[Federal Register Volume 87, Number 128 (Wednesday, July 6, 2022)]
[Notices]
[Pages 40299-40321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-14310]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95180; File No. SR-NYSEArca-2021-90]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, to 
List and Trade Shares of Grayscale Bitcoin Trust Under NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares)

June 29, 2022.

I. Introduction

    On October 19, 2021, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of Grayscale Bitcoin Trust (``Trust'') under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares). The proposed rule change 
was published for comment in the Federal Register on November 8, 
2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93504 (Nov. 2, 
2021), 86 FR 61804. Comments received on the proposed rule change 
are available at: https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190.htm.
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    On December 15, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On February 4, 2022, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On April 21, 2022, the Exchange filed Amendment No. 1, which replaced 
and superseded the proposed rule change in its entirety, and on May 4, 
2022, the Commission provided notice of Amendment No. 1 to the proposed 
rule change and designated a longer period for Commission action on the 
proposed rule change, as modified by Amendment No. 1.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 93788, 86 FR 72291 
(Dec. 21, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 94151, 87 FR 7889 
(Feb. 10, 2022).
    \8\ See Securities Exchange Act Release No. 94844, 87 FR 28043 
(May 10, 2022) (``Amendment No. 1''). Amendment No. 1 to the 
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20125938-286383.pdf.

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[[Page 40300]]

    This order disapproves the proposed rule change, as modified by 
Amendment No. 1. The Commission concludes that NYSE Arca has not met 
its burden under the Exchange Act and the Commission's Rules of 
Practice to demonstrate that its proposal is consistent with the 
requirements of Exchange Act Section 6(b)(5), which requires, in 
relevant part, that the rules of a national securities exchange be 
``designed to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same analytical framework used in 
its orders considering previous proposals to list bitcoin \10\-based 
commodity trusts and bitcoin-based trust issued receipts to assess 
whether a listing exchange of an exchange-traded product (``ETP'') can 
meet its obligations under Exchange Act Section 6(b)(5).\11\ As the 
Commission has explained, an exchange that lists bitcoin-based ETPs 
\12\ can meet its obligations under Exchange Act Section 6(b)(5) by 
demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to the underlying or reference bitcoin assets.\13\
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    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Amendment No. 1, 87 FR at 28045.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Kryptoin 
Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021), 
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under 
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006 
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37) 
(``SkyBridge Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022) 
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin 
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), 
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR 
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10, 
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X 
Order''); Order Disapproving a Proposed Rule Change, as Modified by 
Amendment No. 1, To List and Trade Shares of the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 94571 (Mar. 31, 2022), 
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities 
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2, 
2022) (SR-NYSEArca-2021-67) (``One River Order''). In addition, 
orders were issued by delegated authority on the following matters: 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to the Listing and Trading of Shares of the SolidX 
Bitcoin Trust Under NYSE Arca Equities Rule 8.201, Securities 
Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 16247 (Apr. 3, 
2017) (SR-NYSEArca-2016-101) (``SolidX Order''); Order Disapproving 
a Proposed Rule Change To List and Trade the Shares of the ProShares 
Bitcoin ETF and the ProShares Short Bitcoin ETF, Securities Exchange 
Act Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) 
(SR-NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a 
Proposed Rule Change To List and Trade the Shares of the 
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR 
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares, Securities Exchange Act Release No. 
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck Order''); Order Granting Approval of a Proposed Rule 
Change, as Modified by Amendment No. 2, To List and Trade Shares of 
the Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E, 
Commentary .02 (Trust Issued Receipts), Securities Exchange Act 
Release No. 94620 (Apr. 6, 2022), 87 FR 21676 (Apr. 12, 2022) (SR-
NYSEArca-2021-53) (``Teucrium Order''); Order Granting Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List 
and Trade Shares of the Valkyrie XBTO Bitcoin Futures Fund Under 
Nasdaq Rule 5711(g), Securities Exchange Act Release No. 94853 (May 
5, 2022), 87 FR 28848 (May 11, 2022) (SR-NASDAQ-2021-066) 
(``Valkyrie XBTO Order'').
    \12\ As used in this order, the term ``ETFs'' refers to open-end 
funds that register the offer and sale of their shares under the 
Securities Act of 1933 (``Securities Act'') and are regulated as 
investment companies under the Investment Company Act of 1940 
(``1940 Act''). The term ``ETPs'' refers to exchange-traded products 
that register the offer and sale of their shares under the 
Securities Act but are not regulated under the 1940 Act, such as 
commodity trusts and trust issued receipts. Commenters have 
sometimes used these terms interchangeably, and it is not always 
clear which type of product a commenter is referring to. 
Accordingly, unless clear from the context, the Commission 
interprets statements from the Exchange or a commenter to refer to 
an ETP.
    \13\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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    In this context, the terms ``significant market'' and ``market of 
significant size'' include a market (or group of markets) as to which 
(a) there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
successfully manipulate the ETP, so that a surveillance-sharing 
agreement would assist in detecting and deterring misconduct, and (b) 
it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\14\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \15\
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    \14\ See Winklevoss Order, 83 FR at 37594. See also USBT Order, 
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322.
    \15\ See USBT Order, 85 FR at 12597.
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    Although surveillance-sharing agreements are not the exclusive 
means by which a listing exchange of a commodity-trust ETP can meet its 
obligations under Exchange Act Section 6(b)(5), such agreements have 
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has 
historically recognized their importance. And where, as here, a listing 
exchange fails to establish that other means to prevent fraudulent and 
manipulative acts and practices will be sufficient, the listing 
exchange must enter into a surveillance-sharing agreement with a 
regulated market of significant size because such agreements detect and 
deter fraudulent and manipulative activity.\16\
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    \16\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98) 
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at 
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43924; USBT Order, 85 FR at 12596.

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[[Page 40301]]

    The Commission has long recognized that surveillance-sharing 
agreements ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur'' and thus ``enable the Commission 
to continue to effectively protect investors and promote the public 
interest.'' \17\ As the Commission has emphasized, it is essential for 
an exchange listing a derivative securities product to have the ability 
that surveillance-sharing agreements provide to obtain information 
necessary to detect, investigate, and deter fraud and market 
manipulation, as well as violations of exchange rules and applicable 
federal securities laws and rules.\18\ The hallmarks of a surveillance-
sharing agreement are that the agreement provides for the sharing of 
information about market trading activity, clearing activity, and 
customer identity; that the parties to the agreement have reasonable 
ability to obtain access to and produce requested information; and that 
no existing rules, laws, or practices would impede one party to the 
agreement from obtaining this information from, or producing it to, the 
other party.\19\
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    \17\ See NDSP Adopting Release, 63 FR at 70954, 70959. See also 
id. at 70959 (``It is essential that the SRO [self-regulatory 
organization] have the ability to obtain the information necessary 
to detect and deter market manipulation, illegal trading and other 
abuses involving the new derivative securities product. 
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative 
securities product and its underlying securities in place between 
the SRO listing or trading a derivative product and the markets 
trading the securities underlying the new derivative securities 
product.'').
    \18\ See NDSP Adopting Release, 63 FR at 70959.
    \19\ See Winklevoss Order, 83 FR at 37592-93 (discussing Letter 
from Brandon Becker, Director, Division of Market Regulation, 
Commission, to Gerard D. O'Connell, Chairman, Intermarket 
Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm).
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    The Commission has explained that the ability of a national 
securities exchange to enter into surveillance-sharing agreements 
``furthers the protection of investors and the public interest because 
it will enable the [e]xchange to conduct prompt investigations into 
possible trading violations and other regulatory improprieties.'' \20\ 
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of 
derivative security products, such as equity options, because a 
surveillance-sharing agreement ``permits the sharing of information'' 
that is ``necessary to detect'' manipulation and ``provide[s] an 
important deterrent to manipulation because [it] facilitate[s] the 
availability of information needed to fully investigate a potential 
manipulation if it were to occur.'' \21\ With respect to ETPs, when 
approving the listing and trading of one of the first commodity-linked 
ETPs--a commodity-linked exchange-traded note--on a national securities 
exchange, the Commission continued to emphasize the importance of 
surveillance-sharing agreements, stating that the listing exchange had 
entered into surveillance-sharing agreements with each of the futures 
markets on which pricing of the ETP would be based and stating that 
``[t]hese agreements should help to ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making [the commodity-linked notes] less 
readily susceptible to manipulation.'' \22\
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    \20\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990), 
55 FR 13344 (Apr. 10, 1990) (Notice of Filing and Order Granting 
Accelerated Approval to Proposed Rule Change Regarding Cooperative 
Agreements With Domestic and Foreign Self-Regulatory Organizations) 
(SR-NYSE-90-14).
    \21\ Securities Exchange Act Release No. 33555 (Jan. 31, 1994), 
59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving 
listing of options on American Depositary Receipts (``ADR'')) (``ADR 
Option Order''). The Commission further stated that it ``generally 
believes that having a comprehensive surveillance sharing agreement 
in place, between the exchange where the ADR option trades and the 
exchange where the foreign security underlying the ADR primarily 
trades, will ensure the integrity of the marketplace. The Commission 
further believes that the ability to obtain relevant surveillance 
information, including, among other things, the identity of the 
ultimate purchasers and sellers of securities, is an essential and 
necessary component of a comprehensive surveillance sharing 
agreement.'' Id.
    \22\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995), 
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also 
Winklevoss Order, 83 FR at 37593 n.206.
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    Consistent with these statements, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity and the ETP listing exchange has entered into 
surveillance-sharing agreements with, or held Intermarket Surveillance 
Group (``ISG'') membership in common with, that market.\23\ Moreover, 
the surveillance-sharing agreements have been consistently present 
whenever the Commission has approved the listing and trading of 
derivative securities, even where the underlying securities were also 
listed on national securities exchanges--such as options based on an 
index of stocks traded on a national securities exchange--and were thus 
subject to the Commission's direct regulatory authority.\24\
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    \23\ See Winklevoss Order, 83 FR at 37594. Furthermore, the 
Commission notes that those cases dealt with a futures market that 
had been trading for a long period of time before an exchange 
proposed a commodity-trust ETP based on the asset underlying those 
futures. For example, silver futures and gold futures began trading 
in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on 
spot silver and gold were approved for listing and trading in 2006 
and 2004. See Securities Exchange Act Release No. 53521 (Mar. 20, 
2006), 71 FR 14967 (Mar. 24, 2006) (SR-Amex-2005-072) (order 
approving iShares Silver Trust); Securities Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) 
(order approving streetTRACKS Gold Shares). Platinum futures and 
palladium futures began trading in 1956 and 1968, respectively, see 
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot platinum and palladium 
were approved for listing and trading in 2009. See Securities 
Exchange Act Release No. 61220 (Dec. 22, 2009), 74 FR 68895 (Dec. 
29, 2009) (SR-NYSEArca-2009-94) (order approving ETFS Palladium 
Trust); Securities Exchange Act Release No. 61219 (Dec. 22, 2009), 
74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) (order approving 
ETFS Platinum Trust).
    \24\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at 
5621. The Commission has also recognized that surveillance-sharing 
agreements provide a necessary deterrent to fraud and manipulation 
in the context of index options even when (i) all of the underlying 
index component stocks were either registered with the Commission or 
exempt from registration under the Exchange Act; (ii) all of the 
underlying index component stocks were traded in the U.S. either 
directly or as ADRs on a national securities exchange; and (iii) 
effective international ADR arbitrage alleviated concerns over the 
relatively smaller ADR trading volume, helped to ensure that ADR 
prices reflected the pricing on the home market, and helped to 
ensure more reliable price determinations for settlement purposes, 
due to the unique composition of the index and reliance on ADR 
prices. See Securities Exchange Act Release No. 26653 (Mar. 21, 
1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-87-25) (stating 
that ``surveillance-sharing agreements between the exchange on which 
the index option trades and the markets that trade the underlying 
securities are necessary'' and that ``[t]he exchange of surveillance 
data by the exchange trading a stock index option and the markets 
for the securities comprising the index is important to the 
detection and deterrence of intermarket manipulation''). And the 
Commission has explained that surveillance-sharing agreements 
``ensure the availability of information necessary to detect and 
deter potential manipulations and other trading abuses'' even when 
approving options based on an index of stocks traded on a national 
securities exchange. See Securities Exchange Act Release No. 30830 
(June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-Amex-91-22).
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin

[[Page 40302]]

market is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\25\ In response, the Commission has stated that, if a 
listing exchange could establish that the underlying market inherently 
possesses a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets, the 
listing market would not necessarily need to enter into a surveillance-
sharing agreement with a regulated significant market.\26\ Such 
resistance to fraud and manipulation, however, must be novel and beyond 
those protections that exist in traditional commodity markets or 
securities markets for which surveillance-sharing agreements in the 
context of listing derivative securities products have been 
consistently present.\27\
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    \25\ See USBT Order, 85 FR at 12597.
    \26\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and [spot] bitcoin markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation). See also USBT Order, 85 FR at 
12597.
    \27\ See USBT Order, 85 FR at 12597, 12599.
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    Here, NYSE Arca contends that approval of the proposal is 
consistent with Section 6(b)(5) of the Exchange Act, and, in 
particular, Section 6(b)(5)'s requirement that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices and to protect investors and the public 
interest.\28\ As discussed in more detail below, NYSE Arca asserts that 
the proposal is consistent with Section 6(b)(5) of the Exchange Act 
because bitcoin offers novel protections beyond those that exist in 
traditional commodity markets or equity markets and the proposal's use 
of the Index (as described below) \29\ represents an effective means to 
prevent fraudulent and manipulative acts and practices.\30\ In 
addition, NYSE Arca asserts that the Chicago Mercantile Exchange 
(``CME'') bitcoin futures market is a significant, surveilled, and 
regulated market that is ``closely connected'' to the spot bitcoin 
market, and that the Exchange may obtain information from the CME 
bitcoin futures market and other entities that are members of the ISG 
to assist in detecting and deterring potential fraud and manipulation 
with respect to the Trust and the Shares.\31\ In addition, NYSE Arca 
argues that the proposal would protect investors and the public 
interest because, among other things, the Exchange has in place 
surveillance procedures relating to trading in the Shares and the 
proposal would promote competition.\32\
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    \28\ See Amendment No. 1, 87 FR at 28051-54, 28059-60.
    \29\ See infra note 35 and accompanying text.
    \30\ See Amendment No. 1, 87 FR at 28051-53, 28059-60.
    \31\ See id. at 28054; 28060.
    \32\ See id. at 28060.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Exchange Act by addressing: in Section 
III.B.1 assertions that other means besides surveillance-sharing 
agreements will be sufficient to prevent fraudulent and manipulative 
acts and practices; in Section III.B.2 assertions that NYSE Arca has 
entered into a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to spot bitcoin; in 
Section III.B.3 assertions that the Commission must approve the 
proposal because the Commission has approved the listing and trading of 
ETFs and ETPs that hold CME bitcoin futures; in Section III.C 
assertions that the proposal is consistent with the protection of 
investors and the public interest; and in Section III.D other arguments 
raised by commenters.
    Based on its analysis, the Commission concludes that NYSE Arca has 
not established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. The Commission further 
concludes that NYSE Arca has not established that it has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin, the underlying bitcoin assets 
that would be held by the Trust. As a result, the Commission is unable 
to find that the proposed rule change is consistent with the statutory 
requirements of Exchange Act Section 6(b)(5).
    The Commission emphasizes that its disapproval of this proposed 
rule change, as modified by Amendment No. 1, does not rest on an 
evaluation of the relative investment quality of a product holding spot 
bitcoin versus a product holding CME bitcoin futures, or an assessment 
of whether bitcoin, or blockchain technology more generally, has 
utility or value as an innovation or an investment. Rather, the 
Commission is disapproving this proposed rule change, as modified by 
Amendment No. 1, because, as discussed below, NYSE Arca has not met its 
burden to demonstrate that its proposal is consistent with the 
requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    As described in more detail in Amendment No. 1,\33\ the Exchange 
proposes to list and trade the Shares of the Trust under NYSE Arca Rule 
8.201-E, which governs the listing and trading of Commodity-Based Trust 
Shares on the Exchange.
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    \33\ See supra note 8. See also Amendment No. 1 to Registration 
Statement on Form 10, dated December 31, 2019, filed with the 
Commission on behalf of the Trust (``Registration Statement''); 
Annual Report on Form 10-K for the fiscal year ended December 31, 
2021, filed with the Commission on the behalf of the Trust (``2021 
10-K'').
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    The investment objective of the Trust is for the value of the 
Shares (based on bitcoin per Share) to reflect the value of the 
bitcoins held by the Trust, as determined by reference to the ``Index 
Price,'' less the Trust's expenses and other liabilities.\34\ The 
``Index Price'' is the U.S. dollar value of a bitcoin represented by 
the ``Index,'' calculated at 4:00 p.m., New York time, on each business 
day.\35\ According to the Exchange, the Index Provider develops, 
calculates, and publishes the Index on a continuous basis using the 
price at certain spot bitcoin trading platforms selected by the Index 
Provider.\36\ As of December 31, 2021, the spot bitcoin trading 
platforms included in the Index were: Coinbase Pro, Bitstamp, Kraken, 
and LMAX Digital (``Constituent Platforms'').\37\ The Index applies an

[[Page 40303]]

algorithm to the price of bitcoin on the Constituent Platforms 
calculated on a per second basis over a 24-hour period.\38\
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    \34\ See Amendment No. 1, 87 FR at 28045. Grayscale Investments, 
LLC (``Sponsor'') is the sponsor of the Trust and is a wholly-owned 
subsidiary of Digital Currency Group, Inc. Delaware Trust Company 
(``Trustee'') is the trustee of the Trust. The custodian for the 
Trust is Coinbase Custody Trust Company, LLC (``Custodian''). The 
administrator of the Trust is BNY Mellon Asset Servicing 
(``Administrator''). The distribution and marketing agent for the 
Trust is Genesis. The Trust operates pursuant to a trust agreement 
(``Trust Agreement'') between the Sponsor and the Trustee. See id. 
at 28044.
    \35\ See id. at 28049. According to the Exchange, the index 
provider for the Trust is CoinDesk Indices, Inc., formerly known as 
TradeBlock, Inc. (``Index Provider''). See id. at 28044. While the 
Exchange, in the proposal, does not name the Index that the Trust 
would use to value the bitcoins held by the Trust, the Exchange does 
provide that the value of the Index, as well as additional 
information regarding the Index, may be found at: https://tradeblock.com/markets/index/xbx. See id. at 28058. Further, in its 
letter to the Commission, the Sponsor states that the Trust values 
its bitcoin holdings based on the CoinDesk Bitcoin Price Index (XBX) 
(formerly known as the Tradeblock XBX Index). See Letter from Davis 
Polk & Wardwell LLP, on behalf of the Sponsor, dated Nov. 29, 2021 
(``Grayscale Letter I''), at 5.
    \36\ See Amendment No. 1, 87 FR at 28049.
    \37\ See id. at 28047, 28049, 28052 n.35. In its proposal, NYSE 
Arca uses the term ``U.S.-Compliant Exchanges'' to describe 
Constituent Platforms that are ``compliant with applicable U.S. 
federal and state licensing requirements and practices regarding AML 
and KYC regulations.'' Id. at 28052 n.35. According to NYSE Arca, 
``[a]ll Constituent [Platforms] are U.S.-Compliant Exchanges.'' Id.
    \38\ See id. at 28049. According to the Exchange, prior to 
February 1, 2022, the Trust valued its bitcoins for operational 
purposes by reference to the volume-weighted average Index Price 
(``Old Index Price''). The Old Index Price was calculated by 
applying a weighting algorithm to the price and trading volume data 
for the immediately preceding 24-hour period as of 4:00 p.m., New 
York time, derived from the Constituent Platforms reflected in the 
Index on such trade date, and overlaying an averaging mechanism to 
the price produced. Thus, whereas the Old Index Price reflected the 
price of a bitcoin at 4:00 p.m., New York time, calculated by taking 
the average of each price of a bitcoin produced by the Index over 
the preceding 24-hour period, as of February 1, 2022, the Index 
Price reflects the price of a bitcoin at 4:00 p.m., New York time, 
calculated based on the price and trading volume data of the 
Constituent Platforms over the preceding 24-hour period. According 
to the Exchange, the Index Price differs from the Old Index Price 
only in that it does not use an additional averaging mechanism; the 
Index Price otherwise uses the same methodology as the Old Index 
Price, and there has been no change to the Index used to determine 
the Index Price or the criteria used to select the Constituent 
Platforms. See id. at 28053 n.44.
---------------------------------------------------------------------------

    The Trust's assets will consist solely of bitcoins; Incidental 
Rights; \39\ IR Virtual Currency; \40\ proceeds from the sale of 
bitcoins, Incidental Rights, and IR Virtual Currency pending use of 
such cash for payment of Additional Trust Expenses \41\ or distribution 
to the shareholders; and any rights of the Trust pursuant to any 
agreements, other than the Trust Agreement, to which the Trust is a 
party. Each Share represents a proportional interest, based on the 
total number of Shares outstanding, in each of the Trust's assets as 
determined in the case of bitcoin by reference to the Index Price, less 
the Trust's expenses and other liabilities (which include accrued but 
unpaid fees and expenses).\42\
---------------------------------------------------------------------------

