[Federal Register Volume 88, Number 137 (Wednesday, July 19, 2023)]
[Notices]
[Pages 46249-46285]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15267]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97899; File No. SR-CboeBZX-2023-044]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change, as Modified by Amendment No. 2, To 
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares

July 13, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-114 thereunder,\2\ notice is hereby 
given that on June 30, 2023, Cboe BZX Exchange, Inc. (the ``Exchange'' 
or ``BZX'') filed with the Securities and Exchange Commission 
(``Commission'') 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. On July 11, 2023, the Exchange filed Amendment No. 1 to 
the proposed rule change, which amended and replaced the proposed rule 
change in its entirety. On July 13, 2023, the Exchange filed Amendment 
No. 2 to the proposed rule change, which amended and replaced the 
proposed rule change, as modified by Amendment No. 1, in its entirety. 
The proposed rule change, as modified by Amendment No. 2, is described 
in Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change, as modified by Amendment No. 2, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing 
with the Securities and Exchange Commission (``Commission'' or ``SEC'') 
a proposed rule change to list and trade shares of the Wise Origin 
Bitcoin Trust (the ``Trust''),\3\ under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares.
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    \3\ The Trust was formed as a Delaware statutory trust on March 
17, 2021, and is operated as a grantor trust for U.S. federal tax 
purposes. The Trust has no fixed termination date.
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    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

[[Page 46250]]

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

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

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

1. Purpose
    This Amendment No. 2 to SR-CboeBZX-2023-044 amends and replaces in 
its entirety the proposal as originally submitted on June 30, 2023 and 
as amended by Amendment No. 1 on July 11, 2023. The Exchange submits 
this Amendment No. 2 in order to clarify certain points and add 
additional details to the proposal.
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ FD Funds Management LLC is the 
sponsor of the Trust (``Sponsor''). The Shares will be registered with 
the Commission by means of the Trust's registration statement on Form 
S-1 (the ``Registration Statement'').\6\ Fidelity Digital Assets 
Services, LLC (``FDAS''), a regulated custodian licensed by the New 
York Department of Financial Services, will be responsible for custody 
of the Trust's bitcoin (the ``Custodian''). The Trust is not permitted 
or required to register under the Investment Company Act of 1940, as 
amended (the ``1940 Act''), and therefore is not subject to regulation 
under the 1940 Act.\7\ Further, the Registration Statement states that 
the Trust will not hold or trade in commodity interests regulated by 
the Commodity Exchange Act of 1936, as amended (the ``CEA''), and 
therefore is not a commodity pool for purposes of the CEA.\8\ The 
Exchange represents that the Shares satisfy the requirements of BZX 
Rule 14.11(e)(4) and thereby qualify for listing on the Exchange.
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    \4\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \5\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \6\ See draft Registration Statement on Form S-1, dated March 
24, 2021, submitted to the Commission by the Sponsor on behalf of 
the Trust. The descriptions of the Trust, the Shares, and the Index 
(as defined below) contained herein are based, in part, on 
information in the Registration Statement. The Registration 
Statement is not yet effective, and the Shares will not trade on the 
Exchange until such time that the Registration Statement is 
effective.
    \7\ See above.
    \8\ See above.
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    As further discussed below, the Commission has historically 
approved or disapproved exchange filings to list and trade series of 
Trust Issued Receipts, including spot-based Commodity-Based Trust 
Shares, on the basis of whether the listing exchange has in place a 
comprehensive surveillance sharing agreement with a regulated market of 
significant size related to the underlying commodity to be held.\9\ 
Prior orders from the Commission have pointed out that in every prior 
approval order for Commodity-Based Trust Shares, there has been a 
derivatives market that represents the regulated market of significant 
size, generally a Commodity Futures Trading Commission (the ``CFTC'') 
regulated futures market.\10\

[[Page 46251]]

Further to this point, the Commission's prior orders have noted that 
the spot commodities and currency markets for which it has previously 
approved spot ETPs are generally unregulated and that the Commission 
relied on the underlying futures market as the regulated market of 
significant size that formed the basis for approving the series of 
Currency and Commodity-Based Trust Shares, including gold, silver, 
platinum, palladium, copper, and other commodities and currencies. The 
Commission specifically noted in the Winklevoss Order that the First 
Gold Approval Order ``was based on an assumption that the currency 
market and the spot gold market were largely unregulated.'' \11\
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    \9\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order'').
    \10\ See streetTRACKS Gold Shares, Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX 
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares 
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold 
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993, 
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS 
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR 
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS 
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74 
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of 
proposed rule change included NYSE Arca's representation that 
``[t]he most significant palladium futures exchanges are the NYMEX 
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest 
exchange in the world for trading precious metals futures and 
options,'' and that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which NYMEX is a member, 
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act 
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29, 
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included 
NYSE Arca's representation that ``[t]he most significant platinum 
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' 
that ``NYMEX is the largest exchange in the world for trading 
precious metals futures and options,'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9, 
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical 
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of 
proposed rule change included NYSE Arca's representation that the 
COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group, Exchange Act Release No. 
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott 
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5, 
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act 
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17, 
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant gold, silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act 
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15, 
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release 
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE 
Arca's representation that ``the most significant gold futures 
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that 
``COMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8, 
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott 
Physical Platinum and Palladium Trust, Exchange Act Release No. 
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012-111) (notice of proposed rule change included NYSE 
Arca's representation that ``[f]utures on platinum and palladium are 
traded on two major exchanges: The New York Mercantile Exchange . . 
. and Tokyo Commodities Exchange'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 68101 (Oct. 24, 
2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX Physical--1 
oz. Gold Redeemable Trust, Exchange Act Release No. 66930 (May 7, 
2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-2012-18) 
(notice of proposed rule change included NYSE Arca's representation 
that NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which COMEX is a member, and that gold 
futures are traded on COMEX and the Tokyo Commodity Exchange, with a 
cross-reference to the proposed rule change to list and trade shares 
of the ETFS Gold Trust, in which NYSE Arca represented that COMEX is 
one of the ``major world gold markets,'' Exchange Act Release No. 
66627 (Mar. 20, 2012), 77 FR 17539, 17542-43, 17547 (Mar. 26, 
2012)); JPM XF Physical Copper Trust, Exchange Act Release No. 68440 
(Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 75485-86 (Dec. 20, 
2012) (SR-NYSEArca-2012-28); iShares Copper Trust, Exchange Act 
Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 13727, 13729-30, 
13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); First Trust Gold 
Trust, Exchange Act Release No. 70195 (Aug. 14, 2013), 78 FR 51239, 
51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) (notice of proposed rule 
change included NYSE Arca's representation that FINRA, on behalf of 
the exchange, may obtain trading information regarding gold futures 
and options on gold futures from members of the Intermarket 
Surveillance Group, including COMEX, or from markets ``with which 
[NYSE Arca] has in place a comprehensive surveillance sharing 
agreement,'' and that gold futures are traded on COMEX and the Tokyo 
Commodity Exchange, with a cross-reference to the proposed rule 
change to list and trade shares of the ETFS Gold Trust, in which 
NYSE Arca represented that COMEX is one of the ``major world gold 
markets,'' Exchange Act Release No. 69847 (June 25, 2013), 78 FR 
39399, 39400, 39405 (July 1, 2013)); Merk Gold Trust, Exchange Act 
Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 4786-87 (Jan. 29, 
2014) (SR-NYSEArca-2013-137) (notice of proposed rule change 
included NYSE Arca's representation that ``COMEX is the largest gold 
futures and options exchange'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' 
including with respect to transactions occurring on COMEX pursuant 
to CME and NYMEX's membership, or from exchanges ``with which [NYSE 
Arca] has in place a comprehensive surveillance sharing agreement,'' 
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369, 
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release 
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15, 
2016) (SR-NYSEArca-2016-84).
    \11\ See Winklevoss Order at 37592.
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    As such, the regulated market of significant size test does not 
require that the spot bitcoin market be regulated in order for the 
Commission to approve this proposal, and precedent makes clear that an 
underlying market for a spot commodity or currency being a regulated 
market would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to surveillance 
sharing agreements with the underlying futures market in order to 
determine whether such products were consistent with the Act. With this 
in mind, the CME Bitcoin Futures market is the proper market to 
consider in determining whether there is a related regulated market of 
significant size.
    Further to this point, the Exchange notes that the Commission has 
approved proposals related to the listing and trading of funds that 
would primarily hold CME Bitcoin Futures that are registered under the 
Securities Act of 1933.\12\ In the Teucrium Approval, the Commission 
found the CME Bitcoin Futures market to be a regulated market of 
significant size as it relates to CME Bitcoin Futures, an odd 
tautological truth that is also inconsistent with prior disapproval 
orders for ETPs that would hold actual bitcoin instead of derivatives 
contracts (``Spot Bitcoin ETPs'') that use the exact same pricing 
methodology as the CME Bitcoin Futures. As further discussed below, 
both the Exchange and the Sponsor believe that this proposal and the 
included analysis are sufficient to establish that the CME Bitcoin 
Futures market represents a regulated market of significant size as it 
relates both to the CME Bitcoin Futures market and to the spot bitcoin 
market and that this proposal should be approved.
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    \12\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5, 
2022) (collectively, with the Teucrium Approval, the ``Bitcoin 
Futures Approvals'').
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    Finally, as discussed in greater detail below, by using 
professional custodians and other service providers, the Trust provides 
investors interested in exposure to bitcoin with important protections 
that are not always available to investors that invest directly in 
bitcoin, including protection against insolvency of non-qualified 
custodians, cyber-attacks, and other risks. If U.S. investors had 
access to vehicles such as the Trust for their bitcoin investments, 
instead of directing their bitcoin investments into loosely regulated 
offshore platforms (such as loosely regulated centralized exchanges 
that have since faced bankruptcy proceedings or other insolvencies), 
then countless investors could have protected their principal 
investments in bitcoin and thus benefited.
Background
    Bitcoin is a digital asset based on the decentralized, open-source 
protocol of the peer-to-peer computer network launched in 2009 that 
governs the creation, movement, and ownership of bitcoin and hosts the 
public ledger, or ``blockchain,'' on which all bitcoin transactions are 
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized 
nature of the Bitcoin Network allows parties to transact directly with 
one another based on cryptographic proof instead of relying on a 
trusted third party. The protocol also lays out the rate of issuance of 
new bitcoin within the Bitcoin Network, a rate that is reduced by half 
approximately every four years with an eventual hard cap of 21 million. 
It's generally understood that the combination of these two features--a 
systemic hard cap of 21 million bitcoin and the ability to transact 
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin 
its value.
    The first rule filing proposing to list an exchange-traded product 
to provide exposure to bitcoin in the U.S. was submitted by the 
Exchange on June 30, 2016.\13\ At that time, blockchain technology, and 
digital assets that utilized it, were relatively new to the broader 
public. The market cap of all bitcoin in existence at that time was 
approximately $10 billion. No registered offering of digital asset 
securities or shares in an investment vehicle with exposure to bitcoin 
or any other cryptocurrency had yet been conducted, and the regulated 
infrastructure for conducting a digital asset securities offering had 
not begun to develop.\14\ Similarly, regulated U.S. bitcoin futures 
contracts did not exist. The CFTC had determined that bitcoin is a 
commodity,\15\ but had not engaged in significant enforcement actions 
in the space. The New York Department of Financial Services (``NYDFS'') 
adopted its final BitLicense regulatory framework in 2015, but had only 
approved four entities to engage in activities relating to virtual 
currencies (whether through granting a BitLicense or a limited-purpose 
trust charter) as of

[[Page 46252]]

June 30, 2016.\16\ While the first over-the-counter bitcoin fund 
launched in 2013, public trading was limited and the fund had only $60 
million in assets.\17\ There were very few, if any, traditional 
financial institutions engaged in the space, whether through investment 
or providing services to digital asset companies. In January 2018, the 
Staff of the Commission noted in a letter to the Investment Company 
Institute and SIFMA that it was not aware, at that time, of a single 
custodian providing fund custodial services for digital assets.\18\
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    \13\ See Winklevoss Order.
    \14\ Digital assets that are securities under U.S. law are 
referred to throughout this proposal as ``digital asset 
securities.'' All other digital assets, including bitcoin, are 
referred to interchangeably as ``cryptocurrencies'' or ``virtual 
currencies.'' The term ``digital assets'' refers to all digital 
assets, including both digital asset securities and 
cryptocurrencies, together.
    \15\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated: 
``Section 1a(9) of the CEA defines `commodity' to include, among 
other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
    \16\ A list of virtual currency businesses that are entities 
regulated by the NYDFS is available on the NYDFS website. See 
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
    \17\ Data as of March 31, 2016 according to publicly available 
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
    \18\ See letter from Dalia Blass, Director, Division of 
Investment Management, U.S. Securities and Exchange Commission to 
Paul Schott Stevens, President & CEO, Investment Company Institute 
and Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association (January 18, 2018), 
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
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    Fast forward to today and the digital assets financial ecosystem, 
including bitcoin, has progressed significantly. The development of a 
regulated market for digital asset securities has significantly 
evolved, with market participants having conducted registered public 
offerings of both digital asset securities \19\ and shares in 
investment vehicles holding bitcoin futures, including Bitcoin Futures 
ETFs (as defined below). Additionally, licensed and regulated service 
providers have emerged to provide fund custodial services for digital 
assets, among other services. For example, in May 2021, the Staff of 
the Commission released a statement permitting open-end mutual funds to 
invest in cash-settled bitcoin futures; in December 2020, the 
Commission adopted a conditional no-action position permitting certain 
special purpose broker-dealers to custody digital asset securities 
under Rule 15c3-3 under the Exchange Act (the ``Custody Statement''); 
\20\ in September 2020, the Staff of the Commission released a no-
action letter permitting certain broker-dealers to operate a non-
custodial Alternative Trading System (``ATS'') for digital asset 
securities, subject to specified conditions; \21\ in October 2019, the 
Staff of the Commission granted temporary relief from the clearing 
agency registration requirement to an entity seeking to establish a 
securities clearance and settlement system based on distributed ledger 
technology,\22\ and multiple transfer agents who provide services for 
digital asset securities registered with the Commission.\23\
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    \19\ See Prospectus supplement filed pursuant to Rule 424(b)(1) 
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \20\ See Securities Exchange Act Release No. 90788, 86 FR 11627 
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset 
Securities by Special Purpose Broker-Dealers).
    \21\ See letter from Elizabeth Baird, Deputy Director, Division 
of Trading and Markets, U.S. Securities and Exchange Commission to 
Kris Dailey, Vice President, Risk Oversight & Operational 
Regulation, Financial Industry Regulatory Authority (September 25, 
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \22\ See letter from Jeffrey S. Mooney, Associate Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos 
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \23\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent 
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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    Outside the Commission's purview, the regulatory landscape has 
changed significantly since 2016, and cryptocurrency markets have grown 
and evolved as well. The market for bitcoin is approximately 100 times 
larger, having at one point reached a market cap of over $1 
trillion.\24\ According to the CME Bitcoin Futures Report, from 
February 13, 2023 through March 27, 2023, CFTC regulated bitcoin 
futures represented between $750 million and $3.2 billion in notional 
trading volume on Chicago Mercantile Exchange (``CME'') (``Bitcoin 
Futures'') on a daily basis and notional volume was never below $670 
million.\25\ Open interest was over $1.4 billion for the entirety of 
the period and at one point was over $2 billion. ETPs that primarily 
hold CME Bitcoin Futures have raised over $1 billion dollars in assets. 
The CFTC has exercised its regulatory jurisdiction in bringing a number 
of enforcement actions related to bitcoin and against trading platforms 
that offer cryptocurrency trading.\26\ As of February 14, 2023 the 
NYDFS has granted no fewer than thirty-four BitLicenses,\27\ including 
to established public payment companies like PayPal Holdings, Inc. and 
Square, Inc., and limited purpose trust charters to entities providing 
cryptocurrency custody services. In addition, the Treasury's Office of 
Foreign Assets Control (``OFAC'') has brought enforcement actions over 
apparent violations of the sanctions laws in connection with the 
provision of wallet management services for digital assets.\28\
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    \24\ As of December 1, 2021, the total market cap of all bitcoin 
in circulation was approximately $1.08 trillion.
    \25\ Data sourced from the CME Bitcoin Futures Report: 19 Nov 
2021, available at: https://www.cmegroup.com/ftp/bitcoinfutures/Bitcoin_Futures_Liquidity_Report.pdf.
    \26\ The CFTC's annual report for Fiscal Year 2020 (which ended 
on September 30, 2020) noted that the CFTC ``continued to 
aggressively prosecute misconduct involving digital assets that fit 
within the CEA's definition of commodity'' and ``brought a record 
setting seven cases involving digital assets.'' See CFTC FY2020 
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download. 
Additionally, the CFTC filed on October 1, 2020, a civil enforcement 
action against the owner/operators of the BitMEX trading platform, 
which was one of the largest bitcoin derivative exchanges. See CFTC 
Release No. 8270-20 (October 1, 2020) available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
    \27\ See https://www.dfs.ny.gov/virtual_currency_businesses.
    \28\ See U.S. Department of the Treasury Enforcement Release: 
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent 
Violations of Multiple Sanctions Programs Related to Digital 
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf. See also U.S. 
Department of the Treasury Enforcement Release: ``Treasury Announces 
Two Enforcement Actions for over $24M and $29M Against Virtual 
Currency Exchange, Bittrex, Inc.'' (October 11, 2022) available at: 
https://home.treasury.gov/news/press-releases/jy1006. See also U.S. 
Department of Treasure Enforcement Release ``OFAC Settles with 
Virtual Currency Exchange Kraken for $362,158.70 Related to Apparent 
Violations of the Iranian Transactions and Sanctions Regulations'' 
(November 28, 2022) available at: https://home.treasury.gov/system/files/126/20221128_kraken.pdf.
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    In addition to the regulatory developments laid out above, more 
traditional financial market participants have become more active in 
cryptocurrency: large insurance companies, asset managers, university 
endowments, pension funds, and even historically bitcoin skeptical fund 
managers \29\ have allocated to bitcoin. In June 2022, PwC estimated 
that the number of crypto-specialist hedge funds was more than 300 
globally, with $4.1 billion in assets under management. In addition, in 
a survey PwC found that 38 percent of surveyed traditional hedge funds 
were currently investing in `digital assets,' compared to 21 percent 
the year prior.'' \30\ The largest over-the-

