```

[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Notices]
[Pages 2297-2321]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00510]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99294; File No. SR-NYSEARCA-2023-44]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
of Amendment No. 2 to a Proposed Rule Change To List and Trade Shares 
of the Bitwise Bitcoin ETF Under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares)

January 8, 2024.
    On June 28, 2023, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares of the Bitwise Bitcoin ETF (f/k/a Bitwise Bitcoin 
ETP Trust) under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares). 
The proposed rule change was published for comment in the Federal 
Register on July 18, 2023.\3\ On August 31, 2023, pursuant to section 
19(b)(2) of the Act,\4\ the Commission designated a longer period 
within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ On September 25, 2023, the 
Exchange filed Amendment No. 1, which amended and replaced the proposed 
rule change in its entirety. On September 28, 2023, the Commission 
noticed Amendment No. 1 and instituted proceedings to determine whether 
to disapprove the proposed rule change, as modified by Amendment No. 
1.\6\ On January 5, 2024, the Exchange filed Amendment No. 2 to the 
proposed rule change as described in Items I and II below, which Items 
have been prepared by the Exchange. Amendment No. 2 amended and 
replaced the proposed rule change, as modified by Amendment No. 1, in 
its entirety. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 2, 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 97884 (July 12, 
2023), 88 FR 45947. Comments on the proposed rule change are 
available at: https://www.sec.gov/comments/sr-nysearca-2023-44/srnysearca202344.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 98268, 88 FR 61647 
(Sept. 7, 2023).
    \6\ See Securities Exchange Act Release No. 98607, 88 FR 68862 
(Oct. 4, 2023).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to list and trade shares of the Bitwise 
Bitcoin ETF under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares). This Amendment No. 2 to SR-NYSEArca-2023-44 replaces SR-
NYSEArca-2023-44 as originally filed and supersedes such filing in its 
entirety. The proposed rule change is available on the Exchange's 
website at www.nyse.com, at the principal office of the Exchange, and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of,

[[Page 2298]]

and basis for, the proposed rule change and discussed any comments it 
received on the proposed rule change. The text of those statements may 
be examined at the places specified in Item IV below. The Exchange has 
prepared summaries, set forth in sections A, B, and C below, of the 
most significant parts of such statements.

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

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the 
Bitwise Bitcoin ETF (the ``Trust''),\7\ under NYSE Arca Rule 8.201-E, 
which governs the listing and trading of Commodity-Based Trust 
Shares.\8\
---------------------------------------------------------------------------

    \7\ The Trust is a Delaware statutory trust that was formerly 
known as the Bitwise Bitcoin ETP Trust. On October 14, 2021, the 
Trust filed with the Commission an initial registration statement 
(the ``Registration Statement'') on Form S-1 under the Securities 
Act of 1933 (15 U.S.C. 77a). On October 25, 2023, the Trust filed 
Amendment No. 1 with the Commission on Form S-1. On December 4, 
2023, the Trust filed Amendment No. 2 with the Commission on Form S-
1. On December 29, 2023, the Trust filed Amendment No. 3 with the 
Commission on Form S-1. The description of the operation of the 
Trust herein is based, in part, on the most recent 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.
    \8\ Commodity-Based Trust Shares are securities issued by a 
trust that represents investors' discrete identifiable and undivided 
beneficial ownership interest in the commodities deposited into the 
trust.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust will not be 
registered as an investment company under the Investment Company Act of 
1940,\9\ and is not required to register thereunder. The Trust is not a 
commodity pool for purposes of the Commodity Exchange Act.\10\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 80a-1.
    \10\ 17 U.S.C. 1.
---------------------------------------------------------------------------

    The Exchange represents that the Shares satisfy the requirements of 
NYSE Arca Rule 8.201-E and thereby qualify for listing on the 
Exchange.\11\
---------------------------------------------------------------------------

    \11\ With respect to the application of Rule 10A-3 (17 CFR 
240.10A-3) under the Act, the Trust relies on the exemption 
contained in Rule 10A-3(c)(7).
---------------------------------------------------------------------------

Bitwise Bitcoin ETF
Operation of the Trust \12\
---------------------------------------------------------------------------

    \12\ The description of the operation of the Trust, the Shares 
and the bitcoin market contained herein are based, in part, on the 
Registration Statement. See note 4, supra.
---------------------------------------------------------------------------

    The Trust will issue the Shares which, according to the 
Registration Statement, represent units of undivided beneficial 
ownership of the Trust. The Trust is a Delaware statutory trust and 
will operate pursuant to a trust agreement (the ``Trust Agreement'') 
between Bitwise Investment Advisers, LLC (the ``Sponsor'' or 
``Bitwise'') and Delaware Trust Company, as the Trust's trustee (the 
``Trustee''). Coinbase Custody Trust Company, LLC will maintain custody 
of the Trust's bitcoin assets (the ``Bitcoin Custodian'').\13\ Bank of 
New York Mellon will be the custodian for the Trust's cash holdings (in 
such role, the ``Cash Custodian''), the administrator of the Trust (in 
such role, the ``Administrator''), and the transfer agent for the Trust 
(in such role, the ``Transfer Agent'').
---------------------------------------------------------------------------

    \13\ When capitalized, references to ``Bitcoin'' are to the 
Bitcoin network or the Bitcoin protocol. When lowercase, references 
to ``bitcoin'' are to the digital asset native to the Bitcoin 
network, which asset is the underlying commodity held by the Trust.
---------------------------------------------------------------------------

    According to the Registration Statement, the investment objective 
of the Trust is to seek to provide exposure to the value of bitcoin 
held by the Trust, less the expenses of the Trust's operations. In 
seeking to achieve its investment objective, the Trust will hold 
bitcoin and establish its Net Asset Value (``NAV'') at the end of every 
business day by reference to the CME CF Bitcoin Reference Rate--New 
York Variant (``CME US Reference Rate'').\14\
---------------------------------------------------------------------------

    \14\ The CME US Reference Rate is a daily reference rate of the 
US Dollar price of one bitcoin, calculated at 4:00 p.m. E.T. The CME 
US Reference Rate utilizes the same methodology as the CME CF 
Bitcoin Reference Rate (the ``CME UK Reference Rate''), which is 
calculated at 4:00 p.m. London time and was designed by the CME 
Group and Crypto Facilities Ltd to facilitate the development of 
financial products, including the cash settlement of bitcoin futures 
traded on the Chicago Mercantile Exchange (``CME''). Andrew Paine 
and William J. Knottenbelt, ``Analysis of the CME CF Bitcoin 
Reference Rate and CME CF Bitcoin Real Time Index,'' Imperial 
College Centre for Cryptocurrency Research and Engineering, November 
14, 2016, available at https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf.
---------------------------------------------------------------------------

    The Trust's only assets will be bitcoin and cash.\15\ The Trust 
does not seek to hold any non-bitcoin crypto assets and has expressly 
disclaimed ownership of any such assets in the event the Trust ever 
involuntarily comes into possession of such assets.\16\ The Trust will 
not use derivatives that may subject the Trust to counterparty and 
credit risks. The Trust will process creations and redemptions in cash. 
The Trust's only recurring ordinary expense is expected to be the 
Sponsor's unitary management fee (the ``Sponsor Fee''), which will 
accrue daily and will be payable in bitcoin monthly in arrears. The 
Administrator will calculate the Sponsor Fee on a daily basis by 
applying an annualized rate to the Trust's total bitcoin holdings, and 
the amount of bitcoin payable in respect of each daily accrual shall be 
determined by reference to the CME US Reference Rate. Financial 
institutions authorized to create and redeem Shares (each, an 
``Authorized Participant'') will deliver, or cause to be delivered, 
cash in exchange for Shares of the Trust, and the Trust will deliver 
cash to Authorized Participants when those Authorized Participants 
redeem Shares of the Trust.
---------------------------------------------------------------------------

    \15\ The Trust conducts creations and redemptions of its Shares 
for cash. Authorized Participants will deliver cash to the Cash 
Custodian pursuant to creation orders for Shares and the Cash 
Custodian will hold such cash until such time as it can be converted 
to bitcoin, which the Trust intends to do on the same business day 
in which such cash is received by the Cash Custodian. Additionally, 
the Trust will sell bitcoin in exchange for cash pursuant to 
redemption orders of its Shares. In connection with such sales, an 
approved Bitcoin Trading Counterparty (defined below) will send cash 
to the Cash Custodian. The Cash Custodian will hold such cash until 
it can be distributed to the redeeming Authorized Participant, which 
it intends to do on the same business in which it is received. In 
connection with the purchases and sales of bitcoin pursuant to its 
creation and redemption activity, it is possible that the Trust may 
retain de minimis amounts of cash as a result of rounding 
differences. The Trust may also initially hold small amounts of cash 
to initiate Trust operations in the immediate aftermath of its 
Registration Statement being declared effective. Lastly, the Trust 
may also sell bitcoin and temporarily hold cash as part of a 
liquidation of the Trust or to pay certain extraordinary expenses 
not assumed by the Sponsor. Under the Trust Agreement, the Sponsor 
has agreed to assume the normal operating expenses of the Trust, 
subject to certain limitations. For example, the Trust will bear any 
indemnification or litigation liabilities as extraordinary expenses. 
In any event, in the ongoing course of business, the amounts of cash 
retained by the Trust are not expected to constitute a material 
portion of the Trust's holdings.
    \16\ The Trust may, from time to time, passively receive, by 
virtue of holding bitcoin, certain additional digital assets (``IR 
Assets'') or rights to receive IR Assets (``Incidental Rights'') 
through a fork of the Blockchain or an airdrop of assets. It will 
not seek to acquire such IR Assets or Incidental Rights. Pursuant to 
the terms of the Trust Agreement, the Trust has disclaimed ownership 
in any such IR Assets and/or Incidental Rights to make clear that 
such assets are not and shall never be considered assets of the 
Trust and will not be taken into account for purposes of determining 
the Trust's NAV or NAV per Share.
---------------------------------------------------------------------------

Bitcoin, Bitcoin Market, Bitcoin Trading Platforms and Regulation of 
Bitcoin
    The following sections, drawn from the Registration Statement, 
describe bitcoin, including the historical development of bitcoin and 
the Bitcoin network, how a person holds bitcoin, how to use bitcoin in 
transactions, the ``exchange'' market where bitcoin can be bought, held 
and sold, and the bitcoin ``over-the-counter'' (``OTC'') market.
Bitcoin
    Bitcoin was first described in a white paper released in 2008 and 
published under the name ``Satoshi Nakamoto.'' The protocol underlying 
Bitcoin was

[[Page 2299]]

subsequently released in 2009 as open source software and currently 
operates on a worldwide network of computers.
    The Bitcoin network utilizes a digital asset known as ``bitcoin,'' 
which can be transferred among parties via the internet. Unlike other 
means of electronic payments such as credit card transactions, one of 
the advantages of bitcoin is that it can be transferred without the use 
of a central administrator or clearing agency. As a central party is 
not necessary to administer bitcoin transactions or maintain the 
bitcoin ledger, the term decentralized is often used in descriptions of 
bitcoin. Unless it is using a third party service provider, a party 
transacting in bitcoin is not afforded some of the protections that may 
be offered by intermediaries.
    The first step in using the Bitcoin network for transactions is to 
download specialized software referred to as a ``bitcoin wallet.'' A 
user's bitcoin wallet can run on a computer or smartphone, and can be 
used both to send and to receive bitcoin. Within a bitcoin wallet, a 
user can generate one or more unique ``bitcoin addresses,'' which are 
conceptually similar to bank account numbers. After establishing a 
bitcoin address, a user can send or receive bitcoin from his or her 
bitcoin address to another user's bitcoin address. Sending bitcoin from 
one bitcoin address to another is similar in concept to sending a bank 
wire from one person's bank account to another person's bank account; 
however, such transactions are not managed by an intermediary and 
erroneous transactions generally may not be reversed or remedied once 
sent.
    The amount of bitcoin associated with each bitcoin address, as well 
as each bitcoin transaction to or from such bitcoin address, is 
transparently reflected in the Bitcoin network's distributed ledger 
(``Blockchain'') and can be viewed by websites that operate as 
``Blockchain explorers.'' Copies of the Blockchain exist on thousands 
of computers on the Bitcoin network throughout the internet. A user's 
bitcoin wallet will either contain a copy of the Blockchain or be able 
to connect with another computer that holds a copy of the Blockchain. 
The innovative design of the Bitcoin network protocol allows each 
Bitcoin user to trust that their copy of the Blockchain will generally 
be updated consistent with each other user's copy.
    When a Bitcoin user wishes to transfer bitcoin to another user, the 
sender must first request a Bitcoin address from the recipient. The 
sender then uses his or her Bitcoin wallet software to create a 
proposed transaction that is confirmed and settles when included in the 
Blockchain. The transaction would reduce the amount of bitcoin 
allocated to the sender's address and increase the amount allocated to 
the recipient's address, in each case by the amount of bitcoin desired 
to be transferred. The transaction is completely digital in nature, 
similar to a file on a computer, and it can be sent to other computers 
participating in the Bitcoin network; however, the use of cryptographic 
verification is believed to prevent the ability to duplicate or 
counterfeit bitcoin.
Bitcoin Protocol
    The Bitcoin protocol is built using open source software allowing 
for any developer to review the underlying code and suggest changes. 
There is no official company or group responsible for making 
modifications to Bitcoin. There are, however, a number of individual 
developers that regularly contribute to the reference software known as 
``Bitcoin Core,'' a specific distribution of Bitcoin software that 
provides the de-facto standard for the Bitcoin protocol.
    Significant changes to the Bitcoin protocol are typically 
accomplished through a so-called ``Bitcoin Improvement Proposal'' or 
BIP. Such proposals are posted on websites, and the proposals explain 
technical requirements for the protocol change as well as reasons why 
the change should be accepted by users. Because Bitcoin has no central 
authority, updating the reference software's Bitcoin protocol will not 
immediately change the Bitcoin network's operations. Instead, the 
implementation of a change is achieved by users (including transaction 
validators known as ``miners'') downloading and running the updated 
versions of Bitcoin Core or other Bitcoin software that abides by the 
new Bitcoin protocol. Users and miners must accept any changes made to 
the Bitcoin source code by downloading a version of their Bitcoin 
software that incorporates the proposed modification of the Bitcoin 
network's source code. A modification of the Bitcoin network's source 
code or protocol is only effective with respect to those Bitcoin users 
and miners who download it. If an incompatible modification is accepted 
by a less than overwhelming percentage of users and miners, a division 
in the Bitcoin network will occur such that one network will run the 
pre-modification source code and the other network will run the 
modified source code. Such a division is known as a ``fork'' in the 
Bitcoin network.
Bitcoin Transactions
    A bitcoin transaction is similar in concept to an irreversible 
digital check. The transaction contains the sender's bitcoin address, 
the recipient's bitcoin address, the amount of bitcoin to be sent, a 
transaction fee and the sender's digital signature. Bitcoin 
transactions are secured by cryptography known as ``public-private key 
cryptography,'' represented by the bitcoin addresses and digital 
signature in a transaction's data file. Each Bitcoin network address, 
or wallet, is associated with a unique ``public key'' and ``private 
key'' pair, both of which are lengthy alphanumeric codes, derived 
together and possessing a unique relationship.
    The use of key pairs is a cornerstone of the Bitcoin network 
technology. This is because the use of a private key is the only 
mechanism by which a bitcoin transaction can be signed. If a private 
key is lost, the corresponding bitcoin is thereafter permanently non-
transferable. Moreover, the theft of a private key provides the thief 
immediate and unfettered access to the corresponding bitcoin. Bitcoin 
users must therefore understand that in this regard, bitcoin is similar 
to cash: that is, the person or entity in control of the private key 
corresponding to a particular quantity of bitcoin has de facto control 
of the bitcoin.
    The public key is visible to the public and analogous to the 
Bitcoin network address. The private key is a secret and is used to 
digitally sign a transaction in a way that proves the transaction has 
been signed by the holder of the public-private key pair, and without 
having to reveal the private key. A user's private key must be kept 
safe in accordance with appropriate controls and procedures to ensure 
it is used only for legitimate and intended transactions. If an 
unauthorized third person learns of a user's private key, that third 
person could apply the user's digital signature without authorization 
and send the user's bitcoin to their or another bitcoin address, 
thereby stealing the user's bitcoin. Similarly, if a user loses his 
private key and cannot restore such access (e.g., through a backup), 
the user may permanently lose access to the bitcoin associated with 
that private key and bitcoin address.
    To prevent the possibility of double-spending of bitcoin, each 
validated transaction is recorded, time stamped and publicly displayed 
in a ``block'' in the Blockchain, which is publicly available. Thus, 
the Bitcoin network provides confirmation against double-spending by 
memorializing every transaction in the Blockchain, which is

[[Page 2300]]

publicly accessible and downloaded in part or in whole by all users of 
the Bitcoin network software program. Any user may validate, through 
their Bitcoin wallet or a Blockchain explorer, that each transaction in 
the Bitcoin network was authorized by the holder of the applicable 
private key, and Bitcoin network mining software consistent with 
reference software requirements validates each such transaction before 
including it in the Blockchain. This cryptographic security ensures 
that bitcoin transactions may not be counterfeited, although it does 
not protect against the ``real world'' theft or coercion of use of a 
Bitcoin user's private key, including the hacking of a Bitcoin user's 
computer or a service provider's systems.
    A Bitcoin transaction between two parties is recorded if included 
in a valid block added to the Blockchain, when that block is accepted 
as valid through consensus formation among Bitcoin network 
participants. A block is validated by confirming the cryptographic hash 
value included in the block's data and by the block's addition to the 
longest confirmed Blockchain on the Bitcoin network. For a transaction, 
inclusion in a block in the Blockchain constitutes a ``confirmation'' 
of validity. As each block contains a reference to the immediately 
preceding block, additional blocks appended to and incorporated into 
the Blockchain constitute additional confirmations of the transactions 
in such prior blocks, and a transaction included in a block for the 
first time is confirmed once against double-spending. This layered 
confirmation process makes changing historical blocks (and reversing 
transactions) exponentially more difficult the further back one goes in 
the Blockchain.
    The process by which bitcoin are created and bitcoin transactions 
are verified is called ``mining.'' To begin mining, a user, or 
``miner,'' can download and run a mining ``client,'' which, like 
regular Bitcoin network software programs, turns the user's computer 
into a ``node'' on the Bitcoin network, and in this case has the 
ability to validate transactions and add new blocks of transactions to 
the Blockchain.
    Miners, through the use of the bitcoin software program, engage in 
a set of prescribed, complex mathematical calculations in order to 
verify transactions and compete for the right to add a block of 
verified transactions to the Blockchain and thereby confirm bitcoin 
transactions included in that block's data. The miner who successfully 
``solves'' the complex mathematical calculations has the right to add a 
block of transactions to the Blockchain and is then rewarded by a grant 
of bitcoin, known as a ``coinbase,'' plus any transaction fees paid for 
the transactions included in such block. Bitcoin is created and 
allocated by the Bitcoin network protocol and distributed through 
mining, subject to a strict, well-known issuance schedule. The supply 
of bitcoin is programmatically limited to 21 million bitcoin in total. 
As of November 28, 2023, approximately 19,555,000 bitcoin had been 
mined.
    Confirmed and validated bitcoin transactions are recorded in blocks 
added to the Blockchain. Each block contains the details of some or all 
of the most recent transactions that are not memorialized in prior 
blocks, as well as a record of the award of bitcoin to the miner who 
added the new block. Each unique block can only be solved and added to 
the Blockchain by one miner, therefore, all individual miners and 
mining pools on the Bitcoin network must engage in a competitive 
process of constantly increasing their computing power to improve their 
likelihood of solving for new blocks. As more miners join the Bitcoin 
network and its processing power increases, the Bitcoin network adjusts 
the complexity of a block-solving equation to maintain a predetermined 
pace of adding a new block to the Blockchain approximately every ten 
minutes.
