Document ID: SEC-2019-1502-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2019-10-16T04:00Z

[Federal Register Volume 84, Number 200 (Wednesday, October 16, 2019)]
[Notices]
[Pages 55382-55414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22486]

[[Page 55381]]

Vol. 84

Wednesday,

No. 200

October 16, 2019

Part II

Securities and Exchange Commission

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Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the 
Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust Under 
NYSE Arca Rule 8.201-E; Notice

  Federal Register / Vol. 84 , No. 200 / Wednesday, October 16, 2019 / 
Notices  

[[Page 55382]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87267; File No. SR-NYSEArca-2019-01]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin 
ETF Trust Under NYSE Arca Rule 8.201-E

October 9, 2019.

I. Introduction

    On January 28, 2019, NYSE Arca, Inc. (``NYSE Arca'') 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 ETF 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 February 15, 2019.\3\ On March 29, 2019, 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\ The 
Commission received comment letters in response to the Original 
Notice.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 85093 (Feb. 11, 
2019), 84 FR 4589 (Feb. 15, 2019) (``Original Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85461 (Mar. 29, 
2019), 84 FR 13339 (Apr. 4, 2019). The Commission designated May 16, 
2019, as the date by which it should approve, disapprove, or 
institute proceedings to determine whether to disapprove the 
proposed rule change.
    \6\ See Letters from Anonymous (Feb. 15, 2019) (``Anonymous 
Letter I''); Roald Johansson (Feb. 15, 2019) (``Johansson Letter''); 
Samantha Puddifoot (Feb. 17, 2019) (``Puddifoot Letter''); Paul 
Jones (Feb. 17, 2019) (``Jones Letter''); Nayna Mallya (Feb. 18, 
2019) (``Mallya Letter''); Chris (Feb. 18, 2019) (``Chris Letter''); 
Avinash Shenoy (Feb. 18, 2019) (``Shenoy Letter I''); Sami dos 
Santos (Feb. 18, 2019) (``Santos Letter''); Vineet Jain (Feb. 19, 
2019) (``Jain Letter''); Adam Malkin (Feb. 19, 2019) (``Malkin 
Letter''); James Perrott (Feb. 19, 2019) (``Perrott Letter''); Sarah 
Malone (Mar. 6, 2019) (``Malone Letter''); Anthony Darwin (Mar. 6, 
2019) (``Darwin Letter''); D. Barnwell (Mar. 6, 2019) (``Barnwell 
Letter''); Dina Pinto (Mar. 6, 2019) (``Pinto Letter''); Louise 
Fitzgerald (Mar. 19, 2019) (``Fitzgerald Letter I''); Hugh Neil 
(Mar. 23, 2019) (``Neil Letter''); Martyn Denscombe (Mar. 23, 2019) 
(``Denscombe Letter''); Carl Ross (Mar. 23, 2019) (``C. Ross 
Letter''); Rob (Mar. 24, 2019) (``Rob Letter''); Emma Buckley (Mar. 
25, 2019) (``Buckley Letter''); Paul Arssov (Mar. 27, 2019) 
(``Arssov Letter''); Shravan Kumar (Mar. 29, 2019) (``Kumar 
Letter''); John Monterio (Mar. 30, 2019) (``Monterio Letter''); Bill 
Blake (Apr. 18, 2019) (``Blake Letter''). All comments on the 
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901.htm. Bitwise Asset Management 
also provided the Commission with a written presentation at a 
meeting on March 19, 2019. See Commission Staff Memorandum to File 
re: Meeting with Bitwise Asset Management, NYSE Arca, Inc., and 
Vedder Price P.C. (Mar. 20, 2019) (attaching Presentation to the 
Commission by Bitwise Asset Management (``Bitwise Submission I'')), 
available at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf.
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    On May 7, 2019, NYSE Arca filed Amendment No. 1 to the proposed 
rule change, which replaced and superseded the proposed rule change as 
originally filed. On May 14, 2019, the Commission published the 
proposed rule change, as modified by Amendment No. 1, for notice and 
comment and instituted proceedings to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 1.\7\ 
And on August 12, 2019, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\ The Commission 
received additional comment letters in response to the Notice and 
OIP.\9\
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    \7\ See Securities Exchange Act Release No. 85854 (May 14, 
2019), 84 FR 23125 (May 21, 2019) (``Notice and OIP'').
    \8\ See Securities Exchange Act Release No. 86629 (Aug. 12, 
2019), 84 FR 42036 (Aug. 16, 2019).
    \9\ See Letters from Anonymous (May 14, 2019) (``Anonymous 
Letter II''); Avinash Shenoy (May 15, 2019) (``Shenoy Letter II''); 
Sam Ahn (May 15, 2019) (``Ahn Letter I''); Hu Liang, CEO, and Thomas 
Eidt, General Counsel, Omniex Holdings, Inc. (May 16, 2019) 
(``Omniex Letter''); John Bird (May 18, 2019) (``Bird Letter''); 
John LeStarge (May 20, 2019) (``LeStarge Letter''); Justin Ross (May 
20, 2019) (``J. Ross Letter''); Matthew Hougan, Hong Kim, and Micah 
Lerner, Bitwise Asset Management (May 24, 2019) (``Bitwise 
Submission II''); Louise Fitzgerald (May 31, 2019) (``Fitzgerald 
Letter II''); Fan Xia (June 7, 2019) (``Xia Letter''); Kristin 
Smith, Blockchain Association (June 10, 2019) (``Blockchain 
Association Letter''); Stephen McKeon, Assoc. Professor of Finance, 
University of Oregon, Partner, Collaborative Fund (June 11, 2019) 
(``Collaborative Fund Letter''); Sam McIngvale, Chief Executive 
Officer, Coinbase Custody Trust Company, LLC (June 11, 2019) 
(``Coinbase Custody Letter''); James C. Wiandt, Donostia Ventures 
LLC (June 11, 2019) (``Donostia Ventures Letter''); Matthew Hougan, 
Hong Kim, and Micah Lerner, Bitwise Asset Management, Annotated 
Commentary on the Winklevoss Order (June 11, 2019) (``Bitwise 
Submission III); Matthew Hougan, Global Head of Research, Bitwise 
Asset Management, CFE Futures Question (June 11, 2019) (``Bitwise 
Submission IV''); Matthew Hougan, Global Head of Research, Bitwise 
Asset Management, Bitfinex Question (June 11, 2019) (``Bitwise 
Submission V''); Bart Mallon, Co-Managing Partner, Cole-Frieman & 
Mallon LLP (June 12, 2019) (``Mallon Letter''); Robert (June 13, 
2019) (``Robert Letter''); Sam Ahn (June 18, 2019) (``Ahn Letter 
II''); Sam Ahn (June 20, 2019) (``Ahn Letter III''); Matthew P. 
Walsh, Founding Partner, Castle Island Ventures (June 23, 2019) 
(``Castle Island Ventures Letter''); Spencer Bogart, General 
Partner, Blockchain Capital (June 24, 2019) (``Blockchain Capital 
Letter''); Scott Page (July 5, 2019) (``Page Letter''); Bill Blake 
(July 16, 2019) (``Blake Letter''); Tagomi Holdings Inc. (Sept. 18, 
2019) (``Tagomi Letter''); Patrick Neal (Sept. 24, 2019) (``Neal 
Letter''). All comments on the proposed rule change, as modified by 
Amendment No. 1 can be found at: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901.htm. Bitwise Asset Management also 
provided the Commission with a written presentation at a meeting on 
September 12, 2019. See Commission Staff Memorandum to File re: 
Meeting with Bitwise Asset Management, Inc., NYSE Arca, Inc., Vedder 
Price P.C., and Wilson Sonsini Goodrich & Rosati (Sept. 17, 2019) 
(attaching Presentation to the Commission by Bitwise Asset 
Management (``Bitwise Submission VI'')), available at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-6135582-192240.pdf.
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 1. Although the Commission is disapproving this proposed 
rule change, the Commission emphasizes that its disapproval does not 
rest on an evaluation of whether bitcoin,\10\ 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 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), and, in particular, the requirement that the rules of 
a national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices.'' \11\
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    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``Bitcoin Blockchain.'' The Bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. The proposed 
rule change, as modified by Amendment No. 1, describes the exchange-
traded product's underlying asset as a ``digital asset'' and as a 
``commodity,'' see Notice and OIP, supra note 7, 84 FR at 23127-28, 
and describes the exchange-traded product as a Commodity-Based 
Trust. For the purpose of considering this proposal, this order 
describes a bitcoin as a ``digital asset'' and as a commodity.
    \11\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list the Shares is 
designed to prevent fraudulent and manipulative acts and practices, the 
Commission has applied the same analysis used in its orders considering 
previous proposals to list a bitcoin-based commodity trust--the 
``Winklevoss Order''--and bitcoin-based trust issued receipts.\12\ For 
example, in

