Document ID: SEC-2022-0884-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2022-07-06T04:00Z

[Federal Register Volume 87, Number 128 (Wednesday, July 6, 2022)]
[Notices]
[Pages 40282-40294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-14309]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95179; File No. SR-NYSEArca-2021-89]

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

June 29, 2022.

I. Introduction

    On October 14, 2021, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the Bitwise Bitcoin ETP Trust (``Trust'') under NYSE 
Arca Rule 8.201-E (Commodity-Based Trust Shares). The proposed rule 
change was published for comment in the Federal Register on November 3, 
2021.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93445 (Oct. 28, 
2021), 86 FR 60695 (``Notice''). Comments on the proposed rule 
change are available at: https://www.sec.gov/comments/sr-nysearca-2021-89/srnysearca202189.htm.
---------------------------------------------------------------------------

    On December 15, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On February 1, 2022, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On April 22, 2022, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 93790, 86 FR 72300 
(Dec. 21, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 94126, 87 FR 6903 
(Feb. 7, 2022).
    \8\ See Securities Exchange Act Release No. 94781, 87 FR 25327 
(Apr. 28, 2022).
---------------------------------------------------------------------------

    This order disapproves the proposed rule change. The Commission 
concludes that NYSE Arca has not met its burden under the Exchange Act 
and the Commission's Rules of Practice to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5), 
which

[[Page 40283]]

requires, in relevant part, that the rules of a national securities 
exchange be ``designed to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \9\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    When considering whether NYSE Arca's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same analytical framework used in 
its orders considering previous proposals to list bitcoin \10\-based 
commodity trusts and bitcoin-based trust issued receipts to assess 
whether a listing exchange of an exchange-traded product (``ETP'') can 
meet its obligations under Exchange Act Section 6(b)(5).\11\ As the 
Commission has explained, an exchange that lists bitcoin-based ETPs can 
meet its obligations under Exchange Act Section 6(b)(5) by 
demonstrating that the exchange has a comprehensive surveillance-
sharing agreement with a regulated market of significant size related 
to the underlying or reference bitcoin assets.\12\
---------------------------------------------------------------------------

    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Notice, 86 FR at 60696.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Kryptoin 
Bitcoin ETF Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021), 
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust Under 
NYSE Arca Rule 8.201-E, Securities Exchange Act Release No. 94006 
(Jan. 20, 2022), 87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37) 
(``SkyBridge Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 94080 (Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022) 
(SR-CboeBZX-2021-039) (``Wise Origin Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the NYDIG Bitcoin 
ETF Under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), 
Securities Exchange Act Release No. 94395 (Mar. 10, 2022), 87 FR 
14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57) (``NYDIG Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Global X Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 94396 (Mar. 10, 
2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052) (``Global X 
Order''); Order Disapproving a Proposed Rule Change, as Modified by 
Amendment No. 1, To List and Trade Shares of the ARK 21Shares 
Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 94571 (Mar. 31, 2022), 
87 FR 20014 (Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the One River Carbon Neutral Bitcoin Trust Under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities 
Exchange Act Release No. 94999 (May 27, 2022), 87 FR 33548 (June 2, 
2022) (SR-NYSEArca-2021-67) (``One River Order''). In addition, 
orders were issued by delegated authority on the following matters: 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to the Listing and Trading of Shares of the SolidX 
Bitcoin Trust Under NYSE Arca Equities Rule 8.201, Securities 
Exchange Act Release No. 80319 (Mar. 28, 2017), 82 FR 16247 (Apr. 3, 
2017) (SR-NYSEArca-2016-101) (``SolidX Order''); Order Disapproving 
a Proposed Rule Change To List and Trade the Shares of the ProShares 
Bitcoin ETF and the ProShares Short Bitcoin ETF, Securities Exchange 
Act Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) 
(SR-NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a 
Proposed Rule Change To List and Trade the Shares of the 
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR 
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares, Securities Exchange Act Release No. 
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck Order''); Order Granting Approval of a Proposed Rule 
Change, as Modified by Amendment No. 2, To List and Trade Shares of 
the Teucrium Bitcoin Futures Fund Under NYSE Arca Rule 8.200-E, 
Commentary .02 (Trust Issued Receipts), Securities Exchange Act 
Release No. 94620 (Apr. 6, 2022), 87 FR 21676 (Apr. 12, 2022) (SR-
NYSEArca-2021-53) (``Teucrium Order''); Order Granting Approval of a 
Proposed Rule Change, as Modified by Amendment Nos. 1 and 2, To List 
and Trade Shares of the Valkyrie XBTO Bitcoin Futures Fund Under 
Nasdaq Rule 5711(g), Securities Exchange Act Release No. 94853 (May 
5, 2022), 87 FR 28848 (May 11, 2022) (SR-NASDAQ-2021-066) 
(``Valkyrie XBTO Order'').
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
---------------------------------------------------------------------------

    In this context, the terms ``significant market'' and ``market of 
significant size'' include a market (or group of markets) as to which 
(a) there is a reasonable likelihood that a person attempting to 
manipulate the ETP would also have to trade on that market to 
successfully manipulate the ETP, so that a surveillance-sharing 
agreement would assist in detecting and deterring misconduct, and (b) 
it is unlikely that trading in the ETP would be the predominant 
influence on prices in that market.\13\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \14\
---------------------------------------------------------------------------

    \13\ See Winklevoss Order, 83 FR at 37594. See also USBT Order, 
85 FR at 12596-97; WisdomTree Order, 86 FR at 69322.
    \14\ See USBT Order, 85 FR at 12597.
---------------------------------------------------------------------------

    Although surveillance-sharing agreements are not the exclusive 
means by which a listing exchange of a commodity-trust ETP can meet its 
obligations under Exchange Act Section 6(b)(5), such agreements have 
previously provided the basis for the exchanges that list commodity-
trust ETPs to meet those obligations, and the Commission has 
historically recognized their importance. And where, as here, a listing 
exchange does not establish that other means to prevent fraudulent and 
manipulative acts and practices will be sufficient,\15\ the listing 
exchange must enter into a surveillance-sharing agreement with a 
regulated market of significant size because such agreements detect and 
deter fraudulent and manipulative activity.\16\
---------------------------------------------------------------------------

    \15\ Listing exchanges have also attempted to demonstrate that 
other means besides surveillance-sharing agreements will be 
sufficient to prevent fraudulent and manipulative acts and 
practices, including that the bitcoin market as a whole or the 
relevant underlying bitcoin market is ``uniquely'' and 
``inherently'' resistant to fraud and manipulation. See USBT Order, 
85 FR at 12597. The Exchange, however, does not make any such 
arguments with respect to this proposal.
    \16\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-98) 
(``NDSP Adopting Release''). See also Winklevoss Order, 83 FR at 
37593-94; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43924; USBT Order, 85 FR at 12596.
---------------------------------------------------------------------------

    In previous orders,\17\ the Commission has identified possible 
sources of fraud and manipulation in the spot bitcoin market, including 
(1) ``wash'' trading,\18\ (2) persons with a dominant position in 
bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin 
network and

[[Page 40284]]

trading platforms, (4) malicious control of the bitcoin network, (5) 
trading based on material, non-public information, including the 
dissemination of false and misleading information, (6) manipulative 
activity involving purported ``stablecoins,'' including Tether (USDT), 
and (7) fraud and manipulation at bitcoin trading platforms. The 
Exchange does not refute the presence of these possible sources of 
fraud and manipulation.\19\
---------------------------------------------------------------------------

    \17\ See, e.g., One River Order, 87 FR at 33554.
    \18\ See also CFTC v. Gemini Trust Co., LLC, No. 22-cv-4563 
(S.D.N.Y. filed June 2, 2022) (alleging, among other things, failure 
by Gemini personnel to disclose to the CFTC that Gemini customers 
could and did engage in collusive or wash trading).
    \19\ The Trust's Registration Statement also acknowledges that 
``[o]ver the past several years, a number of digital asset trading 
platforms have been closed or faced issues due to fraud, failure, 
security breaches or governmental regulations''; that ``[t]he 
platforms on which users trade bitcoin are relatively new and, in 
some cases, largely unregulated, and, therefore, may be more exposed 
to fraud and security breaches than established, regulated exchanges 
for other financial assets or instruments''; that ``[t]he nature of 
the assets held at digital asset trading platforms makes them 
appealing targets for hackers and a number of digital asset trading 
platforms have been victims of cybercrimes''; that bitcoin networks 
are susceptible to a ``51% attack,'' in which ``[i]f a malicious 
actor or botnet obtains control of more than 50% of the processing 
power on the [b]itcoin network, or otherwise obtains control over 
the [b]itcoin network through its influence over core developers or 
otherwise, such actor or botnet could manipulate how data is 
recorded [on] the [bitcoin blockchain]''; that ``it is believed that 
certain mining pools may have exceeded the 50% threshold on the 
[b]itcoin network on a temporary basis''; that the inputs to the CME 
US Reference Rate ``may be subject to technological error, 
manipulative activity, or fraudulent reporting from their initial 
source''; and that ``in the past, flaws in the source code for 
digital assets have been exposed and exploited.'' See Registration 
Statement on Form S-1, filed by the Trust on October 14, 2021, at 
11-12, 17-18. See also Are Blockchains Decentralized? Unintended 
Centralities in Distributed Ledgers, prepared by Trail of Bits based 
upon work supported by the Defense Advanced Research Projects 
Agency, June 2022, available at: https://assets-global.website-files.com/5fd11235b3950c2c1a3b6df4/62af6c641a672b3329b9a480_Unintended_Centralities_in_Distributed_Ledgers.pdf.
---------------------------------------------------------------------------

    The Commission has long recognized that surveillance-sharing 
agreements ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur'' and thus ``enable the Commission 
to continue to effectively protect investors and promote the public 
interest.'' \20\ As the Commission has emphasized, it is essential for 
an exchange listing a derivative securities product to have the ability 
that surveillance-sharing agreements provide to obtain information 
necessary to detect, investigate, and deter fraud and market 
manipulation, as well as violations of exchange rules and applicable 
federal securities laws and rules.\21\ 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.\22\
---------------------------------------------------------------------------

    \20\ See NDSP Adopting Release, 63 FR at 70954, 70959. See also 
id. at 70959 (``It is essential that the SRO [self-regulatory 
organization] have the ability to obtain the information necessary 
to detect and deter market manipulation, illegal trading and other 
abuses involving the new derivative securities product. 
Specifically, there should be a comprehensive ISA [information-
sharing agreement] that covers trading in the new derivative 
securities product and its underlying securities in place between 
the SRO listing or trading a derivative product and the markets 
trading the securities underlying the new derivative securities 
product.'').
    \21\ See NDSP Adopting Release, 63 FR at 70959.
    \22\ See Winklevoss Order, 83 FR at 37592-93 (discussing Letter 
from Brandon Becker, Director, Division of Market Regulation, 
Commission, to Gerard D. O'Connell, Chairman, Intermarket 
Surveillance Group (June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm).
---------------------------------------------------------------------------