[[Page 46253]]

counter bitcoin fund previously filed a Form 10 registration statement, 
which the Staff of the Commission reviewed and which took effect 
automatically, and is now a reporting company.\31\ Established 
companies like Tesla, Inc., MicroStrategy Incorporated, and Square, 
Inc., among others, have made substantial investments in bitcoin. The 
foregoing examples demonstrate that bitcoin has gained mainstream usage 
and recognition.
---------------------------------------------------------------------------

    \29\ See e.g., ``Bridgewater: Our Thoughts on Bitcoin'' (January 
28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones says he 
likes bitcoin even more now, rally still in the `first inning''' 
(October 22, 2020) available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
    \30\ See the FSOC ``Report on Digital Asset Financial Stability 
Risks and Regulation 2022'' (October 3, 2022) (at footnote 26) at 
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
    \31\ See Letter from Division of Corporation Finance, Office of 
Real Estate & Construction to Barry E. Silbert, Chief Executive 
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
---------------------------------------------------------------------------

    Despite these developments, access for U.S. retail investors to 
gain exposure to bitcoin via a transparent and U.S. regulated, U.S. 
exchange-traded vehicle remains limited. Instead current options 
include: (i) facing the counter-party risk, legal uncertainty, 
technical risk, and complexity associated with accessing spot bitcoin; 
(ii) over-the-counter bitcoin funds (``OTC Bitcoin Funds'') with high 
management fees and potentially volatile premiums and discounts; \32\ 
(iii) purchasing shares of operating companies that they believe will 
provide proxy exposure to bitcoin with limited disclosure about the 
associated risks; \33\ or (iv) purchasing Bitcoin Futures ETFs, as 
defined below, which represent a sub-optimal structure for long-term 
investors that will cost them significant amounts of money every year 
compared to Spot Bitcoin ETPs, as further discussed below. Meanwhile, 
investors in many other countries, including Canada and Brazil, are 
able to use more traditional exchange listed and traded products 
(including exchange-traded funds holding physical bitcoin) to gain 
exposure to bitcoin. Similarly, investors in Switzerland and across 
Europe have access to Exchange Traded Products which trade on regulated 
exchanges and provide exposure to a broad array of spot crypto assets. 
U.S. investors, by contrast, are left with fewer and more risky means 
of getting bitcoin exposure, as described above.\34\
---------------------------------------------------------------------------

    \32\ The largest OTC Bitcoin Fund has an AUM of $23 billion. The 
premium and discount for OTC Bitcoin Funds is known to move rapidly. 
For example, over the period of 12/21/20 to 1/21/20, the premium for 
the largest OTC Bitcoin Fund went from 40.18% to 2.79%. While the 
price of bitcoin appreciated significantly during this period and 
NAV per share increased by 41.25%, the price per share increased by 
only 3.58%. This means that investors are buying shares of a fund 
that experiences significant volatility in its premium and discount 
outside of the fluctuations in price of the underlying asset. Even 
operating within the normal premium and discount range, it's 
possible for an investor to buy shares of an OTC Bitcoin Fund only 
to have those shares quickly lose 10% or more in dollar value 
excluding any movement of the price of bitcoin. That is to say--the 
price of bitcoin could have stayed exactly the same from market 
close on one day to market open the next, yet the value of the 
shares held by the investor decreased only because of the 
fluctuation of the premium. As more investment vehicles, including 
mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest 
option for a buy and hold strategy for such vehicles is often an OTC 
Bitcoin Fund, meaning that even investors that do not directly buy 
OTC Bitcoin Funds can be disadvantaged by extreme premiums (or 
discounts) and premium volatility.
    \33\ A number of operating companies engaged in unrelated 
businesses--such as Tesla (a car manufacturer) and MicroStrategy (an 
enterprise software company)--have announced investments as large as 
$5.3 billion in bitcoin. Without access to bitcoin exchange-traded 
products, retail investors seeking investment exposure to bitcoin 
may end up purchasing shares in these companies in order to gain the 
exposure to bitcoin that they seek. In fact, mainstream financial 
news networks have written a number of articles providing investors 
with guidance for obtaining bitcoin exposure through publicly traded 
companies (such as MicroStrategy, Tesla, and bitcoin mining 
companies, among others) instead of dealing with the complications 
associated with buying spot bitcoin in the absence of a bitcoin ETP. 
See e.g., ``7 public companies with exposure to bitcoin'' (February 
8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want to get 
in the crypto trade without holding bitcoin yourself? Here are some 
investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html. Such operating companies, 
however, are imperfect bitcoin proxies and provide investors with 
partial bitcoin exposure paired with a host of additional risks 
associated with whichever operating company they decide to purchase. 
Additionally, the disclosures provided by such operating companies 
with respect to risks relating to their bitcoin holdings are 
generally substantially smaller than the registration statement of a 
bitcoin ETP, including the Registration Statement, typically 
amounting to a few sentences of narrative description and a handful 
of risk factors. In other words, investors seeking bitcoin exposure 
through publicly traded companies are gaining only partial exposure 
to bitcoin and are not fully benefitting from the risk disclosures 
and associated investor protections that come from the securities 
registration process.
    \34\ The Exchange notes that the list of countries above is not 
exhaustive and that securities regulators in a number of additional 
countries have either approved or otherwise allowed the listing and 
trading of Spot Bitcoin ETPs.
---------------------------------------------------------------------------

    To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor 
assets to significant risk because investors that would otherwise seek 
crypto asset exposure through a Spot Bitcoin ETP are forced to find 
alternative exposure through generally riskier means. For instance, 
many U.S. investors that held their digital assets in accounts at 
FTX,\35\ Celsius Network LLC,\36\ BlockFi Inc.\37\ and Voyager Digital 
Holdings, Inc.\38\ have become unsecured creditors in the insolvencies 
of those entities. If a Spot Bitcoin ETP was available, it is likely 
that at least a portion of the billions of dollars tied up in those 
proceedings would still reside in the brokerage accounts of U.S. 
investors, having instead been invested in a transparent, regulated, 
and well-understood structure--a Spot Bitcoin ETP. To this point, 
approval of a Spot Bitcoin ETP would represent a major win for the 
protection of U.S. investors in the cryptoasset space. As further 
described below, the Trust, like all other series of Commodity-Based 
Trust Shares, is designed to protect investors against the risk of 
losses through fraud and insolvency that arise by holding digital 
assets, including bitcoin, on centralized platforms.
---------------------------------------------------------------------------

    \35\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \36\ See Celsius Network LLC, et al., Case No. 22-10964.
    \37\ See BlockFi Inc., Case No. 22-19361.
    \38\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

    Additionally, investors in other countries, specifically Canada, 
generally pay lower fees than U.S. retail investors that invest in OTC 
Bitcoin Funds due to the fee pressure that results from increased 
competition among available bitcoin investment options. Without an 
approved and regulated Spot Bitcoin ETP in the U.S. as a viable 
alternative, U.S. investors could seek to purchase shares of non-U.S. 
bitcoin vehicles in order to get access to bitcoin exposure. Given the 
separate regulatory regime and the potential difficulties associated 
with any international litigation, such an arrangement would create 
more risk exposure for U.S. investors than they would otherwise have 
with a U.S. exchange listed ETP. Further to this point, the lack of a 
U.S.-listed Spot Bitcoin ETP is not preventing U.S. funds from gaining 
exposure to bitcoin--several U.S. exchange-traded funds are using 
Canadian bitcoin ETPs to gain exposure to spot bitcoin. In addition to 
the benefits to U.S. investors articulated throughout this proposal, 
approving this proposal (and others like it) would provide U.S. 
exchange-traded funds and mutual funds with a U.S.-listed and regulated 
product to provide such access rather than relying on either flawed 
products or products listed and primarily regulated in other countries.
Bitcoin Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the 
launch of ETFs registered under the 1940 Act and the Bitcoin Futures 
Approvals that provide exposure to bitcoin primarily through CME 
Bitcoin Futures (``Bitcoin Futures ETFs''). Allowing such products to 
list and trade is a productive first step

[[Page 46254]]

in providing U.S. investors and traders with transparent, exchange-
listed tools for expressing a view on bitcoin. The Bitcoin Futures 
Approvals, however, have created a logical inconsistency in the 
application of the standard the Commission applies when considering 
bitcoin ETP proposals.
    As discussed further below, the standard applicable to bitcoin ETPs 
is whether the listing exchange has in place a comprehensive 
surveillance sharing agreement with a regulated market of significant 
size in the underlying asset. Previous disapproval orders have made 
clear that a market that constitutes a regulated market of significant 
size is generally a futures and/or options market based on the 
underlying reference asset rather than the spot commodity markets, 
which are often unregulated.\39\ Leaving aside the analysis of that 
standard until later in this proposal,\40\ the Exchange believes that 
the following rationale the Commission applied to a Bitcoin Futures ETF 
should result in the Commission approving this and other Spot Bitcoin 
ETP proposals:
---------------------------------------------------------------------------

    \39\ See Winklevoss Order at 37593, specifically footnote 202, 
which includes the language from numerous approval orders for which 
the underlying futures markets formed the basis for approving series 
of ETPs that hold physical metals, including gold, silver, 
palladium, platinum, and precious metals more broadly; and 37600, 
specifically where the Commission provides that ``when the spot 
market is unregulated--the requirement of preventing fraudulent and 
manipulative acts may possibly be satisfied by showing that the ETP 
listing market has entered into a surveillance-sharing agreement 
with a regulated market of significant size in derivatives related 
to the underlying asset.'' As noted above, the Exchange believes 
that these citations are particularly helpful in making clear that 
the spot market for a spot commodity ETP need not be ``regulated'' 
in order for a spot commodity ETP to be approved by the Commission, 
and in fact that it's been the common historical practice of the 
Commission to rely on such derivatives markets as the regulated 
market of significant size because such spot commodities markets are 
largely unregulated.
    \40\ As further outlined below, both the Exchange and the 
Sponsor believe that the Bitcoin Futures market represents a 
regulated market of significant size and that this proposal and 
others like it should be approved on this basis.

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, 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 proposed 
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. As such, when the CME shares its 
surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct 
related to the non-cash assets held by the proposed ETP.\41\
---------------------------------------------------------------------------

    \41\ See Teucrium Approval at 21679.

