery in       2020  Chang, Herrmann, and Cai.
                        the bitcoin markets \46\.
----------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                         CME IS     CME CS
        #               Authors           (%)        (%)                 Intervals                          Time period                     Result
--------------------------------------------------------------------------------------------------------------------------------------------------------
1...............  Corbet, Lucey, et           15         18  1 min............................  (\47\).............................  Spot leads.
                   al.
2...............  Baur and Dimpfl....         14         14  15 min...........................  12/18/2017-10/18/2018..............  Spot leads.
3...............  Kapar and Olmo.....         89  .........  1 day............................  12/18/2017-05/16/2018..............  Futures lead.
4...............  Alexander and Heck.         66         73  30 min...........................  12/18/2017-06/30/2019..............  Futures lead.
5...............  Hu, Hou, and Oxley.         55  .........  1 day............................  12/18/2017-06/16/2019..............  Futures lead.
6...............  Akyildirim, Corbet,      91-97      67-87  1/5/10/15/30/60 min..............  12/18/2017-02/26/2018..............  Futures lead.
                   et al.
7...............  Fassas, Papadamou,          97         77  1 hour...........................  01/01/2018-12/31/2018..............  Futures lead.
                   and Koulis.
8...............  Entrop, Frijns, and         50         53  1 min............................  12/18/2017-03/31/2019..............  Mixed.
                   Seruset.
9...............  Aleti and Mizrach..      53-55      68-91  5 min............................  01/02/2019-02/28/2019..............  Futures lead.
10..............  Chang, Herrmann,     .........         63  1 min............................  07/01/2019-12/31/2019..............  Futures lead.
                   and Cai.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As the above table indicates, a majority of papers support the 
notion that the CME Market leads price discovery using IS and/or CS 
when compared to the bitcoin spot market.
---------------------------------------------------------------------------

    \47\ Corbet et al (2018) do not specify the time period of the 
price discovery analysis presented. See note 53, infra, and 
accompanying text.
---------------------------------------------------------------------------

    Because the methodologies and findings of each paper are nuanced, 
the Sponsor examined each paper in detail. The analysis begins with the 
majority opinion that the CME Market leads the bitcoin spot market:
     Kapar and Olmo (2019) was the first paper to assert that, 
contrary to the two studies that came before it (Corbet et al. (2018) 
and Baur and Dimpfl (2019)), the data ``clearly reflect the leadership 
of the Bitcoin futures markets with respect to the spot market.'' The 
paper attributed 89% of IS to the futures market.
    Kapar and Olmo (2019) relies on daily price data, which means the 
study may not capture intraday information flow. Still, long-run 
relationships are relevant in holistically describing the relative 
strength one market has compared with another. The authors illustrated 
the importance of long-run relationships, saying, ``when the market is 
in contango we can expect increases in the spot price in the next 
period. In contrast, when the market is in backwardation, the VECM 
suggests a fall in spot prices

[[Page 60706]]

to correct departures from equilibrium.'' In other words, the authors 
found that if there is a gap between the spot and futures price on a 
given day, the spot price is more likely to correct toward the futures 
price than vice versa.
     Alexander and Heck (2019) similarly found that there was 
``strong evidence that both CME and CBOE futures have played the 
leading role in price discovery.'' Unlike Kapar and Olmo (2019), 
Alexander and Heck (2019) used intraday data with a 30-minute timing 
interval. Their analysis ran from December 18, 2017 to June 30, 2019, 
the longest time period among the ten studies the Sponsor discovered. 
It showed that the CME Market led the bitcoin spot market with 66% of 
IS and 73% of CS during that time.
    Interestingly, the authors noted strong price leadership from the 
CME Market during Q2 2019, the last quarter they studied. In fact, Q2 
2019 boosted the overall IS from the study from 57% to 66%, and CS from 
50% to 73%. This increase in the CME Market's contribution to price 
discovery aligned with significant growth in volume on the CME Market 
after Q1 2019.\48\
---------------------------------------------------------------------------

    \48\ The monthly ADV in the CME Market grew from $60 million in 
March 2019 to $230 million in April 2019, according to data from the 
CME Group. In Q3 2020, the CME Market had a $365 million ADV.
---------------------------------------------------------------------------

    In 2020, Alexander and Heck published a second paper in which the 
authors highlight the role unregulated futures and perpetual swaps from 
trading platforms such as Bitmex, Huobi, and OKEx play in the bitcoin 
market.\49\ The analysis involves a complex, multidimensional approach 
to price discovery analysis conducted across eight different markets 
and four different exposure types (unregulated futures, regulated 
futures, perpetual swaps, and spot markets), each with different levels 
of microstructure friction and data integrity. These complications make 
it difficult to draw a direct comparison of this paper's results with 
the ten studies included in the table above.\50\
---------------------------------------------------------------------------

    \49\ Alexander, C., and Heck, D. (2020), Price discovery in 
bitcoin: the impact of unregulated markets. Journal of Financial 
Stability (50), Article Number 100776.
    \50\ The direct question around whether the CME Market leads or 
lags price discovery compared to the unregulated bitcoin futures 
market is explored in detail in a following sub-section titled 
``Examining Lead-Lag Relationships Between The Unregulated Bitcoin 
Futures Market And The CME Bitcoin Futures Market.''
---------------------------------------------------------------------------

     Hu et al. (2020) added to the literature, saying, ``What 
we contribute to this literature here, especially compared to Alexander 
& Heck (2019), is that we consider price discovery in the Bitcoin 
futures markets that allow for time-varying approaches,'' noting that 
cointegrating relationships can be interrogated more comprehensively 
using time-varying approaches. The authors conclude that, ``Bitcoin 
futures markets dominate the price discovery process using a time-
varying version of an information share measures of the IS and GIS 
types.'' This finding provides additional clarity around the time-
dependency of other price discovery analytical results.
     Akyildirim, Corbet et al. (2019) conducted its analysis in 
five-, ten-, 15-, 30-, and 60-min price data intervals to reach a range 
of IS and CS outcomes in order to test robustness across different data 
time intervals. The finding that the CME Market led the bitcoin spot 
market was consistent across all studied time intervals.
     Fassas et al. (2020) added another record to the body of 
literature finding that the CME Market led the bitcoin spot market, 
saying, ``Our study confirms [the] Akyildirim et al. (2019), Alexander 
et al. (2019) and Kapar and Olmo (2019) conclusion that bitcoin futures 
markets, while in their relative youth, have portrayed evidence of 
price discovery leadership compared to the spot market.'' Fassas et al. 
(2020) arrives at this conclusion after applying price discovery 
measures to the entire year of 2018 with hourly price data.
     Aleti and Mizrach (2020) explores the market 
microstructure of four spot trading platforms (Bitstamp, Coinbase, 
Kraken, and itBit) and the CME Market over a relatively narrow two-
month time period (January 2, 2019 to February 28, 2019). The paper 
reports separate CME Market IS values for each of the four spot trading 
platforms, ranging from 53% versus itBit to 55% versus Bitstamp, and 
four CME Market CS values ranging from 68% versus itBit to 91% versus 
Kraken. All of these tests find that the CME Market led price discovery 
against each of the spot trading platforms.
     Chang et al. (2020) explored a more recent time period 
(the ``second half of 2019'') and found that the CME Market led the 
spot market in price discovery with a CS of 63%.
    It is worth noting that--as explored in Putnins (2013) \51\--IS and 
CS price discovery metrics can face challenges when comparing markets 
that differ by tick size, trade frequency, and other microstructure 
frictions. Specifically, these measures bias against finding price 
formation in markets like the CME Market that have larger tick sizes or 
less frequent trades. In spite of these headwinds, a majority of the 
studies in the table above found the CME Market led price discovery 
against bitcoin spot market.\52\
---------------------------------------------------------------------------