    \39\ ``Incidental Rights'' are rights to acquire, or otherwise 
establish dominion and control over, any virtual currency or other 
asset or right, which rights are incident to the Trust's ownership 
of bitcoins and arise without any action of the Trust, or of the 
Sponsor or Trustee on behalf of the Trust. See id. at 28044 n.14.
    \40\ ``IR Virtual Currency'' is any virtual currency tokens, or 
other asset or right, acquired by the Trust through the exercise 
(subject to the applicable provisions of the Trust Agreement) of any 
Incidental Right. See id. at 28045 n.15.
    \41\ ``Additional Trust Expenses'' are any expenses incurred by 
the Trust in addition to the Sponsor's fee that are not Sponsor-paid 
expenses. See id. at 28045 n.16.
    \42\ See id. at 28045, 28047.
---------------------------------------------------------------------------

    On each business day at 4:00 p.m., New York time, or as soon 
thereafter as practicable, the Sponsor will evaluate the bitcoin held 
by the Trust and calculate and publish the ``Digital Asset Holdings'' 
of the Trust using the Index Price.\43\ The Trust's website, as well as 
one or more major market data vendors, will provide an intra-day 
indicative value (``IIV'') per Share updated every 15 seconds, as 
calculated by the Exchange or a third party financial data provider 
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m., 
E.T.). The IIV will be calculated using the same methodology as the 
Digital Asset Holdings of the Trust, specifically by using the prior 
day's closing Digital Asset Holdings per Share as a base and updating 
that value during the Exchange's Core Trading Session to reflect 
changes in the value of the Trust's Digital Asset Holdings during the 
trading day.\44\ In addition, according to the Exchange, ``each 
investor will have access to the current Digital Asset Holdings of the 
Trust through the Trust's website, as well as from one or more major 
market data vendors.'' \45\
---------------------------------------------------------------------------

    \43\ The Exchange does not define the term ``Digital Asset 
Holdings'' in the proposed rule change. Additional information about 
the calculation of the Digital Asset Holdings can be found in 
Amendment No. 1. See id. at 28047. The Trust does not expect to take 
any Incidental Rights or IR Virtual Currency it may hold into 
account for purposes of determining the Trust's Digital Asset 
Holdings. Id.
    \44\ See id. at 28058.
    \45\ Id.
---------------------------------------------------------------------------

    The Trust will issue Shares to authorized participants from time to 
time, but only in one or more Baskets (each ``Basket'' being a block of 
100 Shares). The creation of Baskets will be made only in exchange for 
the delivery to the Trust of the number of whole and fractional 
bitcoins represented by each Basket being created.\46\ The Trust may 
redeem Shares from time to time, but only in Baskets. The redemption of 
Baskets requires the distribution by the Trust of the number of 
bitcoins represented by the Baskets being redeemed. The redemption of a 
Basket will be made only in exchange for the distribution by the Trust 
of the number of whole and fractional bitcoins represented by each 
Basket being redeemed.\47\ Creation and redemption orders may be placed 
either ``in-kind'' or ``in-cash.'' \48\ Although the Trust will create 
Baskets only upon the receipt of bitcoins, and will redeem Baskets only 
by distributing bitcoins, an authorized participant may deposit cash 
with or receive cash from the Administrator, which will facilitate the 
purchase or sale of bitcoins through a liquidity provider on behalf of 
an authorized participant.\49\
---------------------------------------------------------------------------

    \46\ See id. at 28055.
    \47\ See id. at 28056.
    \48\ See id. at 28056-57.
    \49\ See id. at 28055-57.
---------------------------------------------------------------------------

    According to the Sponsor, shares of the Trust are currently offered 
to accredited investors within the meaning of Regulation D under the 
Securities Act, and, once such investors have held their shares for the 
requisite holding period pursuant to Rule 144 under the Securities Act, 
they have the ability to resell them through transactions on the OTCQX 
Best Market (``OTCQX''), an over-the-counter (``OTC'') marketplace 
operated by OTC Markets Group that is not registered with the 
Commission as a national securities exchange.\50\ The Sponsor states 
that these shares have been quoted on OTCQX since March 2015 and are 
available to investors through broker transactions.\51\ The Sponsor 
also states that, in the twelve months ended October 31, 2021, trading 
in these shares accounted for the most transactions by dollar volume of 
any security traded on OTCQX.\52\ The Sponsor further states that the 
Trust is the largest and most liquid bitcoin investment fund in the 
world and that the Sponsor is the world's largest digital currency 
asset manager, with more than $55 billion in assets under management as 
of October 29, 2021.\53\
---------------------------------------------------------------------------

    \50\ See Grayscale Letter I, at 2.
    \51\ See id.
    \52\ See id.
    \53\ See id. at 4.
---------------------------------------------------------------------------

III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is 
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act 
requires, in relevant part, that the rules of a national securities 
exchange be designed ``to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \54\ 
Under the Commission's

[[Page 40304]]

Rules of Practice, the ``burden to demonstrate that a proposed rule 
change is consistent with the Exchange Act and the rules and 
regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \55\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \55\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\56\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\57\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\58\
---------------------------------------------------------------------------

    \56\ See id.
    \57\ See id.
    \58\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

B. Whether NYSE Arca Has Met Its Burden to Demonstrate That the 
Proposal Is Designed to Prevent Fraudulent and Manipulative Acts and 
Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient to Prevent Fraudulent and Manipulative Acts and 
Practices
(i) Assertions Regarding the Bitcoin Market
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with the detection and deterrence of fraud and manipulation provided by 
a comprehensive surveillance-sharing agreement with a regulated market 
of significant size related to the underlying bitcoin assets, including 
by demonstrating that the bitcoin market as a whole or the relevant 
underlying bitcoin market is uniquely and inherently resistant to fraud 
and manipulation.\59\ Such resistance to fraud and manipulation, 
however, must be novel and beyond those protections that exist in 
traditional commodities or securities markets.\60\
---------------------------------------------------------------------------

    \59\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \60\ See id. at 12597.
---------------------------------------------------------------------------

(a) Representations Made and Comments Received
    NYSE Arca asserts that ``the fundamental features of [b]itcoin's 
fungibility, transportability[,] and exchange tradability offer novel 
protections beyond those that exist in traditional commodity markets or 
equity markets when combined with other means.'' \61\
---------------------------------------------------------------------------

    \61\ Amendment No. 1, 87 FR at 28051.
---------------------------------------------------------------------------

    In addition, some commenters claim that the spot bitcoin market's 
size and depth of liquidity, as well as the diversity of market 
participants, limits its susceptibility to manipulation.\62\ An 
affiliate of the Custodian, for example, states that bitcoin's average 
daily trading volume in 2021 was approximately $45 billion, which, 
according to this commenter, is significantly higher than that of the 
largest equity stocks.\63\ This commenter also states that the spot 
bitcoin market is comparably as large and transparent as the silver, 
palladium, and platinum markets, for which the Commission has approved 
spot ETPs.\64\ According to this commenter, ``[w]hen compared across 
key market dimensions--trading volume, capitalization, and number of 
active trading venues--the [b]itcoin spot market is more robust, a sign 
of lower likelihood of successful market manipulation.'' \65\ Lastly, 
this commenter states that asset managers, hedge funds, and public 
companies participate in the bitcoin market and that interest from 
institutional investors continues to increase.\66\
---------------------------------------------------------------------------

    \62\ See, e.g., Letter from Paul Grewal, Chief Legal Officer, 
Coinbase, dated Mar. 3, 2022 (``Coinbase Letter II''), at 2 (``the 
[b]itcoin markets exhibit characteristics and maturity commensurate 
with some of the deeply traded markets in commodities and U.S. 
equities. The liquidity and transparency of the [b]itcoin markets 
limits its susceptibility to manipulation . . . .''); Letter from 
Cassandra Lentchner, President and Chairman, BitGo Trust Company, 
Inc., dated Apr. 18, 2022 (``BitGo Letter''), at 2 (``Bitcoin is a 
widely-traded asset with a market capital of over $750B and trading 
volumes of tens of billions daily. The sheer size of this widely 
held market demonstrates the difficulty of manipulation.''); Letter 
from Mike Cammarata, dated Mar. 31, 2022 (``Cammarata Letter'') 
(``the size of the [b]itcoin market (around $1 Trillion USD) has now 
reached a level where price manipulation concerns are minor as any 
attempt at manipulation will simply be arbitraged away by the deep 
pool of robust market participants''); Letter from Kate McAllister 
and James Toes, Security Traders Association, dated Apr. 20, 2022 
(``STA Letter''), at 2 (``the combination of liquid markets for 
[b]itcoin and the features within the ETF structure mitigate 
potential price manipulation''); Letter from Michael D. Moffitt, 
dated Feb. 7, 2022 (``Moffitt Letter I'') (stating that ``the 
[b]itcoin as of 2021/2022 are indeed sufficiently liquid and 
transparent for the purposes of an ETF'' and ``it is my belief that 
widespread manipulation is simply not possible in the same way that 
it might have been several years ago'').
    \63\ See Coinbase Letter II, at 3.
    \64\ See id. at 3, 8. See also, e.g., Letter from Douglas Shultz 
(Feb. 14, 2022) (``Shultz Letter'') (``The cryptocurrency market has 
passed silver in terms of total market capitalization at various 
times. If silver can't be manipulated at these levels, neither can 
[b]itcoin.'').
    \65\ Coinbase Letter II, at 3.
    \66\ See id. at 3.
---------------------------------------------------------------------------

    Some commenters state that active participation by market makers 
and arbitrageurs across bitcoin-related markets serves to quickly close 
arbitrage opportunities, including any that may be due to attempted 
price manipulation.\67\ In support of this claim, the affiliate of the 
Custodian states that it has undertaken empirical research that shows 
that spot bitcoin prices do not deviate significantly across digital 
asset platforms.\68\ According to this commenter, in a comparison of 
hour-end prices for bitcoin across the Constituent Platforms, the 
platforms showed less than 20 basis point deviation 97% of the time 
over a roughly three-year time horizon.\69\ This commenter states that 
its observations and interpretations are consistent with those 
expressed previously by the Commission--that a strong convergence

[[Page 40305]]

of pricing across a broad market is present where spot markets are deep 
and liquid.\70\ This commenter concludes that, given the spot bitcoin 
market's significant volume and efficiency of intermarket price 
correction, manipulating the price of the Shares by manipulating the 
spot bitcoin market would require a prohibitively large trading volume 
and coordination across several large trading platforms, and that 
activity on this scale would be readily detected via surveillance.\71\
---------------------------------------------------------------------------

    \67\ See, e.g., Coinbase Letter II, at 2; Letter from Douglas A. 
Cifu, Chief Executive Officer, Virtu Financial, Inc., dated Apr. 4, 
2022 (``Virtu Letter''), at 3 (``we believe that the active 
participation by market makers across all of these linked markets--
spot, futures, derivatives and ETP--can mitigate the risk of 
manipulation through competitive liquidity provision, arbitrage and 
creation/redemption transactions''); Letter from W. Graham Harper, 
Head of Public Policy and Market Structure, Cumberland, a subsidiary 
of DRW Trading Group, dated Apr. 1, 2022 (``Cumberland Letter''), at 
2 (``[a]ny narrowly scoped attempt to manipulate the spot [b]itcoin 
market would be quickly counteracted by the collective activity of 
arbitrageurs and liquidity providers, ultimately facilitating 
orderly price discovery potentially causing artificial prices to be 
perpetuated across all [b]itcoin related products, but in any case, 
forcing the arbitrage relationships to remain intact'').
    \68\ See Coinbase Letter II, at 4.
    \69\ See id. According to this commenter, while there were 
instances where prices across Constituent Platforms experienced 
higher deviations than 20 bps, the vast majority (e.g., 90% of 
deviations greater than 1%) were driven by a single platform's 
pricing with less than 5% of the trading volume. In the remaining 
instances, price differences quickly closed by intermarket trading, 
typically within one hour, with the exception of two price 
deviations that lasted three hours during the onset of the Covid-19 
pandemic. See id.
    \70\ See id. (citing to Securities Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) 
(Order Granting Approval of Proposed Rule Change by the New York 
Stock Exchange, Inc. Regarding Listing and Trading of 
streetTRACKS[supreg] Gold Shares).
    \71\ See id. at 4-5.
---------------------------------------------------------------------------

    A number of commenters, however, take the opposite view, arguing, 
among other things, that the price of bitcoin is subject to 
manipulation on the unregulated platforms, and approval of the proposal 
would invite additional manipulation.\72\
---------------------------------------------------------------------------

    \72\ See, e.g., Letters from David Rosenthal (Apr. 20, 2022); 
David Golumbia (Apr. 18, 2022); Elliot Kleinfelder (Apr. 19, 2022) 
(``Kleinfelder Letter''); Scott S. (Feb. 20, 2022); John Carvalho 
(Feb. 22, 2022); JRL Innovations (Feb. 14, 2022); Anonymous (Feb. 
17, 2022); Adan (Feb. 8, 2022). Some commenters that support 
approval of the proposal nevertheless state that the spot bitcoin 
market is subject to manipulation. See, e.g., Letter from Noah 
Dreyfuss, CIO, Dreyfuss Capital Management, dated Feb. 21, 2022 
(``Dreyfuss Letter''), at 1 (``Frankly, one would find great 
difficulty in claiming that the spot [b]itcoin market is free of 
manipulation.''); Letter from Jonas M. Grant (Feb. 6, 2022) (``the 
[b]itcoin market is no doubt susceptible to some manipulation'').
---------------------------------------------------------------------------

(b) Analysis
    As with the previous proposals, the Commission here concludes that 
information in the record regarding the bitcoin market does not support 
a finding that the Exchange has established other means to prevent 
fraudulent and manipulative acts and practices sufficient to justify 
dispensing with the detection and deterrence of fraud and manipulation 
that is provided by a comprehensive surveillance-sharing agreement with 
a regulated market of significant size related to spot bitcoin. 
Likewise, the record does not support a finding that the Exchange has 
demonstrated that the bitcoin market as a whole or the relevant 
underlying bitcoin market is uniquely and inherently resistant to fraud 
and manipulation.
    The Commission has identified in previous orders possible sources 
of fraud and manipulation in the spot bitcoin market, including: (1) 
``wash'' trading; \73\ (2) persons with a dominant position in bitcoin 
manipulating bitcoin pricing; (3) hacking of the bitcoin network and 
trading platforms; (4) malicious control of the bitcoin network; (5) 
trading based on material, non-public information (for example, plans 
of market participants to significantly increase or decrease their 
holdings in bitcoin, new sources of demand for bitcoin, or the decision 
of a bitcoin-based investment vehicle on how to respond to a ``fork'' 
in the bitcoin blockchain, which would create two different, non-
interchangeable types of bitcoin) or based on the dissemination of 
false and misleading information; (6) manipulative activity involving 
purported ``stablecoins,'' including Tether (USDT); and (7) fraud and 
manipulation at bitcoin trading platforms.\74\
---------------------------------------------------------------------------

    \73\ See also CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563 
(S.D.N.Y. filed June 2, 2022) (alleging, among other things, failure 
by Gemini personnel to disclose to the CFTC that Gemini customers 
could and did engage in collusive or wash trading).
    \74\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (Oct. 28, 2019), 
available at https://ssrn.com/abstract=3195066 and published in 75 
J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86; 
WisdomTree Order, 86 FR at 69326; Global X Order, 87 FR at 14916; 
ARK 21Shares Order, 87 FR at 20019; One River Order, 87 FR at 33554.
---------------------------------------------------------------------------

    NYSE Arca concedes that neither bitcoin itself nor the global 
bitcoin markets are inherently resistant to fraud or manipulation.\75\ 
NYSE Arca acknowledges in its proposal that ``fraud and manipulation 
may exist and that [b]itcoin trading on any given exchange may be no 
more uniquely resistant to fraud and manipulation than other commodity 
markets.'' \76\ NYSE Arca also states that ``[b]itcoin is not itself 
inherently resistant to fraud and manipulation'' \77\ and concedes that 
``the global exchange market for the trading of [b]itcoins''--which 
NYSE Arca says consists of transactions on the ``electronic marketplace 
where exchange participants may trade, buy and sell [b]itcoins based on 
bid-ask trading''--also ``is not inherently resistant to fraud and 
manipulation.'' \78\
---------------------------------------------------------------------------

    \75\ See Amendment No. 1, 87 FR at 28050-51 (where the Exchange 
states that ``[t]he Commission has expressed legitimate concerns 
about the underlying [spot bitcoin market] due to the potential for 
fraud and manipulation'' and discusses previous Commission orders 
finding ``evidence of potential and actual fraud and manipulation in 
the historical trading of [b]itcoin on certain marketplaces such as 
(1) `wash' trading, (2) trading based on material, non-public 
information, including the dissemination of false and misleading 
information, (3) manipulative activity involving Tether, and (4) 
fraud and manipulation''). See also id. at 28049 (where the Exchange 
asserts that the proposal's use of the Index mitigates the effects 
of wash trading and order book spoofing).
    \76\ Id. at 28051.
    \77\ Id. at 28054.
    \78\ Id. at 28059 (the ``Digital Asset Exchange Market is not 
inherently resistant to fraud and manipulation''). In its filing, 
the Exchange uses the term ``Digital Asset Exchange Market'' as 
``the global exchange market for the trading of [b]itcoins, which 
consists of transactions on electronic Digital Asset Exchanges.'' A 
``Digital Asset Exchange'' is defined by NYSE Arca as ``an 
electronic marketplace where exchange participants may trade, buy 
and sell [b]itcoins based on bid-ask trading.'' Id. at 28045 n.18.
---------------------------------------------------------------------------

    Moreover, the Trust's Registration Statement acknowledges that 
``[d]ue to the unregulated nature and lack of transparency surrounding 
the operations of [bitcoin trading platforms], they may experience 
fraud, security failures or operational problems, which may adversely 
affect the value of [b]itcoin and, consequently, the value of the 
Shares''; that the bitcoin network is currently vulnerable to a ``51% 
attack,'' in which a bad actor or botnet that controls a majority of 
the processing power dedicated to mining on the bitcoin network may be 
able to gain full control of the network and the ability to manipulate 
the bitcoin blockchain; that ``in 2019 there were reports claiming that 
80-95% of [b]itcoin trading volume on [bitcoin platforms] was false or 
non-economic in nature''; and that ``[o]ver the past several years, 
some [bitcoin trading platforms] have been closed due to fraud and 
manipulative activity, business failure or security breaches.'' \79\
---------------------------------------------------------------------------

    \79\ See Exhibit 99.1 of the Registration Statement, at 13-14, 
17-18. See also 2021 10-K, at 13, 50; Are Blockchains Decentralized? 
Unintended Centralities in Distributed Ledgers, prepared by Trail of 
Bits based upon work supported by the Defense Advanced Research 
Projects Agency, June 2022, available at: https://assets-global.website-files.com/5fd11235b3950c2c1a3b6df4/62af6c641a672b3329b9a480_Unintended_Centralities_in_Distributed_Ledgers.pdf.
---------------------------------------------------------------------------

    NYSE Arca asserts that bitcoin's fungibility, transportability, and 
exchange tradability, ``when combined with other means,'' offer novel 
protections beyond those that exist in traditional commodity markets or 
equity markets.\80\ The Exchange, however, does not explain how bitcoin 
is fungible, transportable, or tradable; or how bitcoin's fungibility, 
transportability, and tradability offer novel protections or help to 
detect and deter potential fraud and manipulation. As stated above, 
``unquestioning reliance'' on an SRO's representations in a proposed 
rule change is not sufficient to justify the

[[Page 40306]]

Commission's approval of a proposed rule change.\81\
---------------------------------------------------------------------------

    \80\ See Amendment No. 1, 87 FR at 28051. The Exchange does not 
explicitly tie the asserted novel aspects of bitcoin to an argument 
that such market provides sufficient means besides surveillance-
sharing agreements to prevent fraud and manipulation.
    \81\ See supra note 58.
---------------------------------------------------------------------------

    Further, contrary to the Exchange's assertion, fungibility, 
transportability, and tradability are not a novel protection beyond 
those that exist in traditional commodity or equity markets. Fungible, 
``transportable,'' exchange-traded assets, such as securities and 
exchange-traded derivatives, trade subject to substantial regulatory 
oversight and surveillance-sharing agreements that would be unnecessary 
if fungibility, transportability, and tradability were sufficient 
protection against fraud and manipulation. Moreover, manipulation of 
asset prices can occur through trading activity, including activity 
that creates a false impression of supply and demand.\82\ Therefore, 
the Exchange's assertions about fungibility, transportability, and 
tradability do not inform the Commission's view with respect to the 
necessity that a listing exchange have the abilities to detect and 
deter fraud and manipulation that are provided by entering into a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin.\83\
---------------------------------------------------------------------------

    \82\ See Winklevoss Order, 83 FR at 37585.
    \83\ Further, transportation and storage costs for bitcoin are 
not zero, as bitcoin mining and recording transactions to the 
blockchain have costs. Bitcoin mining involves significant costs for 
electrical power and computer hardware. Moreover, bitcoin trading is 
subject to transaction fees charged by trading platforms, withdrawal 
fees, expenses for custody arrangements, and other factors that 
impose frictions on trading.
---------------------------------------------------------------------------

    Likewise, the Commission is not persuaded by commenters' assertions 
that the bitcoin market's size, liquidity, market participation, or 
arbitrage, either individually or together, sufficiently address 
concerns regarding fraud and manipulation.\84\ Although commenters 
recite various metrics, including market capitalization and average 
daily trading volume, or make observations concerning the growth of the 
bitcoin market, including increasing institutional participation, they 
offer no evidence or analysis of how these metrics or observations 
serve to detect and deter potential fraud and manipulation. Further, 
even if the record demonstrates that the bitcoin market's size, 
liquidity, market participation, or arbitrage makes manipulation more 
difficult or costly, as the Commission has stated in prior orders with 
respect to similar arguments, these attributes speak to providing some 
resistance to manipulation, rather than establishing a unique 
resistance to manipulation that would justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin.\85\
---------------------------------------------------------------------------