    CME Bitcoin Futures pricing is based on pricing from spot bitcoin 
markets. The statement from the Teucrium Approval that ``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 proposed futures ETP by manipulating the price of CME 
bitcoin futures contracts . . . indirectly by trading outside of the 
CME bitcoin futures market,'' makes clear that the Commission believes 
that CME's surveillance can capture the effects of trading on the 
relevant spot markets on the pricing of Bitcoin Futures. If CME is able 
to detect such attempts at manipulation in the complex and 
interconnected spot bitcoin market, how would such an ability to detect 
attempted manipulation and the utility in sharing that information with 
the listing exchange apply only to Bitcoin Futures ETFs and not Spot 
Bitcoin ETPs? Stated a different way, given that there is significant 
trading volume on numerous bitcoin exchanges that are not part of the 
CME CF Bitcoin Reference Rate and that arbitrage opportunities across 
bitcoin exchanges means that such trading volume will influence spot 
bitcoin prices across the market and, despite this, the Commission 
still believes that CME can detect attempted manipulation of the 
Bitcoin Futures through ``trading outside of the CME bitcoin futures 
market,'' it is clear that such ability would apply equally to both 
Bitcoin Futures ETFs and Spot Bitcoin ETPs. To take it a step further, 
such an ability would also seem to be a strong indication that the CME 
Bitcoin Futures market represents a regulated market of significant 
size. The Exchange agrees with the Commission on this point and notes 
that the pricing mechanism applicable to the Shares is similar to that 
of the CME CF Bitcoin Futures.
    Further to this point, a Bitcoin Futures ETF is potentially more 
susceptible to potential manipulation than a Spot Bitcoin ETP that 
offers only in-kind creation and redemption because settlement of CME 
Bitcoin Futures pricing (and thus the value of the underlying holdings 
of a Bitcoin Futures ETF) occurs at a single price derived from spot 
bitcoin pricing, while shares of a Spot Bitcoin ETP would represent 
interest in bitcoin directly and authorized participants for a Spot 
Bitcoin ETP (as proposed herein) would be able to source bitcoin from 
any exchange and create or redeem with the applicable trust regardless 
of the price of the underlying index. It is not logically possible to 
conclude that the CME Bitcoin Futures market represents a significant 
market for a futures-based product, but also conclude that the CMR 
Bitcoin Futures market does not represent a significant market for a 
spot-based product.
    In addition to potentially being more susceptible to manipulation 
than a Spot Bitcoin ETP, the structure of Bitcoin Futures ETFs provides 
negative outcomes for buy and hold investors as compared to a Spot 
Bitcoin ETP.\42\ Specifically, the cost of rolling CME Bitcoin Futures 
contracts will cause the Bitcoin Futures ETFs to lag the performance of 
bitcoin itself and, at over a billion dollars in assets under 
management, would cost U.S. investors significant amounts of money on 
an annual basis compared to Spot Bitcoin ETPs. Such rolling costs would 
not be required for Spot Bitcoin ETPs that hold bitcoin. Further, 
Bitcoin Futures ETFs could potentially hit CME position limits, which 
would force a Bitcoin Futures ETF to invest in non-futures assets for 
bitcoin exposure and cause potential investor confusion and lack of 
certainty about what such Bitcoin Futures ETFs are actually holding to 
try to get exposure to bitcoin, not to mention completely changing the 
risk profile associated with such an ETF. While Bitcoin Futures ETFs 
represent a useful trading tool, they are clearly a sub-optimal 
structure for U.S. investors that are looking for long-term exposure to 
bitcoin that will, based on the calculations above, unnecessarily cost 
U.S. investors significant amounts of money every year compared to Spot 
Bitcoin ETPs and the Exchange believes that any proposal to list and 
trade a Spot Bitcoin ETP should be reviewed by the Commission with this 
important investor protection context in mind.
---------------------------------------------------------------------------

    \42\ See e.g., ``Bitcoin ETF's Success Could Come at 
Fundholders' Expense,'' Wall Street Journal (October 24, 2021), 
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin 
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available 
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&__cf_chl_jschl_tk__=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list Spot Bitcoin ETPs compared to 
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead 
to the conclusion that Spot Bitcoin ETPs should be

[[Page 46255]]

available to U.S. investors and, as such, this proposal and other 
comparable proposals to list and trade Spot Bitcoin ETPs should be 
approved by the Commission. Stated simply, U.S. investors will continue 
to lose significant amounts of money from holding Bitcoin Futures ETFs 
as compared to Spot Bitcoin ETPs, losses which could be prevented by 
the Commission approving Spot Bitcoin ETPs. Additionally, any concerns 
related to preventing fraudulent and manipulative acts and practices 
related to Spot Bitcoin ETPs would apply equally to the spot markets 
underlying the futures contracts held by a Bitcoin Futures ETF. While 
the 1940 Act does offer certain investor protections, those protections 
do not relate to mitigating potential manipulation of the holdings of 
an ETF in a way that warrants distinction between Bitcoin Futures ETFs 
and Spot Bitcoin ETPs. To be clear, both the Exchange and Sponsor 
believe that the Bitcoin Futures market is a regulated market of 
significant size and that such manipulation concerns are mitigated as 
described throughout this proposal. After issuing the Bitcoin Futures 
Approvals which conclude the CME Bitcoin Futures market is a regulated 
market of significant size as it relates to Bitcoin Futures, the only 
consistent outcome would be approving Spot Bitcoin ETPs on the basis 
that the CME Bitcoin Futures market is also a regulated market of 
significant size as it relates to the bitcoin spot market. Given the 
current landscape, approving this proposal (and others like it) and 
allowing Spot Bitcoin ETPs to be listed and traded alongside Bitcoin 
Futures ETFs would establish a consistent regulatory approach, provide 
U.S. investors with choice in product structures for bitcoin exposure, 
and offer flexibility in the means of gaining exposure to bitcoin 
through transparent, regulated, U.S. exchange-listed vehicles.
Spot and Proxy Exposure to Bitcoin
    Exposure to bitcoin through an ETP also presents certain advantages 
for retail investors compared to buying spot bitcoin directly. The most 
notable advantage from the Sponsor's perspective is the elimination of 
the need for an individual retail investor to either manage their own 
private keys or to hold bitcoin through a cryptocurrency exchange that 
lacks sufficient protections. Typically, retail exchanges hold most, if 
not all, retail investors' bitcoin in ``hot'' (internet-connected) 
storage and do not make any commitments to indemnify retail investors 
or to observe any particular cybersecurity standard. Meanwhile, a 
retail investor holding spot bitcoin directly in a self-hosted wallet 
may suffer from inexperience in private key management (e.g., 
insufficient password protection, lost key, etc.), which could cause 
them to lose some or all of their bitcoin holdings. Thus, with respect 
to custody of the Trust's bitcoin assets, the Trust presents advantages 
from an investment protection standpoint for retail investors compared 
to owning spot bitcoin directly.
    Finally, as described in the Background section above, a number of 
operating companies largely engaged in unrelated businesses--such as 
Tesla (a car manufacturer) and MicroStrategy (an enterprise software 
company)--have announced significant investments in bitcoin. Without 
access to bitcoin exchange-traded products, retail investors seeking 
investment exposure to bitcoin may end up purchasing shares in these 
companies in order to gain the exposure to bitcoin that they seek.\43\ 
In fact, mainstream financial news networks have written a number of 
articles providing investors with guidance for obtaining bitcoin 
exposure through publicly traded companies (such as MicroStrategy, 
Tesla, and bitcoin mining companies, among others) instead of dealing 
with the complications associated with buying spot bitcoin in the 
absence of a bitcoin ETP.\44\ Such operating companies, however, are 
imperfect bitcoin proxies and provide investors with partial bitcoin 
exposure paired with a host of additional risks associated with 
whichever operating company they decide to purchase. Additionally, the 
disclosures provided by the aforementioned operating companies with 
respect to risks relating to their bitcoin holdings are generally 
substantially smaller than the registration statement of a bitcoin ETP, 
including the Registration Statement, typically amounting to a few 
sentences of narrative description and a handful of risk factors.\45\ 
In other words, investors seeking bitcoin exposure through publicly 
traded companies are gaining only partial exposure to bitcoin and are 
not fully benefitting from the risk disclosures and associated investor 
protections that come from the securities registration process.
---------------------------------------------------------------------------

    \43\ In August 2017, the Commission's Office of Investor 
Education and Advocacy warned investors about situations where 
companies were publicly announcing events relating to digital coins 
or tokens in an effort to affect the price of the company's publicly 
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
    \44\ See, e.g., ``7 public companies with exposure to bitcoin'' 
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want 
to get in the crypto trade without holding bitcoin yourself? Here 
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
    \45\ See, e.g., Tesla 10-K for the year ended December 31, 2020, 
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
---------------------------------------------------------------------------

Bitcoin Futures
    CME began offering trading in Bitcoin Futures in 2017. Each 
contract represents five bitcoin and is based on the CME CF Bitcoin 
Reference Rate.\46\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric 
related to Bitcoin Futures has generally trended up since launch, 
although certain notional volume calculations have decreased roughly in 
line with the decrease in the price of bitcoin. For example, there were 
143,215 Bitcoin Futures contracts traded in April 2023 (approximately 
$20.07 billion) compared to 193,182 ($5 billion), 104,713 ($3.9 
billion) 118714 ($42.7b billion), and 111,964 ($23.2b billion) 
contracts traded in April 2019, April 2020, and April 2021, and April 
2022, respectively.\47\
---------------------------------------------------------------------------

    \46\ The CME CF Bitcoin Reference Rate is based on a publicly 
available calculation methodology based on pricing sourced from 
several crypto exchanges and trading platforms, including Bitstamp, 
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
    \47\ Source: CME, Yahoo Finance 4/30/23.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[[Page 46256]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.167

    The number of large open interest holders \48\ and unique accounts 
trading Bitcoin Futures have both increased, even in the face of 
heightened Bitcoin price volatility.
---------------------------------------------------------------------------

    \48\ A large open interest holder in Bitcoin Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
125 bitcoin. At a price of approximately $29,268.81 per bitcoin on 
4/30/2023, more than 100 firms had outstanding positions of greater 
than $3.65 million in Bitcoin Futures.
[GRAPHIC] [TIFF OMITTED] TN19JY23.168


[[Page 46257]]


[GRAPHIC] [TIFF OMITTED] TN19JY23.169

BILLING CODE 8011-01-C
    The Sponsor further believes that publicly available research, 
including research done as part of rule filings proposing to list and 
trade shares of Spot Bitcoin ETPs, corroborates the overall trend 
outlined above and supports the thesis that the Bitcoin Futures pricing 
leads the spot market and, thus, a person attempting to manipulate the 
Shares would also have to trade on that market to manipulate the ETP. 
Specifically, the Sponsor believes that such research indicates that 
bitcoin futures lead the bitcoin spot market in price formation.\49\
---------------------------------------------------------------------------

    \49\ See Exchange Act Releases No. 94080 (January 27, 2022), 87 
FR 5527 (April 12, 2022) (specifically ``Amendment No. 1 to the 
Proposed Rule Change To List and Trade Shares of the Wise Origin 
Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity-Based Trust 
Shares''); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844 
(May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28, 
2021), 86 FR 60695 (November 3, 2021). See also Hu, Y., Hou, Y. and 
Oxley, L. (2019). ``What role do futures markets play in Bitcoin 
pricing? Causality, cointegration and price discovery from a time-
varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This academic research paper concludes 
that ``There exist no episodes where the Bitcoin spot markets 
dominates the price discovery processes with regard to Bitcoin 
futures. This points to a conclusion that the price formation 
originates solely in the Bitcoin futures market. We can, therefore, 
conclude that the Bitcoin futures markets dominate the dynamic price 
discovery process based upon time-varying information share 
measures. Overall, price discovery seems to occur in the Bitcoin 
futures markets rather than the underlying spot market based upon a 
time-varying perspective.''
---------------------------------------------------------------------------

Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\50\ including Commodity-Based Trust Shares,\51\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\52\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the Act and that this filing sufficiently 
demonstrates that the CME Bitcoin Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the Commission are sufficiently 
mitigated to the point that they are outweighed by quantifiable 
investor protection issues that would be resolved by approving this 
proposal.
---------------------------------------------------------------------------

    \50\ See Exchange Rule 14.11(f).
    \51\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \52\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \53\ with a regulated

[[Page 46258]]

market of significant size. Specifically, the Commission has previously 
stated that:
---------------------------------------------------------------------------

    \53\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance- sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in the 
Intermarket Surveillance Group (``ISG'') constitutes such a 
surveillance sharing agreement. See Securities Exchange Act Release 
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval'').

. . . when the spot market is unregulated--the requirement of 
preventing fraudulent and manipulative acts may possibly be 
satisfied by showing that the ETP listing market has entered into a 
surveillance-sharing agreement with a regulated market of 
significant size in derivatives related to the underlying asset. 
That is because, where a market of significant size exists with 
respect to derivatives on the asset underlying the commodity-trust 
ETP, the Commission believes that there is a reasonable likelihood 
that a person attempting to manipulate the ETP by manipulating the 
underlying spot market would also have to trade in the derivatives 
market in order to succeed, since arbitrage between the derivative 
and spot markets would tend to counter an attempt to manipulate the 
spot market alone.\54\
---------------------------------------------------------------------------

    \54\ Self-Regulatory Organizations; Bats BZX Exchange, Inc.; 
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, 83 FR 37579, 37600 
(Aug 1, 2018).

    The Commission has provided illustrative guidance in interpreting 
the terms ``significant market'' and ``market of significant size'' to 
include ``a market (or group of markets) as to which (a) there is a 
reasonable likelihood that a person attempting to manipulate the ETP 
would also have to trade on that market to successfully manipulate the 
ETP, so a surveillance-sharing agreement would assist the ETP listing 
market in detecting and deterring misconduct, and (b) it is unlikely 
that trading in the ETP would be the predominant influence on prices in 
that market.'' \55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    The Commission has stated in a prior disapproval order that ``the 
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.'' 
\56\ The Commission further noted that ``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.'' \57\
---------------------------------------------------------------------------

    \56\ Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin 
ETF Trust Under NYSE Arca Rule 8.201-E, 84-FR 55382, 55411 (Oct 16, 
2019).
    \57\ Id.
---------------------------------------------------------------------------

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

    \58\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

    The Exchange believes that this proposal is consistent with the 
requirements of Section 6(b)(5) of the Act and that the Sponsor's 
analysis demonstrates that the Exchange can meet such requirements in 
that the CME Bitcoin Futures Market (i) is a regulated market; (ii) has 
a comprehensive surveillance-sharing agreement with the Exchange; and 
(iii) satisfies the Commission's ``significant market'' definition.
1.The CME Bitcoin Futures Market Is a Regulated Market and ISG Member
    The CME is regulated by the CFTC and is a member of the Intermarket 
Surveillance Group (``ISG''), which was established to provide a 
framework for sharing information and coordinating regulatory efforts 
among exchanges trading securities and related products and to address 
potential intermarket manipulations and trading abuses. The Commission 
has previously stated that membership by a regulated futures exchange 
in ISG is sufficient to meet the surveillance-sharing requirement.\59\ 
Both the Exchange and CME are members of the Intermarket Surveillance 
Group (the ``ISG'').\60\
---------------------------------------------------------------------------

    \59\ See Winklevoss Order at 37594.
    \60\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
_____________________________________-

2.The CME Bitcoin Futures Market Is a Market of Significant Size
    Based on the Commission's prior guidance, Sponsor conducted a 
detailed price discovery study through its lead-lag analysis of bitcoin 
spot and futures trading across markets located globally. As discussed 
below, Sponsor's analysis concludes that the CME Bitcoin Futures market 
is consistently the leading market for price discovery across USD 
bitcoin markets located globally, including bitcoin spot markets and 
offshore, unregulated bitcoin futures markets. Thus, Sponsor's analysis 
supports the conclusion that there is a reasonable likelihood that a 
person attempting to manipulate the Shares would also have to trade on 
the CME Bitcoin Futures market to manipulate the Trust. Sponsor also 
conducted an additional lead-lag analysis including data from a 
recently launched bitcoin futures-based ETF to evaluate the likelihood 
of whether trading in the Trust could become the predominant influence 
on prices in the CME Bitcoin Futures market and concluded that it is 
unlikely that trading in the Trust would be the predominant influence 
on prices in the CME Bitcoin Futures market.
    Sponsor's analysis on price discovery in the Bitcoin spot and 
futures markets is described below.
Data Description and Sources
    Sponsor obtained tick level trade data for Bitcoin spot prices and 
futures prices used in its analysis from Coin Metrics for the period 
spanning from January 1, 2019, to March 31, 2021. Table 1 summarizes 
the dataset by exchange, market type, and quote currency.
    Sponsor aggregated the tick level trades to the one second floor 
level using a volume weighted average price (VWAP) approach. Compared 
to the daily/minute level granularity of timestamps, Sponsor believes 
the second level can capture more intra-day price dynamics and is more 
useful here to investigate price discovery, as both arbitrage and 
manipulative activities can occur within a matter of seconds. To 
preprocess the tick level trade data to second level granularity, two 
typical methods are often used. One is to use the last observed trade 
price within a second, and the other is to use VWAP within a second. 
Since multiple trades can occur with simultaneous timestamps but with 
different transaction prices, a VWAP can represent the price 
information from each trade instead of randomly selecting the last 
price. It is worth mentioning that although the price time series' have 
second level resolution (timestamped to seconds), this does not mean 
that the price time series' values are evenly spaced at each second 
since a market may not have trades within every second. Given this non-
synchronous nature of trading and the potential model issues arising 
from utilizing data