    \51\ Putnins, T., What do price discovery metrics really 
measure? Journal of Empirical Finance, 23 (9), September 2013.
    \52\ The Commission has previously cited mixed or unsettled 
academic literature on lead-lag analysis in its bitcoin ETP 
disapproval orders. See USBT Order, 84 FR at 12613. Of course, the 
existence of variable results in IS/CS analysis, either within one 
study or a group of studies, is not in isolation sufficient to 
determine that a commodity futures market does not satisfy the 
concerns of the Act. There are multiple commodity markets where the 
Commission has approved ETPs based in part on the existence of a 
regulated derivatives market of significant size where select IS/CS 
studies find that the related derivatives market is not the main 
source of price discovery. For instance, Dimpfl et al. (2017) found 
that futures markets account for less than 10% of IS price discovery 
in markets like corn, wheat, soybeans, cattle, and lean hogs. 
Dimpfl, T., Flad, M., and Jung, R. (2017), Price discovery in 
agricultural commodity markets in the presence of futures 
speculation. Journal of Commodity Markets, March 2017. Similarly, 
Narayan and Sharma (2018), examined data on 15 commodities markets 
from 1977 to 2012, found that spot led futures in nine commodities 
(canola, cocoa, coffee, corn, gold, platinum, silver, soybean oil, 
and soybean yellow), and that futures dominated in just six 
commodities (copper, crude oil, platinum, soybean meal, sugar and 
wheat). Narayan, P. and Sharma, S. (2018), An analysis of time-
varying commodity market price discovery. International Review of 
Financial Analysis, May 2018.
---------------------------------------------------------------------------

    The Sponsor also evaluated three studies where the authors noted 
that the spot market led the CME Market or had mixed results:
     Corbet et al. (2018) is the earliest study examining 
whether the futures or spot market lead in the bitcoin market. It 
reached the conclusion that the spot market led, with IS and CS values 
assigned to the CME Market of just 15% and 18%, respectively. The time 
period of the price discovery analysis is not clear from the paper, and 
it is possible that, being the earliest paper, the period was very 
short. Akyildirim, Corbet, et al. (2019), a study that shares the same 
co-author (Corbet) but examines different data sets, arrived at the 
opposite conclusion, as noted above, determining that the futures 
market had the dominant share of price discovery. Discussing the 
difference between the two papers, Akyildirim, Corbet, et al. (2019) 
notes that Corbet et al. (2018) was based on a shorter time period, and 
for that reason, could have found a relationship that has since 
reversed.\53\
---------------------------------------------------------------------------

    \53\ Akyildirim, Corbet, et al. (2019) notes that ``in contrast 
to results based on a shorter period as in Corbet et al. (2018a), it 
appears that as the new cryptocurrency futures markets developed, 
they presented substantial leadership in price discovery over spot 
Bitcoin markets.'' This view is repeated in the conclusion, which 
says, ``while earlier research found that information flows and 
price discovery were transmitted from spot to futures markets, this 
research verifies that this relationship has since reversed, most 
likely explained by the influx of institutional and sophisticated 
investors.''
---------------------------------------------------------------------------

     Baur and Dimpfl (2019) is the other study that found the 
bitcoin spot market

[[Page 60707]]

led the bitcoin futures market. This paper, however, has an important 
methodological flaw that led the CME Market contribution to appear 
artificially low: The authors conducted their price discovery analysis 
on a per-lifetime-of-each-contract basis, rather than a standard 
rolling-contract basis.
    Alexander and Heck (2019) explore this issue extensively, going as 
far as running a similar per-lifetime-of-each-contract analysis to 
observe how much lower the futures market contribution can appear. The 
authors concluded that ``[t]his apparently leading role of the spot 
market is not surprising since, during the first few months after the 
introduction of a contract, there is always another contract with a 
nearer maturity where almost all trading activity occurs. So any 
finding that the spot market dominates the price discovery process is 
merely an artefact of very low trading volumes when the contract is 
first issued.''
    Baur and Dimpfl (2019) acknowledge this issue and run a rolling-
futures model of the same analysis for contracts traded on the Cboe, 
using a fairly standard methodology where the studied contract is 
rolled over one day prior to maturity. This led to a significantly 
higher share of price discovery for the Cboe contract, albeit one that 
still did not dominate the bitcoin spot market. Unfortunately, the 
authors were unable to do the same analysis for CME futures, noting 
that the continuous price data approach was ``only feasible for the 
Cboe futures as there are short gaps in our CME data.''
    It is not clear why such data gaps existed, as CME data is readily 
available. Additionally, it is not appropriate to assume that, if the 
authors had studied a rolling-futures version of the CME analysis, the 
result would also have aligned with the findings of the rolling-futures 
version of the Cboe analysis. There were fewer CME bitcoin futures 
contracts in the data set than in the Cboe data set (four versus 
seven), and each of the CME contracts had a longer lifetime (or 
``Sample Period,'' as shown in Table 1 of the paper), likely leading to 
a stronger bias from this methodological flaw.
    Therefore, the Sponsor concluded that Baur and Dimpfl (2019) failed 
to address whether the CME Market as a whole leads price discovery 
versus the bitcoin spot market.
     Entrop et al. (2020) arrives at a mixed result. In 
aggregate, the paper finds that the CME Market leads, noting that the 
futures exchange has an average IS value of 50% and average CS value of 
53%. The paper also found that the CME Market led price discovery in a 
majority of months studied, noting, ``We find that, on average, the 
futures market leads the price formation process in 9 (contract) 
months, while the spot market is the leader in the remaining (6) 
months.'' The paper, however, does note that the spot market led the 
CME Market in a statistically significant way in the last two months of 
the study (February and March 2019), and in nonsignificant ways in 
select other months. These findings led the authors to the claim that 
``the leading market has changed.''
    The Sponsor noted that Aleti and Mizrach (2020) and Alexander and 
Heck (2019) explored price discovery in overlapping time periods and 
reached a different conclusion.
    In summary, the Sponsor concluded that the majority of academic and 
practitioner papers support the view that the CME Market leads price 
discovery as compared with the bitcoin spot market. Of the ten 
available papers, seven clearly find that the CME Market leads, and an 
eighth (Entrop et al. (2020)) has aggregate results in favor of the CME 
Market leading. Of the two papers that conclude that the spot market 
leads, one was an early paper that potentially studied a very limited 
time period (Corbet et al. (2018)) and the other (Baur and Dimpfl 
(2019)) has an important methodological flaw that limits its 
applicability to the question at hand.
    In addition to the literature review above, the Sponsor conducted 
its own analysis of IS/CS price discovery between the CME Market and 
the bitcoin spot market. In preparing its analysis, the Sponsor 
considered that the academic literature on bitcoin price discovery does 
not have a single approach to defining ``the bitcoin spot market.'' 
Many studies, such as Baur and Dimpfl (2019), use a single bitcoin 
trading platform as a proxy for all existing spot platforms; others, 
such as Aleti and Mizrach (2020), evaluate a small number (typically 
two to five) of bitcoin trading platforms as representative of the 
bitcoin spot market; still others, like Kapar and Olmo (2019), use an 
aggregated price (in their case, the Coindesk Bitcoin USD Price Index, 
which draws on a screened subset of global bitcoin trading platforms).
    The Sponsor evaluated the CME Market and ten bitcoin trading 
platforms, more than the number used in other studies encountered in 
the Sponsor's academic literature review. These trading platforms 
included all five Constituent Platforms represented in the CME US 
Reference Rate and the CME UK Reference Rate (Bitstamp, Coinbase, 
Gemini, itBit and Kraken), along with five additional bitcoin trading 
platforms with high reported trading volume (Binance, Bitfinex, Huobi, 
LBank, and OKEx). These trading platforms include both the largest USD-
BTC Pair trading platform by reported volume (Coinbase) and the largest 
tether-BTC pair trading platform by reported volume (Binance).\54\
---------------------------------------------------------------------------

    \54\ While reported volumes on bitcoin trading platforms need to 
be considered with caution, Coinbase and Binance regularly appear as 
the top trading platform for the USD-BTC Pair and tether-BTC pair, 
respectively, on CoinMarketcap.com (https://coinmarketcap.com/currencies/bitcoin/markets/). Tether is a digital asset used as a 
``stablecoin'' that has an intended value of $1.
---------------------------------------------------------------------------

    The Sponsor used available trade data, from the inception of the 
CME bitcoin futures contract on December 18, 2017 through the end of 
September 30, 2020. The results aligned with the majority of academic 
and practitioner research in finding that the CME Market leads the 
bitcoin spot market. The results are statistically significant for all 
ten trading platforms when evaluated from both an IS and a CS 
perspective.
    The Sponsor presents the results in both full time period and 
monthly formats. Academic literature commonly presents results as full 
time period results; however, the Sponsor noted that shorter time 
periods such as the monthly results may be more appropriate given the 
potential for time variation in the bitcoin trading market.
    The table below shows the IS and CS for the CME Market versus each 
of the ten spot trading platforms averaged across the entire time 
period (December 18, 2017 to September 30, 2020), along with a 95% 
confidence interval for those results. The * indicates that the results 
are statistically significant (p-value <0.05). Note that all of the IS 
and CS values and their confidence intervals are above the 50% mark, 
indicating that CME Market led all of the ten spot trading platforms 
across this time period.

