[Federal Register Volume 86, Number 247 (Wednesday, December 29, 2021)]
[Notices]
[Pages 74156-74164]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-28254]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93859; File No. SR-NYSEArca-2021-31]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Valkyrie Bitcoin Fund Under NYSE Arca Rule 8.201-E (Commodity-Based 
Trust Shares)

December 22, 2021.

I. Introduction

    On April 23, 2021, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the Valkyrie Bitcoin 
Fund (``Trust'') under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares). The proposed rule change was published for comment in the 
Federal Register on May 12, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 91771 (May 6, 2021), 
86 FR 26073 (``Notice''). Comments on the proposed rule change can 
be found at: https://www.sec.gov/comments/sr-nysearca-2021-31/srnysearca202131.htm.
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    On June 22, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On August 9, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On November 1, 2021, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92233, 86 FR 34107 
(June 28, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 92610, 86 FR 44763 
(Aug. 13, 2021).
    \8\ See Securities Exchange Act Release No. 93489, 86 FR 61344 
(Nov. 5, 2021).
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    This order disapproves the proposed rule change. The Commission 
concludes that NYSE Arca has not met its burden under the Exchange Act 
and the Commission's Rules of Practice to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5), 
and in particular, the requirement that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same standard used in its orders 
considering previous proposals to list bitcoin \10\-based commodity 
trusts and bitcoin-based trust issued receipts.\11\ As the

[[Page 74157]]

Commission has explained, an exchange that lists bitcoin-based 
exchange-traded products (``ETPs'') can meet its obligations under 
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying or reference bitcoin 
assets.\12\
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    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Notice, 86 FR at 26074-75.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''). See also Order Disapproving a Proposed Rule 
Change, as Modified by Amendment No. 1, Relating to the Listing and 
Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca 
Equities Rule 8.201, Securities Exchange Act Release No. 80319 (Mar. 
28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) 
(``SolidX Order''). The Commission also notes that orders were 
issued by delegated authority on the following matters: Order 
Disapproving a Proposed Rule Change To List and Trade the Shares of 
the ProShares Bitcoin ETF and the ProShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83904 (Aug. 22, 2018), 83 FR 
43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) (``ProShares Order''); 
Order Disapproving a Proposed Rule Change To List and Trade the 
Shares of the GraniteShares Bitcoin ETF and the GraniteShares Short 
Bitcoin ETF, Securities Exchange Act Release No. 83913 (Aug. 22, 
2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) 
(``GraniteShares Order''); Order Disapproving a Proposed Rule Change 
To List and Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange Act 
Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-
CboeBZX-2021-019).
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since 
they ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur.'' \13\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\14\ The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading activity, 
clearing activity, and customer identity; that the parties to the 
agreement have reasonable ability to obtain access to and produce 
requested information; and that no existing rules, laws, or practices 
would impede one party to the agreement from obtaining this information 
from, or producing it to, the other party.\15\
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    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at 
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at 
12596.
    \14\ See NDSP Adopting Release, 63 FR at 70959.
    \15\ See Winklevoss Order, 83 FR at 37592-93; 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.
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    In the context of this standard, the terms ``significant market'' 
and ``market of significant size'' include a market (or group of 
markets) as to which (a) there is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (b) it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\16\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There 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. See id.
    \17\ See USBT Order, 85 FR at 12597.
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    Consistent with this standard, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity--whether gold, silver, platinum, palladium, or 
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
(``ISG'') membership in common with, that market.\18\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\19\
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    \18\ See Winklevoss Order, 83 FR at 37594.
    \19\ See USBT Order, 85 FR at 12597; Securities Exchange Act 
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) 
(SR-Amex-93-28) (order approving listing of options on American 
Depository Receipts (``ADRs'')). The Commission has also required a 
surveillance-sharing agreement in the context of index options even 
when (i) all of the underlying index component stocks were either 
registered with the Commission or exempt from registration under the 
Exchange Act; (ii) all of the underlying index component stocks 
traded in the U.S. either directly or as ADRs on a national 
securities exchange; and (iii) effective international ADR arbitrage 
alleviated concerns over the relatively smaller ADR trading volume, 
helped to ensure that ADR prices reflected the pricing on the home 
market, and helped to ensure more reliable price determinations for 
settlement purposes, due to the unique composition of the index and 
reliance on ADR prices. See Securities Exchange Act Release No. 
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the 
exchange on which the index option trades and the markets that trade 
the underlying securities are necessary'' and that ``[t]he exchange 
of surveillance data by the exchange trading a stock index option 
and the markets for the securities comprising the index is important 
to the detection and deterrence of intermarket manipulation.''). And 
the Commission has required a surveillance-sharing agreement even 
when approving options based on an index of stocks traded on a 
national securities exchange. See Securities Exchange Act Release 
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure 
the availability of information necessary to detect and deter 
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\20\ In response, the Commission has agreed that, if a 
listing exchange could establish that the underlying market inherently 
possesses a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets, it 
would not necessarily need to enter into a surveillance-sharing 
agreement with a regulated significant market.\21\ Such resistance to 
fraud and manipulation, however, must be novel and beyond those 
protections that exist in traditional commodity markets or equity 
markets for which the Commission has