    The Commission has explained that the ability of a national 
securities exchange to enter into surveillance-sharing agreements 
``furthers the protection of investors and the public interest because 
it will enable the [e]xchange to conduct prompt investigations into 
possible trading violations and other regulatory improprieties.'' \23\ 
The Commission has also long taken the position that surveillance-
sharing agreements are important in the context of exchange listing of 
derivative security products, such as equity options, because a 
surveillance-sharing agreement ``permits the sharing of information'' 
that is ``necessary to detect'' manipulation and ``provide[s] an 
important deterrent to manipulation because [it] facilitate[s] the 
availability of information needed to fully investigate a potential 
manipulation if it were to occur.'' \24\ With respect to ETPs, when 
approving the listing and trading of one of the first commodity-linked 
ETPs--a commodity-linked exchange-traded note--on a national securities 
exchange, the Commission continued to emphasize the importance of 
surveillance-sharing agreements, stating that the listing exchange had 
entered into surveillance-sharing agreements with each of the futures 
markets on which pricing of the ETP would be based and stating that 
``[t]hese agreements should help to ensure the availability of 
information necessary to detect and deter potential manipulations and 
other trading abuses, thereby making [the commodity-linked notes] less 
readily susceptible to manipulation.'' \25\
---------------------------------------------------------------------------

    \23\ Securities Exchange Act Release No. 27877 (Apr. 4, 1990), 
55 FR 13344 (Apr. 10, 1990) (SR-NYSE-90-14).
    \24\ Securities Exchange Act Release No. 33555 (Jan. 31, 1994), 
59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order approving 
listing of options on American Depositary Receipts (``ADR'')) (``ADR 
Option Order''). The Commission further stated that it ``generally 
believes that having a comprehensive surveillance sharing agreement 
in place, between the exchange where the ADR option trades and the 
exchange where the foreign security underlying the ADR primarily 
trades, will ensure the integrity of the marketplace. The Commission 
further believes that the ability to obtain relevant surveillance 
information, including, among other things, the identity of the 
ultimate purchasers and sellers of securities, is an essential and 
necessary component of a comprehensive surveillance sharing 
agreement.'' Id.
    \25\ Securities Exchange Act Release No. 35518 (Mar. 21, 1995), 
60 FR 15804, 15807 (Mar. 27, 1995) (SR-Amex-94-30). See also 
Winklevoss Order, 83 FR at 37593 n.206.
---------------------------------------------------------------------------

    Consistent with these statements, for the commodity-trust ETPs 
approved to date for listing and trading, there has been in every case 
at least one significant, regulated market for trading futures on the 
underlying commodity and the ETP listing exchange has entered into 
surveillance-sharing agreements with, or held Intermarket Surveillance 
Group (``ISG'') membership in common with, that market.\26\ Moreover, 
the surveillance-sharing agreements have been consistently present 
whenever the Commission has approved the listing and trading of 
derivative securities, even where the underlying securities were also 
listed on national securities exchanges--such as options based on an 
index of stocks traded on a national securities exchange--and were thus 
subject to the

[[Page 40285]]

Commission's direct regulatory authority.\27\
---------------------------------------------------------------------------

    \26\ See Winklevoss Order, 83 FR at 37594. Furthermore, the 
Commission notes that those cases dealt with a futures market that 
had been trading for a long period of time before an exchange 
proposed a commodity-trust ETP based on the asset underlying those 
futures. For example, silver futures and gold futures began trading 
in 1933 and 1974, respectively, see https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on 
spot silver and gold were approved for listing and trading in 2006 
and 2004. See Securities Exchange Act Release No. 53521 (Mar. 20, 
2006), 71 FR 14967 (Mar. 24, 2006) (SR-Amex-2005-072) (order 
approving iShares Silver Trust); Securities Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614 (Nov. 5, 2004) (SR-NYSE-2004-22) 
(order approving streetTRACKS Gold Shares). Platinum futures and 
palladium futures began trading in 1956 and 1968, respectively, see 
https://www.cmegroup.com/media-room/historical-first-trade-dates.html, and the first ETPs based on spot platinum and palladium 
were approved for listing and trading in 2009. See Securities 
Exchange Act Release No. 61220 (Dec. 22, 2009), 74 FR 68895 (Dec. 
29, 2009) (SR-NYSEArca-2009-94) (order approving ETFS Palladium 
Trust); Securities Exchange Act Release No. 61219 (Dec. 22, 2009), 
74 FR 68886 (Dec. 29, 2009) (SR-NYSEArca-2009-95) (order approving 
ETFS Platinum Trust).
    \27\ See USBT Order, 85 FR at 12597; ADR Option Order, 59 FR at 
5621. The Commission has also recognized that surveillance-sharing 
agreements provide a necessary deterrent to fraud and manipulation 
in the context of index options even when (i) all of the underlying 
index component stocks were either registered with the Commission or 
exempt from registration under the Exchange Act; (ii) all of the 
underlying index component stocks were traded in the U.S. either 
directly or as ADRs on a national securities exchange; and (iii) 
effective international ADR arbitrage alleviated concerns over the 
relatively smaller ADR trading volume, helped to ensure that ADR 
prices reflected the pricing on the home market, and helped to 
ensure more reliable price determinations for settlement purposes, 
due to the unique composition of the index and reliance on ADR 
prices. See Securities Exchange Act Release No. 26653 (Mar. 21, 
1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-87-25) (stating 
that ``surveillance-sharing agreements between the exchange on which 
the index option trades and the markets that trade the underlying 
securities are necessary'' and that ``[t]he exchange of surveillance 
data by the exchange trading a stock index option and the markets 
for the securities comprising the index is important to the 
detection and deterrence of intermarket manipulation''). And the 
Commission has explained that surveillance-sharing agreements 
``ensure the availability of information necessary to detect and 
deter potential manipulations and other trading abuses'' even when 
approving options based on an index of stocks traded on a national 
securities exchange. See Securities Exchange Act Release No. 30830 
(June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-Amex-91-22).
---------------------------------------------------------------------------

    Here, NYSE Arca contends that approval of the proposal is 
consistent with Section 6(b)(5) of the Exchange Act, and, in 
particular, Section 6(b)(5)'s requirement that the rules of a national 
securities exchange be designed to prevent fraudulent and manipulative 
acts and practices and to protect investors and the public 
interest.\28\ As discussed in more detail below, NYSE Arca asserts that 
the proposal is consistent with Section 6(b)(5) of the Exchange Act 
because the Exchange has a comprehensive surveillance-sharing agreement 
with the Chicago Mercantile Exchange (``CME''), which the Exchange 
argues is a regulated market of significant size in the context of the 
proposed spot bitcoin ETP.\29\
---------------------------------------------------------------------------

    \28\ See Notice, 86 FR at 60700-15.
    \29\ See id.
---------------------------------------------------------------------------

    Based on its analysis, as discussed below in Section III.B, the 
Commission concludes that NYSE Arca has not established that it has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to spot bitcoin, the underlying bitcoin assets 
that would be held by the Trust. In addition, the Commission examines 
in Section III.C other arguments raised by NYSE Arca and commenters, 
and concludes that NYSE Arca has not demonstrated that the proposed 
rule change is consistent with the statutory requirements of Exchange 
Act Section 6(b)(5).
    The Commission emphasizes that its disapproval of this proposed 
rule change does not rest on an evaluation of the relative investment 
quality of a product holding spot bitcoin versus a product holding CME 
bitcoin futures, or an assessment of whether bitcoin, or blockchain 
technology more generally, has utility or value as an innovation or an 
investment. Rather, the Commission is disapproving this proposed rule 
change because, as discussed below, NYSE Arca has not met its burden to 
demonstrate that its proposal is consistent with the requirements of 
Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\30\ the Exchange 
proposes to list and trade the Shares of the Trust under NYSE Arca Rule 
8.201-E, which governs the listing and trading of Commodity-Based Trust 
Shares on the Exchange.
---------------------------------------------------------------------------

    \30\ See Notice, supra note 3.
---------------------------------------------------------------------------

    The investment objective of the Trust is to seek to provide 
exposure to the value of bitcoin held by the Trust, less the expenses 
of the Trust's operations.\31\ The Shares would represent units of 
undivided beneficial ownership of the Trust.\32\ Under normal 
circumstances, the Trust's only asset would be bitcoin, and, under 
limited circumstances, cash.\33\ The Trust would not use derivatives 
that may subject the Trust to counterparty and credit risks.\34\
---------------------------------------------------------------------------

    \31\ See id. at 60696. Bitwise Investment Advisers, LLC 
(``Sponsor'') is the sponsor of the Trust, and Delaware Trust 
Company is the trustee. The Trust would engage a third party 
custodian to maintain custody of the Trust's bitcoin assets. The 
Trust also would engage a third party service provider to serve as 
the administrator (``Administrator'') and transfer agent of the 
Trust. See id.
    \32\ See id.
    \33\ See id. The Trust may sell bitcoin and temporarily hold 
cash as part of a liquidation of the Trust or to pay certain 
extraordinary expenses not assumed by the Sponsor. According to the 
Exchange, the Trust also may, from time to time, passively receive, 
by virtue of holding bitcoin, certain additional digital assets or 
rights to receive such digital assets through a fork of the bitcoin 
blockchain or an airdrop of assets. See id. at 60696 n.12.
    \34\ See id. at 60696.
---------------------------------------------------------------------------

    The Trust's net asset value (``NAV'') and NAV per Share would be 
determined by the Administrator once each Exchange trading day as of 
4:00 p.m. E.T., or as soon thereafter as practicable, by reference to 
the CF Bitcoin-Dollar US Settlement Price (``CME US Reference 
Rate'').\35\ The Administrator would calculate the NAV by multiplying 
the number of bitcoins held by the Trust by the CME US Reference Rate 
for such day, and subtracting the accrued but unpaid expenses and 
liabilities of the Trust.\36\ The CME US Reference Rate is a daily 
reference rate of the U.S. dollar price of one bitcoin, calculated at 
4:00 p.m. E.T.\37\
---------------------------------------------------------------------------

    \35\ See id. at 60696, 60699.
    \36\ See id. at 60699.
    \37\ The Exchange states that the CME US Reference Rate utilizes 
the same methodology as the CME CF Bitcoin Reference Rate, which is 
calculated at 4:00 p.m., London time, and is used to settle bitcoin 
futures on the CME. See id. at 60696 n.11, 60698-99.
---------------------------------------------------------------------------

    The CME US Reference Rate aggregates during a calculation window 
the trade flow of several spot bitcoin trading platforms into the U.S. 
dollar price of one bitcoin as of its calculation time. The current 
constituent bitcoin platforms of the CME US Reference Rate are 
Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent 
Platforms'').\38\ In calculating the CME US Reference Rate, the 
methodology creates a joint list of certain trade prices and sizes from 
the Constituent Platforms. The methodology then divides this list into 
a number of equally sized time intervals, and it calculates the volume-
weighted median trade price for each of those intervals. The CME US 
Reference Rate is the equally weighted average of the volume-weighted 
medians of all intervals.\39\
---------------------------------------------------------------------------