[[Page 60708]]



----------------------------------------------------------------------------------------------------------------
                                                                    Confidence                      Confidence
                                                    CME IS (%)     interval (%)     CME CS (%)     interval (%)
----------------------------------------------------------------------------------------------------------------
Binance.........................................         * 58.32     56.78-59.86         * 57.38     55.45-59.32
Bitfinex........................................         * 65.75     64.22-67.29         * 65.08     63.28-66.89
Bitstamp........................................         * 64.10     62.74-65.47         * 68.03     66.21-69.86
Coinbase........................................         * 60.60     59.20-62.00         * 60.88     58.99-62.77
Gemini..........................................         * 56.44     55.03-57.84         * 56.73     54.73-58.72
Huobi...........................................         * 60.91     59.34-62.49         * 58.97     56.96-60.98
itBit...........................................         * 53.33     51.91-54.75         * 52.97     50.93-55.00
Kraken..........................................         * 63.17     61.58-64.76         * 63.24     61.29-65.19
LBank...........................................         * 66.03     63.95-68.11         * 63.51     61.34-65.68
OKEx............................................         * 56.19     54.74-57.64         * 53.60     51.73-55.47
----------------------------------------------------------------------------------------------------------------

    To provide additional context to this finding, the Sponsor also 
examined each market on a calendar-month-by-calendar-month basis. This 
calendar-month-segmented approach allowed the Sponsor to evaluate the 
potential for time variation in price discovery leadership between the 
CME Market and the bitcoin spot market over shorter periods.
    The table below displays the percentage of months that the CME 
Market led price discovery versus each of the ten evaluated spot 
trading platforms since the launch of the CME bitcoin futures contract 
in December 2017. The exact numbers vary by exchange, but on average, 
the CME Market has led spot trading platforms from an IS perspective in 
89% of evaluated months, and from a CS perspective in 80% of evaluated 
months.

------------------------------------------------------------------------
                                                % of months  % of months
                                                 CME led IS   CME led CS
------------------------------------------------------------------------
Binance.......................................           85           79
Bitfinex......................................           94           91
Bitstamp......................................           94           91
Coinbase......................................           91           85
Gemini........................................           82           76
Huobi.........................................           94           84
itBit.........................................           79           62
Kraken........................................           94           91
LBank.........................................           90           80
OKEx..........................................           85           65
                                               -------------------------
  Average.....................................           89           80
------------------------------------------------------------------------

    Taken together, these findings support the conclusion that the CME 
Market leads price discovery compared with the bitcoin spot market, and 
that leadership is generally persistent across the full time period.
Time-Shift Lead-Lag Analysis on the Bitcoin Spot Market vs. the CME 
Market
    The Sponsor also examined time-shift lead-lag analysis (TSLL), the 
other popular academic approach to investigating market leadership. 
TSLL is an attempt to find the direction and length of the lead-lag 
relationship between two price series that maximizes the predictive 
strength of one price series against another. The analysis is performed 
by shifting one price series forward or backward in time relative to 
another series and calculating the cross-correlation between the two 
series and is repeated for many different lag periods to see which 
amount of lag of one price series results in the highest cross-
correlation between the two price series. The amount of lead or lag 
that results in the highest cross-correlation is referred to as ``lead-
lag time.''
    The Sponsor analyzed the TSLL relationship between the CME Market 
and the same ten bitcoin spot trading platforms evaluated using IS/CS 
price discovery analysis. The analysis utilized available trade data 
from the inception of the CME bitcoin futures contract on December 18, 
2017 through the end of the study on September 30, 2020.
    The results of the Sponsor's TSLL analysis align with the results 
of its IS/CS analysis and demonstrate that the CME Market leads all 
evaluated spot trading platforms over the duration of the study.
    The table below shows the lead-lag time (the amount of lead or lag 
that results in the highest cross-correlation between two price series) 
for the CME Market versus each of the ten spot trading platforms, 
calculated daily, and averaged across the entire time period (December 
18, 2017 to September 30, 2020). The table also shows the 95% 
confidence interval for those results. A positive value indicates the 
CME Market leading by that amount of seconds. A negative value would 
indicate CME Market lagging by that amount of seconds. The * indicates 
the result being statistically significant (p-value <0.05), meaning the 
lead-lag time for the entire time period lies squarely within the 
positive (or negative) value territory.

------------------------------------------------------------------------
                                                            Confidence
                                           Lead-lag time     interval
                                             (seconds)       (seconds)
------------------------------------------------------------------------
Binance.................................          * 7.28       6.53-8.03
Bitfinex................................          * 9.03       8.33-9.73
Bitstamp................................          * 6.52       5.96-7.08
Coinbase................................          * 8.42       7.65-9.18
Gemini..................................          * 6.51       5.91-7.11
Huobi...................................          * 7.57       6.96-8.18
itBit...................................          * 8.63       7.89-9.37
Kraken..................................         * 17.19     16.00-18.38
Lbank...................................         * 16.62     15.37-17.87
OKEx....................................          * 8.27       7.41-9.13
------------------------------------------------------------------------

    The lead-lag times vary slightly by trading platform, but are all 
contained within a positive value band of 6.51-17.19 seconds, 
indicating CME leading. All results are statistically significant.
    The results of our TSLL analysis support the conclusion of our IS/
CS analysis, showing that the CME Market leads each of the ten 
evaluated spot trading platforms in a statistically significant manner 
over the duration of the study.
    These findings across both types of statistical analysis are, 
perhaps, unsurprising. Futures markets often lead price discovery when 
compared to spot markets. As described in papers like Garbade and 
Silver (1983),\55\ Chan (1992),\56\ and Fleming et al. (1996),\57\ 
futures benefit from leverage, lower transaction costs, and access to 
short exposure. In addition, in the bitcoin market, the regulated 
nature of the CME Market may attract more professional investors than 
unregulated spot markets. These professional investors may have 
advantages over retail investors from an available capital, technology, 
information flow, and trading speed perspective. Such conditions may be

[[Page 60709]]

expected to continue into the future, particularly as bitcoin sees 
continued and expanded adoption as an investable asset among 
professional and institutional investors.
---------------------------------------------------------------------------

    \55\ Garbade, K. and Silber, W. (1983), Price movements and 
price discovery in futures and cash markets. The Review of Economics 
and Statistics 65(2), 289-297.
    \56\ Chan, K. (1992), A further analysis of the lead-lag 
relationship between the cash market and stock index futures market. 
The Review of Financial Studies (5)1, 123-152.
    \57\ Fleming et al. (1996), Trading Costs and the relative rates 
of price discovery in stock, futures, and option markets. Journal of 
Futures Markets 16(4), 353-387.
---------------------------------------------------------------------------

Examining Lead-Lag Relationships Between the Unregulated Bitcoin 
Futures Market and the CME Bitcoin Futures Market
    After completing its analysis showing that the CME Market leads 
price discovery compared to the bitcoin spot market, the Sponsor 
considered whether the CME Market leads price discovery compared to the 
unregulated bitcoin futures market.
    A number of unregulated bitcoin futures trading platforms 
(``Unregulated Futures Platforms'') exist, so the first step in this 
analysis was to determine which Unregulated Futures Platforms to 
consider.
    The Sponsor gathered data from CoinGecko, a popular crypto data 
provider, which maintains an extensive list of Unregulated Futures 
Platforms and their futures contracts.\58\ CoinGecko tracks two 
categories of contracts: Perpetual futures and quarterly futures. 
Perpetual futures are cash-settled futures that do not have an 
expiration date, while quarterly futures settle on a calendar basis and 
must be rolled forward to maintain exposure. Aggregating these two 
categories generated a list of 33 Unregulated Futures Platforms. The 
Sponsor elected to evaluate the seven largest Unregulated Futures 
Platforms based on open interest: Binance, BitMEX, Bybit, Deribit, FTX, 
Huobi, and OKEx. Together, these Unregulated Futures Platforms 
accounted for approximately 80% of all open interest captured by 
CoinGecko at the time of the analysis on May 4, 2021.
---------------------------------------------------------------------------

