Document ID: SEC-2021-1806-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Cboe BZX Exchange, Inc.
Posted Date: 2021-12-27T05:00Z

[Federal Register Volume 86, Number 245 (Monday, December 27, 2021)]
[Notices]
[Pages 73360-73391]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27824]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93822; File No. SR-CboeBZX-2021-051]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 1 to 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

December 17, 2021.

I. Introduction

    On July 20, 2021, Cboe BZX Exchange, Inc. (``BZX'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'' or 
``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ 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. The proposed rule 
change was published for comment in the Federal Register on August 6, 
2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92543 (Aug. 2, 
2021), 86 FR 43289. Comments on the proposed rule change can be 
found at: https://www.sec.gov/comments/sr-cboebzx-2021-051/srcboebzx2021051.htm.

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[[Page 73361]]

    On September 15, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On November 2, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92989, 86 FR 52530 
(Sept. 21, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93510, 86 FR 61820 
(Nov. 8, 2021).
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    On December 9, 2021, the Exchange filed Amendment No. 1 to the 
proposed rule change, which replaced and superseded the proposed rule 
change as originally filed.\8\ The Commission is publishing this notice 
to solicit comments from interested persons on Amendment No. 1, as 
described in Items II and III below, which Items have been prepared by 
the Exchange.
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    \8\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-cboebzx-2021-051/srcboebzx2021051-9436437-263630.pdf.
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II. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes a rule change to list and trade shares of the 
ARK 21Shares Bitcoin ETF (the ``Trust''),\9\ under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares. The shares of the Trust are 
referred to herein as the ``Shares.''
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    \9\ The Trust was formed as a Delaware statutory trust on June 
22, 2021 and is operated as a grantor trust for U.S. federal tax 
purposes. The Trust has no fixed termination date.
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    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    This Amendment No. 1 to SR-CboeBZX-2021-051 amends and replaces in 
its entirety the proposal as originally submitted on July 20, 2021. The 
Exchange submits this Amendment No. 1 in order to clarify certain 
points and add additional details to the proposal.
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\10\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\11\ 21Shares US LLC is the sponsor 
of the Trust (the ``Sponsor''). The Shares will be registered with the 
Commission by means of the Trust's registration statement on Form S-1 
(the ``Registration Statement'').\12\ As further discussed below, the 
Commission has historically approved or disapproved exchange filings to 
list and trade series of Trust Issued Receipts, including spot-based 
Commodity-Based Trust Shares, on the basis of whether the listing 
exchange has in place a comprehensive surveillance sharing agreement 
with a regulated market of significant size related to the underlying 
commodity.\13\ A survey of previously approved series of Commodity-
Based Trust Shares and Currency Trust Shares makes clear that the spot 
markets for commodities and currencies held in such ETPs are generally 
unregulated. In fact, the Commission specifically noted in the 
Winklevoss Order that the first gold ETP approval order, which was also 
the first commodity-trust ETP, ``was based on an assumption that the 
currency market and the spot gold market were largely unregulated.'' 
\14\ This makes clear that the applicable standard is not whether the 
underlying commodity market itself is regulated. Further to this point, 
prior orders have also emphasized that in every prior approval order 
for Commodity-Based Trust Shares there was a regulated derivatives 
market of significant size, generally a Commodity Futures Trading 
Commission (the ``CFTC'') regulated futures market.\15\

[[Page 73362]]

Despite the lack of regulation of the underlying spot commodity and 
currency markets, the Commission approved series of Currency and 
Commodity-Based Trust Shares, including those that held gold, silver, 
platinum, palladium, copper, and other commodities and currencies, 
because it determined that the futures markets for these commodities 
and currencies represented regulated markets of significant size and 
that the listing exchange had a surveillance sharing agreement in place 
with that market.\16\
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    \10\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \11\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \12\ See draft Registration Statement on Form S-1, dated June 
28, 2021 submitted to the Commission by the Sponsor on behalf of the 
Trust. The descriptions of the Trust, the Shares, and the Index (as 
defined below) contained herein are based, in part, on information 
in the Registration Statement. The Registration Statement is not yet 
effective and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective.
    \13\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order'').
    \14\ See Winklevoss Order at 37592 and Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) 
(order approving the listing and trading of streetTRACKS Gold 
Shares) (the ``First Gold Approval Order'').
    \15\ See Winklevoss Order at 37592. See also the First Gold 
Approval Order at 64618-19; iShares COMEX Gold Trust, Exchange Act 
Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751, 3754-55 (Jan. 
26, 2005) (SR-Amex-2004-38); iShares Silver Trust, Exchange Act 
Release No. 53521 (Mar. 20, 2006), 71 FR 14967, 14968, 14973-74 
(Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold Trust, Exchange Act 
Release No. 59895 (May 8, 2009), 74 FR 22993, 22994-95, 22998, 23000 
(May 15, 2009) (SR-NYSEArca-2009-40); ETFS Silver Trust, Exchange 
Act Release No. 59781 (Apr. 17, 2009), 74 FR 18771, 18772, 18775-77 
(Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS Palladium Trust, 
Exchange Act Release No. 61220 (Dec. 22, 2009), 74 FR 68895, 68896 
(Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of proposed rule 
change included NYSE Arca's representation that ``[t]he most 
significant palladium futures exchanges are the NYMEX and the Tokyo 
Commodity Exchange,'' that ``NYMEX is the largest exchange in the 
world for trading precious metals futures and options,'' and that 
NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which NYMEX is a member, Exchange Act 
Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-86, 59291 (Nov. 
17, 2009)); ETFS Platinum Trust, Exchange Act Release No. 61219 
(Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29, 2009) (SR-NYSEArca-
2009-95) (notice of proposed rule change included NYSE Arca's 
representation that ``[t]he most significant platinum futures 
exchanges are the NYMEX and the Tokyo Commodity Exchange,'' that 
``NYMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9, 
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical 
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of 
proposed rule change included NYSE Arca's representation that the 
COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group, Exchange Act Release No. 
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott 
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5, 
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act 
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17, 
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant gold, silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act 
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15, 
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release 
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE 
Arca's representation that ``the most significant gold futures 
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that 
``COMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8, 
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott 
Physical Platinum and Palladium Trust, Exchange Act Release No. 
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012-111) (notice of proposed rule change included NYSE 
Arca's representation that ``[f]utures on platinum and palladium are 
traded on two major exchanges: The New York Mercantile Exchange . . 
. and Tokyo Commodities Exchange'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 68101 (Oct. 24, 
2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX Physical--1 
oz. Gold Redeemable Trust, Exchange Act Release No. 66930 (May 7, 
2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca-2012-18) 
(notice of proposed rule change included NYSE Arca's representation 
that NYSE Arca ``may obtain trading information via the Intermarket 
Surveillance Group,'' of which COMEX is a member, and that gold 
futures are traded on COMEX and the Tokyo Commodity Exchange, with a 
cross-reference to the proposed rule change to list and trade shares 
of the ETFS Gold Trust, in which NYSE Arca represented that COMEX is 
one of the ``major world gold markets,'' Exchange Act Release No. 
66627 (Mar. 20, 2012), 77 FR 17539, 17542-43, 17547 (Mar. 26, 
2012)); JPM XF Physical Copper Trust, Exchange Act Release No. 68440 
(Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 75485-86 (Dec. 20, 
2012) (SR-NYSEArca-2012-28); iShares Copper Trust, Exchange Act 
Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 13727, 13729-30, 
13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); First Trust Gold 
Trust, Exchange Act Release No. 70195 (Aug. 14, 2013), 78 FR 51239, 
51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) (notice of proposed rule 
change included NYSE Arca's representation that FINRA, on behalf of 
the exchange, may obtain trading information regarding gold futures 
and options on gold futures from members of the Intermarket 
Surveillance Group, including COMEX, or from markets ``with which 
[NYSE Arca] has in place a comprehensive surveillance sharing 
agreement,'' and that gold futures are traded on COMEX and the Tokyo 
Commodity Exchange, with a cross-reference to the proposed rule 
change to list and trade shares of the ETFS Gold Trust, in which 
NYSE Arca represented that COMEX is one of the ``major world gold 
markets,'' Exchange Act Release No. 69847 (June 25, 2013), 78 FR 
39399, 39400, 39405 (July 1, 2013)); Merk Gold Trust, Exchange Act 
Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 4786-87 (Jan. 29, 
2014) (SR-NYSEArca-2013-137) (notice of proposed rule change 
included NYSE Arca's representation that ``COMEX is the largest gold 
futures and options exchange'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' 
including with respect to transactions occurring on COMEX pursuant 
to CME and NYMEX's membership, or from exchanges ``with which [NYSE 
Arca] has in place a comprehensive surveillance sharing agreement,'' 
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369, 
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release 
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15, 
2016) (SR-NYSEArca-2016-84).
    \16\ Id.
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    The Exchange acknowledges that unregulated currency and commodity 
markets do not provide the same protections as the markets that are 
subject to the Commission's oversight. However, the Commission has 
consistently looked to surveillance sharing agreements with an 
underlying futures market to determine whether ETPs holding currency or 
commodities were consistent with the Act, as established above. As 
such, the Commission's regulated market of significant size test does 
not require that the spot bitcoin market be regulated to approve this 
proposal. To the contrary, precedent makes clear that any requirement 
that the spot bitcoin market be a ``regulated market'' prior to 
approval would be incongruous with all prior spot commodity and 
currency approval orders. With this in mind, the CME Bitcoin Futures 
market is the proper market for the Commission to consider in 
determining whether this proposal is consistent with the Act. The 
Exchange has a comprehensive surveillance sharing agreement in place 
with CME, which operates a bitcoin futures market that, as established 
by the included analysis below, represents a regulated market of 
significant size related to the underlying commodity (bitcoin) to be 
held by the Trust. Therefore, both the Exchange and the Sponsor believe 
that the CME Bitcoin Futures market satisfies the standard that the 
Commission has applied to all previously approved series of Commodity-
Based Trust Shares and that this proposal should be approved.
Background
    Bitcoin is a digital asset based on the decentralized, open source 
protocol of the peer-to-peer computer network launched in 2009 that 
governs the creation, movement, and ownership of bitcoin and hosts the 
public ledger, or ``blockchain,'' on which all bitcoin transactions are 
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized 
nature of the Bitcoin Network allows parties to transact directly with 
one another based on cryptographic proof instead of relying on a 
trusted third party. The protocol also lays out the rate of issuance of 
new bitcoin within the Bitcoin Network, a rate that is reduced by half 
approximately every four years with an eventual hard cap of 21 million. 
It's generally understood that the combination of these two features--a 
systemic hard cap of 21 million bitcoin and the ability to transact 
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin 
its value.\17\ The first rule filing proposing to list an exchange-
traded product to provide exposure to bitcoin in the U.S. was submitted 
by the Exchange on June 30, 2016.\18\ At that time, blockchain 
technology, and digital assets that utilized it, were relatively new to 
the broader public. The market cap of all bitcoin in existence at that 
time was approximately $10 billion. No registered offering of digital 
asset securities or shares in an investment vehicle with exposure to 
bitcoin or any other cryptocurrency had yet been conducted, and the 
regulated infrastructure for conducting a digital asset securities 
offering had not begun to develop.\19\ Similarly, regulated U.S. 
bitcoin futures contracts did not exist. The CFTC had determined that 
bitcoin is a commodity,\20\ but had not engaged in