    \84\ Although a commenter claims that ``transparency'' of the 
bitcoin market assists arbitrage and limits bitcoin's susceptibility 
to manipulation, the commenter does not explain what is meant by 
``transparency,'' how the bitcoin markets are transparent, or why 
such transparency limits manipulation. See Coinbase Letter II, at 2-
4.
    \85\ See USBT Order, 85 FR at 12601; Kryptoin Order, 86 FR at 
74171; Global X Order, 87 FR at 14916; Wise Origin Order, 87 FR at 
5531.
---------------------------------------------------------------------------

    Moreover, commenters do not explain how the bitcoin market's 
diversity of market participants, widely held nature, or increase in 
institutional participation help mitigate concerns about fraud and 
manipulation such that a surveillance-sharing agreement is unnecessary. 
In addition, commenters' assertions about the diverse, broad, and 
institutional nature of bitcoin's investor base do not provide any 
information on the concentration of bitcoin ownership within or among 
market participants, or take into account that a market participant 
with a dominant ownership position may not find it prohibitively 
expensive to overcome the liquidity supplied by arbitrageurs and could 
use dominant market share to engage in manipulation.\86\ Indeed, the 
Sponsor's own statements cast doubt on assertions that the bitcoin 
market's attributes sufficiently address concerns about fraud and 
manipulation. According to the Sponsor, ``[a]s of December 31, 2021, 
the largest 100 [b]itcoin wallets held approximately 15% of the 
[b]itcoins in circulation. Moreover, it is possible that other persons 
or entities control multiple wallets that collectively hold a 
significant number of [b]itcoins, even if they individually only hold a 
small amount, and it is possible that some of these wallets are 
controlled by the same person or entity. As a result of this 
concentration of ownership, large sales or distributions by such 
holders could have an adverse effect on the market price of 
[b]itcoin.'' \87\
---------------------------------------------------------------------------

    \86\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01; WisdomTree Order, 86 FR at 69325; Valkyrie Order, 86 
FR at 74160; Kryptoin Order, 86 FR at 74170; SkyBridge Order, 87 FR 
at 3783-84; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 
FR at 20019.
    \87\ 2021 10-K, at 46.
---------------------------------------------------------------------------

    The Custodian affiliate's comparison of the spot bitcoin market to 
the silver, palladium, and platinum markets also does not support the 
finding that other means to prevent fraudulent and manipulative acts 
and practices are sufficient to justify dispensing with the detection 
and deterrence of fraud and manipulation provided by a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to spot bitcoin. As discussed above,\88\ for the 
commodity-trust ETPs approved to date for listing and trading, 
including where the underlying commodity is silver, palladium, or 
platinum, there has been in every case at least one significant, 
regulated market for trading futures on the underlying commodity, and 
the ETP listing exchange has entered into surveillance-sharing 
agreements with, or held ISG membership in common with, that market.
---------------------------------------------------------------------------

    \88\ See supra note 23 and accompanying text.
---------------------------------------------------------------------------

    The Commission is also not persuaded by commenters' assertion that 
efficiency of intermarket price correction in the spot bitcoin markets 
would make manipulating the spot market prohibitively expensive and 
readily detectable. The affiliate of the Custodian provides various 
statistics which purport to show that bitcoin prices are closely and 
increasingly aligned across markets and that any price disparities are 
quickly arbitraged away. However, such statistics are based on hour-end 
bitcoin prices and do not capture intra-hour price disparities or 
provide intra-hour information on how long price disparities persist. 
Nor do this commenter's statistics or its assertions provide any 
insight into what size or duration of price disparities would be needed 
for a would-be manipulator to have an opportunity to make a profit.\89\
---------------------------------------------------------------------------

    \89\ See Coinbase Letter II, at 4-5. In addition, the 
Registration Statement states: ``As corresponding increases in 
throughput lag behind growth in the use of digital asset networks, 
average fees and settlement times may increase considerably. For 
example, the Bitcoin Network has been, at times, at capacity, which 
has led to increased transaction fees . . . . Increased fees and 
decreased settlement speeds could . . . adversely impact the value 
of the Shares.'' Exhibit 99.1 of the Registration Statement, at 13. 
See also 2021 10-K, at 46. The affiliate of the Custodian does not 
provide data or analysis to address, among other things, whether 
such risks of increased fees and bitcoin transaction settlement 
times may affect whether arbitrage is as effective as the commenter 
asserts. And without such data or analysis, the Commission cannot 
agree with this commenter's assertions. See Susquehanna, 866 F.3d at 
447. See also ARK 21Shares Order, 87 FR at 20019 n.68.
---------------------------------------------------------------------------

    In any event, as the Commission has explained, efficient price 
arbitrage is not sufficient to support the finding that a market is 
uniquely or inherently resistant to manipulation such that the 
Commission can dispense with surveillance-sharing agreements.\90\ The 
Commission has stated, for example,

[[Page 40307]]

that even for equity options based on securities listed on national 
securities exchanges, the Commission relies on surveillance-sharing 
agreements to detect and deter fraud and manipulation.\91\ Equities 
that underlie such options trade on U.S. equity markets that are deep, 
liquid, highly interconnected, and almost entirely automated and 
operate at high speeds measured in microseconds and even 
nanoseconds.\92\ Here, the affiliate of the Custodian and other 
commenters provide insufficient evidence to support their assertion of 
efficient price arbitrage across bitcoin-related platforms, let alone 
any evidence that price arbitrage in the bitcoin market is novel and 
beyond those protections that exist in traditional commodity markets or 
securities markets so as to warrant the Commission dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin.
---------------------------------------------------------------------------

    \90\ See Winklevoss Order, 83 FR at 37586; SolidX Order, 82 FR 
at 16256-57; USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69325; Valkyrie Order, 86 FR at 74159-60; Kryptoin Order, 86 FR at 
74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 FR 
at 20019.
    \91\ See, e.g., USBT Order, 85 FR at 12601; WisdomTree Order, 86 
FR at 69329; Valkyrie Order, 86 FR at 74160; Kryptoin Order, 86 FR 
at 74170; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 
FR at 20019.
    \92\ See SEC Staff Report on Algorithmic Trading in U.S. Capital 
Markets (Aug. 5, 2020), available at: https://www.sec.gov/files/Algo_Trading_Report_2020.pdf; Market Data Infrastructure Proposing 
Release, Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 
85 FR 16726, 16728 (Mar. 24, 2020). See also ARK 21Shares Order, 87 
FR at 20019 n.70.
---------------------------------------------------------------------------

    Additionally, even assuming that efficiency of intermarket price 
correction in the spot bitcoin markets results in bitcoin prices 
increasingly aligned across markets, such alignment is not sufficient 
to support the finding that a market is uniquely or inherently 
resistant to manipulation such that the Commission can dispense with 
surveillance-sharing agreements.\93\ As stated above, as a general 
matter, the manipulation of asset prices can occur simply through 
trading activity that creates a false impression of supply and demand, 
notwithstanding the presence of linkages among markets, whether these 
linkages be formal (such as those with consolidated quotations or 
routing requirements) or informal (such as in the context of the global 
bitcoin markets).\94\
---------------------------------------------------------------------------

    \93\ See WisdomTree Order, 86 FR at 69325-26; Kryptoin Order, 86 
FR at 74170; SkyBridge Order, 87 FR at 3783-84; Wise Origin Order, 
87 FR at 5531; ARK 21Shares Order, 87 FR at 20019.
    \94\ See Winklevoss Order, 83 FR at 37585; ARK 21Shares Order, 
87 FR at 20019.
---------------------------------------------------------------------------

(ii) Assertions Regarding the Index
(a) Representations Made and Comments Received
    NYSE Arca asserts that the Index used by the Trust to determine the 
value of its bitcoin assets ``represents an effective alternative means 
to prevent fraud and manipulation[,] and the Trust's reliance on the 
Index addresses the Commission's concerns with respect to potential 
fraud and manipulation.'' \95\ It states that the Trust ``has used the 
Index to price the Shares for more than six years, and the Index has 
proven its ability to (i) mitigate the effects of fraud, manipulation 
and other anomalous trading activity from impacting the [b]itcoin 
reference rate, (ii) provide a real-time, volume-weighted fair value of 
bitcoin and (iii) appropriately handle and adjust[ ] for non-market 
related events, such that efforts to manipulate the price of [b]itcoin 
would have had a negligible effect on the pricing of the Trust, due to 
the controls embedded in the structure of the Index.'' \96\
---------------------------------------------------------------------------

    \95\ Amendment No. 1, 87 FR at 28053. A commenter also states 
that the ``Index is designed to (i) mitigate the effects of fraud, 
manipulation and other anomalous trading activity from impacting the 
bitcoin reference rate, (ii) provide a real-time, volume-weighted 
fair value of bitcoin and (iii) appropriately handle and adjust for 
non-market related events.'' Letter from Campbell R. Harvey, 
Professor of Finance, Duke University, dated Mar. 26, 2022 (``Harvey 
Letter''), at 3. Another commenter agrees with the Exchange that 
``[h]aving the Index Price determined through a process in which 
trade data is cleansed and compiled will sufficiently mitigate the 
impact of manipulation.'' Letter from Robert Citrone, Founder, 
Discovery Capital Management, dated Feb. 23, 2022 (``Discovery 
Letter''), at 1. See also, e.g., Moffitt Letter I (``the structure 
of this Index is robust enough to protect investors'').
    \96\ Amendment No. 1, 87 FR at 28059. See also id. at 28053 
(``Since November 1, 2014, the Trust has consistently priced its 
Shares at 4:00 p.m., E.T. based on the Index Price. . . . While that 
pricing would be known to the market, the Sponsor believes that, 
even if efforts to manipulate the price of [b]itcoin at 4:00 p.m., 
E.T. were successful on any exchange, such activity would have had a 
negligible effect on the pricing of the Trust, due to the controls 
embedded in the structure of the Index.'').
---------------------------------------------------------------------------

    First, NYSE Arca argues that the Index's use of Constituent 
Platforms that are compliant with applicable U.S. federal and state 
licensing requirements and practices regarding anti-money laundering 
(``AML'') and know-your-customer (``KYC'') regulations reduces the risk 
of fraud, manipulation, and other anomalous trading activity from 
impacting the Index. NYSE Arca also states that Constituent Platforms 
are considered to be Money Services Businesses (``MSBs'') and thus 
subject to certain requirements such as reporting suspicious activities 
to the U.S. Department of the Treasury's FinCEN division, having 
customer identification through KYC procedures, and establishing a 
formal AML policy.\97\ In addition, the Constituent Platforms that are 
regulated by the New York State Department of Financial Services 
(``NYSDFS'') under the BitLicense program have regulatory requirements 
(1) to implement measures designed to effectively detect, prevent, and 
respond to fraud, attempted fraud, market manipulation, and similar 
wrongdoing; and (2) to monitor, control, investigate, and report back 
to the NYSDFS regarding any wrongdoing.\98\ And according to NYSE Arca, 
the other non-NYSDFS regulated Constituent Platforms have voluntarily 
implemented measures to protect against common forms of market 
manipulation.\99\ Moreover, according to NYSE Arca, the Commodity 
Futures Trading Commission (``CFTC'') has the authority to police fraud 
and manipulation on Constituent Platforms.\100\ In addition, certain of 
the Index's Constituent Platforms ``have or have begun to implement 
market surveillance infrastructure to further detect, prevent, and 
respond to fraud, attempted fraud, and similar wrongdoing, including 
market manipulation.'' \101\
---------------------------------------------------------------------------

    \97\ See id. at 28052.
    \98\ See id. The Exchange also states that these platforms have 
the following obligations: submission of audited financial 
statements; compliance with NYSDFS's capitalization requirements; 
prohibitions against the ``sale or encumbrance to protect the full 
reserves of custodian assets''; fingerprints and photographs of 
employees with access to customer funds; retention of a qualified 
Chief Information Security Officer and annual penetration testing/
audits; documented business continuity and disaster recovery plan; 
and participation in an independent exam by NYSDFS. See id.
    \99\ See id. The Exchange states that, as of the date of the 
filing, two of the four Constituent Platforms (Bitstamp and Coinbase 
Pro) are regulated by NYSDFS. See id. at 28052 n.39.
    \100\ See id. at 28052. A commenter states that the CFTC has 
exercised its anti-manipulation and anti-fraud enforcement authority 
over spot bitcoin markets since 2014, which is three years longer 
than the CFTC has overseen bitcoin futures markets. See Letter from 
Kristin Smith, Executive Director, and Jake Chervinsky, Head of 
Policy, Blockchain Association, dated Nov. 29, 2021 (``Blockchain 
Association Letter''), at 3. Another commenter states that the 
Commission should rely on the CFTC to exercise its fraud authority 
to ensure the underlying bitcoin market is free of manipulation. See 
Letter from Michelle Bond, Chief Executive Officer, Association for 
Digital Asset Markets, dated Apr. 19, 2022 (``ADAM Letter''), at 6.
    \101\ Amendment No. 1, 87 FR at 28059-60. The affiliate of the 
Custodian that operates one of the Constituent Platforms states in a 
comment letter that it applies surveillance and monitoring measures 
for its spot digital asset trading platform that are designed to 
identify and address potential manipulative or fraudulent trading 
activity, and that it believes that the other Constituent Platforms 
also employ measures to counter potential fraudulent or manipulative 
trading. See Coinbase Letter II, at 5. This commenter states that, 
in addition to its surveillance program, it employs measures similar 
to circuit breakers and trading limits used in traditional financial 
markets and participates in industry initiatives meant to facilitate 
cross-platform surveillance and bolster the integrity and efficiency 
of digital asset markets. See id. at 6.

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

[[Page 40308]]

    Second, NYSE Arca asserts that other aspects of the methodology 
employed in constructing the Index mitigate the impact of fraud, 
manipulation, and other anomalous trading activity.\102\ The Exchange 
states that the Index is calculated once every second according to a 
systematic methodology that relies on observed trading activity on the 
Constituent Platforms. The key elements of this proprietary methodology 
are as follows: (i) volume weighting--Constituent Platforms with 
greater liquidity receive a higher weighting in the Index; (ii) price 
variance weighting--the Index reflects data points that are weighted in 
proportion to their variance from the rest of the Constituent Platforms 
(i.e., as the price at a particular platform diverges from the prices 
at the rest of the Constituent Platforms, its weight in the Index Price 
decreases.); (iii) inactivity adjustment--the Index algorithm penalizes 
stale activity from any given Constituent Platform; and (iv) 
manipulation resistance--the Index only includes executed trades in its 
calculation in order to mitigate the effects of wash trade and 
spoofing, and only includes Constituent Platforms that charge trading 
fees to its users in order to attach a real, quantifiable cost to any 
manipulation attempts.\103\ In addition, the Exchange states that, by 
referencing multiple trading venues and weighting them based on trade 
activity, the Index mitigates the impact of any potential fraud, 
manipulation, or anomalous trading activity occurring on any single 
venue.\104\ In other words, the effects of fraud, manipulation, or 
anomalous trading activity occurring on any single venue are de-
weighted and consequently diluted by non-anomalous trading activity of 
other Constituent Platforms.\105\
---------------------------------------------------------------------------

    \102\ See Amendment No. 1, 87 FR at 28052-53; 28059. A commenter 
states that the Index Provider has published empirical evidence 
identifying a number of cases in which the Index methodology has 
successfully shielded the Index from anomalistic or manipulative 
pricing. See Harvey Letter, at 4 (citing to https://tradeblock.com/blog/analysis-of-bitfinex-anomalies-and-xbx-performance; https://tradeblock.com/blog/bitfinex-flash-crash-analysis; https://tradeblock.com/blog/xbx-update-adding-okcoin-removing-btc-e-and-btcchina; https://tradeblock.com/blog/xbx-update-adding-coinbase-removing-kraken; https://tradeblock.com/blog/xbx-index-update-removing-okcoin; https://tradeblock.com/blog/updates-to-tradeblocks-ecx-and-xbx-indices-2; https://tradeblock.com/blog/bitfinex-bitcoin-premium-reaches-widest-level-in-two-years; https://tradeblock.com/blog/bitcoin-futures-flash-crash-occurs-as-exchanges-show-irregular-trading-activity, https://tradeblock.com/blog/updates-to-all-tradeblock-indices). This commenter also states that ``this is the 
highest quality benchmark being used in a bitcoin ETP proposal and 
one that can substantially mitigate price manipulation to ensure a 
fair, orderly, and efficient market.'' Id.
    \103\ See Amendment No. 1, 87 FR at 28052-53.
    \104\ See id. at 28053. A commenter states that the Trust has 
``created a robust approach to managing the risk of manipulation by 
relying on an index of [b]itcoin prices from various exchanges'' and 
that the Index's ``use of a 24-hour VWAP should make any attempt at 
manipulation prohibitively expensive.'' Letter from Peter L. Briger, 
Jr., Chief Executive Officer, Fortress Investment Group LLC, dated 
Apr. 25, 2022 (``Fortress Letter''), at 2-3. The Exchange states 
that the Index no longer utilizes a 24-hour VWAP in its methodology. 
See supra note 38.
    \105\ See Amendment No. 1, 87 FR at 28053.
---------------------------------------------------------------------------

    Third, NYSE Arca asserts that the Index is constructed and 
maintained by an expert third-party index provider, which would allow 
for prudent handling of non-market-related events.\106\ The Exchange 
states that in the event that a manual intervention with respect to the 
Index calculation is necessary in response to ``non-market-related 
events'' (e.g., halting of deposits or withdrawals of funds, 
unannounced closure of platform operations, insolvency, compromise of 
user funds, etc.), the Index Provider would issue a public 
announcement.\107\ NYSE Arca also asserts that the Index Provider 
reviews and periodically updates which bitcoin platforms are included 
in the Index by utilizing a methodology that is guided by the IOSCO 
principles for financial benchmarks.\108\
---------------------------------------------------------------------------

    \106\ See id. at 28053, 28059.
    \107\ See id. at 28053.
    \108\ See id.
---------------------------------------------------------------------------

(b) Analysis
    Based on the assertions made and the information provided with 
respect to the Index, the record is inadequate to conclude that NYSE 
Arca has articulated other means to prevent fraud and manipulation that 
are sufficient to justify dispensing with the detection and deterrence 
of fraud and manipulation provided by a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to spot bitcoin.
    First, NYSE Arca argues that the Index's exclusive use of prices 
from particular spot bitcoin trading platforms (the Constituent 
Platforms), which are subject to FinCEN's AML/KYC regulations, as well 
as NYSDFS's BitLicense program for two Constituent Platforms, helps to 
reduce the impact of fraud and manipulation on the Index Price. The 
Exchange acknowledges, however, that it ``does not believe the 
inclusion'' of these platforms is ``in and of itself sufficient to 
prove that the Index is an alternative means to prevent fraud and 
manipulation such that surveillance sharing agreements are not 
required'' but rather that including only such platforms ``in the Index 
is one significant way in which the Index is protected from the 
potential impacts of fraud and manipulation.'' \109\
---------------------------------------------------------------------------

    \109\ Id. at 28052.
---------------------------------------------------------------------------

    The Commission does not agree that the inclusion of only certain 
Constituent Platforms as described provides a significant protection 
against fraud and manipulation. Any oversight afforded by FinCEN and 
NYSDFS, including AML/KYC or BitLicense regulation, is not a substitute 
for a surveillance-sharing agreement between the Exchange and a 
regulated market of significant size related to the underlying bitcoin 
assets. AML and KYC regulation, for example, do not substitute for the 
sharing of information about market trading activity or clearing 
activity that a surveillance-sharing agreement would afford. And 
although some of the Constituent Platforms may be registered with 
FinCEN or NYSDFS, these spot bitcoin trading platforms are not 
comparable to a national securities exchange or futures exchange.\110\ 
As the Commission has explained, there are substantial differences 
between NYSDFS and FinCEN regulation and the Commission's regulation of 
national securities exchanges.\111\ The Commission's market oversight 
of national securities exchanges includes substantial requirements, 
including the requirement to have rules that are ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.'' \112\ Moreover, national 
securities exchanges must file proposed

[[Page 40309]]

rules with the Commission regarding certain material aspects of their 
operations,\113\ and the Commission has the authority to disapprove any 
such rule that is not consistent with the requirements of the Exchange 
Act.\114\ Thus, national securities exchanges are subject to Commission 
oversight of, among other things, their governance, membership 
qualifications, trading rules, disciplinary procedures, recordkeeping, 
and fees.\115\ The Constituent Platforms have none of these 
requirements--none are registered as a national securities exchange. In 
addition, NYSDFS's BitLicense program is ``guidance'' that is ``not 
intended to limit the scope or applicability of any law or 
regulation,'' including the Exchange Act.\116\
---------------------------------------------------------------------------