[[Page 74158]]

long required surveillance-sharing agreements in the context of listing 
derivative securities products.\22\ No listing exchange has satisfied 
its burden to make such demonstration.\23\
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    \20\ See USBT Order, 85 FR at 12597.
    \21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR at 
12597.
    \22\ See USBT Order, 85 FR at 12597.
    \23\ See supra note 11.
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    Here, NYSE Arca contends that approval of the proposal is 
consistent with Section 6(b)(5) of the Exchange Act, in particular 
Section 6(b)(5)'s requirement that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices and to protect investors and the public interest.\24\ 
Although NYSE Arca recognizes the Commission's concern with potential 
manipulation of bitcoin ETPs in prior disapproval orders, NYSE Arca 
argues that the proposal is consistent with Section 6(b)(5) of the 
Exchange Act because the growth of liquidity and presence of arbitrage 
in the spot market for bitcoin as well as the methodology and framework 
of the Index (as defined below) that is used to determine the value of 
the assets and net asset value (``NAV'') of the Trust sufficiently 
mitigate effects of potential manipulation in the bitcoin market.\25\ 
Further, NYSE Arca believes that the proposal would provide investors a 
more convenient, more efficient, and less risky way to invest in 
bitcoin than the purchase of a standalone bitcoin.\26\
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    \24\ See Notice, 86 FR at 26080-81.
    \25\ See id. at 26078-80.
    \26\ See id. at 26073, 26080.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act by addressing: in Section III.B.1 assertions that other means 
besides surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices; in Section III.B.2 
assertions relating to NYSE Arca's surveillance-sharing agreements 
related to bitcoin; and in Section III.C assertions that the proposal 
is consistent with the protection of investors and the public interest. 
As discussed further below, NYSE Arca repeats various assertions made 
in prior bitcoin-based ETP proposals that the Commission has previously 
addressed and rejected--and more importantly, NYSE Arca does not 
respond to the Commission's reasons for rejecting those assertions but 
merely repeats them. The Commission concludes that NYSE Arca has not 
established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Commission further 
concludes that NYSE Arca has not established that it has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to bitcoin. As a result, the Commission is 
unable to find that the proposed rule change is consistent with the 
statutory requirements of Exchange Act Section 6(b)(5).
    The Commission again emphasizes that its disapproval of this 
proposed rule change does not rest on an evaluation of whether bitcoin, 
or blockchain technology more generally, has utility or value as an 
innovation or an investment. Rather, the Commission is disapproving 
this proposed rule change because, as discussed below, NYSE Arca has 
not met its burden to demonstrate that its proposal is consistent with 
the requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\27\ the Exchange 
proposes to list and trade the Shares of the Trust under NYSE Arca Rule 
8.201-E, which governs the listing and trading of Commodity-Based Trust 
Shares on the Exchange.
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    \27\ See Notice, supra note 3. See also Registration Statement 
on Form S-1/A, dated April 30, 2021 (File No. 333-252344), filed 
with the Commission on behalf of the Trust (``Registration 
Statement'').
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    The investment objective of the Trust will be for the Shares to 
reflect the performance of the value of a bitcoin as represented by the 
CF Bitcoin U.S. Settlement Price (``Index''), less the Trust's 
liabilities and expenses.\28\ The Trust will use the Index to calculate 
the Trust's NAV. The Index was created and is administered by CF 
Benchmarks Ltd. (``Benchmark Administrator'') and serves as a once-a-
day benchmark rate of the U.S. dollar price of bitcoin (USD/BTC), 
calculated as of 4:00 p.m. E.T.\29\ The Index aggregates the trade flow 
of several bitcoin platforms during an observation window between 3:00 
p.m. and 4:00 p.m. E.T. into the U.S. dollar price of one bitcoin at 
4:00 p.m. E.T. The current constituent bitcoin platforms of the Index 
are Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent 
Bitcoin Platforms''). The Index is calculated based on the ``Relevant 
Transactions'' \30\ of all of its Constituent Bitcoin Platforms. All 
Relevant Transactions are added to a joint list, recording the time of 
execution, trade price, and size for each transaction, and the list is 
partitioned by timestamp into 12 equally-sized time intervals of five 
minute length.\31\ For each partition separately, the volume-weighted 
median trade price is calculated from the trade prices and sizes of all 
Relevant Transactions.\32\ The Index is then determined by the 
arithmetic mean of the volume-weighted medians of all partitions.\33\
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    \28\ Valkyrie Digital Assets LLC is the sponsor of the Trust 
(``Sponsor'') and Delaware Trust Company is the trustee. Coinbase 
Custody Trust Company, LLC (``Custodian'') will act as custodian for 
the Trust's bitcoins. U.S. Bancorp Fund Services, LLC 
(``Administrator'') will act as the transfer agent and administrator 
of the Trust. See Notice, 86 FR at 26073.
    \29\ According to NYSE Arca, the Index is based on materially 
the same methodology (except calculation time, as described herein) 
as the Benchmark Administrator's CME CF Bitcoin Reference Rate 
(``BRR''), which was first introduced on November 14, 2016, and is 
the rate on which bitcoin futures contracts are cash-settled in U.S. 
dollars on the Chicago Mercantile Exchange (``CME''). The Index is 
calculated as of 4:00 p.m. E.T., whereas the BRR is calculated as of 
4:00 p.m. London Time. See id. at 26076 & n.9.
    \30\ According to the Exchange, a ``Relevant Transaction'' is 
any cryptocurrency versus U.S. dollar spot trade that occurs during 
the observation window between 3:00 p.m. and 4:00 p.m. E.T. on a 
Constituent Bitcoin Platform in the BTC/USD pair that is reported 
and disseminated by a Constituent Bitcoin Platform and observed by 
the Benchmark Administrator. See id. at 26076 n.10.
    \31\ See id. at 26076.
    \32\ See id. According to the Exchange, a volume-weighted median 
differs from a standard median in that a weighting factor, in this 
case trade size, is factored into the calculation. See id.
    \33\ See id.
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    The Shares of the Trust represent units of fractional undivided 
beneficial interest in, and ownership of, the Trust. The Trust will 
only hold bitcoin. The Custodian will establish accounts that hold the 
bitcoins deposited with the Custodian on behalf of the Trust.\34\
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    \34\ See id. at 26073.
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    The Administrator will calculate the NAV of the Trust once each 
Exchange trading day. The Sponsor will publish the NAV and NAV per 
Share as soon as practicable after their determination and 
availability, and the NAV will be released after the end of the Core 
Trading Session (4:00 p.m. E.T.). The NAV of the Trust is not 
officially struck until later in the day (often by 5:30 p.m. E.T, and 
usually by 8:00 p.m. E.T.). The Trust's NAV per Share is calculated by 
taking the current market value of its total assets, less any 
liabilities of the Trust, and dividing that total by the total number 
of outstanding Shares. The bitcoin held by the Trust will be valued 
based on the price set by the Index.\35\
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    \35\ See id. at 26076.
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    The Trust will provide website disclosure of its bitcoin holdings 
daily.\36\ The Trust will also disseminate an intraday indicative value 
(``IIV'') per Share updated every 15 seconds by one or more major 
market data vendors