[[Page 73363]]

significant enforcement actions in the space. The New York Department 
of Financial Services (``NYDFS'') adopted its final BitLicense 
regulatory framework in 2015, but had only approved four entities to 
engage in activities relating to virtual currencies (whether through 
granting a BitLicense or a limited-purpose trust charter) as of June 
30, 2016.\21\ While the first over-the-counter bitcoin fund launched in 
2013, public trading was limited and the fund had only $60 million in 
assets.\22\ There were very few, if any, traditional financial 
institutions engaged in the space, whether through investment or 
providing services to digital asset companies. In January 2018, the 
Staff of the Commission noted in a letter to the Investment Company 
Institute and SIFMA that it was not aware, at that time, of a single 
custodian providing fund custodial services for digital assets.\23\ 
Fast forward to the fourth quarter of 2021 and the digital assets 
financial ecosystem, including bitcoin, has progressed significantly. 
The development of a regulated market for digital asset securities has 
significantly evolved, with market participants having conducted 
registered public offerings of both digital asset securities \24\ and 
shares in investment vehicles holding bitcoin futures.\25\ 
Additionally, licensed and regulated service providers have emerged to 
provide fund custodial services for digital assets, among other 
services. For example, in May 2021, the Staff of the Commission 
released a statement permitting open-end mutual funds to invest in 
cash-settled bitcoin futures; in December 2020, the Commission adopted 
a conditional no-action position permitting certain special purpose 
broker-dealers to custody digital asset securities under Rule 15c3-3 
under the Exchange Act (the ``Custody Statement''); \26\ in September 
2020, the Staff of the Commission released a no-action letter 
permitting certain broker-dealers to operate a non-custodial 
Alternative Trading System (``ATS'') for digital asset securities, 
subject to specified conditions; \27\ in October 2019, the Staff of the 
Commission granted temporary relief from the clearing agency 
registration requirement to an entity seeking to establish a securities 
clearance and settlement system based on distributed ledger 
technology,\28\ and multiple transfer agents who provide services for 
digital asset securities registered with the Commission.\29\
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    \17\ For additional information about bitcoin and the Bitcoin 
Network, see https://bitcoin.org/en/getting-started; https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms; and https://www.vaneck.com/education/investment-ideas/investing-in-bitcoin-and-digital-assets/.
    \18\ See Winklevoss Order.
    \19\ Digital assets that are securities under U.S. law are 
referred to throughout this proposal as ``digital asset 
securities.'' All other digital assets, including bitcoin, are 
referred to interchangeably as ``cryptocurrencies'' or ``virtual 
currencies.'' The term ``digital assets'' refers to all digital 
assets, including both digital asset securities and 
cryptocurrencies, together.
    \20\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated: 
``Section 1a(9) of the CEA defines `commodity' to include, among 
other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
    \21\ A list of virtual currency businesses that are entities 
regulated by the NYDFS is available on the NYDFS website. See 
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
    \22\ Data as of March 31, 2016 according to publicly available 
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
    \23\ See letter from Dalia Blass, Director, Division of 
Investment Management, U.S. Securities and Exchange Commission to 
Paul Schott Stevens, President & CEO, Investment Company Institute 
and Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association (January 18, 2018), 
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
    \24\ See Prospectus supplement filed pursuant to Rule 424(b)(1) 
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \25\ See Prospectus filed by Stone Ridge Trust VI on behalf of 
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
    \26\ See Securities Exchange Act Release No. 90788, 86 FR 11627 
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset 
Securities by Special Purpose Broker-Dealers).
    \27\ See letter from Elizabeth Baird, Deputy Director, Division 
of Trading and Markets, U.S. Securities and Exchange Commission to 
Kris Dailey, Vice President, Risk Oversight & Operational 
Regulation, Financial Industry Regulatory Authority (September 25, 
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \28\ See letter from Jeffrey S. Mooney, Associate Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos 
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \29\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent 
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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    Outside the Commission's purview, the regulatory landscape has 
changed significantly since 2016, and cryptocurrency markets have grown 
and evolved as well. The market for bitcoin is approximately 100 times 
larger, with a market cap of over $1 trillion.\30\ According to the CME 
Bitcoin Futures Report, from October 25, 2021 through November 19, 
2021, CFTC regulated bitcoin futures represented approximately $2.9 
billion in notional trading volume on Chicago Mercantile Exchange 
(``CME'') (``CME Bitcoin Futures'') on a daily basis and notional 
volume was never below $1.2 billion per day.\31\ Open interest was over 
$4 billion for the entirety of the period and at one point reached $5.5 
billion. The CFTC has exercised its regulatory jurisdiction in bringing 
a number of enforcement actions related to bitcoin and against trading 
platforms that offer cryptocurrency trading.\32\ The U.S. Office of the 
Comptroller of the Currency (the ``OCC'') has made clear that 
federally-chartered banks are able to provide custody services for 
cryptocurrencies and other digital assets.\33\ The OCC recently granted 
conditional approval of two charter conversions by state-chartered 
trust companies to national banks, both of which provide cryptocurrency 
custody services.\34\ NYDFS has granted no fewer than twenty-five 
BitLicenses, including to established public payment companies like 
PayPal Holdings, Inc. and Square, Inc., and limited purpose trust 
charters to entities providing cryptocurrency custody services, 
including the Trust's Custodian. The U.S. Treasury Financial Crimes 
Enforcement Network (``FinCEN'') has released extensive guidance 
regarding the applicability of the Bank Secrecy Act (``BSA'') and 
implementing regulations to virtual currency businesses,\35\ and has 
proposed rules imposing requirements on entities subject to the BSA 
that are specific to the technological context of virtual 
currencies.\36\ In addition, the Treasury's

[[Page 73364]]

Office of Foreign Assets Control (``OFAC'') has brought enforcement 
actions over apparent violations of the sanctions laws in connection 
with the provision of wallet management services for digital 
assets.\37\
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    \30\ As of December 1, 2021, the total market cap of all bitcoin 
in circulation was approximately $1.08 trillion.
    \31\ Data sourced from the CME Bitcoin Futures Report: 19 Nov, 
2021, available at: https://www.cmegroup.com/ftp/bitcoinfutures/Bitcoin_Futures_Liquidity_Report.pdf.
    \32\ The CFTC's annual report for Fiscal Year 2020 (which ended 
on September 30, 2020) noted that the CFTC ``continued to 
aggressively prosecute misconduct involving digital assets that fit 
within the CEA's definition of commodity'' and ``brought a record 
setting seven cases involving digital assets.'' See CFTC FY2020 
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download. 
Additionally, the CFTC filed on October 1, 2020, a civil enforcement 
action against the owner/operators of the BitMEX trading platform, 
which was one of the largest bitcoin derivative exchanges. See CFTC 
Release No. 8270-20 (October 1, 2020) available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
    \33\ See OCC News Release 2021-2 (January 4, 2021) available at: 
https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html.
    \34\ See OCC News Release 2021-6 (January 13, 2021) available 
at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-6.html and OCC News Release 2021-19 (February 5, 2021) 
available at: https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-19.html.
    \35\ See FinCEN Guidance FIN-2019-G001 (May 9, 2019) 
(Application of FinCEN's Regulations to Certain Business Models 
Involving Convertible Virtual Currencies) available at: https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf.
    \36\ See U.S. Department of the Treasury Press Release: ``The 
Financial Crimes Enforcement Network Proposes Rule Aimed at Closing 
Anti-Money Laundering Regulatory Gaps for Certain Convertible 
Virtual Currency and Digital Asset Transactions'' (December 18, 
2020), available at: https://home.treasury.gov/news/press-releases/sm1216.
    \37\ See U.S. Department of the Treasury Enforcement Release: 
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent 
Violations of Multiple Sanctions Programs Related to Digital 
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf.
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    In addition to the regulatory developments laid out above, more 
traditional financial market participants have embraced and continue to 
embrace cryptocurrency: Large insurance companies,\38\ asset 
managers,\39\ university endowments,\40\ pension funds,\41\ and even 
historically bitcoin skeptical fund managers \42\ are allocating to 
bitcoin. The largest over-the-counter bitcoin fund previously filed a 
Form 10 registration statement, which the Staff of the Commission 
reviewed and which took effect automatically, and is now a reporting 
company.\43\ Established companies like Tesla, Inc.,\44\ MicroStrategy 
Incorporated,\45\ and Square, Inc.,\46\ among others, have recently 
announced substantial investments in bitcoin in amounts as large as 
43,200 BTC \47\, worth around $2.5 billion (Tesla) valued at a BTCUSD 
price of $60,000 and 121,043 BTC worth $7.2 billion (MicroStrategy). 
The foregoing examples demonstrate that bitcoin has gained mainstream 
usage and recognition.
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    \38\ On December 10, 2020, Massachusetts Mutual Life Insurance 
Company (MassMutual) announced that it had purchased $100 million in 
bitcoin for its general investment account. See MassMutual Press 
Release ``Institutional Bitcoin provider NYDIG announces minority 
stake purchase by MassMutual'' (December 10, 2020) available at: 
https://www.massmutual.com/about-us/news-and-press-releases/press-releases/2020/12/institutional-bitcoin-provider-nydig-announces-minority-stake-purchase-by-massmutual.
    \39\ See e.g., ``BlackRock's Rick Rieder says the world's 
largest asset manager has `started to dabble' in bitcoin'' (February 
17, 2021) available at: https://www.cnbc.com/2021/02/17/blackrock-has-started-to-dabble-in-bitcoin-says-rick-rieder.html and 
``Guggenheim's Scott Minerd Says Bitcoin Should Be Worth $400,000'' 
(December 16, 2020) available at: https://www.bloomberg.com/news/articles/2020-12-16/guggenheim-s-scott-minerd-says-bitcoin-should-be-worth-400-000.
    \40\ See e.g., ``Harvard and Yale Endowments Among Those 
Reportedly Buying Crypto'' (January 25, 2021) available at: https://www.bloomberg.com/news/articles/2021-01-26/harvard-and-yale-endowments-among-those-reportedly-buying-crypto.
    \41\ See e.g., ``Virginia Police Department Reveals Why its 
Pension Fund is Betting on Bitcoin'' (February 14, 2019) available 
at: https://finance.yahoo.com/news/virginia-police-department-reveals-why-194558505.html.
    \42\ See e.g., ``Bridgewater: Our Thoughts on Bitcoin'' (January 
28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones says he 
likes bitcoin even more now, rally still in the `first inning''' 
(October 22, 2020) available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
    \43\ See Letter from Division of Corporation Finance, Office of 
Real Estate & Construction to Barry E. Silbert, Chief Executive 
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/00000000020000953/filename1.pdf.
    \44\ See Form 10-K submitted by Tesla, Inc. for the fiscal year 
ended December 31, 2020 at 23: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
    \45\ See Form 10-Q submitted by MicroStrategy Incorporated for 
the quarterly period ended September 30, 2020 at 8: https://www.sec.gov/ix?doc=/Archives/edgar/data/1050446/000156459020047995/mstr-10q_20200930.htm.
    \46\ See Form 10-Q submitted by Square, Inc. for the quarterly 
period ended September 30, 2020 at 51: https://www.sec.gov/ix?doc=/Archives/edgar/data/1512673/000151267320000012/sq-20200930.htm.
    \47\ Amount obtained from https://bitcointreasuries.net as of 
December 3, 2021.
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    Despite these developments, access for U.S. retail investors to 
gain exposure to bitcoin via a transparent and U.S. regulated, U.S. 
exchange-traded vehicle remains limited. Instead current options 
include: (i) Paying a potentially high premium (and high management 
fees) to buy over-the-counter bitcoin funds (``OTC Bitcoin Funds''), to 
the advantage of more sophisticated investors that are able to create 
shares at net asset value (``NAV'') directly with the issuing trust; 
\48\ (ii) facing the technical risk, complexity and generally high fees 
associated with buying spot bitcoin; (iii) purchasing shares of 
operating companies that they believe will provide proxy exposure to 
bitcoin with limited disclosure about the associated risks; \49\ or 
(iv) through the purchase of Bitcoin Futures ETFs, which represent a 
sub-optimal structure for long-term investors that will cost them 
collectively tens of millions of dollars every year, as further 
discussed below. Meanwhile, investors in many other countries, 
including Canada \50\ and Brazil, are able to use more traditional 
exchange listed and traded products (including exchange-traded funds