    \110\ See USBT Order, 85 FR at 12603-05 and n.101; VanEck Order, 
86 FR at 64545 and n.89; WisdomTree Order, 86 FR at 69328 and n.95; 
Kryptoin Order, 86 FR at 74173 and n.98; ARK 21Shares Order, 87 FR 
at 20021-22 and n.107.
    \111\ FinCEN and NYSDFS regulation have been referenced in other 
bitcoin-based ETP proposals as a purportedly alternative means by 
which such ETPs would be uniquely resistant to manipulation. See 
USBT Order, 85 FR at 12603 n.101 and accompanying text. See also, 
e.g., WisdomTree Order, 86 FR at 69328 n.95; Kryptoin Order, 86 FR 
at 74173 n.98; ARK 21Shares Order, 87 FR at 20022 n.107.
    \112\ 15 U.S.C. 78f(b)(5).
    \113\ 17 CFR 240.19b-4(a)(6)(i).
    \114\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rule changes 
with the Commission and provides the Commission with the authority 
to disapprove proposed rule changes that are not consistent with the 
Exchange Act. Designated contract markets (``DCMs'') (commonly 
called ``futures markets'') registered with and regulated by the 
CFTC must comply with, among other things, a similarly comprehensive 
range of regulatory principles and must file rule changes with the 
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available 
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \115\ See Winklevoss Order, 83 FR at 37597.
    \116\ Maria T. Vullo, Superintendent of Financial Services, 
NYSDFS, Guidance on Prevention of Market Manipulation and Other 
Wrongful Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/system/files/documents/2020/03/il180207.pdf. See 
also, e.g., WisdomTree Order, 86 FR at 69328 n.95; Kryptoin Order, 
86 FR at 74173 n.98; ARK 21Shares Order, 87 FR at 20022 n.107.
---------------------------------------------------------------------------

    Further, neither the Constituent Platforms' voluntary adherence to 
the BitLicense program, nor the Custodian affiliate's adoption of 
various surveillance, monitoring, and other measures to address 
potential manipulative or fraudulent trading activity on its trading 
platform, is material to the Commission's analysis. The Exchange 
provides no supporting evidence to substantiate its claims that the 
Constituent Platforms have voluntarily implemented measures to protect 
against common forms of market manipulation and that some of the 
Constituent Platforms have begun to implement market surveillance 
infrastructure to further detect, prevent, and respond to fraud, 
attempted fraud, and similar wrongdoing. Moreover, even taken at face 
value, these measures, unlike the Exchange Act's requirements for 
national securities exchanges,\117\ are entirely voluntary and 
therefore have no binding force. The Constituent Platforms, including 
the platform operated by an affiliate of the Custodian, could change or 
cease to administer such measures at any time.
---------------------------------------------------------------------------

    \117\ See 15 U.S.C. 78e, 78f.
---------------------------------------------------------------------------

    NYSE Arca's assertions regarding the CFTC's authority with respect 
to the Constituent Platforms and the underlying bitcoin market also do 
not establish a level of oversight sufficient to dispense with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin.\118\ While the Commission 
recognizes that the CFTC maintains some jurisdiction over the spot 
bitcoin market, under the Commodity Exchange Act, the CFTC does not 
have regulatory authority over spot bitcoin trading platforms, 
including the Constituent Platforms.\119\ Except in certain limited 
circumstances, spot bitcoin trading platforms are not required to 
register with the CFTC,\120\ and the CFTC does not set standards for, 
approve the rules of, examine, or otherwise regulate spot bitcoin 
markets.\121\ As the CFTC itself stated, while the CFTC ``has an 
important role to play,'' U.S. law ``does not provide for direct, 
comprehensive Federal oversight of underlying Bitcoin or virtual 
currency spot markets.'' \122\
---------------------------------------------------------------------------

    \118\ See Valkyrie Order, 86 FR at 74162.
    \119\ See USBT Order, 85 FR at 12604.
    \120\ See Winklevoss Order, 83 FR at 37599 (``Spot bitcoin 
markets are not required to register with the CFTC, unless they 
offer leveraged, margined, or financed trading to retail 
customers.''). See Commodity Exchange Act Sections 2(c)(2)(D), 7 
U.S.C. 2(c)(2)(D), and 2(c)(2)(A)(i), 7 U.S.C. 2(c)(2)(A)(i) 
(defining CFTC jurisdiction to specifically cover contracts of sale 
of a commodity for future delivery (or options on such contracts), 
or an option on a commodity (other than foreign currency or a 
security or a group or index of securities), that is executed or 
traded on an organized exchange). See also Winklevoss Order, 83 FR 
at 37599 n.286.
    \121\ See USBT Order, 85 FR at 12604; SolidX Order, 82 FR at 
16256 (concluding that there is nothing in the record to indicate 
that there is currently a regulatory framework in the United States 
for detecting and deterring manipulation in the spot bitcoin markets 
and that ``[a]lthough the CFTC can bring enforcement actions against 
manipulative conduct in spot markets for a commodity, spot markets 
are not required to register with the CFTC unless they offer 
leveraged, margined, or financed trading to retail customers. . . . 
In all other cases, the CFTC does not set standards for, approve the 
rules of, examine, or otherwise regulate bitcoin spot markets.'').
    \122\ Winklevoss Order, 83 FR at 37599 (quoting CFTC 
Backgrounder on Oversight of and Approach to Virtual Currency 
Futures Markets (Jan. 4, 2018), at 1, available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf). See also Testimony of Rostin 
Behnam, Chair, CFTC, Before the Senate Committee on Agriculture, 
Nutrition, and Forestry (Feb. 9, 2022), available at: https://www.agriculture.senate.gov/imo/media/doc/Testimony_Behnam_020920225.pdf (``[W]hile the crystallization of our 
enforcement authority through judicial interpretation has proven an 
effective means of uncovering and addressing some of the regulatory 
gaps presented by innovation and evolution in the financial markets 
with respect to digital and related assets, it cannot be viewed as a 
viable substitute for a functional regulatory oversight regime for 
the cash digital asset market. . . . In fact, there is no one 
regulator, either state or federal, with sufficient visibility into 
digital asset commodity trading activity to fully police conflicts 
of interest and deceptive trading practices impacting retail 
customers.'').
---------------------------------------------------------------------------

    Second, the record does not demonstrate that the proposed 
methodology for calculating the Index would make the proposed ETP 
resistant to fraud or manipulation such that the ability to detect and 
deter fraud that is provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to spot 
bitcoin is unnecessary. Specifically, NYSE Arca has not assessed the 
possible influence that spot platforms not included among the 
Constituent Platforms would have on bitcoin prices used to calculate 
the Index Price. As discussed above, NYSE Arca does not contest the 
presence of possible sources of fraud and manipulation in the spot 
bitcoin market generally.\123\ Instead, NYSE Arca focuses its analysis 
on the attributes of the Constituent Platforms, as well as the Index 
methodology that calibrates the pricing input generated by the 
Constituent Platforms (such as volume and price-variance weighting and 
inactivity adjustment). What the Exchange ignores, however, is that to 
the extent that trading on spot bitcoin platforms not directly used to 
calculate the Index Price affects prices on the Constituent Platforms, 
the activities on those other platforms--where various kinds of fraud 
and manipulation from a variety of sources may be present and persist--
may affect whether the Index is resistant to manipulation. Importantly, 
the record does not demonstrate that these possible sources of fraud 
and manipulation in the broader spot bitcoin market do not affect the 
Constituent Platforms that represent a slice of the spot bitcoin 
market. To the extent that fraudulent and manipulative trading on the 
broader bitcoin market could influence prices or trading activity on 
the Constituent Platforms, the Constituent Platforms (and thus the 
Index) would not be inherently resistant to manipulation.\124\
---------------------------------------------------------------------------

    \123\ See supra notes 75-78 and accompanying text.
    \124\ See USBT Order, 85 FR at 12601; WisdomTree Order, 86 FR at 
69327; Kryptoin Order, 86 FR at 74172; Valkyrie Order, 86 FR at 
74161; SkyBridge Order, 87 FR at 3873.

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

[[Page 40310]]

    In addition, while NYSE Arca asserts that aspects of the Index 
methodology mitigate the impact of fraud and manipulation on the 
Shares, the Commission can find no basis to conclude that the Index 
methodology constitutes a novel means beyond the protections utilized 
by traditional commodity or securities markets to prevent fraud and 
manipulation that is sufficient to justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin. For example, while the Index 
methodology uses an algorithm to discount prices that deviate from the 
average (i.e., price variance weighting), this automatic discounting 
could attenuate, but would not eliminate, the effect of manipulative 
activity on one of the Constituent Platforms--just as it could 
attenuate, but would not eliminate, the effect of bona fide liquidity 
demand on one of those platforms.\125\
---------------------------------------------------------------------------

    \125\ See SolidX Order, 82 FR at 16257.
---------------------------------------------------------------------------

    Moreover, NYSE Arca's assertions that the Trust's use of the Index 
helps make the Shares resistant to manipulation conflict with the 
Registration Statement. Specifically, the Registration Statement 
represents, among other things, that the market price of bitcoin may be 
subject to ``[m]anipulative trading activity on bitcoin [trading 
platforms], which are largely unregulated,'' and that, ``[d]ue to the 
unregulated nature and lack of transparency surrounding the operations 
of bitcoin [trading platforms], they may experience fraud, security 
failures or operational problems, which may adversely affect the value 
of [b]itcoin and, consequently, the value of the Shares.'' \126\ 
Constituent Platforms are a subset of the bitcoin trading platforms 
that the Registration Statement describes.\127\ The Registration 
Statement also states, specifically with respect to the Index, that 
``[t]he Index has a limited history and a failure of the [Index Price] 
could adversely affect the value of the Shares.'' \128\ Although the 
Sponsor raises concerns regarding fraud on and the security of bitcoin 
platforms, as well as concerns specific to the Index, the Exchange does 
not explain how or why such concerns are consistent with its assertion 
that the Index is resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \126\ Exhibit 99.1 of the Registration Statement, at 16-17. See 
also 2021 10-K, at 50.
    \127\ See Exhibit 99.1 of the Registration Statement, at 42-43. 
See also 2021 10-K, at 10.
    \128\ Exhibit 99.1 of the Registration Statement, at 18. See 
also 2021 10-K, at 51.
---------------------------------------------------------------------------

    Third, although NYSE Arca asserts that the Index Provider's 
oversight of the Index, which includes updating the Constituent 
Platforms from time to time and handling non-market-related events, 
mitigates fraud and manipulation in calculation of the Index, the 
record does not suggest that the purported oversight represents a 
unique measure to resist or prevent fraud or manipulation beyond 
protections that exist in traditional securities or commodities 
markets.\129\ Rather, the oversight performed by the Index Provider 
appears to be for the purpose of ensuring the accuracy and integrity of 
the Index. Such Index accuracy and integrity oversight serves a 
fundamentally different purpose as compared to the regulation of 
national securities exchanges and the requirements of the Exchange Act. 
While the Commission recognizes that this may be an important function 
in ensuring the integrity of the Index, such requirements do not imbue 
the Index Provider with regulatory authority similar to that which the 
Exchange Act confers upon SROs such as national securities 
exchanges.\130\ Furthermore, other commodity-based ETPs approved by the 
Commission for listing and trading utilize reference rates or indices 
administered by similar benchmark administrators,\131\ and the 
Commission has not, in those instances, dispensed with the need for a 
surveillance-sharing agreement with a significant regulated market.
---------------------------------------------------------------------------

    \129\ See, e.g., Valkyrie Order, 86 FR at 74162.
    \130\ See WisdomTree Order, 86 FR at 69329; One River Order, 87 
FR at 33556.
    \131\ See, e.g., Securities Exchange Act Release Nos. 80840 
(June 1, 2017) 82 FR 26534 (June 7, 2017) (SR-NYSEArca-2017-33) 
(approving the listing and trading of shares of certain trusts 
seeking to track the Solactive GLD EUR Gold Index, Solactive GLD GBP 
Gold Index, and the Solactive GLD JPY Gold Index).
---------------------------------------------------------------------------

    Finally, NYSE Arca does not explain the significance of the Index's 
purported resistance to manipulation to the overall analysis of whether 
the proposal to list and trade the Shares is designed to prevent fraud 
and manipulation.\132\ Even assuming that NYSE Arca's argument is that 
the price of the Trust's Shares would be resistant to manipulation if 
the Index is resistant to manipulation, NYSE Arca has not established 
in the record a basis for this conclusion because NYSE Arca has not 
established a link between the price of the Shares and the Index Price, 
either in the primary or secondary market. While the Index is used by 
the Trust to value its bitcoin, the Trust will create or redeem Baskets 
only upon the receipt or distribution of bitcoins from/to authorized 
participants, and only for the amount of bitcoin represented by the 
Shares in such Baskets, without reference to the value of such bitcoin 
as determined by the Index or otherwise. Furthermore, the Shares would 
trade in the secondary market at market-based prices, not the Index 
Price. The Exchange provides no information on the relationship between 
the Index and secondary market prices generally,\133\ or how the use of 
the Index would mitigate fraud and manipulation of the Shares in the 
secondary market.\134\
---------------------------------------------------------------------------

    \132\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601; Valkyrie Order, 86 FR at 74162; ARK 21Shares Order, 87 FR 
at 20022.
    \133\ For example, as currently traded OTC, the Shares do not 
reflect the value of the Index but rather trade at a significant 
discount (or at other times, a significant premium). See Exhibit 
99.1 of the Registration Statement, at 23 (``the value of the Shares 
of the Trust may not approximate, and the Shares may trade at a 
substantial premium over, or substantial discount to, the value of 
the Trust's Bitcoin Holdings per Share''); 2021 10-K, at 2 (``from 
May 5, 2015 to December 31, 2021, the maximum premium of the closing 
price of the Shares quoted on OTCQX over the value of the Trust's 
Digital Asset Holdings per Share was 142% . . . and the average 
premium was 37% . . ., and the maximum discount of the closing price 
of the Shares quoted on OTCQX below the value of the Trust's Digital 
Asset Holdings was 21% . . . and the average discount was 13% . . . 
. As of December 31, 2021, the Trust's Shares were quoted on OTCQX 
at a discount of 20% . . . to the Trust's Digital Asset Holdings per 
Share.''); Grayscale Letter I, at 2 n.11 (``From May 5, 2015 to 
October 31, 2021, the maximum single-day premium of the closing 
price of BTC shares quoted on OTCQX over the value of its Bitcoin 
holdings was 142% and the average of all daily premiums was 37%; the 
maximum single-day discount below the value of its Bitcoin holdings 
was 21% and the average of all daily discounts was 12%; and the 
average of all single-day premiums and discounts was a premium of 
32%.''); Coinbase Letter I, at 2 (``GBTC has traded over-the-counter 
at a premium to its net-asset value that has ranged as high as 142% 
and a discount to its net-asset value of 21%'').
    \134\ See WisdomTree Order, 86 FR at 69329 and n.108; Valkyrie 
Order, 86 FR at 74162; ARK 21Shares Order, 87 FR at 20022.
---------------------------------------------------------------------------

(2) Assertions That NYSE Arca Has Entered Into a Comprehensive 
Surveillance-Sharing Agreement With a Regulated Market of Significant 
Size Related to the Underlying Bitcoin Assets
    As NYSE Arca has not demonstrated that other means besides 
surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices, the Commission next 
examines whether the record supports the conclusion that NYSE Arca has 
entered into a comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to the underlying bitcoin 
assets. In this context, the term ``market of

[[Page 40311]]

significant size'' includes a market (or group of markets) as to which 
(i) there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
successfully manipulate the ETP, so that a surveillance-sharing 
agreement would assist in detecting and deterring misconduct, and (ii) 
it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\135\
---------------------------------------------------------------------------

    \135\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    As the Commission has explained, it considers two markets that are 
members of the ISG to have a comprehensive surveillance-sharing 
agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement.\136\ Accordingly, based on 
the common membership of NYSE Arca and the CME in the ISG,\137\ NYSE 
Arca has the equivalent of a comprehensive surveillance-sharing 
agreement with the CME. However, while the Commission recognizes that 
the CFTC regulates the CME futures market,\138\ including the CME 
bitcoin futures market, and thus such market is ``regulated,'' in the 
context of the proposed ETP, the record does not, as explained further 
below, establish that the CME bitcoin futures market is a ``market of 
significant size'' related to spot bitcoin, the underlying bitcoin 
assets that would be held by the Trust.
---------------------------------------------------------------------------

    \136\ See id. at 37580 n.19.
    \137\ See Amendment No. 1, 87 FR at 28054.
    \138\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying spot bitcoin market. See Winklevoss 
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at 
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order, 
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93; ARK 
21Shares Order, 87 FR at 20023 n.121.
---------------------------------------------------------------------------

(i) Whether There is a Reasonable Likelihood That a Person Attempting 
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin 
Futures Market to Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' related to spot 
bitcoin is the determination that there is a reasonable likelihood that 
a person attempting to manipulate the ETP would have to trade on the 
CME bitcoin futures market to successfully manipulate the ETP. In 
previous Commission orders, the Commission explained that the lead/lag 
relationship between the bitcoin futures market and the spot market is 
``central'' to understanding this first prong.\139\
---------------------------------------------------------------------------

    \139\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a 
lead-lag relationship between the bitcoin futures market and the 
spot market is central to understanding whether it is reasonably 
likely that a would-be manipulator of the ETP would need to trade on 
the bitcoin futures market to successfully manipulate prices on 
those spot platforms that feed into the proposed ETP's pricing 
mechanism. In particular, if the spot market leads the futures 
market, this would indicate that it would not be necessary to trade 
on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move 
to meet the spot price.''). When considering past proposals for spot 
bitcoin ETPs, the Commission has discussed whether there is a lead/
lag relationship between the regulated market (e.g., the CME) and 
the market on which the assets held by the ETP would have traded 
(i.e., spot bitcoin platforms), as part of an analysis of whether a 
would-be manipulator of the spot bitcoin ETP would need to trade on 
the regulated market to effect such manipulation. See, e.g., USBT 
Order, 85 FR at 12612. See also VanEck Order, 86 FR at 64547; 
WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 74176 
n.144; SkyBridge Order, 87 FR at 3876 n.101; Wise Origin Order, 87 
FR at 5535 n.107; ARK 21Shares Order, 87 FR at 20024 n.138.
---------------------------------------------------------------------------

(a) Assertions Made and Comments Received
    The Exchange asserts in its proposal that the CME bitcoin futures 
market is a ``large, surveilled and regulated market that is closely 
connected with the spot market for [b]itcoin and through which the 
Exchange could obtain information to assist in detecting and deterring 
potential fraud or manipulation.'' \140\ The Exchange, however, 
concedes that the Sponsor did not find a significant lead/lag 
relationship between the spot and the CME bitcoin futures markets. 
Specifically, according to NYSE Arca, the Sponsor ``conducted a lead/
lag analysis of per minute data comparing the [b]itcoin futures market, 
as represented by the CME futures market, to the [b]itcoin spot market, 
as represented by the Index.'' However, for the period of November 1, 
2019, to August 31, 2021, the analysis showed that ``there does not 
appear to be a significant lead/lag relationship between the two 
instruments.'' \141\ The Sponsor's analysis notwithstanding, NYSE Arca 
states that ``other studies prior to and since such date have found 
that the CME futures market does lead the [b]itcoin spot market.'' 
\142\
---------------------------------------------------------------------------

    \140\ Amendment No. 1, 87 FR at 28060. A commenter also states 
its belief that the Trust ``has strong links to a regulated market 
of significant size (i.e., the CME).'' Fortress Letter, at 2. Based 
on arguments articulated in the proposal, the Commission understands 
that the Exchange is arguing that CME is the regulated market of 
significant size with which it has the relevant surveillance-sharing 
agreement.
    \141\ Amendment No. 1, 87 FR at 28054.
    \142\ Id. at 28054 and n.50 (citing Memorandum to File from Neel 
Maitra, Senior Special Counsel (Fintech & Crypto Specialist), 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission re: Meeting with Representatives from Fidelity Digital 
Assets, et al. and attachment (SR-CboeBZX-2021-039) (Sept. 8, 2021), 
available at: https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf; Letter from Bitwise Asset Management, 
Inc. re: File Number SR-NYSEArca-2021-89 (Feb. 25, 2022), available 
at: https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20117902-270822.pdf; Letter from Wilson Sonsini 
Goodrich and Rosati, P.C. and Chapman and Cutler LLP, on behalf of 
Bitwise Asset Management, Inc. re: File No. SR-NYSEArca-2021-89 
(Mar. 7, 2022), available at: https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189-20118794-271630.pdf). See also 
Submission by the Sponsor to the Commission in connection with a 
meeting between representatives of the Sponsor, the Sponsor's 
counsel, Davis Polk & Wardwell LLP, and Commission staff on April 
26, 2022 (``Grayscale Submission''), at 21-22, available at: https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190-20128860-294707.pdf). A commenter states that ``there is ample historical 
data to demonstrate how closely the CME futures contracts track the 
spot market (and in fact as BitWise's research has shown, lead the 
spot market a majority of the time.).'' Letter from Ben Davenport, 
dated Feb. 10, 2022 (``Davenport Letter'').
---------------------------------------------------------------------------

    NYSE Arca goes on to assert that, ``[a]lthough there have been 
mixed findings regarding the lead/lag relationship between the CME 
futures and [b]itcoin spot markets, . . . the CME futures market 
represents a large, surveilled[,] and regulated market.'' \143\ As 
evidence of its assertion that the CME constitutes a market of 
significant size related to spot bitcoin, the Exchange states that, 
from November 1, 2019, to August 31, 2021, the CME futures market 
trading volume was over $432 billion, compared to $624 billion in 
trading volume across the Constituent Platforms included in the 
Index.\144\ The Exchange also points to the CME futures market trading 
volume from November 1, 2019, to August 31, 2021, which it states was 
approximately 50% of the trading volume of certain U.S. dollar-
denominated spot bitcoin platforms, including Binance, Coinbase Pro, 
Bitfinex, Kraken, Bitstamp, BitFlyer, Poloniex, Bittrex, and 
itBit.\145\ The Exchange, therefore, concludes that, ``[g]iven the 
significant size of the CME futures markets, . . . there is a