The Bitcoin Market and Bitcoin Trading Platforms
    In addition to using bitcoin to engage in transactions, investors 
may purchase and sell bitcoin to speculate as to the value of bitcoin 
in the bitcoin market, or as a long-term investment to diversify their 
portfolio. The value of bitcoin within the market is determined, in 
part, by (1) the supply of and demand for bitcoin in the bitcoin 
market, (2) market expectations for the expansion of investor interest 
in bitcoin and the adoption of bitcoin by users, (3) the number of 
merchants that accept bitcoin as a form of payment, and (4) the volume 
of private end-user-to-end-user transactions.
    Although the value of bitcoin is determined by the value that two 
transacting market participants place on bitcoin through their 
transaction, the most common means of determining a reference value is 
by surveying one or more trading platforms where secondary markets for 
bitcoin exist. The most prominent bitcoin trading platforms are often 
referred to as ``exchanges,'' although they neither report trade 
information nor are they regulated in the same way as a national 
securities exchange. As such, there is some difference in the form, 
transparency and reliability of trading data from bitcoin trading 
platforms. Bitcoin data is available from these trading platforms with 
publicly disclosed valuations for each executed trade, measured against 
a fiat currency such as the US Dollar or Euro, or against another 
digital asset (for example, bitcoin trades against the US Dollar are 
reflected in the ``USD-BTC Pair'').
    Currently, there are many bitcoin trading platforms operating 
worldwide and trading platforms represent a substantial percentage of 
bitcoin buying and selling activity, and, therefore, provide large data 
sets for the market valuation of bitcoin. A bitcoin trading platform 
provides investors with a way to purchase and sell bitcoin, similar to 
stock exchanges like the New York Stock Exchange or NASDAQ, which 
provide ways for investors to buy stocks and bonds in the so-called 
``secondary market.'' Unlike stock exchanges, which are regulated to 
monitor securities trading activity, bitcoin trading platforms are 
largely regulated as money services businesses (or a foreign regulatory 
equivalent) and are required to monitor for and detect money-laundering 
and other illicit financing activities that may take place on their 
platform. Bitcoin trading platforms operate websites designed to permit 
investors to open accounts with the trading platform and then purchase 
and sell bitcoin.
    As with conventional stock exchanges, an investor opening a trading 
account and wishing to transact at a bitcoin trading platform must 
deposit an accepted government-issued currency into their account, or a 
previously acquired digital asset. The process of establishing an 
account with a bitcoin trading platform and trading bitcoin is 
different from, and should not be confused with, the process of users 
sending bitcoin from one bitcoin address to another bitcoin address, 
such as to pay for goods and services. This latter process is an 
activity that occurs wholly within the confines of the Bitcoin network, 
while the former is an activity that occurs largely on private websites 
and databases owned by the trading platform.
    In addition to the bitcoin trading platforms that provide spot 
markets for bitcoin, an OTC trading market has emerged for digital 
assets. The bitcoin OTC market demonstrates flexibility in terms of 
quotes, price, size, and other factors. The OTC market has no formal 
structure and no open-outcry meeting place, and typically involves 
bilateral agreements on a principal-to-principal

[[Page 2301]]

basis. Parties engaging in OTC transactions will agree upon a price--
often via phone, email, or chat--and then one of the two parties will 
initiate the transaction. For example, a seller of bitcoin could 
initiate the transaction by sending the bitcoin to the buyer's bitcoin 
address. The buyer would then wire US Dollars to the seller's bank 
account. OTC trading tends to occur in large blocks of bitcoin. All 
risks and issues related to creditworthiness are between the parties 
directly involved in the transaction. OTC market participants include 
institutional entities, such as hedge funds, family offices, private 
wealth managers, high-net-worth individuals that trade bitcoin on a 
proprietary basis, and brokers that offer two-sided liquidity for 
bitcoin.
    Beyond the spot bitcoin trading platforms and the OTC market, a 
number of unregulated bitcoin derivatives trading platforms exist that 
offer traders the ability to gain leveraged and/or short exposure to 
the price of bitcoin through perpetual futures, quarterly futures, and 
other derivative contracts.
    Finally, the trading of regulated bitcoin futures contracts 
launched on the CME in December 2017.\17\ A further discussion of the 
CME bitcoin futures market (``CME Market'') is included in the section 
entitled ``The CME Bitcoin Futures Market,'' below.
---------------------------------------------------------------------------

    \17\ See note 14, infra.
---------------------------------------------------------------------------

The CME Bitcoin Futures Market
    The CME Group announced the planned launch of bitcoin futures on 
October 31, 2017. Trading began on December 17, 2017.\18\ Each contract 
represents five bitcoin and is based on the CME CF Bitcoin Reference 
Rate. The contracts trade and settle like other cash settled commodity 
futures contracts.
---------------------------------------------------------------------------

    \18\ See ``CME Group Announces Launch of Bitcoin Futures,'' 
October 31, 2017, available at https://www.cmegroup.com/media-room/press-releases/2017/10/31/cme_group_announceslaunchofbitcoinfutures.html. At the same time as 
the launch of the CME Market, the Cboe Futures Exchange, LLC 
announced and subsequently launched Cboe bitcoin futures. See ``CFE 
to Commence Trading in Cboe Bitcoin (USD) Futures Soon,'' December 
01, 2017, available at cdn.cboe.com/resources/release_notes/2017/Cboe-Bitcoin-USD-Futures-Launch-Notification.pdf. Each future was 
cash settled, with the CME Market tracking the CME UK Reference Rate 
and the Cboe bitcoin futures tracking a bitcoin trading platform 
daily auction price. The Cboe Futures Exchange, LLC subsequently 
discontinued its bitcoin futures market effective June 2019. ``Cboe 
put the brakes on bitcoin futures,'' March 15, 2019, available at 
https://www.reuters.com/article/us-cboe-bitcoin/cboe-puts-the-brakes-on-bitcoin-futures-idUSKCN1QW261. The Trust uses the CME US 
Reference Rate to calculate its NAV.
---------------------------------------------------------------------------

    Nearly every measurable metric related to bitcoin futures has 
trended up since launch. For example, there were 264,323 bitcoin 
futures contracts traded in June 2023 (approximately $39.8 billion) 
compared to 267,495 ($25.1 billion) contracts, 182,369 contracts ($31.7 
billion), 131,419 contracts ($6.0 billion), and 167,362 contracts ($9.8 
billion) traded in June 2022, June 2021, June 2020, and June 2019, 
respectively.\19\
---------------------------------------------------------------------------

    \19\ Data from CME Volume and Average Daily Volume Reports, 
available at https://www.cmegroup.com/market-data/volume-open-interest.html#volumeTotals.
[GRAPHIC] [TIFF OMITTED] TN12JA24.000

    Open interest was 18,264 bitcoin futures contracts in June 2023 
(approximately $2.8 billion) compared to 14,108 contracts ($1.3 
billion), 6,817 contracts ($1.2 billion), 7,675 contracts ($0.4 
billion), and 5,991 contracts ($0.4 billion) in June 2022, June 2021, 
June 2020, and June 2019, respectively.\20\
---------------------------------------------------------------------------

    \20\ Data from CME Open Interest Reports, available at https://www.cmegroup.com/market-data/volume-open-interest.html#openInterestTools.

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

[[Page 2302]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.001

    The number of large open interest holders \21\ has increased as 
well, even in the face of heightened bitcoin price volatility, as 
demonstrated in the figure that follows.
---------------------------------------------------------------------------

    \21\ A large open interest holder in Bitcoin Futures is an 
entity that holds at least 25 contracts, which is the equivalent of 
125 bitcoin. At a price of approximately $30,705.00 per bitcoin on 
6/27/2023, more than 120 firms had outstanding positions of greater 
than $3.83 million in Bitcoin Futures. Data from The Block, 
available at https://www.theblock.co/data/crypto-markets/cme-cots/large-open-interest-holders-of-cme-bitcoin-futures.
[GRAPHIC] [TIFF OMITTED] TN12JA24.002

[[Page 2303]]

    The Commission has previously recognized that the CME bitcoin 
futures market qualifies as a regulated market \22\ and that common 
membership between a listing exchange and a futures market such as the 
CME in the Intermarket Surveillance Group (``ISG'') functions as ``the 
equivalent of a comprehensive surveillance sharing agreement.'' \23\
---------------------------------------------------------------------------

    \22\ See Bitwise Order, 84 FR at 55410, n. 456 (``the Commission 
recognizes that the CFTC comprehensively regulates CME''). See also 
Winklevoss Order, 83 FR at 37594 & at note 202; GraniteShares Order 
83 FR at 43929; and USBT Order, 85 FR at 12597.
    \23\ See Bitwise Order, 84 FR at 55410, n.456. A list of the 
current ISG members is available at https://www.isgportal.org.
---------------------------------------------------------------------------

Valuation of the Trust's Bitcoin
The CME US Reference Rate, CME UK Reference Rate and CME Bitcoin Real 
Time Price
    According to the Registration Statement, the CME US Reference Rate 
was designed to provide a daily, 4:00 p.m. Eastern Time (``E.T.'') 
reference rate of the U.S. dollar price of one bitcoin that may be used 
to develop financial products. The CME US Reference Rate uses 
materially the same methodology as the CME CF Bitcoin Reference Rate 
(the ``CME UK Reference Rate''), which was designed by the CME Group 
and CF Benchmarks Ltd. to facilitate the cash settlement of bitcoin 
futures traded on the CME Market. The only material difference between 
the CME US Reference Rate and CME UK Reference Rate is that the CME UK 
Reference Rate measures the U.S. dollar price of one bitcoin as of 4:00 
p.m. London time and the CME US Reference Rate measures the U.S. dollar 
price of one bitcoin as of 4:00 p.m. E.T. Both the CME US Reference 
Rate and CME UK Reference Rate are calculated once per day based on the 
methodology set forth below and applying data from constituent trading 
platforms (the ``Constituent Platforms''). The CME US Reference Rate 
was introduced on February 28, 2022, and is based on materially the 
same methodology (except calculation time) as the CME UK Reference 
Rate, which was first introduced on November 14, 2016. Although the CME 
UK Reference Rate has a longer history and is used to settle bitcoin 
futures on the CME, the Trust determined to utilize the CME US 
Reference Rate to establish the NAV because the CME US Reference Rate 
is calculated as of the same time as the NAV and is based on the same 
methodology and data sources as the CME UK Reference Rate.
    The CME Group and CF Benchmarks Ltd. also design and administer a 
continuous real-time bitcoin price index using data from the 
Constituent Platforms (the ``CME Bitcoin Real Time Price''), which is 
published by the CME Group.
    The CME US Reference Rate, CME UK Reference Rate and CME Bitcoin 
Real Time Price are administered by CF Benchmarks Ltd., with the 
selection of Constituent Platforms performed by an oversight 
committee.\24\ A trading platform is eligible to be selected as a 
Constituent Platform if it facilitates spot trading of bitcoin against 
the USD-BTC Pair and makes trade data and order data available through 
an Automatic Programming Interface with sufficient reliability, detail 
and timeliness. Additional initial and continuing eligibility 
requirements apply to the Constituent Platforms.
---------------------------------------------------------------------------

    \24\ This summary does not represent a complete description of 
the CME US Reference Rate, the CME UK Reference Rate and CME Bitcoin 
Real Time Price. Additional information on administration and 
methodologies, may be found at CF Benchmarks' website, available at 
https://www.cfbenchmarks.com/data/indices/BRRNY, https://www.cfbenchmarks.com/indices/BRR, and https://www.cfbenchmarks.com/indices/BRTI. The CME US Reference Rate, the CME UK Reference Rate 
and CME Bitcoin Real Time Price are registered benchmarks under the 
European Benchmarks Regulation.
---------------------------------------------------------------------------

    Each of the CME US Reference Rate, which has been calculated and 
published since February 2022, and CME UK Reference Rate, which has 
been calculated and published since November 2016, aggregates during a 
calculation window the trade flow of several spot bitcoin trading 
platforms into the U.S. dollar price of one bitcoin as of their 
respective calculation time. Specifically, the CME US Reference Rate is 
calculated based on the ``Relevant Transactions'' (as defined below) of 
each of its Constituent Platforms, which are currently Bitstamp, 
Coinbase, Gemini, itBit, Kraken and LMAX, as follows:

    1. All Relevant Transactions are added to a joint list, 
recording the time of execution, trade price and size for each 
transaction.
    2. The list is partitioned by timestamp into 12 equally-sized 
time intervals of five minute length.
    3. For each partition separately, the volume-weighted median 
trade price is calculated from the trade prices and sizes of all 
Relevant Transactions across all Constituent Platforms. A volume-
weighted median differs from a standard median in that a weighting 
factor, in this case trade size, is factored into the calculation.
    4. The CME US Reference Rate or CME UK Reference Rate, as 
applicable, is then determined by the equally-weighted average of 
the volume-weighted medians of all partitions.

    The CME Bitcoin Real Time Price uses similar data sources, but is 
calculated once per second based on the weighted mid-price-volume 
curve, which is a measure of the active bid and ask volume present on a 
Constituent Platform's order book.
    The CME Bitcoin Real Time Price uses similar data sources, but is 
calculated once per second based on the weighted mid-price-volume 
curve, which is a measure of the active bid and ask volume present on a 
Constituent Platform's order book.
    The CME US Reference Rate, CME UK Reference Rate, and CME Bitcoin 
Real Time Price do not include any bitcoin futures prices in their 
respective methodologies. A ``Relevant Transaction'' is any 
``cryptocurrency versus legal tender spot trade that occurs during the 
TWAP [Time Weighted Average Price] Period'' on a Constituent Platform 
in the USD-BTC Pair that is reported and disseminated by Crypto 
Facilities Ltd., as calculation agent for the CME US Reference Rate, 
CME UK Reference Rate and CME Bitcoin Real Time Price.
Net Asset Value
    Under normal circumstances, the Trust's only asset will be bitcoin 
and, under limited circumstances, cash. The Trust's NAV and NAV per 
Share will be determined by the Administrator once each Exchange 
trading day as of 4:00 p.m. E.T., or as soon thereafter as practicable. 
The Administrator will calculate the NAV by multiplying the number of 
bitcoin held by the Trust by the CME US Reference Rate for such day, 
adding any additional receivables and subtracting the accrued but 
unpaid liabilities of the Trust. The NAV per Share is calculated by 
dividing the NAV by the number of Shares then outstanding. The 
Administrator will determine the price of the Trust's bitcoin by 
reference to the CME US Reference Rate, which is published and 
calculated as set forth above.
Intraday Trust Value
    One or more major market data vendors will provide an intraday 
trust value (``ITV'') updated every 15 seconds each trading day as 
calculated by the Exchange or a third party financial data provider 
during the Exchange's Core Trading Session (9:30 a.m. to 4:00 p.m., 
E.T.). The ITV will be calculated throughout the trading day by using 
the prior day's holdings at the close of business and the most recently 
reported price level of the CME Bitcoin Real Time Price as reported by 
Bloomberg, L.P. or another reporting service, or another price of 
bitcoin derived from updated bids and offers indicative of the spot 
price of bitcoin. The ITV will be

[[Page 2304]]

widely disseminated by one or more major market data vendors during the 
NYSE Arca Core Trading Session.
Creation and Redemption of Shares
    The Trust creates and redeems Shares from time to time, but only in 
one or more Creation Units, which will initially consist of at least 
10,000 Shares, but may be subject to change (``Creation Unit''). A 
Creation Unit is only made in exchange for delivery to the Trust or the 
distribution by the Trust of an amount of cash, equivalent to the 
amount of bitcoin represented by the Creation Unit being created or 
redeemed, the amount of which is representative of the combined NAV of 
the number of Shares included in the Creation Units being created or 
redeemed determined as of 4:00 p.m. E.T. on the day the order to create 
or redeem Creation Units is properly received. Except when aggregated 
in Creation Units or under extraordinary circumstances permitted under 
the Trust Agreement, the Shares are not redeemable securities.
    Authorized Participants are the only persons that may place orders 
to create and redeem Creation Units. Authorized Participants must be 
(1) registered broker-dealers or other securities market participants, 
such as banks and other financial institutions, that are not required 
to register as broker-dealers to engage in securities transactions 
described below, and (2) Depository Trust Company (``DTC'') 
Participants. To become an Authorized Participant, a person must enter 
into an Authorized Participant Agreement with the Trust and/or the 
Trust's marketing agent (the ``Marketing Agent'').
    According to the Registration Statement, when purchasing or selling 
bitcoin in response to the purchase of Creation Units or the redemption 
of Creation Units, which will be processed in cash, the Trust would do 
so pursuant to either (1) a ``Trust-Directed Trade Model,'' or (2) an 
``Agent Execution Model,'' which are each described in more detail 
below.
    The Trust intends to utilize the Trust-Directed Trade Model for all 
purchases and sales of bitcoin and would only utilize the Agent 
Execution Model in the event that no Bitcoin Trading Counterparty is 
able to effectuate the Trust's purchase or sale of bitcoin. Under the 
Trust-Directed Trade Model, in connection with receipt of a purchase 
order or redemption order, the Sponsor, on behalf of the Trust, would 
be responsible for acquiring bitcoin from an approved Bitcoin Trading 
Counterparty in an amount equal to the Basket Amount. When seeking to 
purchase bitcoin on behalf of the Trust, the Sponsor will seek to 
purchase bitcoin at commercially reasonable price and terms from any of 
the approved Bitcoin Trading Counterparties.\25\ Once agreed upon, the 
transaction will generally occur on an ``over-the-counter'' basis.
---------------------------------------------------------------------------

    \25\ The Sponsor will maintain ownership and control of bitcoin 
in a manner consistent with good delivery requirements for spot 
commodity transactions.
---------------------------------------------------------------------------

    Whether utilizing the Trust-Directed Trade Model or the Agent 
Execution Model, the Authorized Participants will deliver only cash to 
create shares and will receive only cash when redeeming Shares. 
Further, Authorized Participants will not directly or indirectly 
purchase, hold, deliver, or receive bitcoin as part of the creation or 
redemption process or otherwise direct the trust or a third party with 
respect to purchasing, holding, delivering, or receiving bitcoin as 
part of the creation or redemption process. Additionally, under both 
the Trust-Directed Trade Model or the Agent Execution Model, the Trust 
will create Shares by receiving bitcoin from a third party that is not 
the Authorized Participant and is not affiliated with the Sponsor or 
the Trust, and the Trust--not the Authorized Participant--is 
responsible for selecting the third party to deliver the bitcoin. The 
third party will not be acting as an agent of the Authorized 
Participant with respect to the delivery of the bitcoin to the Trust or 
acting at the direction of the Authorized Participant with respect to 
the delivery of the bitcoin to the Trust. Additionally, the Trust will 
redeem Shares by delivering bitcoin to a third party that is not the 
Authorized Participant and is not affiliated with the Sponsor or the 
Trust, and the Trust--not the Authorized Participant--is responsible 
for selecting the third party to receive the bitcoin. Finally, the 
third party will not be acting as an agent of the Authorized 
Participant with respect to the receipt of the bitcoin from the Trust 
or acting at the direction of the Authorized Participant with respect 
to the receipt of the bitcoin from the Trust.
Acquiring and Selling Bitcoin Pursuant to Creation and Redemption of 
Shares Under the Trust-Directed Model
    Under the Trust-Directed Trade Model and as set forth in the 
Registration Statement, on any business day, an Authorized Participant 
may create Shares by placing an order to purchase one or more Creation 
Units with the Transfer Agent through the Marketing Agent. Such orders 
are subject to approval by the Marketing Agent and the Transfer Agent. 
For purposes of processing creation and redemption orders, a ``business 
day'' means any day other than a day when the Exchange is closed for 
regular trading (``Business Day''). To be processed on the date 
submitted, creation orders must be placed before 4 p.m. E.T. or the 
close of regular trading on the Exchange, whichever is earlier, but may 
be required to be placed earlier at the discretion of the Sponsor. A 
purchase order will be effective on the date it is received by the 
Transfer Agent and approved by the Marketing Agent (``Purchase Order 
Date'').