[[Page 46259]]

with numerous imputed values, Sponsor's analysis leverages a method 
that eliminates the need for imputation for the timestamps without 
trades. This approach allows the model inputs of price time series from 
different markets to stay non-synchronous without further data 
processing.
    In order to exclude any impacts caused by exchange rate movements, 
Sponsor limited the dataset to BTC-USD and BTC-USDT trades. Markets 
with an average correlation lower than 0.1 to other bitcoin markets, in 
any given quarter, were removed from the analysis. For futures markets, 
Sponsor included both ordinary futures and perpetuals. Contract 
frequencies were validated and recorded via respective exchange 
websites, and, for CME data, the sponsor compared data from the 
exchange directly with data provided by Coin Metrics to verify 
accuracy.
    Within the ordinary futures market, one exchange, quote and 
contract lifespan combination can often have same-day trading on 
contracts with different expiration dates. To remove price gaps in this 
market, Sponsor constructed a continuous time-series of prices by 
choosing the contract with the highest volume per day within an 
exchange, quote, and contract lifespan combination. For each 
combination, successive contracts are backwards adjusted using the 
price difference between the two contracts at the time of rollover.
BILLING CODE 8011-01-P

[[Page 46260]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.170

Research Design
    Price discovery between spot and futures markets plays an important 
role in financial research due to its association with market maturity. 
In theory, the futures market is expected to lead price discovery in 
established asset classes due to its inherent features, such as lower 
transaction fees, built-in leverage, unconstrained short-selling, and 
greater transparency. Since bitcoin futures contracts began trading on 
regulated exchanges in December 2017, several academic and market 
research papers have studied spot-futures price discovery in bitcoin 
markets. Sponsor started its research by reviewing the existing 
literature. Table 2 summarizes the metrics, data ranges, frequency 
levels, and conclusions for thirteen papers.

[[Page 46261]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.171


[[Page 46262]]


[GRAPHIC] [TIFF OMITTED] TN19JY23.172

BILLING CODE 8011-01-C
    Sponsor noted that each of the studies reviewed used metrics 
derived from the Vector Error Correction Model (VECM) or an extension 
of VECM to examine price discovery. Within the column of metrics, 
Information Share (IS) proposed by Hasbrouk (1995) and Component Share 
(CS) pioneered by Gonzalo and Granger (1995) are mostly used. Hasbrouk 
transforms the VECM into a vector moving average with a common factor 
component and transitory component and defines the metric IS to measure 
the proportion of the variance of the permanent component of prices 
coming from each market with Cholesky factorization. The IS is not 
unique if switching the order of input price data of the underlying two 
markets. To overcome it, Lien and Shrestha (2009) use eigenvalue 
decomposition instead of Cholesky factorization--this metric is called 
Modified Information Share. Both Information Share and Modified 
Information Share are used for pair-wise analysis. The extension of 
Modified Information Share to more than two markets is called 
Generalized Information Share (Lien and Shrestha, 2014). Component 
Share is calculated from the normalized orthogonal coefficients to the 
vector of the lagged error correlation term in the VECM. Fractional 
Component Share is derived similarly to CS but from a version of VECM 
that uses a fractional difference operator instead of the first order 
difference operator. Information Leadership Share (Yan and Zivot, 2010) 
and Information Leadership Share (Putnins, 2013) combine Information 
Share and Component Share non-linearly.
    Although the metrics used in reviewed studies are similar, the 
conclusions from these papers are mixed as to which markets lead or lag 
in price discovery. Buccheri (2021) \61\ discussed the limitations for 
VECM derived metrics and noted that when price observations are sparse 
(See CME price observations in Figure 1 as an example), a lot of zero 
returns are produced through imputation; therefore, the time series of 
prices strongly deviate from the standard semi-martingale assumption 
and sample covariances can be downward biased. The authors in Buccheri 
(2021) conclude that when the prices have a high level of sparsity, the 
VECM is clearly mis-specified and the estimates are potentially biased.
---------------------------------------------------------------------------

    \61\ Buccheri, Giuseppe, Giacomo Bormetti, Fulvio Corsi, and 
Fabrizio Lillo. ``Comment on: Price discovery in high resolution.'' 
Journal of Financial Econometrics 19, no. 3 (2021): 439-451. https://doi.org/10.1093/jjfinec/nbz008. The authors comment on the 
limitations of using information share within markets with trades on 
high resolution frequencies. The paper illustrates why the 
application of a VECM methodology like information share would be 
mis-specified and the OLS estimates could be biased because of high 
sparsity in the data.

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

[[Page 46263]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.173

    This conclusion in Buccheri (2021) provides theorical support on 
why VECM derived metrics are not suitable to use when the underlying 
data has high level of sparsity but does not quantify the actual impact 
in practice. In ``Suitable Price Discovery Measurement of Bitcoin Spot 
and Futures Markets'' \62\ (Robertson and Zhang, 2022), the authors 
demonstrate that the conclusions of Buccheri (2019) are of high 
importance by quantifying the impact of sparsity. within bitcoin 
markets.
---------------------------------------------------------------------------

    \62\ Robertson, Kevin, and Jiani Zhang. (2022) ``Suitable Price 
Discovery Measurement of Bitcoin Spot and Futures Markets.'' 
Available at SSRN: https://ssrn.com/abstract=4012165 or http://dx.doi.org/10.2139/ssrn.4012165.
---------------------------------------------------------------------------

    The authors show IS and CS are sensitive to input data's level of 
sparsity with numerical experiments. When the sparsity level is about 
10% for a designed-to-lead market, IS and CS show the known-leading 
market clearly contributes a majority to price discovery. However, as 
the sparsity is increased, the known-leading market begins to 
contribute less to price discovery and, when the level of sparsity is 
higher than 30%, using IS and CS produces mixed results or the opposite 
conclusion of what is true.
    Buccheri explains the effect of using VECM based metrics with 
violation of model assumptions from theorical perspective, and 
Robertson and Zhang show the effect with numerical experiments and 
provide empirical evidence about to what extent using VECM can give 
unreliable results. Both emphasize that sparsity level is important 
regarding price discovery measurement using VECM based metrics.
    Although Robertson and Zhang state that the choice of market to 
create the experiment data does not change the conclusion, Sponsor 
replicated their experiment using a different market to provide 
additional evidence on the impact of sparsity on VECM based metrics. 
Sponsor calculates the IS and CS every day from Q1 2019 through Q1 2021 
(821 days) between the artificially leading (by 3 seconds) version of 
the BitMEX USD perpetual futures market at 9 different levels of 
sparsity (measured by the percent of random data removed, 10% 
increments starting at 10% and ending at 90%) and the original BitMEX 
USD perpetual futures market. To satisfy the VECM assumption that 
prices/returns are synchronous, Sponsor used the typical and commonly 
used form of forward filling using previous second values. Figure 2 
shows the distributions of daily IS and CS values for the designed-to-
lead market. The x axis is the sparsity level, and the y axis is IS/CS. 
The plotted results show that, as the level of sparsity is increased, 
the known leading market begins to contribute less to price discovery 
causing mixed results (both IS and CS dropped from above 0.8 to less 
than 0.2) and the opposite conclusion of what is true. The market is 
considered leading when IS/CS is above 0.5.

[[Page 46264]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.174

    The observations from Sponsor's experiment confirm the conclusions 
of Buccheri (2019) and Robertson and Zhang (2022) that VECM derived 
metrics are sensitive to the level of sparsity within market data.
    Robertson and Zhang (2022) show that only about half of the markets 
included in the quarter of 2021 have trades for every second increment. 
Taking the CME USD futures market, Coinbase USD spot market, and BitMEX 
USD perpetual futures markets as representatives of bitcoin futures 
market, spot market, and perpetual market, Table 3 shows their 
comparison in average time in seconds between trades in each quarter. 
In the first quarter of 2019, on average, CME records a trade every 111 
seconds (~2 minutes) while Coinbase records a trade every 3 seconds. In 
more recent time periods, the sparsity level decreases for CME, but is 
still 25 times higher than the Coinbase USD spot market and BitMEX USD 
perpetual futures market in the first quarter of 2021.
[GRAPHIC] [TIFF OMITTED] TN19JY23.175

    Due to the high sparsity of CME Bitcoin futures data, the Sponsor 
attributes the ``mixed results'' in previous academic studies that have 
failed to demonstrate that the CME bitcoin futures market constitutes a 
market of significant size to the problems associated with using 
econometric models without considering the suitability. When analyzing 
information flow with daily data that has low sparsity level, the 
analysis using metrics derived from VECM (e.g., Hu, et al., 2019) is 
convincing. However, for analyzing intraday information flow and 
accounting for the varying levels of sparsity among the bitcoin market, 
the sponsor believes the framework of correlation-based lead-lag 
analysis using the Hayashi-Yoshida (HY) estimator \63\ to compute 
correlation and its extension by other academic researchers, including 
Hoffman (2013) \64\ and Huth (2011),\65\ to obtain the lead-lag seconds 
and lead-lag ratio is more suitable.
---------------------------------------------------------------------------

    \63\ Hayashi, Takaki, and Nakahiro Yoshida. ``On covariance 
estimation of non-synchronously observed diffusion processes.'' 
Bernoulli 11, no. 2 (2005): 359-379. http://www.jstor.org/stable/3318933. The authors proposed a novel method (HY estimator) of 
estimating the covariance of two diffusion processes when they are 
observed only at discrete times in a non-synchronous manner. This 
methodology addresses the issue that the traditional realized 
covariance estimator encounters, which is that the choice of regular 
interval size and data interpolation scheme can lead to unreliable 
estimation. The new method Hayashi and Yoshida introduced in this 
paper is free from any interpolation and therefore avoids the bias 
and other problems caused by it.
    \64\ Hoffmann, Marc, Mathieu Rosenbaum, and Nakahiro Yoshida. 
``Estimation of the lead-lag parameter from non-synchronous data.'' 
Bernoulli 19, no. 2 (2013): 426-461. http://www.jstor.org/stable/23525731. The authors propose a methodology for modeling the lead-
lag effect between two financial assets with non-synchronous data 
based on Hayashi and Yoshida's work (2015). It has been applied in 
various price discovery research publications. The Sponsor's 
analysis utilized this methodology to obtain pairwise lead-lag 
seconds between two markets.
    \65\ Huth, Nicolas, and Fr[eacute]d[eacute]ric Abergel. ``High 
frequency lead/lag relationships--empirical facts.'' Journal of 
Empirical Finance 26 (2014): 41-58. https://doi.org/10.1016/j.jempfin.2014.01.003.
---------------------------------------------------------------------------

    Lead-lag seconds and lead-lag ratio are the typical output metrics 
in correlation-based lead-lag analysis. The former measures the 
relative time in lead or lag between two markets and the latter 
measures the relative strength of the lead-lag relationship between two 
markets. They are both free from any imputation or sampling within non-
synchronous and/or infrequent data and have proven to be useful in 
price discovery research in other markets. Dao (2018) \66\ applied the 
Hayashi-Yoshida estimator in a lead-lag framework with these two 
metrics on price discovery

[[Page 46265]]

research of the S&P 500 index and the two most liquid ETFs that track 
it. This academic study is the first to analyze the effect of 
information arrival on the lead-lag relationship among related spot 
instruments and concludes that sophisticated investors have a more 
significant effect on the lead-lag relationship. The analysis from this 
study confirms that using the Hayashi-Yoshida estimator in a lead-lag 
framework is suitable for analyzing high frequency, tick level, non-
synchronous data even timestamped to milliseconds. Sponsor notes that 
there is academic research studying high-frequency lead-lag 
relationships between multiple bitcoin spot markets using the Hayashi-
Yoshida estimator with lead-lag seconds and lead-lag ratio from Schei 
(2019).\67\ The suitability test performed by Robertson and Zhang 
(2022) shows that these two metrics are not sensitive to the level of 
sparsity within markets. Their experiment shows that the accuracy of 
lead-lag seconds is consistent across the varying levels of sparsity 
and the lead-lag ratio moves closer to 1 (i.e., provides less certainty 
about the result) when the level of sparsity increases. Lead-lag ratio 
quantifies how strong the relationship is, and the strength can be 
considered as the confidence level associated with the conclusion that 
one market leads or lags another. The closer the lead-lag ratio is to 
1, the less certain one can conclude the relationship is of one 
market's lead/lag over the other market.
---------------------------------------------------------------------------

    \66\ Dao, Thong Minh, Frank McGroarty, and Andrew Urquhart. 
``Ultra-high-frequency lead-lag relationship and information 
arrival.'' Quantitative Finance 18, no. 5 (2018): 725-735. https://doi.org/10.1080/14697688.2017.1414484.
    \67\ Schei, Norheim Schei. ``High Frequency Lead-Lag 
Relationships in the Bitcoin Market.'' (unpublished master's thesis, 
2019). Copenhagen Business School, Copenhagen, Denmark.
---------------------------------------------------------------------------

    Again, Sponsor replicated the suitability test using the HY 
estimator in a lead-lag framework performed by Robertson and Zhang 
(2022) but on the BitMEX USD perpetual futures market. As mentioned by 
the authors, no interpolation is needed in this version of the 
experiment because the HY estimator computes directly from non-
synchronous data. Figure 3 shows the distribution of daily lead-lag 
seconds and daily lead-lag ratios between the artificially leading and 
sparse versions of the BitMEX USD perpetual futures market and the 
original BitMEX USD perpetual futures market.
[GRAPHIC] [TIFF OMITTED] TN19JY23.176

    The observations from Sponsor's experiment match those of Robertson 
and Zhang (2022) that the HY estimator used in a lead-lag framework is 
not sensitive to the level of sparsity within market data. The 
distribution of lead-lag seconds shows that the time shift parameter 
that maximizes the HY estimator is consistently +3 seconds--which is 
the amount of time the artificial market was advanced by. The 
distribution of the lead-lag ratios are consistently above 1, showing 
that the leading relationship of the artificial market over the 
original is strong. As Robertson and Zhang also noted, the lead-lag 
ratios decay towards the level of 1 with increasing levels of sparsity, 
which matches the expectation that the lead-lag relationship becomes 
weak when one of the markets rarely has data.
    Sponsor's analysis expands the research of Schei by using the 
Hayashi-Yoshida estimator with a lead-lag framework and the same 
metrics but on both bitcoin spot and futures markets. It is worth 
mentioning, the lead-lag framework is different than a VECM based 
approach. A VECM based approach, for example IS, measures the 
proportion of the variance of the permanent component of prices coming 
from each market and the total variance and the variance proportion 
change when the number of markets included changes. Therefore, 
``omitting substantial information flows from other markets [by using a 
two-dimensional methodology] can produce misleading results'', which 
Alexander and Heck (2020) \68\ state in their study as the motivation 
to use Generalized Information Share instead of the original 
Information Share metric. This is a limitation for two-dimensional VECM 
based metrics and does not apply to Sponsor's correlation-based lead-
lag analysis. This is because VECM based metrics measure the proportion 
of price discovery among markets while a lead-lag framework measures 
how much time one market leads/lags another without the need to compute 
the total variance of the permanent component of prices.
---------------------------------------------------------------------------

    \68\ C. Alexander & D. Heck ``Price discovery in Bitcoin: The 
impact of unregulated markets'', 50 J. Financial Stability 100776 
(2020).
---------------------------------------------------------------------------

Lead-Lag Analysis
    In the lead-lag analysis, Sponsor examined the pairwise lead-lag 
relationship within the spot market and futures market, as well as 
across them. For each pair, Sponsor computed the correlation 
coefficients using the HY estimator between one market price time 
series and a second market price time series as well as timestamp-
adjusted (leading/lagging) versions of the second market to find the 
time delta that maximizes their correlation. The range of time deltas 
is from -N seconds to N seconds in one second increments. In the 
Sponsor's analysis, the parameter N is set as 15. In the Sponsor's 
analysis, the parameter N is set as 15. For illustration below, Sponsor 
uses the pair of CME USD Futures (denoted as price

[[Page 46266]]

time series X) and Coinbase USD Spot (denoted as price time series Y) 
as an example to describe the process.
    Step 1: Fix the timestamp of CME and adjust the timestamps of 
Coinbase from N seconds lagging to N seconds leading. Figure 4 shows 
this process with time deltas equal to 1 and -1 for illustration 
purpose.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN19JY23.177

    Step 2: Compute the correlation coefficients between CME price time 
series and each of timestamp-adjusted time series of Coinbase with l 
seconds (l [isin] [-N, N]) lead/lag using HY estimator. The correlation 
coefficient is defined as (Hayashi & Yoshida 2005):
[GRAPHIC] [TIFF OMITTED] TN19JY23.178

    The numerator of p is the covariance between CME and Coinbase, 
which equates to the sum pf every product of price changes that share a 
time overlap. Figure 5 shows this process with a simple example.