[[Page 74159]]

during the Exchange's Core Trading Session (normally 9:30 a.m. to 4:00 
p.m. E.T.). The IIV will be calculated by a third-party financial data 
provider using the prior day's closing NAV per Share of the Trust as a 
base and updating that value throughout the trading day to reflect 
changes in the most recently reported price level of the CME CF Bitcoin 
Real-Time Index (``BRTI''), as reported by CME Group, Inc., Bloomberg, 
L.P., or another reporting service.\37\
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    \36\ See id. at 26081.
    \37\ According to NYSE Arca, the BRTI is calculated in real time 
based on the universe of the currently unmatched limit orders to buy 
or sell in the BTC/USD pair of all Constituent Bitcoin Platforms. 
See id. at 26076.
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    The Trust will issue and redeem Shares to authorized participants 
on an ongoing basis in one or more ``Baskets'' of 50,000 Shares. The 
creation and redemption of a Basket requires the delivery to the Trust, 
or the distribution by the Trust, of the number of whole and fractional 
bitcoins represented by each Basket being created or redeemed.\38\ 
Creation orders and redemption orders may be placed either ``in-kind'' 
or ``in-cash.'' Although the Trust will create Baskets only upon the 
receipt of bitcoins, and will redeem Baskets only by distributing 
bitcoins, an authorized participant may deposit cash with the 
Administrator, which will facilitate the purchase or sale of bitcoins 
through a liquidity provider on behalf of an authorized participant 
(``Conversion Procedures'').\39\
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    \38\ See id. at 26076-77.
    \39\ The Conversion Procedures will be facilitated by a single 
liquidity provider, which will be selected by the Sponsor on an 
order-by-order basis. In the event that an order cannot be filled in 
its entirety by a single liquidity provider, additional liquidity 
provider(s) will be selected by the Sponsor to fill the remaining 
amount. See id. at 26076-78.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is 
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act 
requires, in relevant part, that the rules of a national securities 
exchange be designed ``to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \40\ 
Under the Commission's Rules of Practice, the ``burden to demonstrate 
that a proposed rule change is consistent with the Exchange Act and the 
rules and regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \41\
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    \40\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\42\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\43\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\44\
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    \42\ See id.
    \43\ See id.
    \44\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the 
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and 
Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\45\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\46\
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    \45\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \46\ See id. at 12597.
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    NYSE Arca asserts that the bitcoin marketplace has matured rapidly 
in recent years regarding user growth, market capitalization, volume, 
market participants, and liquidity shifts, such that billion-dollar 
bitcoin transactions have occurred without significantly distorting the 
marketplace.\47\ NYSE Arca further asserts that bitcoin trades in a 
well-arbitraged and distributed market.\48\ NYSE Arca concludes that, 
due to the linkage between the bitcoin markets and the presence of 
arbitrageurs in those markets, the manipulation of the price of bitcoin 
on any Constituent Bitcoin Platform would likely require overcoming the 
liquidity supply of such arbitrageurs who are potentially eliminating 
any cross-market pricing differences.\49\
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    \47\ See Notice, 86 FR at 26078.
    \48\ See id. at 26080.
    \49\ See id.
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    As with the previous proposals, the Commission here concludes that 
the Exchange's assertions about the nature of the bitcoin market do not 
constitute other means to prevent fraud and manipulation sufficient to 
justify dispensing with the requisite surveillance-sharing 
agreement.\50\ The Exchange argues that the maturation of the bitcoin 
market mitigates against the Commission's concerns about fraud and 
manipulation,\51\ but NYSE Arca provides no evidence for how such 
maturation serves to detect and deter potential fraud and manipulation. 
Nor does the Exchange provide any data or analysis to support its 
assertions regarding efficient price arbitrage across bitcoin 
platforms, either in terms of how closely bitcoin prices are aligned 
across different bitcoin trading venues or how quickly price 
disparities may be arbitraged away. Indeed, NYSE Arca