[[Page 40312]]

reasonable likelihood that a person attempting to manipulate the ETP 
would also have to trade on that market to successfully manipulate the 
ETP, since arbitrage between the derivative and spot markets would tend 
to counter an attempt to manipulate the spot market alone.'' \146\
---------------------------------------------------------------------------

    \143\ Amendment No. 1, 87 FR at 28054.
    \144\ See id.
    \145\ See id. at 28054 and n.51. See also Grayscale Submission, 
at 16, citing to https://www.bitcointradingvolume.com/ (``CME 
represents >50% of all [b]itcoin trading volume''). But see Letter 
from Robert E. Whaley, Professor of Management (Finance), Director, 
Financial Markets Research Center, Vanderbilt University Owen 
Graduate School of Management, dated May 25, 2022 (``Whaley 
Letter''), at 2 (``In terms of USD value, the market cap in the 
CME's bitcoin futures market averages less than one-quarter of one 
percent of the bitcoin spot market.''). This commenter nonetheless 
concludes that, ``[s]ince the Commission is comfortable with the 
viability of futures-based ETF investing in an environment in which 
the spot market dominates (in terms of both dollar value and trading 
volume), it follows logically that spot-based ETPs are warranted.'' 
Whaley Letter, at 2.
    \146\ Amendment No. 1, 87 FR at 28054. A commenter also states 
its belief that ``any attempt to manipulate the price of [the Trust] 
would likely also require manipulation of the CME futures markets''; 
that ``arbitrage between the spot and derivative markets would 
quickly counteract the attempted manipulation''; and that ``the CME 
would undoubtedly assist in monitoring and stopping the 
misconduct.'' Fortress Letter, at 3.
---------------------------------------------------------------------------

    Similar to the Sponsor's analysis, a commenter concludes that the 
relationship between spot and futures prices is ``complex and 
interrelated with no clear winner.'' \147\ According to the commenter, 
the ``results of the test of which market is leading depends on the 
time period of testing.'' \148\ Despite the commenter's lead/lag 
conclusion, the commenter argues that a would-be manipulator would be 
unable to manipulate the proposed ETP without also trading in the CME 
bitcoin futures market, ``[g]iven the relative size of trading volumes 
of bitcoin futures relative to spot, the strong dependence of spot 
prices on futures prices and vice versa, and the inefficiency of 
attempting to manipulate the [proposed] ETP through offshore trading.'' 
\149\ Regarding the relative size of trading volumes, the commenter 
states that it examined Bloomberg trading data for the 365 days ended 
February 4, 2022, across all spot bitcoin trading venues and all CME 
bitcoin futures contract maturities, and found that the aggregate 
futures volume ($579 billion) was 31% higher than aggregate spot volume 
($442 billion), a result that the commenter found to be statistically 
significant.\150\ Regarding offshore trading, the commenter states that 
they believe it unlikely ``a bad actor would attempt to manipulate the 
[proposed] ETP through trading on offshore cryptocurrency trading 
venues'' because ``offshore trading venues generally do not support 
fiat trading and instead only support trading between different 
cryptocurrencies.'' \151\ The commenter further states that ``offshore 
trading venues generally offer trading in bitcoin derivatives such as 
quarterly futures and perpetual futures; however, both would be poor 
choices for a bad actor seeking to manipulate the [proposed] ETP 
because both are known to deviate from the bitcoin spot price much more 
than CME futures,'' and thus any actor seeking to manipulate the 
proposed ETP ``would risk expanding or contracting the premium of the 
derivative being used as a manipulation tool rather than influencing 
bitcoin spot prices.'' \152\
---------------------------------------------------------------------------

    \147\ Letter from Hunting Hill Global Capital, LLC, dated Mar. 
3, 2022 (``Hunting Hill Letter''), at 2. The commenter makes this 
conclusion based on its own lead/lag analysis, ``using minute-by-
minute last-price data over the [365 days ended February 4, 2022], 
converted to percentage price changes, based on the first lagged 
term for both markets.'' Id.
    \148\ Id.
    \149\ Id. at 3.
    \150\ See id. at 1-2. Although the observed time periods are 
different, the Commission observes that the relative trading volume 
data provided by this commenter is significantly different than the 
relative trading volume data provided by the Exchange. See supra 
notes 144-145 and accompanying text.
    \151\ Hunting Hill Letter, at 2-3. To the extent some offshore 
trading venues allow for bitcoin to be exchanged to Tether, the 
commenter states that ``it would not be economically practical for a 
bad actor to manipulate the [proposed] ETP using Tether-denominated 
bitcoin prices'' because ``manipulation in the bitcoin/USD exchange 
pair would likely result in a widening of Tether premiums and 
discounts.'' Id.
    \152\ Id. at 3.
---------------------------------------------------------------------------

(b) Analysis
    The record does not demonstrate that there is a reasonable 
likelihood that a person attempting to manipulate the proposed ETP 
would have to trade on the CME bitcoin futures market to successfully 
manipulate the proposed ETP. The Exchange's and commenters' assertions 
about the size of the CME bitcoin futures market in comparison to the 
Constituent Platforms in particular and/or spot bitcoin markets in 
general do not establish that the CME bitcoin futures market is of 
significant size related to spot bitcoin. As the Commission has 
previously stated, the interpretation of the term ``market of 
significant size'' or ``significant market'' depends on the 
interrelationship between the market with which the listing exchange 
has a surveillance-sharing agreement and the proposed ETP.\153\ 
Recitations of data reflecting the size of the CME bitcoin futures 
market and the size of the spot bitcoin market are not sufficient to 
establish an interrelationship between the CME bitcoin futures market 
and the proposed ETP.\154\
---------------------------------------------------------------------------

    \153\ See USBT Order, 85 FR at 12611.
    \154\ See id. at 12612; Wise Origin Order, 87 FR at 5534-35.
---------------------------------------------------------------------------

    NYSE Arca asserts that there is a reasonable likelihood that a 
person would have to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP, because ``arbitrage between 
the derivative and spot markets would tend to counter an attempt to 
manipulate the spot market alone.'' \155\ However, the record does not 
demonstrate the existence of efficient price arbitrage across bitcoin-
related platforms, either generally or specifically as it relates to 
the bitcoin derivative and spot markets.\156\ The Exchange also does 
not provide any additional data or analysis to support its conclusion 
that the arbitrage that may exist between the bitcoin derivatives 
markets and spot markets would counter an attempt to manipulate the 
spot market alone, or to demonstrate that such arbitrage would occur 
quickly enough to prevent a would-be manipulator of the proposed ETP 
from profiting off of movements in the spot price. Moreover, even 
assuming that the Commission concurred with the Exchange's premise that 
efficient arbitrage exists between the bitcoin derivatives markets and 
spot markets, the Exchange does not explain why the presence of 
efficient arbitrage implies that a would-be manipulator would be 
reasonably likely to trade specifically on the CME bitcoin futures 
market rather than on unregulated bitcoin futures markets or other 
bitcoin derivatives markets.\157\
---------------------------------------------------------------------------

    \155\ Amendment No. 1, 87 FR at 28054.
    \156\ See also supra note 89 and accompanying text.
    \157\ See WisdomTree Order, 86 FR at 69332; NYDIG Order, 87 FR 
at 14939.
---------------------------------------------------------------------------

    In addition, while a commenter asserts that it is unlikely a would-
be manipulator would use offshore bitcoin futures as their manipulation 
tool,\158\ this commenter has not sufficiently explained or supported 
its assertions. The commenter provides no data or other evidence to 
support its assertions that, because Tether often trades at a premium 
or discount to USD, it is not ``economically practical''--and therefore 
``unlikely''--for a bad actor to manipulate the proposed ETP using 
Tether-denominated bitcoin prices. The commenter also does not provide 
any data regarding the deviation of offshore futures prices from spot 
bitcoin prices, or on how much (or how long) attempted manipulation of 
offshore futures affects this deviation, that would allow for 
assessment of whether offshore futures would be a ``poor choice'' for a 
manipulation tool.
---------------------------------------------------------------------------

    \158\ See supra notes 151-152 and accompanying text.
---------------------------------------------------------------------------

    Finally, the econometric evidence in the record for the proposal 
does not support the conclusion that an interrelationship exists 
between the CME bitcoin futures market and the spot bitcoin market such 
that it is reasonably likely that a person attempting to manipulate the 
proposed ETP would also have to trade on the CME bitcoin futures 
market.\159\ As the Commission

[[Page 40313]]

has stated in previous orders, if the spot market leads the futures 
market, this would indicate that it would not be necessary to trade on 
the futures market to manipulate the proposed ETP.\160\ But as NYSE 
Arca concedes, there have been ``mixed'' findings regarding the lead/
lag relationship between the CME futures and spot bitcoin markets.\161\ 
Moreover, based on the Sponsor's own analysis--the data, methodology, 
results, and statistical significance of which were not described in 
the filing--``there does not appear to be a significant lead/lag 
relationship between'' the CME bitcoin futures market and the spot 
bitcoin market.\162\ In addition, a commenter's lead/lag analysis 
purportedly finds ``no clear winner'' and a bi-directional relationship 
between spot bitcoin prices and CME futures prices.\163\ And while the 
Exchange and the Sponsor highlight previous papers and analyses 
submitted to the Commission in connection with other proposals to list 
and trade spot bitcoin ETPs to support the premise that the CME bitcoin 
futures market leads the spot bitcoin market,\164\ the Commission 
disapproved the proposals related to these submissions, and the 
Commission raised issues and criticisms with respect to these 
submissions that the Exchange does not address. The Exchange does not 
provide any additional evidence of an interrelationship between the CME 
bitcoin futures market, which is the regulated market, and spot bitcoin 
platforms, which are the markets on which the assets held by the 
proposed ETP would trade. As in previous disapprovals, because the 
lead/lag analysis regarding whether the CME bitcoin futures market 
leads the spot market remains inconclusive,\165\ the Commission 
determines that the evidence in the record is inadequate to conclude 
that an interrelationship exists between the CME bitcoin futures market 
and the spot bitcoin market such that it is reasonably likely that a 
person attempting to manipulate the proposed ETP would have to trade on 
the CME bitcoin futures market to successfully manipulate the proposed 
ETP.
---------------------------------------------------------------------------

    \159\ See USBT Order, 85 FR at 12611; Wise Origin Order, 87 FR 
at 5535; NYDIG Order, 87 FR at 14938; Global X Order, 87 FR at 
14920; ARK 21Shares, 87 FR at 20024.
    \160\ See, e.g., USBT Order, 85 FR at 12612.
    \161\ See Amendment No. 1, 87 FR at 28054.
    \162\ Id.
    \163\ See Hunting Hill Letter, at 2. The Commission considers 
the lead/lag relationship between the CME bitcoin futures market and 
the spot bitcoin market to be central to understanding whether it is 
reasonably likely that a would-be manipulator of a spot bitcoin ETP 
would need to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP. See USBT Order, 85 FR at 
12612. This commenter, however, does not explain its data, 
methodology (such as why using only the first lag for each time 
series was the appropriate model specification), or results to an 
extent that can be assessed and/or verified. The commenter also 
argues that the Commission should not require that the CME bitcoin 
futures market ``always'' lead the spot market, as the commenter 
believes that would be ``tantamount to requiring that an obvious 
statistical arbitrage opportunity exists between two highly liquid 
and automated markets'' from which any trader could ``profit 
immensely,'' and would ``be the same as a declaration that bitcoin 
ETPs will never be approved in the United States.'' See Hunting Hill 
Letter, at 2. The Commission disagrees. A lead/lag statistical 
result that CME bitcoin futures prices ``lead'' spot prices does not 
mean that CME bitcoin futures prices ``always'' move before spot 
prices--which would be the ``obvious'' and exploitable arbitrage 
opportunity--or that there would never be a situation where the spot 
price moves before the CME bitcoin futures price.
    \164\ See supra note 142.
    \165\ As the academic literature and listing exchanges' analyses 
pertaining to the pricing relationship between the CME bitcoin 
futures market and spot bitcoin market have developed, the 
Commission has critically reviewed those materials. See ARK 21Shares 
Order, 87 FR at 20024; Global X Order, 87 FR at 14920; Wise Origin 
Order, 87 FR at 5535-36, 5539-40; Kryptoin Order, 86 FR at 74176; 
WisdomTree Order, 86 FR at 69330-32; VanEck Order, 86 FR at 64547-
48; USBT Order, 85 FR at 12613.
---------------------------------------------------------------------------

    The Commission thus concludes that the information that NYSE Arca 
provides is not sufficient to support a determination that it is 
reasonably likely that a would-be manipulator of the proposed ETP would 
have to trade on the CME bitcoin futures market to successfully 
manipulate the proposed ETP. Therefore, the information in the record 
also does not establish that the CME bitcoin futures market is a 
``market of significant size'' related to the assets to be held by the 
proposed ETP.
(ii) Whether It Is Unlikely That Trading in the Proposed ETP Would Be 
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' related to spot 
bitcoin is the determination that it is unlikely that trading in the 
proposed ETP would be the predominant influence on prices in the CME 
bitcoin futures market.\166\
---------------------------------------------------------------------------

    \166\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

(a) Assertions Made and Comments Received
    NYSE Arca asserts that ``it is unlikely that the ETP would become 
the predominant influence on prices in the market.'' \167\ In support, 
NYSE Arca states that the Sponsor examined the change in ``market 
capitalization of bitcoin'' with net inflows into the Trust, which 
currently trades OTC,\168\ and found that from November 1, 2019, to 
August 31, 2021, the market capitalization of bitcoin grew by $721 
billion, while the Trust experienced $6.6 billion of inflows over the 
same period.\169\ The Exchange states that the cumulative inflow into 
the Trust over the stated time period was only 0.9% of the aggregate 
growth of bitcoin's market capitalization.\170\ The Exchange also 
states that ``the Trust experienced approximately $98.5 billion of 
trading volume from November 1, 2019[,] to August 31, 2021, only 23% of 
the CME futures market and 16% of the Index over the same period.'' 
\171\
---------------------------------------------------------------------------

    \167\ Amendment No. 1, 87 FR at 28054.
    \168\ The Exchange states that, compared with global commodity 
ETPs, the Trust would rank fourth among global commodity ETPs in 
assets under management and seventh in notional trading volume for 
the period from November 1, 2019, to October 31, 2020. See id. at 
28054 n.52.
    \169\ See id. at 28054.
    \170\ See id.
    \171\ Id.
---------------------------------------------------------------------------

(b) Analysis
    The record does not demonstrate that it is unlikely that trading in 
the proposed ETP would be the predominant influence on prices in the 
CME bitcoin futures market. First, the Sponsor's comparison of the 
Trust's historical inflows to the growth of bitcoin's market 
capitalization misapplies the second prong of the Commission's 
analysis. As stated above, the second prong in establishing whether the 
CME bitcoin futures market constitutes a ``market of significant size'' 
is the determination that it is unlikely that trading in the proposed 
ETP would be the predominant influence on prices in the CME bitcoin 
futures market. The Sponsor's analysis of the Trust's historical 
inflows vis-[agrave]-vis the capitalization of the spot bitcoin market 
considers neither the CME bitcoin futures market nor the CME bitcoin 
futures market's prices. Accordingly, such statistics, without more, 
are not relevant to the Commission's consideration of whether trading 
in the ETP would be the predominant influence on prices in the CME 
bitcoin futures market.
    Second, putting aside the question of the spot bitcoin market's 
relevance to the second prong of the analysis, neither the Sponsor nor 
the Exchange has adequately explained why historical inflows into the 
OTC Trust is an appropriate proxy for trading in what would be 
exchange-listed Shares. There is no limit on the amount of mined 
bitcoins that the Trust may hold. Yet the Sponsor relies on the Trust's 
historical inflows and does not provide any information on the expected 
growth in the size of the Trust if the proposal is approved and the 
resultant increase in

[[Page 40314]]

the amount of bitcoin that may be held by the Trust over time, or on 
the overall expected number, size, and frequency of creations and 
redemptions--or how any of the foregoing could (if at all) influence 
prices in the CME bitcoin futures market. Moreover, the Trust's trading 
volume cited by the Exchange only relates to the Trust as it trades OTC 
and does not contemplate what may happen if the Trust converts to an 
ETP.\172\ Commenters state that approval of a spot bitcoin ETP would 
provide a simpler, safer, and more efficient way to obtain exposure to 
bitcoin than the products that are currently available to retail 
investors; \173\ and converting the Trust into an ETP would allow for 
daily creations and redemptions.\174\ Further, the Sponsor itself 
acknowledges that converting the Trust into an ETP would allow the 
Shares to better track the Trust's net asset value (``NAV'') and reduce 
discounts and premiums.\175\ Therefore, the Sponsor's use of historical 
inflow data is questionable as a way to approximate trading that may 
ensue in the proposed ETP.
---------------------------------------------------------------------------

    \172\ In addition, neither the Exchange nor the Sponsor 
addresses the likely impact, if any, of the conversion itself on CME 
bitcoin futures prices, such as whether there may be rapid inflows 
into, or outflows from, the Trust upon conversion, and how long any 
such impacts are expected to last.
    \173\ See infra note 237.
    \174\ See infra note 245 and accompanying text.
    \175\ See infra notes 245-246 and accompanying text.
---------------------------------------------------------------------------

    Third, NYSE Arca's assertions are general and conclusory. While 
NYSE Arca recites data relating to the market capitalization of bitcoin 
and inflows to the Trust, and trading volume of the Trust as compared 
to the CME bitcoin futures market and the Constituent Platforms, NYSE 
Arca provides no meaningful analysis of such data to support its 
conclusion. For example, setting aside the issues with the relevance of 
the data that the Sponsor chose to consider, the analysis performed on 
such data is merely a comparison of the size of one data point (e.g., 
change in market capitalization) to the size of another (e.g., net 
inflows). Such an analysis is, at best, a simple correlation between 
the two data points; it provides no information relating to the impact 
of one on the other--e.g., no information on the impact of the Trust's 
historical inflows on market capitalization, or of the Trust's trading 
volume on the CME bitcoin futures market (let alone, on the CME bitcoin 
futures market's prices). In short, the analysis performed provides no 
information on the influence that is central to the second prong.
    Fourth, the data that NYSE Arca provides indicate that the Trust's 
trading volume from November 1, 2019, to August 31, 2021, was ``only'' 
23% of that of the CME bitcoin futures market.\176\ Even assuming that 
this historical data is an accurate predictor of the future percentage, 
neither the Sponsor nor the Exchange directly addresses why a single 
bitcoin ETP with trading volume close to one-quarter that of the CME 
bitcoin futures market is not likely to be the predominant influence on 
prices in that market. Moreover, the Sponsor describes the Trust, as of 
April 26, 2022, as holding approximately $30 billion in bitcoin, an 
amount that constitutes 3.4% of all outstanding bitcoin \177\ and that 
far exceeds the value of all open interest in CME bitcoin futures 
contracts.\178\ Yet neither the Sponsor nor the Exchange directly 
addresses why a spot bitcoin ETP whose assets under management would 
similarly exceed the value of all open interest in CME bitcoin futures 
contracts is not likely to be the predominant influence on prices in 
that market.
---------------------------------------------------------------------------

    \176\ See Amendment No. 1, 87 FR at 28054.
    \177\ See Grayscale Submission, at 2.
    \178\ As of May 31, 2022, the value of open interest in the 
front two month CME BTC contracts was approximately $1.7 billion 
(source: CME Group).
---------------------------------------------------------------------------

    Thus, the Commission cannot conclude, based on the assertions in 
the filing and absent sufficient evidence or analysis in support of 
these assertions, that it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in the CME bitcoin futures 
market.\179\
---------------------------------------------------------------------------

    \179\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86 
FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 
FR at 3879; Wise Origin Order, 87 FR at 5537; ARK 21Shares Order, 87 
FR at 20025.
---------------------------------------------------------------------------

    Therefore, because NYSE Arca has not provided sufficient 
information to establish both prongs of the ``market of significant 
size'' determination, the Commission cannot conclude that the CME 
bitcoin futures market is a ``market of significant size'' related to 
spot bitcoin such that NYSE Arca would be able to rely on a 
surveillance-sharing agreement with the CME to provide sufficient 
protection against fraudulent and manipulative acts and practices.
(3) Assertions That the Proposed Spot Bitcoin ETP Is Comparable to 
Bitcoin Futures-Based ETFs and ETPs
(i) Assertions Made and Comments Received
    The Exchange and the Sponsor argue that it would be inconsistent 
for the Commission to allow the listing and trading of ETFs and ETPs 
that provide exposure to bitcoin through CME bitcoin futures while 
disapproving the current proposal.\180\
---------------------------------------------------------------------------

    \180\ See Amendment No. 1, 87 FR at 28055; Grayscale Letter I, 
at 7-13; Letter from Davis Polk & Wardwell LLP, on behalf of the 
Sponsor, dated Apr. 18, 2022 (``Grayscale Letter II'').
---------------------------------------------------------------------------