[[Page 73365]]

holding physical bitcoin) to gain exposure to bitcoin, disadvantaging 
U.S. investors and leaving them with more risky means of getting 
bitcoin exposure.\51\ Additionally, investors in other countries, 
specifically Canada, generally pay lower fees than U.S. retail 
investors that invest in OTC Bitcoin Funds due to the fee pressure that 
results from increased competition among available bitcoin investment 
options. Without an approved and regulated spot bitcoin ETP in the U.S. 
as a viable alternative, U.S. investors could seek to purchase shares 
of non-U.S. bitcoin vehicles in order to get access to bitcoin 
exposure. Given the separate regulatory regime and the potential 
difficulties associated with any international litigation, such an 
arrangement would create more risk exposure for U.S. investors than 
they would otherwise have with a U.S. exchange listed ETP. Further to 
this point, the lack of a U.S.-listed spot bitcoin ETP is not 
preventing U.S. funds from gaining exposure to bitcoin--several U.S. 
exchange-traded funds are using Canadian bitcoin ETPs to gain exposure 
to spot bitcoin. In addition to the benefits to U.S. investors 
articulated throughout this proposal, approving this proposal (and 
others like it) would provide U.S. exchange-traded funds with a U.S.-
listed and regulated product to provide such access rather than relying 
on either flawed products or products listed and primarily regulated in 
other countries.
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    \48\ The largest OTC Bitcoin Fund has grown its AUM from 
approximately $2.6 billion on February 26, 2020, the date on which 
the Commission issued the disapproval order for the United States 
Bitcoin and Treasury Investment Trust, to $37.1 billion on December 
1, 2021, according to Grayscale's website. See Securities Exchange 
Act Release No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 
2020) (SR-NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval''). 
While the price of one bitcoin has increased approximately 690% in 
the intervening period, the total AUM has increased by approximately 
1540%, indicating that the increase in AUM was created beyond just 
price appreciation in bitcoin. The premium and discount for OTC 
Bitcoin Funds is known to move rapidly. For example, over the period 
of 12/21/20 to 1/21/20, the premium for the largest OTC Bitcoin Fund 
went from 40.18% to 2.79%. While the price of bitcoin appreciated 
significantly during this period and NAV per share increased by 
41.25%, the price per share increased by only 3.58%. This means that 
investors are buying shares of a fund that experiences significant 
volatility in its premium and discount outside of the fluctuations 
in price of the underlying asset. Even operating within the normal 
premium and discount range, it's possible for an investor to buy 
shares of an OTC Bitcoin Fund only to have those shares quickly lose 
10% or more in dollar value excluding any movement of the price of 
bitcoin. That is to say--the price of bitcoin could have stayed 
exactly the same from market close on one day to market open the 
next, yet the value of the shares held by the investor decreased 
only because of the fluctuation of the premium. As more investment 
vehicles, including mutual funds and ETFs, seek to gain exposure to 
bitcoin, the easiest option for a buy and hold strategy for such 
vehicles is often an OTC Bitcoin Fund, meaning that even investors 
that do not directly buy OTC Bitcoin Funds can be disadvantaged by 
extreme premiums (or discounts) and premium volatility.
    \49\ Recently a number of operating companies engaged in 
unrelated businesses--such as Tesla (a car manufacturer) and 
MicroStrategy (an enterprise software company)--have announced 
investments as large as $5.3 billion in bitcoin. Without access to 
bitcoin exchange-traded products, retail investors seeking 
investment exposure to bitcoin may end up purchasing shares in these 
companies in order to gain the exposure to bitcoin that they seek. 
In fact, mainstream financial news networks have written a number of 
articles providing investors with guidance for obtaining bitcoin 
exposure through publicly traded companies (such as MicroStrategy, 
Tesla, and bitcoin mining companies, among others) instead of 
dealing with the complications associated with buying spot bitcoin 
in the absence of a bitcoin ETP. See e.g., ``7 public companies with 
exposure to bitcoin'' (February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want to get in the crypto trade without 
holding bitcoin yourself? Here are some investing ideas'' (February 
19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html. 
Such operating companies, however, are imperfect bitcoin proxies and 
provide investors with partial bitcoin exposure paired with a host 
of additional risks associated with whichever operating company they 
decide to purchase. Additionally, the disclosures provided by such 
operating companies with respect to risks relating to their bitcoin 
holdings are generally substantially smaller than the registration 
statement of a bitcoin ETP, including the Registration Statement, 
typically amounting to a few sentences of narrative description and 
a handful of risk factors. In other words, investors seeking bitcoin 
exposure through publicly traded companies are gaining only partial 
exposure to bitcoin and are not fully benefitting from the risk 
disclosures and associated investor protections that come from the 
securities registration process.
    \50\ The Exchange notes that the Purpose Bitcoin ETF, a retail 
physical bitcoin ETP launched in Canada, reportedly reached $1.2 
billion in assets under management as of October 15, 2021 (``AUM''), 
demonstrating the demand for a North American market listed bitcoin 
exchange-traded product (``ETP''). The Purpose Bitcoin ETF also 
offers a class of units that is U.S. dollar denominated, which could 
appeal to U.S. investors.
    \51\ The Exchange notes that securities regulators in a number 
of other countries have either approved or otherwise allowed the 
listing and trading of bitcoin ETPs. Specifically, these funds 
include the Purpose Bitcoin ETF, Bitcoin ETF, VanEck Vectors Bitcoin 
ETN, WisdomTree Bitcoin ETP, Bitcoin Tracker One, BTCetc bitcoin 
ETP, Amun Bitcoin ETP, Amun Bitcoin Suisse ETP, 21Shares Short 
Bitcoin ETP, CoinShares Physical Bitcoin ETP.
---------------------------------------------------------------------------

Bitcoin Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the 
recent launch of the ETFs registered under the Investment Company Act 
of 1940, as amended (the ``1940 Act''), that provide exposure to 
bitcoin through CME Bitcoin Futures (``Bitcoin Futures ETFs''). 
Allowing such products to list and trade is a productive first step in 
providing transparent, exchange-listed tools for expressing a view on 
bitcoin for U.S. investors and traders. However, as has been reported 
by numerous outlets, the structure of such products provides negative 
outcomes for buy and hold investors as compared to an ETP that would 
hold actual bitcoin instead of derivatives contracts (``Spot Bitcoin 
ETPs'').\52\ Specifically, the cost of rolling CME Bitcoin Futures 
contracts (which has reached as high as 17% annually \53\ excluding a 
fund's management fees and borrowing costs, if any) will cause the 
Bitcoin Futures ETFs to lag the performance of bitcoin itself and, at 
over a billion dollars in assets under management, would cost U.S. 
investors hundreds of millions of dollars on an annual basis. Such 
rolling costs would not be required for Spot Bitcoin ETPs that hold 
bitcoin. Further, Bitcoin Futures ETFs have grown so rapidly that they 
face potentially running into CME position limits, which would force a 
Bitcoin Futures ETF to invest in non-futures assets for bitcoin 
exposure and cause potential investor confusion and lack of certainty 
about what such Bitcoin Futures ETFs are actually holding to try to get 
exposure to bitcoin, not to mention completely changing the risk 
profile associated with such an ETF. While Bitcoin Futures ETFs 
represent a useful trading tool, they are clearly a sub-optimal 
structure for U.S. investors that are looking for long-term exposure to 
bitcoin that will, based on the calculations above, unnecessarily cost 
U.S. investors millions of dollars every year and the Exchange believes 
that any proposal to list and trade a Spot Bitcoin ETP should be 
reviewed by the Commission with this important investor protection 
context in mind.
---------------------------------------------------------------------------

    \52\ See e.g., ``Bitcoin ETF's Success Could Come at 
Fundholders' Expense,'' Wall Street Journal (October 24, 2021), 
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin 
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available 
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&__cf_chl_jschl_tk__=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
    \53\ Id.
---------------------------------------------------------------------------

    As discussed further below, the Commission's primary test in 
determining whether to approve or disapprove a series of Commodity-
Based Trust Shares, a product type which includes Spot Bitcoin ETPs, is 
whether the listing exchange has in place a comprehensive surveillance 
sharing agreement with a regulated market of significant size in the 
underlying asset. Previous disapproval orders have made clear that a 
regulated market of significant size is generally a futures and/or 
options market rather than the spot commodity markets, which are often 
unregulated.\54\ Leaving aside the analysis of that standard for 
now,\55\ Cboe believes it would be inconsistent to allow the listing 
and trading of Bitcoin Futures ETFs that hold primarily CME Bitcoin 
Futures while simultaneously disapproving Spot Bitcoin ETPs on the 
basis that the CME Bitcoin Futures market is not a regulated market of 
significant size. If the CME Bitcoin Futures market were not, in the 
opinion of the Commission, a regulated market of significant size, 
permitting Bitcoin Futures ETFs that trade on such market would seem to 
be inconsistent with the requirement under the Act of being designed to 
``prevent fraudulent and manipulative acts and practices'' as 
articulated in the Winklevoss Order and other disapproval orders.\56\ 
One may argue that the 1940 Act provides certain investor protections 
that could mitigate some of these concerns, but the investor protection 
mechanisms under the 1940 Act relate primarily to the composition of a 
1940 Act fund's board of directors, limitations on leverage and 
transactions with affiliates, among others. Those requirements--which 
primarily relate to a 1940 Act fund's internal structure and 
operations, rather than to the markets for the assets which the 1940 
Act fund trades--would not confer additional protections to investors 
in relation to the underlying CME Bitcoin Futures market that would 
justify different regulatory outcomes for Bitcoin Futures ETFs and Spot 
Bitcoin ETPs.\57\
---------------------------------------------------------------------------

    \54\ See Winklevoss Order at 37593, specifically footnote 202, 
which includes the language from numerous approval orders for which 
the underlying futures markets formed the basis for approving series 
of ETPs that hold physical metals, including gold, silver, 
palladium, platinum, and precious metals more broadly; and 37600, 
specifically where the Commission provides that ``when the spot 
market is unregulated--the requirement of preventing fraudulent and 
manipulative acts may possibly be satisfied by showing that the ETP 
listing market has entered into a surveillance-sharing agreement 
with a regulated market of significant size in derivatives related 
to the underlying asset.'' As noted above, the Exchange believes 
that these citations are particularly helpful in making clear that 
the spot market for a spot commodity ETP need not be ``regulated'' 
in order for a spot commodity ETP to be approved by the Commission, 
and in fact that it's been the common historical practice of the 
Commission to rely on such derivatives markets as the regulated 
market of significant size because such spot commodities markets are 
largely unregulated.
    \55\ As further outlined below, both the Exchange and the 
Sponsor believe that the CME Bitcoin Futures market represents a 
regulated market of significant size and that this proposal and 
others like it should be approved on this basis.
    \56\ 15 U.S.C. 78f(b)(5). For additional detail, see Winklevoss 
Order at 37600.
    \57\ The largest OTC Bitcoin Funds holding spot Bitcoin today 
are not 1940 Act Funds.
---------------------------------------------------------------------------

    Further to this point, part of the analysis of the regulated market 
of significant size test is whether an underlying market is 
sufficiently large to support an ETP is whether trading in the ETP is 
likely to be the predominant influence on prices in the market of

[[Page 73366]]

significant size.\58\ According to publicly available data, the largest 
Bitcoin Futures ETF represents 3,803 contracts \59\ of the total 9,625 
contracts of open interest in December CME Bitcoin Futures \60\ as of 
12/2/21 (roughly 40% of open interest). This seems to directly 
contradict the previously articulated standards by the Commission in 
the disapproval orders issued for Spot Bitcoin ETPs related to whether 
the trading in the ETP would be the predominant influence on prices in 
that market.\61\ While it is difficult at this point to assess the 
direct impact on pricing of the CME Bitcoin Futures based on the launch 
of the Bitcoin Futures ETFs, such circumstances, especially related to 
the generally predictable trading behaviors of an ETF, seem to have the 
potential to represent a significant influence over pricing in the 
market. Allowing Spot Bitcoin ETPs to come to market will alleviate 
these concerns because such ETPs would be transacting in the spot 
bitcoin market on a more limited basis (acquiring spot bitcoin as 
needed and not rolling contracts on a monthly basis). As further 
discussed below, research indicates that the CME Bitcoin Futures market 
is a regulated market of significant size that generally leads price 
discovery across USD-based trading in bitcoin futures and spot markets 
globally.
---------------------------------------------------------------------------

    \58\ See Winklevoss Order at 37594.
    \59\ See Fund Holdings Information available at https://www.proshares.com/funds/bito.html.
    \60\ See Volume and Open Interest data available at https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html.
    \61\ See Winklevoss Order at 37594-37595.
---------------------------------------------------------------------------