    \38\ See id. at 60699. None of these platforms are ``regulated'' 
as a national securities exchange. National securities exchanges are 
required to have rules that are ``designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest.'' 15 U.S.C. 78f(b)(5). 
Moreover, national securities exchanges must file proposed rules 
with the Commission regarding certain material aspects of their 
operations (17 CFR 240.19b-4(a)(6)(i)), and the Commission has the 
authority to disapprove any such rule that is not consistent with 
the requirements of the Exchange Act (15 U.S.C. 78s(b)). Thus, 
national securities exchanges are subject to Commission oversight 
of, among other things, their governance, membership qualifications, 
trading rules, disciplinary procedures, recordkeeping, and fees. See 
Winklevoss Order, 83 FR at 37597. The Constituent Platforms have 
none of these requirements (none are registered as a national 
securities exchange).
    \39\ See Notice, 86 FR at 60699.
---------------------------------------------------------------------------

    The Trust would provide website disclosure of its holdings 
daily.\40\ In addition, each trading day, the Exchange would calculate 
and disseminate an intraday trust value (``ITV'') every 15 seconds 
during the NYSE Arca Core Trading Session.\41\ The ITV would be 
calculated throughout the

[[Page 40286]]

trading day by using the prior day's holdings at close of business and 
the most recently reported price level of the CME Bitcoin Real Time 
Price \42\ as reported by Bloomberg, L.P., or another reporting 
service, or another price of bitcoin derived from updated bids and 
offers indicative of the spot price of bitcoin.\43\
---------------------------------------------------------------------------

    \40\ See id. at 60715.
    \41\ See id. at 60699. The ITV would also be widely disseminated 
by one or more major market data vendors during the NYSE Arca Core 
Trading Session. See id.
    \42\ The CME Bitcoin Real Time Price is a continuous real-time 
bitcoin price index published by the CME Group and Crypto Facilities 
Ltd. using data from the Constituent Platforms. See id.
    \43\ See id.
---------------------------------------------------------------------------

    The Trust would create and redeem Shares from time to time, but 
only in one or more Creation Units. A Creation Unit would initially 
consist of at least 25,000 Shares, but may be subject to change.\44\ 
The Trust would process all creations and redemptions in-kind, and 
accrue all ordinary fees in bitcoin (rather than cash), as a way of 
seeking to ensure that the Trust holds the desired amount of bitcoin-
per-share. The Trust would not purchase or sell bitcoins, other than if 
the Trust liquidates or must pay expenses not contractually assumed by 
the Sponsor. Instead, financial institutions authorized to create and 
redeem Shares (``Authorized Participants'') would deliver, or cause to 
be delivered, bitcoins to the Trust in exchange for Shares of the 
Trust, and the Trust would deliver bitcoins to Authorized Participants 
when those Authorized Participants redeem Shares of the Trust.\45\
---------------------------------------------------------------------------

    \44\ See id.
    \45\ See id. at 60696.
---------------------------------------------------------------------------

III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is 
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act 
requires, in relevant part, that the rules of a national securities 
exchange be designed ``to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \46\ 
Under the Commission's Rules of Practice, the ``burden to demonstrate 
that a proposed rule change is consistent with the Exchange Act and the 
rules and regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \47\
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \47\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\48\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\49\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\50\
---------------------------------------------------------------------------

    \48\ See id.
    \49\ See id.
    \50\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
---------------------------------------------------------------------------

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

    As stated above, an exchange can meet its obligations under 
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to the underlying bitcoin assets. In this 
context, the term ``market of significant size'' includes a market (or 
group of markets) as to which (i) there is a reasonable likelihood that 
a person attempting to manipulate the ETP would also have to trade on 
that market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct, 
and (ii) it is unlikely that trading in the ETP would be the 
predominant influence on prices in that market.\51\
---------------------------------------------------------------------------

    \51\ See Winklevoss Order, 83 FR at 37594. See also supra note 
13.
---------------------------------------------------------------------------

    As the Commission has explained, it considers two markets that are 
members of the ISG to have a comprehensive surveillance-sharing 
agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement.\52\ Accordingly, based on the 
common membership of NYSE Arca and the CME in the ISG,\53\ NYSE Arca 
has the equivalent of a comprehensive surveillance-sharing agreement 
with the CME. However, while the Commission recognizes that the CFTC 
regulates the CME futures market,\54\ including the CME bitcoin futures 
market, and thus such market is ``regulated,'' in the context of the 
proposed ETP, the record does not, as explained further below, 
establish that the CME bitcoin futures market is a ``market of 
significant size'' related to spot bitcoin, the underlying bitcoin 
assets that would be held by the Trust.
---------------------------------------------------------------------------

    \52\ See Winklevoss Order, 83 FR at 37580 n.19.
    \53\ See Notice, 86 FR at 60703.
    \54\ While the Commission recognizes that the CFTC regulates the 
CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying spot bitcoin market. See Winklevoss 
Order, 83 FR at 37587, 37599. See also WisdomTree Order, 86 FR at 
69330 n.118; Kryptoin Order, 86 FR at 74174 n.119; SkyBridge Order, 
87 FR at 3874 n.80; Wise Origin Order, 87 FR at 5534 n.93.

(1) Whether There is a Reasonable Likelihood That a Person Attempting 
to Manipulate the ETP Would Also Have to Trade on the CME Bitcoin 
---------------------------------------------------------------------------
Futures Market to Successfully Manipulate the ETP

    The first prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' related to spot 
bitcoin is the determination that there is a reasonable likelihood that 
a person attempting to manipulate the ETP would have to trade on the 
CME bitcoin futures market to successfully manipulate the ETP.
    In previous Commission orders, the Commission explained that the 
lead-lag relationship between the bitcoin futures market and the spot 
market is ``central to understanding'' the first prong.\55\ In

[[Page 40287]]

response, the Exchange's Notice and Exhibit 3A thereto \56\ describe 
the methodology and results of statistical analysis undertaken by 
Bitwise Asset Management, Inc. (``Bitwise''), the parent of the 
Sponsor, which, according to the Exchange, shows that prices on the CME 
bitcoin futures market ``consistently lead prices on the bitcoin spot 
market and the unregulated bitcoin futures market.'' \57\ As explained 
in more detail in the Notice and Exhibit 3A, Bitwise used data from 
Coin Metrics, CoinAPI, CoinGecko, and the CME for its analysis of the 
relationship between CME bitcoin futures prices and prices on 10 
unregulated spot bitcoin platforms \58\ and seven unregulated bitcoin 
futures platforms.\59\ For each of these 17 unregulated platforms, 
Bitwise performed three types of analysis: (1) information share 
(``IS'') price discovery analysis, which Bitwise describes as measuring 
``who moves first'' to incorporate new information into a common 
``efficient'' price for an asset being traded on multiple platforms; 
\60\ (2) component share (``CS'') price discovery analysis, which 
Bitwise describes as measuring the ``component weight'' or contribution 
to the common ``efficient'' price; \61\ and (3) time-shift lead-lag 
(``TSLL'') analysis, which Bitwise describes as off-setting (or 
``shifting'') two time series against each other to find the direction 
and length of the lead-lag relationship between the two series that 
maximizes the predictive strength of one series against the other.\62\
---------------------------------------------------------------------------

    \55\ See, e.g., USBT Order, 85 FR at 12612 (``[E]stablishing a 
lead-lag relationship between the bitcoin futures market and the 
spot market is central to understanding whether it is reasonably 
likely that a would-be manipulator of the ETP would need to trade on 
the bitcoin futures market to successfully manipulate prices on 
those spot platforms that feed into the proposed ETP's pricing 
mechanism. In particular, if the spot market leads the futures 
market, this would indicate that it would not be necessary to trade 
on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move 
to meet the spot price.''). When considering past proposals for spot 
bitcoin ETPs, the Commission has discussed whether there is a lead-
lag relationship between the regulated market (e.g., the CME) and 
the market on which the assets held by the ETP would have traded 
(i.e., spot bitcoin platforms), as part of an analysis of whether a 
would-be manipulator of the spot bitcoin ETP would need to trade on 
the regulated market to effect such manipulation. See, e.g., USBT 
Order, 85 FR at 12612. See also VanEck Order, 86 FR at 64547; 
WisdomTree Order, 86 FR at 69330-31; Kryptoin Order, 86 FR at 74176 
n.144; SkyBridge Order, 87 FR at 3876 n.101; Wise Origin Order, 87 
FR at 5535 n.107; ARK 21Shares Order, 87 FR at 20024 n.138.
    \56\ Exhibit 3A is available at: https://www.sec.gov/rules/sro/nysearca/2021/34-93445-ex3a.pdf.
    \57\ See Notice, 86 FR at 60703-04.
    \58\ The 10 unregulated spot bitcoin platforms are Bitstamp, 
Coinbase, Gemini, itBit, and Kraken, which the Exchange states are 
the trading platforms represented in the CME US Reference Rate (see 
id. at 60707); as well as Binance, Bitfinex, Huobi, LBank, and OKEx. 
The Exchange states that these trading platforms include both the 
largest USD-BTC pair trading platform by reported volume (Coinbase) 
and the largest tether-BTC pair trading platform by reported volume 
(Binance). See id.
    \59\ The seven unregulated bitcoin futures platforms are 
Binance, BitMEX, Bybit, Deribit, FTX, Huobi, and OKEx. See id. at 
60709.
    \60\ See Exhibit 3A, supra note 56, at 143-44.
    \61\ See id.
    \62\ See id. at 143, 157.
---------------------------------------------------------------------------

    As described in more detail in the Notice and Exhibit 3A, Bitwise 
removed trades that occurred during non-CME trading hours and made 
certain other adjustments to the data. Bitwise then performed each type 
of analysis (IS, CS, and TSLL) on each of the 17 unregulated platforms 
for each day in its sample period. For each type of analysis (IS, CS, 
and TSLL) and each platform, Bitwise then averaged the daily results 
both by month (to evaluate the potential for time variation in price 
discovery leadership) and across the full sample period. Bitwise ran 
statistical significance tests with a 95% confidence interval on the 
resulting monthly and full-sample averages.\63\
---------------------------------------------------------------------------

    \63\ See id. at 152, 159.
---------------------------------------------------------------------------

    According to Bitwise, with respect to its IS/CS analysis, the full-
sample average results demonstrate that the CME bitcoin futures market 
leads all evaluated bitcoin spot and futures trading platforms and that 
the results are statistically significant for all platforms from an IS 
perspective, and for 16 of the 17 platforms from a CS perspective.\64\ 
According to Bitwise, on a month-by-month basis, each trading platform 
generates a slightly different profile and has slightly different 
results; but on average, the CME led the 10 spot trading platforms from 
an IS perspective in 89% of evaluated months, and from a CS perspective 
in 80% of evaluated months.\65\
---------------------------------------------------------------------------

    \64\ See id. at 152, 168.
    \65\ See id. at 154-156. Exhibit 3A does not provide 
corresponding averages with respect to the seven unregulated futures 
platforms. The month-by-month results for each unregulated futures 
platform indicate that the CME has led IS/CS price discovery in a 
majority of months for each such platform. See id. at 170.
---------------------------------------------------------------------------