    The Sponsor asserts that CME bitcoin futures ETFs and ETPs and spot 
bitcoin ETPs ``are the same in all relevant respects.'' \181\ In 
support of this assertion, the Sponsor claims that CME bitcoin futures 
ETFs and ETPs are ``priced according to the CME CF Bitcoin Reference 
Rate'' (``BRR''), which, ``in turn, is determined according to pricing 
data collected from digital asset trading platforms that include all 
but one of those currently incorporated into [the Index].'' \182\ NYSE 
Arca also states that spot bitcoin ETPs, including the Trust, ``would 
be priced by referencing [spot bitcoin platforms] included in the BRR, 
such as through the Index.'' \183\
---------------------------------------------------------------------------

    \181\ Grayscale Letter I, at 4.
    \182\ Id. at 7. See also Amendment No. 1, 87 FR at 28055; 
Grayscale Letter II, at 2; Grayscale Submission, at 13-14; STA 
Letter, at 2 (``both types of products use similar processes for 
determining price on the underlying spot cash [b]itcoin markets'').
    \183\ Amendment No. 1, 87 FR at 28055. See also Grayscale Letter 
I, at 7; Grayscale Letter II, at 2; Grayscale Submission, at 13; 
Fortress Letter, at 2; Virtu Letter, at 3; Letter from Adam 
Kornfield, dated Feb. 15, 2022 (``Kornfield Letter''), at 1; Letter 
from Hashem Dezhbakhsh, Narasimhan Jegadeesh, and Juan Rubio-
Ramirez, Emory University, dated April 24, 2022, at 2 (``Emory 
Letter''). The Sponsor states that the BRR and the Index have 
significant overlap in constituents, resulting in prices that track 
each other closely, with an average daily price difference over 
trailing 12 months of 0.04%. See Grayscale Submission, at 13. See 
also Whaley Letter, at 2-3 (presenting summary data relating to the 
Index and the BRR and concluding that ``XBX and BRR are near perfect 
substitutes'').
---------------------------------------------------------------------------

    The Sponsor further asserts that, because the BRR is based upon 
``substantially the same [b]itcoin pricing data'' as the Index, both 
CME bitcoin futures ETFs and ETPs and spot bitcoin ETPs are exposed to 
the ``same risks relating to pricing data quality'' (``same data, same 
risks'').\184\ Moreover, because of the ``almost complete overlap'' in 
the platforms underlying the BRR and the Index, the Sponsor claims that 
``the risks of fraud and manipulation in the [b]itcoin market impacting 
spot [b]itcoin ETPs are indistinguishable from those same risks 
impacting futures [b]itcoin ETPs.'' \185\ The Exchange also asserts

[[Page 40315]]

that, because of this overlap, any potential fraud or manipulation in 
the underlying spot bitcoin market would impact both CME bitcoin 
futures ETFs and ETPs and spot bitcoin ETPs.\186\ The Sponsor goes 
further, asserting that ``any'' fraud or manipulation in the underlying 
market ``will affect both products in the same way.'' \187\
---------------------------------------------------------------------------

    \184\ See Grayscale Letter I, at 7. See also, e.g., Letter from 
Paul Grewal, Chief Legal Officer, Coinbase, dated Dec. 14, 2021 
(``Coinbase Letter I''), at 4 (``the reference rate used to price 
[b]itcoin contracts underlying futures-based ETPs is subject to the 
same pricing quality risks as the index used to price spot [b]itcoin 
and calculate net-asset value in spot ETPs.''); Letter from James J. 
Angel, Associate Professor of Finance, Georgetown University, dated 
Apr. 17, 2022 (``Angel Letter I''), at 6; Blockchain Association 
Letter, at 3.
    \185\ Grayscale Letter I, at 9.
    \186\ See Amendment No. 1, 87 FR at 28055. See also Grayscale 
Submission, at 14. Some commenters agree that bitcoin futures ETFs 
and ETPs pose identical risks of fraud and manipulation as spot 
bitcoin ETPs given their views that both products are priced based 
on the spot bitcoin price. See, e.g., Blockchain Association Letter, 
at 2; Coinbase Letter I, at 3; Coinbase Letter II, at 7; Virtu 
Letter, at 3; Angel Letter I, at 5; BitGo Letter, at 2; Cumberland 
Letter, at 2; Letter from Carol R. Goforth, University Professor and 
Clayton N. Little Professor of Law, University of Arkansas, dated 
May 3, 2022 (``Goforth Letter''), at 1; Kornfield Letter, at 2; 
Letters from Brandon Gunderson (Feb. 4, 2022) (``Gunderson 
Letter''), at 2; Kenneth L. Keiffer, dated May 3, 2022 (``Keiffer 
Letter''), at 1; Robert L. DiLonardo and Donna S. DiLonardo, dated 
May 3, 2022 (``DiLonardo Letter''); Bridget Metzger (May 9, 2022) 
(``Metzger Letter''); Emory Letter, at 2; Letter from Sigal 
Mandelker and Jessi Brooks, Ribbit Capital, dated June 20, 2022 
(``Ribbit Capital Letter''), at 5. An affiliate of the Custodian 
also states that prices and volumes in the bitcoin futures and spot 
bitcoin markets ``are highly correlated, indicating very similar 
market dynamics between the futures market, for which the Commission 
has approved a [CME bitcoin futures ETF], and the spot market.'' 
Coinbase Letter II, at 3.
    \187\ Grayscale Letter II, at 2.
---------------------------------------------------------------------------

    Moreover, the Sponsor states that the Commission itself has 
recognized that ``the CME bitcoin futures market is not insulated from 
potential risks of fraud and manipulation in the underlying [b]itcoin 
market.'' \188\ The Sponsor even asserts that, ``[i]f anything, 
derivatives markets present additional opportunities for manipulation 
on top of spot markets--which is why the derivatives markets have an 
additional layer of federal regulation to begin with.'' \189\ According 
to the Sponsor, the Commission has never found there to be any 
meaningful difference in the risk of fraud or manipulation between spot 
bitcoin and bitcoin futures markets.\190\ The Sponsor further asserts 
that, ``[e]ven with regulation by the CFTC, limiting ETP exposure to 
[b]itcoin futures does not address the risk of manipulation of 
underlying [b]itcoin spot market prices--unless the Commission's view 
is that CFTC regulation is adequate for all [b]itcoin spot markets, 
including those in which [the Trust] invests.'' \191\
---------------------------------------------------------------------------

    \188\ Id. (referring to the Teucrium Order, supra note 11). See 
also Grayscale Submission, at 14.
    \189\ See Grayscale Letter I, at 11. Some commenters make 
similar arguments. For example, a commenter states that ``spot 
markets may be less prone to manipulation given their daily notional 
volumes in the range of $35 billion, with futures volumes in the 
range of $1 billion daily notional.'' Virtu Letter, at 3. Another 
commenter states that an ETP that actually holds bitcoin would be 
less vulnerable to manipulation than an ETP that holds futures 
contracts because, with respect to bitcoin futures, there is the 
possibility of manipulation on the CME itself in addition to the 
spot bitcoin trading platforms. See Angel Letter I, at 6. Another 
commenter states that having a bitcoin futures ETF actually makes 
the derivatives markets more liquid and easy to manipulate than the 
spot market. See Dreyfuss Letter, at 2. See also, e.g., Letter from 
Mary L. Holsinger, dated May 8, 2022.
    \190\ See Grayscale Letter I, at 11-12; Grayscale Letter II, at 
2 (``The Commission's prior disapprovals of spot bitcoin ETPs have 
not identified any distinct and significant additional risk of fraud 
and manipulation that is somehow specific to spot [b]itcoin ETPs, 
and none exists.''). See also, e.g., Blockchain Association Letter, 
at 3.
    \191\ Grayscale Letter I, at 11. See also, e.g., Blockchain 
Association Letter, at 3; Coinbase Letter I, at 3; Ribbit Capital 
Letter, at 5.
---------------------------------------------------------------------------

    Given that CME bitcoin futures ETFs currently trade, the Sponsor 
believes that the Commission's disapproval of the proposal would 
violate Section 6(b)(5) of the Exchange Act's prohibition against 
unfair discrimination among issuers, and would constitute an arbitrary 
and capricious administrative action in violation of the Administrative 
Procedure Act (``APA'').\192\ According to the Sponsor, ``[t]he 
Commission has not offered any meaningful explanation for its 
differential treatment of these competing products.'' \193\ The Sponsor 
argues that regulation of bitcoin futures ETFs under the 1940 Act 
offers no protections against fraudulent and manipulative trading in 
the underlying bitcoin market and provides no basis for treating 
bitcoin futures ETFs and spot bitcoin ETPs registered under the 
Securities Act differently.\194\
---------------------------------------------------------------------------

    \192\ See Grayscale Letter I, at 8-9; 12-13; Grayscale 
Submission, at 23; Grayscale Letter II, at 2-4 (stating, among other 
things, that if the proposal ``were disapproved based on the 
`significant market' test, without an independent evaluation of the 
proposal's compliance with Section 6(b)(5) in light of the [Teucrium 
Order], we believe the action would be inconsistent with the 
requirements of both the Exchange Act and the [APA]''). Some 
commenters agree that the Commission's disparate treatment of 
bitcoin futures ETFs and ETPs and spot bitcoin ETPs results in 
unfair discrimination amongst issuers in contravention of the 
Exchange Act and/or is arbitrary and capricious in violation of the 
APA. See, e.g., Blockchain Association Letter, at 3-4, Coinbase 
Letter I, at 4; Virtu Letter, at 3; Angel Letter I, at 5; Fortress 
Letter, at 3; Kornfield Letter; Keiffer Letter; Metzger Letter; 
Goforth Letter, at 2; DiLonardo Letter; Letter from Michael D. 
Moffitt, dated Mar. 13, 2022 (``Moffitt Letter II) (citing 
transcript of Joseph Grundfest, former SEC Commissioner); Davenport 
Letter; Letter from John Carlson, dated Feb. 22, 2022; Ribbit 
Capital Letter, at 6; Letter from Alan J. Lane, Chief Executive 
Officer, Silvergate Capital Corporation, dated June 21, 2022. See 
also, e.g., ADAM Letter, at 6 (``a disapproval of Arca's proposal 
would lead to the Commission picking winners based on its 
preferential treatment of one product over another''). A commenter 
asserts that ``it is not within [the Commission's mandate to 
regulate the spot commodity markets upon which ETPs are based[,]'' 
that ``Section 6(b)(5) neither mentions underlying markets, nor an 
exchange's obligations with respect to fraud within them[,]'' and 
``[t]he Commission's apparent position that an exchange must 
mitigate fraud and manipulation in an underlying market, or be 
prohibited from listing a product based on a commodity in an 
underlying market subject to fraud and manipulation not in the 
exchange's control, stretches the Commission's authority beyond 
existing statutory language.'' See Ribbit Capital Letter, at 5.
    \193\ Grayscale Letter I, at 8. Some commenters agree that the 
Commission has not articulated a valid justification for treating 
bitcoin futures ETFs and ETPs and spot bitcoin ETPs differently. 
See, e.g., Blockchain Association Letter, at 3-4; Coinbase Letter I, 
at 4; Cumberland Letter, at 2; STA Letter, at 2; Moffitt Letter II 
(citing transcript of Joseph Grundfest, former SEC Commissioner); 
Kornfield Letter; Goforth Letter; Chilson Letter, at 4.
    \194\ See Grayscale Letter I, at 9-11; Grayscale Submission, at 
14. See also, e.g., Blockchain Association Letter, at 3; Coinbase 
Letter I, at 5 n.11. The Sponsor states that the Commission's recent 
approval of bitcoin futures ETPs registered under the Securities Act 
``confirms that 1940 Act registration is not a basis for the 
Commission to approve one product and reject another.'' See 
Grayscale Letter II, at 1 (referring to the Teucrium Order, supra 
note 11). See also Amendment No. 1, 87 FR at 28055; Goforth Letter, 
at 1-2.
---------------------------------------------------------------------------

    The Sponsor also argues that the Commission's standard violates the 
APA because it is illusory and cannot be satisfied.\195\ According to 
the Sponsor, the framework that the Commission has articulated for 
assessing whether a proposal to list and trade any bitcoin-based ETP 
complies with the requirements of Exchange Act Section 6(b)(5) is ``so 
ill-defined and unachievable as to be arbitrary.'' \196\ The Sponsor 
continues to state that ``[t]he Commission has never quantified a 
`significant market' or `market of significant size.' '' \197\ 
Moreover, according to the Sponsor, the Commission ``has never defined 
or specified what would actually constitute `unique resistance to 
manipulation' that is `beyond the protections of the traditional 
commodities and equities markets,' nor has the Commission explained 
what it

[[Page 40316]]

means for resistance to be `inherent' or `novel' in this context.'' 
\198\
---------------------------------------------------------------------------

    \195\ See Grayscale Letter I, at 12-13.
    \196\ See id. at 12. For a summary of the Commission's approach 
to considering proposals to list bitcoin-based ETPs, see supra notes 
11-27 and accompanying text. Some commenters agree that the 
Commission's evaluation of spot bitcoin ETPs and bitcoin futures 
ETFs and ETPs is ambiguous and inconsistent. See, e.g., Coinbase 
Letter I, at 4 (``when market participants compare the Commission's 
evaluation and approval of a futures-based [b]itcoin ETP to its 
treatment of spot [bitcoin] ETP proposals, they will see a lack of 
well-defined criteria and inconsistent application of the 
criteria''); Fortress Letter, at 2 (``While the Commission has 
stated that it considered each [spot bitcoin ETP] rule application 
`on its own merits and under the standards applicable to it', the 
Commission has itself devised those standards ambiguously and 
inconsistently.'').
    \197\ Grayscale Letter I, at 12. See also Grayscale Letter II, 
at 3 (``the Commission's reluctance to quantify the size a market 
must achieve to be `significant,' and its reluctance to articulate 
discernible standards for determining whether the market has the 
requisite linkage to the ETP's assets, renders this test subjective, 
arbitrary and effectively unachievable'').
    \198\ Grayscale Letter I, at 13.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission disagrees with these assertions and conclusions. The 
proposed rule change does not relate to the same underlying holdings as 
either ETFs regulated under the 1940 Act that provide exposure to 
bitcoin through CME bitcoin futures, or CME bitcoin futures-based ETPs 
registered under the Securities Act but not regulated under the 1940 
Act. The Commission considers the proposed rule change on its own 
merits and under the standards applicable to it. Namely, with respect 
to this proposed rule change, the Commission must apply the standards 
as provided by Section 6(b)(5) of the Exchange Act, which it has 
applied in connection with its orders considering previous proposals to 
list bitcoin-based commodity trusts and bitcoin-based trust issued 
receipts.\199\
---------------------------------------------------------------------------

    \199\ See supra note 11 and accompanying text. The Sponsor also 
mischaracterizes the Teucrium Order. For example, the Sponsor states 
that the Teucrium Order ``reflects plainly the Commission's 
recognition that the CME bitcoin futures market is not insulated 
from potential risks of fraud and manipulation in the underlying 
[b]itcoin market,'' and that ``the Commission took pains to 
`disagree[ ] with much of [NYSE] Arca's reasoning' about the 
[b]itcoin futures market's separation from the underlying [b]itcoin 
market.'' Grayscale Letter II, at 2. However, this discussion in the 
Teucrium Order addresses whether NYSE Arca had supported its claim 
that it is reasonably likely that a would-be manipulator of the CME 
bitcoin futures ETP that was the subject of the Teucrium Order would 
have to trade on the CME to manipulate that ETP. See Teucrium Order, 
87 FR at 21679. In that context, NYSE Arca had not sufficiently 
supported its statements that the CME bitcoin futures market 
``stands alone'' or that ``[b]itcoin futures prices are not 
specifically materially influenced by other [b]itcoin markets'' for 
the Commission to be persuaded by such statements. See id. at 21680.
---------------------------------------------------------------------------

    In asserting that, for purposes of making a determination to 
approve or disapprove proposals to list and trade bitcoin futures and 
spot bitcoin ETPs, the Commission is drawing a distinction about the 
potential for fraud and manipulation in the CME bitcoin futures market 
vis-[agrave]-vis the spot bitcoin markets, the Exchange, Sponsor, and 
commenters mischaracterize the framework that the Commission has 
articulated in the Winklevoss Order. As stated in the Winklevoss Order, 
the Commission is not applying a ``cannot be manipulated'' standard--
either on the CME bitcoin futures market or the spot bitcoin markets. 
Rather, as the Commission has repeatedly emphasized, and also 
summarized above, the Commission is examining whether the proposal 
meets the requirements of the Exchange Act and, pursuant to its Rules 
of Practice, is placing the burden on NYSE Arca to demonstrate the 
validity of its contentions that bitcoin markets ``offer novel 
protections beyond those that exist in traditional commodity markets or 
equity markets'' such that the detection and deterrence of fraud and 
manipulation provided by a comprehensive surveillance-sharing agreement 
with a regulated market of significant size related to spot bitcoin is 
unnecessary,\200\ or to establish that it has entered into such a 
surveillance-sharing agreement.\201\
---------------------------------------------------------------------------

    \200\ See supra note 60 and accompanying text.
    \201\ Although the Sponsor claims that the Commission has never 
defined or specified what would constitute ``unique resistance to 
manipulation'' that is ``beyond the protections of the traditional 
commodities and equities markets,'' or explained what it means for 
resistance to be ``inherent'' or ``novel,'' the Sponsor 
mischaracterizes the premise of its own argument. Listing exchanges, 
not the Commission, have argued that other means besides 
surveillance-sharing agreements may be sufficient to prevent 
fraudulent and manipulative acts and practices, including by 
asserting that the bitcoin market as a whole or the relevant 
underlying bitcoin market is ``uniquely'' and ``inherently'' 
resistant to fraud and manipulation. In response, the Commission has 
agreed with listing exchanges' posited hypothetical: that, if a 
listing exchange could establish that the underlying market 
inherently possesses a unique resistance to manipulation beyond the 
protections that are utilized by traditional commodity or securities 
markets--for which surveillance-sharing agreements in the context of 
listing derivative securities products have been consistently 
present--the exchange would not necessarily need to enter into a 
surveillance-sharing agreement with a regulated significant market 
related to the underlying bitcoin assets. See Winklevoss Order, 83 
FR at 37580, 37582-91 (addressing assertions that ``bitcoin and 
bitcoin [spot] markets'' generally, as well as one bitcoin trading 
platform specifically, have unique resistance to fraud and 
manipulation). See also USBT Order, 85 FR at 12597. Furthermore, a 
listing exchange need not substantiate its claim that the underlying 
bitcoin market is uniquely and inherently resistant to fraud in 
addition to demonstrating that the listing exchange has a 
surveillance-sharing agreement with a regulated significant market 
related to the underlying bitcoin assets.
---------------------------------------------------------------------------

    Consistent with this approach, contrary to the Exchange's, the 
Sponsor's, and some commenters' assertions, the Commission's 
consideration (and approval) of proposals to list and trade CME bitcoin 
futures ETPs, as well as the Commission's consideration (and thus far, 
disapproval) of proposals to list and trade spot bitcoin ETPs, does not 
focus on an assessment of the overall risk of fraud and manipulation in 
the spot bitcoin or futures markets, or on the extent to which such 
risks are similar.\202\ Rather, the Commission's focus has been 
consistently on whether the listing exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to the underlying bitcoin assets of the ETP under 
consideration, so that it would have the necessary ability to detect 
and deter manipulative activity. For reasons articulated in the orders 
approving proposals to list and trade CME bitcoin futures-based ETPs 
(i.e., the Teucrium Order and the Valkyrie XBTO Order), the Commission 
found that in each such case the listing exchange has entered into such 
a surveillance-sharing agreement.\203\ Making the same assessment with 
respect to this proposed spot bitcoin ETP, however, as discussed and 
explained above, the Commission finds that NYSE Arca has not.
---------------------------------------------------------------------------

    \202\ The Commission's general discussion on the risk of fraud 
and manipulation in the spot bitcoin or futures markets is only in 
response to arguments raised by the proposing listing exchanges (or 
commenters) that mitigating factors against fraud and manipulation 
in the spot bitcoin or futures markets should compel the Commission 
to dispense with the detection and deterrence of fraud and 
manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to the 
underlying bitcoin assets. But even in such instance, the central 
issue is about the necessity of such a surveillance-sharing 
agreement, not the overall risk of fraud and manipulation in the 
spot bitcoin or futures markets, or the extent to which such risks 
are similar.
    \203\ See Teucrium Order, 87 FR at 21678-81; Valkyrie XBTO 
Order, 87 FR at 28850-53.
---------------------------------------------------------------------------

    Specifically, for the CME bitcoin futures ETPs under consideration 
in the Teucrium Order and the Valkyrie XBTO Order, the proposed 
``significant'' regulated market (i.e., the CME) with which the listing 
exchange has a surveillance-sharing agreement is the same market on 
which the underlying bitcoin assets (i.e., CME bitcoin futures 
contracts) trade. As explained in those Orders, the CME's surveillance 
can reasonably be relied upon to capture the effects on the CME bitcoin 
futures market caused by a person attempting to manipulate the CME 
bitcoin futures ETP by manipulating the price of CME bitcoin futures 
contracts, whether that attempt is made by directly trading on the CME 
bitcoin futures market or indirectly by trading outside of the CME 
bitcoin futures market.\204\ Regarding the approved Teucrium Bitcoin 
Futures Fund in the Teucrium Order (``Fund''), for example, when the 
CME shares its surveillance information with NYSE Arca (the listing 
exchange for the Fund), the information would assist in detecting and 
deterring fraudulent or manipulative misconduct related to the non-cash 
assets held by the Fund.\205\ Accordingly, the Commission explains in 
the Teucrium Order and the Valkyrie XBTO Order that it is unnecessary 
for a listing exchange to establish a