    To the extent the Commission may view differential treatment of 
Bitcoin Futures ETFs and Spot Bitcoin ETPs as warranted based on the 
Commission's concerns about the custody of physical Bitcoin that a Spot 
Bitcoin ETP would hold (compared to cash-settled futures 
contracts),\62\ the Sponsor believes this concern is mitigated to a 
significant degree by the custodial arrangements that the Trust has 
contracted with Coinbase Trust Company, LLC (the ``Custodian'') to 
provide. In the Custody Statement, the Commission stated that the 
fourth step that a broker-dealer could take to shield traditional 
securities customers and others from the risks and consequences of 
digital asset security fraud, theft, or loss is to establish, maintain, 
and enforce reasonably designed written policies, procedures, and 
controls for safekeeping and demonstrating the broker-dealer has 
exclusive possession or control over digital asset securities that are 
consistent with industry best practices to protect against the theft, 
loss, and unauthorized and accidental use of the private keys necessary 
to access and transfer the digital asset securities the broker-dealer 
holds in custody. While bitcoin is not a security and the Custodian is 
not a broker-dealer, the Sponsor believes that similar considerations 
apply to the Custodian's holding of the Trust's bitcoin. After diligent 
investigation, the Sponsor believes that the Custodian's policies, 
procedures, and controls for safekeeping, exclusively possessing, and 
controlling the Trust's bitcoin holdings are consistent with industry 
best practices to protect against the theft, loss, and unauthorized and 
accidental use of the private keys. As a trust company chartered by the 
New York Department of Financial Services, the Sponsor notes that the 
Custodian is subject to extensive regulation and has among the longest 
track records in the industry of providing custodial services for 
digital asset private keys. The Custodian has represented to the Trust 
that it has never suffered a loss of bitcoin belonging to customers. 
Under the circumstances, therefore, to the extent the Commission 
believes that its concerns about the risks of spot bitcoin custody 
justifies differential treatment of a Bitcoin Futures ETF versus a Spot 
Bitcoin ETP, the Sponsor believes that the fact that the Custodian 
employs the same types of policies, procedures, and safeguards in 
handling spot bitcoin that the Commission has stated that broker-
dealers should implement with respect to digital asset securities would 
appear to weaken the justification for treating a Bitcoin Futures ETF 
compared to a Spot Bitcoin ETP differently due to spot bitcoin custody 
concerns.
---------------------------------------------------------------------------

    \62\ See, e.g., Division of Investment Management Staff, Staff 
Statement on Funds Registered Under the Investment Company Act 
Investing in the Bitcoin Futures Market, May 11, 2021 (``The Bitcoin 
futures market also has not presented the custody challenges 
associated with some cryptocurrency-based investing because the 
futures are cash-settled'').
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list Spot Bitcoin ETPs compared to 
the already listed and traded Bitcoin Futures ETFs would lead to the 
conclusion that Spot Bitcoin ETPs should be available to U.S. investors 
and, as such, this proposal and other comparable proposals to list and 
trade Spot Bitcoin ETPs should be approved by the Commission. Stated 
simply, U.S. investors stand to lose hundreds of millions of dollars 
from holding Bitcoin Futures ETFs, losses which could be prevented by 
the Commission approving Spot Bitcoin ETPs. Additionally, any concerns 
related to preventing fraudulent and manipulative acts and practices 
related to Spot Bitcoin ETPs would apply equally to the spot markets 
underlying the futures contracts held by a Bitcoin Futures ETF. While 
the 1940 Act does offer certain investor protections, those protections 
do not relate to mitigating potential manipulation of the holdings of 
an ETF in a way that warrants distinction between Bitcoin Futures ETFs 
and Spot Bitcoin ETPs. To be clear, both the Exchange and Sponsor 
believe that the CME Bitcoin Futures market is a regulated market of 
significant size and that such manipulation concerns are mitigated, as 
described extensively below. After allowing the listing and trading of 
Bitcoin Futures ETFs that hold primarily CME Bitcoin Futures, however, 
the only consistent outcome would be approving Spot Bitcoin ETPs on the 
basis that the CME Bitcoin Futures market is a regulated market of 
significant size. Including in the analysis the significant and 
preventable losses to U.S. investors that comes with Bitcoin Futures 
ETFs, disapproving Spot Bitcoin ETPs seems even more arbitrary and 
capricious. Given the current landscape, approving this proposal (and 
others like it) and allowing Spot Bitcoin ETPs to be listed and traded 
alongside Bitcoin Futures ETFs would establish a consistent regulatory 
approach, provide U.S. investors with choice in product structures for 
bitcoin exposure, and offer flexibility in the means of gaining 
exposure to bitcoin through transparent, regulated, U.S. exchange-
listed vehicles.
Bitcoin Futures
    CME began offering trading in CME Bitcoin Futures in December 2017. 
Each contract represents five bitcoin and is based on the CME CF 
Bitcoin Reference Rate.\63\ The contracts trade and settle like other 
cash-settled commodity futures contracts. Nearly every measurable 
metric related to CME Bitcoin Futures has trended consistently up since 
launch and/or accelerated upward in the past year, which is captured in 
the following charts.
---------------------------------------------------------------------------

    \63\ According to CME, the CME CF Bitcoin Reference Rate 
aggregates the trade flow of major bitcoin spot exchanges during a 
specific calculation window into a once-a-day reference rate of the 
U.S. dollar price of bitcoin. Calculation rules are geared toward 
maximum transparency and real-time replicability in underlying spot 
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken. 
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.

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[[Page 73367]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.001

Additional Analysis \64\
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    \64\ Unless otherwise noted, all data and analysis presented in 
this section and referenced elsewhere in the filing has been 
provided by the Sponsor.
---------------------------------------------------------------------------

    According to the Sponsor, the increase in the volume on the CME is 
reflected in a higher proportion of the bitcoin market share. This is 
illustrated by plotting the proportion of monthly volume traded in 
bitcoin on the CME \65\ (categorized as regulated in the chart and used 
as the numerator) in relation to the total bitcoin market, which 
comprises of the sum of the volume of bitcoin futures on the CME and 
the spot volume on cryptocurrency exchanges \66\ (categorized as 
unregulated and used as the denominator) from January 1, 2018 to 
December 1, 2021 illustrates this point.
---------------------------------------------------------------------------

    \65\ Data on Bitcoin futures is obtained from https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html.
    \66\ Data on Bitcoin volume traded on cryptocurrency exchanges 
is obtained from https://www.cryptocompare.com.

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[[Page 73368]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.002

    The proportion of volume traded on the CME has increased from less 
than 5% at inception, to more than 20% over three and a half years. 
Furthermore, the CME market, as well as other crypto-linked markets, 
and the spot market are highly correlated. In markets that are globally 
and efficiently integrated, one would expect that changes in prices of 
an asset across all markets to be highly correlated. The rationale 
behind this is that quick and efficient arbitrageurs would capture 
potentially profitable opportunities, consequently converging prices to 
the average intrinsic value very rapidly.
    Bitcoin markets exhibit a high degree of correlation. Using daily 
Bitcoin prices from centralized exchanges, ETP providers, and the CME 
from January 20, 2021 to December 1, 2021,\67\ the Sponsor calculates 
the Pearson correlation of returns \68\ across these markets and find a 
high degree of correlation.
---------------------------------------------------------------------------

    \67\ The calculation of correlations used the period January 20, 
2021 to December 1, 2021 as this is the common period across all the 
exchanges and data sources being analyzed.
    \68\ The Pearson correlation is a measure of linear association 
between two variables, and indicates the magnitude as well as 
direction of this relationship. The value can range between -1 
(suggesting a strong negative association) and 1 (suggesting a 
strong positive association).
---------------------------------------------------------------------------

    Correlations are between 57% and 99%, with the latter found mainly 
across centralized exchanges due to their higher level of 
interconnectedness. The lower correlations pertain mainly to the ETPs, 
which are relatively newer products and are mainly offered by a few 
competing market makers who are required to trade in large blocks, thus 
making it economically infeasible to capture small mispricings. As 
additional investors and arbitrageurs enter the market and capture the 
mispricing opportunities between these markets, it is likely that there 
will be much higher levels of correlations across all markets.

[[Page 73369]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.003

    According to the Sponsor's research, this relationship holds true 
during periods of extreme price volatility. This implies that no single 
Bitcoin market can deviate significantly from the consensus for a 
prolonged period of time, such that the global Bitcoin market is 
sufficiently large and has an inherent unique resistance to 
manipulation. Hence, the Sponsor introduces a statistical component 
called cokurtosis, which measures to what extent two random variables 
change together. If two returns series exhibit a high degree of 
cokurtosis, this means that they tend to undergo extreme positive and 
negative changes simultaneously. A cokurtosis value larger than +3 or 
less than -3 is considered statistically significant. This table shows 
that the level of cokurtosis is positive and very high between all 
market combinations,\69\ which suggests that Bitcoin markets tend to 
move very similarly especially for extreme price deviations. These 
results present evidence of a robust global Bitcoin market that quickly 
reacts in a unanimous manner to extreme price movements across both the 
spot markets, futures and ETP markets.
---------------------------------------------------------------------------

    \69\ The cokurtosis was calculated using hourly Bitcoin returns 
across centralized exchanges, ETPs--21Shares Bitcoin ETP (Ticker: 
ABTC) and VanEck Vectors Bitcoin ETN (Ticker: VBTC)--and CME Bitcoin 
Futures.

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[[Page 73370]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.004

    The Sponsor further believes that academic research corroborates 
the overall trend outlined above and supports the thesis that the CME 
Bitcoin Futures pricing leads the spot market and, thus, a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP. Specifically, the Sponsor believes that 
such research supports the evidence in the literature (highlighted 
later on) that bitcoin futures lead the bitcoin spot market in price 
formation.\70\
---------------------------------------------------------------------------

    \70\ See Hu, Y., Hou, Y. and Oxley, L. (2019). ``What role do 
futures markets play in Bitcoin pricing? Causality, cointegration 
and price discovery from a time-varying perspective'' (available at: 
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This 
academic research paper concludes that ``There exist no episodes 
where the Bitcoin spot markets dominates the price discovery 
processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective.''
---------------------------------------------------------------------------

Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\71\ including Commodity-Based Trust Shares,\72\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
The requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\73\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the Act and that this filing sufficiently 
demonstrates that the CME Bitcoin Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the

[[Page 73371]]

Commission are sufficiently mitigated to the point that they are 
outweighed by quantifiable investor protection issues that would be 
resolved by approving this proposal.
---------------------------------------------------------------------------

    \71\ See Exchange Rule 14.11(f).
    \72\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \73\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \74\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\75\ The only remaining 
issue to be addressed is whether the CME Bitcoin Futures market 
constitutes a market of significant size, which both the Exchange and 
the Sponsor believe that it does. The terms ``significant market'' and 
``market of significant size'' include a market (or group of markets) 
as to which: (a) There is a reasonable likelihood that a person 
attempting to manipulate the ETP would also have to trade on that 
market to manipulate the ETP, so that a surveillance-sharing agreement 
would assist the listing exchange in detecting and deterring 
misconduct; and (b) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\76\
---------------------------------------------------------------------------

    \74\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance- sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. The 
hallmarks of a surveillance-sharing agreement are that the agreement 
provides for the sharing of information about market trading 
activity, clearing activity, and customer identity; that the parties 
to the agreement have reasonable ability to obtain access to and 
produce requested information; and that no existing rules, laws, or 
practices would impede one party to the agreement from obtaining 
this information from, or producing it to, the other party.'' The 
Commission has historically held that joint membership in the 
Intermarket Surveillance Group (``ISG'') constitutes such a 
surveillance sharing agreement. See Wilshire Phoenix Disapproval.
    \75\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \76\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\77\
---------------------------------------------------------------------------

    \77\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    The topic of price discovery in Bitcoin markets, including both 
spot and futures, has attracted the attention of many researchers. 
Nevertheless, despite the use of similar measures of price discovery, 
the literature has presented mixed evidence according to analysis by 
the Sponsor.
    On the one hand, an early study by Corbet et al. (2018) \78\ 
applied four metrics of price discovery including the information share 
approach of Hasbrouck (1995),\79\ the component share methodology of 
Gonzalo and Granger (1995),\80\ the information leadership approach of 
Yan and Zivot (2010),\81\ and the information leadership share measure 
of Putnins (2013) \82\ between the CME, CBOE, and spot prices using 
data sampled on a one-minute frequency. The authors find that price 
discovery is focused on the spot market. Similar evidence is presented 
by Baur and Dimpfl (2019),\83\ where the authors use data sampled on a 
five-minute interval and conclude that price discovery occurs in the 
spot market.
---------------------------------------------------------------------------

    \78\ Corbet S., Lucey B., Peat M., Vigne S. Bitcoin futures--
What use are they? Economics Letters. 2018;172:23-27.
    \79\ Hasbrouck J. One security, many markets: Determining the 
contributions to price discovery. The Journal of Finance. 
1995;50(4):1175-1199.
    \80\ Gonzalo J., Granger C. Estimation of common long-memory 
components in cointegrated systems. Journal of Business & Economic 
Statistics. 1995;13(1):27-35.
    \81\ Yan B., Zivot E. A structural analysis of price discovery 
measures. Journal of Financial Markets. 2010;13(1):1-19.
    \82\ Putni[ncedil][scaron] T.J. What do price discovery metrics 
really measure? Journal of Empirical Finance. 2013;23:68-83.
    \83\ Baur D.G., Dimpfl T. Price discovery in bitcoin spot or 
futures? Journal of Futures Markets. 2019;39(7):803-817.
---------------------------------------------------------------------------