[[Page 55383]]

the Winklevoss Order, the Commission explained that, although 
surveillance-sharing agreements with markets relating to underlying 
assets are not the exclusive means by which an exchange-traded product 
(``ETP'') listing exchange can meet its obligations under Exchange Act 
Section 6(b)(5), such agreements are a widely used means for exchanges 
that list ETPs to meet their obligations, and the Commission has long 
recognized their importance.\13\ The Commission found in the Winklevoss 
Order and in orders considering bitcoin-based trust issued receipts, 
that, if the listing exchange for an ETP fails to establish that the 
underlying commodity market is inherently resistant to fraud and 
manipulation,\14\ or that other means to prevent fraudulent and 
manipulative acts and practices will be sufficient, the listing 
exchange must enter into a surveillance-sharing agreement with a 
regulated market of significant size relating to the underlying or 
reference assets since ``[s]uch agreements provide a necessary 
deterrent to manipulation because they facilitate the availability of 
information needed to fully investigate a manipulation if it were to 
occur.'' \15\
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    \12\ 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). The Commission also notes 
that orders were issued by delegated authority on the following 
matters, which are under review before the Commission: 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) (NYSEArca-2017-139) (``ProShares Order''); 
Order Disapproving a Proposed Rule Change Relating to Listing and 
Trading of the Direxion Daily Bitcoin Bear 1X Shares, Direxion Daily 
Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 1.5X Bull Shares, 
Direxion Daily Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X 
Bear Shares Under NYSE Arca Rule 8.200-E, Securities Exchange Act 
Release No. 83912 (Aug. 22, 2018), 83 FR 43912 (Aug. 28, 2018) (SR-
NYSEArca-2018-02) (``Direxion Order''); and 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'').
    \13\ See Winklevoss Order, supra note 12, 83 FR at 37580. See 
also id. at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
supra note 12, 83 FR at 43925-27 nn.35-39 and accompanying text 
(discussing previous Commission approvals of commodity-futures 
ETPs). 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. See 
Winklevoss Order, supra note 12, 83 FR at 37592-93.
    \14\ Winklevoss Order, supra note 12, 83 FR at 37582. While the 
Commission has not applied a ``cannot be manipulated'' standard to 
such proposals, the burden is on the listing exchange to demonstrate 
the validity of its contention that the underlying market is 
uniquely resistant to market manipulation and fraudulent activity 
and to establish that the requirements of the Exchange Act have been 
met. See id. In the Winklevoss Order, the Commission found that, 
even if the record had supported the proposition that some features 
of bitcoin and bitcoin markets mitigate some types of manipulation 
to some degree, such mitigation would be insufficient to justify 
dispensing with the detection and deterrence of fraud and 
manipulation provided by surveillance-sharing agreements with 
significant, regulated markets. See id. at 37586.
    \15\ Id. at 37580 (citing 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)). See also ProShares Order, supra note 12, 83 FR at 43936; 
Direxion Order, supra note 12, 83 FR at 43914; GraniteShares Order, 
supra note 12, 83 FR at 43924. The Commission has stated that it 
considers two markets that are members of the Intermarket 
Surveillance Group to have a comprehensive surveillance-sharing 
agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement. See Winklevoss Order, 
supra note 12, 83 FR at 37580 n.19.
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    The listing exchange must enter into a surveillance-sharing 
agreement with a regulated market of significant size relating to the 
underlying or reference assets. 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.\16\ Thus, 
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.'' Consistent with these principles, 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 membership in common with, that 
market.\17\
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    \16\ See Winklevoss Order, supra note 12, 83 FR at 37594. This 
definition is illustrative and not exclusive. There could be other 
types of ``significant markets'' and ``markets of significant 
size,'' but this definition is an example that will provide guidance 
to market participants. See id.
    \17\ See id.
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    As discussed further below, Bitwise Asset Management, Inc. 
(collectively with its affiliates, ``the Sponsor'') \18\ argues that 
the proposal addresses the Commission's analysis because (1) the 
``real'' bitcoin spot market--as opposed to the ``fake'' and non-
economic bitcoin spot market--and the Trust's net asset value (``NAV'') 
process are each uniquely resistant to market manipulation and 
fraudulent activity; and (2) NYSE Arca has entered into a surveillance-
sharing agreement with a regulated bitcoin futures market of 
significant size.\19\ As support for its propositions, the Sponsor has 
presented an analysis of the bitcoin spot market that asserts that a 
small set of identified platforms have ``real'' trading volume, unlike 
the remaining 95% of the spot bitcoin market, which the Sponsor asserts 
is dominated by fake and non-economic activity, such as wash 
trades.\20\ The Sponsor would base its pricing mechanism for the 
proposed ETP on this purportedly ``real'' segment of the market, and 
the Sponsor's analyses and comments focus solely on this segment of the 
market when asserting that the underlying bitcoin market is uniquely 
resistant to manipulation.\21\ Additionally, NYSE Arca asserts that its 
existing surveillance procedures are adequate to properly monitor 
trading of the Shares and to detect and deter violations of NYSE Arca's 
rules and federal securities laws,\22\ and that approval of the 
proposal would be consistent with the protection of investors and the 
public interest.\23\
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    \18\ Amendment No. 1 identifies Bitwise Investment Advisers, LLC 
as the Sponsor, see Notice and OIP, supra note 7, 84 FR at 23126. 
Bitwise Asset Management, Inc. authored the comment letters and 
presentations submitted on behalf of the Sponsor in support of NYSE 
Arca's proposal. For purposes of this Order, the Sponsor's affiliate 
Bitwise Index Services, LLC will also be referred to as the Sponsor.
    \19\ See id. at 23128, 23134; Bitwise Submission I, supra note 
6, at 84; Bitwise Submission III, supra note 9, at 51. With respect 
to key elements of its proposal--such as several assertions about 
the nature of the underlying bitcoin markets and their 
susceptibility to manipulation--NYSE Arca conveys the position of 
the Sponsor. This Order will therefore address statements in the 
Notice and OIP that recount what the Sponsor asserts along with 
other representations and comments by the Sponsor.
    \20\ See Bitwise Submission I, supra note 6, at 23, 60; Bitwise 
Submission II, supra note 9, at 2, 34-36. See infra Section 
III.B.1(c) for discussion of the Sponsor's methodology for 
distinguishing ``real'' trading volume from fake and non-economic 
activity.
    \21\ See Bitwise Submission I, supra note 6, at 67-69, 91, 118; 
Bitwise Submission II, supra note 9, at 13.
    \22\ See Notice and OIP, supra note 7, 84 FR at 23136.
    \23\ See id.
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    Accordingly, the Commission examines below whether the proposed 
rule change, as modified by Amendment No. 1, is consistent with Section 
6(b)(5) of the Exchange Act by addressing in Section III.B.1 below 
assertions that

[[Page 55384]]

bitcoin and the relevant bitcoin market are uniquely resistant to 
manipulation and fraudulent activity; addressing in Section III.B.2 
below assertions that other means are available to prevent fraudulent 
and manipulative activity in the Shares; addressing in Section III.B.3 
below assertions that NYSE Arca has entered into a surveillance-sharing 
agreement with a regulated market of significant size related to 
bitcoin; and addressing in Section III.C below assertions that the 
proposal is consistent with the protection of investors and the public 
interest. Because, among other things, the Sponsor has asserted that 
95% of the bitcoin spot market consists of fake and non-economic 
activity, but has not established that it has in fact identified the 
``real'' bitcoin market, or that the ``real'' bitcoin market is 
isolated from the fraudulent and manipulative activity, we find, in 
each case, that NYSE Arca has not met its burden to demonstrate that 
its proposal is consistent with the requirements of Exchange Act 
Section 6(b)(5), and therefore the Commission disapproves this proposed 
rule change.

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

    As described in detail in the Notice and OIP,\24\ NYSE Arca 
proposes to list and trade the Shares under NYSE Arca Rule 8.201-E, 
which covers the listing and trading of Commodity-Based Trust Shares on 
NYSE Arca.\25\ Bitwise Investment Advisers, LLC would be the Sponsor of 
the Trust.\26\
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    \24\ See Notice and OIP, supra note 7.
    \25\ See NYSE Arca Rule 8.201-E (permitting the listing and 
trading of ``Commodity-Based Trust Shares,'' defined as a security 
(a) that is issued by a trust that holds a specified commodity 
deposited with the trust; (b) that is issued by such trust in a 
specified aggregate minimum number in return for a deposit of a 
quantity of the underlying commodity; and (c) that, when aggregated 
in the same specified minimum number, may be redeemed at a holder's 
request by such trust, which will deliver to the redeeming holder 
the quantity of the underlying commodity).
    \26\ See Notice and OIP, supra note 7, 84 FR at 23126.
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    According to NYSE Arca, the investment objective of the Trust would 
be to provide exposure to bitcoin at a price that reflects the 
purportedly ``real'' bitcoin spot market--as opposed to the ``fake'' 
and non-economic bitcoin market \27\--where investors can purchase and 
sell bitcoin, minus the expenses of the Trust's operation.\28\ The 
Trust would use the Bitwise Daily Bitcoin Reference Price to calculate 
its daily NAV, and the Sponsor would produce the Bitwise Daily Bitcoin 
Reference Price once per day at 4:00 p.m. E.T., using the prices and 
volume from selected platforms that trade bitcoin in the bitcoin spot 
market (``platforms'' or ``trading platforms'') that the Sponsor 
asserts currently account for substantially all of the ``real'' spot 
global volume of bitcoin traded on such platforms, excluding trading in 
capital-controlled countries.\29\ To calculate the Bitwise Daily 
Bitcoin Reference Price, the Sponsor would examine six five-minute 
periods leading up to 4:00 p.m. E.T., calculate the volume-weighted 
median price of each of these periods, and then calculate an equal-
weighted average of the six volume-weighted median prices.\30\
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    \27\ See infra Section III.B.1(c)(i) (describing the Sponsor's 
assertions about the nature and extent of ``fake'' and non-economic 
trading in the bitcoin market).
    \28\ See Notice and OIP, supra note 7, 84 FR at 23126.
    \29\ NYSE Arca, the Sponsor, and other commenters may refer to 
the spot trading of bitcoin on ``exchanges.'' The platforms that 
trade bitcoin in the bitcoin spot market are not registered with the 
Commission as national securities exchanges. See Sections 5 and 6 of 
the Exchange Act, 15 U.S.C. 78e, 78f.
    \30\ See Notice and OIP, supra note 7, 84 FR at 23131. See also 
id. at 23130 n.20 (describing the reduction in the number of 
platforms used to calculate the Bitwise Daily Bitcoin Reference 
Price from ten to nine).
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    NYSE Arca would also calculate an intraday indicative value 
(``IIV'') every fifteen seconds during the core trading day, based on 
the Bitwise Real-Time Bitcoin Price. The Sponsor would calculate the 
Bitwise Real-Time Bitcoin Price from the same set of selected platforms 
with purportedly ``real'' volume, using a volume-weighted price 
methodology. Instead of equally weighting prices captured over six 
five-minute periods, however, the Bitwise Real-Time Bitcoin Price would 
use only the price from the last trade on each platform, and it would 
use the trailing thirty-minute volume on those platforms as a weighting 
factor.\31\
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    \31\ See id. at 23132. Further details regarding the Trust and 
the Shares, including investment strategies, calculation of NAV and 
IIV, creation and redemption procedures, and additional background 
information about bitcoins and the Bitcoin network, among other 
things, can be found in the Notice and OIP (see supra note 7) and 
the registration statement filed with the Commission on Form S-1/A 
(File No. 333-229180) under the Securities Act of 1933 
(``Registration Statement''), as applicable.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is 
consistent with Exchange Act Section 6(b)(5), which requires, in 
relevant part, that the rules of a national securities exchange be 
designed ``to prevent fraudulent and manipulative acts and practices'' 
and ``to protect investors and the public interest.'' \32\ 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.'' \33\
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    \32\ 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.78(f)(b)(5).
    \33\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    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,\34\ 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.\35\ 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.\36\
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    \34\ See id.
    \35\ See id.
    \36\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the 
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and 
Practices