[[Page 46267]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.179

    Step 3: Collect the correlation coefficients with different lead-
lag seconds as a correlation curve and search for the value lmax from -
N to N that maximizes their correlation. Meanwhile, compute the lead-
lag ratio between CME and Coinbase, llr, to measure the strength of the 
lead-lag relationship (Huth & Abergel 2012). It is defined as
[GRAPHIC] [TIFF OMITTED] TN19JY23.180

    The further the llr is from 1, the stronger the relationship is of 
one market's lead/lag over the other market. The llr is used in 
conjuntion with the HY correlation coefficient and the lead-lag seconds 
to provide a more comprehensive analysis. If llr [isin] [0.95, 1.05] or 
lmax is zero, we conclude neither market leads. If llr is not in the 
range [0.95, 1.05] and lmax is positive, CME leads Coinbase by lmax 
seconds and vice versa. Figure 6 shows an example of the correlation 
curve.
[GRAPHIC] [TIFF OMITTED] TN19JY23.181

    These three steps provide the pairwise lead-lag seconds between two 
markets. To measure a market's overall price discovery leadership, the 
results are aggregated by taking the average

[[Page 46268]]

lead-lag seconds it has with all other markets included in a quarter.
Conclusion of Reasonable Likelihood-Lead Lag Analysis
    Sponsor's results suggest that, out of the 20 spot markets and 26 
futures markets analyzed, the CME bitcoin futures market plays the most 
important role in price discovery during each quarter spanning from the 
first quarter of 2019 to the first quarter of 2021. Figure 7 shows the 
average pairwise lead-lag seconds between CME bitcoin futures and other 
bitcoin markets with 95% confidence intervals using the calculations 
introduced in previous session. The blue dots represent the CME's 
average leading time in seconds and the black line represents the 
confidence interval. All the blue dots are above 0 and only 6 markets 
have lower confidence bounds slightly below 0; therefore, Sponsor 
concludes the CME bitcoin futures market leads all other markets 
included in the analysis.
[GRAPHIC] [TIFF OMITTED] TN19JY23.182

    Table 4 lists the detailed results for every pair of CME against 
other markets with lead-lag seconds used to create Figure 7 along with 
lead-lag ratios.

[[Page 46269]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.183

    Additionally, Sponsor compared the CME bitcoin futures market's 
leadership with other markets by aggregating each market's lead-lag by 
taking the average of each markets lead-lag seconds over all other 
markets in a quarter.
    Figure 8 shows that, while other category leaders can change rank 
each quarter, they consistently rank below CME futures in average 
seconds leading. This consistency, along with the Sponsor's inclusion 
standards of strict overall average market correlations and 
demonstrative lead-lag ratios, speaks to the strength of CME futures' 
leadership

[[Page 46270]]

across spot and futures markets globally.\69\
---------------------------------------------------------------------------

    \69\ For more information, see Memorandum from the Division of 
Trading and Markets regarding a September 8, 2021 meeting with 
representatives from Fidelity Digital Assets, et al. (Sept. 8, 2021) 
available at https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
[GRAPHIC] [TIFF OMITTED] TN19JY23.185

    Figure 9 shows the average lead over all other markets for each 
market category leader by quarter. For example, the market leader 
within the USD Futures category (which is consistently CME) leads all 
other markets by an average of 5.8 seconds in Q1 2019.
[GRAPHIC] [TIFF OMITTED] TN19JY23.186

    Another observation from Figure 9 is that there is a clear decline 
in seconds-leading through time for these market category leaders. As 
discussed further below (Figure 10 & 11), this declining lead-lag time 
does not mean that a particular market category leader's strength in 
leadership is deteriorating, as it is not only evident for market 
category leaders, but all markets, and suggests efficiency within the 
bitcoin markets has continued to improve.
    The lead-lag relationships between and among bitcoin futures and 
spot markets provide insights into the directional influences of 
markets on price discovery, with the CME Bitcoin futures market playing 
the most

[[Page 46271]]

important role in price discovery during each quarter spanning from the 
first quarter of 2019 to the first quarter of 2021, as noted above. 
Arbitrage between the CME Bitcoin futures market and spot markets would 
tend to counter an attempt to manipulate the spot market alone. Thus, 
the Sponsor's analysis supports the conclusion that there is a 
reasonable likelihood that a person attempting to manipulate the Shares 
would also have to trade on the CME Bitcoin futures market to 
manipulate the ETP.
    Figure 10 shows that the absolute average of every market's overall 
lead-lag seconds (average lead-lag seconds over all other markets) has 
steadily decreased from the first quarter of 2019 to the first quarter 
of 2021. This suggests that the efficiency within bitcoin markets has 
continued to improve, and the window of arbitrage opportunity has 
closed with increasing speed.
[GRAPHIC] [TIFF OMITTED] TN19JY23.187

    While average lead/lag among markets has decreased over time, this 
does not mean that relative leadership among markets has decreased over 
time. To understand relative leadership among markets during different 
time periods, Sponsor standardizes each market's average lead/lag with 
other markets by dividing the market's average lead with other markets 
by the average of every market's absolute average lead with other 
markets. This relative leadership score (RLS) of market x is defined 
as:
[GRAPHIC] [TIFF OMITTED] TN19JY23.188

    The RLS of the CME bitcoin futures market indicates that the 
strength of CME leadership has not deteriorated, shown in Figure 11. 
The RLS for the CME USD futures market is relatively stable--indicating 
that there is no deterioration in the strength of this market and even 
a slight increase in strength during the last three quarters observed--
even the average lead/lag (the denominator of RLS plotted in Figure 10) 
among markets has decreased over time.

[[Page 46272]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.189

    To summarize, the top rank in average leading seconds and the 
pairwise leading results with confidence intervals for the CME bitcoin 
futures market, support the conclusion that there is a reasonable 
likelihood that a person attempting to manipulate the Shares would also 
have to trade on the CME bitcoin futures market to manipulate the ETP. 
The RLS of the CME bitcoin futures market provides evidence that that 
likelihood has stayed consistent while the efficiency within the 
bitcoin markets has continued to improve.
3. Trading in the Shares Unlikely to be Predominant Influence on Prices 
in CME Bitcoin Futures Market
    As described above, the Commission requires the Exchange to 
conclude that it is unlikely that trading in the Shares would become 
the predominant influence on prices in the CME Bitcoin Futures market. 
In a recent approval order \70\ of a bitcoin-futures ETP, the 
Commission concluded that it is unlikely that trading in the proposed 
bitcoin-futures ETP would be the predominant influence on prices in the 
CME bitcoin futures market. The Commission specifies as reasons for its 
conclusion ``the maturation of the CME bitcoin futures market since its 
inception in 2017-including, but not limited to, the overall size, 
volume, liquidity, and number of years of trading in the CME bitcoin 
futures market and evidence from the 1940 Act-registered Bitcoin 
Futures ETFs''. Sponsor agrees with the Commission's remarks on the 
maturation of the CME bitcoin futures market and would also add ``price 
discovery leadership'', as discussed above, to the list of maturation 
evidence. As evidence from the 1940 Act-registered Bitcoin Futures 
ETFs, the Commission states it ``has neither observed any disruption to 
the CME bitcoin futures market, nor any evidence that the Bitcoin 
Futures ETFs have exerted dominant influence on CME bitcoin futures 
prices.'' Through its own analysis, Sponsor again agrees with the 
Commission's remarks and, as discussed below, also found that the level 
of price discovery leadership associated with the CME bitcoin futures 
market remained unchanged since the launch of Bitcoin Futures ETFs.
---------------------------------------------------------------------------

    \70\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5, 
2022) (collectively, with the Teucrium Approval, the ``Bitcoin 
Futures Approvals'').
---------------------------------------------------------------------------

    In considering the question of whether the proposed bitcoin-spot 
ETP would be the predominant influence on prices in the CME bitcoin 
futures market, Sponsor conducted a numerical experiment to best 
estimate the effect since it is not feasible to directly evaluate the 
effect for the proposed ETP before its existence. The experiment is 
designed to observe whether the price discovery leadership of the CME 
bitcoin futures market can be changed by a new market (specifically an 
ETP) entering with high trade activity. If it is, it is reasonable to 
assume that the proposed bitcoin-spot ETP could be the predominant 
influence on prices in the CME bitcoin futures market if it has high 
trade activity. However, if it is not, it is also reasonable to assume 
that the proposed bitcoin-spot ETP would not be the predominant 
influence. From the numerical experiment, Sponsor aims to demonstrate 
that high trade activity or volume is not the key factor in price 
discovery.
    Sponsor used trade data from a recently launched bitcoin futures-
based ETF, ProShares Bitcoin Strategy ETF (``BITO''), which caused high 
trading activity after its launch, as the model in its experiment. BITO 
is a Commission-registered ETF that is listed and traded on a U.S. 
regulated national securities exchange and was launched on October 18, 
2021. As described in its prospectus, BITO seeks to invest primarily in 
CME Bitcoin futures contracts.
    Sponsor selected two periods, representing a regular period with 
normal trading activity and a period with new information and 
heightened trading activity (from approximately $15 billion to $34 
billion) in the CME Bitcoin futures market as seen from Figure 12. The 
experiment is to compare whether the leadership of CME increased during 
the second period. If not, it is reasonable to conclude the heightened 
trading activity in the futures market did not increase the leadership 
of the futures market. With that same logic, the potential heightened 
trading activity in the spot market would not increase the leadership 
of the spot market.
    Sponsor obtained tick level data from Coin Metrics for all markets 
included in the lead-lag analysis described above spanning two specific 
periods: 11 days before the launch of BITO (10/8/2021--10/18/2021) and 
11 days after the launch (10/19/2021-10/29/2021). For the 11 days after 
the launch of BITO, Sponsor obtained tick-level trade data on BITO via 
Bloomberg and aggregated to the one second floor level using the same 
method described above.

[[Page 46273]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.190

    Sponsor examined the pairwise lead-lag relationship between CME 
bitcoin futures and all other markets included. For each pair, Sponsor 
computed the correlation coefficients using the same lead-lag framework 
and HY estimator between CME bitcoin futures and the second market 
price timeseries as well as timestamp-adjusted (leading/lagging) 
versions of the second market to find the time delta that maximized 
their correlation. The only differences between Sponsor's BITO analysis 
and the quarterly analysis spanning Q1 2019 through Q1 2021 discussed 
above are the timeframes and a stricter average correlation threshold 
(.2 instead of.1) in the BITO analysis given the shorter timeframe.
    The results of this experiment in Figure 13 show the CME bitcoin 
futures market leading all markets for the period of 11 days prior to 
the launch of BITO. The price discovery leadership of the CME bitcoin 
futures market still leads after BITO's launch in the period of 10/19/
2021 to 10/29/2020, but CME's leadership does not become stronger even 
though the trading volume increased significantly.

[[Page 46274]]

[GRAPHIC] [TIFF OMITTED] TN19JY23.191

    Given that the CME bitcoin futures market did not see an increase 
in price discovery leadership even during a period of heightened 
activity (trading volume increased from 15 billion to 34 billion) on 
that market after BITO's launch, Sponsor believes it would be 
unreasonable to assume that the level of the spot markets' leadership 
would increase (CME bitcoin futures market price leadership would 
deteriorate) due to the potential heightened trade activity in the spot 
markets after the proposed spot-based ETP launch. This dynamic is 
illustrated in Figure 14.
[GRAPHIC] [TIFF OMITTED] TN19JY23.192

BILLING CODE 8011-01-C
    Based on the experiment, Sponsor concludes the inherent features of 
futures are more important factors in price discovery and allow this 
market to dominate even with lower or changing levels of volume. This 
conclusion is also supported in academic research \71\

[[Page 46275]]

studying similar patterns in other asset classes. It is worth 
mentioning that it is not feasible to directly evaluate the effect for 
the proposed ETP before its existence. The numerical experiment above 
is to best estimate the effect and eliminate the concern on the 
potential high trade activity in spot markets caused by the proposed 
ETP.
---------------------------------------------------------------------------

    \71\ Futures with much smaller trading volumes compared to the 
underlying spot market can still dominate price discovery. See 
Hauptfleisch, Martin, Talis J. Putni[ncedil][scirc], and Brian 
Lucey. ``Who sets the price of gold?'' ``London or New York.'' 
Journal of Futures Markets 36, no. 6 (2016): 564-586. https://doi.org/10.1002/fut.21775 for more information.
---------------------------------------------------------------------------

    Moreover, Sponsor believes that there will be no material effect of 
the Shares' trade prices on CME bitcoin futures prices from secondary 
market trading activities. To estimate this effect, Sponsor uses BITO 
in its analysis as the first ETP launched in U.S. and a reasonable 
example of a general ETP. Sponsor examined the pairwise lead-lag 
relationship between BITO and all other markets included in previous 
analysis. As seen in Table 5, only four markets have a lead-lag ratio 
(the strength measurement of the lead-lag relationship) outside the 
range of [.95,1.05] and non-zero lead-lag seconds to conclude they are 
leading or lagging. Sponsor interprets this result as BITO's lead-lag 
relationship with other bitcoin markets is not significant.