    According to Bitwise, with respect to its TSLL analysis, the full-
sample average results indicate that CME leads, and all such results 
are statistically significant.\66\ According to Bitwise, on a month-by-
month basis, each trading platform generates a slightly different 
profile and has slightly different results; but the CME led 
consistently throughout the study period in a statistically significant 
manner.\67\ Bitwise also states that, with respect to the 10 
unregulated spot platforms, the monthly TSLL results display a 
``general trend'' where the CME's ``lead'' starts out long, with wide 
confidence bands, and then ``tightens'' over time ``and becomes more 
consistent.'' \68\
---------------------------------------------------------------------------

    \66\ See id. at 160, 170-171.
    \67\ See id. at 161, 173.
    \68\ See id. at 161.
---------------------------------------------------------------------------

    In addition, Bitwise performed a review of academic and industry 
literature pertaining to the relationship between the CME bitcoin 
futures market and unregulated bitcoin markets.\69\ Bitwise states that 
a majority (7 of 10) of the papers that it reviewed that use IS and/or 
CS support the view that the CME bitcoin futures market leads price 
discovery as compared with the spot bitcoin market; \70\ and that one 
paper that uses a similar TSLL approach as Bitwise arrives at nearly 
identical conclusions: that the CME bitcoin futures market leads all 
other markets

[[Page 40288]]

considered in the paper's pairwise TSLL analysis, and that the CME's 
lead has tightened over time.\71\
---------------------------------------------------------------------------

    \69\ Bitwise considered the following papers in Exhibit 3A (see 
id. at 145-151): S. Corbet, B. Lucey, M. Peat & S. Vigne, Bitcoin 
Futures--What use are they?, 172 Econ. Letters 23 (2018); D. Baur & 
T. Dimpfl, Price discovery in bitcoin spot or futures?, 39 J. 
Futures Mkts. 803 (2019); B. Kapar & J. Olmo, An analysis of price 
discovery between Bitcoin futures and spot markets, 174 Econ. 
Letters 62 (2019) (``Kapar & Olmo); C. Alexander & D. Heck, Price 
Discovery, High-Frequency Trading and Jumps in Bitcoin Markets 
(2019), working paper available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3383147 (``Alexander & Heck 2019''); Y. Hu, 
Y. Hou & L. Oxley, What role do futures markets play in Bitcoin 
pricing? Causality, cointegration and price discovery from a time-
varying perspective, 72 Int'l Rev. of Fin. Analysis 101569 (2020) 
(``Hu, Hou & Oxley''); E. Akyildirim, S. Corbet, P. Katsiampa, N. 
Kellard & A. Sensoy, The development of Bitcoin futures: Exploring 
the interactions between cryptocurrency derivatives, 34 Fin. Res. 
Letters 101234 (2020); A. Fassas, S. Papadamou, & A. Koulis, Price 
discovery in bitcoin futures, 52 Res. Int'l Bus. Fin. 101116 (2020); 
O. Entrop, B. Frijns & M. Seruset, The determinants of price 
discovery on bitcoin markets, 40 J. Futures Mkts. 816 (2020); S. 
Aleti & B. Mizrach, Bitcoin spot and futures market microstructure, 
41 J. Futures Mkts. 194 (2021); A. Chang, W. Herrmann & W. Cai, 
Efficient Price Discovery in the Bitcoin Markets, Wilshire Phoenix, 
Oct. 14, 2020, working paper available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3733924. Bitwise also submitted a 
comment letter that discusses K. Robertson & J. Zhang, Suitable 
Price Discovery Measurement of Bitcoin Spot and Futures Markets, 
Fidelity Investments Inc., Jan. 12, 2022, working paper available 
at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4012165 
(``Fidelity Paper''). See letter from Katherine Dowling, Matt 
Hougan, and Paul Fusaro, Bitwise, dated Feb. 25, 2022 (``Bitwise 
Letter 1'').
    \70\ See Exhibit 3A, supra note 56, at 151. Bitwise states that 
an eighth paper has aggregate results in favor of the CME leading; 
and that of the two remaining papers that conclude that the spot 
market leads, one was an early paper that potentially studied a very 
limited time period, and the other has an important methodological 
flaw. See id. Bitwise also references C. Alexander & D. Heck, Price 
discovery in Bitcoin: The impact of unregulated markets, 50 J. 
Financial Stability 100776 (2020) (``Alexander & Heck 2020''). See 
id. at 148. This published paper is a later version of the working 
paper Alexander & Heck 2019, and finds, employing a multidimensional 
approach to price discovery, including the main price leaders within 
futures, perpetuals, and spot markets, that CME bitcoin futures have 
a very minor effect on price discovery; and that faster speed of 
adjustment and information absorption occurs on the unregulated spot 
and derivatives platforms than on the CME bitcoin futures market. 
See also infra notes 91-94 and accompanying text. With respect to 
the Commission's citation of the ``mixed'' literature in its prior 
disapproval orders for spot bitcoin ETPs, the Exchange asserts that 
``[o]f course, the existence of variable results in IS/CS analysis, 
either within one study or a group of studies, is not in isolation 
sufficient to determine that a commodity futures market does not 
satisfy the concerns of the [Exchange] Act,'' and that there have 
been multiple commodity markets where the Commission has approved 
ETPs where ``select IS/CS studies find that the related derivatives 
market is not the main source of price discovery.'' See Notice, 86 
FR at 60706 n.52.
    \71\ See Bitwise Letter 1 at 4.
---------------------------------------------------------------------------

    The Exchange concludes from Bitwise's consideration of the 
literature and Bitwise's own IS, CS, and TSLL analysis that ``the 
Sponsor has demonstrated that the CME [bitcoin futures market] leads 
the bitcoin spot market and the unregulated bitcoin futures market, 
such that it is reasonably likely that a person attempting to 
manipulate the ETP would also have to trade on the CME [bitcoin futures 
market].'' \72\
---------------------------------------------------------------------------

    \72\ See Notice, 86 FR at 60711.
---------------------------------------------------------------------------

    The Commission disagrees. The evidence in the record for the 
proposal is inadequate to conclude that an interrelationship exists 
between the CME bitcoin futures market and the spot bitcoin market such 
that it is reasonably likely that a person attempting to manipulate the 
proposed spot bitcoin ETP would have to trade on the CME bitcoin 
futures market to successfully manipulate the proposed ETP.\73\
---------------------------------------------------------------------------

    \73\ See USBT Order, 85 FR at 12611.
---------------------------------------------------------------------------

    The Commission raises particular disagreements with the Sponsor's 
assertions regarding its analysis below, but even accepting at face 
value the results of Bitwise's statistical analysis of the relationship 
between the CME bitcoin futures market and the spot market, such 
results are only part of the ``mixed'' record on the topic of bitcoin 
price discovery.\74\ Bitwise's literature review considered 10 papers 
that undertook IS/CS analysis, each using different methodologies, time 
periods, data, and data aggregation techniques.\75\ Bitwise states that 
7 of these 10 studies find that the CME bitcoin futures market leads 
price discovery.\76\ Bitwise does not, however, address issues that the 
Commission has raised with respect to two of these papers purportedly 
supporting the CME bitcoin futures market's lead in past disapproval 
orders.\77\ Nor does Bitwise discuss these 10 IS/CS studies in light of 
Bitwise's acknowledgment that ``classic'' price discovery metrics like 
IS/CS could be misspecified, with potentially biased results, when 
price data have a high level of sparsity.\78\ Further, beyond the 10 
studies considered by Bitwise, subsequent bitcoin price discovery 
literature likewise includes some studies finding that the spot bitcoin 
market dominates price discovery \79\ and other studies finding that 
the CME bitcoin futures market dominates.\80\ As in previous 
disapprovals, because the evidence regarding whether the CME bitcoin 
futures market leads the spot market remains inconclusive,\81\ the 
Commission is unable to find that an interrelationship exists between 
the CME bitcoin futures market and the spot bitcoin market such that it 
is reasonably likely that a person attempting to manipulate the 
proposed ETP would have to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP. Accordingly, the Commission 
concludes that the Sponsor has not demonstrated that the CME bitcoin 
futures market constitutes a market of significant size related to spot 
bitcoin.
---------------------------------------------------------------------------

    \74\ See Bitwise Letter 1 at 3.
    \75\ See supra note 69.
    \76\ See Exhibit 3A, supra note 56, at 151.
    \77\ See, e.g., USBT Order, 85 FR at 12613 n.244 (discussing 
that the use of daily price data, as opposed to intraday prices, by 
Kapar & Olmo and Hu, Hou & Oxley (in an unpublished version of the 
paper) may not be able to distinguish which market incorporates new 
information faster; and discussing that the (unpublished version of 
the) Hu, Hou & Oxley paper found inconclusive evidence that futures 
prices lead spot bitcoin prices--in particular, that the months at 
the end of the paper's sample period showed, using Granger causality 
methodology, that the spot market was the leading market--and that 
the record did not include evidence to explain why this would not 
indicate a shift towards prices in the spot market leading the 
futures market that would be expected to persist into the future).
    \78\ See Bitwise Letter 1 at 3.
    \79\ See, e.g., J. Hung, H. Liu & J. Yang, Trading activity and 
price discovery in Bitcoin futures markets, 62 J. Empirical Finance 
107 (2021).
    \80\ See, e.g., J. Wu, K. Xu, X. Zheng & J. Chen, Fractional 
cointegration in bitcoin spot and futures markets, 41 J. Futures 
Mkts. 1478 (2021). In addition, the Exchange claims that, based on 
its review of past commodity-trust ETP approvals and ``select'' IS/
CS studies, a mixed result ``is not in isolation sufficient to 
determine that a commodity futures market does not satisfy the 
concerns of the [Exchange] Act.'' Notice, 86 FR at 60706 n.52 
(emphasis added). However, the applicable standard of review is 
whether a listing exchange has provided sufficient evidence to 
demonstrate that its proposal is consistent with the Exchange Act. 
See supra notes 46-50 and accompanying text. For each proposal, the 
Commission considers the totality of the evidence provided by the 
listing exchange and on its own merits.
    \81\ As the academic literature and listing exchanges' analyses 
pertaining to the pricing relationship between the CME bitcoin 
futures market and spot bitcoin market have developed, the 
Commission has critically reviewed those materials. See ARK 21Shares 
Order, 87 FR at 20024; Global X Order, 87 FR at 14920; Wise Origin 
Order, 87 FR at 5535-36, 5539-40; Kryptoin Order, 86 FR at 74176; 
WisdomTree Order, 86 FR at 69330-32; VanEck Order, 86 FR at 64547-
48; USBT Order, 85 FR at 12613.
---------------------------------------------------------------------------