[[Page 74160]]

concedes that ``the global [b]itcoin market is not inherently resistant 
to fraud and manipulation.'' \52\ As stated above, ``unquestioning 
reliance'' on an SRO's representations in a proposed rule change is not 
sufficient to justify Commission approval of a proposed rule 
change.\53\
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    \50\ One commenter describes digital assets such as bitcoin, and 
the blockchains on which they rely, as having complexity that makes 
users vulnerable to fraud. See letter from JC, dated June 24, 2021 
(``JC Letter'').
    \51\ The Commission notes that the Exchange does not explicitly 
tie the asserted maturation of the bitcoin market to an argument 
that such market evolution provides sufficient means besides 
surveillance-sharing agreements to prevent fraud and manipulation.
    \52\ See Notice, 86 FR at 26080. See also id. at 26078 (``There 
has been concern over whether cryptocurrency exchanges have 
mechanisms in place to report and remediate price and overall, 
ensure integrity.'').
    \53\ See supra note 44.
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    Efficient price arbitrage, moreover, is not sufficient to dispense 
with surveillance-sharing agreements.\54\ The Commission has stated, 
for example, that even for equity options based on securities listed on 
national securities exchanges, the Commission relies on surveillance-
sharing agreements to detect and deter fraud and manipulation.\55\ 
Here, the Exchange provides no evidence to support its assertion of 
efficient price arbitrage across bitcoin platforms, let alone any 
evidence that price arbitrage in the bitcoin market is novel or unique 
so as to warrant the Commission dispensing with the requisite 
surveillance-sharing agreement. Moreover, NYSE Arca does not take into 
account that a market participant with a dominant ownership position 
would not find it prohibitively expensive to overcome the liquidity 
supplied by arbitrageurs and could use dominant market share to engage 
in manipulation.\56\
---------------------------------------------------------------------------

    \54\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601.
    \55\ See, e.g., USBT Order, 85 FR at 12601.
    \56\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01.
---------------------------------------------------------------------------

    Furthermore, NYSE Arca concedes that the global bitcoin market is 
not inherently resistant to fraud and manipulation and that concerns 
exist over whether bitcoin trading platforms ``have mechanisms in place 
to report and remediate price and overall, ensure market integrity.'' 
\57\ In addition, the Trust's Registration Statement acknowledges that 
``[bitcoin platforms] are relatively new and, in some cases, largely 
unregulated, and, therefore, may be more exposed to fraud and security 
breaches than established, regulated exchanges for other financial 
assets or instruments;'' that the bitcoin network is currently 
vulnerable to a ``51% attack,'' in which a bad actor or actors that 
control a majority of the processing power dedicated to mining on the 
bitcoin network may be able to gain full control of the network and the 
ability to manipulate the bitcoin blockchain; that ``in 2019 there were 
reports claiming that 80-95% of Bitcoin trading volume on [bitcoin 
platforms] was false or non-economic in nature;'' and that ``over the 
past several years, some [bitcoin trading platforms] have been closed 
due to fraud and manipulative activity, business failure or security 
breaches.'' \58\
---------------------------------------------------------------------------

    \57\ See supra note 52 and accompanying text.
    \58\ See Registration Statement at 14, 17, 36.
---------------------------------------------------------------------------

    NYSE Arca also does not contest the presence of possible sources of 
fraud and manipulation in the bitcoin spot market generally that the 
Commission has raised in previous orders, which have included (1) 
``wash'' trading, (2) persons with a dominant position in bitcoin 
manipulating bitcoin pricing, (3) hacking of the bitcoin network and 
trading platforms, (4) malicious control of the bitcoin network, (5) 
trading based on material, non-public information (such as plans of 
market participants to significantly increase or decrease their 
holdings in bitcoin; new sources of demand for bitcoin; the decision of 
a bitcoin-based investment vehicle on how to respond to a ``fork'' in 
the bitcoin blockchain, which would create two different, non-
interchangeable types of bitcoin), or based on the dissemination of 
false and misleading information, (6) manipulative activity involving 
the purported ``stablecoin'' Tether (USDT), and (7) fraud and 
manipulation at bitcoin trading platforms.\59\
---------------------------------------------------------------------------

    \59\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 
2019), available at https://ssrn.com/abstract=3195066 and published 
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
---------------------------------------------------------------------------

    Instead, NYSE Arca asserts that the methodology and framework of 
the Index used by the Trust to determine the value of its bitcoin 
assets and its NAV serve to mitigate against fraud and 
manipulation.\60\ First, NYSE Arca asserts that the methodology 
employed in constructing the Index makes the Index more resistant to 
manipulation than other measurements that employ different 
methodologies and that the Benchmark Administrator aggregates the trade 
data from the Constituent Bitcoin Platforms in a manner designed to 
resist manipulation.\61\ NYSE Arca states that the Index utilizes 
partitions to ensure large individual trades have a limited effect on 
the price of the Index, and the Index utilizes volume-weighted medians 
to ensure that outlying prices do not have an excessive effect on the 
value of a partition.\62\ NYSE Arca also states that transactions from 
a Constituent Bitcoin Platform may be excluded from the Index 
calculation if they are deemed potentially erroneous.\63\
---------------------------------------------------------------------------

    \60\ See Notice, 86 FR at 26078, 26080.
    \61\ See id. at 26076, 26079.
    \62\ See id. at 26079.
    \63\ See id. The Exchange states that, where a Constituent 
Bitcoin Platform's volume-weighted median transaction price exhibits 
an absolute percentage deviation from the volume-weighted median 
price of other Constituent Bitcoin Platform transactions greater 
than the potentially erroneous data parameter (10%), then 
transactions from that Constituent Bitcoin Platform are deemed 
potentially erroneous and excluded from the index calculation. See 
id.
---------------------------------------------------------------------------