    On the other hand, a study by Kapar and Olmo (2019) \84\ finds 
contradictory evidence using daily-sampled data, concluding that the 
CME futures market dominates price discovery based on the approaches of 
Gonzalo and Granger (1995) and Hasbrouck (1995). Similarly, Akyildirim 
et al. (2019) \85\ show that Bitcoin futures play a significant role in 
price discovery relative to the spot market using the four previously 
mentioned measures of price discovery.
---------------------------------------------------------------------------

    \84\ Kapar B., Olmo J. An analysis of price discovery between 
Bitcoin futures and spot markets. Economics Letters. 2019;174:62-64.
    \85\ Akyildirim E., Corbet S., Katsiampa P., Kellard N., Sensoy 
A. The development of bitcoin futures: Exploring the interactions 
between cryptocurrency derivatives. Finance Research Letters. 
2019;34:1-9.
---------------------------------------------------------------------------

    One potential reason for the mixed evidence, according to Hu et al. 
(2020) \86\ is that cointegration relationships may go undetected if 
the underlying model formulation is constrained to be time-invariant. 
As such, the authors apply time-varying cointegrating coefficients 
based on the works of Park and Hahn (1999) \87\ and Shi et al. 
(2018),\88\ and conclude that futures prices Granger-cause spot prices 
and that futures prices dominate Bitcoin price discovery.
---------------------------------------------------------------------------

    \86\ Hu, Yang et al. ``What role do futures markets play in 
Bitcoin pricing? Causality, cointegration and price discovery from a 
time-varying perspective?.'' International Review of Financial 
Analysis vol. 72 (2020): 101569.
    \87\ Park J.Y., Hahn S.B. Cointegrating regressions with time 
varying coefficients. Econometric Theory. 1999;15(5):664-703.
    \88\ Shi S., Phillips P.C., Hurn S. Change detection and the 
causal impact of the yield curve. Journal of Time Series Analysis. 
2018;39(6):966-987.

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

[[Page 73372]]

    Additionally, the Bitcoin futures market is by orders of magnitude 
larger than the entire spot market of all cryptoassets in terms of 
traded volume. According to a study by the Blockchain Lab of 
Massachusetts Institute of Technology, ``the derivative market leads 
price discovery of bitcoin more frequently than the spot markets. The 
spot market is more likely to indicate the direction of the price 
movement while the derivatives market is more likely to lead the 
magnitude of the price movement'', says the report.\89\
---------------------------------------------------------------------------

    \89\ Eguren, Luisa, Fondufe, Bryan, Hogan, Caleb, and Matthews, 
Claire. ``Price Discovery in the Bitcoin Spot and Derivatives 
Markets'' Massachusetts Institute of Technology Blockchain Lab 
Program, May 15th, 2020.
---------------------------------------------------------------------------

    The Bitcoin futures market has processed more than $1 trillion in 
futures volume per month since the start of the year. In November 2021, 
Bitcoin futures volume accounted for $1.58 trillion, while spot volume, 
in the same time frame, amounted to $1.4 trillion including both 
crypto-only and fiat currency volumes of all cryptoassets, not just 
Bitcoin. Namely, the Bitcoin futures market is 12% larger than the 
entire spot market in terms of volume just in the last month. Over the 
past three months, the average monthly spot volume was $1.3 trillion 
while the average Bitcoin futures volume was significantly greater 
(approximately 30%) than the spot at $1.71 trillion.\90\
---------------------------------------------------------------------------

    \90\ According to data from CryptoCompare and Coinglass.
---------------------------------------------------------------------------

    In the past twelve months, the average monthly futures volume for 
Bitcoin was $1.89 trillion, while the monthly spot volume for all 
cryptoassets was $1.24 trillion.\91\ In other words, since the start of 
the year, the Bitcoin futures market is 52% larger than the spot volume 
of all cryptoassets traded on exchanges. As of December 2, 2021, the 
ratio of Bitcoin spot vs futures volume currently stands at 0.17.\92\ 
In other words, the Bitcoin spot market accounts for 17% of the bitcoin 
futures market in volume terms.
---------------------------------------------------------------------------

    \91\ Id.
    \92\ Id.
---------------------------------------------------------------------------

    Where CME Bitcoin Futures lead the price in the spot market such 
that a potential manipulator of the bitcoin spot market (beyond just 
the constituents of the Index \93\) would have to participate in the 
CME Bitcoin Futures market, it follows that a potential manipulator of 
the Shares would similarly have to transact in the CME Bitcoin Futures 
market because the Index is based on spot prices.
---------------------------------------------------------------------------

    \93\ As further described below, the ``Index'' for the Fund is 
the S&P Bitcoin Index. The current exchange composition of the Index 
is Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, 
Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.
---------------------------------------------------------------------------

    Further, the Trust only allows for in-kind creation and redemption, 
which, as further described below, reduces the potential for 
manipulation of the Shares through manipulation of the Index or any of 
its individual constituents, again emphasizing that a potential 
manipulator of the Shares would have to manipulate the entirety of the 
bitcoin spot market, which is led by the CME Bitcoin Futures market. As 
such, the Exchange believes that part (a) of the significant market 
test outlined above is satisfied and that common membership in ISG 
between the Exchange and CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares.
(a) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME Bitcoin Futures 
market or spot market for a number of reasons, including the 
significant volume in the CME Bitcoin Futures market, the size of 
bitcoin's market cap, and the significant liquidity available in the 
spot market. Moreover, the fact that the Shares are created in-kind 
means that they are fully collateralized and should remain close to NAV 
given that investors and market makers would arbitrage any significant 
price deviations between the price of the Shares and prices in the spot 
market. In addition to the CME Bitcoin Futures market data points cited 
above, the spot market for bitcoin is also very liquid. According to 
data from CoinRoutes from February 2021, the cost to buy or sell $5 
million worth of bitcoin averages roughly 10 basis points with a market 
impact of 30 basis points.\94\ For a $10 million market order, the cost 
to buy or sell is roughly 20 basis points with a market impact of 50 
basis points. Stated another way, a market participant could enter a 
market buy or sell order for $10 million of bitcoin and only move the 
market 0.5%. More strategic purchases or sales (such as using limit 
orders and executing through OTC bitcoin trade desks) would likely have 
less obvious impact on the market--which is consistent with 
MicroStrategy, Tesla, and Square being able to collectively purchase 
billions of dollars in bitcoin. As such, the combination of CME Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants, including authorized 
participants creating and redeeming in-kind with the Trust, to buy or 
sell large amounts of bitcoin without significant market impact will 
help prevent the Shares from becoming the predominant force on pricing 
in either the bitcoin spot or CME Bitcoin Futures markets, satisfying 
part (b) of the test outlined above.
---------------------------------------------------------------------------

    \94\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

(b) Other Means to Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present. According to the Sponsor, a 
significant portion of the considerations around Bitcoin pricing have 
historically stemmed from a lack of consistent pricing across markets. 
However, according to the Sponsor's research, cross-exchange spreads in 
Bitcoin have been declining consistently over the past several years. 
Based on the daily Bitcoin price series from several popular 
centralized exchanges \95\ the Sponsor has calculated the largest 
cross-exchange percentage spread (labelled as %C-Spread) by deducting 
the highest or maximum price (P) at time t from the lowest or minimum, 
and dividing by the lowest across all exchanges (i). Formally, this is 
expressed as:
---------------------------------------------------------------------------

    \95\ The exchanges include Binance, Bitfinex, Bithumb, Bitstamp, 
Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, Kraken, 
Kucoin, and OKEX.
[GRAPHIC] [TIFF OMITTED] TN27DE21.005

[[Page 73373]]

    The results show a clear and sharp decline in the %C-Spread, 
indicating that the Bitcoin market has become more efficient as cross-
exchange prices have converged over time.
[GRAPHIC] [TIFF OMITTED] TN27DE21.006

    In addition, the magnitude of outlier % C-spreads has also declined 
over time. This boxplot shows that, not only did the median value of 
the %C-Spread decline over time, but also the extreme outlier values. 
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, and 
2021 are 29.14%, 14.45%, 8.54%, 6.04%, and 7.1%, respectively. The 
market has experienced a 38% year-on-year decline in the annual median 
%C-Spread indicating a greater degree of Bitcoin price convergence 
across exchanges and a more efficient market.

[[Page 73374]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.007

    The dispersion ([sigma]) of Bitcoin Prices has also declined over 
the same period. This chart shows the 7-day rolling standard deviation 
of the %C-Spread from January 1, 2017 to December 1, 2021. The 
Sponsor's research finds that the dispersion in Bitcoin prices across 
all exchanges has decreased over time, indicating that prices on all 
the considered exchanges converge towards the intrinsic average much 
more efficiently. This suggests that the market has become better at 
quickly reaching a consensus price for Bitcoin.
    As the pricing of the Bitcoin market becomes increasingly 
efficient, pricing methodologies become more accurate and less 
susceptible to manipulation. The clustering of prices across a variety 
of sources within the primary market points towards robust price 
discovery mechanisms and efficient arbitrage.

[[Page 73375]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.008

    One factor that has contributed to the overall efficiency, price 
discovery, and lower volatility of the Bitcoin market is the increase 
in the number of participants, and subsequently, the total dollar 
amount allocated to this market. This can be illustrated by the 
following chart, which shows the number of wallet addresses holding 
Bitcoin from March 2012 to December 2021.
[GRAPHIC] [TIFF OMITTED] TN27DE21.009

    The increase in the number of participants has manifested itself in 
higher liquidity in the market. This is exhibited in the following 
chart, which shows the daily aggregated dollar notional of the bid and 
ask order books within the first 100 price levels across several of the 
largest centralized crypto exchanges from October 2020 to April 2021. 
Specifically, the dollar notional that is allocated closest to the mid 
price has increased from around $230 million to $860 million over that 
period, representing a 270% increase in half a year.

[[Page 73376]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.010

    An increased notional order book suggests that there is a higher 
degree of consensus among investors regarding the price of Bitcoin. 
Moreover, this market characteristic hampers any attempt of price 
manipulation by any single large entity.
    As a robustness check, the Sponsor investigates whether the dollar 
notional in the order book changes significantly prior to, and post an 
extreme price event. Specifically, for events constituting large 
increases in the price of Bitcoin, if the ask (or sell) side of the 
order book experiences a significant shrinkage in the dollar notional 
right before the event, then this may be an indication of market 
manipulation whereby the ask-side of the order book becomes 
sufficiently thin for a large order to move the price upward. 
Similarly, for events constituting large decreases in the price of 
Bitcoin, if the bid (or buy) side of the order book experiences a 
significant shrinkage in the dollar notional prior to such events, then 
this may be an indication of market manipulation whereby the thinner 
bid-side of the order book may potentially lead to significant downward 
price movements.
    Using the top and bottom 0.1% of hourly price changes from October 
2020 to April 2021 as events of extreme upward and downward market 
movements, respectively, the Sponsor plotted the bid (left charts) and 
ask (right charts) dollar notional of the Bitcoin order book within a 
six-hour window around these events in the chart below, which shows the 
results for extreme upward price movements. The extreme price events 
(indicated by the dashed green lines) perfectly coincide with the 
decrease in dollar notional of the ask-side of the order book. This is 
indicative of an efficient market, whereby large market movements are 
quickly and dynamically absorbed by a thick orderbook. Moreover, the 
dollar notional on the ask side after the event is replenished back to 
its pre-event level, which implies that market participants' reactions 
are quick to restore the market back to its equilibrium level.

[[Page 73377]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.011

    The same results and conclusions are found for extreme downward 
price movements. The charts below show that such price events perfectly 
coincide with shrinkages on the bid side of the order book (left 
charts), indicating an efficient and dynamic Bitcoin market. Moreover, 
the bid-side of the order book after the event is also restored back to 
its pre-event level, which suggests that the market is symmetrically 
efficient in moving back to equilibrium.