    Creation Units are processed in cash. By placing a purchase order, 
an Authorized Participant agrees to deposit, or cause to be deposited, 
an amount of cash equal to the quantity of bitcoin attributable to each 
Share of the Trust (net of accrued but unpaid expenses and liabilities) 
multiplied by the number of Shares (10,000) comprising a Creation Unit 
(the ``Basket Amount''). The Sponsor will cause to be published each 
Business Day, prior to the commencement of trading on the Exchange, the 
Basket Amount relating to a Creation Unit applicable for such Business 
Day. That amount is derived by multiplying the Basket Amount by the 
value of bitcoin ascribed by the CME US Reference Rate. However, the 
Authorized Participant is also responsible for any additional cash 
required to account for the price at which the Trust agrees to purchase 
the requisite amount of bitcoin from a bitcoin trading counterparty 
approved by the Sponsor (``Bitcoin Trading Counterparty'') \26\ to the 
extent it is greater than the CME US Reference Rate price on each 
Purchase Order Date.
---------------------------------------------------------------------------

    \26\ The Bitcoin Trading Counterparties with which the Sponsor 
will engage in bitcoin transactions are unaffiliated third-parties 
that are not acting as agents of the Trust, the Sponsor or the 
Authorized Participant, and all transactions will be done on an 
arms-length basis. There is no contractual relationship between the 
Trust, the Sponsor or the Bitcoin Trading Counterparty. When seeking 
to sell bitcoin on behalf of the Trust, the Sponsor will seek to 
sell bitcoin at commercially reasonable price and terms to any of 
the approved Bitcoin Trading Counterparties. Once agreed upon, the 
transaction will generally occur on an ``over-the-counter'' basis.
---------------------------------------------------------------------------

    Prior to the delivery of Creation Units, the Authorized Participant 
must also have wired to the Transfer Agent the nonrefundable 
transaction fee due for the creation order. Authorized Participants may 
not withdraw a creation request. If an Authorized Participant fails to 
consummate the foregoing, the order may be cancelled.
    Following the acceptance of a purchase order, the Authorized 
Participant must wire the cash amount

[[Page 2305]]

described above to the Cash Custodian, and the Bitcoin Trading 
Counterparty must deposit the required amount of bitcoin with the 
Bitcoin Custodian by the end of the day E.T. on the Business Day 
following the Purchase Order Date. The bitcoin will be purchased from 
Bitcoin Trading Counterparties that are not acting as agents of the 
Trust or agents of the Authorized Participant. These transactions will 
be done on an arms-length basis, and there is no contractual 
relationship between the Trust, the Sponsor, or the Bitcoin Trading 
Counterparty to acquire such bitcoin. Prior to any movement of cash 
from the Cash Custodian to the Bitcoin Trading Counterparty or movement 
of Shares from the Transfer Agent to the Authorized Participant's DTC 
account to settle the transaction, the bitcoin must be deposited at the 
Bitcoin Custodian.
    The Bitcoin Trading Counterparty must deposit the required amount 
of bitcoin by end of day E.T. on the Business Day following the 
Purchase Order Date prior to any movement of cash from the Cash 
Custodian or Shares from the Transfer Agent. Upon receipt of the 
deposit amount of bitcoin at the Bitcoin Custodian from the Bitcoin 
Trading Counterparty, the Bitcoin Custodian will notify the Sponsor 
that the bitcoin has been received. The Sponsor will then notify the 
Transfer Agent that the bitcoin has been received, and the Transfer 
Agent will direct DTC to credit the number of Shares ordered to the 
Authorized Participant's DTC account and will wire the cash previously 
sent by the Authorized Participant to the Bitcoin Trading Counterparty 
to complete settlement of the Purchase Order and the acquisition of the 
bitcoin by the Trust, as described above.
    As between the Trust and the Authorized Participant, the expense 
and risk of the difference between the value of bitcoin calculated by 
the Administrator for daily valuation using the CME US Reference Rate 
and the price at which the Trust acquires the bitcoin will be borne 
solely by the Authorized Participant to the extent that the Trust pays 
more for bitcoin than the price used by the Trust for daily valuation. 
Any such additional cash amount will be included in the amount of cash 
calculated by the Administrator on the Purchase Order Date, 
communicated to the Authorized Participant on the Purchase Order Date, 
and wired by the Authorized Participant to the Cash Custodian on the 
day following the Purchase Order Date. If the Bitcoin Trading 
Counterparty fails to deliver the bitcoin to the Bitcoin Custodian, no 
cash is sent from the Cash Custodian to the Bitcoin Trading 
Counterparty, no Shares are transferred to the Authorized Participant's 
DTC account, the cash is returned to the Authorized Participant, and 
the Purchase Order is cancelled.
    Under the Trust-Directed Trade Model and according to the 
Registration Statement, the procedures by which an Authorized 
Participant can redeem one or more Creation Units mirror the procedures 
for the creation of Creation Units. On any Business Day, an Authorized 
Participant may place an order with the Transfer Agent through the 
Marketing Agent to redeem one or more Creation Units. To be processed 
on the date submitted, redemption orders must be placed before 4 p.m. 
E.T. or the close of regular trading on the Exchange, whichever is 
earlier, or earlier as determined by the Sponsor. A redemption order 
will be effective on the date it is received by the Transfer Agent and 
approved by the Marketing Agent (``Redemption Order Date''). The 
redemption procedures allow Authorized Participants to redeem Creation 
Units and do not entitle an individual shareholder to redeem any Shares 
in an amount less than a Creation Unit, or to redeem Creation Units 
other than through an Authorized Participant. In connection with 
receipt of a redemption order accepted by the Marketing Agent and 
Transfer Agent, the Sponsor, on behalf of the Trust, is responsible for 
selling the bitcoin to an approved Bitcoin Trading Counterparty in an 
amount equal to the Basket Amount.
    The redemption distribution from the Trust will consist of a 
transfer to the redeeming Authorized Participant, or its agent, of the 
amount of cash the Trust received in connection with a sale of the 
Basket Amount of bitcoin to a Bitcoin Trading Counterparty made 
pursuant to the redemption order. The Sponsor will cause to be 
published each Business Day, prior to the commencement of trading on 
the Exchange, the redemption distribution amount relating to a Creation 
Unit applicable for such Business Day. The redemption distribution 
amount is derived by multiplying the Basket Amount by the value of 
bitcoin ascribed by the CME US Reference Rate. However, as between the 
Trust and the Authorized Participant, the expense and risk of the 
difference between the value of bitcoin ascribed by the CME US 
Reference Rate and the price at which the Trust sells the bitcoin will 
be borne solely by the Authorized Participant to the extent that the 
Trust receives less for bitcoin than the value ascribed by CME US 
Reference Rate.
    Prior to the delivery of Creation Units, the Authorized Participant 
must also have wired to the Transfer Agent the nonrefundable 
transaction fee due for the redemption order.
    The redemption distribution due from the Trust will be delivered by 
the Transfer Agent to the Authorized Participant once the Cash 
Custodian has received the cash from the Bitcoin Trading Counterparty. 
The Bitcoin Custodian will not send the Basket Amount of bitcoin to the 
Bitcoin Trading Counterparty until the Cash Custodian has received the 
cash from the Bitcoin Trading Counterparty and is instructed by the 
Sponsor to make such transfer. Once the Bitcoin Trading Counterparty 
has sent the cash to the Cash Custodian in an agreed upon amount to 
settle the agreed upon sale of the Basket Amount of bitcoin, the 
Transfer Agent will notify Sponsor. The Sponsor will then notify the 
Bitcoin Custodian to transfer the bitcoin to the Bitcoin Trading 
Counterparty, and the Transfer Agent will wire the redemption proceeds 
to the Authorized Participant once the Trust's DTC account has been 
credited with the Shares represented by the Creation Unit from the 
redeeming Authorized Participant. Once the Authorized Participant has 
delivered the Shares represented by the Creation Unit to be redeemed to 
the Trust's DTC account, the Cash Custodian will wire the requisite 
amount of cash to the Authorized Participant. If the Trust's DTC 
account has not been credited with all of the Shares of the Creation 
Unit to be redeemed, the redemption distribution will be delayed until 
such time as the Transfer Agent confirms receipt of all such Shares. If 
the Bitcoin Trading Counterparty fails to deliver the cash to the Cash 
Custodian, the transaction will be cancelled, and no transfer of 
bitcoin or Shares will occur.
Acquiring and Selling Bitcoin Pursuant to Creation and Redemption of 
Shares Under the Agent Execution Model
    Under the Agent Execution Model, Coinbase, Inc. (``Coinbase Inc.'' 
or the ``Prime Execution Agent,'' an affiliate of the Bitcoin 
Custodian), acting in an agency capacity, would conduct bitcoin 
purchases and sales on behalf of the Trust with third parties through 
its Coinbase Prime service pursuant to the Prime Execution Agent 
Agreement. To utilize the Agent Execution Model, the Trust may maintain 
some bitcoin or cash in a trading account (the ``Trading Balance'') 
with the Prime Execution Agent. The Prime Execution Agent Agreement 
provides that the Trust does not have an identifiable claim to any 
particular bitcoin (and cash); rather, the

[[Page 2306]]

Trust's Trading Balance represents an entitlement to a pro rata share 
of the bitcoin (and cash) the Prime Execution Agent holds on behalf of 
customers who hold similar entitlements against the Prime Execution 
Agent. In this way, the Trust's Trading Balance represents an omnibus 
claim on the Prime Execution Agent's bitcoins (and cash) held on behalf 
of the Prime Execution Agent's customers.
    To avoid having to pre-fund purchases or sales of bitcoin in 
connection with cash creations and redemptions and sales of bitcoin to 
pay Trust expenses not assumed by the Sponsor, to the extent 
applicable, the Trust may borrow bitcoin or cash as trade credit 
(``Trade Credit'') from Coinbase Credit, Inc. (the ``Trade Credit 
Lender'') on a short-term basis pursuant to the Coinbase Credit 
Committed Trade Financing Agreement (the ``Trade Financing 
Agreement'').
    On the day of the Purchase Order Date, the Trust would enter into a 
transaction to buy bitcoin through the Prime Execution Agent for cash. 
Because the Trust's Trading Balance may not be funded with cash on the 
Purchase Order Date for the purchase of bitcoin in connection with the 
Purchase Order under the Agent Execution Model, the Trust may borrow 
Trade Credits in the form of cash from the Trade Credit Lender pursuant 
to the Trade Financing Agreement or may require the Authorized 
Participant to deliver the required cash for the Purchase Order on the 
Purchase Order Date. The extension of Trade Credits on the Purchase 
Order Date allows the Trust to purchase bitcoin through the Prime 
Execution Agent on the Purchase Order Date, with such bitcoin being 
deposited in the Trust's Trading Balance.
    On the day following the Purchase Order Date (the ``Purchase Order 
Settlement Date''), the Trust would deliver Shares to the Authorized 
Participant in exchange for cash received from the Authorized 
Participant. Where applicable, the Trust would use the cash to repay 
the Trade Credits borrowed from the Trade Credit Lender. On the 
Purchase Order Settlement Date for a Purchase Order utilizing the Agent 
Execution Model, the bitcoin associated with the Purchase Order and 
purchased on the Purchase Order Date is swept from the Trust's Trading 
Balance with the Prime Execution Agent to the Trust Bitcoin Account 
with the Bitcoin Custodian pursuant to a regular end-of-day sweep 
process. Transfers of bitcoin into the Trust's Trading Balance are off-
chain transactions and transfers from the Trust's Trading Balance to 
the Trust Bitcoin Account are ``on-chain'' transactions represented on 
the bitcoin blockchain. Any financing fee owed to the Trade Credit 
Lender is deemed part of trade execution costs and embedded in the 
trade price for each transaction.
    For a Redemption Order utilizing the Agent Execution Model, on the 
day of the Redemption Order Date the Trust would enter into a 
transaction to sell bitcoin through the Prime Execution Agent for cash. 
The Trust's Trading Balance with the Prime Execution Agent may not be 
funded with bitcoin on trade date for the sale of bitcoin in connection 
with the redemption order under the Agent Execution Model, when bitcoin 
remains in the Trust Bitcoin Account with the Bitcoin Custodian at the 
point of intended execution of a sale of bitcoin. In those 
circumstances the Trust may borrow Trade Credits in the form of bitcoin 
from the Trade Credit Lender, which allows the Trust to sell bitcoin 
through the Prime Execution Agent on the Redemption Order Date, and the 
cash proceeds are deposited in the Trust's Trading Balance with the 
Prime Execution Agent. On the business day following the Redemption 
Order Date (the ``Redemption Order Settlement Date'') for a redemption 
order utilizing the Agent Execution Model where Trade Credits were 
utilized, the Trust delivers cash to the Authorized Participant in 
exchange for Shares received from the Authorized Participant. In the 
event Trade Credits were used, the Trust will use the bitcoin that is 
moved from the Trust Bitcoin Account with the Bitcoin Custodian to the 
Trading Balance with the Prime Execution Agent to repay the Trade 
Credits borrowed from the Trade Credit Lender.
    For a redemption of Creation Units utilizing the Agent Execution 
Model, the Sponsor would instruct the Bitcoin Custodian to prepare to 
transfer the bitcoin associated with the redemption order from the 
Trust Bitcoin Account with the Bitcoin Custodian to the Trust's Trading 
Balance with the Prime Execution Agent. On the Redemption Order 
Settlement Date, the Trust would enter into a transaction to sell 
bitcoin through the Prime Execution Agent for cash, and the Prime 
Execution Agent credits the Trust's Trading Balance with the cash. On 
the same day, the Authorized Participant would deliver the necessary 
Shares to the Trust and the Trust delivers cash to the Authorized 
Participant.
Fee Accrual
    According to the Registration Statement, the Trust's only recurring 
ordinary expense is expected to be the Sponsor Fee, which will accrue 
daily and will be payable in bitcoin monthly in arrears. The 
Administrator will calculate the Sponsor Fee on a daily basis by 
applying an annualized rate to the Trust's total bitcoin holdings, and 
the amount of bitcoin payable in respect of each daily accrual shall be 
determined by reference to the CME US Reference Rate.
Standard for Approval
Background
    To date, the Commission has considered numerous proposed spot 
bitcoin ETPs,\27\ including prior

[[Page 2307]]

proposals with respect to the Trust.\28\ In each case, the Commission 
determined that the filing failed to demonstrate that the proposal was 
consistent with the requirements of section 6(b)(5) of the Act \29\ 
and, in particular, the requirement that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices.
---------------------------------------------------------------------------

    \27\ See, e.g., Securities Exchange Act Release No. 80206 (Mar. 
10, 2017), 82 FR 14076 (March 16, 2017) (SR-BatsBZX-2016-30) (Order 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, to BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, to 
List and Trade Shares Issued by the Winklevoss Bitcoin Trust); 
Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 
16247 (April 3, 2017) (SR-NYSEArca-2016-101) (Order Disapproving a 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to 
the Listing and Trading of Shares of the SolidX Bitcoin Trust under 
NYSE Arca Equities Rule 8.201; Securities Exchange Act Release No. 
83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (SR-BatsBZX-
2016-30) (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) 
(``Winklevoss Order''); Securities Exchange Act Release No. 83904 
(Aug. 22, 2018), 83 FR 43934 (August 28, 2018) (SR-NYSEArca-2017-
139) (Order Disapproving a Proposed Rule Change to List and Trade 
the Shares of the ProShares Bitcoin ETF and the ProShares Short 
Bitcoin ETF); Securities Exchange Act Release No. 83912 (Aug. 22, 
2018), 83 FR 43912 (August 28, 2018) (SR-NYSEArca-2018-02) (Order 
Disapproving a Proposed Rule Change Relating to Listing and Trading 
of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 
1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion 
Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear 
Shares Under NYSE Arca Rule 8.200-E); Securities Exchange Act 
Release No. 83913 (Aug. 22, 2018), 83 FR 43923 (August 28, 2018) 
(SR-CboeBZX-2018-001) (Order Disapproving a Proposed Rule Change to 
List and Trade the Shares of the GraniteShares Bitcoin ETF and the 
GraniteShares Short Bitcoin ETF (``GraniteShares Order''); 
Securities Exchange Act Release No. 88284 (February 26, 2020), 85 FR 
12595 (March 3, 2020) (Sr-NYSEArca-2019-39) (Order Disapproving a 
Proposed Rule Change, as Modified by Amendment No. 1, to Amend NYSE 
Arca Rule 8.201-E (Commodity-Based Trust Shares) and to List and 
Trade Shares of the United States Bitcoin and Treasury Investment 
Trust Under NYSE Arca Rule 8.201-E) (``USBT Order''); Securities 
Exchange Act Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 
18, 2021) (SR-CboeBZX-2021-019) (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) (``VanEck Order''); Securities Exchange Act Release 
No. 93700 (Dec. 1, 2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-
2021-024) (Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the WisdomTree Bitcoin Trust Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares) (``WisdomTree Order''); 
Securities Exchange Act Release No. 93859 (Dec. 22, 2021), 86 FR 
74156 (Dec. 29, 2021) (SR-NYSEArca-2021-31) (Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Valkyrie 
Bitcoin Fund Under NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares)) (``Valkyrie Order''); Securities Exchange Act Release No. 
93860 (Dec. 22, 2021), 86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-
029) (Order Disapproving a Proposed Rule Change To List and Trade 
Shares of the Kryptoin Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares) (``Kryptoin Order''); Securities 
Exchange Act Release No. 94006 (Jan. 20, 2022), 87 FR 3869 (Jan. 25, 
2022) (SR-NYSEArca-2021-37) (Order Disapproving a Proposed Rule 
Change To List and Trade Shares of the First Trust SkyBridge Bitcoin 
ETF Trust Under NYSE Arca Rule 8.201-E) (``SkyBridge Order''); 
Securities Exchange Act Release No. 94080 (Jan. 27, 2022), 87 FR 
5527 (Feb. 1, 2022) (SR-CboeBZX-2021-039) (Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Wise Origin 
Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares) (``Wise Origin Order''); Securities Exchange Act Release No. 
94395 (Mar. 10, 2022), 87 FR 14932 (Mar. 16, 2022) (SR-NYSEArca-
2021-57) (Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the NYDIG Bitcoin ETF Under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares)) (``NYDIG Order''); Securities 
Exchange Act Release No. 94396 (Mar. 10, 2022), 87 FR 14912 (Mar. 
16, 2022) (SR-CboeBZX-2021-052) (Order Disapproving a Proposed Rule 
Change To List and Trade Shares of the Global X Bitcoin Trust Under 
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares) (``Global X 
Order''); Securities Exchange Act Release No. 94571 (Mar. 31, 2022), 
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (Order Disapproving 
a Proposed Rule Change, as Modified by Amendment No. 1, To List and 
Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares) (``ARK 21Shares Order''); 
Securities Exchange Act Release No. 94999 (May 27, 2022), 87 FR 
33548 (June 2, 2022) (SR-NYSEArca-2021-67) (Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the One River 
Carbon Neutral Bitcoin Trust Under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares)) (``One River Order''); Securities 
Exchange Act Release No. 95180 (June 29, 2022), 87 FR 40299 (July 6, 
2022) (SR-NYSEArca-2021-90) (Order Disapproving a Proposed Rule 
Change, as Modified by Amendment No. 1, To List and Trade Shares of 
Grayscale Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares)) (``Grayscale Order''); Securities Excnnage Act 
Release No. 96011 (Oct. 11, 2022), 87 FR 62466 (Oct. 14, 2022) (SR-
CboeBZX-2022-006) (Order Disapproving a Proposed Rule Change To List 
and Trade Shares of the WisdomTree Bitcoin Trust Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares) (``WisdomTree Order 
II''); Securities Exchange Act Release No. 96751 (Jan. 26, 2023), 88 
FR 6328 (Jan. 31, 2023) (SR-CboeBZX-2021-031) (Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares) (``ARK 21Shares Order II''); Securities Exchange Act Release 
No. 97102 (Mar. 10, 2023), 88 FR 16055 (Mar. 15, 2023) (SR-CboeBZX-
2022-035) (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)) (``VanEck Order II'').