    In analyzing whether the NYSE Arca has met its burden to 
demonstrate that its proposal is consistent with Exchange Act Section 
6(b)(5), the Commission examines below whether the record supports the 
Sponsor's assertions that bitcoin and the relevant bitcoin market are 
uniquely resistant to manipulation

[[Page 55385]]

and fraudulent activity such that a sufficient surveillance-sharing 
agreement is unnecessary. See infra Section III.B.1. The Commission 
first addresses whether the record demonstrates that the inherent 
properties of bitcoin would make the proposed ETP uniquely resistant to 
manipulation. See infra Section III.B.1(a). The Commission next 
addresses the Sponsor's contention that, based on its analysis, ``when 
fake and/or non-economic data is removed, the remaining or `real' 
market for bitcoin is significantly smaller, more orderly and more 
regulated than commonly understood,'' \37\ and whether, focusing solely 
on the asserted characteristics of the ``real'' market for bitcoin, the 
record demonstrates that the nature of the ``real'' spot market for 
bitcoin would make the proposed ETP uniquely resistant to manipulation. 
See infra Section III.B.1(b). The Commission then addresses whether the 
record demonstrates that the Sponsor, through its analysis, has shown 
that the ``real'' spot market for bitcoin is isolated from other 
trading platforms that may be dominated by fake or non-economic 
trading, such that the proposed ETP based on those trading platforms in 
the identified ``real'' market would be uniquely resistant to 
manipulation. See infra Section III.B.1(c). The Commission also 
considers whether the record demonstrates that any additional aspects 
of the Trust and its methods for determining NAV, handling creations 
and redemptions, and calculating fees (see infra Section III.B.1(d)), 
or NYSE Arca's rules, including its surveillance procedures (see infra 
Section III.B.2), would provide sufficient means to prevent fraud and 
manipulation. The Commission concludes that NYSE Arca has not 
demonstrated that a surveillance-sharing agreement with a significant, 
regulated market is unnecessary.
---------------------------------------------------------------------------

    \37\ Notice and OIP, supra note 7, 84 FR at 23129.
---------------------------------------------------------------------------

    The Commission then examines whether the record supports the 
Sponsor's assertion that the bitcoin futures market, as represented by 
bitcoin futures listed and traded on the Chicago Mercantile Exchange 
(``CME''), is a significant, regulated market, such that a 
surveillance-sharing agreement with that market would provide a 
necessary deterrent to manipulation because it would facilitate the 
availability of information needed to fully investigate a manipulation 
if it were to occur.\38\ See infra Section III.B.3. The Commission 
addresses the Sponsor's comparison of the size of the bitcoin futures 
and spot markets and the Sponsor's representations about the 
correlation of prices between these markets, as well as whether the 
record establishes that there is a reasonable likelihood that a person 
attempting to manipulate the proposed ETP would also have to trade on 
the bitcoin futures market to manipulate the proposed ETP. The 
Commission concludes that--because NYSE Arca has not demonstrated that 
the bitcoin futures market is ``significant,'' as the Commission has 
interpreted that term in this context \39\--NYSE Arca has not met its 
burden to demonstrate that its proposal is consistent with Exchange Act 
Section 6(b)(5). Finally, the Commission addresses and rejects other 
factors that the Sponsor contends support approval. See infra Section 
III.B.4.
---------------------------------------------------------------------------

    \38\ The Sponsor's arguments address both trading on the CME and 
the Cboe Futures Exchange (``CFE''), see, e.g., id. at 23134, but 
the Commission notes that the CFE ceased offering new bitcoin 
futures contracts as of March 2019. See New CFE Products Being Added 
in March 2019--Update, Cboe (Mar. 14, 2019), available at https://markets.cboe.com/resources/product_update/2019/New-CFE-Products-Being-Added-in-March-2019-Update.pdf (last visited Oct. 7, 2019).
    \39\ See supra note 16 and accompanying text.
---------------------------------------------------------------------------

1. Assertions That Bitcoin and the Bitcoin Market Are Uniquely 
Resistant to Market Manipulation and Fraudulent Activity
(a) The Sponsor's Assertions About the Inherent Properties of Bitcoin
(i) Representations Made and Comments Received
    The Sponsor argues that the digital nature of bitcoin makes it 
unique compared to other commodities in three important ways--
fungibility, transportability, and ``exchange tradability''--that 
combine to provide unique protections against, and allow bitcoin to be 
uniquely resistant to, attempts at price manipulation.\40\ The Sponsor 
represents that bitcoin is a globally fungible commodity with low 
transaction costs, near-zero transportation costs that allow nearly 
instantaneous transportation, and low-to-zero storage costs.\41\ 
According to the Sponsor, bitcoin is globally fungible because a 
bitcoin is the same anywhere in the world.\42\ In addition, a commenter 
compares the fungibility of bitcoin to that of gold and states that 
this fungibility reduces the overhead costs of evaluating the qualities 
of each asset to arrive at a fair price.\43\
---------------------------------------------------------------------------

    \40\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission I, supra note 6, at 114; Bitwise Submission III, supra 
note 9, at 47. See also Omniex Letter, supra note 9, at 4 (stating 
that, as the Sponsor has detailed, the digital nature of bitcoin 
makes it unique due to ``exchange-tradability,'' fungibility, and 
transportability).
    \41\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise 
Submission I, supra note 6, at 14.
    \42\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise 
Submission I, supra note 6, at 15.
    \43\ See Blockchain Capital Letter, supra note 9, at 6.
---------------------------------------------------------------------------

    The Sponsor represents that bitcoin is inherently transportable at 
a cost approaching zero and can be safely stored at established, 
regulated third-party custodians, in a ``limitless'' amount, at costs 
of 0% to 1.5% a year.\44\ A commenter states that bitcoin's portability 
is a valuable and unprecedented attribute and states that bitcoin can 
be quickly and easily transferred anywhere in the world.\45\ While the 
Sponsor points to spreads of $0.01 on certain bitcoin platforms as 
evidence of low transaction costs,\46\ when discussing the limitations 
of arbitrage quality in the bitcoin market, the Sponsor also 
acknowledges the presence of certain frictions, including trading fees, 
withdrawal fees, withdrawal times and hedging costs, risk of default or 
computer hacking, and difficulties operating across different countries 
and fiat currencies.\47\
---------------------------------------------------------------------------

    \44\ See Notice and OIP, supra note 7, 84 FR at 23129; Bitwise 
Submission I, supra note 6, at 17-18; Bitwise Submission II, supra 
note 9, at 2.
    \45\ See Blockchain Capital Letter, supra note 9, at 5-6 (noting 
that bitcoin's reduced transaction fees and accelerated transaction 
timeframe lower barriers to enter the market).
    \46\ See Notice and OIP, supra note 7, 84 FR at 23129; Bitwise 
Submission I, supra note 6, at 16.
    \47\ See Bitwise Submission II, supra note 9, at 65-66 
(describing trading fees on two bitcoin platforms that range from 
0.00% to 0.25% and withdrawal fees that ``can range from a little to 
a lot,'' including 3% for substantial U.S. dollar withdrawals on one 
bitcoin platform). The Sponsor represents that the U.S. dollar, 
Euro, and Japanese Yen are examples of fiat currencies. See id. at 
15.
---------------------------------------------------------------------------

    The Sponsor argues that having price discovery for bitcoin 
conducted on the open market--bitcoin's purported ``exchange 
tradability''--makes bitcoin unique as compared to other commodities 
that have their prices set using off-market, ``coordinated fix 
pricing.'' \48\ The Sponsor points to recent market manipulation 
scandals that it states were driven by coordinated fix pricing, 
including those related to the London Interbank Offered Rate 
(``LIBOR'') in 2012, global forex in 2013, the gold fix in 2014, and 
the Australian

[[Page 55386]]

Bank Bill Swap Rate in 2016.\49\ In addition, the Sponsor asserts that 
bitcoin's lack of a physical delivery location makes it unique and 
prevents cornering, a form of manipulation in the commodities 
market.\50\
---------------------------------------------------------------------------