    Beyond the Commission's overarching concern about the divergent 
conclusions of the econometric evidence about the lead-lag relationship 
between the CME bitcoin futures market and spot market, the Commission 
also has particular disagreements with the Sponsor's assertions 
regarding its analysis. Those disagreements support the Commission's 
determination that NYSE Arca has not provided a sufficient basis to 
conclude that it is reasonably likely that a would-be manipulator of 
the proposed ETP would have to trade on the CME bitcoin futures market 
to successfully manipulate the proposed ETP.
    First, Bitwise's first comment letter casts doubt on its own IS/CS 
results. Bitwise's first comment letter acknowledges that ``classic'' 
price discovery metrics like IS and CS ``face difficulties based on the 
model assumptions of VECM [the Vector Error Correction Model] when the 
prices under consideration are asynchronous and/or infrequent,'' \82\ 
citing an academic study by Buccheri et al.\83\ that investigates the 
difficulties to identifying price discovery with VECM models due to the 
high sparsity of data in markets that record trades at the sub-
millisecond level. Bitwise also acknowledges that, ``when prices have a 
high level of sparsity, the VECM is clearly misspecified and the 
estimates are potentially biased.'' \84\ However, while Bitwise claims 
that ``[t]he limitations of classic IS and CS analysis informed 
Bitwise's specific methodological approach to IS and CS analysis,'' 
\85\ Bitwise neither explains how its IS/CS approach was ``informed'' 
by such limitations, nor provides any information on whether the price 
data that Bitwise used in its IS/CS analysis have a high level of 
sparsity. Moreover, Bitwise's acknowledgement of the Fidelity Paper's 
finding that ``there is a high level of sparsity in bitcoin data'' \86\ 
suggests that, by its own admission, Bitwise's IS/CS approach is 
misspecified and its estimates potentially biased.
---------------------------------------------------------------------------

    \82\ Bitwise Letter 1 at 3, quoting Fidelity Paper at 12-13.
    \83\ G. Buccheri, G. Bormetti, F. Corsi & F. Lillo, Comment on: 
Price discovery in high resolution, 19 J. Financial Econometrics 439 
(2021).
    \84\ Bitwise Letter 1 at 3, quoting Fidelity Paper at 13.
    \85\ Bitwise Letter 1 at 3.
    \86\ Id.
---------------------------------------------------------------------------

    Second, Bitwise performed its IS, CS, and TSLL analysis for each of 
the 17 unregulated platforms per day and then averaged the daily 
results both by month and across the full sample period.\87\ However, 
neither the Exchange nor Bitwise explains why Bitwise chose a daily 
basis to compute its IS, CS, and TSLL estimates; provides any 
information about how variable the daily estimates are, before the 
monthly and/or full-sample averaging was applied; or provides any 
information on the robustness of the estimates--that is, whether these 
daily estimates or the statistical significance of the monthly

[[Page 40289]]

and/or full-sample averages of such daily estimates are sensitive to 
different choices that Bitwise could have made for the analysis (e.g., 
to compute intraday estimates).
---------------------------------------------------------------------------

    \87\ See Exhibit 3A, supra note 56, at 152, 159.
---------------------------------------------------------------------------

    Third, the pairwise IS/CS full-sample average results for CME 
compared to each of the 10 spot platforms ranged between 52.97% (the CS 
result versus itBit) to 68.03% (the CS result versus Bitstamp).\88\ 
Even accepting these results and their statistical significance at face 
value, these results suggest that spot bitcoin markets still account 
for approximately 32%-47% of price discovery. Yet neither Bitwise nor 
the Exchange has explained why, notwithstanding this amount of price 
discovery occurring on spot platforms, it is reasonably likely that a 
would-be manipulator would nonetheless have to trade on the CME bitcoin 
futures market to successfully manipulate the proposed ETP.
---------------------------------------------------------------------------

    \88\ See id. at 153.
---------------------------------------------------------------------------

    Fourth, taking Bitwise's TSLL results at face value, as Bitwise 
acknowledges, the extent to which the CME bitcoin futures market 
``leads'' the 10 unregulated spot platforms has decreased since 2019 to 
the end of Bitwise's sample period in September 2020.\89\ This general 
trend is also observed in the Fidelity Paper's TSLL analysis, which 
uses a longer sample period (to Q1 2021) and finds that the CME's 
average ``lead'' time has ``steadily decreased'' among all evaluated 
markets to about one second in Q4 2020 and Q1 2021.\90\ The record, 
however, does not explain the implication of the CME's decreasing lead 
over the identified spot platforms, nor why the CME's ``lead'' time 
against spot platforms would not be expected to continue to decrease 
throughout 2021 and 2022 until it ``lags'' spot platforms. Moreover, 
neither Bitwise nor the Exchange has explained why, notwithstanding 
such decreasing ``lead'' times against spot platforms, it is 
nonetheless reasonably likely that a would-be manipulator would have to 
trade on the CME to successfully manipulate the proposed ETP.
---------------------------------------------------------------------------

    \89\ See id. at 161.
    \90\ See Fidelity Paper at 17.
---------------------------------------------------------------------------

    Fifth, all of Bitwise's statistical results--IS, CS, and TSLL--are 
based on pairwise, two-dimensional analysis (e.g., CME compared to 
Coinbase; CME compared to Gemini; etc.). At least one multidimensional 
approach to price discovery (Alexander & Heck 2020) finds that CME 
bitcoin futures ``have a very minor effect on price discovery,'' and 
that ``a faster speed of adjustment and information absorption [occurs] 
on the unregulated spot and derivatives [platforms] than on CME bitcoin 
futures.'' \91\ Specifically, Alexander & Heck's multidimensional 
analysis--which simultaneously includes unregulated futures, regulated 
futures, perpetual futures, and spot markets--finds that CME bitcoin 
futures have never accounted for more than 9% of price discovery (and 
unregulated markets collectively account for more than 91% of price 
discovery), and have always contributed the least to price discovery 
among all venues considered, except during July 2019.\92\ While Bitwise 
acknowledges the Alexander & Heck 2020 paper, Bitwise merely states 
that the paper ``involves a complex, multidimensional approach to price 
discovery analysis conducted across eight different markets and four 
different exposure types (unregulated futures, regulated futures, 
perpetual futures, and spot markets), each with different levels of 
microstructure friction and data integrity,'' and that ``these 
complications make it difficult to draw a direct comparison'' to the 10 
IS/CS papers that Bitwise considered.\93\ Bitwise neither critiques the 
multidimensional Alexander & Heck 2020 approach; nor attempts to apply 
the approach to Bitwise's own data; nor discusses the robustness of 
Bitwise's two-dimensional methodology in response to the critique in 
Alexander & Heck 2020 that: ``omitting substantial information flows 
from other markets can produce misleading results. . . . [I]n a two-
dimensional model one or other of the instruments must necessarily be 
identified as price leader.'' \94\ In other words, a two-dimensional 
model might erroneously attribute information share or component share 
of omitted platforms to one of the two platforms included in the 
pairwise estimate, because the two shares must necessarily sum up to 
100%. As such, the Exchange has not adequately addressed whether 
Bitwise's conclusion that the CME bitcoin futures market ``leads'' 
price discovery continues to hold up when the entirety of the bitcoin-
related market (spot and futures) is simultaneously considered.
---------------------------------------------------------------------------

    \91\ See Alexander & Heck 2020 at 1-2.
    \92\ See id. at 13. Alexander & Heck attribute these findings 
to: (i) the trading volume of each individual unregulated 
derivatives in their data set being much larger than that of CME 
bitcoin futures; (ii) many smaller players in bitcoin markets (such 
as miners or crypto-specialized hedge funds), who have easy access 
to unregulated platforms and ultra-high-frequency trading platforms, 
may be considered as more informed bitcoin investors than the CME's 
clients; and (iii) investors who want to manipulate the price of 
bitcoin ``may do so much more easily on an unregulated [platform] 
rather than on the CME, which is heavily regulated by the CFTC.'' 
See id.
    \93\ See Exhibit 3A, supra note 56, at 148.
    \94\ Alexander & Heck 2020 at 2.
---------------------------------------------------------------------------

    The Commission thus concludes that the information that NYSE Arca 
provides is not a sufficient basis to support a determination that it 
is reasonably likely that a would-be manipulator of the proposed ETP 
would have to trade on the CME bitcoin futures market to successfully 
manipulate the proposed ETP.\95\ Therefore, the information in the 
record also does not establish that the CME bitcoin futures market is a 
``market of significant size'' related to spot bitcoin.
---------------------------------------------------------------------------

    \95\ In the Teucrium Order and Valkyrie XBTO Order, the 
Commission determined that it is unnecessary for the listing 
exchanges to establish a reasonable likelihood that a would-be 
manipulator would have to trade on the CME itself to manipulate a 
proposed ETP whose only non-cash holdings would be CME bitcoin 
futures contracts. As the Commission explains in those Orders, in 
each such case, the proposed ``significant'' regulated market (i.e., 
the CME) with which the listing exchange has a surveillance-sharing 
agreement would be the same market on which the underlying bitcoin 
assets (i.e., CME bitcoin futures contracts) trade. Consequently, in 
the circumstances under consideration in the Teucrium Order and 
Valkyrie XBTO Order, the CME's surveillance can reasonably be relied 
upon to capture the effects on the CME bitcoin futures market caused 
by a person attempting to manipulate a CME bitcoin futures-based ETP 
by manipulating the price of CME bitcoin futures contracts, whether 
that attempt is made by directly trading on the CME bitcoin futures 
market or indirectly by trading outside of the CME bitcoin futures 
market. See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order, 87 
FR at 28851. However, as the Commission also states in those Orders, 
this reasoning does not extend to spot bitcoin ETPs. Spot bitcoin 
markets are not currently ``regulated.'' See Teucrium Order, 87 FR 
at 21679 n.46 (citing USBT Order, 85 FR at 12604; NYDIG Order, 87 FR 
at 14936 nn.65-67). See also Valkyrie XBTO Order, 87 FR at 28851 
n.42. Thus if an exchange seeking to list a spot bitcoin ETP relies 
on the CME as the regulated market with which it has a comprehensive 
surveillance-sharing agreement, the assets held by the spot bitcoin 
ETP would not be traded on the CME; and because of this important 
difference, with respect to a spot bitcoin ETP, there would be 
reason to question whether a surveillance-sharing agreement with the 
CME would, in fact, assist in detecting and deterring fraudulent and 
manipulative misconduct affecting the price of the spot bitcoin held 
by that ETP. If, however, an exchange proposing to list and trade a 
spot bitcoin ETP identifies the CME as the regulated market with 
which it has a comprehensive surveillance-sharing agreement, the 
exchange could overcome the Commission's concern by demonstrating 
that there is a reasonable likelihood that a person attempting to 
manipulate the spot bitcoin ETP would have to trade on the CME in 
order to manipulate the ETP, because such demonstration would help 
establish that the exchange's surveillance-sharing agreement with 
the CME would have the intended effect of aiding in the detection 
and deterrence of fraudulent and manipulative misconduct related to 
the spot bitcoin held by the ETP. See Teucrium Order, 87 FR at 21679 
n.46; Valkyrie XBTO Order, 87 FR at 28851 n.42.