    \28\ See Securities Exchange Act Release No. 87267 (Oct. 9, 
2019), 84 FR 55382 (October 16, 2019) (SR-NYSEArca-2019-01) (Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin 
ETF Trust Under NYSE Arca Rule 8.201-E) (``Bitwise Order'') 
(withdrawn on Jan. 13, 2020 while delegated action was under review 
by the Commission, see Release No. 90431 (Nov. 13, 2020), 85 FR 
73819 (November 19, 2020)); Securities Exchange Act Release No. 
95179 (June 29, 2022), 87 FR 40282 (July 6, 2022) (SR-NYSEArca-2021-
89) (Order Disapproving a Proposed Rule Change To List and Trade 
Shares of the Bitwise Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares)) ((``Bitwise Order II'').
    \29\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Specifically, although comprehensive surveillance-sharing 
agreements \30\ are not the exclusive means by which a listing exchange 
can meet its obligations under section 6(b)(5) of the Act, the 
Commission has determined that, where a listing exchange cannot 
establish that other means to prevent fraudulent and manipulative acts 
and practices are sufficient, the listing exchange must enter into a 
surveillance-sharing agreement with a regulated market of significant 
size because ``[s]uch agreements provide a necessary deterrent to 
manipulation because they facilitate the availability of information 
needed to fully investigate a manipulation if it were to occur.'' \31\
---------------------------------------------------------------------------

    \30\ The Commission has described a comprehensive surveillance 
sharing agreement as including an agreement under which a self-
regulatory organization may expressly obtain information on (1) 
market trading activity, (2) clearing activity and (3) customer 
identity, and where existing rules, laws or practices would not 
impede access to such information. See Letter from Brandon Becker, 
Director, Division of Market Regulation, Commission, to Gerard D. 
O'Connell, Chairman, Intermarket Surveillance Group (June 3, 1994), 
available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm (``ISG Letter''). The Commission has emphasized the 
importance of surveillance sharing agreements, noting that ``[s]uch 
agreements provide a necessary deterrent to manipulation because 
they facilitate the availability of information needed to fully 
investigate a manipulation if it were to occur.'' Securities 
Exchange Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70954, 
70959 (Dec. 22, 1998) (File No. S7-13-98) (Amendment to Rule Filing 
Requirements for Self-Regulatory Organizations Regarding New 
Derivative Securities Products) (``NDSP Adopting Release'').
    \31\ See Winklevoss Order, 83 FR at 37580. In the Winklevoss 
Order as well as the Bitwise Order and USBT Order, the Commission 
determined that the proposing exchange had not established that 
bitcoin markets were uniquely resistant to fraud or manipulation, 
which unique resistance might provide protections such that the 
proposing exchange ``would not necessarily need to enter into a 
surveillance sharing agreement with a regulated significant 
market.'' See Winklevoss Order 83 FR at 37591; Bitwise Order 84 FR 
at 55386; and USBT Order 85 FR at 12597. In all instances, the 
Commission determined that, while the existing, regulated 
derivatives markets (including the CME bitcoin futures market) was a 
regulated market, the proposing exchanges had not demonstrated that 
the regulated derivatives markets had achieved significant size. See 
Winklevoss Order, 83 FR at 37601; Bitwise Order 84 FR at 55410; and 
USBT Order 85 FR at 12597. In short, the Commission determined that 
a proposing exchange had established neither that it had a 
surveillance sharing agreement with a group of underlying bitcoin 
trading platforms, nor that such bitcoin trading platforms 
constituted regulated markets of significant size with respect to 
bitcoin. See Winklevoss Order 83 FR 37590-37591; Bitwise Order 84 FR 
at 55407; and USBT Order 85 FR at 12615.
---------------------------------------------------------------------------

    In the Winklevoss Order, the Commission set forth both the 
importance and definition of a surveilled, regulated market of 
significant size, explaining that:

    [For all] commodity-trust ETPs approved to date for listing and 
trading, there has been in every case at least one significant, 
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP 
listing exchange has entered into surveillance-sharing agreements 
with, or held Intermarket Surveillance Group membership in common 
with, that market.\32\
---------------------------------------------------------------------------

    \32\ See Winklevoss Order, 83 FR 37594.

    On an illustrative and not exclusive basis, the Commission further 
---------------------------------------------------------------------------
defined:

    [T]he terms `significant market' and `market of significant 
size' to include a market (or group of markets) as to which (a) 
there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
successfully manipulate the ETP, so that a surveillance-sharing 
agreement would assist the ETP listing market in detecting and 
deterring misconduct, and (b) it is unlikely that trading in the ETP 
would be the predominant influence on prices in that market.\33\
---------------------------------------------------------------------------

    \33\ Id. The Commission further noted that ``[t]here could be 
other types of ``significant markets'' and ``markets of significant 
size,'' but this definition is an example that will provide guidance 
to market participants.'' See id. This two-prong definition of the 
term ``significant market'' will be referred to herein as the 
``significant market test'' with ``first prong'' referring to the 
``reasonable likelihood'' clause (a) and ``second prong'' referring 
to the ``predominant influence'' clause (b).

    In support of the Sponsor's first attempt to satisfy the 
significant market test in 2019,\34\ the Sponsor conducted and 
presented extensive research into the bitcoin market and published a 
226-slide study of its findings.\35\ The study

[[Page 2308]]

asserted that the relative size of the CME bitcoin futures market 
compared to real size of bitcoin spot markets demonstrated that the CME 
bitcoin futures market was a market of significant size.
---------------------------------------------------------------------------

    \34\ See Securities Exchange Act Release No. 85093 (Feb. 11, 
2019), 84 FR 4589 (Feb. 15, 2019)) (SR-NYSEArca-2019-01) (Notice of 
Filing of Proposed Rule Change Relating to the Listing and Trading 
of Shares of the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 
8.201-E).
    \35\ See Bitwise Asset Management, Presentation to the U.S. 
Securities and Exchange Commission, dated March 19, 2019, attached 
to Memorandum from the Division of Trading and Markets regarding a 
March 19, 2019 meeting with representatives of Bitwise Asset 
Management, Inc., NYSE Arca, Inc., and Vedder Price P.C., available 
at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf.
---------------------------------------------------------------------------

    The Commission disagreed, explaining that:

the evidence that the Sponsor presents regarding the relative size 
of the bitcoin futures market and the relationship in prices between 
the spot and futures markets does not . . . establish the 
interrelationship between the futures market and the proposed ETP, 
or directionality of that interrelationship, that would make the 
bitcoin futures market a ``market of significant size'' in the 
context of the proposed ETP.\36\
---------------------------------------------------------------------------

    \36\ See Bitwise Order, 84 FR at 55410.

    The Commission highlighted the central importance of knowing the 
directionality (``lead-lag'') of the interrelationship between the two 
---------------------------------------------------------------------------
venues when determining if a market qualifies as ``significant'':

    [T]he lead-lag relationship between the bitcoin futures market 
and the spot market . . . . is central to understanding whether it 
is reasonably likely that a would-be manipulator of the ETP would 
need to trade on the bitcoin futures market to successfully 
manipulate prices on those spot platforms that feed into the 
proposed ETP's pricing mechanism. In particular, if the spot market 
leads the futures market, this would indicate that it would not be 
necessary to trade on the futures market to manipulate the proposed 
ETP, even if arbitrage worked efficiently, because the futures price 
would move to meet the spot price.\37\
---------------------------------------------------------------------------

    \37\ See id. at 55411. See also USBT Order, 85 FR at 12612.

    In a subsequent filing to list and trade the United States Bitcoin 
and Treasury Investment (USBT), the Commission rejected a different 
sponsor's attempt to establish through statistical analysis that the 
CME bitcoin futures market led the bitcoin spot market from a price 
discovery perspective,\38\ noting, among other things, that:
---------------------------------------------------------------------------

    \38\ See Securities Exchange Act Release No. 86195 (June 25, 
2019), 84 FR 31373 (July 1, 2019) (SR-NYSEArca-2019-39) (Notice of 
Filing of Proposed Rule Change To Amend NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares) and To List and Trade Shares of the 
United States Bitcoin and Treasury Investment Trust Under NYSE Arca 
Rule 8.201-E) (``USBT Proposal'').

    [T]he Sponsor has not provided sufficient details supporting 
this conclusion, and unquestioning reliance by the Commission on 
representations in the record is an insufficient basis for approving 
a proposed rule change in circumstances where, as here, the 
proponent's assertion would form such an integral role in the 
Commission's analysis and the assertion is subject to several 
challenges. For example, the [s]ponsor has not provided sufficient 
information explaining its underlying analysis, including detailed 
information on the analytic methodology used, the specific time 
period analyzed, or any information that would enable the Commission 
to evaluate whether the findings are statistically significant or 
time varying.\39\
---------------------------------------------------------------------------

    \39\ See USBT Order, 85 FR at 12612.

    In an effort to conduct comprehensive research demonstrating the 
lead-lag relationship between the CME bitcoin futures market and the 
spot market while providing sufficient information to the Commission on 
the data and methodology underlying its analysis, the Sponsor met with 
the Commission Staff 14 times between January 2020 and August 2021, 
including members from the divisions of Trading and Markets, Economic 
Risk and Analysis, and Corporate Finance, to discuss a comprehensive 
approach to conducting lead-lag analysis. As a result, in October 2021, 
the Exchange filed another rule proposal including a 107-page white 
paper from the Sponsor which presented the results of this research. 
The research explored the lead-lag relationship between the CME bitcoin 
futures market, bitcoin spot market, and unregulated bitcoin futures 
market, and evidenced that the CME bitcoin futures market led the spot 
market and unregulated bitcoin futures market (``Bitwise Prong One 
Paper'').\40\ The Sponsor also submitted a 24-page white paper 
demonstrating that a new bitcoin ETP is unlikely to become the 
predominant influence on prices in the CME bitcoin futures market 
(``Bitwise Prong Two Paper'').\41\
---------------------------------------------------------------------------

    \40\ See Matthew Hougan, Hong Kim and Satyajeet Pal, ``Price 
discovery in the modern bitcoin market: Examining lead-lag 
relationships between the bitcoin spot and bitcoin futures market,'' 
June 11, 2021, available at https://static.bitwiseinvestments.com/Bitwise-Bitcoin-ETP-White-Paper-1.pdf.
    \41\ See Matthew Hougan, Hong Kim and Satyajeet Pal, ``Is it 
likely that a US bitcoin ETP, if approved, will become the 
predominant influence on prices in the CME bitcoin futures 
market?,'' June 11, 2021, available at https://static.bitwiseinvestments.com/Bitwise-Bitcoin-ETP-White-Paper-2.pdf.
---------------------------------------------------------------------------

    The Bitwise Prong One Paper included a survey and validation of 
bitcoin data sources, a detailed review of existing academic literature 
on the topic of lead-lag relationships between bitcoin markets, and a 
rigorous statistical analysis using both Information Share (IS)/
Component Share (CS) and Time-Shift Lead-Lag (TSLL) metrics comparing 
the CME bitcoin futures market against both spot bitcoin platforms and 
unregulated bitcoin futures platforms. The Bitwise Prong Two paper 
included an estimation of potential inflows into a spot bitcoin ETP and 
a statistical evaluation of the impact of historical inflows into other 
bitcoin investment products on the bitcoin market. In disapproving the 
Sponsor's proposal for a second time, the Commission noted:

    [E]ven accepting at face value the results of Bitwise's 
statistical analysis of the relationship between the CME bitcoin 
futures market and the spot market, such results are only part of 
the ``mixed'' record on the topic of bitcoin price discovery.\42\
---------------------------------------------------------------------------

    \42\ See Bitwise Order II, 87 FR at 40288.

    In light of the foregoing, the following discussion will 
demonstrate that the CME bitcoin futures market is a regulated market 
of significant size and meets both prongs of the significant market 
test. Given the stated limitations on what the Sponsor's analysis alone 
can demonstrate, the discussion focuses on resolving the ``mixed 
record'' in the broad academic literature before turning to the 
questions the Commission raised regarding the Sponsor's statistical 
analysis.
The Approval of Bitcoin Futures ETPs Registered Under the Securities 
Act of 1933 Demonstrates That the CME Bitcoin Futures Market Is a 
Regulated Market of Significant Size Related to Spot Bitcoin for the 
Purposes of Satisfying Section 6(b)(5) of the Act
    In 2022, the Commission approved rule changes to list and trade 
shares of two CME bitcoin futures-based ETPs registered under the 
Securities Act of 1933 (the ``Bitcoin Futures ETPs'').\43\ Unlike the 
CME bitcoin futures-based ETFs that began trading in 2021,\44\ which 
are regulated under the Investment Company Act of 1940, the listing 
exchanges for the Bitcoin Futures ETPs had to satisfy the requirements 
of section 6(b)(5) by demonstrating that listing markets had in place a 
comprehensive surveillance sharing agreement with a regulated market of 
significant size related to CME bitcoin futures contracts. In approving 
the applications, the Commission concluded that the CME's surveillances

[[Page 2309]]

could 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.\45\
---------------------------------------------------------------------------

    \43\ See Securities Exchange Act Release No. 94620 (Apr. 6, 
2022), 87 FR 21676 (Apr. 12, 2022) (SR-NYSEArca-2021-53) (Order 
Granting Approval of a Proposed Rule Change, as Modified by 
Amendment No. 2, To List and Trade Shares of the Teucrium Bitcoin 
Futures Fund Under NYSE Arca Rule 8.200-E, Commentary .02 (Trust 
Issued Receipts)) (``Teucrium Order''); Securities Exchange Act 
Release No. 94853 (May 5, 2022), 87 FR 28848 (May 11, 2022) (SR-
NASDAQ-2021-066) (Order Granting Approval of a Proposed Rule Change, 
as Modified by Amendment Nos. 1 and 2, To List and Trade Shares of 
the Valkyrie XBTO Bitcoin Futures Fund Under Nasdaq Rule 5711(g)) 
(``Valkyrie XBTO Order'').
    \44\ The ProShares Bitcoin Strategy ETF (``BITO'') launched on 
October 18, 2021. The Valkyrie Bitcoin Strategy ETF (``BTF'') 
launched on October 21, 2021. The VanEck Bitcoin Strategy ETF 
(``XBTF'') launched on November 15, 2021.
    \45\ See Grayscale Investments, LLC v. SEC, No. 22-1142 (D.C. 
Cir. Aug. 29, 2023), at 10-11.
---------------------------------------------------------------------------

    While the Commission rejected the view that this logic extended to 
spot bitcoin ETPs,\46\ this view was recently rejected by the Court of 
Appeals for the D.C. Circuit. In Grayscale Investments LLC v. 
Securities and Exchange Commission (``Grayscale''), the Court observed:
---------------------------------------------------------------------------

    \46\ See, e.g., Bitwise Order II, 87 FR at 40289.

    Grayscale's proposed bitcoin ETP and the approved bitcoin 
futures ETPs all track the bitcoin market price, i.e., the spot 
market price . . . Grayscale presented uncontested evidence that 
there is a 99.9 percent correlation between bitcoin's spot market 
and CME futures contract prices . . . Because the spot and futures 
markets for bitcoin are highly related, it stands to reason that 
manipulation in either market will affect the price of bitcoin 
futures . . . To the extent that the price of bitcoin futures might 
be affected by trading in both the futures and spot markets, the 
Commission concluded fraud in either market could be detected by 
surveillance of the CME futures market.\47\
---------------------------------------------------------------------------

    \47\ See Grayscale Investments, LLC v. SEC, No. 22-1142 (D.C. 
Cir. Aug. 29, 2023), at 9-10.

    The same reasoning applies to the instant application. Bitcoin 
futures pricing is based on pricing from spot bitcoin markets. If CME's 
surveillances can capture the effects of trading on the relevant spot 
markets on the pricing of bitcoin futures, CME should equally be able 
to capture the effects of trading on the relevant spot markets on the 
pricing of spot bitcoin ETPs. The fact that bitcoin futures trade on 
the CME but spot bitcoin does not is a distinction without difference 
regarding the matter of whether surveillance of the CME futures market 
can be relied upon to detect manipulation occurring in the spot market. 
It follows that the CME bitcoin futures market is a regulated market of 
significant size related to spot bitcoin.
The Academic Record Demonstrates That the CME Bitcoin Futures Market 
Meets the First Prong of the Significant Market Test
    The first prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' is the 
determination that there is a reasonable likelihood that a person 
attempting to manipulate the proposed ETP would have to trade on the 
CME bitcoin futures market to successfully manipulate the ETP. As 
detailed in the ``Background'' section above, the Commission explained 
in previous orders that the lead-lag relationship between the bitcoin 
futures market and the spot market is ``central'' to understanding this 
first prong and making this determination.
The Mixed Academic Record as Presented by the Commission
    The Commission has repeatedly cited the ``mixed'' or 
``inconclusive'' academic record regarding the lead-lag relationship 
between spot and futures markets as a core reason it believed that the 
first prong was not met in past disapproval orders. For instance, in 
the most recent spot bitcoin ETP disapproval order, the Commission 
provided a long list of disapproval orders where the Commission has 
commented on this matter:

    As the academic literature and listing exchanges' analyses 
pertaining to the pricing relationship between the CME bitcoin 
futures market and spot bitcoin market have developed, the 
Commission has critically reviewed those materials. See WisdomTree 
Order II, 87 FR at 62476-77; Grayscale Order, 87 FR at 40311-13; 
Bitwise Order, 87 FR at 40286-89; ARK 21Shares Order, 87 FR at 
20024; Global X Order, 87 FR at 14920; Wise Origin Order, 87 FR at 
5535-36, 5539-40; Kryptoin Order, 86 FR at 74176; WisdomTree Order, 
86 FR at 69330-32; Previous VanEck Order, 86 FR at 64547-48; USBT 
Order, 85 FR at 12613.\48\
---------------------------------------------------------------------------

    \48\ See VanEck Order II, 88 FR at 16065.

    In order to address all of the Commission's critical questions 
regarding the mixed academic record, the Sponsor reviewed all eleven 
disapproval orders referenced above and summarized the critical 
questions the Commission has raised regarding the mixed academic record 
across these orders, as follows.
    In the USBT Order, VanEck Order, WisdomTree Order, Kryptoin Order, 
Wise Origin Order, NYDIG Order, Global X Order, and ARK 21Shares Order, 
the Commission listed out nine academic studies that have evaluated the 
lead-lag relationship between the bitcoin futures market and the spot 
market, and provided one-line summaries of the key findings of each 
paper, as a means of illustrating the mixed nature of the academic 
record.\49\ The text below is drawn from Global X Order, but is 
repeated in other Orders as well. The studies that found either that 
the spot market led the futures market or that the leadership was mixed 
are set forth in bold text. Both paragraph spacing and numbering have 
been added for clarity. The Commission's one-line summary of the key 
findings appears in parentheses.
---------------------------------------------------------------------------

    \49\ See USBT Order, 85 FR 12613; VanEck Order, 86 FR at 64547-
48; WisdomTree Order, 86 FR at 69330-32; Kryptoin Order, 86 FR at 
74176; Wise Origin Order, 87 FR at 5535-36; NYDIG Order, 87 FR 
14939; Global X Order, 87 FR at 14920; ARK 21Shares Order, 87 FR at 
20024.

    1. D. Baur & T. Dimpfl, Price discovery in bitcoin spot or 
futures?, 39 J. Futures Mkts. 803 (2019) (finding that the bitcoin 
spot market leads price discovery).