[[Page 40317]]

reasonable likelihood that a would-be manipulator would have to trade 
on the CME itself to manipulate a proposed ETP whose only non-cash 
holdings would be CME bitcoin futures contracts.\206\
---------------------------------------------------------------------------

    \204\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order, 
87 FR at 28851.
    \205\ See Teucrium Order, 87 FR at 21679.
    \206\ See id.
---------------------------------------------------------------------------

    However, as the Commission also states in those Orders, this 
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets 
are not currently ``regulated.'' \207\ If an exchange seeking to list a 
spot bitcoin ETP relies on the CME as the regulated market with which 
it has a comprehensive surveillance-sharing agreement, the assets held 
by the spot bitcoin ETP would not be traded on the CME. Because of this 
significant difference, with respect to a spot bitcoin ETP, there would 
be reason to question whether a surveillance-sharing agreement with the 
CME would, in fact, assist in detecting and deterring fraudulent and 
manipulative misconduct affecting the price of the spot bitcoin held by 
that ETP. If, however, an exchange proposing to list and trade a spot 
bitcoin ETP identifies the CME as the regulated market with which it 
has a comprehensive surveillance-sharing agreement, the exchange could 
overcome the Commission's concern by demonstrating that there is a 
reasonable likelihood that a person attempting to manipulate the spot 
bitcoin ETP would have to trade on the CME in order to manipulate the 
ETP, because such demonstration would help establish that the 
exchange's surveillance-sharing agreement with the CME would have the 
intended effect of aiding in the detection and deterrence of fraudulent 
and manipulative misconduct related to the spot bitcoin held by the 
ETP.\208\
---------------------------------------------------------------------------

    \207\ See Teucrium Order, 87 FR at 21679 n.46 (citing USBT 
Order, 85 FR at 12604; NYDIG Order, 87 FR at 14936 nn.65-67). See 
also Valkyrie XBTO Order, 87 FR at 28851 n.42.
    \208\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
---------------------------------------------------------------------------

    Because, here, NYSE Arca is seeking to list a spot bitcoin ETP that 
relies on the CME as the purported ``significant'' regulated market 
with which it has a comprehensive surveillance-sharing agreement, the 
assets held by the proposed ETP would not be traded on the CME. Thus 
there is reason to question whether a surveillance-sharing agreement 
with the CME would, in fact, assist in detecting and deterring 
fraudulent and manipulative misconduct affecting the price of the spot 
bitcoin held by the proposed ETP.\209\ The Exchange could have overcome 
this concern by demonstrating that there is a reasonable likelihood 
that a person attempting to manipulate the proposed ETP would have to 
trade on the CME in order to manipulate the ETP because such 
demonstration would help establish that the Exchange's surveillance-
sharing agreement with the CME would have the intended effect of aiding 
in the detection and deterrence of fraudulent and manipulative 
misconduct related to the spot bitcoin held by the proposed ETP.\210\ 
As discussed and explained above,\211\ the Commission finds that NYSE 
Arca has not made such demonstration.
---------------------------------------------------------------------------

    \209\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42. There is reason to question whether the 
CME's surveillance would capture manipulation of spot bitcoin that 
occurs off of the CME, if, for example, off-CME manipulation of spot 
bitcoin does not also similarly impact CME bitcoin futures 
contracts. As discussed further below, see infra notes 224-225 and 
accompanying text, the information in the record for this filing 
does not sufficiently demonstrate that attempted manipulation of 
spot bitcoin would also similarly impact CME bitcoin futures 
contracts.
    \210\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42.
    \211\ See Section III.B.2.i, supra.
---------------------------------------------------------------------------

    To the extent that the Sponsor--by way of claiming that, 
``[b]ecause both spot and futures-based [b]itcoin products face 
exposure to the same underlying [b]itcoin market, any fraud or 
manipulation in the underlying market will affect both products in the 
same way'' \212\--is arguing that the CME's surveillance would, in 
fact, assist in detecting and deterring fraudulent and manipulative 
misconduct that impacts spot bitcoin ETPs in the same way as it would 
for misconduct that impacts the CME bitcoin futures ETFs/ETPs, the 
information in the record for this filing does not support such a 
claim. Specifically, the Sponsor claims that (i) CME bitcoin futures 
ETFs/ETPs are ``priced according to the [BRR];'' (ii) the proposed spot 
bitcoin ETP would be priced based on the Index; and (iii) because of 
the ``almost complete overlap'' between the spot platforms whose prices 
are used to calculate the BRR and the Index, bitcoin futures ETFs/ETPs 
and the proposed ETP are subject to the ``same risks relating to 
pricing data quality.'' \213\ This logic, however, is flawed for the 
following reasons.
---------------------------------------------------------------------------

    \212\ Grayscale Letter II, at 2.
    \213\ See id. at 7, 9.
---------------------------------------------------------------------------

    First, there is no evidence in the record that CME bitcoin futures 
ETFs/ETPs are ``priced according to the [BRR].'' The BRR is a once-a-
day reference rate of the U.S. dollar price of one bitcoin as of 4 
p.m., London time.\214\ The BRR aggregates the trade flow of its 
constituent spot bitcoin platforms--Coinbase, Gemini, LMAX Digital, 
itBit, Kraken, and Bitstamp \215\--during a specific one-hour 
calculation window.\216\ While the BRR is used to value the final cash 
settlement of CME bitcoin futures contracts, it is not generally used 
for daily cash settlement of such contracts,\217\ nor is it claimed to 
be used for any intra-day trading of such contracts. In addition, CME 
bitcoin futures ETFs/ETPs do not hold their CME bitcoin futures 
contracts to final cash settlement; rather, the contracts are rolled 
prior to their settlement dates. Moreover, the shares of CME bitcoin 
futures ETFs/ETPs trade in secondary markets, and there is no evidence 
in the record for this filing that such intra-day, secondary market 
trading prices are determined by the BRR.
---------------------------------------------------------------------------

    \214\ See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Reference+Rates+Methodology.pdf.
    \215\ See https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Constituent+Exchanges.pdf.
    \216\ See https://www.cmegroup.com/education/courses/introduction-to-bitcoin/introduction-to-bitcoin-reference-rate.html. 
This one-hour window is partitioned into 12, five-minute intervals, 
where the BRR is calculated as the equally-weighted average of the 
volume-weighted medians of all 12 partitions. See id.
    \217\ Under normal procedures, daily cash settlements are 
generally based on the volume-weighted average price of trading 
activity on CME Globex between 2:59 p.m. and 3:00 p.m., Central 
Time). See https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin for a description of CME bitcoin futures daily settlement 
procedures.
---------------------------------------------------------------------------

    Second, there is no evidence in the record that the Shares' prices 
would be determined by the Index. The Index is a U.S. dollar-
denominated composite reference rate for the price of bitcoin 
calculated at 4:00 p.m. New York time.\218\ As described above, the 
Index applies an algorithm to the price of bitcoin on the Constituent 
Platforms--Coinbase Pro, LMAX Digital, Kraken, and Bitstamp--calculated 
on a per second basis over a 24-hour period. While the Index is used 
daily to value the bitcoins held by the Trust,\219\ as discussed 
above,\220\ the Index would not be used for the creation or redemption 
of Shares, nor is the Index claimed to be used for any intra-day 
secondary market trading of the Shares, either currently on the OTC 
market or in the future on the Exchange. Rather, the Share price is 
discovered through continuous intra-day, secondary market interactions 
of buy and sell interests.\221\
---------------------------------------------------------------------------

    \218\ See Amendment No. 1, 87 FR at 28047.
    \219\ See id. at 28047, 28049.
    \220\ See supra notes 132-133 and accompanying text.
    \221\ As discussed above, the use of the Index by the Trust to 
determine the value of its bitcoin does not support the finding that 
the Exchange has established other means to prevent fraud and 
manipulation that are sufficient to justify dispensing with the 
detection and deterrence of fraud and manipulation provided by a 
comprehensive surveillance-sharing agreement with a regulated market 
of significant size related to spot bitcoin. See Section III.B.1.ii, 
supra. Likewise, the Commission has previously rejected arguments by 
listing exchanges that the use of a reference rate similar to the 
BRR to value bitcoin held by proposed spot bitcoin ETPs provides 
other means to prevent fraud and manipulation that are sufficient to 
justify dispensing with the detection and deterrence of fraud and 
manipulation provided by a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to 
spot bitcoin. See Wise Origin Order, 87 FR at 5532-33; SkyBridge 
Order, 87 FR at 3877. Accordingly, the Index and the BRR, and the 
similarities between the BRR and the Index, are not informative in 
the Commission's determination of whether the Exchange has 
established other means to prevent fraud and manipulation.

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

[[Page 40318]]

    Third, despite the Sponsor's claim of ``almost complete overlap'' 
between the spot platforms whose prices are used to calculate the BRR 
and those platforms whose prices are used for the Index, the BRR 
includes trade flow from Gemini and itBit, neither of which are 
included as Constituent Platforms of the Index.\222\
---------------------------------------------------------------------------

    \222\ Although the Sponsor states that the BRR is ``determined 
according to pricing data collected from digital asset trading 
platforms that include all but one of those currently incorporated 
into [the Index]'' (Grayscale Letter I, at 7), based on information 
provided on the CME's website, the Sponsor's statement does not 
appear to be correct. See https://www.cmegroup.com/markets/cryptocurrencies/cme-cf-cryptocurrency-benchmarks.html?redirect=/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html. It is 
also unclear from the record whether Coinbase (used by the BRR) and 
Coinbase Pro (used by the Index) are the same platform. Based on 
recent press articles, it appears that Coinbase Pro will be 
discontinued. See, e.g., https://cointelegraph.com/news/coinbase-to-shut-down-coinbase-pro-to-merge-trading-services; https://
www.forbesindia.com/article/crypto-made-easy/coinbase-to-shut-down-
coinbase-pro-to-merge-trading-services/77585/
1#:~:text=Coinbase%20Pro%2C%20the%20professional,them%20into%20a%20si
ngle%20platform.
---------------------------------------------------------------------------

    In short, and importantly, although the Exchange and the Sponsor 
focus heavily on the similarities between the BRR and the Index, there 
is no evidence in the record that the shares of any CME bitcoin futures 
ETF/ETP, or the Shares of the proposed spot bitcoin ETP, would trade in 
the secondary market at a price related to (or informed by) the BRR or 
the Index.\223\
---------------------------------------------------------------------------

    \223\ A commenter provides a correlation analysis, using daily 
price information between November 2021 and February 2022, which 
purports to show high correlation (99.9%) between the price of CME 
bitcoin futures contracts and a Coinbase spot price. See Coinbase 
Letter II, at 7 and Figure 6. The same commenter also provides 
correlation analysis, using daily price information between December 
2021 and February 2022, which purports to show high correlation 
between the prices of various non-U.S. spot bitcoin ETPs and a 
Coinbase spot price. See id. at 8-9 and Figures 11-16. The 
commenter, however, does not provide evidence with respect to price 
correlation between shares of CME bitcoin futures ETFs and the BRR 
or between the prices of various non-U.S. spot bitcoin ETPs and the 
Index. Nor does correlation analysis, at daily intervals, provide 
evidence of the causal economic relationship of interest: namely, 
whether fraud or manipulation that impacts spot bitcoin would also 
similarly impact CME bitcoin futures contracts. See infra notes 224-
225 and accompanying text.
---------------------------------------------------------------------------

    Fourth, the Commission's determination in the Teucrium Order and 
the Valkyrie XBTO Order to approve the listing and trading of the 
relevant CME bitcoin futures ETPs was not based on the ETPs' use--or 
lack of use--of the BRR (or any other similar pricing mechanism) for 
the calculation of NAV, or on the fact that the BRR is used for the 
final cash settlement of CME bitcoin futures contracts. Rather, as 
discussed above, the Commission approved the listing and trading of 
such CME bitcoin futures ETPs, not because of the BRR, but because the 
Commission found that the listing exchanges satisfy the requirement 
pertaining to a surveillance-sharing agreement with a regulated market 
of significant size related to the underlying bitcoin assets--which for 
such ETPs are CME bitcoin futures contracts, not spot bitcoin.
    Fifth, even if the Exchange or the Sponsor had demonstrated a link 
between the BRR and/or the Index and the prices of CME bitcoin futures 
ETFs/ETPs and/or the proposed ETP, which they have not, it does not 
necessarily follow that the CME's surveillance would, in fact, assist 
in detecting and deterring fraudulent and manipulative misconduct that 
impacts spot bitcoin ETPs in the same way as it would for misconduct 
that impacts the CME bitcoin futures ETFs/ETPs--particularly when such 
misconduct occurs off of the CME itself.\224\ For example, even 
assuming, for the sake of argument, that the BRR and/or the Index is a 
potential link between prices on certain spot bitcoin platforms and CME 
bitcoin futures prices, it does not--absent supporting data--
necessarily follow that any manipulation that impacts spot bitcoin also 
similarly impacts CME bitcoin futures contracts. Neither the Sponsor 
nor the Exchange has provided any analysis or data that assesses the 
reaction (if any) of CME bitcoin futures contracts to instances of 
fraud and manipulation in spot bitcoin markets. Indeed, the only 
analysis that the Sponsor itself provides is a summary of its lead/lag 
analysis comparing CME bitcoin futures prices with the Index, from 
which the Sponsor concludes that ``there does not appear to be a 
significant lead/lag relationship between the two instruments.'' \225\
---------------------------------------------------------------------------

    \224\ See also supra note 209.
    \225\ See Amendment No. 1, 87 FR at 28054.
---------------------------------------------------------------------------

    In addition, the disapproval of the proposal would not violate the 
requirement in Section 6(b)(5) of the Exchange Act \226\ that the rules 
of an exchange not be designed to permit unfair discrimination between 
issuers, nor would it constitute an arbitrary and capricious 
administrative action in violation of the APA.\227\ Importantly, the 
issuers are not similarly situated. The issuers of CME bitcoin futures-
based ETPs propose to hold only CME bitcoin futures contracts (which 
are traded on the CME itself) as their only non-cash holdings, and the 
Trust proposes to hold only spot bitcoin (which is not traded on the 
CME). As explained in detail above and in the Teucrium Order and the 
Valkyrie XBTO Order, because of this important difference, for a spot 
bitcoin ETP, there is reason to question whether a surveillance-sharing 
agreement with the CME would, in fact, assist in detecting and 
deterring fraudulent and manipulative misconduct affecting the price of 
the spot bitcoin held by that ETP.\228\ And as discussed above, neither 
the Exchange, nor the Sponsor, nor any other evidence in the record for 
this filing, sufficiently demonstrates that the CME's surveillance can 
be reasonably relied upon to capture the effects of manipulation of the 
spot bitcoin assets underlying the proposed ETP when such manipulation 
is not attempted on the CME itself.
---------------------------------------------------------------------------

    \226\ 15 U.S.C. 78f(b)(5).
    \227\ The Sponsor argues that disapproval of the proposal would 
constitute merit regulation, which is not authorized under the 
Exchange Act. See Grayscale Letter I at 14-15. In addition, the 
affiliate of the Custodian states that ``the Commission's role is 
not to evaluate the characteristics and quality of the underlying 
[b]itcoin market but instead to evaluate the [proposed] ETP, and the 
role that [NYSE] Arca would play in monitoring trading in [the 
Shares].'' Coinbase Letter I, at 5. See also, e.g., ADAM Letter, at 
6; Ribbit Capital Letter, at 5. As previously stated, the Commission 
is disapproving this proposed rule change because NYSE Arca has not 
met its burden to demonstrate that its proposal is consistent with 
the requirements of Exchange Act Section 6(b)(5). The Commission's 
disapproval of this proposed rule change does not rest on an 
evaluation of the relative investment quality of a product holding 
spot bitcoin versus a product holding CME bitcoin futures, or an 
assessment of whether bitcoin, or blockchain technology more 
generally, has utility or value as an innovation or an investment. 
See, e.g., Winklevoss Order, 83 FR at 37580; USBT Order, 85 FR at 
12597; One River Order, 87 FR at 33550.
    \228\ See supra notes 208-209 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the analytical framework for assessing compliance with 
the requirements of Exchange Act Section 6(b)(5) that the Commission 
applies here (i.e., comprehensive surveillance-sharing agreement with a 
regulated market of significant size related to the underlying bitcoin 
assets) is the same one that the Commission has applied in each of its 
orders considering previous proposals to list bitcoin-based

[[Page 40319]]

commodity trusts and trust issued receipts.\229\ The Commission has 
applied this framework to each proposal by analyzing the evidence 
presented by the listing exchange and statements made by 
commenters.\230\ Although the Sponsor states that the Commission's 
approach to assessing compliance with Section 6(b)(5) has created a 
standard that cannot be satisfied and therefore violates the APA, the 
Commission has in fact recently approved proposals by the Exchange and 
the Nasdaq Stock Market to list and trade shares of ETPs holding CME 
bitcoin futures as their only non-cash holdings.\231\ And in the orders 
approving these CME bitcoin futures-based ETPs, the Commission 
explicitly discussed how an exchange seeking to list and trade a spot 
bitcoin ETP could overcome the lack of a one-to-one relationship 
between the regulated market with which it has a surveillance-sharing 
agreement and the market(s) on which the assets held by a spot bitcoin 
ETP could be traded: by demonstrating that there is a reasonable 
likelihood that a person attempting to manipulate the spot bitcoin ETP 
would have to trade on the regulated market (i.e., on the CME) to 
manipulate the spot bitcoin ETP.\232\
---------------------------------------------------------------------------

    \229\ See supra notes 11-24 and accompanying text.
    \230\ See supra note 11.
    \231\ See Teucrium Order and Valkyrie XBTO Order, supra note 11.
    \232\ See supra note 208 and accompanying text.
---------------------------------------------------------------------------

    When considering past proposals for spot bitcoin ETPs, the 
Commission has, in particular, reviewed the econometric and/or 
statistical evidence in the record to determine whether the listing 
exchange's proposal has met the applicable standard.\233\ The 
Commission's assessment fundamentally presents quantitative, empirical 
questions, but, as discussed above, the Exchange has not provided 
evidence sufficient to support its arguments. Instead, the Exchange and 
the Sponsor make various assertions that are not supported by the 
limited data in the record regarding, among other things, trading 
volume and bitcoin market capitalization, or the relationship between 
spot bitcoin prices and CME bitcoin futures prices (including the lead/
lag relationship between the spot market and the CME bitcoin futures 
market), and the record contains insufficient empirical analysis or 
quantitative evidence of any such data to support the Exchange's 
conclusions.\234\
---------------------------------------------------------------------------

    \233\ See, e.g., USBT Order, 85 FR at 12612-13; VanEck Order, 86 
FR at 64547-48; WisdomTree Order, 86 FR at 69330-32; Kryptoin Order, 
86 FR at 74175-76; NYDIG Order, 87 FR at 14938-39; Wise Origin 
Order, 87 FR at 5534-36; Global X Order, 87 FR at 14919-20; ARK 
21Shares Order, 87 FR at 20023-24.
    \234\ See Sections III.B.1 & III.B.2, supra.
---------------------------------------------------------------------------

    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation to have a comprehensive surveillance-sharing agreement with 
a regulated market of significant size related to spot bitcoin, or 
other means to prevent fraudulent and manipulative acts and practices 
that are sufficient to justify dispensing with such a surveillance-
sharing agreement, resides with the listing exchange. Because there is 
insufficient evidence in the record demonstrating that NYSE Arca has 
satisfied this obligation, the Commission cannot approve the proposed 
ETP for listing and trading on NYSE Arca.