    Second, NYSE Arca argues that the Index's exclusive use of 
transactions from Constituent Bitcoin Platforms mitigates the effects 
of potential manipulation of the bitcoin market.\64\ NYSE Arca states 
that, to be eligible for inclusion in the Index, a Constituent Bitcoin 
Platform must make trade and order data available through an Automatic 
Programming Interface with sufficient reliability, relevant data, and 
appropriate speed, and must meet a minimum trading volume 
threshold.\65\ In addition, NYSE Arca states that a Constituent Bitcoin 
Platform must enforce policies to ensure fair and transparent market 
conditions; have processes in place to impede illegal or manipulative 
trading practices; and comply with applicable law and regulation, 
including proper Anti-Money Laundering (``AML'') and Know-Your-Customer 
(``KYC'') procedures.\66\ NYSE Arca states that the calculation agent 
of the Index conducts a thorough review of any bitcoin trading platform 
under consideration and the arrangements of all Constituent Bitcoin 
Platforms are reviewed regularly to ensure they continue to meet all 
criteria.\67\
---------------------------------------------------------------------------

    \64\ See id. at 26080.
    \65\ See id. at 26078. The Exchange states that the Index 
included over $133,293,551,000 in bitcoin trades (approximately 
16,304,168 bitcoins) during the one-year period ended December 31, 
2020. See id. at 26076.
    \66\ See id. at 26078.
    \67\ See id. at 26079.
---------------------------------------------------------------------------

    Third, NYSE Arca asserts that the Commodity Futures Trading 
Commission (``CFTC'') has been successfully exercising its enforcement 
authority related to fraud and manipulation on the Constituent Bitcoin 
Platforms.\68\ In addition, the Exchange asserts that the Constituent 
Bitcoin Platforms must enter into a data sharing agreement with the 
CME, cooperate with inquiries and investigations of regulators and the 
Benchmark Administrator, and submit each of their clients to their KYC 
procedures.\69\ According to the Exchange, in the case of any 
suspicious trades on the Constituent Bitcoin Platforms, the CME would 
therefore be able to discover all

[[Page 74161]]

material trade information, including the identities of the customers 
placing the trades.\70\
---------------------------------------------------------------------------

    \68\ See id.
    \69\ See id.
    \70\ See id.
---------------------------------------------------------------------------

    Finally, NYSE Arca asserts that the oversight of the Index by the 
Benchmark Administrator and the CME mitigates concerns relating to 
manipulation.\71\ The Exchange states that, to date, there has been no 
evidence that the Index has been subject to manipulation or that the 
``Index provider'' \72\ has been failing to maintain processes and 
controls to prevent manipulation by its organization. It further 
asserts that the CME participates in an oversight committee of the 
Index that is responsible for regularly reviewing and overseeing the 
methodology, practice, standards, and scope of the Index to ensure that 
it continues to accurately track the spot prices of bitcoin.\73\ 
According to the Exchange, given that the Index formula and data 
sources are publicly available, if manipulation of the Index were to 
occur, it would be quickly detected by the CME and hundreds of 
sophisticated market participants.\74\
---------------------------------------------------------------------------

    \71\ See id. at 26076, 26079.
    \72\ See id. at 26079. The Exchange uses the term ``Index 
provider'' with respect to this particular assertion. The Commission 
understands the term to mean the Benchmark Administrator.
    \73\ See id. at 26076, 26079.
    \74\ See id. at 26079.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the 
Commission can find no basis to conclude that NYSE Arca has articulated 
other means to prevent fraud and manipulation that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement. 
First, the record does not demonstrate that the proposed methodology 
for calculating the Index would make the proposed ETP resistant to 
fraud or manipulation such that a surveillance-sharing agreement with a 
regulated market of significant size is unnecessary.\75\ Specifically, 
the Exchange has not assessed the possible influence that spot 
platforms not included among the Constituent Bitcoin Platforms would 
have on bitcoin prices used to calculate the Index. As discussed above, 
NYSE Arca does not contest the presence of possible sources of fraud 
and manipulation in the bitcoin spot market generally.\76\ Instead, 
NYSE Arca focuses its analysis on the Constituent Bitcoin Platforms. 
Importantly, however, the record does not demonstrate that these 
possible sources of fraud and manipulation in the broader bitcoin spot 
market do not affect the Constituent Bitcoin Platforms that represent a 
slice of the bitcoin spot market. To the extent that fraudulent and 
manipulative trading on the broader bitcoin market could influence 
prices or trading activity on the Constituent Bitcoin Platforms, the 
Constituent Bitcoin Platforms would not be inherently resistant to 
manipulation.\77\
---------------------------------------------------------------------------

    \75\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601.
    \76\ See supra notes 57-59 and accompanying text.
    \77\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------

    Moreover, the Exchange's assertions that the Index's methodology 
helps make the Index resistant to manipulation are contradicted by the 
Registration Statement's own statements. The Sponsor raises, but does 
not address here, concerns regarding the Index in the Registration 
Statement, stating that ``the [Index] has a limited history and there 
are limitations with the price of bitcoin reflected there.'' \78\ And 
while the Exchange asserts that the Index's exclusive use of 
Constituent Bitcoin Platforms helps make the Index resistant to 
manipulation, such assertions are called into question by the Sponsor's 
own statements in the Registration Statement that ``[b]itcoin 
[platforms] on which users trade bitcoin . . . may be more exposed to 
fraud and security breaches than established, regulated exchanges for 
other financial assets or instruments, which could have a negative 
impact on the performance of the Trust.'' \79\ Constituent Bitcoin 
Platforms are a subset of the existing bitcoin platforms. Although the 
Sponsor raises concerns regarding fraud and security of bitcoin 
platforms in the Registration Statement, the Exchange does not explain 
how or why such concerns are consistent with its assertion that the 
Index is resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \78\ See Registration Statement at 30.
    \79\ See id. at 14.
---------------------------------------------------------------------------