    2. O. Entrop, B. Frijns & M. Seruset, The determinants of price 
discovery on bitcoin markets, 40 J. Futures Mkts. 816 (2020) 
(finding that price discovery measures vary significantly over time 
without one market being clearly dominant over the other).
    3. J. Hung, H. Liu & J. Yang, Trading activity and price 
discovery in Bitcoin futures markets, 62 J. Empirical Finance 107 
(2021) (finding that the bitcoin spot market dominates price 
discovery).
    4. B. Kapar & J. Olmo, An analysis of price discovery between 
Bitcoin futures and spot markets, 174 Econ. Letters 62 (2019) 
(finding that bitcoin futures dominate price discovery).
    5. E. Akyildirim, S. Corbet, P. Katsiampa, N. Kellard & A. 
Sensoy, The development of Bitcoin futures: Exploring the 
interactions between cryptocurrency derivatives, 34 Fin. Res. 
Letters 101234 (2020) (finding that bitcoin futures dominate price 
discovery).
    6. A. Fassas, S. Papadamou, & A. Koulis, Price discovery in 
bitcoin futures, 52 Res. Int'l Bus. Fin. 101116 (2020) (finding that 
bitcoin futures play a more important role in price discovery).
    7. S. Aleti & B. Mizrach, Bitcoin spot and futures market 
microstructure, 41 J. Futures Mkts. 194 (2021) (finding that 
relatively more price discovery occurs on the CME as compared to 
four spot exchanges).
    8. J. Wu, K. Xu, X. Zheng & J. Chen, Fractional cointegration in 
bitcoin spot and futures markets, 41 J. Futures Mkts. 1478 (2021) 
(finding that CME bitcoin futures dominate price discovery).
    9. C. Alexander & D. Heck, Price discovery in Bitcoin: The 
impact of unregulated markets, 50 J. Financial Stability 100776 
(2020) (finding that, in a multi-dimensional setting, including the 
main price leaders within futures, perpetuals, and spot markets, CME 
bitcoin futures have a very minor effect on price discovery; and 
that faster speed of adjustment and information absorption occurs on 
the unregulated spot and derivatives platforms than on CME bitcoin 
futures).

    The Commission has also repeatedly raised doubts about the 
methodology of two studies finding that the futures market leads the 
spot market, Kapar and Olmo (2019) \50\ and Hu et al. (2020),\51\ 
writing in the USBT Order:
---------------------------------------------------------------------------

    \50\ B. Kapar & J. Olmo (2019), ``An analysis of price discovery 
between Bitcoin futures and spot markets,'' Economics Letters, 
Elsevier, vol. 174(C), pages 62-64. (``Kapar and Olmo 2019'').
    \51\ Y. Hu, Y. Hou & L. Oxley (2020), ``What role do futures 
markets play in Bitcoin pricing? Causality, cointegration and price 
discovery from a time-varying perspective,'' 72 Int'l Rev. of Fin. 
Analysis 101569 (``Hu et al. 2020'').

[[Page 2310]]

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

    The Commission notes that two other papers cited by the Sponsor 
utilize daily spot market prices, as opposed to intraday prices. See 
Kapar & Olmo; Hu et al. In seeking to draw conclusions regarding 
which market leads price discovery, studies based on daily price 
data may not be able to distinguish which market incorporates new 
information faster, because the time gap between two consecutive 
observations in the data samples could be longer than the typical 
information processing time in such markets. The Sponsor has not 
provided evidence to support the assertion that daily price data is 
sufficiently able to capture information flows in the bitcoin 
market.\52\
---------------------------------------------------------------------------

    \52\ See USBT Order, 85 FR at 12613.

    Furthermore, regarding Hu et al. (2020), the Commission also noted 
---------------------------------------------------------------------------
that the analysis included time varying results:

    [F]or a period of time spanning over 20% of the study, prices in 
the bitcoin spot market led futures market prices. Such time 
inconsistency in the direction of price discovery could suggest that 
the market has not yet found its natural equilibrium. Moreover, this 
period spanned the end of the study period and the record does not 
include evidence to explain why this would not indicate a shift 
towards prices in the spot market leading the futures market that 
would be expected to persist into the future.\53\
---------------------------------------------------------------------------

    \53\ See id.

    Lastly, in Bitwise Order II, the Commission raised the question as 
to whether classic price discovery metrics like IS/CS could be trusted 
at all if, as the Sponsor claimed, referencing Robertson and Zhang 
(2022) and Buccheri et al. (2021), these metrics could produce biased 
---------------------------------------------------------------------------
results when the price data used has a high level of sparsity:

    [Bitwise does not] discuss these 10 IS/CS studies in light of 
Bitwise's acknowledgment that ``classic'' price discovery metrics 
like IS/CS could be misspecified, with potentially biased results, 
when price data have a high level of sparsity.\54\
---------------------------------------------------------------------------

    \54\ See Bitwise Order II, 87 FR at 40288.

    The following section aims to comprehensively address all of the 
above critical questions raised by the Commission.
The Sponsor's Response to the Questions Raised by the Commission 
Regarding the ``Mixed'' Academic Record
    The Sponsor's prior research (Bitwise Prong One Paper) included a 
detailed literature review wherein the Sponsor examined 10 academic 
studies exploring the lead-lag relationship between bitcoin futures and 
spot markets, writing about each study in detail, and will be referred 
to as ``prior literature review'' in this proposal.
Baur and Dimpfl (2019) \55\
---------------------------------------------------------------------------

    \55\ D. Baur & T. Dimpfl (2019), ``Price discovery in bitcoin 
spot or futures?,'' Journal of Futures Markets, 39(7): 803-817 
(``Baur and Dimpfl 2019'').
---------------------------------------------------------------------------

    As the Sponsor detailed in the prior literature review, Baur and 
Dimpfl (2019) has a severe methodological flaw that led the CME bitcoin 
futures market's contribution to price discovery to appear artificially 
low: The authors conduct their price discovery analysis on a per-
lifetime-of-each-contract basis, rather than a standard rolling-front-
month-contract basis.
    An independent study, Alexander and Heck (2019), explored this 
issue extensively. The paper begins by using a standard rolling-front-
month-contract approach to compare the futures market with the spot 
market, and concludes that there is a ``greater contribution to price 
discovery from the futures market than the spot market.'' \56\
---------------------------------------------------------------------------

    \56\ C. Alexander & D. Heck (2019), Price Discovery, High-
Frequency Trading and Jumps in Bitcoin Markets (``Alexander and Heck 
2019'').
---------------------------------------------------------------------------

    The paper specifically notes that this finding contradicts the 
findings in Baur and Dimpfl (2019), and the authors set about resolving 
this discrepancy by repeating their original study using Baur and 
Dimpfl (2019)'s per-lifetime-of-each-contract approach. The authors 
show that this methodological change reverses their original finding 
and shows the spot market leading price discovery. The authors conclude 
by explaining why the per-lifetime-of-each-contract approach is flawed 
and should not be relied on:

    This apparently leading role of the spot market [using the per-
lifetime-of-each-contract approach] is not surprising since, during 
the first few months after the introduction of a contract, there is 
always another contract with a nearer maturity where almost all 
trading activity occurs. So any finding that the spot market 
dominates the price discovery process is merely an artifact of very 
low trading volumes when the contract is first issued.\57\
---------------------------------------------------------------------------

    \57\ See Alexander and Heck 2019.

    As regards the first prong, the question is not whether each 
individual futures contract leads the spot market, but rather, whether 
the futures market as a whole leads the spot market. Given this, the 
rolling-front-month-contract approach, which focuses attention on the 
contract that attracts the bulk of trading activity at any given time, 
is the correct approach.
Entrop et al. (2020) \58\
---------------------------------------------------------------------------

    \58\ See O. Entrop, B. Frijns & M. Seruset (2020), ``The 
Determinants of Price Discovery on Bitcoin Markets,'' 40 J. Futures 
Mkts. 816 (``Entrop et al. 2020'').
---------------------------------------------------------------------------

    Entrop et al. (2020) evaluates price discovery in the bitcoin 
market by comparing the CME futures market and Bitstamp, a spot market, 
from December 2017 to March 2019. The paper finds that the CME futures 
market led price discovery for the majority of the time period studied.
    Despite the fact that the paper finds generally in favor of the 
futures market leading, the Commission calls out Entrop et al. (2020) 
in multiple disapproval orders, noting for instance in the USBT Order 
the paper ``finding that price discovery measures vary significantly 
over time without one market being clearly dominant over the other.'' 
\59\ The Commission's point draws on the fact that, for the last five 
months of the 16 month study, the spot market led the futures market in 
IS/CS measures, and that, for the last two months of the study, it did 
so in a statistically significant way. The authors of the paper note 
the significant time variation in market leadership as well.
---------------------------------------------------------------------------

    \59\ See USBT Order, 85 FR at 12613.
---------------------------------------------------------------------------

    As with Baur and Dimpfl (2019), this finding is driven by a 
methodological choice in the study design that introduces an artificial 
bias against the CME bitcoin futures market: Whereas the vast majority 
of studies evaluating price discovery in the bitcoin market use actual 
transaction prices to conduct their analysis, Entrop et al. (2020) uses 
``midquotes'' (or midpoint of the bid-ask spread) in each market. As 
explored further below, the bias introduced by this methodological 
decision is exaggerated specifically in the period where leadership 
swings to the spot market.
    The authors justify their non-standard choice to use midquotes 
instead of transaction prices by pointing to four academic studies, 
itemizing three specific advantages:

    First, quotes can be updated in the absence of transactions. 
Second, midquotes mitigate the problem of infrequent trading, which 
is normally observed in transaction prices. Third, midquotes are not 
affected by the bid-ask bounce.\60\
---------------------------------------------------------------------------

    \60\ See Entrop et al. 2020.

    These theoretical advantages, however, must be considered in light 
of the specific microstructure of the bitcoin markets, and 
specifically, the sizable difference in ``tick size'' (or the minimum 
price change) in the CME bitcoin market compared to the spot market. 
For CME bitcoin futures contracts, the tick size per contract is 
$25.00,\61\ which equates to $5.00 per bitcoin, while for spot 
platforms like

[[Page 2311]]

Bitstamp (the spot platform used in this study), the tick size is 
typically $0.01.\62\
---------------------------------------------------------------------------

    \61\ See CME bitcoin futures contract specs, available at 
https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.contractSpecs.html.
    \62\ See Bitstamp tick sizes before changes made in 2022, 
available at https://blog.bitstamp.net/post/changes-to-tick-sizes/.
---------------------------------------------------------------------------

    In a low volatility environment, where the price of bitcoin may 
trade within a single $5.00 range for a period of time, the midquote on 
a spot market can update on a tick-by-tick basis as the market price of 
bitcoin moves up or down within the range. Meanwhile, the midquote on 
the CME bitcoin futures market will not change at all.
    Importantly, this does not mean the CME bitcoin futures market has 
forfeited price discovery or that it cannot transmit information to 
other markets. Transactions may occur on the CME bitcoin futures market 
at either the ask or the bid even as the midquote remains static, 
depending on whether traders believe the market is likely to rise or 
fall. By electing to ignore these transactions, Entrop et al. (2020) 
renders it significantly harder for the CME bitcoin futures market to 
demonstrate price leadership during low volatility environments. One 
cannot measure what the eye refuses to see.
    There is strong reason to believe that the methodological choice to 
use midquotes biased the time varying results of this study. The last 
two months of the study (February and March 2019), where the study 
showed the spot market leading the futures market in a statistically 
significant manner, occurred during the depth of the bitcoin bear 
market. During this period, bitcoin's price hovered below the $4,000 
mark, rendering the $5 tick size particularly large on a percentage 
basis, and bitcoin's price volatility was exceptionally low, as 
observed in Table 3 of the study. The impact is clear: Midquotes were 
sampled at a 1 minute interval in the study, and amongst the 22,788 and 
29,962 CME midquotes sampled for the months of February and March 2019, 
80.82% and 84.76% of the data points represented zero change, as 
observed in Table 4. This was by far the highest ratio of zero change 
samples in the study. By comparison, in the first two months of the 
study, only 8.66% and 12.32% of the midquotes sampled at 1 minute 
intervals from the CME represented zero change.
    The Sponsor believes that the results of the last two months, where 
the percentage of sampled midquotes representing zero change were so 
high, cannot be relied upon to draw the conclusion that price discovery 
leadership changed from the futures market to the spot market during 
that time, and that the academic record should reflect Entrop et al. 
(2020)'s overall finding that the futures market leads the spot market.
Hung et al. (2021) \63\
---------------------------------------------------------------------------

    \63\ This paper was published after the Sponsor completed the 
academic literature review in the Bitwise Prong One Paper, and 
therefore was not captured or analyzed in that white paper. See J. 
Hung, H. Liu & J. Yang, ``Trading activity and price discovery in 
Bitcoin futures markets,'' 62 J. Empirical Finance 107 (2021) 
(``Hung et al. 2021'').
---------------------------------------------------------------------------

    Hung et al. (2021) does not focus on price discovery between the 
bitcoin futures market and the spot market. In fact, the word ``spot'' 
does not appear in the paper's abstract. Instead, the paper is 
primarily focused on investigating the relative contributions of 
different types of traders (e.g., hedgers, retailers, etc.) on price 
discovery in the bitcoin futures markets, both CME and CBOE, using the 
Commitments of Traders (COT) data from the CFTC. Its secondary focus is 
on analyzing price discovery competition between the CME and CBOE 
bitcoin futures markets, as a way of exploring CBOE's decision to 
suspend further listings of their bitcoin futures contracts in 2019.
    The ancillary nature of the spot vs. futures investigation is worth 
noting because it may explain why the mathematical oddities in the 
results of that investigation went unexplored by the authors.
    Those results are presented in Table 4 of the paper. The authors 
use modified information share (MIS), a variant of classic IS, to 
evaluate price leadership between a single spot platform (Bitstamp) and 
both the CME and CBOE futures exchanges, for the period between April 
10, 2018 and April 30, 2019. The authors divide this period into 56 
weeks, and independently calculate the MIS for each week, before 
presenting it on an average, minimum, and maximum basis. The results 
show that the spot market led the CME futures market over this time 
period with an average MIS value of 0.654.
    The table, however, also shows a minimum spot market MIS value 
amongst the 56 data points of 0.000 (a finding that the CME futures 
market completely led the spot market for at least one entire week) and 
a maximum value of 0.999 (a finding that the spot market completely led 
the CME futures market for at least one entire week).
    These maximum and minimum values are extremely unlikely. Price 
discovery analyses such as MIS are statistical analyses where even a 
slight bit of randomness in an otherwise clearly lagging price series 
would still produce some contribution to price discovery. A 0.000 and 
0.999 result is an unexplained mathematical oddity hard to comprehend, 
and even more so as results come at both ends of the spectrum. Amongst 
all the price discovery academic literature the Sponsor has reviewed--
as well as all the papers cited by the Commission--there are no other 
examples where a full week's worth of data between two time series has 
resulted in such extreme values. The unprecedented results are both so 
statistically improbable and so out-of-line with results from other 
papers that the most likely explanation is that some amount of data 
errors existed in the price data that went into the analysis.
    Unfortunately, the study's spot data provider (bitcoincharts.com) 
is no longer accessible, and so, it is not possible to check the data. 
In addition, the paper does not provide any charts or visualizations 
that would permit the Sponsor to visually inspect price discovery 
trends over time and attempt to infer some other explanation for these 
highly unusual results.
    Given the anomalous and statistically unlikely nature of the 
results, the Sponsor believes that the paper's ancillary findings about 
price discovery between spot and futures markets cannot be relied upon 
and should be dismissed.
Alexander and Heck (2020) \64\
---------------------------------------------------------------------------

    \64\ See C. Alexander & D. Heck (2020), ``Price Discovery in 
Bitcoin: The Impact of Unregulated Markets,'' Journal of Financial 
Stability, Volume 50, October 2020, Article Number 100776 
(``Alexander and Heck 2020'').
---------------------------------------------------------------------------

    Alexander and Heck (2020) stands alone from all other academic 
papers cited by the Commission in its review of the academic literature 
by using a ``multidimensional'' approach to evaluate the source of 
price discovery leadership in the bitcoin market. That is, rather than 
using the classic ``pairwise'' approach to IS/CS price discovery 
analysis--comparing Exchange A against Exchange B, and then comparing 
Exchange A against Exchange C, and so on--Alexander and Heck (2020) 
uses a statistical technique that attempts to compare multiple 
exchanges simultaneously.
    The Commission commented on the findings of Alexander and Heck 
(2020) in Bitwise Order II, noting that:

    [Alexander & Heck] finds that CME bitcoin futures ``have a very 
minor effect on price discovery,'' and that ``a faster speed of 
adjustment and information absorption [occurs] on the unregulated 
spot and derivatives [platforms] than on CME bitcoin futures.'' 
Specifically, Alexander & Heck's multidimensional analysis--which 
simultaneously includes unregulated futures,

[[Page 2312]]

regulated futures, perpetual futures, and spot markets--finds that 
CME bitcoin futures have never accounted for more than 9% of price 
discovery (and unregulated markets collectively account for more 
than 91% of price discovery), and have always contributed the least 
to price discovery among all venues considered, except during July 
2019.\65\
---------------------------------------------------------------------------

    \65\ See Bitwise Order II, 87 FR at 40289.

    Expanding beyond the specific finding, the Commission used 
commentary from this paper to question in general the validity of 
pairwise, two-dimensional analysis--the type of analysis employed by 
every other paper the Commission references, as well as the Sponsor's 
own statistical IS and CS analysis.
    Quoting a critique from the paper and adding its own color, the 
Commission notes:

    [From Alexander and Heck (2020):] ``omitting substantial 
information flows from other markets can produce misleading results. 
. . . [I]n a two-dimensional model one or other of the instruments 
must necessarily be identified as price leader.'' In other words, a 
two-dimensional model might erroneously attribute information share 
or component share of omitted platforms to one of the two platforms 
included in the pairwise estimate, because the two shares must 
necessarily sum up to 100%.\66\
---------------------------------------------------------------------------

    \66\ See id. at 40289.

    The Sponsor disagrees. To the contrary, the Sponsor believes that 
the multidimensional study design employed by Alexander and Heck 
introduces a strong bias against the CME bitcoin futures market that 
renders the results invalid.
    The core issue with multidimensional price discovery analysis, and 
possibly the reason Alexander and Heck (2020) is the only study to 
employ it in this context that the Sponsor is aware of, is that when 
comparing price discovery amongst different category of markets (as in 
here, regulated futures, unregulated futures, and spot), the question 
of which markets appear to contribute more to price discovery can be 
biased by the number of constituent markets from each category.
    The reason for this bias is that IS/CS price discovery measures are 
based on the computation of an implicit ``common price'' that is 
derived from the collection of inputted price series. The statistical 
measures track the shares of contribution made to changes in the common 
price by each price series. In a multidimensional context, as more 
alike markets are added, those markets can artificially appear to 
contribute more to changes in the common price because the common price 
itself changes with the addition of more markets. For example, if 
market A objectively leads both market B and and market C, but market B 
and market C have very similar price series, a multidimensional 
analysis amongst all three markets can erroneously conclude that market 
A's movements contributed less to changes in the common price than 
market B and C, simply because the latter two markets were similar.
    Looking at Alexander and Heck (2020) with this understanding, the 
Sponsor notes that the paper's final analysis compares eight markets in 
its multidimensional format, and that these eight markets fit into 
three broad categories: Regulated futures (CME), unregulated futures 
(Huobi futures, OKEx futures, OKEx perpetuals, and Bitmex perpetuals), 
and spot (Coinbase, Bitfinex, Bitstamp).\67\
---------------------------------------------------------------------------

    \67\ In the paper, Alexander and Heck disaggregate unregulated 
futures and perpetuals into separate market categories. The Sponsor 
has grouped them here because the two markets are extremely similar: 
Both offer derivative exposure to bitcoin and are characterized by 
their offshore and highly leveraged nature (unregulated derivatives 
markets often offer traders 10-100X leverage, while regulated 
futures markets limit leverage to roughly 2-3X). In addition, 
because all three unregulated derivatives platforms (Huobi, OKEx, 
Bitmex) have both instruments (futures and perpetuals), it is 
reasonable to assume that the two instruments likely share a similar 
base of traders who can easily arbitrage across positions in the two 
instrument types using shared margin, keeping prices closely 
aligned.