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

    NYSE Arca contends that, if approved, the proposed ETP would 
protect investors and the public interest. However, the Commission must 
consider these potential benefits in the broader context of whether the 
proposal meets each of the applicable requirements of the Exchange 
Act.\235\ Because NYSE Arca has not demonstrated that its proposed rule 
change is designed to prevent fraudulent and manipulative acts and 
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \235\ See Winklevoss Order, 83 FR at 37602. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615; WisdomTree Order, 86 FR at 69333; 
Valkyrie Order, 86 FR at 74163; Kryptoin Order, 86 FR at 74178; 
SkyBridge Order, 87 FR at 3880; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

(1) Assertions Made and Comments Received
    Commenters argue that the Commission should approve the proposal 
because doing so would satisfy investor demand for a U.S. regulated 
investment vehicle with direct exposure to bitcoin.\236\ Commenters 
state that approval of a spot bitcoin ETP would provide a simpler, 
safer, and more efficient way to obtain exposure to bitcoin than the 
products that are currently available to retail investors, such as 
holding spot bitcoin, OTC bitcoin funds, bitcoin futures funds, or 
foreign bitcoin funds.\237\ Some commenters state that approving a spot 
bitcoin ETP would reduce the custody and cybersecurity risks to 
investors of holding physical bitcoin.\238\
---------------------------------------------------------------------------

    \236\ See, e.g., Blockchain Association Letter, at 1-2; Virtu 
Letter, at 2-4; BitGo Letter, at 1-2; STA Letter, at 2-3; ADAM 
Letter, at 3-4; Harvey Letter, at 1-3; Shultz Letter; Letter from 
Neil Chilson and Jonathan M. Zalewski, dated May 31, 2022 (``Chilson 
Letter''), at 3; Letter from Jody Cryder, dated Apr. 25, 2022; 
Letter from Rich Seils, dated Apr. 25, 2022 (``Seils Letter''); 
Letter from Grant Johnson, dated Mar. 4, 2022 (``Johnson Letter''); 
Letter from Evelyne Dandurand, dated Feb. 18, 2022; Letter from 
David Brown, dated Apr. 19, 2022; Letter from Mark Reid, dated Feb. 
28, 2022; Letter from William McPherson, dated Mar. 1, 2022; Letter 
from Jalen Rose, dated Mar. 2, 2022; Letter from Brandon Gillet, 
dated Feb. 22, 2022; Letter from Clint Jasperson, dated Feb. 18, 
2022; Letter from Jason Miller, dated Feb. 17, 2022 (``Miller 
Letter''); Letter from Michael Bielik, dated Feb. 18, 2022; Letter 
from Joseph DeFilippis, dated Feb. 15, 2022; Letter from Peter C., 
dated Feb. 15, 2022; Letter from James P. Scofield, dated Feb. 14, 
2022; Letter from Chris Smalley, dated Feb. 10, 2022; Letter from 
Nico Peruzzi, dated Feb. 5, 2022; Letter from Matt Robins, dated May 
10, 2022. See also Grayscale Submission, at 10.
    \237\ See, e.g., ADAM Letter, at 3-4; Harvey Letter, at 1-3; 
BitGo Letter, at 1-2; Discovery Letter, at 2; Angel Letter, at 6-7; 
Johnson Letter; Letter from Logan Kane, Writer, Seeking Alpha, dated 
Feb. 19, 2022 (``Kane Letter''); Letter from Michael Falk, dated 
Feb. 15, 2022; Letter from Andrew Farinelli, dated Feb. 10, 2022 
(``Farinelli Letter''); Letter from Boris Hristov, dated May 18, 
2022; Letter from Paul Smith, dated Feb. 28, 2022; Letter from Luke 
Groom, dated Feb. 22, 2022; Emory Letter, at 2. In addition, some 
commenters state that a spot bitcoin ETP would be just as, or less 
risky than, other investments already trading in the U.S. See, e.g., 
Dreyfuss Letter; Miller Letter; Letter from Derek Serlet, dated Apr. 
27, 2022; Letter from Monty Henry, dated Feb. 7, 2022 (``Henry 
Letter''); Letter from Alexander, dated Feb. 22, 2022; Letter from 
Martin Baer, dated Feb. 15, 2022; Letter from Gage Gorda, dated Feb. 
14, 2022; Letter from Branon White, dated Feb. 10, 2022; Letter from 
Nikolas Garcia, dated Mar. 4, 2022 (``Garcia Letter'').
    \238\ See, e.g., Angel Letter I, at 8; ADAM Letter; Kane Letter; 
Henry Letter; Letter from Tim Crick, dated Mar. 21, 2022; Letter 
from Michael David Spadaccini, dated Feb. 7, 2022; Letter from 
Michael A. Rheintgen, dated Feb. 24, 2022; Letter from Richard 
Arrett, dated Feb. 22, 2022 (``Arrett Letter''); Letter from Brian 
Boerner, dated Feb. 14, 2022; Letter from William Perez, dated Feb. 
12, 2022 (``Perez Letter''); Letter from Henry Chen, dated Feb. 26, 
2022 (``Chen Letter'').
---------------------------------------------------------------------------

    Several commenters argue that a spot bitcoin ETP would provide 
lower costs and less risk than bitcoin futures ETPs.\239\ The Sponsor 
and some

[[Page 40320]]

commenters assert that disapproving spot bitcoin ETPs after approving 
bitcoin futures ETFs and ETPs harms investors.\240\ In addition, the 
Sponsor states that bitcoin futures ETPs present certain structural 
disadvantages over spot bitcoin ETPs, such as monthly roll-costs \241\ 
and risks due to position limits.\242\
---------------------------------------------------------------------------

    \239\ See, e.g., Blockchain Association Letter, at 2 (``while 
bitcoin futures ETPs have certain useful features, they are inferior 
investment products for many Americans due to their relatively 
higher cost and risk profile''); Angel Letter I, at 6-7 (stating 
that ``[a] physical-based product in which the fund actually holds 
the bitcoin is far less vulnerable to manipulation than the futures 
contracts'' and that CME futures contracts experience roll costs, 
lack liquidity, and have wide bid-ask spreads); Letter from Murray 
Stahl, Chief Investment Officer, Horizon Kinetics Asset Management 
LLC, dated Apr. 8, 2022 (``Horizon Kinetics Letter''), at 1-2 
(stating that a futures-based bitcoin ETP is not suitable for long-
term investors since the performance deviates greatly from the 
underlying asset and that a spot bitcoin ETP would eliminate such a 
tracking error); Fortress Letter, at 2-3 (``Futures ETFs present 
investors with a more costly and complex means of gaining exposure 
to [b]itcoin while reflecting only a small portion of the actual 
market for the digital asset''); Letter from Benjamin T. Fulton, 
CEO, Elkhorn Consulting, LLC, dated Apr. 27, 2022 (``Elkhorn 
Letter''), at 2-3; Harvey Letter, at 3; Whaley Letter, at 3-7; 
Letter from Charles Hwang, Jason Albanese, Jock Percy, General 
Partners, Lightning Capital, dated Mar. 21, 2022 (``Lightning 
Capital Letter''), at 2-3; Discovery Letter, at 2 (``a spot 
[b]itcoin ETP would provide a much better vehicle for investors due 
to the vast liquidity, lower cost, and transparent Index pricing 
than the current [f]utures based ETPs''); Kane Letter; Letter from 
Ryan Wilday, dated Feb. 17, 2022; Letter from Michael Douglas Magee, 
dated Apr. 19, 2022; Letter from Bryan Kelley, dated May 10, 2022.
    \240\ See, e.g., Grayscale Letter I, at 13-14 (``Continued 
disparate treatment of [b]itcoin futures ETPs and spot [b]itcoin 
ETPs would harm--rather than protect--investors by limiting their 
choices without a reasoned basis.''); Cumberland Letter, at 1-2; 
Harvey Letter, at 2-3; Lightning Capital Letter, at 1-3; ADAM 
Letter, at 6; Fortress Letter, at 2; Letter from Justin Valdata, 
dated Apr. 22, 2022 (``Valdata Letter''). A commenter argues that 
such disparate treatment may undermine confidence in the Commission 
and stifle innovation in the bitcoin and securities markets. See 
Coinbase Letter I, at 4.
    \241\ See Grayscale Letter I, at 14. The Sponsor states that one 
analysis showed that over the last year, a bitcoin futures ETP would 
have lost 28% of its value just on roll costs (effectively, fees and 
expenses being equal, a spot ETP would have performed around 28% 
better). See id. (citing Michael J. Casey, Why a Bitcoin Futures ETF 
is Bad for Investors, CoinDesk (last updated Oct. 22, 2021 at 4:29 
p.m.), https://www.coindesk.com/policy/2021/10/22/why-a-bitcoin-futures-etf-is-bad-for-investors/). See also, e.g., Blockchain 
Association Letter, at 2; Angel Letter I, at 7; Harvey Letter, at 3; 
Elkhorn Letter, at 2; Fortress Letter, at 1-2; BitGo Letter, at 1-2; 
Horizon Kinetics Letter, at 1-2.
    \242\ See Grayscale Letter I, at 14. According to the Sponsor, 
position limits can cause a bitcoin futures ETP to experience 
liquidity problems or losses, or have to halt new creations or 
increase its fixed-income portfolio, thereby introducing tracking 
error by diluting its exposure to bitcoin. The Sponsor states that, 
alternatively, the CME may have to raise position limits to 
accommodate increased demand in the absence of a spot bitcoin ETP 
alternative, potentially increasing the concentration of economic 
power of a few large market participants in the bitcoin futures 
markets and reducing the resiliency of those markets against 
manipulation. The Sponsor states that ``[t]hese risks--that 
[b]itcoin futures ETPs could be constrained by position limits and 
that the CME may raise those limits--are not purely speculative; 
indeed, both have already occurred since the first [b]itcoin futures 
ETP began trading.'' Id. See also, e.g., Blockchain Association 
Letter, at 2 (``Futures ETPs are also subject to additional, unique 
risks related to position limits, limited liquidity, dilution and 
other factors.'').
---------------------------------------------------------------------------

    Commenters also emphasize that conversion of the existing Trust to 
an ETP structure would be beneficial to its investors. The Sponsor, for 
example, states that the Trust has grown to become the largest 
publicly-traded digital asset fund in the world \243\ and that 
approving the Trust to operate as an ETP traded on a national 
securities exchange ``will provide investors with the additional 
protections of [the Commission] and [NYSE Arca] while unlocking 
billions of value for investors.'' \244\ Moreover, according to the 
Sponsor, converting the Trust into an ETP would allow the Shares to 
better track the Trust's NAV and reduce discounts and premiums, thereby 
unlocking approximately $8 billion in value for investors.\245\ 
Similarly, commenters state that the proposal would protect investors 
and help maintain fair and orderly markets by reducing premium and 
discount volatility with respect to the Shares, thereby allowing 
investors to gain access to bitcoin through an ETP structure at trading 
prices that are more closely aligned with spot bitcoin trading 
prices.\246\ Moreover, other commenters state that approving the 
proposal and allowing the Trust to convert into an ETP would protect 
investors by, among other things, lowering fees and providing 
heightened regulation of the Shares.\247\
---------------------------------------------------------------------------

    \243\ See Grayscale Submission, at 2.
    \244\ Id. at 17.
    \245\ See id. at 9. The Sponsor states that, because the Shares 
are not currently listed on a national securities exchange and the 
Trust is therefore not permitted to operate an ongoing creation and 
redemption program, arbitrage opportunities resulting from 
differences between the price of the Shares and the price of bitcoin 
are not available to keep the price of the Shares closely linked to 
the Index Price for bitcoin. As a result, the Shares are usually 
quoted at a premium over, or discount to, the value of the Trust's 
bitcoin holdings. See Grayscale Letter I, at 5. See also Coinbase 
Letter I, at 2.
    \246\ See, e.g., Coinbase Letter I, at 2-3; Virtu Letter, at 2; 
Angel Letter I, at 7-8; BitGo Letter, at 1; ADAM Letter, at 4-5; 
Cumberland Letter, at 1; Lightning Capital Letter, at 1-2; Gunderson 
Letter; Discovery Letter, at 1; Henry Letter; Keiffer Letter; Perez 
Letter; DiLonardo Letter; Kornfield Letter; Garcia Letter; Johnson 
Letter; Arrett Letter; Emory Letter, at 2; Letter from Richard Leo, 
dated Apr. 22, 2022; Letter from Joseph McDevitt, dated Apr. 22, 
2022; Letter from Mitchell J. Brodie, dated Apr. 22, 2022; Letter 
from Steve Axel, dated Feb. 18, 2022; Letter from Brent Zeigler, 
dated Feb. 19, 2022; Letter from Jonas Lippuner, dated Apr. 21, 
2022; Letter from David Lynch, dated Mar. 3, 2022; Letter from David 
New, dated Feb. 23, 2022; Letter from Roger A. Rector, dated Feb. 
22, 2022; Letter from Michael Charles, dated Feb. 19, 2022; Letter 
from Scott Egon Roge, dated Feb. 15, 2022; Letter from Ozeir 
Nassery, dated Feb. 11, 2022; Letter from Raj Lakkundi, dated Feb. 
11, 2022. The affiliate of the Custodian states that the performance 
of spot bitcoin ETPs in other countries confirms the ability of a 
spot bitcoin ETP to appropriately reflect the underlying bitcoin 
market. See Coinbase Letter II, at 3, 8. See also Virtu Letter, at 2 
(``In our experience as a market maker and AP in spot cryptocurrency 
ETPs in Canada, we have observed the positive impact of these 
dynamics--as spot cryptocurrency ETP spreads to NAV are compressed 
to levels observed for non-crypto ETPs.'').
    \247\ See, e.g., Angel Letter I, at 7-8; Horizon Kinetics 
Letter, at 2-3; Shultz Letter; Johnson Letter; Arret Letter; Roge 
Letter; Perez Letter; Letter from Keith Arvidson, dated Apr. 5, 
2022; Letter from Rick Parker, dated Feb. 22, 2022; Letter from 
Michael J. Sheslow, dated Feb. 22, 2022; Letter from Omid Jafari, 
dated Feb. 18, 2022; Letter from Richard Payne, dated Feb. 19, 2022; 
Letter from Sunjeev Konduru, dated Mar. 16, 2022 (``Konduru 
Letter'').
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    Several commenters further state that approval of a spot bitcoin 
ETP would enhance the liquidity, price discovery, and efficiency of the 
underlying bitcoin markets.\248\ The affiliate of the Custodian states 
that the introduction of a spot bitcoin ETP with a robust create and 
redeem arbitrage process can improve the price efficiency of an 
underlying asset and thus further increase the resilience of bitcoin 
trading in the spot market.\249\ This commenter believes the presence 
of a spot bitcoin ETP ``may bolster and stabilize the broader [b]itcoin 
derivatives market by encouraging a . . . greater volume of activity 
and easier arbitrage between the two markets.'' \250\
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    \248\ See, e.g., Cammarata Letter, Coinbase Letter I, at 3; 
Coinbase Letter II, at 7; Fortress Letter, at 3; Harvey Letter, at 5 
(stating ``financial derivatives, including ETPs, can generally 
serve to enhance the liquidity and efficiency of the markets for 
many asset classes and currencies, including bitcoins'' and ``[i]t 
is difficult to imagine a scenario in which approval of [the Trust] 
as a bona fide ETP on the NYSE Arca would not increase the number of 
market participants, dollar-denominated liquidity, and other 
competitive forces that would lead to more efficient price discovery 
than currently exists in a semi-fragmented, global bitcoin spot 
market that lacks a regulated, centralized trading venue or order 
book''); Fortress Letter, at 3 (stating that the Trust can serve an 
important price discovery purpose and that, because of its size, the 
Trust will create additional liquidity and will allow for greater 
transparency and efficiency in the bitcoin market); Dreyfuss Letter, 
at 2 (stating that ``increasing the liquidity of [the spot bitcoin] 
markets would actually reduce the influence of predatory forces by 
encouraging long term ownership across a broader spectrum of 
investors'').
    \249\ See Coinbase Letter I, at 3.
    \250\ Coinbase Letter II, at 7.
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    Finally, some commenters argue that the proposal should be approved 
because doing so would enhance investor choice,\251\ improve market 
structure and competition for the benefit of investors,\252\ and 
facilitate capital formation.\253\
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    \251\ See, e.g., Blockchain Association Letter, at 1; Letter 
from David Noble, Director, The Werth Institute, University of 
Connecticut, dated Apr. 26, 2022 (``Noble Letter''); Letter from 
John Shinkunas, dated Apr. 10, 2022; Letter from Karl J. Randall, 
dated Feb. 28, 2022; Letter from Reginald M. Browne, Principal, GTS 
Securities, LLC, dated June 10, 2022 (``GTS Letter''), at 2.
    \252\ See, e.g., BitGo Letter, at 1;Virtu Letter, at 3-4; Groom 
Letter; Egan Letter; Angel Letter I; Chilson Letter; GTS Letter, at 
2.
    \253\ See, e.g., Harvey Letter, at 5 (``as an ETP on the NYSE 
Arca, [the Trust] would continue to serve as a liquid, but even more 
regulated conduit for capital formation within the bitcoin 
ecosystem''); ADAM Letter, at 5 (stating that approval of the 
proposal would facilitate the Commission's mission of promoting 
capital formation); GTS Letter, at 2; Emory Letter, at 1-2 (stating 
that disapproval of the proposal would be ``contrary to the goal of 
equitable access to means of wealth generation'').

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[[Page 40321]]

(2) Analysis
    The Commission disagrees. Here, even if it were true that, compared 
to trading in unregulated spot bitcoin markets or OTC bitcoin funds, 
trading a spot bitcoin-based ETP on a national securities exchange 
could provide some additional protection to investors, or that the 
Shares would provide more efficient exposure to bitcoin than other 
products on the market such as bitcoin futures ETPs, or that approval 
of a spot bitcoin ETP could enhance competition or strengthen the 
underlying spot bitcoin and derivatives markets, 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.\254\ 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.\255\ Thus, even if a proposed rule 
change purports to protect investors from a particular type of 
investment risk--such as experiencing a potentially high premium/
discount by investing in an OTC bitcoin fund or roll costs by investing 
in bitcoin futures ETPs--or purports to provide benefits to investors 
and the public interest--such as enhancing competition and bolstering 
resiliency in the underlying commodity or futures markets--the proposed 
rule change may still fail to meet the requirements under the Exchange 
Act.\256\
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    \254\ See supra note 235.
    \255\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C). See also Affiliated Ute Citizens of Utah v. United 
States, 406 U.S. 128, 151 (1972) (Congress enacted the Exchange Act 
largely ``for the purpose of avoiding frauds''); Gabelli v. SEC, 568 
U.S. 442, 451 (2013) (The ``SEC's very purpose'' is to detect and 
mitigate fraud.).
    \256\ See SolidX Order, 82 FR at 16259; VanEck Order, 86 FR at 
54550-51; WisdomTree Order, 86 FR at 69344; Kryptoin Order, 86 FR at 
74179; Valkyrie Order, 86 FR at 74163; SkyBridge Order, 87 FR at 
3881; Wise Origin Order, 87 FR at 5538; ARK 21Shares Order, 87 FR at 
20026-27.
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    For the reasons discussed above, NYSE Arca has not met its burden 
of demonstrating an adequate basis in the record for the Commission to 
find that the proposal is consistent with Exchange Act Section 
6(b)(5),\257\ and, accordingly, the Commission must disapprove the 
proposal.\258\
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    \257\ 15 U.S.C. 78f(b)(5).
    \258\ 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). Some commenters state that approval 
of the proposal would enhance market efficiency and facilitate 
competition and capital formation. See supra notes 248-253 and 
accompanying text. For the reasons discussed throughout, however 
(see supra notes 56-57), 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.
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D. Other Comments

    Comment letters also address, among other things, the general 
nature and uses of bitcoin and blockchain technology; \259\ the state 
of development of bitcoin as an investment asset; \260\ beneficial tax 
consequences of approval of a spot bitcoin ETP; \261\ the merits of an 
investment in bitcoin; \262\ the nature and state of the bitcoin mining 
network; \263\ the current failure, and potential promotion of, U.S. 
competitiveness in the global marketplace relating to bitcoin; \264\ 
suggestions for improving regulation of bitcoin and other digital 
assets markets and related market participants and criticisms of the 
current regulatory approach; \265\ increasing education relating to, 
and accessibility of, bitcoin; \266\ the merits of the Sponsor; \267\ 
and specific concerns relating to the Sponsor and its management of the 
Trust.\268\ 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.
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    \259\ See, e.g., Angel Letter I, at 2-4, Letter from Thomas M. 
Wynne, dated Apr. 9, 2022 (``Wynne Letter''); Chilson Letter, at 1.
    \260\ See, e.g., Moffitt Letter I; Letter from Patric Berger, 
dated Feb. 23, 2022; Letter from Sundeep Bollineni, dated Feb. 22, 
2022; Chilson Letter; Letter from James McClave, Jane Street 
Capital, LLC, dated June 16, 2022.
    \261\ See, e.g., Chen Letter; Letter from John Berggren, dated 
Feb. 14, 2022.
    \262\ See, e.g., Seils Letter; Konduru Letter; Emory Letter.
    \263\ See, e.g., Letters from David Bush, dated Feb. 22, 2022 
(``Bush Letter''); Joseph D. Camp, Ph.D., Professor, Southern 
Methodist University, dated Feb. 14, 2022.
    \264\ See, e.g., Elkhorn Letter; Johnson Letter; Valdata Letter; 
Bush Letter; Letter from Milton W., dated Feb. 23, 2022; Letter from 
Aaron Fenker, dated Feb. 23, 2022; Letter from Anil Gorania, dated 
Feb. 18, 2022; Letter from Nirav Trivedi, dated Feb. 11, 2022; 
Letter from Enrique Rea, Jr., dated Apr. 22, 2022; Chilson Letter, 
at 3; GTS Letter, at 2; Emory Letter, at 2. The Sponsor states that 
the U.S. lags global markets with respect to providing bitcoin and 
other digital asset ETPs and argues that approval of the proposal 
would support the White House Executive Order on Ensuring 
Responsible Development of Digital Assets by further bringing 
bitcoin into the regulatory perimeter. See Grayscale Submission, at 
11-12. A commenter states that, ``as a global firm, it is concerning 
to observe the U.S. lagging far behind such foreign capital market 
competitors in offering regulated products for an emerging 
technology like Blockchain.'' Fortress Letter, at 3.
    \265\ See, e.g., Angel Letter I, at 9-40; ADAM Letter, at 5; 
Dreyfuss Letter; Kane Letter; Boyer Letter; Letter from James J. 
Angel, Associate Professor of Finance, Georgetown University, dated 
May 6, 2022 (``Angel Letter II''); Chilson Letter, at 1-2.
    \266\ See, e.g., Noble Letter; Letter from Julian Rogers, dated 
Apr. 7, 2022.
    \267\ See, e.g., Wynne Letter; Henry Letter.
    \268\ See, e.g., Letter from David B. Hennes, Ropes & Gray LLP, 
dated March 3, 2022 (expressing concern, on behalf of an unnamed 
``interested investor,'' about the Sponsor's potential windfall if 
the Trust were to be allowed to convert to an ETP); Kleinfelder 
Letter.
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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, as modified by Amendment No. 1, 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-2021-90, as 
modified by Amendment No. 1, be, and hereby is, disapproved.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-14310 Filed 7-5-22; 8:45 am]
BILLING CODE 8011-01-P