    Table 5--Markets With Significant Lead/Lag Relationships to BITO
------------------------------------------------------------------------
                                               BITO
                                            leadership
                                             (lead-lag    Lead-lag ratio
                                             seconds)
------------------------------------------------------------------------
CME USD Ordinary Futures................              -1           0.909
Kraken USD Ordinary Futures.............              -1           0.926
Huobi USD Ordinary Futures (Bi-                       -1           0.933
 Quarterly).............................
CEX.IO USD Spot.........................              12           1.067
------------------------------------------------------------------------

    Regarding BITO's price discovery contribution measured by lead-lag 
seconds, it does not lead any bitcoin markets except CEX.IO USD spot 
market, which not only lags BITO but also lags all other bitcoin 
markets. More importantly, the CME bitcoin futures market leads BITO 
with the highest level of certainty as seen from the lead-lag ratio. As 
such, Sponsor concludes that the proposed ETP would have no material 
impact on CME bitcoin futures prices.
    The gold market shares certain characteristics with the bitcoin 
market--both gold and bitcoin have a finite supply, are traded globally 
in various market venues against various currency pairs and have a 
robust futures market. In addition, many investors view bitcoin as a 
form of digital gold and in looking to determine the potential impact 
of price discovery in trading in the ETP shares on the secondary 
market, the Sponsor looks to the gold market as an analogous market to 
bitcoin when looking to determine the impact of price discovery. 
According to a previous study \72\ the Sponsor reviewed, the authors 
analyzed intraday data on gold prices from 1997-2014 and concluded that 
futures markets tend to lead price discovery in the gold market despite 
the spot market having ten times more volume than the U.S. futures 
market. A second \73\ study that the sponsor analyzed, came to the same 
conclusion that futures are the global leader in price discovery for 
gold, with a growing influence of ETPs.
---------------------------------------------------------------------------

    \72\ See Hauptfleisch, et. al.
    \73\ Sehgal, Sanjay, Neharika Sobti, and Florent Diesting. ``Who 
leads in intraday gold price discovery and volatility connectedness: 
Spot, futures, or exchange-traded fund?'' Journal of Futures Markets 
41, no. 7 (2021): 1092-1123. https://doi.org/10.1002/fut.22208.
---------------------------------------------------------------------------

    Further, Sponsor believes that Shares of the Trust trading on the 
secondary market could have a positive impact on the CME Bitcoin 
Futures market leading position. Sponsor believes this due to the use 
of CME Bitcoin Futures in hedging activities by market participants. 
One such example, is when Authorized Participants transact on both the 
secondary and primary markets. In order to arbitrage or fulfill large 
basket trades on behalf of clients, Authorized Participants may 
transact in the primary market with the ETP by creating and/or 
redeeming and then immediately offsetting that transaction in the 
secondary market. Because the primary market is settled in-kind 
(meaning the exchange of shares and bitcoin) and the secondary market 
is settled in cash (meaning the exchange of shares and fiat currency), 
the Authorized Participant needs to transact in the bitcoin spot 
market. Given there is a lag between the secondary market transaction, 
the striking of the NAV per Share in the primary market and the 
settlement of the primary market transaction, the Authorized 
Participants will look to hedge their exposure to the bitcoin market 
using bitcoin futures. For the reasons discussed throughout this 
document such as the transparency, low fees, and leverage capabilities, 
many market participants look to hedge themselves using futures and 
Sponsor believes that will be the case with Authorized Participant 
transactions in respect of the Trust as well.
    The Exchange also believes that trading in the Shares would not be 
the predominant force on prices in the Bitcoin Futures market (or spot 
market) for several additional reasons, including the significant 
volume in the Bitcoin Futures market, the size of bitcoin's market cap 
(approximately $1 trillion), and the significant liquidity available in 
the spot market. According to the Sponsor's analysis, in the second 
quarter of 2021, bitcoin futures volume greatly exceeded volumes in the 
spot markets. The volume of the bitcoin futures market was 
approximately $7.1 trillion where the volume of the bitcoin spot 
markets was approximately $1.4 trillion.\74\ In addition to the Bitcoin 
Futures market data points cited above, the spot market for bitcoin is 
also very liquid. According to data from CoinRoutes from February 2021, 
the cost to buy or sell $5 million worth of bitcoin averages roughly 10 
basis points with a market impact of 30 basis points.\75\ For a $10 
million market order, the cost to buy or sell is roughly 20 basis 
points with a market impact of 50 basis points. Stated another way, a 
market participant could enter a market buy or sell order for $10 
million of bitcoin and only move the market 0.5%. More strategic 
purchases or sales (such as using limit orders and executing through 
OTC bitcoin trade desks) would

[[Page 46276]]

likely have less obvious impact on the market--which is consistent with 
MicroStrategy, Tesla, and Square being able to collectively purchase 
billions of dollars in bitcoin. As such, the combination of Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants, including authorized 
participants creating and redeeming with the Trust, to buy or sell 
large amounts of bitcoin without significant market impact will help 
prevent the Shares from becoming the predominant force on pricing in 
either the bitcoin spot or Bitcoin Futures markets, satisfying part (b) 
of the test outlined above.
---------------------------------------------------------------------------

    \74\ For more information, see Memorandum from the Division of 
Trading and Markets regarding a September 8, 2021 meeting with 
representatives from Fidelity Digital Assets, et al. (Sept. 8, 2021) 
available at https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
    \75\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

(b) SEC Approval of Bitcoin Futures ETFs and CME Surveillance
    Bitcoin Futures represent a growing influence on pricing in the 
spot bitcoin market as has been laid out above and in other proposals 
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is 
based on pricing from spot bitcoin markets. As noted above, the 
statement from the Teucrium Approval that ``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 proposed 
futures ETP by manipulating the price of CME bitcoin futures contracts 
. . . indirectly by trading outside of the CME bitcoin futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of Bitcoin Futures. While the Commission makes 
clear in the Teucrium Approval that the analysis only applies to the 
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin 
Futures as its only non-cash or cash equivalent holding, if CME's 
surveillance is sufficient to mitigate concerns related to trading in 
Bitcoin Futures for which the pricing is based directly on pricing from 
spot bitcoin markets, it's not clear how such a conclusion could apply 
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin 
ETPs.
    Additionally, a Bitcoin Futures ETF is actually potentially more 
susceptible to manipulation than a Spot Bitcoin ETP where the 
underlying trust offers only in-kind creation and redemption. 
Specifically, the pricing of Bitcoin Futures is based on prices from 
spot bitcoin markets, while shares of a Spot Bitcoin ETP would 
represent an interest in bitcoin directly and authorized participants 
for a Spot Bitcoin ETP would be able to source bitcoin from any 
exchange and create or redeem with the applicable trust regardless of 
the price of the underlying index. Potential manipulation of a Bitcoin 
Futures ETF would require manipulation on the spot markets on which the 
pricing for Bitcoin Futures are based while the in-kind creation and 
redemption process and fungibility of bitcoin means that a would be 
manipulator of a Spot Bitcoin ETP would need to manipulate the price 
across all bitcoin markets or risk simply providing arbitrage 
opportunities for authorized participants. Further to this point, this 
arbitrage opportunity also acts to reduce any incentives to manipulate 
the price of a Spot Bitcoin ETP because the underlying trust will 
create and redeem shares at set rates of bitcoin per share without 
regard to the price that the ETP is trading at in the secondary market 
or the price of the underlying index. As such, the Exchange believes 
that part (a) of the significant market test outlined above is 
satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares.
    Recently, the Commission allowed three ETFs primarily invested in 
CME Bitcoin futures to register and list on a national securities 
exchange (``Bitcoin Futures ETFs'').\76\ As described in its 
prospectus, BITO does not invest directly in bitcoin but rather seeks 
to provide capital appreciation primarily through managed exposure to 
cash-settled bitcoin futures contracts traded on commodity exchanges 
registered with the Commodity Futures Trading Commission (``CFTC''). 
Currently, the only such contracts that are traded on, or subject to 
the rules of, the CME. CME Bitcoin futures are cash-settled in U.S. 
dollars based on the CME DF Bitcoin Reference Rate (``BRR''), which is 
a volume-weighted composite of U.S. dollar-bitcoin trading activity on 
certain constituent exchanges including Bitstamp, Coinbase, Gemini, 
itBit, Kraken, and LMAX Digital.\77\
---------------------------------------------------------------------------

    \76\ ProShares Bitcoin Strategy ETF (BITO); VanEck Bitcoin 
Strategy ETF (XBTF); Valkyrie Bitcoin Strategy ETF (BTF).
    \77\ See CME CF Bitcoin Reference Rate Index data at https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html.
---------------------------------------------------------------------------

    The CME reference rate is based on substantially the same pricing 
data from digital asset trading platforms as the Index used by the 
Trust. The Index is designed to reflect the performance of bitcoin in 
U.S. dollars and the current constituent exchange composition of the 
Index is Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital. 
As noted recently by a commenter on another Rule 19b-4 application for 
a bitcoin spot ETP, Bitcoin Futures ETFs and the Trust are exposed to 
the same underlying pricing data and the same risks of 
manipulation.\78\
---------------------------------------------------------------------------

    \78\ See Letter from Joseph A. Hall et al. to Vanessa Countryman 
on SR-NYSE-Arca-2021-90 (Nov. 29, 2021).
---------------------------------------------------------------------------

    There is no basis, in law or in fact, for determining that the 
Bitcoin Futures ETFs satisfy the standards of Section 6(b)(5) of the 
Exchange Act while the Trust does not. Bitcoin pricing, whether in the 
spot market or the futures market, is determined in the digital asset 
trading platforms where supply and demand interact; and there is almost 
complete overlap in the underlying digital asset trading platforms that 
supply pricing information for the reference indices used by both the 
CME Bitcoin futures market and the Trust.
    Just three weeks after the Bitcoin Futures ETFs began trading, the 
Commission again rejected a 19b-4 application filed by a spot bitcoin 
ETP on the grounds that the listing exchange had failed to demonstrate 
satisfaction of the Section 6(b)(5) standard.\79\ The Commission 
specifically disagreed with the exchange's premises that (i) it is 
inconsistent with the Section 6(b)(5) standard for the Commission to 
permit a Bitcoin Futures ETF registered under the 1940 Act to launch 
but to disapprove the approval of a bitcoin spot ETP; (ii) it is 
inconsistent for the Commission to approve a Bitcoin Futures ETF that 
trades exclusively in CME Bitcoin Futures contracts and conclude that 
the CME Bitcoin Futures market is not a ``market of significant size'' 
under the Section 6(b)(5) standard; and (iii) there is no basis of fact 
or law that the 1940 Act is designed to prevent market manipulation in 
the markets in which the Bitcoin Futures ETF trades. Instead, the 
Commission stated that it considers each proposed rule change on its 
own merits and noted that the proposed rule did not relate to a product 
regulated under the 1940 Act and did not relate to the same underlying 
holdings as the Bitcoin Futures ETFs. In practice, however, the 
Commission did not address why a bitcoin spot ETP fails to satisfy the 
Section 6(b)(5) standard when it is exposed to the same underlying 
risks of manipulation as the CME Bitcoin Futures contracts primarily 
held by Bitcoin Futures ETFs, which have been allowed to register and 
list.
---------------------------------------------------------------------------

    \79\ 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-
2019)(``VanEck Order'').

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

[[Page 46277]]

    As recently as 2020, the Commission approved new exchange listing 
rules permitting ETFs registered under the 1940 Act, including Bitcoin 
Futures ETFs, to list under an exchange's generic listing standards 
without having to submit separate rule filing pursuant to Section 
19(b).\80\ In determining that the rule change was reasonably designed 
to help prevent fraudulent and manipulative acts and practice, the SEC 
stated that ETFs would be required to disclose its portfolio holdings 
under the 1940 Act and that the exchange rule included requirements 
relating to fire walls and procedures to prevent the use and 
dissemination of material, non-pubic information regarding the 
applicable ETF index and portfolio.\81\ Importantly, with regard to 
surveillance, the Commission stated only that the rule change required 
the exchange to implement and maintain written surveillance procedures 
for ETF shares and noted that the exchange would use its existing 
surveillance procedures applicable to derivative products to monitor 
trading in ETF shares. In approving the generic listing standards, the 
SEC did not require in-depth analyses into any particular markets or 
index components.\82\ While noting the ability of an exchange to rely 
on FINRA for information related to certain securities held by ETPs, 
the Commission focused its determination on the exchange's surveillance 
of the market for ETF shares. As a result, Bitcoin Futures ETFs are 
permitted to list and trade under generic listing standards based 
solely on the oversight of the underlying futures by the CFTC and 
futures exchanges with no acknowledgement or assessment by the 
Commission of the actual risk of fraud or manipulation related to 
underlying bitcoin spot markets referenced by such bitcoin futures--
even when such bitcoin markets mirror those proposed as reference 
markets in the Index used by the Trust and other spot bitcoin ETP 
listing proposals.
---------------------------------------------------------------------------

    \80\ Self-Regulatory Organizations, NYSE Arca, Inc.; Notice of 
Filing of Amendment No. 2 and Order Granting Accelerated Approval of 
a Proposed Rule Change, as Modified by Amendment No. 2, to Adopt 
NYSE Arca Rule 5.2-E(j)(8) Governing the Listing and Trading of 
Exchange-Traded Fund Shares (Apr. 13, 2020) (SR-NYSE-Arca-2019-81).
    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

    Because (i) the risks of manipulation in the bitcoin markets 
impacting the Trust are thus indistinguishable from those same risks 
impacting Bitcoin Futures ETFs; (ii) the Trust will have the same 
pricing sources, and (iii) the Trust will be subject to the same risks 
of manipulation as shares of Bitcoin Futures ETFs; the Exchange 
believes that the proposed rule change is sufficiently designed to 
prevent fraudulent and manipulative acts and practice. Approving this 
change is consistent with the treatment of substantially similar 
products, and the Exchange believes that any finding to the contrary 
would result in arbitrarily disparate treatment to the Trust.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\83\
---------------------------------------------------------------------------

    \83\ See Winklevoss Order at 37580. The Commission has also 
specifcally noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
---------------------------------------------------------------------------

    The Exchange believes that such conditions are present. 
Specifically, the significant liquidity in the spot market and the 
impact of market orders on the overall price of bitcoin mean that 
attempting to move the price of bitcoin is costly and has grown more 
expensive over the past year. In January 2020, for example, the cost to 
buy or sell $5 million worth of bitcoin averaged roughly 30 basis 
points (compared to 10 basis points in 2/2021) with a market impact of 
50 basis points (compared to 30 basis points in 2/2021).\84\ For a $10 
million market order, the cost to buy or sell was roughly 50 basis 
points (compared to 20 basis points in 2/2021) with a market impact of 
80 basis points (compared to 50 basis points in 2/2021). As the 
liquidity in the bitcoin spot market increases, it follows that the 
impact of $5 million and $10 million orders will continue to decrease 
the overall impact in spot price.
---------------------------------------------------------------------------