---------------------------------------------------------------------------

    Given these inputs, it is unsurprising--and perhaps even 
predetermined--that the results of the multidimensional analysis showed 
that the unregulated futures markets (with four markets included in the 
analysis) were found to dominate price discovery, with the three spot 
markets following, and the one regulated futures market coming in last.
    The Sponsor's conclusion that the results of Alexander and Heck 
(2020) are driven by study design, rather than accurately reflecting 
the true source of price discovery in the markets, is supported by a 
paper published by the same authors in the prior year. Alexander and 
Heck (2019) uses a classic, pairwise, two-dimensional price discovery 
analysis to compare the CME futures market and the bitcoin spot market 
(represented by a reconstructed version of Bitcoin Reference Rate which 
includes transactions from Coinbase and Bitstamp). The study finds that 
the CME futures market led the spot market.
    The two studies generally focus on different time periods, but they 
overlap for one quarter: Q2 2019. Notably, in the 2019 paper, Alexander 
and Heck call out the significant leadership demonstrated by the CME 
market during Q2 2019. Specifically, they note that the Generalized 
Information Share (GIS) attributed to the CME grew from 56% for the 
period from December 2017 to March 2019, to 65% when Q2 2019 was added 
to the analysis. The authors do not provide a discrete GIS value for Q2 
2019, but the rise in overall GIS after including the quarter indicates 
that the GIS for Q2 2019 was likely above 75%.
    By comparison, in Alexander and Heck (2020), CME's GIS ranged from 
3.23% to 5.83% in Q2 2019, while the combined GIS of the three included 
spot markets (Coinbase, Bitfinex, Bitstamp) ranged from 41.60% to 
50.20%, (the remainder was attributed to unregulated futures 
markets).\68\
---------------------------------------------------------------------------

    \68\ Huobi futures and OKEx perpetuals did not exist in Q2 2019, 
so the multidimensional analysis starts with just 6 markets: 3 spot 
markets, 2 unregulated futures markets, and 1 regulated futures 
market.
---------------------------------------------------------------------------

    How could the results be so different? CME dominated price 
discovery in Q2 2019 when compared on a pairwise basis with spot 
markets, but spot markets had a much larger share of price discovery 
than the CME when analyzed on a multidimensional basis. The most likely 
explanation is that the multidimensional analytical approach created a 
bias in the ``common price'' by adding three spot markets into the mix 
compared to just one regulated futures market.
    Lastly, Alexander and Heck's critique (and the Commission's 
concern) that two-dimensional analysis omits information flows from 
other markets and thereby may generate spurious results is misleading. 
It is, of course, axiomatically true in isolation that omitting a 
market from consideration could lead to spurious results. But as long 
as the two-dimensional analysis includes all potential leading markets, 
an exhaustive pairwise analysis will ultimately find the market that is 
leading overall. Put differently, if you can show that Market A leads 
Market B and also that Market A leads Market C, you can feel confident 
that Market A leads both Markets B and C. Unfortunately, the same 
cannot be said for multidimensional analysis, where, as demonstrated by 
comparing the 2019 and 2020 papers, adding additional ``like markets'' 
can influence the ``common price'' and create spurious results.
    The Sponsor believes that the traditional, pairwise approach to 
price discovery analysis--the dominant approach in the academic 
literature--is the correct approach for exploring the lead-lag 
relationship between the bitcoin futures market and the spot market, 
and the multidimensional approach is mis-specified.

[[Page 2313]]

Kapar and Olmo (2019)
    Kalpar and Olmo (2019) finds that the CME futures market dominates 
price discovery when compared to the spot market. The Commission, 
however, raises a concern about this study's choice to use a daily 
price sampling period rather than a more frequent sampling period, and 
questions the validity of the results. This concern also applies to Hu 
et al. (2020). The Commission writes in the USBT Order:

    [S]tudies based on daily price data may not be able to 
distinguish which market incorporates new information faster, 
because the time gap between two consecutive observations in the 
data samples could be longer than the typical information processing 
time in such markets.\69\
---------------------------------------------------------------------------

    \69\ See USBT Order, 85 FR at 12613.

    The Sponsor believes that the requirement that the ``the time gap 
between two consecutive observations'' be shorter than the 
``information processing time'' of the market in question is not 
supported by the academic literature and is, in fact, directly in 
contrast to the standard used in all nine academic studies listed by 
the Commission, as well as all studies that the Sponsor is aware of.
    In the Bitwise Prong One Paper, the Sponsor conducted a 
comprehensive study of bitcoin spot markets and the CME bitcoin futures 
market using time-shift lead-lag (TSLL) analysis, wherein you shift one 
time series against another to find the amount of shift that creates 
the highest correlation between the two series. Using this well-
established technique, the Sponsor estimated that the average ``lead-
lag time'' between the CME bitcoin futures market and Coinbase, a spot 
market, from April 2019 to September 2020, was 2.94 seconds. This can 
be considered as the time it took, on average, for information to 
travel between the CME and Coinbase.
    If it takes only 2.94 seconds on average for information to travel 
between the CME and Coinbase, is all price discovery analysis that uses 
sampling intervals longer than 2.94 seconds unequipped to explore which 
market leads?
    For the nine studies noted by the Commission as constituting the 
``Mixed Academic Record,'' the sampling intervals were (in the order in 
which the papers were cited) 15 minutes, 1 minute, 15 minutes, 1 day, 
between 1 and 60 minutes, 60 minutes, 5 minutes, 1 minute, and 1 
minute. This is a wide range of values, ranging from 1 minute to 1 day, 
but all of them are at least 20X longer than the average lead-lag time 
that the Sponsor found between the CME futures market and Coinbase.
    The record is similar in the broader, non-crypto-related price 
discovery literature, where minutely, hourly, or daily analyses are 
common.
    Academics still find daily analysis useful, even in markets with 
fast information processing time, for a reason: Even if the sampling 
period is longer than the information processing time, at each sampling 
point, there will still likely be a gap between two markets' prices, 
and analyzing statistically whether market A's prices move to meet 
market B's prices or vice versa and which market's price as a result 
contributes more to the ``common price'' is still useful in determining 
which market leads price discovery.
    The Sponsor believes that price leadership at a daily interval 
still illustrates which market bends to meet the other market, and 
should not be removed from the academic record under consideration.
Hu et al. (2020)
    Hu et al (2020) strongly supports the notion that the futures 
market leads the spot market. Indeed, the abstract of the paper finds 
that:

. . . futures prices Granger cause spot prices and that futures 
prices dominate the price discovery process.

    In Bitwise Order II, however, the Commission wrote that the:

    Hu, Hou & Oxley paper found inconclusive evidence that futures 
prices lead spot bitcoin prices--in particular, that the months at 
the end of the paper's sample period showed, using Granger causality 
methodology, that the spot market was the leading market--and that 
the record did not include evidence to explain why this would not 
indicate a shift towards prices in the spot market leading the 
futures market that would be expected to persist into the 
future.\70\
---------------------------------------------------------------------------

    \70\ See Bitwise Order II, 87 FR at 40288.

    The Sponsor believes this is a misreading of the results of the 
paper.
    The primary objective of Hu et al. (2020) is to explore the time-
varying nature of the lead-lag relationship between the bitcoin futures 
market and spot market. In order to do that, the authors use a time-
varying version of the Granger causality test developed in Shi et al. 
(2018).\71\ The time-varying Granger causality test has two main 
variants: the rolling window approach and the recursive evolving 
approach.
---------------------------------------------------------------------------

    \71\ S. Shi, P. C. Phillips, & S. Hurn (2018), ``Change 
Detection and the Causal Impact of the Yield Curve,'' Journal of 
Time Series Analysis, 39(6), 966-987 (``Shi et al. 2018'').
---------------------------------------------------------------------------

    Hu et al. (2020) references that the authors of Shi et al. (2018) 
explicitly note that the recursive evolving approach is the more 
accurate approach:

    Simulation experiments compare the efficacy of the proposed test 
with two other commonly used tests, the forward recursive and the 
rolling window tests. The results indicate that the recursive 
evolving approach offers the best finite sample performance, 
followed by the rolling window algorithm.\72\
---------------------------------------------------------------------------

    \72\ See id. at 1.

    Under the lesser of the two approaches--the rolling window 
algorithm--it is true that CME futures prices are not found to Granger 
cause spot prices for the last five months of the study. However, under 
the recursive evolving approach, CME futures prices are found to 
Granger cause spot prices for the entire study period, and do so with 
increasing strength towards the end of the study, as shown in Figure 6 
of the study.
    How do you resolve the conflict? The authors reference Shi et al. 
(2018)'s perspective that ``the recursive evolving window algorithm 
provides the most reliable results,'' and therefore choose to interpret 
the results based on this method. Indeed, they write conclusively about 
this topic to avoid any doubt, saying:

    More importantly, given the duration of the Granger-causal 
episodes and the magnitude of the test statistics in Fig. 5 and Fig. 
6, it was found that the strength of Granger causality from the 
futures prices to spot prices is stronger than vice-versa. From this 
we conclude that Granger causality runs from the futures market to 
the spot market. This result further suggests that the CME Bitcoin 
futures market leads the spot since the former embeds the new 
information faster than the latter.\73\
---------------------------------------------------------------------------

    \73\ See Hu et al. 2020 at 9.

    The authors' conclusion--based on a deep understanding of the 
analytical methods used--is that the CME futures prices Granger caused 
spot prices for the entire period of the study and that the CME futures 
market conclusively leads the spot market even when examined using 
time-varying analytical approaches, and the Sponsor finds no reason to 
question the conclusivity of the study.
Robertson and Zhang (2022) \74\ and Buccheri et al. (2021) \75\
---------------------------------------------------------------------------

    \74\ K. Robertson & J. Zhang (2022), Suitable Price Discovery 
Measurement of Bitcoin Spot and Futures Markets (``Robertson and 
Zhang 2022'').
    \75\ G. Buccheri, G. Bormetti, F. Corsi & F. Lillo (2021), 
``Comment on: Price Discovery in High Resolution,'' Journal of 
Financial Econometrics, Volume 19, Issue 3, Summer 2021, Pages 439-
451, (``Buccheri et al. 2021'').
---------------------------------------------------------------------------

    In Bitwise Order II, the Commission raised questions regarding a 
statement the Sponsor made in a February 25,

[[Page 2314]]

2022 Comment Letter,\76\ discussing two academic papers:
---------------------------------------------------------------------------

    \76\ The sponsor submitted a comment letter that discusses 
Robertson and Zhang 2022. See Letter from Katherine Dowling, Matt 
Hougan, and Paul Fusaro, Bitwise, dated Feb. 25, 2022 (``Bitwise 
Letter I'').
---------------------------------------------------------------------------

Robertson and Zhang (2022) and Buccheri et al. (2021)
    The Sponsor's letter noted that the papers raised questions about 
the accuracy of traditional price discovery metrics like IS and CS, 
writing:

    [Robertson and Zhang] note that classic price discovery metrics 
like Information Share (IS) and Component Share (CS) ``face 
difficulties based on the model assumptions of VECM [the Vector 
Error Correction Model] when the prices under consideration are 
asynchronous and/or infrequent.'' Citing Buccheri et al. (2019), 
they note that ``when prices have a high level of sparsity, the VECM 
is clearly misspecified and the estimates are potentially biased.'' 
\77\
---------------------------------------------------------------------------

    \77\ See Bitwise Letter I, at 3.

    Given the Sponsor's acknowledgement that classic price discovery 
metrics like IS/CS could be biased by sparsity in price data, the 
Commission deemed it odd that the Sponsor still drew conclusions from 
---------------------------------------------------------------------------
the academic literature without further explanation:

    [Bitwise does not] discuss these 10 IS/CS studies in light of 
Bitwise's acknowledgment that ``classic'' price discovery metrics 
like IS/CS could be misspecified, with potentially biased results, 
when price data have a high level of sparsity.\78\
---------------------------------------------------------------------------

    \78\ See Bitwise Order II, 87 FR at 40288.

    Furthermore, the Commission suggested that the Sponsor was 
implicitly casting doubt on the results of its own IS/CS analysis as 
---------------------------------------------------------------------------
well:

    Bitwise's acknowledgement of the [Robertson and Zhang (2022) 
paper]'s finding that ``there is a high level of sparsity in bitcoin 
data'' suggests that, by its own admission, Bitwise's IS/CS approach 
is misspecified and its estimates potentially biased.\79\
---------------------------------------------------------------------------

    \79\ See id.

    The Sponsor would like to clear up this misunderstanding.
    It is indeed true that the CME bitcoin futures market has a high 
level of sparsity in its transaction data compared to that of spot 
markets, because CME bitcoin futures contracts have much higher tick 
sizes ($5 vs. $0.01 per bitcoin on Coinbase) and minimum trade sizes (5 
bitcoin vs. 0.00000001 bitcoin on Coinbase).\80\ Robertson and Zhang 
(2022) includes a table in the Appendix of their study where the 
authors quantify this sparsity concretely: For Q1 2021, the average 
seconds between trades (rounded) was 25 seconds for CME and 1 second 
for Coinbase.
---------------------------------------------------------------------------

    \80\ See CME bitcoin futures contract specs, available at 
https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.contractSpecs.html; see also Coinbase market specs, 
available at https://exchange.coinbase.com/markets.
---------------------------------------------------------------------------

    It is also true that, if one price series of a two-dimensional 
price discovery analysis has a high degree of sparsity compared to the 
other price series, the results can be potentially biased. Robertson 
and Zhang (2022) demonstrates this incredibly clearly through a 
simulation analysis constructed as below (copied directly from the 
paper):

    [W]e compare the Coinbase USD market to an artificially modified 
version of itself using IS and CS every day from Q1 2019 through Q1 
2021. The artificial modifications come in two forms: (1) the 
market's trade times are advanced by 3 seconds to represent a 
leading market and then (2) a percentage (in 10% increments starting 
at 10% and ending at 90%) of random trade values is removed to 
represent leading markets with varying levels of sparsity.\81\
---------------------------------------------------------------------------

    \81\ See Robertson and Zhang 2022, at 14.

    The results of the simulation analysis is that the artificially-
leading Coinbase price series is found to lead close to 100% (as 
expected) when only 10% of the trade values are removed. Then as the 
percentage of trade values randomly removed increases towards 90%, the 
price leadership of the artificially-leading Coinbase price series 
trends down, approaching 0%. With only about 40% of the trade values 
removed, the leadership actually flips directions, with IS and CS 
values dropping below 50%. In other words, introducing sparsity into a 
price series can cause it to appear as if it is lagging the other price 
series using IS and CS, even when the price series is objectively 
leading originally. This is the ``potential bias'' we acknowledged and 
agreed with the authors of the study on.
    It is important to note, however, that this bias only runs one way: 
Against the market with higher data sparsity. As such, the 
acknowledgement of this statistical bias does not mean results cannot 
be relied on in a situation where the market with higher data sparsity 
is found to lead price discovery. Quite the contrary.
    In all studies comparing the CME bitcoin futures market and spot 
markets, the CME futures market has a higher degree of sparsity. As a 
result, in each of these studies, the IS/CS values for the CME bitcoin 
futures market are biased downwards compared to that of spot markets. 
This means we can rely on IS/CS results showing the CME futures market 
leading spot markets, as those results only understate the strength of 
the CME futures market's price leadership.
Section Summary
    The Sponsor does not believe that the academic literature is mixed. 
Instead, it finds a high degree of consensus amongst well-designed 
studies showing that the CME futures market leads the spot market. This 
finding is all-the-more impressive given the high degree of sparsity in 
the CME bitcoin futures market, which introduces a significant bias 
against it in traditional price discovery analysis.
    As such, the Sponsor believes the academic record clearly 
demonstrates that the CME bitcoin futures market leads the spot market, 
and therefore meets the first prong of the significant market test.
The Sponsor's Comprehensive Research Demonstrates That the CME Bitcoin 
Futures Market Meets Both Prongs of the Significant Market Test
    As detailed in the ``Background'' section, following the first 
Bitwise disapproval Order, the Sponsor, in an effort to conduct 
comprehensive research demonstrating both prongs of the significant 
market test while providing sufficient information to the Commission on 
the data and methodology underlying its analysis, met with the 
Commission Staff 14 times between January 2020 and August 2021, 
including with staff from the Divisions of Trading and Markets, 
Economic Risk and Analysis, and Corporate Finance, and produced two 
white papers, one addressing each prong.
    The 107-page Bitwise Prong One Paper included a survey and 
validation of bitcoin data sources, a detailed review of existing 
academic literature on the topic of lead-lag relationships between 
bitcoin markets, and a rigorous statistical analysis using both 
Information Share (IS)/Component Share (CS) and Time-Shift Lead-Lag 
(TSLL) metrics comparing the CME bitcoin futures market against both 
spot bitcoin platforms and unregulated bitcoin futures platforms. The 
24-page Bitwise Prong Two paper included an analysis of potential 
inflows into a spot bitcoin ETP and a statistical evaluation of the 
impact of historical inflows into other bitcoin investment products on 
the bitcoin market.
    Both the Bitwise Prong One Paper and the Bitwise Prong Two Paper 
were included in full as exhibits in the rule proposal disapproved in 
Bitwise Order II, and their analyses formed the core arguments around 
why the Sponsor and the Exchange believed the CME bitcoin

[[Page 2315]]

futures market had met both prongs of the significant market test. The 
Commission disagreed with the Sponsor's analyses and listed out five 
specific disagreements regarding the first prong analysis and three 
specific disagreements regarding the second prong analysis.
    The following sections will comprehensively address all eight 
disagreements the Commission raised regarding the Sponsor's prior 
analyses in Bitwise Order II.
The Sponsor's Response to the Disagreements Raised by the Commission 
Regarding the Sponsor's Prior Analysis of the First Prong of the 
Significant Market Test
    Disagreement 1: The Sponsor's acknowledgement of the concerns 
raised in Robertson and Zhang (2022) and Buccheri et al. (2021) casts 
doubt on its own IS/CS results.
    The first disagreement raised by the Commission regarding the 
Sponsor's prior analysis of the first prong focuses on the Sponsor's 
acknowledgement of certain academic concerns surrounding IS/CS price 
discovery analysis.
    According to the Commission:

    Bitwise's first comment letter acknowledges that ``classic'' 
price discovery metrics like IS and CS ``face difficulties based on 
the model assumptions of VECM [the Vector Error Correction Model] 
when the prices under consideration are asynchronous and/or 
infrequent,\[82]\ citing an academic study by Buccheri et al.\[83]\ 
that investigates the difficulties to identifying price discovery 
with VECM models due to the high sparsity of data in markets that 
record trades at the sub-millisecond level. Bitwise also 
acknowledges that, ``when prices have a high level of sparsity, the 
VECM is clearly misspecified and the estimates are potentially 
biased.'' \82\
---------------------------------------------------------------------------

    \82\ See Bitwise Order II, 87 FR at 40288.

    The Commission suggests that this means ``by its own admission, 
Bitwise's IS/CS approach is misspecified and its estimates potentially 
biased.'' \83\
---------------------------------------------------------------------------

    \83\ Id.