    \48\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission III, supra note 9, at 47, 137. The Sponsor acknowledges 
that conducting price discovery in an open, transparent, online 
setting introduces risks, but asserts that these risks must be 
weighed against the benefits of open price discovery and can be 
controlled through the design of the Trust. See Notice and OIP, 
supra note 7, 84 FR at 23133; Bitwise Submission III, supra note 9, 
at 137.
    \49\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission I, supra note 9, at 116; Bitwise Submission III, supra 
note 9, at 137.
    \50\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission III, supra note 9, at 47. For example, Amendment No. 1 
states that, in May 2011, the U.S. Commodity Futures Trading 
Commission (``CFTC'') filed suit against trading firms for 
attempting to manipulate the price of oil by cornering the market 
for oil storage in Cushing, Oklahoma. See Notice and OIP, supra note 
7, 84 FR at 23133. According to Amendment No. 1, a disconnect 
between the size of the storage market in the reference price market 
(Cushing) and the much larger real market for WTI crude oil created 
an opportunity for individuals and firms to attempt to profit from 
artificially manipulating the small market for storage while holding 
larger positions in the underlying commodity. See id. at 23133.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that the record does not demonstrate that 
bitcoin's asserted fungibility, transportability, and ``exchange-
tradability'' make bitcoin uniquely resistant to manipulation. The 
manipulation of asset prices can occur through trading activity that 
creates a false impression of supply or demand,\51\ and the Commission 
concludes that the Sponsor's concessions that 95% of the reported 
trading in bitcoin is ``fake'' or non-economic (including wash trading 
or trading that is simply fabricated) \52\--and that the early bitcoin 
market may have been subject to market manipulation \53\--effectively 
concede that the properties of bitcoin do not make it inherently 
resistant to manipulation.\54\
---------------------------------------------------------------------------

    \51\ See Winklevoss Order, supra note 12, 83 FR at 37585.
    \52\ See Bitwise Submission I, supra note 6, at 23; Bitwise 
Submission II, supra note 9, at 2, 35-36. A ``wash trade'' is a 
transaction such as a purchase and sale simultaneously or within a 
short period of time, that involves no changes in beneficial 
ownership, and is a means of creating artificial market activity. 
See In re Silseth, Release No. 7317, 1996 WL 427988, at *1 & n.3 
(July 30, 1996); Reddy v. CFTC, 191 F.3d 109, 115 (2d Cir. 1999). 
Wash trading is manipulative and defrauds investors. See id.; Santa 
Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77 (1977); Ernst & Ernst 
v. Hochfelder, 425 U.S. 185, 199 (1976).
    \53\ See Bitwise Submission III, supra note 9, at 49 (describing 
reports of manipulation at the failed Mt. Gox platform in 2013).
    \54\ The Commission also notes that several commenters have 
asserted that bitcoin prices can be manipulated. See infra notes 69-
73 and accompanying text.
---------------------------------------------------------------------------

    Moreover, contrary to the Sponsor's argument, the Commission does 
not agree that the relative fungibility of an asset makes it inherently 
resistant to manipulation and notes that fungible assets, such as 
securities and exchange-traded derivatives, trade subject to 
substantial regulatory oversight and surveillance-sharing agreements 
that would be unnecessary if fungibility were sufficient protection 
against manipulation.\55\ Further, transportation and storage costs for 
bitcoin are not zero, contrary to the Sponsor's claims,\56\ as bitcoin 
mining and recording transactions to the blockchain have costs. Bitcoin 
mining involves significant costs for electrical power and computer 
hardware, and the Sponsor acknowledges that bitcoin is subject to 
transaction fees charged by trading platforms, withdrawal fees, 
expenses for custody arrangements, and other factors that impose 
frictions on trading.\57\ The Sponsor also points to the presence of a 
spread on bitcoin platforms,\58\ which, even if small, indicates the 
presence of trading costs. Therefore claims in the record about 
bitcoin's fungibility and transportability do not suffice to establish 
unique resistance to manipulation.\59\
---------------------------------------------------------------------------

    \55\ The Commission notes that, while the Sponsor asserts that 
bitcoin is fungible to the degree that it is ``the same anywhere in 
the world'' and that all bitcoin are treated equally, see supra 
notes 40-43 and accompanying text, if a market participant seeks to 
trade bitcoins on a trading platform that complies with Anti-Money 
Laundering (``AML'') and Know Your Customer (``KYC'') standards, 
those bitcoins may be subject to review regarding their provenance 
and may not be accepted if they have previously been used for money 
laundering, drug trades, human trafficking, or other criminal 
purposes.
    \56\ See supra notes 44-47 and accompanying text.
    \57\ See supra notes 44, 47, and accompanying text. See also 
Registration Statement, supra note 31, at 9, 12 (recognizing 
transaction costs and fees).
    \58\ See supra note 46 and accompanying text.
    \59\ Contrary to the Sponsor's characterization that bitcoin is 
available in a ``limitless'' amount, see supra note 44, the 
Registration Statement represents that the Bitcoin protocol 
currently ``limits both the total amount of bitcoin that will be 
produced and the rate at which it is released'' such that the 
``supply of bitcoin is programmatically limited to 21 million 
bitcoin.'' Registration Statement, supra note 31, at 1, 19.
---------------------------------------------------------------------------

    While the Sponsor attempts to distinguish bitcoin from certain 
commodities that have their prices set using off-market, coordinated 
fix pricing and asserts that bitcoin's use of prices set in the open 
market makes it uniquely resistant to certain forms of manipulation 
that have been witnessed with such commodities,\60\ the Commission has 
required the listing exchange for a derivatives securities product to 
have a surveillance-sharing agreement even where the underlying was 
exchange-traded.\61\ And, as discussed further below,\62\ NYSE Arca has 
not demonstrated that the bitcoin market itself, or the segment of the 
market used for the proposed ETP's pricing mechanism, is uniquely 
resistant to manipulation. Thus, the Commission cannot conclude that 
the nature of bitcoin itself would make the proposed ETP uniquely 
resistant to manipulation, such that a surveillance-sharing agreement 
with a significant, regulated market would not be required.
---------------------------------------------------------------------------

    \60\ See supra notes 48-50, and accompanying text.
    \61\ See infra note 135 and accompanying text (concerning equity 
options).
    \62\ See infra Sections III.B.1(b) and III.B.1(c) for additional 
discussion of the spot market for bitcoin.
---------------------------------------------------------------------------

(b) The Sponsor's Assertions About the Nature of the Spot Market for 
Bitcoin
    The Sponsor contends that it has identified a ``real'' spot market 
for bitcoin that is isolated from the remaining 95% of the bitcoin spot 
market, which the Sponsor asserts is dominated by ``fake'' or non-
economic trading, and the Sponsors proffers its methodology for 
distinguishing this ``real'' bitcoin trading from fake or non-economic 
bitcoin trading. In this subsection of the order, the Commission 
analyzes the Sponsor's claims regarding the ``real'' spot market as 
identified by the Sponsor and examines whether the record demonstrates 
that the nature of trading in, and the degree of regulation of, this 
``real'' bitcoin spot market make it uniquely resistant to 
manipulation. And, in the following subsection of this order,\63\ the 
Commission analyzes the Sponsor's proffered methodology for isolating 
``real'' bitcoin trading activity from fake or non-economic activity--
an analysis that bears on the nature of the spot market for bitcoin 
considered in this section, because the purportedly ``real'' bitcoin 
spot market that the Sponsor identifies cannot be uniquely resistant to 
manipulation unless it is free from the influence of prices derived 
from fake or non-economic trading, or fraudulent or manipulative 
activity, in the broader bitcoin market.
---------------------------------------------------------------------------

    \63\ See infra Section III.B.1(c).
---------------------------------------------------------------------------

(i) Representations Made and Comments Received
(A) The Sponsor's Assertions Regarding Arbitrage and Efficiency in the 
Bitcoin Spot Market
    The Sponsor asserts that, once fake and non-economic trading have 
been removed, the remaining ``real'' market for bitcoin, as identified 
by the Sponsor's research, is significantly smaller, more orderly, and 
more regulated ``than commonly understood,'' and moreover, that this 
``real'' market is uniquely resistant to manipulation.\64\ The Sponsor 
asserts that bitcoin trades at a single price on ``real'' trading

[[Page 55387]]

platforms globally, that extremely effective arbitrage is in place 
between those platforms, and that a distributed market has emerged in 
which no single platform represents the majority of ``real'' trading 
volume.\65\ The Sponsor asserts that these characteristics of the 
``real'' bitcoin market provide unique resistance to manipulation 
because an attempt to manipulate the market would need to involve a 
non-trivial amount of bitcoin's total global liquidity and either be 
coordinated simultaneously across multiple platforms or involve a 
significant spike in volume on a single platform (which would trigger 
review as part of the Sponsor's NAV process).\66\ Therefore, according 
to the Sponsor, any attempt at manipulation would be relatively 
difficult, risky, and costly to carry out.\67\ In addition, a commenter 
asserts that bitcoin has a highly liquid secondary market that is 
conducive to an efficient market and price discovery.\68\ Several 
commenters generally assert that manipulation is present in the bitcoin 
market \69\ or provide evidence of manipulation in the bitcoin market, 
including Ponzi schemes; \70\ spoofing, layering, and front running; 
\71\ trading by dominant market participants; \72\ and suspicious 
trading patterns or price movements.\73\
---------------------------------------------------------------------------