[[Page 73378]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.012

    Finally, offering only in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Index which it uses to value the 
Trust's bitcoin is designed to reduce the risk of manipulation based on 
the methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Index significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\96\ When authorized participants are 
creating with the Trust, they need to deliver a certain number of 
bitcoin per share (regardless of the valuation used) and when they're 
redeeming, they can similarly expect to receive a certain number of 
bitcoin per share. As such, even if the price used to value the Trust's 
bitcoin is manipulated (which the Sponsor believes that its methodology 
is resistant to), the ratio of bitcoin per Share does not change and 
the Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Index because 
there is little financial incentive to do so.
---------------------------------------------------------------------------

    \96\ While the Index will not be particularly important for the 
creation and redemption process, it will be used for calculating 
fees.
---------------------------------------------------------------------------

(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past 1.5 years, U.S. 
investor exposure to bitcoin through OTC Bitcoin Funds has grown into 
the tens of billions of dollars and more than a billion dollars of 
exposure through Bitcoin Futures ETFs. With that growth, so too has 
grown the quantifiable investor protection issues to U.S. investors 
through roll costs for Bitcoin Futures ETFs and premium/discount 
volatility and management fees for OTC Bitcoin Funds. The Exchange 
believes that the concerns related to the prevention of fraudulent and 
manipulative acts and practices have been sufficiently addressed to be 
consistent with the Act. As such, the Exchange believes that approving 
this proposal (and comparable proposals) provides the Commission with 
the opportunity to allow U.S. investors with access to bitcoin in a 
regulated and transparent exchange-traded vehicle that would act to 
limit risk to U.S. investors by: (i) Reducing premium and discount 
volatility; (ii) reducing management fees through meaningful 
competition; (iii) reducing risks and costs associated with investing 
in Bitcoin Futures ETFs and operating companies that are imperfect 
proxies for bitcoin exposure; and (iv) providing an alternative for 
investors to self-custodying spot bitcoin.
ARK 21Shares Bitcoin ETF
    Delaware Trust Company is the trustee (``Trustee''). The Bank of 
New York Mellon will be the administrator (``Administrator'') and 
transfer agent (``Transfer Agent''). Foreside Global Services, LLC will 
be the marketing agent (``Marketing Agent'') in connection with the 
creation and redemption of ``Baskets'' of Shares. ARK Investment 
Management LLC (``ARK'') will provide assistance in the marketing of 
the Shares. Coinbase Custody Trust Company, LLC, a third-party 
regulated custodian (the ``Custodian''), will be responsible for 
custody of the Trust's bitcoin.
    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the bitcoin held by the 
Trust. The Trust's assets will consist of bitcoin

[[Page 73379]]

held by the Custodian on behalf of the Trust. The Trust generally does 
not intend to hold cash or cash equivalents. However, there may be 
situations where the Trust will unexpectedly hold cash on a temporary 
basis.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\97\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares (a ``Creation Basket'') 
at the Trust's NAV. Authorized participants will deliver, or facilitate 
the delivery of, bitcoin to the Trust's account with the Custodian in 
exchange for Shares when they purchase Shares, and the Trust, through 
the Custodian, will deliver bitcoin to such authorized participants 
when they redeem Shares with the Trust. Authorized participants may 
then offer Shares to the public at prices that depend on various 
factors, including the supply and demand for Shares, the value of the 
Trust's assets, and market conditions at the time of a transaction. 
Shareholders who buy or sell Shares during the day from their broker 
may do so at a premium or discount relative to the NAV of the Shares of 
the Trust.
Investment Objective
    According to the Registration Statement and as further described 
below, the investment objective of the Trust is to seek to track the 
performance of bitcoin, as measured by the performance of the S&P 
Bitcoin Index (the ``Index''), adjusted for the Trust's expenses and 
other liabilities. In seeking to achieve its investment objective, the 
Trust will hold bitcoin and will value the Shares daily based on the 
Index. The Trust will process all creations and redemptions in-kind in 
transactions with authorized participants. The Trust is not actively 
managed.
The Index
    As described in the Registration Statement, the Fund will use the 
Index to calculate the Trust's NAV. The Index is a U.S. dollar-
denominated composite reference rate for the price of bitcoin. There is 
no component other than bitcoin in the Index. The underlying exchanges 
are sourced by Lukka Inc. (the ``Data Provider'') \98\ based on a 
combination of qualitative and quantitative metrics to analyze a 
comprehensive data set and evaluate factors including legal/regulation, 
KYC/transaction risk, data provision, security, team/exchange, asset 
quality/diversity, market quality and negative events. The Index price 
is currently sourced from the following set of exchanges: Binance, 
Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, Gemini, HitBTC, 
Huobi, Kraken, KuCoin, and Poloniex. As the digital ecosystem continues 
to evolve, the Data Provider can add additional or remove exchanges 
based on the processes established by Lukka's Pricing Integrity 
Oversight Board.\99\
---------------------------------------------------------------------------

    \98\ Lukka is an independent third-party digital asset data 
company engaged by the Sponsor to provide fair market value (FMV) 
bitcoin prices. This price, commercially available from Lukka, will 
form the basis for determining the value of the Trust's Bitcoin 
Holdings. Lukka is not affiliated with the Trust or the Sponsor 
other than through a commercial relationship. All of Lukka's 
products are also SOC 1 and 2 Type 2 certified.
    \99\ The purpose of Lukka's Pricing Integrity Oversight Board is 
to ensure (i) the integrity and validity of the Lukka pricing and 
valuation products and (ii) the Lukka pricing and valuation products 
remain fit for purpose in the rapidly evolving market and 
corresponding regulatory environments.
---------------------------------------------------------------------------

    The Index methodology is intended to determine the fair market 
value (``FMV'') for bitcoin by determining the principal market for 
bitcoin as of 4 p.m. ET daily. The Index methodology uses a ranking 
approach that considers several exchange characteristics including 
oversight and intra-day trading volume. Specifically, to rank the 
credibility and quality of each exchange, the Data Provider dynamically 
assigns a Base Exchange Score (``BES'') score to the key 
characteristics for each exchange.
    The BES reflects the fundamentals of an exchange and determines 
which exchange should be designated as the principal market at a given 
point of time. This score is determined by computing a weighted average 
of the values assigned to four different exchange characteristics. The 
exchange characteristics are as follows: (i) Oversight; (ii) 
microstructure efficiency; (iii) data transparency and (iv) data 
integrity.
Oversight
    This score reflects the rules in place to protect and to give 
access to the investor. The score assigned for exchange oversight will 
depend on parameters such as jurisdiction, regulation, ``Know Your 
Customer and Anti-Money Laundering Compliance'' (KYC/AML), among other 
proprietary factors.
Microstructure Efficiency
    The effective bid ask spread is used as a proxy for efficiency. For 
example, for each exchange and currency pair, the Data Provider takes 
an estimate of the ``effective spread'' relative to the price.
Data Transparency
    Transparency is the term used for a quality score that is 
determined by the level of detail of the data offered by an exchange. 
The most transparent exchanges offer order-level data, followed by 
order book, trade-level, and then candles.
Data Integrity
    Data integrity reconstructs orders to ensure the transaction 
amounts that make up an order equal the overall order amount matching 
on both a minute and daily basis. This data would help expose nefarious 
actions such as wash trading or other potential manipulation of data.
    The methodology then applies a five-step weighting process for 
identifying a principal exchange and the last price on that exchange. 
Following this weighting process, an executed exchange price is 
assigned for bitcoin as of 4 p.m. ET. The Index price is determined 
according to the following procedure:
     Step 1: Assign each exchange a Base Exchange Score 
(``BES'') reflecting static exchange characteristics such as oversight, 
microstructure and technology, as discussed below.
     Step 2: Adjust the BES based on the relative monthly 
volume each exchange services. This new score is the Volume Adjusted 
Score (``VAS'').
     Step 3: Decay the VAS based on the time passed since the 
last trade on the exchange. Here, the Data Provider is assessing the 
level of activity in the market by considering the frequency (volume) 
of trades. The decay factor reflects the time since the last trade on 
the exchange. This is the final Decayed Volume Adjusted Score 
(``DVAS''), which tracks the freshness of the data by tracking most 
recent trades.
     Step 4: Rank the exchanges by the DVAS score and designate 
the highest-ranking exchange as the principal market for that point in 
time. The principal market is the exchange with the highest DVAS.
     Step 5: After selecting a primary exchange, an executed 
exchange price is used for bitcoin representing FMV at 4 p.m. ET. The 
Data Provider takes the last traded prices at that moment in time on 
that trading venue for the relevant

[[Page 73380]]

pair (Bitcoin/USD) when determining the Index price.
    As discussed in the Registration Statement, the fact that there are 
multiple bitcoin spot markets that may contribute prices to the Index 
price makes manipulation more difficult in a well-arbitraged and 
fractured market, as a malicious actor would need to manipulate 
multiple spot markets simultaneously to impact the Index price, or 
dramatically skew the historical distribution of volume between the 
various exchanges.
    The Data Provider has designed a series of automated algorithms 
designed to supplement the core Lukka Prime Methodology in enhancing 
the ability to detect potentially anomalous price activity which could 
be detrimental to the goal of obtaining a Fair Market Value price that 
is representative of the market at a point in time.\100\
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    \100\ Upon request, Lukka can provide additional information and 
detail to the Commission regarding the algorithms and data quality 
checks that are put in place, with confidential treatment requested.
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    In addition to the automated algorithms, the Data Provider has 
dedicated resources and has established committees to ensure all prices 
are representative of the market. Any price challenges will result in 
an independent analysis of the price. This includes assessing whether 
the price from the selected exchange is biased according to analyses 
designed to recognize patterns consistent with manipulative activity, 
such as a quick reversion to previous traded levels following a sharp 
price change or any significant deviations from the volume weighted 
average price on a particular exchange or pricing on any other exchange 
included in the Lukka Prime eligibility universe. Policies and 
procedures for any adjustments to prices or changes to core parameters 
(e.g., exchange selection) are described in the Lukka Price Integrity 
Manual.\101\
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    \101\ Upon request, Lukka can provide the Commission the Lukka 
Pricing Integrity Manual, with confidential treatment requested.
---------------------------------------------------------------------------

    Upon detection or external referral of suspect manipulative 
activities, the case is raised to the Price Integrity Oversight Board. 
These checks occur on an on-going, intraday basis and any 
investigations are typically resolved promptly, in clear cases within 
minutes and in more complex cases same business day. The evidence 
uncovered shall be turned over to the Data Provider's Price Integrity 
Oversight Board for final decision and action. The Price Integrity 
Oversight Board may choose to pick an alternative primary market and 
may exclude such market from future inclusion in the Index methodology 
or choose to stand by the original published price upon fully 
evaluating all available evidence. It may also initiate an 
investigation of prior prices from such markets and shall evaluate 
evidence presented on a case-by-case basis.
    After the Lukka Prime price is generated, the S&P DJI (``The Index 
Provider'') performs independent quality checks as a second layer of 
validation to those employed by the Data Provider, including checks 
against assets with large price movements, assets with missing prices, 
assets with zero prices, assets with unchanged prices, assets that have 
ceased pricing and assets where the price does not match the Lukka 
Prime primary exchange. The Index Provider may submit a price challenge 
to Lukka if any of the checks listed above are found to be material. 
Lukka will perform an independent review of the price challenge to 
ensure the price is representative of the fair value of a particular 
cryptocurrency. If there is a change, the process will follow that 
described in the Recalculation Policy found on the The Index Provider 
Digital Assets Indices Policies & Practices and Index Mathematics 
Methodology.
    In addition, The Index Provider currently provides the below 
additional quality assurance mechanisms with respect to crypto price 
validation. These checks are based on current market conditions, 
internal system processes and other assessments. The Index Provider 
reserves the right within its sole discretion to supplement, modify 
and/or remove individual checks and/or the parameters used within the 
checks, at any time without notice.
Crypto Price and Exchange Validation
     Check for any assets with no price received from Lukka;
     Check for any assets with a zero price received from 
Lukka;
     Check for any assets with a large change from the previous 
day. (Outliers +/- 40%);
     Check for any assets with a stale price, aggregating the 
number of days the price remains stale;
     Confirm the Lukka price matches the Lukka Prime primary 
exchange price;
     Confirm the Lukka price is consistent with other Lukka 
Prime exchange prices;
     Check the volume of the Lukka Prime exchanges and 
challenge the Lukka primary exchange if the exchange is not within the 
top percentile of the trading volume for that asset;
     Aggregation of Lukka Prime primary exchange changes.
Availability of Information
    In addition to the price transparency of the Index, the Trust will 
provide information regarding the Trust's bitcoin holdings as well as 
additional data regarding the Trust. The Trust will provide an Intraday 
Indicative Value (``IIV'') per Share updated every 15 seconds, as 
calculated by the Exchange or a third-party financial data provider 
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m. 
E.T.). The IIV will be calculated by using the prior day's closing NAV 
per Share as a base and updating that value during Regular Trading 
Hours to reflect changes in the value of the Trust's bitcoin holdings 
during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price \102\ in relation to the NAV 
as of the time the NAV is calculated and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The price of bitcoin 
will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours. 
Information about the Index, including key elements of how the Index is 
calculated, will be publicly available at https://www.spglobal.com/spdji/en/indices/digital-assets/sp-bitcoin-index//.
---------------------------------------------------------------------------