    NYSE Arca also has not shown that its proposed use of 12 equally-
sized time intervals of five minute length over the observation window 
between 3:00 p.m. and 4:00 p.m. E.T. to calculate the Index would 
effectively be able to eliminate fraudulent or manipulative activity 
that is not transient. Fraud and manipulation in the bitcoin spot 
market could persist for a ``significant duration.'' \80\ The Exchange 
does not connect the use of such partitions to the duration of the 
effects of the wash and fictitious trading that may exist in the 
bitcoin spot market.\81\ Thus, the Exchange fails to establish how the 
Index's methodology eliminates fraudulent or manipulative activity that 
is not transient.\82\
---------------------------------------------------------------------------

    \80\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \81\ See WisdomTree Order, 86 FR at 69327.
    \82\ See USBT Order, 85 FR at 12607.
---------------------------------------------------------------------------

    While the Exchange asserts that the oversight of the Constituent 
Bitcoin Platforms helps to prevent and detect manipulation, the level 
of regulation of the Constituent Bitcoin Platforms is not equivalent to 
the obligations, authority, and oversight of national securities 
exchanges or futures exchanges and therefore is not an appropriate 
substitute.\83\ National securities exchanges are required to have 
rules that are ``designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.'' \84\ Moreover, national securities exchanges must file 
proposed rules with the Commission regarding certain material aspects 
of their operations,\85\ and the Commission has the authority to 
disapprove any such rule that is not consistent with the requirements 
of the Exchange Act.\86\ Thus, national securities exchanges are 
subject to Commission oversight of, among other things, their 
governance, membership qualifications, trading rules, disciplinary 
procedures, recordkeeping, and fees.\87\
---------------------------------------------------------------------------

    \83\ See also id. at 12603-05.
    \84\ See 15 U.S.C. 78f(b)(5).
    \85\ 17 CFR 240.19b-4(a)(6)(i).
    \86\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rules 
changes with the Commission and provides the Commission with the 
authority to disapprove proposed rule changes that are not 
consistent with the Exchange Act. Designated contract markets 
(``DCMs'') (commonly called ``futures markets'') registered with and 
regulated by the CFTC must comply with, among other things, a 
similarly comprehensive range of regulatory principles and must file 
rule changes with the CFTC. See, e.g., Designated Contract Markets 
(DCMs), CFTC, available at https://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \87\ See Winklevoss Order, 83 FR at 37597.
---------------------------------------------------------------------------

    The Constituent Bitcoin Platforms, on the other hand, have none of 
these requirements (none are registered as a national securities 
exchange).\88\ While the Exchange asserts that various entities require 
the Constituent Bitcoin Platforms to adopt certain policies and 
processes, including AML/KYC

[[Page 74162]]

compliance policies, such requirements are fundamentally different from 
the Exchange Act's requirements for national securities exchanges.\89\
---------------------------------------------------------------------------

    \88\ See 15 U.S.C. 78e, 78f.
    \89\ See USBT Order, 85 FR at 12603. The Commission has 
previously concluded that such AML and KYC policies and procedures 
do not serve as a substitute for, and are not otherwise dispositive 
in the analysis regarding the importance of having a surveillance-
sharing agreement with a regulated market of significant size 
relating to bitcoin. For example, AML and KYC policies and 
procedures do not substitute for the sharing of information about 
market trading activity or clearing activity and do not substitute 
for regulation of a national securities exchange. See id. at 12603 
n.101.
---------------------------------------------------------------------------

    NYSE Arca's further assertions regarding CFTC's enforcement 
authority with respect to the Constituent Bitcoin Platforms also do not 
establish a level of oversight sufficient to dispense with the 
requisite surveillance-sharing agreement. While the Commission 
recognizes that the CFTC maintains some jurisdiction over the bitcoin 
spot market, under the Commodity Exchange Act, the CFTC does not have 
regulatory authority over bitcoin spot trading platforms, including the 
Constituent Bitcoin Platforms.\90\ Except in certain limited 
circumstances, bitcoin spot trading platforms are not required to 
register with the CFTC, and the CFTC does not set standards for, 
approve the rules of, examine, or otherwise regulate bitcoin spot 
markets.\91\ As the CFTC itself stated, while the CFTC ``has an 
important role to play,'' U.S. law ``does not provide for direct, 
comprehensive Federal oversight of underlying Bitcoin or virtual 
currency spot markets.'' \92\
---------------------------------------------------------------------------

    \90\ See id. at 12604.
    \91\ See id.
    \92\ See Winklevoss Order, 83 FR at 37599 n.288.
---------------------------------------------------------------------------

    Further, although NYSE Arca states that the Constituent Bitcoin 
Platforms must cooperate with inquiries and investigations of 
regulators and the Benchmark Administrator, it does not describe the 
scope of such requirements or what authority the Benchmark 
Administrator or regulators would have to compel the platforms'' 
cooperation. And while NYSE Arca asserts that the CME has in place 
information-sharing agreements with the Constituent Bitcoin Platforms, 
it does not provide any information on the scope, terms, or enforcement 
authority for such agreements. Nor has NYSE Arca put any information in 
the record as to whether and how it would use or enforce such 
agreements. Moreover, such agreements are contractual in nature and do 
not satisfy the regulatory requirements or purposes of national 
securities exchanges and the Exchange Act. The CME (and the CFTC, as 
discussed above) does not have regulatory authority over the spot 
bitcoin trading platforms,\93\ and, while the CME is regulated by the 
CFTC, the CFTC's regulations do not extend to the Constituent Bitcoin 
Platforms by virtue of such contractual agreements.
---------------------------------------------------------------------------

    \93\ See supra notes 90-92 and accompanying text.
---------------------------------------------------------------------------