    \84\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
Surveillance Sharing Agreement
    The Commission also permits a listing exchange to demonstrate that 
``other means to prevent fraudulent and manipulative acts and 
practices'' are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The Exchange and Sponsor believe that 
such conditions are present. The Exchange is proposing to take 
additional steps to those described above to supplement its ability to 
obtain information that would be helpful in detecting, investigating, 
and deterring fraud and market manipulation in the Commodity-Based 
Trust Shares. On June 21, 2023, the Exchange reached an agreement on 
terms with Coinbase, Inc. (``Coinbase''), an operator of a United 
States-based spot trading platform for Bitcoin that represents a 
substantial portion of US-based and USD denominated Bitcoin 
trading,\85\ to enter into a surveillance-sharing agreement (``Spot BTC 
SSA'') and executed an associated term sheet. Based on this agreement 
on terms, the Exchange and Coinbase will finalize and execute a 
definitive agreement that the parties expect to be executed prior to 
allowing trading of the Commodity-Based Trust Shares.
---------------------------------------------------------------------------

    \85\ According to a Kaiko Research report dated June 26, 2023, 
Coinbase represented roughly 50% of exchange trading volume in USD-
BTC trading on a daily basis during May 2023.
---------------------------------------------------------------------------

    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between the Exchange and Coinbase that is intended to 
supplement the Exchange's market surveillance program. The Spot BTC SSA 
is expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares.\86\ This 
means that the Exchange expects to receive market data for orders and 
trades from Coinbase, which it will utilize in surveillance of the 
trading of Commodity-Based Trust Shares. In addition, the Exchange can 
request further information from Coinbase related to spot bitcoin 
trading activity on the Coinbase exchange platform, if the Exchange 
determines that such information would be necessary to detect and 
investigate potential

[[Page 46278]]

manipulation in the trading of the Commodity-Based Trust Shares.\87\
---------------------------------------------------------------------------

    \86\ For additional information regarding ISG and the hallmarks 
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
    \87\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC 
and Cboe Clear Digital, LLC.
---------------------------------------------------------------------------

In-Kind Creation and Redemption
    Further, and consistent with prior points above, offering only in-
kind creation and redemption will provide unique protections against 
potential attempts to manipulate the Shares. While the Sponsor believes 
that the Benchmark which it uses to value the Trust's bitcoin is itself 
resistant to manipulation based on the methodology further described 
below, the fact that creations and redemptions are only available in-
kind makes the manipulability of the Benchmark significantly less 
important. Specifically, because the Trust will not accept cash to buy 
bitcoin in order to create new shares or, barring a forced redemption 
of the Trust or under other extraordinary circumstances, be forced to 
sell bitcoin to pay cash for redeemed shares, the price that the 
Sponsor uses to value the Trust's bitcoin is not particularly 
important.\88\ When authorized participants are creating with the 
Trust, they need to deliver a certain number of bitcoin per share 
(regardless of the valuation used) and when they're redeeming, they can 
similarly expect to receive a certain number of bitcoin per share. As 
such, even if the price used to value the Trust's bitcoin is 
manipulated (which the Sponsor believes that its methodology is 
resistant to), the ratio of bitcoin per Share does not change and the 
Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Benchmark 
because there is little financial incentive to do so.
---------------------------------------------------------------------------

    \88\ While the Benchmark will not be particularly important for 
the creation and redemption process, it will be used for calculating 
fees.
---------------------------------------------------------------------------

Wise Origin Bitcoin Trust
    The Registration Statement includes the following description of 
the Trust and its operations. The Trust will issue Shares that 
represent fractional undivided beneficial interests in and ownership of 
the Trust. The Trust is a Delaware statutory trust that operates 
pursuant to the Declaration of Trust and Trust Agreement (the ``Trust 
Agreement''), between Sponsor and Delaware Trust Company, the Delaware 
trustee of the Trust (the ``Trustee''). Sponsor manages the Trust and 
is responsible for the ongoing registration of the Shares. The Trust 
will engage Fidelity Service Company, Inc. (``FSC''), a Sponsor 
affiliate, to be the administrator (``Administrator''). A third-party 
transfer agent (the ``Transfer Agent'') will facilitate the issuance 
and redemption of Shares of the Trust and respond to correspondence by 
Trust Shareholders and others relating to its duties, maintain 
Shareholder accounts, and make periodic reports to the Trust.\89\ 
Another affiliate of Sponsor, Fidelity Distributors Corporation, will 
be the marketing agent (``Marketing Agent'') in connection with the 
creation and redemption of ``Baskets'' of Shares. The Sponsor will 
provide assistance in the marketing of the Shares. FDAS, another 
Sponsor affiliate, will serve as the Custodian.
---------------------------------------------------------------------------

    \89\ The Exchange notes that the Sponsor is finalizing 
negotiations with several service providers, and it will submit an 
amendment to this proposal upon finalization of those arrangements.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended (the ``1940 Act''),\90\ nor a commodity pool for purposes of 
the Commodity Exchange Act (``CEA''), and neither the Trust nor the 
Sponsor is subject to regulation as a commodity pool operator or a 
commodity trading adviser in connection with the Shares.
---------------------------------------------------------------------------

    \90\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

    The Trust's investment objective is to seek to track the 
performance of bitcoin, as measured by the performance of the Fidelity 
Bitcoin Index PR (the ``Index''), less the Trust's expenses and other 
liabilities. In seeking to achieve its investment objective, the Trust 
will hold bitcoin and will value its Shares daily as of 4:00 p.m. 
Eastern time using the same methodology used to calculate the Index and 
process all creations and redemptions in transactions with authorized 
participants. The Trust is not actively managed.
The Bitcoin Custodian
    The Sponsor has selected FDAS to be the Trust's Custodian. FDAS is 
a New York state limited liability trust \91\ that serves as bitcoin 
custodian to institutional and individual investors. The Custodian 
maintains a substantial portion of the private keys associated with the 
Trust's bitcoin in ``cold storage'' or similarly secure technology. 
Cold storage is a safeguarding method with multiple layers of 
protections and protocols, by which the private key(s) corresponding to 
the Trust's bitcoin is (are) generated and stored in an offline manner. 
Private keys are generated in offline computers that are not connected 
to the internet so that they are resistant to being hacked. Cold 
storage of private keys may involve keeping such keys on a non-
networked computer or electronic device or storing the public key and 
private keys on a storage device (for example, a USB thumb drive) or 
printed medium and deleting the keys from all computers.
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    \91\ New York state trust companies are subject to rigorous 
oversight similar to other types of entities, such as nationally 
chartered banking entities, that hold customer assets. Like national 
banks, they must obtain specific approval of their primary rgulator 
for the exercise of their fiduciary powers. Moreover, limited 
purpose trust companies engaged in the custody of digial assets are 
subject to even more stringent requirements than national banks 
which, following initial approval of trust powers, generally can 
exercise those powers broadly without further approval of the OCC. 
In contrast, NYDFS requires in their approval orders that limited 
purpose trust companies obtain separate approval for all material 
changes in business.
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    The Custodian may receive deposits of bitcoin but may not send 
bitcoin without use of the corresponding private keys. In order to send 
bitcoin when the private keys are kept in cold storage, either the 
private keys must be retrieved from cold storage and entered into a 
software program to sign the transaction, or the unsigned transaction 
must be sent to the ``cold'' server in which the private keys are held 
for signature by the private keys. At that point, the Custodian can 
transfer the bitcoin. The Trust's Transfer Agent will facilitate the 
settlement of Shares in response to the placement of creation orders 
and redemption orders from Authorized Participants. The Trust generally 
does not intend to hold cash or cash equivalents. However, there may be 
situations where the Trust will hold cash on a temporary basis. The 
Trust will enter into a cash custody agreement with an unaffiliated 
regulated bank as custodian of the Trust's cash and cash equivalents.
The Index
    The Index is designed to reflect the performance of bitcoin in U.S. 
dollars. The current exchange composition of the Index is Bitstamp, 
Coinbase, Gemini, itBit, Kraken, and LMAX Digital. The Index 
methodology was developed by Fidelity Product Services, LLC (the 
``Index Provider'') and is administered by the Fidelity Index 
Committee. Coin Metrics, Inc. is the third-party calculation agent for 
the Index.\92\
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    \92\ The Sponsor's affiliates have an owership interest in Coin 
Metrics, Inc.
---------------------------------------------------------------------------

    The Index is constructed using bitcoin price feeds from eligible 
bitcoin spot

[[Page 46279]]

markets and a volume-weighted median price (``VWMP'') methodology, 
calculated every 15 seconds based on VWMP spot market data over rolling 
5-minute increments to develop a bitcoin price composite. The Index 
market value is the volume-weighted median price of bitcoin in U.S. 
dollars over the previous five minutes, which is calculated by (1) 
ordering all individual transactions on eligible spot markets over the 
previous five minutes by price, and then (2) selecting the price 
associated with the 50th percentile of total volume. Using rolling 
five-minute segments means malicious actors would need to sustain 
efforts to manipulate the market over an extended period of time, or 
such malicious actors would need to replicate efforts multiple times 
across eligible bitcoin spot markets, potentially triggering review. 
This extended period also supports authorized participant activity by 
capturing volume over a longer time period, rather than forcing 
authorized participants to mark an individual close or auction. The use 
of a median price reduces the ability of outlier prices to impact the 
NAV, as it systematically excludes those prices from the NAV 
calculation. The use of a volume-weighted median (as opposed to a 
traditional median) serves as an additional protection against attempts 
to manipulate the NAV by executing a large number of low-dollar trades, 
because any manipulation attempt would have to involve a majority of 
global spot bitcoin volume in a three-minute window to have any 
influence on the NAV. Further, removing the highest and lowest prices 
further protects against attempts to manipulate the NAV, requiring bad 
actors to act on multiple eligible bitcoin spot markets at once to have 
any ability to influence the price.
Availability of Information
    In addition to the price transparency of the Index, the Trust will 
provide information regarding the Trust's bitcoin holdings as well as 
additional data regarding the Trust. The Trust will provide an Intraday 
Indicative Value (``IIV'') per Share updated every 15 seconds, as 
calculated by the Exchange or a third-party financial data provider 
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m. 
Eastern time). The IIV will be calculated by using the prior day's 
closing NAV per Share as a base and updating that value during Regular 
Trading Hours to reflect changes in the value of the Trust's bitcoin 
holdings during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price \93\ in relation to the NAV 
as of the time the NAV is calculated and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The value of the 
Index will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours.
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    \93\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the Consolidated Tape 
Association (``CTA'').
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index.
    Information relating to trading, including price and volume 
information, in bitcoin is available from major market data vendors and 
from the exchanges on which bitcoin are traded. Depth of book 
information is also available from bitcoin exchanges. The normal 
trading hours for bitcoin exchanges are 24 hours per day, 365 days per 
year.
Net Asset Value
    As described in the Registration Statement, for purposes of 
calculating the Trust's NAV per Share, the Trust's holdings of bitcoin 
will be valued using the same methodology as used to calculate the 
Index. NAV means the total assets of the Trust including, but not 
limited to, all bitcoin and cash, if any, less total liabilities of the 
Trust, each determined on the basis of generally accepted accounting 
principles. The NAV of the Trust is calculated by taking the fair 
market value of its total assets based on the volume-weighted median 
price of bitcoin used for the calculation of the Index, subtracting any 
liabilities (which include accrued expenses), and dividing that total 
by the total number of outstanding Shares. The Administrator calculates 
the NAV of the Trust once each Exchange trading day. The NAV for a 
normal trading day will be released after 4:00 p.m. Eastern time. 
Trading during the core trading session on the Exchange typically 
closes at 4:00 p.m. Eastern time. However, NAVs are not officially 
struck until later in the day (often by 5:30 p.m. Eastern time and 
almost always by 8:00 p.m. Eastern time). The pause between 4:00 p.m. 
Eastern time and 5:30 p.m. Eastern time (or later) provides an 
opportunity to algorithmically detect, flag, investigate, and correct 
unusual pricing should it occur.
Creation and Redemption of Shares
    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of Shares (a ``Creation Basket'') at the 
Trust's NAV. Authorized participants will deliver, or facilitate the 
delivery of, bitcoin to the Trust's account with the Custodian in 
exchange for Shares when they purchase Shares, and the Trust, through 
the Custodian, will deliver bitcoin to such authorized participants 
when they redeem Shares with the Trust. Authorized participants may 
then offer Shares to the public at prices that depend on various 
factors, including the supply and demand for Shares, the value of the 
Trust's assets, and market conditions at the time of a transaction. 
Shareholders who buy or sell Shares during the day from their broker 
may do so at a premium or discount relative to the NAV of the Shares of 
the Trust.
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by the time noted in the 
Authorized Participant Agreement or as provided separately to all 
Authorized Participants. The day on which an order is received is 
considered the purchase order date. The total deposit of bitcoin 
required is an amount of bitcoin that is in the same proportion to the 
total assets of the Trust, net of accrued expenses

[[Page 46280]]

and other liabilities, on the date the order to purchase is properly 
received, as the number of Shares to be created under the purchase 
order is in proportion to the total number of Shares outstanding on the 
date the order is received. Each night, the Sponsor will publish the 
amount of bitcoin that will be required in exchange for each creation 
order. The Administrator determines the required deposit for a given 
day by dividing the number of bitcoin held by the Trust as of the 
opening of business on that business day, adjusted for the amount of 
bitcoin constituting estimated accrued but unpaid fees and expenses of 
the Trust as of the opening of business on that business day, by the 
quotient of the number of Shares outstanding at the opening of business 
divided by the aggregation of Shares associated with a Creation Basket. 
The procedures by which an authorized participant can redeem one or 
more Creation Baskets mirror the procedures for the creation of 
Creation Baskets.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a 
trust that holds a specified commodity \94\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity.
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    \94\ For purposes of Rule 14.11(e)(4), the term community takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted abobe, the CFTC has opined that Bitcoin is a commodity 
as defined in Section 1a(9) of the Commodity Exchange Act. See 
Coinflip.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g. , Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) the extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a) the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information regarding 
trading in the Shares and Bitcoin Futures via ISG, from other exchanges 
who are members or affiliates of the ISG, or with which the Exchange