---------------------------------------------------------------------------

    The Sponsor disagrees. As detailed earlier in this proposal, in the 
section under the sub-head ``Robertson and Zhang (2022) \84\ and 
Buccheri et al. (2021),'' \85\ the bias that sparsity introduces into 
IS/CS statistics runs in a single direction, punishing the market with 
the higher level of sparsity. In each and every pairwise investigation 
in the Sponsor's analysis, the CME bitcoin futures market is the market 
with the higher level of sparsity. Therefore, the IS/CS price discovery 
ascribed to the CME bitcoin futures market in each investigation should 
be considered the lower bound of actual contribution, and that the 
actual contribution of the CME to price discovery is likely higher than 
stated.
---------------------------------------------------------------------------

    \84\ See Robertson and Zhang 2022.
    \85\ Giuseppe Buccheri et al. (2021), ``Comment on: Price 
Discovery in High Resolution,'' Journal of Financial Econometrics, 
Volume 19, Issue 3, Summer 2021, pp. 439-451 (``Buccheri et al. 
2021'').
---------------------------------------------------------------------------

    The fact that IS/CS statistics are biased against markets with 
higher levels of sparsity does not weaken the Sponsor's argument that 
the CME bitcoin futures market led other markets from a price discovery 
perspective. It actually strengthens it.
    Disagreement 2: The Sponsor performed its IS, CS and TSLL analysis 
on a daily basis before the monthly or full-sample averaging was 
applied and did not adequately explain why daily was the appropriate 
frequency to calculate intermediate values instead of different 
frequencies such as intraday.
    The second disagreement the Commission raised focused on the 
Sponsor's use of daily results as intermediate values. Specifically, in 
its analysis, the Sponsor performed IS, CS and TSLL analysis on a per 
day basis, and then averaged the daily results both by month and across 
the full-sample period.
    The Commission observed:

    However, neither the Exchange nor Bitwise explains why Bitwise 
chose a daily basis to compute its IS, CS, and TSLL estimates; 
provides any information about how variable the daily estimates are, 
before the monthly and/or full-sample averaging was applied; or 
provides any information on the robustness of the estimates--that 
is, whether these daily estimates or the statistical significance of 
the monthly and/or full-sample averages of such daily estimates are 
sensitive to different choices that Bitwise could have made for the 
analysis (e.g., to compute intraday estimates).\86\
---------------------------------------------------------------------------

    \86\ See Bitwise Order II, 87 FR at 40288 (emphasis in 
original).

    Price discovery metrics are not ``point in time'' metrics, but 
rather, calculations that require statistical analysis over a 
reasonable period of time. This is why all ten studies in the prior 
literature review, as well as all subsequent studies noted by the 
Commission, have evaluated price discovery on either a daily or a 
generalized ``full study period'' basis. The Sponsor elected to use the 
more-frequent daily basis to better capture and display potential time-
dependent changes in leadership, as the Commission previously raised 
questions around this topic. To be clear, evaluating price discovery on 
an intraday basis would have been completely out-of-consensus compared 
to all academic studies reviewed by both the Sponsor and the 
Commission, and it is not clear what conclusions could have been drawn 
by such analysis since price discovery analysis of time periods that 
are too short can lead to spurious results.
    Additionally, the Sponsor disagrees with the statement that it has 
not provided ``any information on the robustness of the estimates.'' 
The Sponsor included statistical significance tests and visual 95% 
confidence intervals on its monthly results specifically to highlight 
the robustness of the underlying daily estimates. The Sponsor also 
provided detailed guidance on its data inputs and methodology--and 
relied only on publicly available statistical tools--so that any 
observer with additional questions about the study could easily 
replicate the results, adjust them to their own specifications, or 
drill down on any specific potential analytical angle.
    Disagreement 3: The Sponsor has not explained why it is reasonably 
likely that a would-be manipulator would have to trade on the CME to 
successfully manipulate the proposed ETP when the spot markets still 
account for 32-47% of price discovery.
    The Commission observed:

    [T]he pairwise IS/CS full-sample average results for CME 
compared to each of the 10 spot platforms ranged between 52.97% (the 
CS result versus itBit) to 68.03% (the CS result versus Bitstamp). 
Even accepting these results and their statistical significance at 
face value, these results suggest that spot bitcoin markets still 
account for approximately 32%-47% of price discovery. Yet neither 
Bitwise nor the Exchange has explained why, notwithstanding this 
amount of price discovery occurring on spot platforms, it is 
reasonably likely that a would-be manipulator would nonetheless have 
to trade on the CME bitcoin futures market to successfully 
manipulate the proposed ETP.\87\
---------------------------------------------------------------------------

    \87\ See Bitwise Order II, 87 FR at 40289.

    The response to this query lies in the words of the Commission 
itself. Through multiple disapproval orders, the Commission has 
highlighted the importance of the ``lead-lag relationship'' between the 
CME bitcoin futures market and the spot market in satisfying the first 
prong of the significant market test. For instance, in the Grayscale 
---------------------------------------------------------------------------
Order, the Commission wrote:

    The Commission considers the lead/lag relationship between the 
CME bitcoin futures market and the spot bitcoin market to be central 
to understanding whether it is reasonably likely that a would-be 
manipulator of a spot bitcoin ETP would need to trade on the CME 
bitcoin futures

[[Page 2316]]

market to successfully manipulate the proposed ETP.\88\
---------------------------------------------------------------------------

    \88\ See Grayscale Order, 87 FR at 40313.

    The Commission has also clarified exactly why this lead/lag 
relationship is so important, writing for instance in the Bitwise 
---------------------------------------------------------------------------
Order:

    [I]f 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.\89\
---------------------------------------------------------------------------

    \89\ See Bitwise Order, 84 FR at 55411.

    The Commission has carried this language through more than a dozen 
disapproval orders and across multiple years, emphasizing the 
``central'' importance of the ``lead-lag relationship'' in 
understanding whether it is reasonably likely that a would-be 
manipulator would have to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP.
    The Commission further clarified that the significant market test 
does not require the CME market to lead bitcoin spot markets 100% of 
the time, noting in the Grayscale Order:

    A lead/lag statistical result that CME bitcoin futures prices 
``lead'' spot prices does not mean that CME bitcoin futures prices 
``always'' move before spot prices--which would be [an] ``obvious'' 
and exploitable arbitrage opportunity. . .\90\
---------------------------------------------------------------------------

    \90\ See id. at 40313.

    The Commission is now turning back to the Sponsor to ask why the 
standard of ``leads'' having more than 50% of price discovery, is 
sufficient to satisfy the first prong. The Sponsor's answer can only be 
that 50% is the uniform academic standard across every price discovery 
paper the Sponsor has reviewed, as well as all academic papers the 
Commission has referenced, for the standard the Commission has set.
    If the Commission believes that the standard for satisfying the 
first prong should be higher than ``leads'' (such as, ``overwhelmingly 
leads'' or ``nearly always leads''), then the Commission should state 
that. Until then, the analysis will assume that determining whether the 
CME futures market ``leads'' or ``lags'' the spot market is ``central'' 
to understanding the first prong and that the Sponsor's IS/CS analysis 
that applies the academic consensus methodologies in making such 
determination is valid.
    Disagreement 4: The Sponsor's TSLL results show that the extent to 
which the CME bitcoin futures market ``leads'' the 10 spot markets has 
decreased since 2019. The Sponsor has not explained the implication of 
the CME's decreasing lead time over the identified spot markets, nor 
why the CME's ``lead'' time against the spot markets would not be 
expected to continue to decrease until it lags spot.
    The Commission writes:

    [T]aking Bitwise's TSLL results at face value, as Bitwise 
acknowledges, the extent to which the CME bitcoin futures market 
``leads'' the 10 unregulated spot platforms has decreased since 2019 
to the end of Bitwise's sample period in September 2020. This 
general trend is also observed in the [Robertson and Zhang (2022)] 
TSLL analysis, which uses a longer sample period (to Q1 2021) and 
finds that the CME's average ``lead'' time has ``steadily 
decreased'' among all evaluated markets to about one second in Q4 
2020 and Q1 2021. The record, however, does not explain the 
implication of the CME's decreasing lead over the identified spot 
platforms, nor why the CME's ``lead'' time against spot platforms 
would not be expected to continue to decrease throughout 2021 and 
2022 until it ``lags'' spot platforms.\91\
---------------------------------------------------------------------------

    \91\ See Bitwise Order II, 87 FR at 40289.

    The Sponsor believes that this disagreement reflects a simple 
misinterpretation of the TSLL analysis.
    TSLL analysis is designed to show whether prices on one market lead 
or lag prices on another market. It achieves this goal by shifting 
prices forward and backward and finding the shift that produces the 
highest level of correlation. In this view, a longer lead time is not 
indicative of a stronger relationship; it is simply indicative of 
different times it takes for information to travel.
    A shorter lead time suggests that there is a faster transmission of 
information from one market to another. The correct way to interpret 
the shortening lead time between the CME bitcoin futures market and the 
spot market is that the rate at which information passes from the CME 
futures market to the spot market is accelerating.
    There is no indication in the results, however, that the direction 
of information flow is changing; indeed, as the lead times decrease, 
the confidence intervals also tighten to indicate that the lead times 
are still statistically significantly above 0. For example, for 
December 2017 (the first month of the study), CME's lead time against 
Coinbase is 26.16 seconds with a 95% confidence interval of 12.72-39.59 
seconds. For September 2020 (the last month of the study), CME's lead 
time against Coinbase is 2.11 seconds with a 95% confidence interval of 
1.77-2.46 seconds.
    In the Sponsor's view, the tightening of the lead time between the 
two markets should only be seen as a sign of market maturation, since 
information processing time is accelerating, and should if anything 
strengthens the view that it is reasonably likely that a would-be 
manipulator would have to trade on the CME bitcoin futures market to 
manipulate the proposed ETP.
    Disagreement 5: The Sponsor's statistical results are all based on 
pairwise, two-dimensional analysis and the Sponsor has not explained 
why its results hold in light of the findings and critiques raised in 
Alexander and Heck (2020).
    The Commission stated:

    [A]ll of Bitwise's statistical results--IS, CS, and TSLL--are 
based on pairwise, two-dimensional analysis . . . At least one 
multidimensional approach to price discovery (Alexander & Heck 2020) 
finds that CME bitcoin futures ``have a very minor effect on price 
discovery,'' and that ``a faster speed of adjustment and information 
absorption [occurs] on the unregulated spot and derivatives 
[platforms] than on CME bitcoin futures.''. . . While Bitwise 
acknowledges the Alexander & Heck 2020 paper . . . Bitwise neither 
critiques the multidimensional Alexander & Heck 2020 approach; nor 
attempts to apply the approach to Bitwise's own data; nor discusses 
the robustness of Bitwise's two-dimensional methodology in response 
to the critique in Alexander & Heck 2020 that: ``omitting 
substantial information flows from other markets can produce 
misleading results. . . . [I]n a two-dimensional model one or other 
of the instruments must necessarily be identified as price leader.'' 
\92\
---------------------------------------------------------------------------

    \92\ See Bitwise Order II, 87 FR at 40289.

    This criticism was addressed in a prior section of this proposal, 
under the sub-heading ``Alexander and Heck (2020)''.
    Multidimensional analysis is rare in the literature, particularly 
when comparing amongst different types of markets, because it 
introduces bias into the assessment of the common price based on the 
numbers of markets used from each different type of market, or from 
similar market types.
    An exhaustive pairwise analysis can be relied upon to find the 
market that is leading overall as long as all potential leading markets 
are included in the analysis. The same cannot be said for 
multidimensional analysis due to the aforementioned bias. Given these 
circumstances, the Sponsor believes that the traditional, pairwise, 
two-dimensional approach to price discovery analysis is the correct 
approach for exploring the lead-lag relationship between the CME 
bitcoin futures market and the spot market.

[[Page 2317]]

Section Summary
    No single statistical study can answer every question, consider 
every variable, or use every statistical approach to a given problem.
    The Sponsor designed its study--developed over a series of 14 
meetings with the Staff--to supplement the broader academic literature 
investigating price discovery in the bitcoin market. It attempted to be 
as comprehensive as possible, using all available data and examining 
all available major trading platforms, including those in spot, 
regulated futures, and unregulated futures. It used high-quality data 
providers, conducting a thorough analysis of data providers to find the 
most accurate data set before beginning its analysis. In an effort to 
be easily replicable, it detailed its full methodology and used 
publicly available statistical tools to conduct its analysis. It made 
these choices in an effort to provide sufficient information to the 
Commission on the data and methodology underlying its analysis and 
bring confidence to its results.
    The data show convincingly that the CME is the leading source of 
price discovery, whether evaluated using IS, CS or TSLL, and despite 
the headwind that the sparsity bias raises against its IS and CS 
results.
The Sponsor's Response to the Disagreements Raised by the Commission 
Regarding the Sponsor's Prior Analysis of the Second Prong of the 
Significant Market Test
    Disagreement 1: The Sponsor provides conflicting claims with 
respect to the demand for a spot bitcoin ETP, which undermines the 
credibility of Sponsor's estimates for the likely size of such an ETP 
and the rapidity of inflows into it.

    The Commission observed:

    On the one hand, Bitwise downplays potential investor demand, 
stating that ``[w]hile there is interest in a bitcoin ETP,'' the 
bitcoin market is ``incredibly and increasingly crowded'' with 
options for investors, noting that investors today can buy bitcoin 
on crypto trading apps, finance apps, through over-the-counter 
trusts, via bitcoin futures ETFs, and ``in many other ways.''. . . . 
On the other hand . . . Bitwise also highlights that, unlike GBTC, 
the proposed ETP would allow for daily creations and redemptions; 
can be expected to ``closely track the value of [b]itcoin, and not 
periodically trade at substantial premiums to and discounts from the 
value of [b]itcoin''; and would be ``professionally managed, SEC-
regulated, highly-liquid, fully transparent, and listed on the NYSE 
Arca''; and that ``at least some segment'' of retail and other 
investors would benefit from such characteristics and would be 
``affirmatively disadvantaged'' by not having access to it . . . If, 
as Bitwise claims, U.S. investors have been and are ever-
increasingly investing in bitcoin, and the proposed ETP ``would add 
material protections'' that are not currently available through GBTC 
or otherwise for some segment of investors, and would, unlike GBTC, 
be available to trade immediately on a national securities exchange 
with daily creations and redemptions, it is not clear that Bitwise's 
use of the GBTC historical record of $4.7 billion in inflows is a 
likely, let alone ``aggressive,'' estimate for first-year inflows 
into a new spot bitcoin ETP.\93\
---------------------------------------------------------------------------

    \93\ See Bitwise Order II, 87 FR at 40291.

    It is true that the Sponsor details both the headwinds 
(increasingly crowded competition with other avenues of accessing 
bitcoin exposure) and tailwinds (unique investor protections afforded) 
that a new spot bitcoin ETP will face in raising assets. However, the 
two claims do not contradict each other. The bitcoin investment market 
is, in fact, crowded, and a spot bitcoin ETP would be attractive in 
certain ways. The Sponsor's decision to present both sides of the 
argument should not undermine the credibility of the Sponsor's 
estimates, but rather add confidence to those estimates by 
demonstrating the Sponsor's balanced perspective.
    Furthermore, the Commission, other than suggesting minor conflicts 
amongst claims the Sponsor has made, has not disagreed with the crux of 
the Sponsor's argument in estimating first-year flows by relying on the 
close approximation historical examples.
    For example, SPDR Gold Shares ETF (GLD) was the fastest growing new 
commodity-trust ETP ever in history with $3.01 billion in first-year 
flows. The spot bitcoin ETP will also be a new commodity-trust ETP, 
occupying the same category. The global above-ground gold market cap 
was roughly $2.1 trillion when GLD debuted in 2004.\94\ By comparison, 
the global bitcoin market cap was $592 billion as of June 30, 2023.\95\ 
If the new spot bitcoin ETP is assumed to be as successful as GLD, the 
most successful commodity-trust ETP ever, in terms relative to the 
market caps of the underlying commodities, the new ETP would gather 
approximately $849 million in first-year flows. The Sponsor's estimate 
of $4.7 billion in first-year flows for the new spot bitcoin ETP is 
over five times the $849 million figure.
---------------------------------------------------------------------------

    \94\ Gold market capitalization as of 2004 is calculated by 
taking the World Gold Council's estimate of above-ground gold stocks 
in 2004 multiplied by the price of gold as reported by Macrotrends 
in November 2004.
    \95\ Bitcoin market capitalization as of June 30, 2023 was $592 
billion according to Blockchain.com.
---------------------------------------------------------------------------

    While there could be meaningful latent demand built up for a spot 
bitcoin ETP given its unique investor protections, the Sponsor 
continues to believe that its estimate of $4.7 billion in first-year 
flows, which is assuming that the new ETP will be over five times as 
successful as GLD, the most successful commodity-trust ETP in history, 
is a safe estimate and the actual first-year flows is unlikely to 
exceed that value.
    Additionally, the Sponsor's analysis should provide comfort that, 
even if first-year flows exceed $4.7 billion, it is unlikely that 
trading in the new ETP will have a ``predominant influence'' on prices 
in the CME bitcoin futures market. The Sponsor's second prong analysis 
includes a correlation study where GBTC's $4.7 billion maximum single 
year flow in 2020 was found to have had a negligible correlation to 
changes in the spot bitcoin price. While we do not have any bitcoin 
investment vehicle with a higher single year flow to run historical 
correlation analysis on, the fact that GBTC's $4.7 billion inflow had 
almost no correlation to bitcoin prices suggests that there is likely a 
safe margin of error where a higher first-year flow figure would still 
not be the predominant influence on prices in the CME bitcoin futures 
market.
    This last point is further reinforced by the fact that the CME 
bitcoin futures market's trading volume grew around six fold between 
2020 (when the correlation analysis was done) and 2023. As noted in 
``The CME Bitcoin Futures Market'' section in this proposal, the CME 
bitcoin futures contracts traded approximately $39.8 billion in June 
2023 compared to $6.0 billion in June 2020. Assuming a relationship 
between trading volume growth and the amount of flows a market could 
withstand without its prices being dominated by the influence of such 
flows, the proposed spot bitcoin ETP could have much more than $4.7 
billion in first-year flows--perhaps even six times as much ($28 
billion, assuming a linear relationship)--without becoming the 
predominant influence on prices in the CME bitcoin futures market.
    Disagreement 2a: The Sponsor's study examined the correlation of 
inflows into GBTC, BTCE and BTCC compared to spot bitcoin prices, 
instead of CME bitcoin futures prices. Given that the Sponsor 
identifies the CME bitcoin futures market as the relevant regulated 
market of significant size, the use of spot bitcoin prices for its 
correlation analysis could render the analysis immaterial.

[[Page 2318]]

    The Sponsor disagrees that the use of spot prices instead of 
futures prices could render the correlation analysis immaterial.
    In the Grayscale Court's analysis of the second prong, the Court 
observed that ``[b]ecause Grayscale owns no futures contracts, trading 
in Grayscale can affect the futures market only through the spot 
market.'' \96\ In other words, when thinking about the potential 
predominant influence trading in a new spot bitcoin ETP could have on 
prices in the CME futures market it is erroneous to consider the 
relationship between the new ETP and the CME futures market in 
isolation, ignoring the existence of the spot market.
---------------------------------------------------------------------------

    \96\ See Grayscale Investments, LLC v. SEC, No. 22-1142 (D.C. 
Cir. Aug. 29, 2023), at 17-18.
---------------------------------------------------------------------------

    Inflows into a new spot bitcoin ETP will result in purchases of the 
underlying asset, spot bitcoin. Market participants might attempt to 
predict the daily inflows into the new ETP and speculate on the CME 
futures market ahead of time but ultimately they are speculating on how 
much the inflows could impact the bitcoin market as a whole, and 
inflows would have to influence both futures and spot markets together 
to impact prices. In short, given the tight correlation and arbitrage 
relationship between the bitcoin futures price and spot price,\97\ 
trading in the new spot bitcoin ETP is unlikely to become a predominant 
influence on prices in the CME futures market without also becoming a 
predominant influence on prices in the spot market. Therefore, a 
correlation analysis of the historical impact of inflows to bitcoin 
prices should be valid when run on either spot prices and futures 
prices.