    \64\ See Notice and OIP, supra note 7, 84 FR at 23129, 23133; 
Bitwise Submission I, supra note 6, at 23.
    \65\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission I, supra note 6, at 117-118; Bitwise Submission III, 
supra note 9, at 47. The Sponsor argues that these characteristics 
of the bitcoin market arise from bitcoin's fungibility and 
transportability, as discussed further above in Section I.A.1(a).
    \66\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission I, supra note 6, at 118.
    \67\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission I, supra note 6, at 117; Bitwise Submission III, supra 
note 9, at 33.
    \68\ See Blockchain Capital Letter, supra note 9, at 6 
(asserting that these characteristics are partly a byproduct of 
bitcoin's divisibility, fungibility, and portability).
    \69\ See Bird Letter, supra note 9 (asserting that bitcoin is 
not immune to manipulation by a group, individual, or software); 
Kumar Letter, supra note 6 (calling it ``common knowledge'' that the 
bitcoin market is manipulated); Perrott Letter, supra note 6 
(stating that we are still very much in a volatile and manipulated 
market); Pinto Letter, supra note 6 (stating that the bitcoin market 
is volatile and manipulated by the very few); C. Ross Letter, supra 
note 6 (referring to manipulation as a ``prime issue''); Shenoy 
Letter I, supra note 6 (incorporating letter from Avinash Shoney 
(Sept. 29, 2018), regarding SR-CboeBZX-2018-040 (``Shenoy Letter 
III''), at 1, available at https://www.sec.gov/comments/sr-cboebzx-2018-040/srcboebzx2018040-4460679-175814.pdf) (asserting that it is 
a ``widely known fact'' that the bitcoin market is manipulated).
    \70\ See Kumar Letter, supra note 6 (arguing that Ponzi schemes 
are common and referencing the recently shut down BitConnect 
platform).
    \71\ See Shenoy Letter III, supra note 69, at 1, 8 (representing 
that spoofing, layering, and front-running are prevalent; that pump-
and-dump schemes organized through messaging apps are ubiquitous and 
make use of coordinated actions of trading bots and the speed at 
which news spreads on social media; and that trading bots have been 
known to artificially inflate the price of cryptocurrencies by up to 
300%). See also Shenoy Letter II, supra note 9, at 1 (stating that 
high-frequency traders have been using trading bots to front-run 
other investors in the equity world for several decades). This 
commenter asserts that, considering past manipulation of the markets 
for LIBOR, foreign currencies, U.S. Treasuries, gold, and silver, it 
would not be so hard to manipulate a smaller market such as the 
market for bitcoin. See Shenoy Letter III, supra note 69, at 1.
    \72\ See Shenoy Letter III, supra note 69, at 1 (stating that 
research by economists indicates that it is likely that past events 
involved manipulation of bitcoin's price by just one or two major 
players, and that miners, some of whom have a large concentration of 
power and large bitcoin positions, have an interest in seeing the 
price of bitcoin rise); Bird Letter, supra note 9 (asserting that 
trading by a single entity recently caused the price of bitcoin to 
drop more than $1,000 in minutes across the market, including on the 
Sponsor's identified ``real'' platforms, and that this incident 
disproves the assertion that bitcoin is uniquely resistant to 
manipulation).
    \73\ One commenter asserts that an observed digital-asset-
trading pattern known as ``Bart'' frequently occurs around bitcoin 
futures expiry and may be caused by high-frequency traders. See 
Shenoy Letter III, supra note 69, at 1-2, 6, 7. This commenter 
represents that it is common to see price movement that appears to 
be market reaction to news before the news is released, which is 
indicative of market manipulation and insider trading. See id. at 3-
5. This commenter also states that most bitcoin platforms do not 
block masked VPN IP addresses, raising questions about the ability 
of trading platforms to restrict access to authorized users only and 
prevent manipulation. See id. at 2-3. Another commenter refers to an 
apparent ``price pump'' of approximately $800 million for bitcoin in 
under a week. See Perrott Letter, supra note 6. Another commenter 
states that three small platforms lost over $200 million in investor 
funds in 2019. See Blake Letter II, supra note 9.
---------------------------------------------------------------------------

    The Sponsor argues that the ``real'' bitcoin market is organized, 
efficient, resilient, and robust, with ``extremely tight spreads and 
effective arbitrage.'' \74\ The Sponsor asserts that spreads in the 
``real'' bitcoin market make bitcoin one of the most tightly quoted 
financial instruments in the world.\75\ For example, the Sponsor 
represents that in April 2019, the average median spread on the ten 
platforms that it identifies as ``real''--Binance, Bitfinex, Coinbase 
Pro, Kraken, Bitstamp, bitFlyer, Gemini, itBit, Bittrex, and Poloniex 
\76\--was $1.31 and the five most liquid ``real'' platforms had median 
spreads ranging from $0.01 to $1.75, constituting a range of 0.01% to 
0.03% as compared to bitcoin's trading price of around $5,000 that 
month.\77\
---------------------------------------------------------------------------

    \74\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise 
Submission II, supra note 9, at 13, 85; Bitwise Submission III, 
supra note 9, at 147; Bitwise Submission VI, supra note 9, at 10. 
See also Omniex Letter, supra note 9, at 4 (stating that the 
Sponsor's study demonstrates that the actual market for bitcoin is 
more orderly and efficient than commonly perceived and exhibits 
robust price discovery and effective arbitrage).
    \75\ See Notice and OIP, supra note 7, 84 FR at 23129; Bitwise 
Submission II, supra note 9, at 55-56. See also Notice and OIP, 
supra note 7, 84 FR at 23128 (asserting that the current efficiency 
of the spot bitcoin market matches or exceeds that of other major 
financial markets).
    \76\ See Bitwise Submission II, supra note 9, at 34-35.
    \77\ See id. at 55-56. See also Notice and OIP, supra note 7, 84 
FR at 23129 (describing that the bitcoin platform Coinbase Pro had a 
median spread in March 2019 of $0.01, with bitcoin valued at 
approximately $5,000); Bitwise Submission I, supra note 6, at 16 
(stating that, on leading platforms, bitcoin commonly trades with a 
$0.01 spread with a price of approximately $4,000), 28 (stating that 
at the time of a December 12, 2018, snapshot, Coinbase Pro had a 
spread of $0.01, or 0.0003% based on bitcoin's trading price of 
$3,419), 111 (stating that average spreads on the ``real'' platforms 
ranged from 0.01% to 0.10% and that two of these platforms had a 
single tick as their median spread). But see Bitwise Submission II, 
supra note 9, at 70 n.182 (referring to one platform (Poloniex) as 
``too small and illiquid to support meaningful arbitrage trading'' 
and stating that another (Bitfinex) has a 3% fee on withdrawals that 
``rais[es] certain challenges for institutional arbitrage 
activity'').
---------------------------------------------------------------------------

    The Sponsor provides an analysis of arbitrage across the ten 
identified platforms in the ``real'' bitcoin spot market and concludes 
that prices on these platforms trade closely together and have their 
disparities rapidly arbitraged away.\78\ According to the Sponsor, this 
conclusion holds regardless of venue, currency pair, or any other 
identifiable factor.\79\ For the purposes of its analysis, the Sponsor 
has taken, once per second, the last-traded price on each of the ten 
platforms and used an equal-weighted average to calculate a real-time 
consolidated spot price (``consolidated price'').\80\ The Sponsor has 
plotted the price of bitcoin on each of the ten platforms from January 
2018 through mid-May 2019 on a chart, and concludes that it is 
``difficult to see meaningful gaps'' between the prices on each 
platform.\81\ The Sponsor has then calculated the average deviation 
from the consolidated price for each of the ten platforms on a second-
by-second basis since January 2019 and finds that the average deviation 
for any given platform ranged from 0.06% to 0.20% during that period, 
with an average deviation across all platforms of 0.12%.\82\ The 
Sponsor

[[Page 55388]]

asserts that these results show that the platforms trade ``incredibly 
tightly,'' with average deviations at a level within the trading fees 
on the platforms.\83\ Therefore, according to the Sponsor, the results 
suggest that institutional-quality arbitrageurs and algorithmic 
programs are at work to keep prices closely aligned.\84\
---------------------------------------------------------------------------

    \78\ See Bitwise Submission II, supra note 9, at 60-65; Bitwise 
Submission III, supra note 9, at 31, 35.
    \79\ See Bitwise Submission III, supra note 9, at 37.
    \80\ See Bitwise Submission II, supra note 9, at 60 (stating 
that the Sponsor chose to use equal-weighting to remove any 
suggestion that one platform appears to trade closely to a 
consolidated price only because it has an undue influence over the 
consolidated price).
    \81\ See id. at 60-61. See also Bitwise Submission I, supra note 
6, at 67 (showing graph of prices on the ten platforms from January 
2018 through mid-March 2019, and stating that they form a 
``singular'' price).
    \82\ See Bitwise Submission II, supra note 9, at 61-62. The 
Sponsor provides an earlier analysis that shows average deviations 
for each platform ranging from 0.13% to 0.25% from January 2018 
through mid-March 2019. See Notice and OIP, supra note 7, 84 FR at 
23131; Bitwise Submission I, supra note 6, at 68. See also Bitwise 
Submission III, supra note 9, at 35 (representing that its earlier 
analysis shows that the average deviation in price between each of 
the ten platforms and the globally integrated price in April 2019 
was between 0.06% and 0.19%).
    \83\ See Bitwise Submission II, supra note 9, at 62 (noting that 
``taker'' trading fees on the ten platforms range from 0.04% to 
0.35%, and that a market participant would need to incur these fees 
on both sides of the trade to immediately capture the arbitrage 
opportunity). See also Bitwise Submission I, supra note 6, at 68 
(stating that average deviations are well within the expected 
arbitrage band when taking into account platform-level fees of 
around 30 basis points, volatility, and hedging costs).
    \84\ See Bitwise Submission II, supra note 9, at 62.
---------------------------------------------------------------------------