    \58\ CoinGecko (https://www.coingecko.com/en/coins/bitcoin#markets). Navigate to the ``Perpetuals'' (perpetual futures) 
and ``Futures'' (predominantly quarterly futures) sub tabs within 
the ``Markets'' tab.
---------------------------------------------------------------------------

    Because some offer both perpetual and quarterly contracts, the 
Sponsor selected from each Unregulated Futures Platform the contract 
type and specific contract with the highest level of open interest: 
Perpetual futures for Binance, BitMEX, Bybit, Deribit, and FTX, and 
quarterly futures for Huobi and OKEx.
    The Sponsor used the full period of data available for each 
Unregulated Futures Platform, through the end of Q1, 2021. The data 
start month for each Unregulated Futures Platform was:

 Binance: September 2019
 BitMEX: December 2017 \59\
---------------------------------------------------------------------------

    \59\ BitMEX was the only platform that existed and has data 
available from the inception of the CME bitcoin futures market on 
December 17, 2017. OKEx claims to have launched bitcoin futures 
trading as early as June 2013, but historical data for OKEx is not 
available before October 2018. Binance, Bybit, Deribit, FTX, and 
Huobi all launched bitcoin futures trading after the inception of 
the CME bitcoin futures market, between 2018 and 2019.
---------------------------------------------------------------------------

 Bybit: October 2019
 Deribit: August 2018
 FTX: July 2019
 Huobi: August 2019
 OKEx: October 2018

    As with the CME Market's monthly futures contract, Huobi and OKEx's 
quarterly futures contracts were rolled one day prior to expiration in 
order to create a continuous price series.
    The table below highlights key statistics for the highest open 
interest contract on each of the evaluated Unregulated Futures 
Platforms, plus the CME Market, for the month of May 2021: Open 
Interest, Trading Volume, and Required Margin. The CME Market row is 
highlighted in light blue.

----------------------------------------------------------------------------------------------------------------
                                                                                                 Required margin
                                                            Open interest      Trading volume          (%)
----------------------------------------------------------------------------------------------------------------
Bybit...................................................     $1,666,878,515     $7,438,356,443                 1
Binance.................................................      1,575,326,903     21,718,058,270                <1
CME.....................................................      1,404,125,298      1,840,129,468                33
FTX.....................................................      1,232,139,553      4,423,394,792                 1
OKEx....................................................        842,460,775      2,112,965,793                <1
Huobi...................................................        680,431,607      5,823,998,157                <1
BitMEX..................................................        664,421,615      2,656,967,907                 1
Deribit.................................................        599,004,598      1,264,134,910                 1
----------------------------------------------------------------------------------------------------------------

    The contracts differ significantly along each of these tracked 
metrics. For instance, Bybit perpetual futures have the highest open 
interest, while Binance perpetual futures have the highest trading 
volume.
    The Sponsor noted the stark difference in required margin between 
the CME Market and all of the evaluated Unregulated Futures Platforms. 
The Unregulated Futures Platforms in this study offer clients leverage 
at ratios ranging from 100-to-1 to 125-to-1, meaning the required 
margin is 1% or less of the notional value of open contract positions. 
By comparison, the maximum leverage ratio for the CME bitcoin futures 
contract is 3-to-1, meaning a 33% required margin ratio.
    While traders on a given Unregulated Futures Platform do not always 
make use of the full amount of potential leverage, industry reports 
suggest that the level of realized leverage on Unregulated Futures 
Platforms is high. For instance, a 2019 report from BitMEX found that 
the average level of realized leverage for BitMEX bitcoin perpetual 
futures for the year ending April 2019 was approximately 27-to-1, 
meaning an average maintained margin of less than 4%.\60\
---------------------------------------------------------------------------

    \60\ BitMEX Leverage Statistics, April 2019 (https://blog.bitmex.com/bitmex-leverage-statistics-april-2019/).
---------------------------------------------------------------------------

    The high leverage ratios offered by Unregulated Futures Platforms 
mean that, at any given moment, the amount of capital committed to any 
one of these unregulated futures contracts is likely significantly 
lower than the amount of capital committed to the CME bitcoin futures 
contract. As a hypothetical example, assuming an average margin of 4% 
(i.e., 25-to-1 leverage), the amount of capital backing the $7.26 
billion in aggregate open interest across the seven unregulated futures 
contracts can be estimated at $363 million. By comparison, assuming a 
33% margin (the minimum required), the capital backing the $1.40 
billion of open interest on the CME bitcoin futures contract is at 
least $462 million. In other words, it is possible that the amount of 
capital committed to the CME bitcoin futures contract is larger than 
the capital committed to all of the evaluated Unregulated Futures 
Platform futures contracts, combined.
    The Sponsor's analysis noted that it is not clear, looking just at 
these top-level statistics alone, that the CME Market or any of the 
Unregulated Futures Platforms is likely to lead price discovery. To 
make this determination, the Sponsor compared data from the

[[Page 60710]]

CME Market and each of the Unregulated Futures Platforms using the same 
statistical techniques used to evaluate price discovery between the CME 
Market and spot bitcoin trading platforms.
    The table below shows the results of the Sponsor's IS and CS 
analysis, comparing the CME Market with each of the seven Unregulated 
Futures Platforms over the duration of the study. Each Unregulated 
Futures Platform evaluation has its own date range, based on the length 
of data available for such platform.
    As in the spot market analysis, IS and CS values above 50% indicate 
that the CME Market led price discovery against a given Unregulated 
Futures Platform over the duration of the study period. A * indicates 
that the results are statistically significant (p-value <0.05). The 
confidence interval column shows a 95% confidence interval for the 
context.
    The results show that the CME Market has led price discovery 
against each of the seven Unregulated Futures Platforms across the 
duration of the study. The results are statistically significant for 
all platforms when evaluated from an IS perspective, and for six of 
seven platforms from a CS perspective.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Confidence                      Confidence
                                                CME IS (%)     interval (%)     CME CS (%)     interval (%)                   Data range
--------------------------------------------------------------------------------------------------------------------------------------------------------
Binance.....................................         * 55.30     53.64-56.96         * 54.01     51.41-56.61  Sept 2019-Mar 2021.
BitMEX......................................         * 63.67     62.30-65.04         * 63.33     61.68-64.99  Dec 2017-Mar 2021.
Bybit.......................................         * 61.50     59.69-63.30         * 60.26     57.75-62.77  Oct 2019-Mar 2021.
Deribit.....................................         * 56.91     55.56-58.26         * 56.20     54.23-58.17  Aug 2018-Mar 2021.
FTX.........................................         * 56.73     55.13-58.32         * 58.72     56.33-61.10  July 2019-Mar 2021.
Huobi.......................................         * 55.25     53.33-57.17         * 53.85     51.36-56.33  Aug 2019-Mar 2021.
OKEx........................................         * 53.04     51.45-54.63           51.22     49.14-53.31  Oct 2018-Mar 2021.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The Sponsor also compared the CME Market against each Unregulated 
Futures Platform on a month-by-month basis. The table below shows the 
percentage of months that the CME Market led IS/CS price discovery 
against each Unregulated Futures Platform:

----------------------------------------------------------------------------------------------------------------
                                            % of months     % of months
                                            CME led IS      CME led CS                  Data range
----------------------------------------------------------------------------------------------------------------
Binance.................................              84              74  Sept 2019-Mar 2021.
BitMEX..................................              93              90  Dec 2017-Mar 2021.
Bybit...................................             100              94  Oct 2019-Mar 2021.
Deribit.................................              88              78  Aug 2018-Mar 2021.
FTX.....................................              90              95  July 2019-Mar 2021.
Huobi...................................              85              70  Aug 2019-Mar 2021.
OKEx....................................              73              60  Oct 2018-Mar 2021.
----------------------------------------------------------------------------------------------------------------

    These monthly results support the conclusion of the Sponsor's full 
duration analysis in finding that the CME Market leads each of the 
seven Unregulated Futures Platforms from an IS and CS perspective.
    In addition to its IS/CS analysis, the Sponsor also examined the 
CME Market and each of the Unregulated Futures Platforms using TSLL 
analysis. The table below shows the lead-lag time (the amount of lead 
or lag that results in the highest cross-correlation between two price 
series) for the CME Market versus each of the seven Unregulated Futures 
Platforms, calculated daily and averaged across the entire time period 
applicable to the Unregulated Futures Platform. The table also shows 
the 95% confidence interval for those results.
    A positive value indicates the CME Market leading by that amount of 
seconds. A negative value would indicate CME Market lagging. The * 
indicates the result being statistically significant (p-value <0.05), 
meaning the lead-lag time for the entire time period lies squarely 
within the positive (or negative) value territory.