    While NYSE Arca asserts the Benchmark Administrator oversees the 
integrity of the Index, the oversight by the Benchmark Administrator 
does not represent a unique measure to resist manipulation beyond 
mechanisms that exist in securities or commodities markets. Other 
commodity-based and equity index ETPs approved by the Commission for 
listing and trading utilize reference rates or indices administered by 
similar benchmark administrators,\94\ and the Commission has not, in 
those instances, dispensed with the need for a surveillance-sharing 
agreement with a significant regulated market.\95\ For the same reason, 
even if, as the Exchange claims, there is no evidence that the Index 
has been subject to manipulation or that the Benchmark Administrator 
ever failed to maintain processes and controls to prevent manipulation 
by its organization, such lack of evidence is not a basis for the 
Commission to disregard the need for a surveillance-sharing agreement.
---------------------------------------------------------------------------

    \94\ See, e.g., Securities Exchange Act Release Nos. 80840 (June 
1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33) (approving 
the listing and trading of shares of exchange traded funds seeking 
to track the Solactive GLD EUR Gold Index, Solactive GLD GBP Gold 
Index, and the Solactive GLD JPY Gold Index); and 83046 (Apr. 13, 
2018) 83 FR 17462 (Apr. 19, 2018) (SR-Nasdaq-2018-012) (approving 
the listing and trading of shares of an exchange-traded fund that 
seeks to track an equity index, the CBOE Russell 2000 30-Delta 
BuyWrite V2 Index).
    \95\ See USBT Order, 85 FR at 12605. See also supra note 19.
---------------------------------------------------------------------------

    Moreover, the Benchmark Administrator does not itself exercise 
governmental regulatory authority. Rather, the Benchmark Administrator 
is a registered, privately-held company in England.\96\ The Benchmark 
Administrator's relationship with the Constituent Bitcoin Platforms is 
based on their participation in the determination of reference rates, 
such as the Index. While the Benchmark Administrator is regulated by 
the UK FCA as a benchmark administrator, the UK FCA's regulations do 
not extend to the Constituent Bitcoin Platforms by virtue of their 
trade prices serving as input data underlying the Index.\97\
---------------------------------------------------------------------------

    \96\ See https://blog.cfbenchmarks.com/legal/ (stating that the 
Benchmark Administrator is authorized and regulated by the UK 
Financial Conduct Authority (``UK FCA'') as a registered Benchmark 
Administrator (FRN 847100) under the EU benchmark regulation, and 
further noting that the Benchmark Administrator is a member of the 
Crypto Facilities group of companies which is in turn a member of 
the Payward, Inc. group of companies, and Payward, Inc. is the owner 
and operator of the Kraken Exchange, a venue that facilitates the 
trading of cryptocurrencies). The Commission notes that the Kraken 
is one of the Constituent Bitcoin Platforms underlying the Index.
    \97\ See USBT Order, 85 FR at 12604. The Benchmark Administrator 
is also not required to apply certain provisions of EU benchmark 
regulation to the Constituent Bitcoin Platforms because the 
Reference Rate's input data is not ``contributed.'' See Benchmark 
Statement, at 5 available at https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Benchmark+Statement.pdf.
---------------------------------------------------------------------------

    Further, the oversight performed by the Benchmark Administrator of 
the Constituent Bitcoin Platforms is for the purpose of ensuring the 
accuracy and integrity of the Index.\98\ Such oversight serves a 
fundamentally different purpose as compared to the regulation of 
national securities exchanges and the requirements of the Exchange Act. 
Likewise, while the Exchange states that the CME participates in an 
oversight committee for the Index, the purpose of such committee is to 
ensure that the Index continues to accurately track the spot prices of 
bitcoin. While the Commission recognizes that these oversight functions 
may be important in ensuring the integrity of the Index, such 
requirements do not imbue either the Benchmark Administrator, the CME 
with respect to the Constituent Bitcoin Platforms, or the Constituent 
Bitcoin Platforms themselves, with regulatory authority similar to that 
the Exchange Act confers upon self-regulatory organizations such as 
national securities exchanges.\99\
---------------------------------------------------------------------------

    \98\ See Notice, 86 FR at 26077 (``. . . an oversight function 
is implemented by the Benchmark Administrator in seeking to ensure 
that the Index is administered through codified policies for Index 
integrity.'').
    \99\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    Finally, the Exchange does not sufficiently explain the 
significance of the Index's purported resistance to manipulation to the 
overall analysis of whether the proposal to list and trade the Shares 
is designed to prevent fraud and manipulation. The Index is used by the 
Trust to value its bitcoin and to calculate its NAV. However, the 
Shares would trade at market-based prices in the secondary market, not 
at NAV.
    In sum, none of NYSE Arca's assertions suggests that other means to 
prevent fraud and manipulation are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement. Importantly, even if 
NYSE Arca had provided evidence to establish its assertions addressed 
above regarding the robustness of the Index methodology and framework 
and the regulation and oversight of the Constituent Bitcoin Platforms 
and Index, such assertions would render the proposed ETP no

[[Page 74163]]

more resistant to manipulation than derivative products based on 
traditional commodities or securities markets.\100\ Thus, the record 
does not establish that NYSE Arca may satisfy Section 6(b)(5) of the 
Exchange Act without entering into a surveillance-sharing agreement 
with a regulated market of significant size.
---------------------------------------------------------------------------

    \100\ See USBT Order, 85 FR at 12599.
---------------------------------------------------------------------------

    (2) Assertions Relating to Surveillance-Sharing Agreements
    As NYSE Arca has not demonstrated that other means besides 
surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices, the Commission next 
examines whether the record supports the conclusion that NYSE Arca has 
entered into a comprehensive surveillance-sharing agreement with a 
regulated market of significant size relating to the underlying assets. 
In this context, the term ``market of significant size'' includes a 
market (or group of markets) as to which (i) there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist in detecting and 
deterring misconduct, and (ii) it is unlikely that trading in the ETP 
would be the predominant influence on prices in that market.\101\
---------------------------------------------------------------------------