    In addition, the Sponsor has identified instances in which the 
price of bitcoin on a particular ``real'' platform deviated by more 
than 1% from the consolidated price during the 12 months starting in 
April 2018.\85\ The Sponsor has then graphed the number of instances 
where a platform had a price deviation greater than 1% away from the 
consolidated price for a specific number of seconds, both across all 
ten ``real'' platforms and for each platform.\86\ The Sponsor states 
that, in the aggregate, the results show that more than 50% of all 
pricing discrepancies greater than 1% were arbitraged away within 5 
seconds and that more than 90% of all such pricing discrepancies were 
arbitraged away within 34 seconds.\87\ According to the Sponsor, these 
results were remarkably consistent across all platforms and show that 
pricing discrepancies greater than 1% were rare and quickly arbitraged 
away.\88\ The Sponsor also asserts that these results suggest that 
bitcoin has a global network of spot platforms that are tightly 
arbitraged and form a single, global price.\89\ The Sponsor states that 
its conversations with leading market makers suggest that such market 
makers maintain capital at multiple platforms to facilitate this 
arbitrage.\90\
---------------------------------------------------------------------------

    \85\ See id.
    \86\ See id. at 62-64.
    \87\ See id. at 63; Bitwise Submission III, supra note 9, at 33, 
35. In its earlier analysis, the Sponsor has examined deviations 
greater than 1% that lasted more than 100 seconds. Based on a 
provided histogram of these instances, the Sponsor concludes that 
such sustained deviations were extremely rare and of diminished 
frequency in recent months. See Notice and OIP, supra note 7, 84 FR 
at 23131; Bitwise Submission I, supra note 6, at 69; Bitwise 
Submission III, supra note 9, at 33, 35.
    \88\ See Bitwise Submission II, supra note 9, at 62-63.
    \89\ See id. at 65.
    \90\ See Bitwise Submission III, supra note 9, at 33.
---------------------------------------------------------------------------

    The Sponsor argues that the efficiency of the ``real'' bitcoin 
market has improved dramatically over the past eighteen months and is 
now approaching its practical limit, in that prices are ``nearly 
perfectly'' arbitraged, spreads are ``incredibly tight,'' and the 
market is liquid on a twenty-four hour, seven-day-a-week basis.\91\ In 
particular, according to the Sponsor, the strength of arbitrage on the 
bitcoin spot market and quality of that market has improved 
significantly since December 2017.\92\ The Sponsor has charted the 
average deviation of the price of bitcoin on the ten ``real'' spot 
platforms, as measured against the consolidated price, monthly from 
January 2018 through April 2019, and concludes that the data show a 
pronounced downward trend, indicating increasingly efficient 
arbitrage.\93\ The Sponsor attributes improvements in arbitrage on the 
bitcoin platforms in part to the December 2017 introduction of the 
bitcoin futures market, which allows arbitrageurs to gain short 
exposure in bitcoin and created a two-sided market with easy hedging, 
and to the growth of contract volume on that market.\94\ The Sponsor 
also points to the February 2018 emergence and subsequent growth of the 
institutional short lending market for bitcoin, which allows 
arbitrageurs to capitalize on short term price dislocations in the 
bitcoin market.\95\ The Sponsor further asserts that the 2018 entry of 
well-established, institutional, and algorithmic market-makers into the 
bitcoin market has brought increased order and efficiency to the 
market.\96\ The Sponsor states that it ``does not discount the 
possibility'' that the bitcoin market was susceptible to market 
manipulation in 2013, prior to the development of material regulation 
or the entry of large market participants, but asserts that concerns 
raised about market conditions during that earlier period are mitigated 
by the current existence of a well-functioning, distributed market with 
multiple, significant platforms connected by efficient arbitrage.\97\
---------------------------------------------------------------------------

    \91\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise 
Submission I, supra note 6, at 111.
    \92\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise 
Submission II, supra note 9, at 72; Bitwise Submission III, supra 
note 9, at 3.
    \93\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise 
Submission II, supra note 9, at 72. See also Bitwise Submission I, 
supra note 6, at 106 (providing a graph of aggregate monthly price 
deviation from December 2017 through mid-March 2019). In addition, 
the Sponsor has provided an updated chart showing the average 
deviation of the price of bitcoin on the ``real'' spot platforms, as 
measured against the consolidated price, through August 2019, 
showing similar average deviations in May through August 2019 as 
compared to the earlier portion of 2019. See Bitwise Submission VI, 
supra note 9, at 7, 24.
    \94\ See Bitwise Submission I, supra note 6, at 107; Bitwise 
Submission II, supra note 9, at 82 (citing May 2018 letter from 
Federal Reserve Bank of San Francisco that explains that the impact 
of the futures market aligns with the impact the introduction of 
futures has had on other markets); Bitwise Submission III, supra 
note 9, at 3; Bitwise Submission VI, supra note 9, at 7. See also 
Bitwise Submission III, supra note 9, at 145 (quoting May 2018 
letter from Federal Reserve Bank of San Francisco that stated that 
the rapid raise in the price of bitcoin, and subsequent price drop 
following the issuance of bitcoin futures, is consistent with 
pricing dynamics suggested elsewhere in financial theory and 
previously observed trading behavior).
    \95\ See Bitwise Submission I, supra note 6, at 110; Bitwise 
Submission II, supra note 9, at 82-83; Bitwise Submission III, supra 
note 9, at 3; Bitwise Submission VI, supra note 9, at 7.
    \96\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise 
Submission I, supra note 6, at 108-109; Bitwise Submission II, supra 
note 9, at 83; Bitwise Submission III, supra note 9, at 3; Bitwise 
Submission VI, supra note 9, at 7. The Sponsor states that expansion 
of the bitcoin custody market in 2018 and 2019, and emergence of a 
strong market for insurance on custodied bitcoin assets, has also 
increased efficiency of the market and enabled a larger number of 
market makers to enter the market. See Bitwise Submission II, supra 
note 9, at 84; Bitwise Submission III, supra note 9, at 3. See also 
Bitwise Submission VI, supra note 9, at 8 (stating that bitcoin 
custody has become ``fully institutional'' and detailing the 
custodians for bitcoin that were regulated or had insurance in 2017, 
2018, and 2019).
    \97\ See Bitwise Submission III, supra note 9, at 49 (describing 
reports of manipulation at the failed Mt. Gox platform in 2013).
---------------------------------------------------------------------------

    The Sponsor asserts that efficient arbitrage exists despite the 
apparent existence of arbitrage opportunities in the bitcoin market 
(from apparent pricing discrepancies on different platforms), because 
these apparent opportunities are usually driven by one of three 
factors.\98\ First, the Sponsor represents that platforms that 
exaggerate and fake their volume utilize algorithms that generally 
display prices that mirror the ``real'' bitcoin spot market, but that 
these algorithms rely on trend-following software rather than effective 
arbitrage and thus deviate more from the consolidated price.\99\ 
Second, the Sponsor asserts that bitcoin prices on platforms in 
capital-controlled markets may trade at significant sustained premiums 
or discounts to the integrated global market because capital controls 
make it difficult or impossible to conduct arbitrage.\100\ Third, the 
Sponsor states that certain platforms conduct

[[Page 55389]]

trading in so-called cryptographic ``stablecoins,'' \101\ rather than 
in the U.S. dollar.\102\ According to the Sponsor, while stablecoins 
have values that fluctuate, many popular data aggregators assume that 
these stablecoins maintain a stable price of $1.00, and therefore do 
not incorporate the fluctuating nature of stablecoins when displaying 
bitcoin prices, unlike arbitrageurs that do take this into 
account.\103\
---------------------------------------------------------------------------

    \98\ See Bitwise Submission II, supra note 9, at 66-68.
    \99\ See id. at 67.
    \100\ See id. See also Bitwise Submission III, supra note 9, at 
31 (stating that capital controls prevent arbitrage or make it 
significantly more difficult, which is why the Bitwise Daily Bitcoin 
Reference Price methodology excludes platforms domiciled in capital-
controlled countries).
    \101\ The term ``stablecoin'' is a marketing term broadly used 
in the industry to refer to a digital asset that purports to 
minimize price volatility. However, the Commission notes that the 
use of the term to refer to a digital asset does not mean that the 
asset does in fact exhibit stability.
    \102\ See Bitwise Submission II, supra note 9, at 67.
    \103\ See id. at 67-68. For example, the Sponsor states that the 
price of the stablecoin Tether (USDT) has fluctuated between $0.91 
and $1.05 in the past year, but that coinmarketcap.com displays the 
price of bitcoin-USDT on the Binance platform as if Tether is worth 
$1, which makes it appear as though bitcoin is trading at a premium 
on Binance. See id. See also Bitwise Submission I, supra note 6, at 
72-74 (asserting that if you adjust for the price of Tether, prices 
for bitcoin-USD and bitcoin-USDT trading pairs line up ``exactly'').
---------------------------------------------------------------------------

    Several commenters assert that there is effective arbitrage in the 
bitcoin market.\104\ One commenter represents that, in recent years, 
spreads in the bitcoin market have narrowed, arbitrage has improved, 
and the market has become increasingly efficient, due to the entry of 
large, established market makers; the launch and growth of a large, 
regulated bitcoin derivatives market; the development of a short 
lending market in bitcoin; and the emergence of algorithmically-driven 
trading tools.\105\ Another commenter states that, through the use of 
high-frequency trading or automated trading ``bots,'' global arbitrage 
in the bitcoin market is very cost-effective and efficient.\106\ A 
third commenter asserts that effective arbitrage exists among the 
platforms with ``real'' volume.\107\ In addition, one commenter states 
that the global bitcoin market is deep and robust, divided among 
multiple spot platforms and futures exchanges, and supported by 
institutional market makers, and that it is unlikely that an attempt to 
manipulate the market could last long.\108\
---------------------------------------------------------------------------