    \102\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
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    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information

[[Page 73381]]

regarding the Shares will be disseminated through the facilities of the 
Consolidated Tape Association (``CTA'').
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
Net Asset Value
    NAV means the total assets of the Trust including, but not limited 
to, all bitcoin and cash less total liabilities of the Trust, each 
determined on the basis of generally accepted accounting principles. 
The Administrator determines the NAV of the Trust on each day that the 
Exchange is open for regular trading, as promptly as practical after 
4:00 p.m. EST. The NAV of the Trust is the aggregate value of the 
Trust's assets less its estimated accrued but unpaid liabilities (which 
include accrued expenses). In determining the Trust's NAV, the 
Administrator values the bitcoin held by the Trust based on the price 
set by the Index as of 4:00 p.m. EST. The Administrator also determines 
the NAV per Share.
Creation and Redemption of Shares
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or 
the close of regular trading on the Exchange, whichever is earlier. The 
day on which an order is received is considered the purchase order 
date. The total deposit of bitcoin required is an amount of bitcoin 
that is in the same proportion to the total assets of the Trust, net of 
accrued expenses and other liabilities, on the date the order to 
purchase is properly received, as the number of Shares to be created 
under the purchase order is in proportion to the total number of Shares 
outstanding on the date the order is received. Each night, the Sponsor 
will publish the amount of bitcoin that will be required in exchange 
for each creation order. The Administrator determines the required 
deposit for a given day by dividing the number of bitcoin held by the 
Trust as of the opening of business on that business day, adjusted for 
the amount of bitcoin constituting estimated accrued but unpaid fees 
and expenses of the Trust as of the opening of business on that 
business day, by the quotient of the number of Shares outstanding at 
the opening of business divided by 5,000. The procedures by which an 
authorized participant can redeem one or more Creation Baskets mirror 
the procedures for the creation of Creation Baskets.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) Issued by a 
trust that holds a specified commodity \103\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity.
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    \103\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted above, the CFTC has opined that Bitcoin is a commodity 
as defined in Section 1a(9) of the Commodity Exchange Act. See 
Coinflip.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g., Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted 
because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) The extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule

[[Page 73382]]

14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a), the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under Section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information regarding 
trading in the Shares and CME Bitcoin Futures via ISG, from other 
exchanges who are members or affiliates of the ISG, or with which the 
Exchange has entered into a comprehensive surveillance sharing 
agreement.\104\
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    \104\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) The procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares outside of Regular Trading Hours \105\ 
when an updated IIV will not be calculated or publicly disseminated; 
(v) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (vi) trading information.
---------------------------------------------------------------------------

    \105\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \106\ in general and Section 6(b)(5) of the Act \107\ 
in particular in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.
---------------------------------------------------------------------------

    \106\ 15 U.S.C. 78f.
    \107\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\108\ including Commodity-Based Trust Shares,\109\ to be 
listed on U.S. national securities exchanges. In order for any proposed 
rule change from an exchange to be approved, the Commission must 
determine that, among other things, the proposal is consistent with the 
requirements of Section 6(b)(5) of the Act, specifically including: (i) 
The requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\110\ and (ii) the requirement that an exchange proposal be designed, 
in general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
Section 6(b)(5) of the Act and that this filing sufficiently 
demonstrates that the CME Bitcoin Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the Commission are sufficiently 
mitigated to the point that they are outweighed by quantifiable 
investor protection issues that would be resolved by approving this 
proposal.
---------------------------------------------------------------------------

    \108\ See Exchange Rule 14.11(f).
    \109\ Commodity-Based Trust Shares, as described in Exchange 
Rule 14.11(e)(4), are a type of Trust Issued Receipt.
    \110\ As the Exchange has stated in a number of other public 
documents, it continues to believe that ``other means to prevent 
fraudulent and manipulative acts and practices'' exist to justify 
dispensing with the requisite surveillance sharing agreement. The 
geographically diverse and continuous nature of bitcoin trading 
render it difficult and prohibitively costly to manipulate the price 
of bitcoin. The fragmentation across bitcoin platforms, the 
relatively slow speed of transactions, and the capital necessary to 
maintain a significant presence on each trading platform make 
manipulation of bitcoin prices through continuous trading activity 
challenging. To the extent that there are bitcoin exchanges engaged 
in or allowing wash trading or other activity intended to manipulate 
the price of bitcoin on other markets, such pricing does not 
normally impact prices on other exchange because participants will 
generally ignore markets with quotes that they deem non-executable. 
Moreover, the linkage between the bitcoin markets and the presence 
of arbitrageurs in those markets means that the manipulation of the 
price of bitcoin price on any single venue would require 
manipulation of the global bitcoin price in order to be effective. 
Arbitrageurs must have funds distributed across multiple trading 
platforms in order to take advantage of temporary price 
dislocations, thereby making it unlikely that there will be strong 
concentration of funds on any particular bitcoin exchange or OTC 
platform. As a result, the potential for manipulation on a trading 
platform would require overcoming the liquidity supply of such 
arbitrageurs who are effectively eliminating any cross-market 
pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \111\ with a regulated

[[Page 73383]]

market of significant size. Both the Exchange and CME are members of 
ISG.\112\ The only remaining issue to be addressed is whether the CME 
Bitcoin Futures market constitutes a market of significant size, which 
both the Exchange and the Sponsor believe that it does. The terms 
``significant market'' and ``market of significant size'' include a 
market (or group of markets) as to which: (a) There is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to manipulate the ETP, so that a 
surveillance-sharing agreement would assist the listing exchange in 
detecting and deterring misconduct; and (b) it is unlikely that trading 
in the ETP would be the predominant influence on prices in that 
market.\113\
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    \111\ As previously articulated by the Commission, ``The 
standard requires such surveillance-sharing agreements since ``they 
provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully 
investigate a manipulation if it were to occur.'' The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement 
with markets trading underlying securities for the listing exchange 
to have the ability to obtain information necessary to detect, 
investigate, and deter fraud and market manipulation, as well as 
violations of exchange rules and applicable federal securities laws 
and rules. The hallmarks of a surveillance-sharing agreement are 
that the agreement provides for the sharing of information about 
market trading activity, clearing activity, and customer identity; 
that the parties to the agreement have reasonable ability to obtain 
access to and produce requested information; and that no existing 
rules, laws, or practices would impede one party to the agreement 
from obtaining this information from, or producing it to, the other 
party.'' The Commission has historically held that joint membership 
in ISG constitutes such a surveillance sharing agreement. See 
Wilshire Phoenix Disapproval.
    \112\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \113\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
Section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\114\
---------------------------------------------------------------------------

    \114\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    The topic of price discovery in Bitcoin markets, including both 
spot and futures, has attracted the attention of many researchers. 
Nevertheless, despite the use of similar measures of price discovery, 
the literature has presented mixed evidence.
    On the one hand, an early study by Corbet et al. (2018) \115\ 
applied four metrics of price discovery including the information share 
approach of Hasbrouck (1995),\116\ the component share methodology of 
Gonzalo and Granger (1995),\117\ the information leadership approach of 
Yan and Zivot (2010),\118\ and the information leadership share measure 
of Putnins (2013) \119\ between the CME, CBOE, and spot prices using 
data sampled on a one-minute frequency. The authors find that price 
discovery is focused on the spot market. Similar evidence is presented 
by Baur and Dimpfl (2019),\120\ where the authors use data sampled on a 
five-minute interval and conclude that price discovery occurs in the 
spot market.
---------------------------------------------------------------------------

    \115\ Corbet S., Lucey B., Peat M., Vigne S. Bitcoin futures--
What use are they? Economics Letters. 2018;172:23-27.
    \116\ Hasbrouck J. One security, many markets: Determining the 
contributions to price discovery. The Journal of Finance. 
1995;50(4):1175-1199.
    \117\ Gonzalo J., Granger C. Estimation of common long-memory 
components in cointegrated systems. Journal of Business & Economic 
Statistics. 1995;13(1):27-35.
    \118\ Yan B., Zivot E. A structural analysis of price discovery 
measures. Journal of Financial Markets. 2010;13(1):1-19.
    \119\ Putni[ncedil][scaron] T.J. What do price discovery metrics 
really measure? Journal of Empirical Finance. 2013;23:68-83.
    \120\ Baur D.G., Dimpfl T. Price discovery in bitcoin spot or 
futures? Journal of Futures Markets. 2019;39(7):803-817.
---------------------------------------------------------------------------

    On the other hand, a study by Kapar and Olmo (2019) \121\ finds 
contradictory evidence using daily-sampled data, concluding that the 
CME futures market dominates price discovery based on the approaches of 
Gonzalo and Granger (1995) and Hasbrouck (1995). Similarly, Akyildirim 
et al. (2019) \122\ show that Bitcoin futures play a significant role 
in price discovery relative to the spot market using the four 
previously mentioned measures of price discovery.
---------------------------------------------------------------------------

    \121\ Kapar B., Olmo J. An analysis of price discovery between 
Bitcoin futures and spot markets. Economics Letters. 2019;174:62-64.
    \122\ Akyildirim E., Corbet S., Katsiampa P., Kellard N., Sensoy 
A. The development of bitcoin futures: Exploring the interactions 
between cryptocurrency derivatives. Finance Research Letters. 
2019;34:1-9.
---------------------------------------------------------------------------

    One potential reason for the mixed evidence, according to Hu et al. 
(2020) \123\ is that cointegration relationships may go undetected if 
the underlying model formulation is constrained to be time-invariant. 
As such, the authors apply time-varying cointegrating coefficients 
based on the works of Park and Hahn (1999) \124\ and Shi et 
al.(2018),\125\ and conclude that futures prices Granger-cause spot 
prices and that futures prices dominate Bitcoin price discovery.
---------------------------------------------------------------------------

    \123\ Hu, Yang et al. ``What role do futures markets play in 
Bitcoin pricing? Causality, cointegration and price discovery from a 
time-varying perspective?.'' International Review of Financial 
Analysis vol. 72 (2020): 101569.
    \124\ Park J.Y., Hahn S.B. Cointegrating regressions with time 
varying coefficients. Econometric Theory. 1999;15(5):664-703.
    \125\ Shi S., Phillips P.C., Hurn S. Change detection and the 
causal impact of the yield curve. Journal of Time Series Analysis. 
2018;39(6):966-987.