----------------------------------------------------------------------------------------------------------------
                                                            Confidence
                                           Lead-lag time     interval                   Data range
                                             (seconds)       (seconds)
----------------------------------------------------------------------------------------------------------------
Binance.................................          * 3.07       2.50-3.65  Sept 2019-Mar 2021.
BitMEX..................................          * 7.23       6.76-7.70  Dec 2017-Mar 2021.
Bybit...................................          * 5.13       4.56-5.70  Oct 2019-Mar 2021.
Deribit.................................          * 4.98       4.47-5.49  Aug 2018-Mar 2021.
FTX.....................................          * 2.27       2.08-2.46  July 2019-Mar 2021.
Huobi...................................          * 2.34       2.21-2.47  Aug 2019-Mar 2021.
OKEx....................................          * 3.47       2.94-4.00  Oct 2018-Mar 2021.
----------------------------------------------------------------------------------------------------------------

    The results show that prices on the CME Market led prices on the 
Unregulated Futures Platforms by 2-7 seconds in a statistically 
significant manner. These results are in-line with the results of the 
IS/CS analysis, and support the finding that the CME Market leads price 
discovery compared to the unregulated bitcoin futures market.
    That these findings demonstrating that the CME Market leads the 
unregulated bitcoin futures market in price discovery might surprise 
some market observers, given the higher total

[[Page 60711]]

notional volumes on the Unregulated Futures Platforms. Besides the 
possibility that the self-reported trading volumes on Unregulated 
Futures Platforms could be inflated, the Sponsor theorizes that highly 
levered retail investors with limited capital on the Unregulated 
Futures Platforms may be opening and closing positions more frequently, 
resulting in higher notional volumes, but with lesser impact on price 
discovery relative to well capitalized, long-term oriented professional 
investors on the CME Market. In addition, professional investors may 
have advantages over retail investors from a technology, information 
flow, and trading speed perspective. Such conditions may be expected to 
continue into the future, particularly as bitcoin sees continued and 
expanded adoption as an investable asset among professional and 
institutional investors.
Conclusion of Winklevoss Standard Prong 1: Reasonable Likelihood
    The first prong of the Winklevoss Standard requires demonstrating a 
reasonable likelihood that a person attempting to manipulate a bitcoin 
ETP would also have to trade on the CME Market. In prior disapproval 
orders, the Commission has stated that demonstrating a lead-lag 
relationship between prices on the CME Market and the underlying 
bitcoin spot market is ``central'' to understanding this reasonable 
likelihood.
    As detailed herein, through extensive statistical analysis and 
careful consideration of third-party evaluations of these markets, the 
Sponsor has demonstrated that the CME Market leads the bitcoin spot 
market and the unregulated bitcoin futures market, such that it is 
reasonably likely that a person attempting to manipulate the ETP would 
also have to trade on the CME Market, thus satisfying the first prong 
of the Winklevoss Standard.
Winklevoss Standard Prong 2: Predominant Influence
    The second prong of the Winklevoss Standard requires demonstrating 
that it is unlikely that trading in the Trust would become the 
predominant influence on prices in the CME Market. As detailed below, 
the Sponsor's analysis shows that trading in the Trust is unlikely to 
become the predominant influence on prices in the CME Market, even when 
assuming aggressive estimates of first-year flows of $4.7 billion and 
average daily trading volume of $143 million.\61\
---------------------------------------------------------------------------

    \61\ See Matthew Hougan, Hong Kim, and Satyajeet Pal, Is it 
likely that a US bitcoin ETP, if approved, will become the 
predominant influence on prices in the CME bitcoin futures market? 
February 16, 2021, as amended and supplemented (``Bitwise Prong Two 
Paper'').
---------------------------------------------------------------------------

Estimating the Likely First-Year Flows Into a Bitcoin ETP
    The Sponsor examined extensive data from other ETPs and a well-
known, publicly traded bitcoin trust to estimate the likely first-year 
flows into a newly approved bitcoin ETP.
    First, the Sponsor examined first-year flows into all ETPs 
currently listed on the market, using data from FactSet.\62\ The 
Sponsor excluded ETPs with negative first-year flows.
---------------------------------------------------------------------------

    \62\ Data obtained from FactSet on November 30, 2020.
---------------------------------------------------------------------------

    Of the more than 2,200 ETPs with positive or flat first-year flows:
     The median ETP attracted $28 million in flows during its 
first year on the market.
     The ETP with the highest first-year flows in history--the 
Invesco QQQ Trust (Nasdaq: QQQ)--attracted $5.35 billion in flows.
    The table below highlights the ten ETPs with the highest first-year 
flows in ETP history.

------------------------------------------------------------------------
                                                          Year-one flows
                  Fund                        Ticker           ($M)
------------------------------------------------------------------------
Invesco QQQ Trust.......................             QQQ          $5,351
Communication Services Select Sector                 XLC           5,186
 SPDR...................................
iShares MSCI EAFE ETF...................             EFA           4,292
JPMorgan BetaBuilders Europe ETF........            BBEU           4,187
PIMCO Active Bond ETF...................            BOND           4,116
JPMorgan BetaBuilders Japan ETF.........            BBJP           3,755
JPMorgan BetaBuilders Canada ETF........            BBCA           3,656
iShares Select Dividend ETF.............             DVY           3,245
Real Estate Select Sector SPDR Fund.....            XLRE           3,171
SPDR Gold Shares........................             GLD           3,010
------------------------------------------------------------------------

    As the analysis shows, $5.35 billion is the outer limit of 
historical first-year flows into a bitcoin ETP. There is no precedent 
for an ETP attracting more than this in its first year on the market. 
The Sponsor concluded it is unlikely that a bitcoin ETP will experience 
the highest first-year flows in history, particularly given the 
relative size of the bitcoin market compared to the markets captured by 
the ETPs above, which target parts or all of the equity, bond, real 
estate, and gold markets.\63\
---------------------------------------------------------------------------

    \63\ At year-end 2020, the total market capitalization of 
bitcoin was $539 billion, according to blockchain.com. By 
comparison, the global market capitalization of the equity market 
was $95 trillion and the outstanding value of the global bond market 
was $106 trillion in 2019, according to the most recently published 
SIFMA Capital Markets Fact Book (September 2020), available at 
https://www.sifma.org/wp-content/uploads/2020/09/US-Fact-Book-2020-SIFMA.pdf; the professionally managed global real estate market was 
$9.6 trillion in 2019, according to MSCI's Market Size Report on 
Global Real Estate, available at https://www.msci.com/real-estate/market-size-report; and the total value of above-ground gold was $10 
trillion on December 31, 2020, according to the World Gold Council 
available at https://www.gold.org/goldhub/data/above-ground-stocks.
---------------------------------------------------------------------------

    To provide a more detailed comparison, the Sponsor also examined 
first-year flows into first-to-market single-commodity ETPs. Bitcoin is 
considered a commodity by the Commodity Futures Trading Commission,\64\ 
and one way to view a potential bitcoin ETP is as a first-to-market 
single-commodity ETP offering exposure to bitcoin in the same manner 
that the SPDR Gold Shares (NYSEArca: GLD) was a first-to-market single-
commodity ETP offering exposure to gold, and the iShares Silver Trust 
(NYSEArca: SLV) was a first-to-market single-commodity ETP offering 
exposure to silver.
---------------------------------------------------------------------------

    \64\ The Commodity Futures Trading Commission has argued 
successfully in federal courts that digital assets such as bitcoin 
are commodities. See, e.g., Commodity Futures Trading Commission v 
McDonnell and CabbageTech, Corp., 18-CV-361 (E.D.N.Y. March 6, 2018) 
and Commodity Futures Trading Commission v My Big Coin Pay, Inc., 
18-cv-10077-RWZ (D. Mass. Sept. 26, 2018).
---------------------------------------------------------------------------

    The following table shows the first-year flows into every first-to-
market single-commodity ETP currently available in the U.S., again 
using data

[[Page 60712]]

from FactSet.\65\ First-year flows range from $3.01 billion for GLD to 
negative $1 million for the iPath Bloomberg Lead Subindex Total Return 
ETN (NYSEArca: LD).\66\
---------------------------------------------------------------------------

    \65\ Data obtained from FactSet on November 30, 2020.
    \66\ Negative flows occur when a product is seeded with a 
certain amount of capital but some of that capital is redeemed over 
time, and there are no offsetting creations.