(2) Whether It is Unlikely that Trading in the Proposed ETP Would Be 
---------------------------------------------------------------------------
the Predominant Influence on Prices in the CME Bitcoin Futures Market

[[Page 40290]]

    The second prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' related to spot 
bitcoin is whether it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in the CME bitcoin futures 
market.\96\
---------------------------------------------------------------------------

    \96\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
---------------------------------------------------------------------------

    As described in more detail in the Notice and Exhibit 3B 
thereto,\97\ the Exchange asserts that trading in the Trust is unlikely 
to become the predominant influence on prices in the CME bitcoin 
futures market based on Bitwise's estimates for the maximum likely 
first-year flows into, and average daily trading volume of, the Trust, 
and Bitwise's analysis of whether such flows and trading volume would 
be likely to impact CME bitcoin futures prices.\98\
---------------------------------------------------------------------------

    \97\ Exhibit 3B is available at: https://www.sec.gov/rules/sro/nysearca/2021/34-93445-ex3b.pdf.
    \98\ See Notice, 86 FR at 60711-15.
---------------------------------------------------------------------------

    To estimate the likely first-year flows into the proposed ETP, 
Bitwise first examined first-year flows into all ETPs currently listed 
on the market. Bitwise concluded that it is unlikely that a bitcoin ETP 
will attract more first-year flow than the ETP with the highest first-
year flows in history (Invesco QQQ Trust, $5.35 billion), particularly 
given the relative size of the bitcoin market compared to the markets 
captured by the most successful ETPs in the past, which target parts or 
all of the equity, bond, real estate, and gold markets.\99\ Bitwise 
also examined first-year flows into first-to-market single-commodity 
ETPs, which Bitwise considers to provide additional context on the 
likely ``upper bound'' of potential flows into a bitcoin ETP.\100\ 
Finally, Bitwise examined the Grayscale Bitcoin Trust (``GBTC''), which 
Bitwise describes as a publicly traded grantor trust that holds bitcoin 
directly with a third-party custodian and that has been accessible to 
U.S. investors since 2015.\101\ Bitwise states that, according to 
Grayscale Investments, GBTC attracted a record $4.7 billion in inflows 
in 2020.\102\
---------------------------------------------------------------------------

    \99\ See Exhibit 3B, supra note 97, at 249-50.
    \100\ See id. at 250-51. Bitwise states that first-year flows 
range from $3.01 billion for the SPDR Gold Shares (``GLD'') to 
negative $1 million for the iPath Bloomberg Lead Subindex Total 
Return ETN. See id. at 250.
    \101\ See id. at 251-252.
    \102\ See id. at 252.
---------------------------------------------------------------------------

    Extrapolating from this historical information, Bitwise uses $4.7 
billion as its estimate for first-year flows into a new bitcoin ETP. 
Bitwise asserts that its $4.7 billion estimate is ``aggressive'' 
because it assumes that a bitcoin ETP would ``[b]e the third-fastest-
growing ETP in history,'' would ``[s]ignificantly surpass (by more than 
50%) the first-year flows into GLD,'' and would ``[m]atch the highest 
annual flow in GBTC's history, achieved during a strong bull market, 
all while the new ETP is forced to compete for market share with GBTC 
itself.'' \103\
---------------------------------------------------------------------------

    \103\ See id.
---------------------------------------------------------------------------

    As described in more detail in Exhibit 3B, to evaluate the 
potential impact of ETP inflows on prices in the CME bitcoin futures 
market, Bitwise conducted a correlation analysis examining the 
relationship of daily and weekly flows into GBTC in 2020 and changes in 
a spot bitcoin-based reference price.\104\ According to Bitwise, the 
data show there is no meaningful relationship between daily and weekly 
flows into GBTC and changes in that spot bitcoin price, despite the 
aggregate yearly flows being $4.7 billion.\105\ According to Bitwise, 
its analysis of outlier days and weeks with large flows also supports 
this conclusion.\106\ Bitwise thus concludes that it is unlikely that 
$4.7 billion in flows into a bitcoin ETP in a single year will cause it 
to become the predominant influence on prices in the CME bitcoin 
futures market.\107\
---------------------------------------------------------------------------

    \104\ Daily or weekly percentage price changes of bitcoin were 
calculated using the 4 p.m. E.T. bitcoin reference rate from Coin 
Metrics. See id. at 253.
    \105\ See id. at 254.
    \106\ See id. at 254-55.
    \107\ See id. at 255.
---------------------------------------------------------------------------

    Bitwise also considered whether secondary market trading in the 
Shares would be likely to become the predominant influence on prices in 
the CME bitcoin futures market. To do so, as described in more detail 
in Exhibit 3B, Bitwise applied the 2020 ratio of average daily volume 
(``ADV'') to assets under management (``AUM'') (``ADV/AUM'') for both 
GBTC and GLD to the $4.7 billion estimate of first-year flows into a 
new bitcoin ETP.\108\ In so doing, for the Shares, Bitwise calculated 
an estimated $72 million ADV and $143 million ADV, corresponding to the 
ADV/AUM ratio of GBTC and GLD, respectively.\109\ And for the purposes 
of its analysis, Bitwise uses the higher figure--$143 million--as its 
estimate for a new bitcoin ETP's average daily trading volume after a 
year on the market. Bitwise asserts that this estimate is 
``aggressive'' because it assumes that a bitcoin ETP would ``[b]e the 
third-fastest-growing ETP in history'' and would ``[h]ave an ADV/AUM 
ratio two times higher than that of GBTC, which competes in the same 
market.'' \110\
---------------------------------------------------------------------------

    \108\ Bitwise asserts that, although the absolute size of the 
ADV for GBTC ranges widely across 2020, the monthly ADV/AUM ratio 
stays fairly consistent, ranging from 1.10% to 2.21%. See id. at 
256. Bitwise does not, however, indicate whether a consistent ADV/
AUM ratio is common among commodity-based products, or why a 
consistent ratio would otherwise be expected to persist into future 
months/years. In addition, ultimately, Bitwise uses GLD's average 
2020 ADV/AUM ratio for its estimate, not the GBTC ratio. The 2020 
monthly ADV/AUM for GLD varies more widely, ranging from 1.65% to 
5.93%. See id. at 257.
    \109\ See id. at 256-58.
    \110\ See id. at 258.
---------------------------------------------------------------------------

    Bitwise ``believe[s] it is unlikely that trading in the ETP will 
become the predominant influence on prices in the CME [bitcoin futures 
market] if such trading activity is substantially smaller than the 
trading activity on the CME bitcoin futures market,'' which Bitwise 
states it has demonstrated to be the leading source of price discovery 
in the bitcoin market.\111\ As described in Exhibit 3B, Bitwise 
estimated CME bitcoin futures' average daily trading volume in 2020 to 
be $392 million, which Bitwise states is 174% higher than its $143 
million estimate of a new bitcoin ETP's likely average daily trading 
volume. Bitwise thus concludes that it is unlikely that trading in a 
new bitcoin ETP will cause it to become the predominant influence on 
prices in the CME bitcoin futures market.\112\
---------------------------------------------------------------------------

    \111\ See id. at 259.
    \112\ See id. at 259-60.
---------------------------------------------------------------------------

    Bitwise makes three additional arguments in support of its 
conclusion. First, Bitwise argues that a new bitcoin ETP is unlikely to 
experience a GLD-like rapid start.\113\ Bitwise states that, ``[w]hile 
there is interest in a bitcoin ETP,'' it is unlikely to match the level 
of demand experienced by GLD after its 2004 launch because (1) bitcoin 
is a substantially smaller market (approximately 74% smaller) than gold 
was at its launch; (2) unlike GLD, U.S. retail investors already have 
``multiple easy ways'' to directly purchase bitcoin; and (3) unlike 
GLD, a bitcoin ETP will ``face stiff competition from GBTC, a $20 
billion product with high levels of liquidity that can be easily 
accessed through a brokerage setting.'' \114\
---------------------------------------------------------------------------

    \113\ According to Bitwise, GLD gained approximately $1.26 
billion in flows in its first week. See id. at 262.
    \114\ See id. at 262-64.
---------------------------------------------------------------------------

    Second, Bitwise considered internationally listed spot bitcoin 
ETPs, specifically the German ETC Group Physical Bitcoin ETP (``BTCE'') 
and the Canadian Purpose Bitcoin ETF (``BTCC''). Using the same 
correlation assessment as it used for GBTC inflows, Bitwise finds that 
there is no meaningful relationship between daily or weekly flows into 
BTCE (over the period June 2020 to March 2021) or BTCC (over a six-week 
period in February-March 2021) and daily or

[[Page 40291]]

weekly changes in the spot bitcoin price.\115\
---------------------------------------------------------------------------

    \115\ See id. at 265-69.
---------------------------------------------------------------------------

    Third, Bitwise argues that evidence from the 2021 launch of CME 
bitcoin futures-based exchange traded funds (``ETFs'')--ProShares 
Bitcoin Strategy ETF (``BITO''), Valkyrie Bitcoin Strategy ETF 
(``BTF''), and VanEck Bitcoin Strategy ETF (``XBTF'')--strengthens its 
arguments. Bitwise states that the fact that these ETFs took in $1.55 
billion in their first month on the market, and have taken in just $216 
million since, strengthens its belief that the estimate of $4.7 billion 
in first-year flows into a spot bitcoin ETP is an aggressive estimate. 
Bitwise also asserts that the bitcoin market is ``incredibly and 
increasingly crowded'' with options for investors, and a spot bitcoin 
ETP would ``face steep competition.'' \116\
---------------------------------------------------------------------------

    \116\ See Bitwise Letter 1 at 5-6.
---------------------------------------------------------------------------

    Based on Bitwise's analysis, the Exchange concludes that trading in 
the Trust is unlikely to become the predominant influence on prices in 
the CME bitcoin futures market.\117\
---------------------------------------------------------------------------

    \117\ See Notice, 86 FR at 60715.
---------------------------------------------------------------------------

    The Commission disagrees. The evidence in the record for the 
proposal does not support the conclusion that it is unlikely that 
trading in the proposed ETP would be the predominant influence on 
prices in the CME bitcoin futures market.
    First, Bitwise's conflicting claims with respect to the demand for 
a spot bitcoin ETP undermine Bitwise's expectations for the likely size 
of such an ETP and the rapidity of inflows into it. On the one hand, 
Bitwise downplays potential investor demand, stating that ``[w]hile 
there is interest in a bitcoin ETP,'' \118\ the bitcoin market is 
``incredibly and increasingly crowded'' with options for investors, 
noting that investors today can buy bitcoin on crypto trading apps, 
finance apps, through over-the-counter trusts, via bitcoin futures 
ETFs, and ``in many other ways.'' \119\ Bitwise states that a spot 
bitcoin ETP ``would now be the fourth bitcoin-linked ETP to come to 
market,'' and ``would face steep competition from the already liquid 
and highly correlated bitcoin futures-based competitors.'' \120\ 
Bitwise describes GBTC in particular as competition for a new bitcoin 
ETP, asserting that GBTC has ``high levels of liquidity'' and can be 
``easily accessed through a brokerage setting,'' and thus that ``a good 
portion of the brokerage-access demand that would otherwise be waiting 
for an ETP is already being met by GBTC.'' \121\ On the other hand, 
when asserting public interest and investor protection arguments in 
favor of its proposal (see also Section III.C, below), Bitwise 
highlights that ``a great many (and an ever-increasing number of) 
investors already'' directly invest in bitcoin.\122\ Bitwise also 
highlights that, unlike GBTC, the proposed ETP would allow for daily 
creations and redemptions; can be expected to ``closely track the value 
of [b]itcoin, and not periodically trade at substantial premiums to and 
discounts from the value of [b]itcoin''; and would be ``professionally 
managed, SEC-regulated, highly-liquid, fully transparent, and listed on 
the NYSE Arca''; and that ``at least some segment'' of retail and other 
investors would benefit from such characteristics and would be 
``affirmatively disadvantaged'' by not having access to it.\123\ 
Bitwise also states that the proposed ETP ``would add material 
protections for the millions of U.S. investors who currently use other 
less protected and transparent avenues to access the bitcoin market, as 
well as for any future investors who may choose to do so.'' \124\ If, 
as Bitwise claims, U.S. investors have been and are ever-increasingly 
investing in bitcoin, and the proposed ETP ``would add material 
protections'' that are not currently available through GBTC or 
otherwise for some segment of investors, and would, unlike GBTC, be 
available to trade immediately on a national securities exchange with 
daily creations and redemptions,\125\ it is not clear that Bitwise's 
use of the GBTC historical record of $4.7 billion in inflows is a 
likely, let alone ``aggressive,'' estimate for first-year inflows into 
a new spot bitcoin ETP.
---------------------------------------------------------------------------