---------------------------------------------------------------------------

    \97\ As demonstrated in a Comment Letter from Professor Robert 
E. Whaley of Vanderbilt University, and presented and relied upon as 
evidence in Grayscale, the CME bitcoin futures market and the spot 
bitcoin market share a 99.9% correlation.
---------------------------------------------------------------------------

    Beyond the argument above around the theoretical validity of using 
spot prices in the correlation analysis in the context of the second 
prong, there is also the broader economic reality that, given the high 
correlation between spot prices and futures prices, the results of the 
correlation analysis would have been nearly identical. Indeed, the 
Sponsor ran the same correlation analysis this time between daily/
weekly inflows into GBTC in 2020 and daily/weekly price changes in the 
CME bitcoin futures market and the correlation values were 0.1075/
0.0771 compared to 0.1087/0.0811 in the original analysis when changes 
in spot prices were used instead.
    Disagreement 2b: The Sponsor's correlation analysis does not 
control for any other factors that may have been affecting spot bitcoin 
prices during the daily or weekly aggregation periods. Thus, the 
results do not isolate the statistical relationship between spot 
bitcoin prices and the factor of interest (i.e., flows into GBTC, BTCE, 
or BTCC).
    The Sponsor believes that this argument is not relevant to the 
question at hand. The goal of the second prong analysis is to 
demonstrate that trading in the new ETP will not become the predominant 
influence on prices in the CME bitcoin futures market as compared to 
other influences. If other factors are perfectly controlled, then the 
results of the analysis would be moot; any amount of isolated buying or 
selling in relation to the new ETP would perfectly move bitcoin prices 
up or down because it is the only influence that was not controlled for 
in the analysis. As the goal of the correlation analysis is to 
demonstrate that inflows into the ETP do not overwhelm other factors, 
presence of other factors is not only valid but necessary.
    Disagreement 3: The Sponsor has not explained its analysis on why 
the second prong would be met when its own estimates still indicate 
that the new ETP would have 36.5% of the daily trading volume and 
first-year AUM greater than the all the open interest in the CME 
bitcoin futures market.
    According to the Commission:

    Bitwise's analysis regarding the potential effects of trading in 
the Shares on CME bitcoin futures prices is vague and conclusory. 
Bitwise states that it `believes' that it is unlikely that trading 
in a new bitcoin ETP will become the predominant influence on prices 
in the CME bitcoin futures market `if such trading activity is 
substantially smaller than the trading activity on the CME bitcoin 
futures market.'. . .
    However, an alternative calculation using Bitwise's statistics 
is that a single bitcoin ETP's average daily trading volume could be 
approximately 36.5% ($143 million divided by $392 million)--more 
than one-third--of the size of CME bitcoin futures' average daily 
trading volume. On top of that, assuming, as Bitwise does, 
potentially $4.7 billion in first-year inflows, such a spot bitcoin 
ETP could have AUM that exceeds the value of all open interest in 
CME bitcoin futures contracts. Bitwise has not directly addressed 
why, given this relative size of estimated daily trading in the 
Shares compared with daily trading in CME bitcoin futures contracts, 
and the relative size of the Trust's estimated AUM itself compared 
with all open interest in CME bitcoin futures contracts, it is 
nonetheless unlikely that trading in the proposed ETP would be the 
predominant influence on prices in the CME bitcoin futures 
market.\98\
---------------------------------------------------------------------------

    \98\ See Bitwise Order II, 87 FR at 40291.

    Any analysis related to the second prong is forced to make guesses 
as to what conditions would make predominant influence ``likely'' or 
``unlikely.'' The Sponsor's logic that predominant influence is 
unlikely ``if [the new ETP's] trading activity is substantially smaller 
than the trading activity on the CME bitcoin futures market'' is 
fundamentally sound and concrete since markets with deeper liquidity 
can absorb cross-market trades with less price movement.
    The actual disagreement, therefore, then is likely less about the 
logic and more about the threshold at which the logic produces an 
affirmative interpretation that predominant influence is unlikely. The 
Sponsor argued that if daily trading in the new ETP is 36.5% of the 
trading in the CME futures market it is unlikely to become the 
predominant influence. The Commission questioned if that is sufficient.
    Fortunately, the CME bitcoin futures market has matured further 
since 2020 (the year which our daily trading volume estimates were 
based upon). Again, as noted in ``The CME Bitcoin Futures Market'' 
section in this proposal, the CME bitcoin futures contracts traded 
approximately $39.8 billion in June 2023 compared to $6.0 billion in 
June 2020, over a six-fold growth in trading volume. The Sponsor's $142 
million daily trading volume estimate of the new ETP was based on the 
Sponsor's $4.7 billion first-year inflow estimate multiplied by the 
higher of GLD and GBTC's average ADV/AUM ratio (3.04%), so that 
estimate remains the same assuming the same first-year inflows to the 
new ETP. Applying the over six-fold growth in the CME futures market's 
trading activity to our past estimates, it would mean that the trading 
activity in the new ETP now would be approximately only 6% of the 
trading activity in the CME bitcoin futures market. This development 
should provide a higher degree of confidence that trading in the new 
ETP is unlikely to be the predominant influence of prices in the CME 
bitcoin futures market.
    With regards to the Commission's concern around the fact that the 
AUM of the new ETP, based on our $4.7 billion first-year flow estimate, 
could exceed all open interest in the CME bitcoin futures market, the 
Sponsor does not find comparing those two figures relevant to the 
question at hand. The second prong asks whether trading in the new ETP 
would be unlikely to be the predominant influence on prices, not 
assets. One could interpret ``trading'' as trading activity in the

[[Page 2319]]

secondary market or inflows in the secondary market, both of which the 
Sponsor has analyzed, but AUM is not directly relevant; it is only 
relevant to the extent that AUM can influence the amount of ``trading'' 
that occurs in the ETP, which the Sponsor's analysis captures.
    Additionally, AUM is an asset related figure and open interest is a 
trading related figure. Comparing the two literally and concluding that 
a market with a higher asset related figure is likely to become the 
predominant influence on prices on a market with a lower trading 
related figure is a bit like comparing apples to oranges.
Section Summary
    The Sponsor's prior estimates of first-year flows in a new spot 
bitcoin ETP and prior correlation analysis studying the relationship 
between inflows into GBTC, BTCE, and BTCC and spot bitcoin prices are 
still valid. Furthermore, in light of the massive growth of trading 
activity in the CME bitcoin futures market, the Sponsor's analysis that 
trading in the new spot bitcoin ETP is unlikely to be the predominant 
influence on prices in the CME bitcoin futures market is even stronger 
than before.
Availability of Information Regarding the Shares and Bitcoin
    The NAV per Share will be disseminated daily to all market 
participants at the same time. Quotation and last-sale information 
regarding the Shares will be disseminated through the facilities of the 
CTA. The ITV will be calculated every 15 seconds throughout the core 
trading session each trading day.
    The Sponsor will cause information about the Shares to be posted to 
the Trust's website (https://www.bitwiseinvestments.com/): (1) the NAV 
and NAV per Share for each Exchange trading day, posted at end of day; 
(2) the daily holdings of the Trust, before 9:30 a.m. E.T. on each 
Exchange trading day; (3) the Trust's effective prospectus, in a form 
available for download; and (4) the Shares' ticker and CUSIP 
information, along with additional quantitative information updated on 
a daily basis for the Trust. For example, the Trust's website will 
include (1) the prior Business Day's trading volume, the prior Business 
Day's reported NAV and closing price, and a calculation of the premium 
and discount of the closing price or mid-point of the bid/ask spread at 
the time of NAV calculation (``Bid/Ask Price'') against the NAV; and 
(2) data in chart format displaying the frequency distribution of 
discounts and premiums of the daily closing price or Bid/Ask Price 
against the NAV, within appropriate ranges, for at least each of the 
four previous calendar quarters. The Trust's website will be publicly 
available prior to the public offering of Shares and accessible at no 
charge.
    Investors may obtain on a 24-hour basis bitcoin pricing information 
based on the CME US Reference Rate, CME UK Reference Rate and CME 
Bitcoin Real Time Price, bitcoin spot market prices and bitcoin futures 
price from various financial information service providers. Current 
bitcoin spot market prices are also available with bid/ask spreads from 
bitcoin trading platforms, including the Constituent Platforms of the 
CME US Reference Rate.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services.
    Information regarding the previous day's closing price and trading 
volume information for the Shares will be published daily in the 
financial section of newspapers.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares of the Trust.\99\ Trading in Shares of the Trust 
will be halted if the circuit breaker parameters in NYSE Arca Rule 
7.12-E have been reached. Trading also may be halted because of market 
conditions or for reasons that, in the view of the Exchange, make 
trading in the Shares inadvisable.
---------------------------------------------------------------------------

    \99\ See NYSE Arca Rule 7.12-E.
---------------------------------------------------------------------------

    The Exchange may halt trading during the day in which an 
interruption to the dissemination of the ITV or the CME US Reference 
Rate occurs.\100\ If the interruption to the dissemination of the ITV 
or the CME US Reference Rate persists past the trading day in which it 
occurred, the Exchange will halt trading no later than the beginning of 
the trading day following the interruption. In addition, if the 
Exchange becomes aware that the NAV with respect to the Shares is not 
disseminated to all market participants at the same time, it will halt 
trading in the Shares until such time as the NAV is available to all 
market participants.
---------------------------------------------------------------------------

    \100\ A limit up/limit down condition in the futures market 
would not be considered an interruption requiring the Trust to 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. Shares will trade on 
the NYSE Arca Marketplace from 4 a.m. to 8 p.m. E.T. in accordance with 
NYSE Arca Rule 7.34-E (Early, Core, and Late Trading Sessions). The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in NYSE Arca Rule 7.6-E, the 
minimum price variation (``MPV'') for quoting and entry of orders in 
equity securities traded on the NYSE Arca Marketplace is $0.01, with 
the exception of securities that are priced less than $1.00 for which 
the MPV for order entry is $0.0001.
    The Shares will conform to the initial and continued listing 
criteria under NYSE Arca Rule 8.201-E. The trading of the Shares will 
be subject to NYSE Arca Rule 8.201-E(g), which sets forth certain 
restrictions on Equity Trading Permit (``ETP'') Holders acting as 
registered Market Makers in Commodity-Based Trust Shares to facilitate 
surveillance.\101\ The Exchange represents that, for initial and 
continued listing, the Trust will be in compliance with Rule 10A-3 
under the Act,\102\ as provided by NYSE Arca Rule 5.3-E. A minimum of 
100,000 Shares of the Trust will be outstanding at the commencement of 
trading on the Exchange.
---------------------------------------------------------------------------

    \101\ Under NYSE Arca Rule 8.201-E(g), an ETP Holder acting as a 
registered Market Maker in the Shares is required to provide the 
Exchange with information relating to its accounts for trading in 
the underlying commodity, related futures or options on futures, or 
any other related derivatives. Commentary .04 of NYSE Arca Rule 
11.3-E requires an ETP Holder acting as a registered Market Maker, 
and its affiliates, in the Shares to establish, maintain and enforce 
written policies and procedures reasonably designed to prevent the 
misuse of any material nonpublic information with respect to such 
products, any components of the related products, any physical asset 
or commodity underlying the product, applicable currencies, 
underlying indexes, related futures or options on futures, and any 
related derivative instruments (including the Shares). As a general 
matter, the Exchange has regulatory jurisdiction over its ETP 
Holders and their associated persons, which include any person or 
entity controlling an ETP Holder. To the extent the Exchange may be 
found to lack jurisdiction over a subsidiary or affiliate of an ETP 
Holder that does business only in commodities or futures contracts, 
the Exchange could obtain information regarding the activities of 
such subsidiary or affiliate through surveillance sharing agreements 
with regulatory organizations of which such subsidiary or affiliate 
is a member.
    \102\ 17 CFR 240.10A-3. See note 8, supra.
---------------------------------------------------------------------------

Surveillance
    The Exchange represents that trading in the Shares of the Trust 
will be subject to the existing trading surveillances administered by 
the Exchange, as well as cross-market surveillances administered by 
FINRA on behalf of the Exchange, which are designed to detect 
violations of Exchange rules and

[[Page 2320]]

applicable federal securities laws.\103\ The Exchange represents that 
these procedures are adequate to properly monitor Exchange trading of 
the Shares in all trading sessions and to deter and detect violations 
of Exchange rules and federal securities laws applicable to trading on 
the Exchange.
---------------------------------------------------------------------------

    \103\ FINRA conducts cross-market surveillances on behalf of the 
Exchange pursuant to a regulatory services agreement. The Exchange 
is responsible for FINRA's performance under this regulatory 
services agreement.
---------------------------------------------------------------------------

    The Exchange further represents that it may obtain information 
regarding trading in the Shares and the CME Market from the CME and 
other markets and other entities that are members of the ISG or with 
which the Exchange has in place a comprehensive surveillance sharing 
agreement.\104\ The Exchange or FINRA, on behalf of the Exchange, or 
both, will communicate as needed regarding trading in the Shares and 
the CME Market with the CME and other markets and entities that are 
members of the ISG, and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding trading in 
the Shares, the CME Market, and the underlying commodity, as 
applicable, from such markets and other entities.
---------------------------------------------------------------------------

    \104\ For a list of current ISG members, see https://isgportal.org/. The Exchange notes that not all components of the 
Trust may trade on markets that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing 
agreement.
---------------------------------------------------------------------------

    Also, pursuant to NYSE Arca Rule 8.201-E(g), the Exchange is able 
to obtain information regarding Market Makers' accounts for trading in 
the Shares and the underlying bitcoin, bitcoin futures contracts, 
options on bitcoin futures, or any other bitcoin derivatives through 
ETP Holders acting as registered Market Makers, in connection with such 
ETP Holders' proprietary or customer trades through ETP Holders which 
they effect on any relevant market.
    In addition, the Exchange has a general policy prohibiting the 
improper distribution of material, non-public information by its 
employees.
    All statements and representations made in this filing regarding 
(1) the description of the index, portfolio or referenced asset, (2) 
limitations on index or portfolio holdings or reference assets, or (3) 
the applicability of Exchange listing rules specified in this rule 
filing will constitute continued listing requirements for listing the 
Shares on the Exchange.
    The Sponsor has represented to the Exchange that it will advise the 
Exchange of any failure by the Trust to comply with the continued 
listing requirements, and, pursuant to its obligations under section 
19(g)(1) of the Act, the Exchange will monitor for compliance with the 
continued listing requirements. If the Trust is not in compliance with 
the applicable listing requirements, the Exchange will commence 
delisting procedures under NYSE Arca Rule 9.2-E(a).
Information Bulletin
    Prior to the commencement of trading, the Exchange will inform its 
ETP Holders in an ``Information Bulletin'' of the special 
characteristics and risks associated with trading the Shares. 
Specifically, the Information Bulletin will discuss the following: (1) 
the procedures for creations of Shares in Creation Units; (2) NYSE Arca 
Rule 9.2-E(a), which imposes a duty of due diligence on its ETP Holders 
to learn the essential facts relating to every customer prior to 
trading the Shares; (3) information regarding how the value of the ITV 
and the CME US Reference Rate is disseminated; (4) the possibility that 
trading spreads and the resulting premium or discount on the Shares may 
widen during the Opening and Late Trading Sessions, when an updated ITV 
will not be calculated or publicly disseminated; (5) the requirement 
that members deliver a prospectus to investors purchasing newly issued 
Shares prior to or concurrently with the confirmation of a transaction 
and (6) trading information.
    In addition, the Information Bulletin will reference that the Trust 
is subject to various fees and expenses as described in the annual 
report. The Information Bulletin will disclose that information about 
the Shares of the Trust is publicly available on the Trust's website. 
The Information Bulletin will also reference the fact that there is no 
regulated source of last sale information regarding bitcoin, that the 
Commission has no jurisdiction over the trading of bitcoin as a 
commodity, and that the CFTC has regulatory jurisdiction over the 
trading of bitcoin futures contracts and options on bitcoin futures 
contracts.
    The Information Bulletin will also discuss any relief, if granted, 
by the Commission or the staff from any rules under the Act.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under section 6(b)(5) \105\ that an exchange have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to, and perfect the mechanism of a free and open market 
and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \105\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices and to protect 
investors and the public interest in that the Shares will be listed and 
traded on the Exchange pursuant to the initial and continued listing 
criteria in NYSE Arca Rule 8.201-E. Further, the Exchange has 
demonstrated that the proposed rule change satisfies section 6(b)(5) of 
the Act by showing that the CME Market is a regulated market of 
significant size that shares surveillance with the Exchange.
    As discussed above, both existing academic literature and the 
Sponsor's own studies show that the CME Market leads price discovery 
relative to the bitcoin spot market. As a result, and given that the 
Sponsor has demonstrated that it is unlikely that trading in the Shares 
will become the predominant influence upon prices in the CME Market, 
the CME Market represents a regulated market of significant size 
related to spot bitcoin, and that there is a reasonable likelihood that 
a person attempting to manipulate the Shares would also have to trade 
on that market to successfully manipulate the Shares.
    The Exchange has in place surveillance procedures that are adequate 
to properly monitor Exchange trading in the Shares in all trading 
sessions and to deter and detect attempted manipulation of the Shares 
or other violations of Exchange rules and applicable federal securities 
laws. The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and bitcoin 
futures with the CME and other markets and other entities that are 
members of the ISG, and the Exchange or FINRA, on behalf of the 
Exchange, or both, may obtain trading information regarding trading in 
the Shares from such markets and other entities. In addition, the 
Exchange may obtain information regarding trading in the Shares from 
markets and other entities that are members of ISG or with which the 
Exchange has in place a comprehensive surveillance sharing agreement. 
The Exchange is also able to obtain information regarding trading in 
the Shares and bitcoin futures or the underlying bitcoin through ETP 
Holders, in connection with such ETP Holders' proprietary or customer 
trades which they effect through ETP Holders on any relevant market.

[[Page 2321]]

    Quotation and last-sale information regarding the Shares will be 
disseminated through the facilities of the CTA. The Trust's website 
will also include a form of the prospectus for the Trust that may be 
downloaded. The website will include the Shares' ticker and CUSIP 
information, along with additional quantitative information updated on 
a daily basis for the Trust. The Trust's website will include (1) daily 
trading volume, the prior Business Day's reported NAV and closing 
price, and a calculation of the premium and discount of the closing 
price or mid-point of the Bid/Ask Price against the NAV; and (ii) data 
in chart format displaying the frequency distribution of discounts and 
premiums of the daily closing price or Bid/Ask Price against the NAV, 
within appropriate ranges, for at least each of the four previous 
calendar quarters. The Trust's website will be publicly available prior 
to the public offering of Shares and accessible at no charge.
    Trading in Shares of the Trust will be halted if the circuit 
breaker parameters in NYSE Arca Rule 7.12-E have been reached or 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable.
    The proposed rule change is designed to perfect the mechanism of a 
free and open market and, in general, to protect investors and the 
public interest in that it will facilitate the listing and trading of a 
new type of exchange-traded product based on the price of bitcoin that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace. As noted above, the Exchange has in 
place surveillance procedures that are adequate to properly monitor 
trading in the Shares in all trading sessions and to deter and detect 
violations of Exchange rules and applicable federal securities laws.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change will facilitate the listing and trading of a new 
type of Commodity-Based Trust Share based on the price of bitcoin that 
will enhance competition among market participants, to the benefit of 
investors and the marketplace.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-NYSEARCA-2023-44 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-NYSEARCA-2023-44. 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-NYSEARCA-2023-44 and should 
be submitted on or before February 2, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\106\
---------------------------------------------------------------------------

    \106\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00510 Filed 1-11-24; 8:45 am]
BILLING CODE 8011-01-P
```