------------------------------------------------------------------------
                                                          Year-one flows
                  Commodity                      Ticker        ($M)
------------------------------------------------------------------------
Gold.........................................        GLD          $3,010
Silver.......................................        SLV           1,730
Crude Oil....................................        USO             827
Platinum.....................................       PPLT             708
Palladium....................................       PALL             603
Natural Gas..................................        UNG             374
Corn.........................................       CORN             115
Coffee.......................................         JO              48
Gasoline.....................................        UGA              28
Sugar........................................        SSG              12
Soybeans.....................................       SOYB              10
Cotton.......................................        BAL               7
Nickel.......................................        JJN               2
Copper.......................................       CPER               2
Wheat........................................       WEAT               1
Cocoa........................................        NIB               1
Aluminum.....................................        JJU               1
Carbon Credits...............................        GRN               0
Tin..........................................        JJT               0
Lead.........................................         LD              -1
------------------------------------------------------------------------

    These figures provide additional context on the likely upper bound 
of potential flows into a bitcoin ETP.
    Finally, the Sponsor examined the Grayscale Bitcoin Trust (OTCQX: 
GBTC), a publicly traded grantor trust that holds bitcoin directly with 
a third-party custodian. As of December 31, 2020, GBTC was the only 
product that provided investors with readily accessible exposure to 
bitcoin through traditional brokerage accounts, and has been available 
to U.S. investors since May 2015.\67\ A bitcoin ETP and GBTC will 
likely compete for investor allocations.
---------------------------------------------------------------------------

    \67\ See OTC Markets Group Inc., press release, May 5, 2015. OTC 
Markets Group Welcomes Bitcoin Investments Trust to OTCQX, available 
at https://www.prnewswire.com/news-releases/otc-markets-group-welcomes-bitcoin-investment-trust-to-otcqx-300077150.html.
---------------------------------------------------------------------------

    GBTC is different from an ETP in certain ways, including that the 
structure does not allow for redemptions, that it has a different 
regulatory status than an ETP, and that shares of GBTC are materially 
more likely to trade at significant and variable premiums and/or 
discounts to the net asset value of the trust. GBTC does, however, 
permit creations, allowing it to accommodate flows to reflect investor 
demand. As such, it can be a useful data set for analyzing investor 
demand for exposure to bitcoin through a traditional brokerage window 
and what impact flows from such demand can have on prices in the CME 
Market.\68\
---------------------------------------------------------------------------

    \68\ The Sponsor notes that one difference between the creation/
redemption and arbitrage mechanism between GBTC and an ETP is that 
newly created shares in GBTC are not immediately available to be 
sold in the secondary market. Instead, after purchasing shares, an 
investor must hold the shares for 6-months before they are permitted 
to be traded on the secondary market. This creates a longer holding 
period for an arbitrageur, as compared to a typical ETP arbitrage 
trade where an authorized participant may immediately trade newly 
created shares into the secondary market. For example, to capture 
arbitrage on GBTC shares trading at a premium, an arbitrageur would 
need to short sell GBTC shares while buying spot bitcoin, deliver 
the bitcoin for creation of GBTC shares, and hold those shares for 
six months until they are released from transfer restriction and can 
be delivered to the short sellers to close out the trade. But while 
the holding period of the GBTC share premium arbitrage is at minimum 
6 months, the buying in the spot bitcoin market occurs, in this 
case, right before the creation date, which is the date inflows into 
GBTC are recorded.
    In addition, institutional arbitrageurs are not the only cohort 
that can create shares for GBTC. Accredited investors may also 
subscribe for GBTC shares either by contributing bitcoin or 
delivering cash. For cash orders, Genesis Trading Global, Inc., the 
``authorized participant'' of the trust, purchases the bitcoin for 
the given cash amount by 6 p.m. ET on the day the cash is provided 
by the subscriber.
---------------------------------------------------------------------------

    In its most successful year, GBTC attracted a record $4.7 billion 
in flows in 2020, according to Grayscale Investments.\69\ The fund's 
previous record was $472 million, set in 2019. 2020's record flows 
occurred during a sustained bull market for bitcoin, as bitcoin's price 
rose 306% in 2020.\70\
---------------------------------------------------------------------------

    \69\ See Grayscale Investments, Digital Asset Investment Report, 
Q4 2020 (grayscale.co/insights/grayscale-q4-2020-digital-asset-
investment-report/).
    \70\ Bitcoin's price rose from $7,147 on December 31, 2019 to 
$29,026 on December 31, 2020 according to the Coin Metrics bitcoin 
reference rate, available at https://coinmetrics.io/reference-rates/.
---------------------------------------------------------------------------

    Based on the foregoing assessments, the Sponsor utilized $4.7 
billion as its working estimate for first-year flows into a new bitcoin 
ETP. The Sponsor believed this estimate to be aggressive, as it assumes 
that a bitcoin ETP will:
     Be the third-fastest-growing ETP in history, out of more 
than 2,200 products with positive year-one flows;
     significantly surpass (by more than 50%) the first-year 
flows into GLD, which experienced the highest first-year flows in 
first-to-market single-commodity ETP history; and
     match the highest annual flow in GBTC's history, achieved 
during a strong bull market, all while the new ETP is forced to compete 
for market share with GBTC itself.
Evaluating the Potential Influence of ETP Flows on Prices in the CME 
Market
    The Sponsor analyzed whether such flows into a first-to-market 
bitcoin ETP would cause such ETP to be the predominant influence on 
prices in the CME Market.
    Based on information on the flows into GBTC that are publicly 
available from multiple sources,\71\ the Sponsor analyzed with 
historical data whether $4.7 billion in flows into a bitcoin investment 
product in a single year would be likely to cause that product to 
become the predominant influence on prices in the CME Market.
---------------------------------------------------------------------------

    \71\ Information on GBTC creation of shares is available from 
the issuer, reports on Form 8-K filed by the issuer on sec.gov, and 
third party websites such as Bloomberg.
---------------------------------------------------------------------------

    The Sponsor's statistical analysis examined the relationship of 
flows into GBTC in 2020 and the changes in the price of bitcoin, using 
both daily and weekly flows.\72\ Daily (or weekly) flows were 
calculated from Bloomberg data by multiplying the change in outstanding 
shares of the trust by the net asset value per share of that day (or 
week). Daily (or weekly) percentage price changes of bitcoin were 
calculated using the 4:00 p.m. E.T. bitcoin reference rate from Coin 
Metrics.\73\
---------------------------------------------------------------------------

    \72\ The Sponsor has used both single day and weekly flows, 
acknowledging that the buying activity for an in-kind creation may 
not necessarily occur in a single day leading up to the creation 
date. Instead, an investor might build their position over time. 
Using both daily and weekly flows helps to capture more of this 
extended possibility.
    \73\ See note 70, supra.
---------------------------------------------------------------------------

    The charts below show the results of the Sponsor's analysis. Each 
dot represents a daily (or weekly) flow into GBTC and the corresponding 
daily (or weekly) change in the price of bitcoin. As such, there are 
253 dots in the first chart representing each trading day, and 52 dots 
in the second chart representing each week in 2020.
BILLING CODE 8011-01-P

[[Page 60713]]

[GRAPHIC] [TIFF OMITTED] TN03NO21.003

BILLING CODE 8011-01-C
    The data shows there is no meaningful relationship between daily 
and weekly flows into GBTC and changes in the price of bitcoin, despite 
the aggregate flows being $4.7 billion: The correlation for daily 
results is 0.08 and the correlation for weekly results is 0.11, both of 
which are low.
    The experience of outlier days and weeks with large flows supports 
this conclusion. For instance, the largest one-day flow occurred on 
December 22, 2020, when $285 million flowed into the fund; bitcoin's 
price moved up 2.3% that day, within the normal daily range for a 
bitcoin price move.\74\
---------------------------------------------------------------------------

    \74\ The standard deviation of the daily percentage price change 
of bitcoin in 2020 using the Coin Metrics bitcoin reference rate was 
4.38%.
---------------------------------------------------------------------------

    Similarly, the largest one-week flow occurred for the week ending 
December 27, 2020, when GBTC attracted approximately $809 million in 
flows; bitcoin's price settled up just 2.9% that week, again within the 
normal range for a weekly price move.\75\
---------------------------------------------------------------------------