    \118\ Exhibit 3B, supra note 97, at 264.
    \119\ Bitwise Letter 1 at 6.
    \120\ Id.
    \121\ Exhibit 3B, supra note 97, at 263-64.
    \122\ See letter from Robert H. Rosenblum, Wilson Sonsini 
Goodrich & Rosati, P.C., and Kathleen H. Moriarty, Chapman and 
Cutler LLP, on behalf of Bitwise, dated Mar. 7, 2022 (``Bitwise 
Letter 2''), at 4.
    \123\ See id. at 3-4.
    \124\ Bitwise Letter 1 at 6.
    \125\ See Exhibit 3B, supra note 97, at 251 (``GBTC is different 
from an ETP is certain ways, including that the structure does not 
allow for redemptions . . .'') and 253 (``While GBTC allows for 
daily creations, unlike an ETF, those shares are not immediately 
available to be sold in the secondary market. After purchasing 
shares, an investor must hold the shares for 6-months before they 
are permitted to be traded on the secondary market.'').
---------------------------------------------------------------------------

    Likewise, on the one hand, Bitwise claims that it is unlikely that 
a new bitcoin ETP would experience rapid one-week inflows similar to 
GLD, which had first-week inflows of approximately $1.26 billion.\126\ 
On the other hand, Bitwise highlights that BTCC--the first bitcoin ETP 
launched in Canada--``experienced three days of very high inflows 
shortly after its launch''; \127\ and that the three CME bitcoin 
futures-based ETFs took in $1.55 billion in their first month on the 
market, with just $216 million since.\128\ BITO--the first such ETF to 
launch--took in $1.21 billion AUM within three days of its launch.\129\
---------------------------------------------------------------------------

    \126\ See Exhibit 3B, supra note 97, at 262-64.
    \127\ See id. at 269.
    \128\ See Bitwise Letter 1 at 5.
    \129\ See Teucrium Order, 87 FR at 21681.
---------------------------------------------------------------------------

    Second, it is not clear from Bitwise's correlation analysis what 
would be the likely impact of inflows into a new bitcoin ETP on CME 
bitcoin futures prices. Bitwise assessed correlations of inflows (into 
GBTC in 2020; into BTCE in 2020-21; and into BTCC in 2021) using a spot 
bitcoin-based reference price.\130\ Bitwise does not explain why it 
chose to use bitcoin spot prices instead of CME bitcoin futures prices 
themselves, despite the CME bitcoin futures market having been 
operating since 2017 and its price data being readily available to 
Bitwise. Bitwise's decision to run its correlations against spot prices 
is particularly puzzling, given its claims (discussed above) that CME 
bitcoin futures prices lead price discovery. Put in another way, given 
that Bitwise identifies the CME bitcoin futures market as the relevant 
regulated market of significant size, the use of a spot bitcoin price 
for its correlation analysis could render the analysis immaterial.
---------------------------------------------------------------------------

    \130\ See Exhibit 3B, supra note 97, at 253-55, 266-69.
---------------------------------------------------------------------------

    Moreover, Bitwise's correlation analysis does not control for any 
other factors that may have been affecting spot bitcoin prices during 
the daily or weekly aggregation periods. Thus, the results do not 
isolate the statistical relationship between spot bitcoin prices and 
the factor of interest (i.e., flows into GBTC, BTCE, or BTCC).
    Third, Bitwise's analysis regarding the potential effects of 
trading in the Shares on CME bitcoin futures prices is vague and 
conclusory. Bitwise states that it ``believes'' that it is unlikely 
that trading in a new bitcoin ETP will become the predominant influence 
on prices in the CME bitcoin futures market ``if such trading activity 
is substantially smaller than the trading activity on the CME bitcoin 
futures market.'' \131\ Bitwise, however, does not provide any 
explanation or basis for its ``belief.'' With this ``belief'' in hand, 
Bitwise then calculates that CME bitcoin futures' average daily trading 
volume in 2020 ($392 million) is 174% higher than its estimate of a new 
bitcoin ETP's likely average daily trading volume ($143

[[Page 40292]]

million), which then is the sole premise for Bitwise to conclude that 
trading in the Shares would not likely be the predominant influence on 
CME bitcoin futures prices.\132\
---------------------------------------------------------------------------

    \131\ Id. at 259.
    \132\ See id.
---------------------------------------------------------------------------

    However, an alternative calculation using Bitwise's statistics is 
that a single bitcoin ETP's average daily trading volume could be 
approximately 36.5% ($143 million divided by $392 million)--more than 
one-third--of the size of CME bitcoin futures' average daily trading 
volume. On top of that, assuming, as Bitwise does, potentially $4.7 
billion in first-year inflows, such a spot bitcoin ETP could have AUM 
that exceeds the value of all open interest in CME bitcoin futures 
contracts.\133\ Bitwise has not directly addressed why, given this 
relative size of estimated daily trading in the Shares compared with 
daily trading in CME bitcoin futures contracts, and the relative size 
of the Trust's estimated AUM itself compared with all open interest in 
CME bitcoin futures contracts, it is nonetheless unlikely that trading 
in the proposed ETP would be the predominant influence on prices in the 
CME bitcoin futures market.
---------------------------------------------------------------------------

    \133\ As of May 31, 2022, the value of open interest in the 
front two month CME BTC contracts was approximately $1.7 billion 
(source: CME Group).
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Exchange Act, the Commission 
must disapprove a proposed rule change filed by a national securities 
exchange if it does not find that the proposed rule change is 
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a 
national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices.\134\ For all of the reasons discussed 
above, NYSE Arca has not provided sufficient information to establish 
both prongs of the ``market of significant size'' determination, and 
thus the Commission cannot conclude that the CME bitcoin futures market 
is a ``market of significant size'' related to spot bitcoin such that 
NYSE Arca would be able to rely on a surveillance-sharing agreement 
with the CME to provide sufficient protection against fraudulent and 
manipulative acts and practices. Therefore, NYSE Arca has not met its 
burden of demonstrating that the proposal is consistent with Exchange 
Act Section 6(b)(5),\135\ and, accordingly, the Commission must 
disapprove the proposal.\136\
---------------------------------------------------------------------------

    \134\ See 15 U.S.C. 78s(b)(2)(C).
    \135\ 15 U.S.C. 78f(b)(5).
    \136\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

C. Other Arguments and Comments

    In a second comment letter,\137\ Bitwise argues that the 
Commission, ``when analyzing the applicable legal standards for 
approving the [proposed ETP], should consider--and should interpret 
those standards in recognition of--the wide-spread use and adoption of 
[b]itcoin among retail investors, merchants, public and private 
companies, payment processors, and others in the U.S. business and 
investment community.'' \138\ Bitwise argues that the fundamental 
question before the Commission should be ``whether, in light of the 
wide-spread retail holdings, investment in, and use of [b]itcoin, at 
least some segment of retail (and other) investors would benefit from 
having access to an investment product that provides exposure to 
[b]itcoin'' and that is traded on a regulated national securities 
exchange, that is reasonably expected to closely track the value of 
bitcoin without substantial premiums or discounts, and that would 
relieve investors from custodial and other transactional burdens of 
bitcoin.\139\
---------------------------------------------------------------------------

    \137\ See Bitwise Letter 2.
    \138\ See id. at 2.
    \139\ See id. at 3-4. Similarly, one commenter also states that 
approval of a spot bitcoin ETP would protect investors by, among 
other things, imposing less transaction costs than CME bitcoin 
futures ETFs, reducing risks associated with custodying spot 
bitcoin, and ``[c]hanneling investor interest into a regulated 
space.'' See Letter from James J. Angel, Associate Professor of 
Finance, Georgetown University, dated April 17, 2022 (``Angel 
Letter''), at 7-9.
---------------------------------------------------------------------------

    Bitwise asserts that ``the public interest is best served by giving 
retail (and other) investors access to a publicly-traded [b]itcoin ETP 
like the Trust, that at least some segment of the investing public 
would be affirmatively disadvantaged by not having access to the Trust, 
and that no part of the investing public would be harmed by having 
access to the Trust.'' \140\ Bitwise concludes that, for these reasons, 
the proposal ``overwhelmingly'' meets Exchange Act Section 6(b)(5)'s 
requirement that a proposed rule change ``protect investors and the 
public interest.'' \141\ Bitwise also asserts that Exchange Act Section 
6(b)(5)'s requirement that the rules of a national securities exchange 
be designed to prevent fraudulent and manipulative acts and practices 
should be considered ``in light of the large and increasing number of 
U.S. investors who directly invest in and trade [b]itcoin'' and who 
``may in fact be subject to increased risks of fraud and 
manipulation.'' \142\
---------------------------------------------------------------------------

    \140\ See Bitwise Letter 2 at 4.
    \141\ 15 U.S.C. 78f(b)(5).
    \142\ See Bitwise Letter 2 at 4. Bitwise also argues that the 
Commission ``must be able to work with the digital asset community 
to find a way to approve more digital asset products for investors'' 
(see id. at 5) and states that it ``was willing to change the 
structure or operation of the Trust as needed to resolve good faith 
legal and regulatory concerns'' (see id. at 6). The Commission 
assesses each proposed rule change--as proposed--on its particular 
facts and on whether it is consistent with the requirements of the 
Exchange Act. Pursuant to the Commission's Rules of Practice, the 
SRO must provide all information elicited by Form 19b-4, and the 
description of the proposed rule change, its purpose and operation, 
its effect, and a legal analysis of its consistency with applicable 
requirements must all be sufficiently detailed and specific to 
support an affirmative Commission finding. See Rule 700(b)(3), 
Commission Rules of Practice, 17 CFR 201.700(b)(3).
---------------------------------------------------------------------------