    \104\ See Shenoy Letter III, supra note 69, at 9; Omniex Letter, 
supra note 9, at 4; Castle Island Ventures Letter, supra note 9, at 
3.
    \105\ See Castle Island Ventures Letter, supra note 9, at 3.
    \106\ See Shenoy Letter III, supra note 69, at 9.
    \107\ See Omniex Letter, supra note 9, at 4.
    \108\ See Donostia Ventures Letter, supra note 9, at 4.
---------------------------------------------------------------------------

    In contrast, one commenter asserts that the Sponsor's claims 
regarding arbitrage and the expectation that bitcoin would trade at the 
same price across platforms are not true because bitcoin trades at 
different prices in different countries, such as what can be seen in 
South Korea or what was seen in India during the peak at the end of 
2017.\109\ This commenter adds that platforms that operate across 
regions may be able to conduct arbitrage and circumvent some capital 
controls, which creates the possibility that the existence of this 
``channel'' adds noise to the estimation of capital controls.\110\ This 
commenter also states that the bitcoin market is not orderly because 
the supply is inelastic and the demand drivers are opaque.\111\
---------------------------------------------------------------------------

    \109\ See Fitzgerald Letter II, supra note 9.
    \110\ See id.
    \111\ See id.
---------------------------------------------------------------------------

(B) The Sponsor's Assertions Regarding Regulation of the Bitcoin Spot 
Market
    The Sponsor asserts that the ``real'' bitcoin spot market is 
``substantially more regulated'' than would be suggested by 
``conventional wisdom.'' \112\ Specifically, the Sponsor argues that 
the ten platforms in the ``real'' bitcoin market are more established, 
more likely to be located in developed markets, more regulated, and 
more likely to utilize sophisticated market surveillance tools than the 
broader set of platforms that report significant volume.\113\ The 
Sponsor represents that all ten of the ``real'' platforms are domiciled 
or based in what it describes as ``developed'' markets.\114\ The 
Sponsor further represents that nine of these ten platforms are 
regulated by the U.S. Department of Treasury's Financial Crimes 
Enforcement Network (``FinCEN'') division as Money Services Businesses 
(``MSB'') and six are regulated by the New York State Department of 
Financial Services (``NYSDFS'') under its BitLicense program.\115\ 
According to the Sponsor, the requirements for a BitLicense include 
having to implement measures designed to detect, prevent, and respond 
to fraud, attempted fraud, and similar wrongdoing, including market 
manipulation, and to monitor, control, investigate, and report back to 
the NYSDFS regarding any wrongdoing.\116\ The Sponsor states that five 
of the ten ``real'' platforms have robust internal or third-party 
market surveillance tools to monitor, report, and correct for abusive 
trading behavior.\117\ According to the Sponsor, this trend toward 
adopting market surveillance tools has been, in part, a response to the 
MSB and BitLicense regulations.\118\
---------------------------------------------------------------------------

    \112\ See Bitwise Submission II, supra note 9, at 48.
    \113\ See Notice and OIP, supra note 7, 84 FR at 23130. See also 
Bitwise Submission II, supra note 9, at 85 (stating that the bitcoin 
market is supported by increasingly effective regulation on the spot 
platforms); Bitwise Submission III, supra note 9, at 171 (stating 
that many bitcoin spot platforms face significant regulation).
    \114\ See Notice and OIP, supra note 7, 84 FR at 23130. The 
Sponsor states that approximately 30% of all ``real'' reported 
volume takes place on platforms domiciled in the United States, with 
the remainder domiciled in Malta, Hong Kong, the United Kingdom, and 
Japan. See Bitwise Submission I, supra note 6, at 64; Bitwise 
Submission II, supra note 9, at 47-48; Bitwise Submission III, supra 
note 9, at 9, 67.
    \115\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise 
Submission I, supra note 6, at 81; Bitwise Submission II, supra note 
9, at 49; Bitwise Submission III, supra note 9, at 9. See also 
Tagomi Letter, supra note 9, at 2. The Sponsor states that the MSB 
license has associated obligations designed to ensure that FinCEN 
can protect against money laundering, and include having an AML 
policy, having customer identification and verification policies, 
and filing Suspicious Activity Reports for suspicious customer 
transactions. See Notice and OIP, supra note 7, 84 FR at 23130; 
Bitwise Submission I, supra note 6, at 77-78; Bitwise Submission II, 
supra note 9, at 50-51.
    \116\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise 
Submission II, supra note 9, at 51-52; Bitwise Submission III, supra 
note 9, at 73.
    \117\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise 
Submission I, supra note 6, at 82; Bitwise Submission II, supra note 
9, at 53; Bitwise Submission III, supra note 9, at 73.
    \118\ See Bitwise Submission II, supra note 9, at 52.
---------------------------------------------------------------------------

    One commenter states that BitLicense regulation has driven advances 
in the bitcoin market and that, after the NYSDFS added guidelines in 
2018 requiring surveillance and reporting of market manipulation, the 
platforms with BitLicenses have implemented sophisticated market 
surveillance tools that help foster a safer and more established 
market.\119\ Another commenter states that, to obtain a BitLicense, the 
platforms must demonstrate to the NYSDFS that they meet the 
requirements for a BitLicense and must commit to ongoing review by the 
NYSDFS, which, according to the commenter, means that these platforms 
``have embraced the need for policies, procedures, and surveillance.'' 
\120\ This commenter asserts that it believes that all of the platforms 
in which it participates, including those outside of New York, must 
have a robust surveillance program and that the listed platforms meet 
these standards and are continuing to develop these programs.\121\ This 
commenter further asserts that these platforms typically employ 
sophisticated third-party surveillance tools that use the qualities

[[Page 55390]]

of bitcoin to scrutinize transaction histories and conduct 
surveillance.\122\
---------------------------------------------------------------------------

    \119\ See Castle Island Ventures Letter, supra note 9, at 2-3.
    \120\ See Tagomi Letter, supra note 9, at 2 (representing that 
the BitLicense requirements mostly relate to the prevention of money 
laundering and to the security of the platforms' systems).
    \121\ See id.
    \122\ See id.
---------------------------------------------------------------------------

    The Sponsor acknowledges that the Trust's Registration Statement 
represents that the platforms on which bitcoin trades 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, which could have a 
negative impact on the performance of the Trust.'' \123\ The Sponsor 
states that regulation of bitcoin platforms varies and is not 
equivalent to the regulation of national securities exchanges, but that 
many bitcoin spot platforms face significant regulation and are well-
capitalized, and that the design of the Trust would mitigate the impact 
of the failure of any individual platform.\124\ Further, the Sponsor 
states that the regulations surrounding MSB licenses and BitLicenses, 
while not as extensive as the obligations of and oversight for national 
securities exchanges and futures exchanges, provide business oversight 
and regulatory compliance requirements and thus convey certain critical 
protections.\125\
---------------------------------------------------------------------------

    \123\ See Bitwise Submission III, supra note 9, at 171 (quoting 
Registration Statement, supra note 31, at 7).
    \124\ See id. (acknowledging that regulation of bitcoin trading 
platforms is ``not pari passu with the regulation of national 
securities exchanges''); Registration Statement, supra note 31, at 
15 (``The trading for spot bitcoin occurs on multiple trading 
venues'' that are ``not regulated in the same manner as traditional 
stock and bond exchanges''); Bitwise Submission I, supra note 6, at 
76 (``We acknowledge that we're using the term `regulated' loosely 
here. We are not implying that bitcoin spot exchanges are `regulated 
markets' or that they are on an equal legal status with national 
securities exchanges or futures exchanges, but rather that the 10 
bitcoin spot exchanges highlighted earlier interface with other 
forms of regulation.''). For additional discussion about the 
Sponsor's arguments that the design of the Trust would make the 
proposed ETP uniquely resistant to manipulation, see infra Section 
III.B.1(d).
    \125\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise 
Submission II, supra note 9, at 49.
---------------------------------------------------------------------------

    The Sponsor states that, out of the ten identified ``real'' 
platforms, Binance is the only one not registered as an MSB and Kraken 
is the only significant U.S.-based platform that has not pursued a 
BitLicense, and that both platforms have expressed a strong preference 
for self-regulation and voiced concerns about regulatory 
overreach.\126\ The Sponsor asserts that Binance and Kraken have been 
aggressive in adopting internal tools to address AML, KYC, and other 
concerns through the use of technology.\127\ Further, the Sponsor 
attributes the ``conventional wisdom'' that the bitcoin platforms are 
almost entirely unregulated to characterizations of the ``fake'' 
platforms that dominate the reported trading volume, rather than the 
ten platforms with ``real'' trading volume.\128\
---------------------------------------------------------------------------

    \126\ See Bitwise Submission II, supra note 9, at 53-54. The 
Sponsor states that Bittrex pursued a BitLicense, but was denied by 
the NYSDFS. See id. at 54 n.140.
    \127\ See id. at 54.
    \128\ See id. at 48-49.
---------------------------------------------------------------------------

    Several commenters assert that there is a lack of regulation in the 
bitcoin market.\129\ One commenter states that while regulation of the 
bitcoin market is improving through the Commission's efforts to root 
out bad actors, it still is not comparable to the traditional markets, 
and that bitcoin platforms lack real-time and historical surveillance 
capabilities to identify and stop suspicious trading activities.\130\ 
Another commenter states that, while most platforms have AML and KYC 
requirements for transactions between fiat currencies and digital 
assets, many allow participants to open accounts to trade between 
digital assets and other digital assets with only a name and email 
address, bypassing AML and KYC requirements.\131\
---------------------------------------------------------------------------