    \75\ The standard deviation of the weekly percentage price 
change of bitcoin in 2020 using the Coin Metrics bitcoin reference 
rate was 10.35%.
---------------------------------------------------------------------------

    Based on this statistical analysis, the Sponsor concluded that it 
is unlikely that the aggressive estimate of first-year flows into a 
bitcoin ETP ($4.7 billion) would cause it to become the predominant 
influence on prices in the CME Market.
Estimating the Likely Trading Volume of a Bitcoin ETP
    Beyond the impact of investment flows, the Sponsor considered 
whether secondary market trading in the Shares would be likely to 
become the predominant influence on prices in the CME Market. The 
Sponsor was able to draw on two relevant comparisons to create 
estimates of the likely trading volume of a bitcoin ETP.
    First, the Sponsor considered trading in GBTC, using secondary 
market data from Bloomberg. Shares of GBTC are publicly quoted on the 
OTCQX Best Market and are widely available to U.S. investors through 
traditional brokerage accounts. As such, although GBTC operates under a 
different regulatory structure than an ETP and has

[[Page 60714]]

historically traded at significant and variable premiums and discounts 
to its net asset value, the historical turnover of GBTC provide one 
estimate of the future turnover of a bitcoin ETP. GBTC's average daily 
trading volume (ADV) in 2020 was $103 million. On a monthly basis, that 
figure ranged from $37 million in April 2020 to $368 million December 
2020, as reported in the table below.
    Examining ADV in isolation offers only a partial picture, however. 
Trading activity in GBTC is correlated with the product's assets under 
management (AUM), which is in turn linked to bitcoin's price. The table 
below shows the ``ADV/AUM Ratio'' for GBTC for each month in 2020, 
using the month-end AUM as the denominator. Although the absolute size 
of the ADV ranges widely across 2020, the ADV/AUM ratio stays fairly 
consistent, running from 1.10% (April and September) to 2.21% 
(February). The average ADV/AUM ratio for the year was 1.54%.

----------------------------------------------------------------------------------------------------------------
                                                                                                   ADV/AUM ratio
                              Month                                   ADV (M)         AUM (M)           (%)
----------------------------------------------------------------------------------------------------------------
Jan 2020........................................................             $43          $3,191            1.36
Feb 2020........................................................              66           2,997            2.21
Mar 2020........................................................              44           2,249            1.96
Apr 2020........................................................              37           3,313            1.10
May 2020........................................................              68           4,034            1.68
Jun 2020........................................................              52           3,870            1.33
Jul 2020........................................................              65           5,264            1.23
Aug 2020........................................................              89           6,018            1.47
Sep 2020........................................................              57           5,167            1.10
Oct 2020........................................................              95           7,728            1.23
Nov 2020........................................................             259          13,060            1.98
Dec 2020........................................................             368          20,445            1.80
Average.........................................................             103           6,445            1.54
----------------------------------------------------------------------------------------------------------------

    Applying this average ADV/AUM ratio to the $4.7 billion working 
estimate of first-year flows into a bitcoin ETP, the estimated daily 
trading volume would be approximately $72 million at the end of the 
ETP's first year.
    A second comparison that may be useful is to examine the case of 
other first-to-market commodity ETPs. GLD is the largest such ETP, and 
therefore trading activity of GLD \76\ may provide a useful comparison. 
Using the same methodology as with GBTC, the Sponsor examined the ADV/
AUM ratio of GLD for every month in 2020. The ratio value ranged from 
1.65% (September) to 5.93% (March). The average ratio was 3.04%.
---------------------------------------------------------------------------

    \76\ See GLD historical market data, available at https://www.spdrgoldshares.com/usa/historical-data/.

----------------------------------------------------------------------------------------------------------------
                                                                                                   ADV/AUM ratio
                              Month                                   ADV (M)         AUM (M)           (%)
----------------------------------------------------------------------------------------------------------------
Jan 2020........................................................          $1,206         $46,053            2.62
Feb 2020........................................................           2,010          47,348            4.25
Mar 2020........................................................           2,903          48,916            5.93
Apr 2020........................................................           1,828          57,343            3.19
May 2020........................................................           1,819          62,557            2.91
Jun 2020........................................................           1,606          67,484            2.38
Jul 2020........................................................           2,215          78,789            2.81
Aug 2020........................................................           3,312          79,163            4.18
Sep 2020........................................................           1,272          76,941            1.65
Oct 2020........................................................           1,376          75,889            1.81
Nov 2020........................................................           1,855          73,285            2.53
Dec 2020........................................................           1,369          71,558            1.91
Average.........................................................           1,901          65,022            3.04
----------------------------------------------------------------------------------------------------------------

    Applying GLD's ADV/AUM ratio to the $4.7 billion working estimate 
of first-year flows into a bitcoin ETP, the estimated daily trading 
volume would be approximately $143 million. The Sponsor elected to use 
this estimate of $143 million as its working estimate for average daily 
trading volume of a new bitcoin ETP at the end of its first year. The 
Sponsor believes this estimate to be aggressive, as it assumes that a 
bitcoin ETP will:
     Be the third-fastest-growing ETP in history, out of more 
than 2,200 products with positive year-one flows.
     have an ADV/AUM ratio approximately two times higher than 
that of GBTC, which also offers exposure to bitcoin through traditional 
brokerage accounts.
Evaluating the Potential Influence of Secondary Market Trading in ETP 
Shares on Prices in the CME Market
    The CME Market had an average daily trading volume of $392 million 
in 2020. The lowest month, April 2020, had an average daily trading 
volume of $176 million, and the highest month, December 2020, had an 
average daily trading volume of $935 million. The table below shows the 
ADV of the CME Market each month in 2020.

[[Page 60715]]



------------------------------------------------------------------------
                          Month                             CME ADV (M)
------------------------------------------------------------------------
Jan 2020................................................            $408
Feb 2020................................................             401
Mar 2020................................................             202
Apr 2020................................................             176
May 2020................................................             305
Jun 2020................................................             223
Jul 2020................................................             252
Aug 2020................................................             455
Sep 2020................................................             397
Oct 2020................................................             329
Nov 2020................................................             665
Dec 2020................................................             935
------------------------------------------------------------------------

    Given that the average daily trading volume of the CME Market in 
2020 was 174% higher at $392 million than the Sponsor's aggressive 
estimate of a new bitcoin ETP's potential trading volume of $143 
million, the Sponsor found that it is unlikely that trading in a new 
bitcoin ETP will cause such ETP to become the predominant influence on 
prices in the CME Market.
Conclusion of Winklevoss Standard Prong 2: Predominant Influence
    The second prong of the Winklevoss Standard requires demonstration 
that it is unlikely that trading in the Trust would become the 
predominant influence on prices in the CME Market.
    As detailed herein, the Sponsor's analysis shows that trading in 
the Trust is unlikely to become the predominant influence on prices in 
the CME Market, even when assuming aggressive estimates of first-year 
flows of $4.7 billion and average daily trading volume of $143 million.
* * * * *
    In conclusion, as the foregoing analysis and data demonstrates, the 
proposal has met its burden presented by Section 6(b)(5) of the Act 
\77\ and, in particular, the requirement that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices, by demonstrating that the CME Market (i) is a 
regulated market; (ii) participates in a surveillance sharing agreement 
with the Exchange; and (iii) satisfies the Commission's ``significant 
market'' definition under the Winklevoss Standard.
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    \77\ 15 U.S.C. 78f(b)(5).
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Availability of Information Regarding the Shares and Bitcoin
    The NAV 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. The ITV will be 
calculated every 15 seconds throughout the core trading session each 
trading day, and available through online information services.
    The Sponsor will cause information about the Shares to be posted to 
the Trust's website (https://www.bitwiseinvestments.com/): (i) The NAV 
and NAV per Share for each Exchange trading day, posted at end of day; 
(ii) the daily holdings of the Trust, before 9:30 a.m. E.T. on each 
Exchange trading day; (iii) the Trust's effective prospectus, in a form 
available for download; and (iv) the Shares' ticker and CUSIP 
information, along with additional quantitative information updated on 
a daily basis for the Trust. For example, the Trust's website will 
include (i) the prior business day's trading volume, the prior business 
day's reported NAV and closing price, and a calculation of the premium 
and discount of the closing price or mid-point of the bid/ask spread at 
the time of NAV calculation (``Bid/Ask Price'') against the NAV; and 
(ii) data in chart format displaying the frequency distribution of 
discounts and premiums of the daily closing price or Bid/Ask Price 
against the NAV, within appropriate ranges, for at least each of the 
four previous calendar quarters. The Trust's website will be publicly 
available prior to the public offering of Shares and accessible at no 
charge.
    Investors may obtain on a 24-hour basis bitcoin pricing information 
based on the CME US Reference Rate, CME UK Reference Rate and CME 
Bitcoin Real Time Price, bitcoin spot market prices and bitcoin futures 
price from various financial information service providers. Current 
bitcoin spot market prices are also generally available with bid/ask 
spreads from bitcoin trading platforms, including the Constituent 
Platforms of the CME US Reference Rate.
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 of the Trust.\78\ Trading in Shares of the Trust 
will be halted if the circuit breaker parameters in NYSE Arca Rule 
7.12-E have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
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    \78\ See NYSE Arca Rule 7.12-E.
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    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the ITV occurs.\79\ If the 
interruption to the dissemination of the ITV persists past the trading 
day in which it occurred, the Exchange will halt trading no later than 
the beginning of the trading day following the interruption. In 
addition, if the Exchange becomes aware that the NAV with respect to 
the Shares is not disseminated to all market participants at the same 
time, it will halt trading in the Shares until such time as the NAV is 
available to all market participants. The Exchange may also halt 
trading if the value of the underlying commodity is no longer 
calculated or available on at least a 15-second delayed basis from a 
source unaffiliated with the Sponsor, Trust, Bitcoin Custodian or the 
Exchange or if the Exchange stops providing a hyperlink on its website 
to any such unaffiliated commodity value.
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    \79\ A limit up/limit down condition in the futures market would 
not be considered an interruption requiring the Trust to be halted.
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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. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with 
NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions). The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in NYSE Arca Rule 7.6-E, the 
minimum price variation (``MPV'') for quoting and entry of orders in 
equity securities traded on the NYSE Arca Marketplace is $0.01, with 
the exception of securities that are priced less than $1.00 for which 
the MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will 
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain 
restrictions on Equity Trading Permit (``ETP'') Holders acting as 
registered Market Makers in Commodity-Based Trust Shares to facilitate 
surveillance.\80\