    In essence, Bitwise asserts that the risky nature of direct 
investment in bitcoin and the potential benefits of a spot bitcoin ETP 
compel approval of the proposed rule change. The Commission disagrees. 
Here, even if it were true that, compared to trading in unregulated 
spot bitcoin markets, trading a bitcoin-based ETP on a national 
securities exchange provides some additional protection to investors, 
the Commission must consider this potential benefit in the broader 
context of whether the proposal meets each of the applicable 
requirements of the Exchange Act.\143\ Pursuant to Section 19(b)(2) of 
the Exchange Act, the Commission must approve a proposed rule change 
filed by a national securities exchange if it finds that the proposed 
rule change is consistent with the applicable requirements of the 
Exchange Act--including the requirement under Section 6(b)(5) that the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices--and it must disapprove 
the filing if it does not make such a finding.\144\ Thus, even if a 
proposed rule change purports to protect investors from a particular 
type of investment risk--such as the susceptibility of an asset to loss 
or theft, or premiums or discounts to underlying asset value--the 
proposed rule change may still fail to meet the requirements under the 
Exchange Act.\145\ For the reasons discussed above, NYSE Arca has not 
met its burden of demonstrating

[[Page 40293]]

an adequate basis in the record for the Commission to find that the 
proposal is consistent with Exchange Act Section 6(b)(5),\146\ and, 
accordingly, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \143\ See Winklevoss Order, 83 FR at 37602. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615.
    \144\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C). See also Affiliated Ute Citizens of Utah v. United 
States, 406 U.S. 128, 151 (1972) (Congress enacted the Exchange Act 
largely ``for the purpose of avoiding frauds''); Gabelli v. SEC, 568 
U.S. 442, 451 (2013) (The ``SEC's very purpose'' is to detect and 
mitigate fraud.).
    \145\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR 
at 69334.
    \146\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In another commenter letter, a commenter questions why the 
Commission would disallow a spot bitcoin ETP when it has allowed a spot 
gold ETP.\147\ The commenter states that ``[t]he argument that a spot 
[b]itcoin [ETP] should not be allowed because the SEC doesn't have the 
ability to regulate outside exchanges trading it doesn't hold water.'' 
The commenter states that ``[g]old trades around the world and around 
the clock in many areas unregulated by the SEC.''
---------------------------------------------------------------------------

    \147\ See letter from Anonymous, dated Feb. 18, 2022.
---------------------------------------------------------------------------

    As the Commission has clearly and consistently stated, an exchange 
that lists bitcoin-based ETPs can meet its obligation under Exchange 
Act Section 6(b)(5) that its rules be designed to prevent fraudulent 
and manipulative acts and practices by demonstrating that the exchange 
has a comprehensive surveillance-sharing agreement with a regulated 
market of significant size related to the underlying or reference 
bitcoin assets.\148\ As discussed in detail in Section III.B, the 
Commission has considered the Exchange's arguments with respect to the 
CME bitcoin futures market, and the Commission concludes that the 
Exchange has failed to demonstrate that the CME bitcoin futures market 
is such a ``market of significant size'' related to spot bitcoin. As 
the Commission has also previously stated, comparisons to the markets 
for other asset classes (such as gold) are not persuasive, and do not 
help the Exchange to meet its burden with respect to a bitcoin-based 
ETP.\149\
---------------------------------------------------------------------------

    \148\ See supra note 12 and accompanying text. See also Wise 
Origin Order, 87 FR at 5539; ARK 21Shares Order, 87 FR at 20027.
    \149\ See USBT Order, 85 FR at 12613; Wise Origin Order, 87 FR 
at 5540; Teucrium Order, 87 FR at 21679-80.
---------------------------------------------------------------------------

    Another commenter asserts that bitcoin futures-based ETFs ``derive 
their price from the spot [bitcoin] market,'' and questions why then a 
``generally more efficient investment vehicle'' such as a spot bitcoin 
ETP ``that tracks the same spot [bitcoin] market'' would be 
disapproved.\150\ The commenter, however, provides no information on 
how prices of bitcoin futures-based ETFs relate to spot bitcoin prices; 
how such an assertion would be compatible with the claims of the 
Exchange in this filing that CME bitcoin futures prices ``lead'' spot 
bitcoin prices; or why, even if such an assertion is true, it would 
necessitate the approval of this proposal.
---------------------------------------------------------------------------

    \150\ See letter from Brandon Gunderson, dated Feb. 4, 2022.
---------------------------------------------------------------------------

    An additional commenter argues that it is inconsistent for the 
Commission to approve the listing and trading of CME bitcoin futures-
based ETFs but not spot-based ETPs.\151\ Among other things, this 
commenter asserts that ``[t]he spot and futures markets are so 
interconnected that actions on one instantly affect the other'' and 
that ``[a]ny manipulations in the spot market instantly affect the 
futures prices and vice versa.'' \152\ This commenter states that CME 
bitcoin futures contracts' ``ultimate cash settlement'' is based on the 
``BRR Bitcoin Reference Rate Index'' (``BRR''),\153\ which is 
calculated by aggregating the trade flow of major bitcoin spot 
platforms, and that a spot bitcoin ETP would be less vulnerable to 
manipulation than a CME bitcoin futures-based ETF because CME bitcoin 
futures contracts can be manipulated on both the CME and through the 
spot bitcoin platforms that are included in the BRR.\154\
---------------------------------------------------------------------------

    \151\ See Angel Letter at 5.
    \152\ See id.
    \153\ The Commission understands the commenter's use of ``BRR 
Bitcoin Reference Rate'' to mean the CME CF Bitcoin Reference Rate.
    \154\ See Angel Letter at 6.
---------------------------------------------------------------------------

    The Commission disagrees with this commenter's assertions. The 
proposed rule change does not relate to the same underlying holdings as 
either exchange-traded funds regulated under the Investment Company Act 
of 1940 (``1940 Act'') that provide exposure to bitcoin through CME 
bitcoin futures or CME bitcoin futures-based ETPs registered under the 
Securities Act of 1933 but not regulated under the 1940 Act. The 
Commission considers the proposed rule change on its own merits and 
under the standards applicable to it. Namely, with respect to this 
proposed rule change, the Commission must apply the standards as 
provided by Section 6(b)(5) of the Exchange Act, which it has applied 
in connection with its orders considering previous proposals to list 
bitcoin-based commodity trusts and bitcoin-based trust issued 
receipts.\155\
---------------------------------------------------------------------------

    \155\ See supra note 11.
---------------------------------------------------------------------------

    For this proposed rule change, the relevant analysis, as discussed 
above in Section III.B, is whether the Exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to spot bitcoin. As discussed above, the record in the 
current proposal does not support a determination that the CME bitcoin 
futures market is a regulated market of significant size related to 
spot bitcoin.\156\
---------------------------------------------------------------------------

    \156\ See supra Section III.B.1 and III.B.2.
---------------------------------------------------------------------------

    Moreover, the commenter argues that, because CME bitcoin futures 
contracts' ``ultimate cash settlement'' is based on the BRR, CME 
bitcoin futures face risks from both manipulation of the CME market 
itself, and manipulation of the spot bitcoin markets whose prices feed 
into the BRR. What is relevant for the ``significant market'' analysis, 
however, is not the number of potential sources of manipulation, but 
rather, as discussed in the Teucrium Order and the Valkyrie XBTO Order, 
whether the CME's surveillance can be reasonably relied upon to capture 
the effects of a person attempting to manipulate the assets underlying 
the proposed ETP.\157\
---------------------------------------------------------------------------

    \157\ See Teucrium Order, 87 FR at 21679; Valkyrie XBTO Order, 
87 FR at 28851.
---------------------------------------------------------------------------

    As explained in the Teucrium Order and the Valkyrie XBTO Order, if 
an exchange seeking to list a spot bitcoin ETP relies on the CME as the 
regulated market with which it has a comprehensive surveillance-sharing 
agreement, the assets held by the spot bitcoin ETP would not be traded 
on the CME; and thus there would be reason to question whether a 
surveillance-sharing agreement with the CME would, in fact, assist in 
detecting and deterring fraudulent and manipulative misconduct 
affecting the price of the spot bitcoin held by that ETP.\158\ While 
the commenter asserts that ``[t]he spot and futures markets are so 
interconnected that actions on one instantly affect the other,'' and 
that ``manipulations in the spot market instantly affect the futures 
prices and vice versa,'' \159\ the commenter provides no evidence in 
support of these assertions. Moreover, the commenter's observation that 
CME bitcoin futures contracts' ``ultimate cash settlement'' is based on 
the BRR is also insufficient to support these assertions. The BRR is 
used for a CME bitcoin futures contract's final cash settlement; it is 
not generally used for daily cash settlements (which, under normal 
procedures, are generally based on the volume-weighted average price of 
trading activity on CME Globex between 2:59 p.m. and 3:00 p.m., Central 
Time),\160\ nor is the BRR

[[Page 40294]]

claimed to be used for any intra-day trading of the contract. And even 
if the BRR is a potential link between prices on certain spot bitcoin 
platforms and CME bitcoin futures prices, it does not--absent 
supporting data--necessarily follow that manipulation that impacts spot 
bitcoin also similarly impacts CME bitcoin futures contracts.\161\
---------------------------------------------------------------------------

    \158\ See Teucrium Order, 87 FR at 21679 n.46; Valkyrie XBTO 
Order, 87 FR at 28851 n.42. There is reason to question whether the 
CME's surveillance would capture manipulation of spot bitcoin that 
occurs off of the CME if, for example, off-CME manipulation of spot 
bitcoin does not also similarly impact CME bitcoin futures 
contracts.
    \159\ See Angel Letter at 5.
    \160\ A description of CME bitcoin futures daily settlement 
procedures is available at: https://www.cmegroup.com/confluence/display/EPICSANDBOX/Bitcoin.
    \161\ The commenter also has not explained how the assertions 
that ``[t]he spot and futures markets are so interconnected that 
actions on one instantly affect the other,'' and that 
``manipulations in the spot market instantly affect the futures 
prices and vice versa,'' would be compatible with the claims of the 
Exchange in this filing that CME bitcoin futures prices lead spot 
bitcoin prices.
---------------------------------------------------------------------------

    Moreover, the Commission's determination in the Teucrium Order and 
the Valkyrie XBTO Order to approve the listing and trading of the 
relevant CME bitcoin futures ETPs was not based on the ETPs' use--or 
lack of use--of the BRR (or any other similar pricing mechanism) for 
the calculation of NAV, or on the fact that the BRR is used for the 
final cash settlement of CME bitcoin futures contracts. Rather, the 
Commission approved the listing and trading of such CME bitcoin futures 
ETPs, not because of the BRR, but because the Commission found that the 
listing exchanges satisfy the requirement pertaining to a surveillance-
sharing agreement with a regulated market of significant size related 
to the underlying bitcoin assets--which for such ETPs, are CME bitcoin 
futures contracts, not spot bitcoin.
    This commenter also addresses, among other things, the general 
nature and uses of bitcoin \162\ and suggestions for improving 
regulation of bitcoin and other digital assets markets and related 
market participants.\163\ Ultimately, however, additional discussion of 
these topics is unnecessary, as they do not bear on the basis for the 
Commission's decision to disapprove the proposal.
---------------------------------------------------------------------------

    \162\ See Angel Letter at 2-4.
    \163\ See, e.g., Angel Letter at 9-40.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.
    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2021-89 be, and 
hereby is, disapproved.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-14309 Filed 7-5-22; 8:45 am]
BILLING CODE 8011-01-P