[[Page 46281]]

has entered into a comprehensive surveillance sharing agreement.\95\
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    \95\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) the procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares outside of Regular Trading Hours \96\ 
when an updated IIV will not be calculated or publicly disseminated; 
(v) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (vi) trading information.
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    \96\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \97\ in general and Section 6(b)(5) \98\ of the Act in 
particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78f.
    \98\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\99\ including Commodity-Based Trust Shares,\100\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\101\ and (ii) the requirement that an exchange proposal be designed, 
in general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the and, as described and discussed above, the 
Sponsor's analysis demonstrates that the Exchange has satisfied the 
requirements under the Act that the CME Bitcoin Futures Market (i) is a 
regulated market, (ii) has a comprehensive surveillance-sharing 
agreement with the Exchange; and (iii) satisfies the Commission's 
``significant market'' definition.'' In addition, the Exchange believes 
that this proposal is consistent with the requirements of Section 
6(b)(5) of the Act because this filing sufficiently demonstrates that 
the standard that has previously been articulated by the Commission 
applicable to Commodity-Based Trust Shares has been met as outlined 
below.
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    \99\ See Exchange Rule 14.11(f).
    \100\ Commodity-Based Trust Shares, as described in Exchange 
Rule 14.11(e)(4), are a type of Trust Issued Receipt.
    \101\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order for a proposal to list and trade a series of Commodity-
Based Trust Shares to be deemed consistent with the Act, the Commission 
requires that an exchange demonstrate that there is a comprehensive 
surveillance-sharing agreement in place \102\ with a regulated market 
of significant size. Both the Exchange and CME are members of ISG.\103\ 
As such, the only remaining issue to be addressed is whether the 
Bitcoin Futures market constitutes a market of significant size, which 
the Exchange believes that it does. The terms ``significant market'' 
and ``market of significant size'' include a market (or group of 
markets) as to which: (a) there is a reasonable likelihood that a 
person attempting to manipulate the ETP would also have to trade on 
that market to manipulate the ETP, so that a surveillance-sharing 
agreement would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\104\
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    \102\ As previously articulated by the Commission, ``The 
standard requires such surveillance-sharing agreements since ''they 
provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully 
investigate a manipulation if it were to occur.`` The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance- sharing agreement 
with markets trading underlying securities for the listing exchange 
to have the ability to obtain information necessary to detect, 
investigate, and deter fraud and market manipulation, as well as 
violations of exchange rules and applicable federal securities laws 
and rules. The hallmarks of a surveillance-sharing agreement are 
that the agreement provides for the sharing of information about 
market trading activity, clearing activity, and customer identity; 
that the parties to the agreement have reasonable ability to obtain 
access to and produce requested information; and that no existing 
rules, laws, or practices would impede one party to the agreement 
from obtaining this information from, or producing it to, the other 
party.'' The Commission has historically held that joint membership 
in ISG constitutes such a surveillance sharing agreement. See 
Wilshire Phoenix Disapproval.
    \103\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \104\ See Wilshire Phoenix Disapproval.
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    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the

[[Page 46282]]

requisite surveillance-sharing agreement.\105\
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    \105\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a ``cannot be 
manipulated'' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met. 
Id. at 37582.
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(a) Reasonable Likelihood That a Person Attempting To Manipulate the 
ETP Would Also Have To Trade on That Market To Manipulate the ETP
    Bitcoin Futures represent a growing influence on pricing in the 
spot bitcoin market as has been laid out above and in other proposals 
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is 
based on pricing from spot bitcoin markets. As noted above, the 
statement from the Teucrium Approval that ``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 proposed 
futures ETP by manipulating the price of CME bitcoin futures 
contracts.indirectly by trading outside of the CME bitcoin futures 
market,'' makes clear that the Commission believes that CME's 
surveillance can capture the effects of trading on the relevant spot 
markets on the pricing of Bitcoin Futures. While the Commission makes 
clear in the Teucrium Approval that the analysis only applies to the 
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin 
Futures as its only non-cash or cash equivalent holding, if CME's 
surveillance is sufficient to mitigate concerns related to trading in 
Bitcoin Futures for which the pricing is based directly on pricing from 
spot bitcoin markets, it's not clear how such a conclusion could apply 
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin 
ETPs.
    Additionally, a Bitcoin Futures ETF is actually potentially more 
susceptible to manipulation than a Spot Bitcoin ETP where the 
underlying trust offers only in-kind creation and redemption. 
Specifically, the pricing of Bitcoin Futures is based on prices from 
spot bitcoin markets, while shares of a Spot Bitcoin ETP would 
represent an interest in bitcoin directly and authorized participants 
for a Spot Bitcoin ETP would be able to source bitcoin from any 
exchange and create or redeem with the applicable trust regardless of 
the price of the underlying index. Potential manipulation of a Bitcoin 
Futures ETF would require manipulation on the spot markets on which the 
pricing for Bitcoin Futures are based while the in-kind creation and 
redemption process and fungibility of bitcoin means that a would be 
manipulator of a Spot Bitcoin ETP would need to manipulate the price 
across all bitcoin markets or risk simply providing arbitrage 
opportunities for authorized participants. Further to this point, this 
arbitrage opportunity also acts to reduce any incentives to manipulate 
the price of a Spot Bitcoin ETP because the underlying trust will 
create and redeem shares at set rates of bitcoin per share without 
regard to the price that the ETP is trading at in the secondary market 
or the price of the underlying index. As such, the Exchange believes 
that part (a) of the significant market test outlined above is 
satisfied and that common membership in ISG between the Exchange and 
CME would assist the listing exchange in detecting and deterring 
misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the Bitcoin Futures 
market or spot market for a number of reasons, including the in-kind 
creation and redemption process, the spot market arbitrage 
opportunities that such in-kind creation and redemption process 
creates, the significant volume in the Bitcoin Futures market, the size 
of bitcoin's market cap, and the significant liquidity available in the 
spot market. In addition to the Bitcoin Futures market data points 
cited above, the spot market for bitcoin is also very liquid. According 
to data from Skew, the cost to buy or sell $5 million worth of bitcoin 
averages roughly 48 basis points with a market impact of $139.08.\106\ 
Stated another way, a market participant could enter a market buy or 
sell order for $5 million of bitcoin and only move the market 0.48%. 
More strategic purchases or sales (such as using limit orders and 
executing through OTC bitcoin trade desks) would likely have less 
obvious impact on the market--which is consistent with MicroStrategy, 
Tesla, and Square being able to collectively purchase billions of 
dollars in bitcoin.
---------------------------------------------------------------------------

    \106\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase, FTX and Kraken during the one-year period ending 
May 2022.
---------------------------------------------------------------------------

    As such, the combination of the in-kind creation and redemption 
process, the Bitcoin Futures leading price discovery, the overall size 
of the bitcoin market, and the ability for market participants, 
including authorized participants creating and redeeming in-kind with 
the Trust, to buy or sell large amounts of bitcoin without significant 
market impact will help prevent the Shares from becoming the 
predominant force on pricing in either the bitcoin spot or Bitcoin 
Futures markets, satisfying part (b) of the test outlined above.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
    The Exchange also believes that reviewing this proposal through the 
lens of the Bitcoin Futures Approvals would also lead the Commission to 
approving this proposal. Previous disapproval orders have made clear 
that a market that constitutes a regulated market of significant size 
is generally a futures and/or options market based on the underlying 
reference asset rather than the spot commodity markets, which are often 
unregulated.\107\ The Exchange believes that the following excerpt from 
the Teucrium Approval is particular informative:
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    \107\ See Winklevoss Order at 37593, specifically footnote 202, 
which includes the language from numerous approval orders for which 
the underlying futures markets formed the basis for approving series 
of ETPs that hold physical metals, including gold, silver, 
palladium, platinum, and precious metals more broadly; and 37600, 
specifically where the Commission provides that ``when the spot 
market is unregulated--the requirement of preventing fraudulent and 
manipulative acts may possibly be satisfied by showing that the ETP 
listing market has entered into a surveillance-sharing agreement 
with a regulated market of significant size in derivatives related 
to the underlying asset.'' As noted above, the Exchange believes 
that these citations are particularly helpful in making clear that 
the spot market for a spot commodity ETP need not be ``regulated'' 
in order for a spot commodity ETP to be approved by the Commission, 
and in fact that it's been the common historical practice of the 
Commission to rely on such derivatives markets as the regulated 
market of significant size because such spot commodities markets are 
largely unregulated.

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus 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 proposed 
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

[[Page 46283]]

trading outside of the CME bitcoin futures market. As such, when the 
CME shares its surveillance information with Arca, the information 
would assist in detecting and deterring fraudulent or manipulative 
misconduct related to the non-cash assets held by the proposed 
ETP.\108\
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    \108\ See Teucrium Approval at 21679.

    Bitcoin Futures pricing is based on pricing from spot bitcoin 
markets. The statement from the Teucrium Approval that ``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 proposed futures ETP by manipulating the price of CME 
bitcoin futures contracts . . . indirectly by trading outside of the 
CME bitcoin futures market,'' makes clear that the Commission believes 
that CME's surveillance can capture the effects of trading on the 
relevant spot markets on the pricing of Bitcoin Futures. If CME is able 
to detect such attempts at manipulation in the complex and 
interconnected spot bitcoin market, how would such an ability to detect 
attempted manipulation and the utility in sharing that information with 
the listing exchange apply only to Bitcoin Futures ETFs and not Spot 
Bitcoin ETPs? Stated a different way, given that there is significant 
trading volume on numerous bitcoin exchanges that are not part of the 
CME CF Bitcoin Reference Rate and that arbitrage opportunities across 
bitcoin exchanges means that such trading volume will influence spot 
bitcoin prices across the market and, despite this, the Commission 
still believes that CME can detect attempted manipulation of the 
Bitcoin Futures through ``trading outside of the CME bitcoin futures 
market,'' it is clear that such ability would apply equally to both 
Bitcoin Futures ETFs and Spot Bitcoin ETPs. To take it a step further, 
such an ability would also seem to be a strong indication that the CME 
Bitcoin Futures market represents a regulated market of significant 
size. To be clear, the Exchange agrees with the Commission on this 
point (and the implications of their conclusions) and further notes 
that the pricing mechanism applicable to the Shares is similar to the 
CME CF Bitcoin Reference Rate.
Surveillance Sharing Agreement
    The Exchange is proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares. On June 21, 
2023, the Exchange reached an agreement on terms with Coinbase, Inc. 
(``Coinbase''), an operator of a United States-based spot trading 
platform for Bitcoin that represents a substantial portion of US-based 
and USD denominated Bitcoin trading,\109\ to enter into a surveillance-
sharing agreement (``Spot BTC SSA'') and executed an associated term 
sheet. Based on this agreement on terms, the Exchange and Coinbase will 
finalize and execute a definitive agreement that the parties expect to 
be executed prior to allowing trading of the Commodity-Based Trust 
Shares.
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    \109\ According to a Kaiko Research report dated June 26, 2023, 
Coinbase represented roughly 50% of exchange trading volume in USD-
BTC trading on a daily basis during May 2023.
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    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between the Exchange and Coinbase that is intended to 
supplement the Exchange's market surveillance program. The Spot BTC SSA 
is expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares.\110\ This 
means that the Exchange expects to receive market data for orders and 
trades from Coinbase, which it will utilize in surveillance of the 
trading of Commodity-Based Trust Shares. In addition, the Exchange can 
request further information from Coinbase related to spot bitcoin 
trading activity on the Coinbase exchange platform, if the Exchange 
determines that such information would be necessary to detect and 
investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.\111\
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    \110\ For additional information regarding ISG and the hallmarks 
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
    \111\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC 
and Cboe Clear Digital, LLC.
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In Kind Creation and Redemption
    Further, and consistent with prior points above, offering only in-
kind creation and redemption will also provide unique protections 
against potential attempts to manipulate the price of the Shares. While 
the Sponsor believes that the Benchmark which it uses to value the 
Trust's bitcoin is itself resistant to manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Benchmark significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new Shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
Shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\112\ When authorized participants are 
creating Shares with the Trust, they need to deliver a certain number 
of bitcoin per Share (regardless of the valuation used) and when 
they're redeeming, they can similarly expect to receive a certain 
number of bitcoin per Share. As such, even if the price used to value 
the Trust's bitcoin is manipulated (which the Sponsor believes that its 
methodology is resistant to), the ratio of bitcoin per Share does not 
change and the Trust will either accept (for creations) or distribute 
(for redemptions) the same number of bitcoin regardless of the value. 
This not only mitigates the risk associated with potential 
manipulation, but also discourages and disincentivizes manipulation of 
the Benchmark because there is little financial incentive to do so.
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    \112\ While the Benchmark will not be particularly important for 
the creation and redemption process, it will be used for calculating 
fees.
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(d) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to bitcoin through OTC Bitcoin Funds has grown into 
the tens of billions of dollars, including through Bitcoin Futures 
ETFs. With that growth, so too has grown the quantifiable investor 
protection issues to U.S. investors through roll costs for Bitcoin 
Futures ETFs and premium/discount volatility and management fees for 
OTC Bitcoin Funds. The Exchange believes that the concerns related to 
the prevention of fraudulent and manipulative acts and practices have 
been sufficiently addressed to be consistent with the Act and, to the 
extent that the Commission disagrees with that assertion, such concerns 
are now outweighed by investor protection concerns. As such, the 
Exchange believes that approving this proposal (and comparable 
proposals) provides the Commission with the opportunity to allow U.S. 
investors with access to bitcoin in a regulated and transparent 
exchange-traded vehicle that would act to limit risk to U.S. investors 
by: (i) reducing

[[Page 46284]]

premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in Bitcoin Futures ETFs and operating companies that are 
imperfect proxies for bitcoin exposure; and (iv) providing an 
alternative to custodying spot bitcoin.
Commodity-Based Trust Shares
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed 
bitcoin derivatives via the ISG, from other exchanges who are members 
or affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about bitcoin and will be available regarding the Trust and 
the Shares. In addition to the price transparency of the Benchmark, the 
Trust will provide information regarding the Trust's bitcoin holdings 
as well as additional data regarding the Trust. The Trust will provide 
an IIV per Share updated every 15 seconds, as calculated by the 
Exchange or a third-party financial data provider during the Exchange's 
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be 
calculated by using the prior day's closing NAV per Share as a base and 
updating that value during Regular Trading Hours to reflect changes in 
the value of the Trust's bitcoin holdings during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price in relation to the NAV as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The price of bitcoin 
will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours. 
Information about the Benchmark, including key elements of how the 
Benchmark is calculated, will be publicly available at www.mvis-indices.com/.
    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the CTA.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Benchmark. Information relating 
to trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
    In sum, the Exchange believes that this proposal is consistent with 
the requirements of Section 6(b)(5) of the Act, that this filing 
sufficiently demonstrates that the CME Bitcoin Futures market 
represents a regulated market of significant size, and that on the 
whole the manipulation concerns previously articulated by the 
Commission are sufficiently mitigated to the point that they are 
outweighed by investor protection issues that would be resolved by 
approving this proposal.
    The Exchange believes that the proposal is, in particular, designed 
to protect investors and the public interest. Premium and discount 
volatility, high fees, rolling costs, insufficient disclosures, and 
technical hurdles are putting U.S. investor money at risk on a daily 
basis that could potentially be eliminated through access to a Spot 
Bitcoin ETP. As such, the Exchange believes that this proposal acts to 
limit the risk to U.S. investors that are increasingly seeking exposure 
to bitcoin by providing direct, 1-for-1 exposure to bitcoin in a 
regulated, transparent, exchange-traded vehicle, specifically by: (i) 
reducing premium volatility; (ii) reducing management fees through 
meaningful competition; (iii) providing an alternative to Bitcoin 
Futures ETFs which will eliminate roll cost; (iv) reducing risks 
associated with investing in operating companies that are imperfect 
proxies for bitcoin exposure; and (v) providing an alternative to 
custodying spot bitcoin. Finally, the Exchange notes that in addition 
to all of the arguments herein which it believes sufficiently 
establishes the CME Bitcoin Futures market as a regulated market of 
significant size, it is logically inconsistent to find that the CME 
Bitcoin Futures market is a significant market as it relates to the CME 
Bitcoin Futures market, but not a significant market as it relates to 
the bitcoin spot market for the numerous reasons laid out above.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

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

[[Page 46285]]

listing venues, to the benefit of investors and the marketplace.

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

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

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 2, is consistent with the Act. 
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2023-044 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-CboeBZX-2023-044. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-CboeBZX-2023-044 and should 
be submitted on or before August 9, 2023.
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    \113\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\113\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-15267 Filed 7-18-23; 8:45 am]
 BILLING CODE 8011-01-P