    \101\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that provides guidance to market 
participants. See id.
---------------------------------------------------------------------------

    However, NYSE Arca does not identify any market as a ``market of 
significant size'' and accordingly makes no assertions regarding, and 
provides no information to establish, either prong of the ``market of 
significant size'' determination.
    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation for a comprehensive surveillance-sharing agreement with a 
regulated market of significant size, or other means to prevent 
fraudulent and manipulative acts and practices that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement, 
resides with the listing exchange. Because there is insufficient 
evidence in the record demonstrating that NYSE Arca has satisfied this 
obligation, the Commission cannot approve the proposed ETP for listing 
and trading on NYSE Arca.

C. Whether NYSE Arca Has Met Its Burden to Demonstrate That the 
Proposal Is Designed To Protect Investors and the Public Interest

    NYSE Arca contends that, if approved, the proposed ETP would 
protect investors and the public interest. However, the Commission must 
consider these potential benefits in the broader context of whether the 
proposal meets each of the applicable requirements of the Exchange 
Act.\102\ Because NYSE Arca has not demonstrated that its proposed rule 
change is designed to prevent fraudulent and manipulative acts and 
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \102\ See id. at 37601. See also GraniteShares Order, 83 FR at 
43931; ProShares Order, 83 FR at 43941; USBT Order, 85 FR at 12615.
---------------------------------------------------------------------------

    NYSE Arca asserts that the Trust will provide investors with 
exposure to bitcoin in a manner that is more efficient and convenient 
than the purchase of stand-alone bitcoin, while also mitigating some of 
the risk by reducing the volatility typically associated with the 
purchase of stand-alone bitcoin and without the uncertain and often 
complex requirements relating to acquiring and/or holding bitcoin.\103\ 
NYSE Arca concludes that the manipulation concerns previously 
articulated by the Commission are mitigated by investor protection 
issues.\104\
---------------------------------------------------------------------------

    \103\ See Notice, 86 FR at 26073.
    \104\ See id. at 26078.
---------------------------------------------------------------------------

    In essence, NYSE Arca asserts that the risky nature of a direct 
investment in the underlying bitcoin compels approval of the proposed 
rule change. The Commission disagrees. Pursuant to Section 19(b)(2) of 
the Exchange Act, the Commission must approve a proposed rule change 
filed by a national securities exchange if it finds that the proposed 
rule change is consistent with the applicable requirements of the 
Exchange Act--including the requirement under Section 6(b)(5) that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices--and it must disapprove 
the filing if it does not make such a finding.\105\ Thus, even if a 
proposed rule change purports to protect investors from a particular 
type of investment risk--such as complexity to acquire and/or hold the 
underlying asset--the proposed rule change may still fail to meet the 
requirements under the Exchange Act.\106\
---------------------------------------------------------------------------

    \105\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \106\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR 
at 69334.
---------------------------------------------------------------------------

    Here, even if it were true that, compared to trading in unregulated 
bitcoin spot markets, trading a bitcoin-based ETP on a national 
securities exchange provides some additional protection to investors, 
the Commission must consider this potential benefit in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act.\107\ As explained above, for bitcoin-
based ETPs, the Commission has consistently required that the listing 
exchange have a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to bitcoin, or demonstrate 
that other means to prevent fraudulent and manipulative acts and 
practices are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The listing exchange has not met that 
requirement here. Therefore, the Commission is unable to find that the 
proposed rule change is consistent with the statutory standard.
---------------------------------------------------------------------------

    \107\ See supra note 102.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Exchange Act, the Commission 
must disapprove a proposed rule change filed by a national securities 
exchange if it does not find that the proposed rule change is 
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices.\108\
---------------------------------------------------------------------------

    \108\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, NYSE Arca has not met its burden 
of demonstrating that the proposal is consistent with Exchange Act 
Section 6(b)(5),\109\ and, accordingly, the Commission must disapprove 
the proposal.\110\
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78f(b)(5).
    \110\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f). A commenter argues, for efficiency 
reasons, against approving a bitcoin ETP. This commenter asserts 
that the adoption of multiple digital assets would force merchants 
to deal with ``complexity [that] doesn't foster [the] modularity 
which is needed to gain economic efficiency.'' See JC Letter at 1. 
For the reasons discussed throughout, however, see supra note 40, 
the Commission is disapproving the proposed rule change because it 
does not find that the proposed rule change is consistent with the 
Exchange Act. See also USBT Order, 85 FR at 12615.
---------------------------------------------------------------------------

D. Other Comments

    Comment letters address the general nature and value of bitcoin; 
\111\ the inherent value of, and risks of investing

[[Page 74164]]

in, bitcoin; \112\ the potential impact of Commission approval of 
bitcoin ETPs on the U.S. economy and financial system; \113\ and the 
retirement investment risks of a bitcoin ETP.\114\ Ultimately, however, 
additional discussion of these topics is unnecessary, as they do not 
bear on the basis for the Commission's decision to disapprove the 
proposal.
---------------------------------------------------------------------------

    \111\ See JC Letter; letter from Sam Ahn, dated May 26, 2021 
(``Ahn Letter'').
    \112\ See JC Letter; Ahn Letter.
    \113\ See JC Letter.
    \114\ See id.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2021-31 be, and 
hereby is, disapproved.

    By the Commission.
Vanessa A. Countryman,
Secretary.
 [FR Doc. 2021-28254 Filed 12-28-21; 8:45 am]
 BILLING CODE 8011-01-P