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

[[Page 73384]]

    Additionally, the Bitcoin futures market is by orders of magnitude 
larger than the entire spot market of all cryptoassets in terms of 
traded volume. According to a study by the Blockchain Lab of 
Massachusetts Institute of Technology, ``the derivative market leads 
price discovery of bitcoin more frequently than the spot markets. The 
spot market is more likely to indicate the direction of the price 
movement while the derivatives market is more likely to lead the 
magnitude of the price movement'', says the report.\126\
---------------------------------------------------------------------------

    \126\ Eguren, Luisa, Fondufe, Bryan, Hogan, Caleb, and Matthews, 
Claire. ``Price Discovery in the Bitcoin Spot and Derivatives 
Markets'' Massachusetts Institute of Technology Blockchain Lab 
Program, May 15th, 2020
---------------------------------------------------------------------------

    The Bitcoin futures market has processed more than $1 trillion in 
futures volume per month since the start of the year. In November 2021, 
Bitcoin futures volume accounted for $1.58 trillion, while spot volume, 
in the same time frame, amounted to $1.4 trillion including both 
crypto-only and fiat currency volumes of all cryptoassets, not just 
Bitcoin. Namely, the Bitcoin futures market is 12% larger than the 
entire spot market in terms of volume just in the last month. Over the 
past three months, the average monthly spot volume was $1.3 trillion 
while the average Bitcoin futures volume was significantly greater 
(approximately 30%) than the spot at $1.71 trillion according to data 
from CryptoCompare and Coinglass.
    In the past twelve months, the average monthly futures volume for 
Bitcoin was $1.89 trillion, while the monthly spot volume for all 
cryptoassets was $1.24 trillion. In other words, since the start of the 
year, the Bitcoin futures market is 52% larger than the spot volume of 
all cryptoassets traded on exchanges. As of December 2, the ratio of 
Bitcoin spot vs futures volume currently stands at 0.17. In other 
words, the Bitcoin spot market accounts for 17% of the bitcoin futures 
market in volume terms.
    According to the Sponsor's research presented above, the CME 
Bitcoin Futures market is the leading market for bitcoin price 
formation. Where CME Bitcoin Futures lead the price in the spot market 
such that a potential manipulator of the bitcoin spot market (beyond 
just the constituents of the Index \127\) would have to participate in 
the CME Bitcoin Futures market, it follows that a potential manipulator 
of the Shares would similarly have to transact in the CME Bitcoin 
Futures market because the Index is based on spot prices.
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    \127\ As further described below, the ``Index'' for the Fund is 
the S&P Bitcoin Index. The current exchange composition of the Index 
is Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, 
Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.
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    Further, the Trust only allows for in-kind creation and redemption, 
which, as further described below, reduces the potential for 
manipulation of the Shares through manipulation of the Index or any of 
its individual constituents, again emphasizing that a potential 
manipulator of the Shares would have to manipulate the entirety of the 
bitcoin spot market, which is led by the CME Bitcoin Futures market. As 
such, the Exchange believes that part (a) of the significant market 
test outlined above is satisfied and that common membership in ISG 
between the Exchange and CME would assist the listing exchange in 
detecting and deterring misconduct in the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the CME Bitcoin Futures 
market or spot market for a number of reasons, including the 
significant volume in the CME Bitcoin Futures market, the size of 
bitcoin's market cap, and the significant liquidity available in the 
spot market. Moreover, the fact that the Shares are created in-kind 
means that they are fully collateralized and should remain close to NAV 
given that investors and market makers would arbitrage any significant 
price deviations between the price of the Shares and prices in the spot 
market. In addition to the CME Bitcoin Futures market data points cited 
above, the spot market for bitcoin is also very liquid. According to 
data from CoinRoutes from February 2021, the cost to buy or sell $5 
million worth of bitcoin averages roughly 10 basis points with a market 
impact of 30 basis points.\128\ For a $10 million market order, the 
cost to buy or sell is roughly 20 basis points with a market impact of 
50 basis points. Stated another way, a market participant could enter a 
market buy or sell order for $10 million of bitcoin and only move the 
market 0.5%. More strategic purchases or sales (such as using limit 
orders and executing through OTC bitcoin trade desks) would likely have 
less obvious impact on the market--which is consistent with 
MicroStrategy, Tesla, and Square being able to collectively purchase 
billions of dollars in bitcoin. As such, the combination of CME Bitcoin 
Futures leading price discovery, the overall size of the bitcoin 
market, and the ability for market participants, including authorized 
participants creating and redeeming in-kind with the Trust, to buy or 
sell large amounts of bitcoin without significant market impact will 
help prevent the Shares from becoming the predominant force on pricing 
in either the bitcoin spot or CME Bitcoin Futures markets, satisfying 
part (b) of the test outlined above.
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    \128\ These statistics are based on samples of bitcoin liquidity 
in USD (excluding stablecoins or Euro liquidity) based on executable 
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, 
BinanceUS, and OKCoin during February 2021.
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(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present. According to the Sponsor, a 
significant portion of the considerations around Bitcoin pricing have 
historically stemmed from a lack of consistent pricing across markets. 
However, according to the Sponsor's research, cross-exchange spreads in 
Bitcoin have been declining consistently over the past several years. 
Based on the daily Bitcoin price series from several popular 
centralized exchanges \129\ the Sponsor has calculated the largest 
cross-exchange percentage spread (labelled as %C-Spread) by deducting 
the highest or maximum price (P) at time t from the lowest or minimum, 
and dividing by the lowest across all exchanges (i). Formally, this is 
expressed as:
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    \129\ The exchanges include Binance, Bitfinex, Bithumb, 
Bitstamp, Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, 
Kraken, Kucoin, and OKEX.
[GRAPHIC] [TIFF OMITTED] TN27DE21.013

[[Page 73385]]

    The results show a clear and sharp decline in the %C-Spread, 
indicating that the Bitcoin market has become more efficient as cross-
exchange prices have converged over time.
[GRAPHIC] [TIFF OMITTED] TN27DE21.014

    In addition, the magnitude of outlier % C-spreads has also declined 
over time. This boxplot shows that, not only did the median value of 
the %C-Spread decline over time, but also the extreme outlier values. 
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, and 
2021 are 29.14%, 14.45%, 8.54%, 6.04%, and 7.1%, respectively. The 
market has experienced a 38% year-on-year decline in the annual median 
%C-Spread indicating a greater degree of Bitcoin price convergence 
across exchanges and a more efficient market.

[[Page 73386]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.015

    The dispersion ([sigma]) of Bitcoin Prices has also declined over 
the same period. This chart shows the 7-day rolling standard deviation 
of the %C-Spread from January 1, 2017 to December 1, 2021. The 
Sponsor's research finds that the dispersion in Bitcoin prices across 
all exchanges has decreased over time, indicating that prices on all 
the considered exchanges converge towards the intrinsic average much 
more efficiently. This suggests that the market has become better at 
quickly reaching a consensus price for Bitcoin.
    As the pricing of the crypto market becomes increasingly efficient, 
pricing methodologies become more accurate and less susceptible to 
manipulation. The clustering of prices across a variety of sources 
within the primary market points towards robust price discovery 
mechanisms and efficient arbitrage.

[[Page 73387]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.016

    One factor that has contributed to the overall efficiency, price 
discovery, and lower volatility of the Bitcoin market is the increase 
in the number of participants, and subsequently, the total dollar 
amount allocated to this market. This can be illustrated by the 
following chart, which shows the number of wallet addresses holding 
Bitcoin from March 2012 to December 2021.
[GRAPHIC] [TIFF OMITTED] TN27DE21.017

    The increase in the number of participants has manifested itself in 
higher liquidity in the market. This is exhibited in the following 
chart, which shows the daily aggregated dollar notional of the bid and 
ask order books within the first 100 price levels across several of the 
largest centralized crypto exchanges from October 2020 to April 2021. 
Specifically, the dollar notional that is allocated closest to the mid 
price has increased from around $230 million to $860 million over that 
period, representing a 270% increase in half a year.

[[Page 73388]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.018

    An increased notional order book suggests that there is a higher 
degree of consensus among investors regarding the price of Bitcoin. 
Moreover, this market characteristic hampers any attempt of price 
manipulation by any single large entity.
    As a robustness check, the Sponsor investigates whether the dollar 
notional in the order book changes significantly prior to, and post an 
extreme price event. Specifically, for events constituting large 
increases in the price of Bitcoin, if the ask (or sell) side of the 
order book experiences a significant shrinkage in the dollar notional 
right before the event, then this may be an indication of market 
manipulation whereby the ask-side of the order book becomes 
sufficiently thin for a large order to move the price upward. 
Similarly, for events constituting large decreases in the price of 
Bitcoin, if the bid (or buy) side of the order book experiences a 
significant shrinkage in the dollar notional prior to such events, then 
this may be an indication of market manipulation whereby the thinner 
bid-side of the order book may potentially lead to significant downward 
price movements.
    Using the top and bottom 0.1% of hourly price changes from October 
2020 to April 2021 as events of extreme upward and downward market 
movements, respectively, the Sponsor plotted the bid (left charts) and 
ask (right charts) dollar notional of the Bitcoin order book within a 
six-hour window around these events in the chart below, which shows the 
results for extreme upward price movements. The extreme price events 
(indicated by the dashed green lines) perfectly coincide with the 
decrease in dollar notional of the ask-side of the order book. This is 
indicative of an efficient market, whereby large market movements are 
quickly and dynamically absorbed by a thick orderbook. Moreover, the 
dollar notional on the ask side after the event is replenished back to 
its pre-event level, which implies that market participants' reactions 
are quick to restore the market back to its equilibrium level.
    The same results and conclusions are found for extreme downward 
price movements. The charts below show that such price events perfectly 
coincide with shrinkages on the bid side of the order book (left 
charts), indicating an efficient and dynamic Bitcoin market. Moreover, 
the bid-side of the order book after the event is also restored back to 
its pre-event level, which suggests that the market is symmetrically 
efficient in moving back to equilibrium.

[[Page 73389]]

[GRAPHIC] [TIFF OMITTED] TN27DE21.019

[GRAPHIC] [TIFF OMITTED] TN27DE21.020

    Finally, offering only in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Index which it uses to value the 
Trust's bitcoin is

[[Page 73390]]

itself resistant to manipulation based on the methodology further 
described below, the fact that creations and redemptions are only 
available in-kind makes the manipulability of the Index significantly 
less important. Specifically, because the Trust will not accept cash to 
buy bitcoin in order to create new shares or, barring a forced 
redemption of the Trust or under other extraordinary circumstances, be 
forced to sell bitcoin to pay cash for redeemed shares, the price that 
the Sponsor uses to value the Trust's bitcoin is not particularly 
important.\130\ When authorized participants are creating with the 
Trust, they need to deliver a certain number of bitcoin per share 
(regardless of the valuation used) and when they're redeeming, they can 
similarly expect to receive a certain number of bitcoin per share. As 
such, even if the price used to value the Trust's bitcoin is 
manipulated (which the Sponsor believes that its methodology is 
resistant to), the ratio of bitcoin per Share does not change and the 
Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Index because 
there is little financial incentive to do so.
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    \130\ While the Index will not be particularly important for the 
creation and redemption process, it will be used for calculating 
fees.
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(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past 1.5 years, U.S. 
investor exposure to bitcoin through OTC Bitcoin Funds has grown into 
the tens of billions of dollars and more than a billion dollars of 
exposure through Bitcoin Futures ETFs. With that growth, so too has 
grown the quantifiable investor protection issues to U.S. investors 
through roll costs for Bitcoin Futures ETFs and premium/discount 
volatility and management fees for OTC Bitcoin Funds. The Exchange 
believes that the concerns related to the prevention of fraudulent and 
manipulative acts and practices have been sufficiently addressed to be 
consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, also believes that such concerns are now 
outweighed by these investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with access to bitcoin in a regulated and transparent exchange-traded 
vehicle that would act to limit risk to U.S. investors by: (i) Reducing 
premium and discount volatility; (ii) reducing management fees through 
meaningful competition; (iii) reducing risks and costs associated with 
investing in Bitcoin Futures ETFs and operating companies that are 
imperfect proxies for bitcoin exposure; and (iv) providing an 
alternative to custodying spot bitcoin.
Commodity-Based Trust Shares
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under Section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed 
bitcoin derivatives via the ISG, from other exchanges who are members 
or affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about bitcoin and will be available regarding the Trust and 
the Shares. In addition to the price transparency of the Index, the 
Trust will provide information regarding the Trust's bitcoin holdings 
as well as additional data regarding the Trust. The Trust will provide 
an IIV per Share updated every 15 seconds, as calculated by the 
Exchange or a third-party financial data provider during the Exchange's 
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be 
calculated by using the prior day's closing NAV per Share as a base and 
updating that value during Regular Trading Hours to reflect changes in 
the value of the Trust's bitcoin holdings during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) The current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price in relation to the NAV as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The price of bitcoin 
will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours. 
Information about the Index, including key elements of how the Index is 
calculated, will be publicly available at https://www.spglobal.com/spdji/en/indices/digital-assets/sp-bitcoin-index/.
    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the CTA.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded.

[[Page 73391]]

Depth of book information is also available from bitcoin exchanges. The 
normal trading hours for bitcoin exchanges are 24 hours per day, 365 
days per year
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of Section 6(b)(5) of the 
Act.

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

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

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

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CboeBZX-2021-051 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CboeBZX-2021-051. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CboeBZX-2021-051, and should be 
submitted on or before January 18, 2022.
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    \131\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\131\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-27824 Filed 12-23-21; 8:45 am]
BILLING CODE 8011-01-P