[[Page 60716]]

The Exchange represents that, for initial and continued listing, the 
Trust will be in compliance with Rule 10A-3 under the Act,\81\ as 
provided by NYSE Arca Rule 5.3-E. A minimum of 100,000 Shares of the 
Trust will be outstanding at the commencement of trading on the 
Exchange.
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    \80\ Under NYSE Arca Rule 8.201-E(g), an ETP Holder acting as a 
registered Market Maker in the Shares is required to provide the 
Exchange with information relating to its trading in the underlying 
commodity, related futures or options on futures, or any other 
related derivatives. Commentary .04 of NYSE Arca Rule 11.3-E 
requires an ETP Holder acting as a registered Market Maker, and its 
affiliates, in the Shares to establish, maintain and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
any material nonpublic information with respect to such products, 
any components of the related products, any physical asset or 
commodity underlying the product, applicable currencies, underlying 
indexes, related futures or options on futures, and any related 
derivative instruments (including the Shares).
    As a general matter, the Exchange has regulatory jurisdiction 
over its ETP Holders and their associated persons, which include any 
person or entity controlling an ETP Holder. To the extent the 
Exchange may be found to lack jurisdiction over a subsidiary or 
affiliate of an ETP Holder that does business only in commodities or 
futures contracts, the Exchange could obtain information regarding 
the activities of such subsidiary or affiliate through surveillance 
sharing agreements with regulatory organizations of which such 
subsidiary or affiliate is a member.
    \81\ 17 CFR 240.10A-3.
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Surveillance
    The Exchange represents that trading in the Shares of the Trust 
will be subject to the existing trading surveillances administered by 
the Exchange, as well as cross-market surveillances administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and applicable federal securities 
laws.\82\ The Exchange represents that these procedures are adequate to 
properly monitor Exchange trading of the Shares in all trading sessions 
and to deter and detect violations of Exchange rules and federal 
securities laws applicable to trading on the Exchange.
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    \82\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
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    The Exchange further represents that it may obtain information 
regarding trading in the Shares and the CME Market from the CME and 
other markets and other entities that are members of the ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.\83\ The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares and 
the CME Market with the CME and other markets and entities that are 
members of the ISG, and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding trading in 
the Shares, the CME Market and the underlying commodity, as applicable, 
from such markets and other entities.
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    \83\ For a list of the current members of ISG, see https://isgportal.org/. The Exchange notes that not all components of the 
Trust may trade on markets that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.
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    Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is able 
to obtain information regarding trading in the Shares, bitcoin futures 
and the underlying bitcoin through ETP Holders acting as registered 
Market Makers, in connection with such ETP Holders' proprietary or 
customer trades through ETP Holders which they effect on any relevant 
market.
    In addition, the Exchange has a general policy prohibiting the 
improper distribution of material, non-public information by its 
employees.
    All statements and representations made in this filing regarding 
(i) the description of the index, portfolio or referenced asset, (ii) 
limitations on index or portfolio holdings or reference assets, or 
(iii) the applicability of Exchange listing rules specified in this 
rule filing will constitute continued listing requirements for listing 
the Shares on the Exchange.
    The Sponsor has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust to comply with the continued 
listing requirements, and, pursuant to its obligations under Section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 9.2-E(a).
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) \84\ that an exchange have rules that 
are designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
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    \84\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices and to protect 
investors and the public interest in that the Shares will be listed and 
traded on the Exchange pursuant to the initial and continued listing 
criteria in NYSE Arca Rule 8.201-E. Further, the Exchange has 
demonstrated that the proposed rule change satisfies the Winklevoss 
Standard with respect to the CME Market.
    As discussed above, both existing academic literature and the 
Sponsor's own studies show that the CME Market leads price discovery 
relative to the bitcoin spot market. As a result, and given that the 
Sponsor has demonstrated that it is unlikely that trading in the Shares 
will become the predominant influence upon prices in the CME Market, 
the CME Market represents a regulated market of significant size, and 
that there is a reasonable likelihood that a person attempting to 
manipulate the Shares would also have to trade on that market to 
successfully manipulate the Shares.\85\
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    \85\ See notes 222 and 23, supra, and accompanying text.
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    The Exchange has in place surveillance procedures that are adequate 
to properly monitor trading in the Shares and the CME Market in all 
trading sessions and to deter and detect attempted manipulation of the 
Shares or other violations of Exchange rules and applicable federal 
securities laws. The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares and 
bitcoin futures with the CME and other markets and other entities that 
are members of the ISG, and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding trading in 
the Shares from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
The Exchange is also able to obtain information regarding trading in 
the Shares and bitcoin futures or the underlying bitcoin through ETP 
Holders, in connection with such ETP Holders' proprietary or customer 
trades which they effect through ETP Holders on any relevant market.
    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. The Trust's website 
will also include a form of the prospectus for the Trust that may be 
downloaded. The website will include the Shares' ticker and CUSIP 
information, along with additional quantitative information updated on 
a daily basis for the Trust. The Trust's website will include (i) daily 
trading volume, the prior business day's reported NAV and closing 
price, and a calculation of the premium and discount of the closing 
price or mid-point of the Bid/Ask Price against the NAV; and (ii) data 
in chart format displaying the frequency distribution of discounts and 
premiums of the daily closing price or Bid/Ask Price against the NAV, 
within appropriate ranges, for at least each of the four previous 
calendar quarters. The Trust's website will be publicly available prior 
to the public offering of Shares and accessible at no charge.

[[Page 60717]]

    Trading in Shares of the Trust will be halted if the circuit 
breaker parameters in NYSE Arca Rule 7.12-E have been reached or 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of a 
new type of exchange-traded product based on the price of bitcoin that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures that are adequate to properly monitor 
trading in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws.

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 will facilitate the listing and trading of a new 
type of Commodity-Based Trust Share based on the price of bitcoin that 
will enhance competition among market participants, 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

    No written comments were solicited or received with respect to 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 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 self-regulatory 
organization consents, the Commission will:
    (A) By order approve or disapprove the 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 sec.gov">[email protected]sec.gov. Please include 
File Number SR-NYSEArca-2021-89 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-NYSEArca-2021-89. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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-NYSEArca-2021-89 and should be submitted 
on or before November 24, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\86\
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    \86\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23921 Filed 11-2-21; 8:45 am]
BILLING CODE 8011-01-P