    \129\ See Kumar Letter, supra note 6 (calling it ``common 
knowledge'' that the bitcoin market is unregulated and manipulated); 
Page Letter, supra note 9 (referring to the bitcoin sector as 
unregulated); Shenoy Letter II, supra note 9, at 1 (suggesting that 
currently the bitcoin market does not have precise regulation or 
apparent external oversight).
    \130\ See Shenoy Letter III, supra note 69, at 1, 10.
    \131\ See Fitzgerald Letter II, supra note 9.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that the record does not demonstrate that 
the identified characteristics of the ``real'' spot market, such as the 
claimed effectiveness of arbitrage and the presence of some degree of 
regulation, establish that the segment of the market that the Sponsor 
identifies--or that NAV and IIV pricing based on that segment--are 
uniquely resistant to manipulation sufficient to justify dispensing 
with the detection and deterrence of fraud and manipulation provided by 
surveillance-sharing agreements with significant, regulated markets. 
While the Sponsor asserts that the ``real'' bitcoin market is ``more 
orderly and more regulated than commonly understood,'' \132\ 
characteristics of the identified ``real'' segment of the bitcoin 
market that differ from the common understanding of the broader bitcoin 
market do not establish that the ``real'' bitcoin market is uniquely 
resistant to manipulation. Moreover, as discussed further below in 
Section III.B.1(c), the Sponsor asserts that 95 percent of the spot 
bitcoin market consists of fake and non-economic activity,\133\ but has 
not established that the ``real'' bitcoin market is isolated from that 
fraudulent and manipulative activity.\134\
---------------------------------------------------------------------------

    \132\ See supra note 64 and accompanying text.
    \133\ See supra note 52 and accompanying text.
    \134\ See infra Section 0 for discussion about the Sponsor's 
assertions that it has separated the ``real'' bitcoin spot market 
from the rest of the market that is dominated by fake and non-
economic trading, and that fake volume does not impact price 
discovery on the ``real'' bitcoin spot market. The Commission 
emphasizes that, as discussed further below, if prices on the 
identified ``real'' spot market are affected by manipulative 
activity on other platforms, then it would fundamentally undercut 
any claims that the ``real'' market is uniquely resistant to 
manipulation.
---------------------------------------------------------------------------

(A) Arbitrage and Efficiency in the Bitcoin Spot Market
    The record does not establish that the effectiveness of arbitrage 
in the ``real'' spot bitcoin market would, by itself, protect against 
the influence of fake and non-economic trading in the broader bitcoin 
market or provide unique resistance to manipulation sufficient to do 
away with the need for a surveillance-sharing agreement with a 
significant, regulated market. The Commission also notes that its 
reliance on surveillance-sharing agreements for derivative securities 
products has not been limited to ETPs based on commodities, but has 
also extended to equity options based on securities listed on national 
securities exchanges.\135\

[[Page 55391]]

Accordingly, even efficient price arbitrage does not eliminate the need 
for surveillance-sharing agreements. There is no evidence in the record 
that arbitrage in the bitcoin market is of such unique effectiveness 
that it would essentially insulate the proposed ETP from attempts at 
manipulation in a way beyond that of existing derivative securities 
products that trade on highly regulated markets.
---------------------------------------------------------------------------

    \135\ See Winklevoss Order, supra note 12, 84 FR at 37593 
(citing 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)). The Commission 
has also required a surveillance-sharing agreement 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 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 required a surveillance-
sharing agreement 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) (stating that surveillance-sharing 
agreements ``ensure the availability of information necessary to 
detect and deter potential manipulations and other trading 
abuses''). See also Registration Statement, supra note 31, at 2 
(stating that the ``real'' bitcoin spot market ``is now operating at 
a level of efficiency and scale similar in material respects to 
established global equity, fixed income and commodity markets'').
---------------------------------------------------------------------------

    Further, even if the record showed that the quality of available 
arbitrage in the ``real'' bitcoin market makes manipulation more 
difficult, costly, and risky to carry out than it would be 
otherwise,\136\ that would speak to providing some resistance to 
manipulation, rather than a unique resistance to manipulation that 
would justify dispensing with a surveillance-sharing agreement with a 
significant, regulated market. Similarly, the Commission concludes that 
claims by the Sponsor and a commenter that the ``real'' spot bitcoin 
market is organized, efficient, resilient, or robust, or has tight 
spreads,\137\ do not suffice to distinguish the proposed ETP from other 
derivative securities products, such as equity options, where the 
Commission required surveillance-sharing agreements with a significant, 
regulated market even though effective arbitrage exists among the 
relevant markets.
---------------------------------------------------------------------------

    \136\ See supra notes 66-67 and accompanying text.
    \137\ See supra notes 68, 74-77, and accompanying text.
---------------------------------------------------------------------------

    The Sponsor ``does not discount the possibility'' that the early 
bitcoin market may have been subject to market manipulation, 
particularly with respect to reports of manipulation regarding the 
failed Mt. Gox platform in 2013.\138\ Rather, the Sponsor points to 
improvements in the strength of arbitrage and overall market quality in 
the bitcoin spot market since December 2017.\139\ The Commission 
concludes that the Sponsor's acknowledgement of past fraud and 
manipulation in the bitcoin spot market, combined with the Sponsor's 
reliance on changes in the market within just the last two years, 
effectively concedes that bitcoin and the bitcoin spot market are not 
inherently resistant to manipulation.\140\
---------------------------------------------------------------------------

    \138\ See Bitwise Submission III, supra note 9, at 49.
    \139\ See supra notes 91-97 and accompanying text.
    \140\ In the Winklevoss Order, the Commission concluded that 
there was an insufficient basis in the record before it to decide 
that the bitcoin spot market is inherently resistant to 
manipulation. See Winklevoss Order, supra note 12, 83 FR at 37585-86 
(noting that possible sources of fraud and manipulation in the 
bitcoin spot market included (1) ``wash'' trading, (2) persons with 
a dominant position in bitcoin manipulating bitcoin pricing, (3) 
hacking of the Bitcoin network and trading platforms, (4) malicious 
control of the Bitcoin Network, (5) trading based on material, non-
public information, including the dissemination of false or 
misleading information, (6) manipulative activity involving Tether, 
and (7) fraud and manipulation at Mt. Gox, a bitcoin trading 
platform).
---------------------------------------------------------------------------

    The Commission also believes that arbitrage in the ``real'' bitcoin 
market would not prevent manipulation by, for example, an actor with a 
dominant ownership position in bitcoin. The existence of concentrated 
holdings in an asset presents a meaningful risk of manipulation. An 
actor or group of actors acting in concert who obtain or have a pre-
existing dominant ownership position in actual bitcoin would not 
necessarily find it prohibitively expensive to engage in manipulation 
across the trading platforms the Sponsor identifies, despite efficient 
arbitrage on the identified ``real'' bitcoin market.\141\ Furthermore, 
there are other possible sources of fraud and manipulation in the 
purportedly ``real'' bitcoin market,\142\ including hacking of the 
trading platforms the Sponsor uses for its pricing mechanism,\143\ 
malicious control of the Bitcoin Network,\144\ and trading based on 
material non-public information.\145\ Accordingly, the Commission 
cannot conclude that the ``real'' bitcoin market is uniquely resistant 
to manipulation.
---------------------------------------------------------------------------

    \141\ See id. at 37584, 37586-87, 37591. The Commission is 
unconvinced by the Sponsor's assertions that no dominant market 
position can be exploited to manipulate bitcoin prices. See Bitwise 
Submission III, supra note 9, at 31 (discussing ``The Not-So-Killer 
Whales of Bitcoin,'' Chainalysis, Oct. 10, 2018, available at 
https://blog.chainalysis.com/reports/bitcoin-whales-oct). Indeed, 
the analysis that the Sponsor cites concludes that bitcoin ``trading 
whales certainly have the capability of executing transactions large 
enough to move the market.'' ``The Not-So-Killer Whales of 
Bitcoin,'' Chainalysis, Oct. 10, 2018. The cited analysis also 
concludes that a group of only 15 early bitcoin adopters hold over 
33% of all outstanding bitcoin (id.), and the Sponsor has not 
demonstrated that these early adopters are unable to manipulate 
prices if they so choose. The cited analysis also concedes that 
12.5% of the outstanding bitcoin is owned by what it characterizes 
as ``criminal whales'' (id.), and the Sponsor has not demonstrated 
that these ``criminals'' are unable to manipulate prices. This 
analysis fails to consider that persons who would together own a 
dominant market share can collude to manipulate bitcoin prices. See 
Winklevoss Order, supra note 12, 83 FR at 37586-87. And this 
analysis fails to consider that ``pseudonymous bitcoin account 
holding means, among other things, that the number of accounts or 
number of trades would not reveal whether a person or group has a 
dominant ownership position in bitcoin, or is using or attempting to 
use a dominant ownership position to manipulate bitcoin pricing.'' 
Id. at 37591.
    \142\ See Winklevoss Order, supra note 12, 83 FR at 37585-86. 
See also notes 69-73 and accompanying text (summarizing comments 
asserting that Ponzi schemes, spoofing, layering, front running, 
market domination, and suspicious trading patterns or price 
movements occur in bitcoin markets).
    \143\ See Winklevoss Order, supra note 12, 83 FR at 37585. The 
Sponsor recognizes that the risk that a profit-motivated hacker can 
manipulate bitcoin prices up or down by hacking some trading venues 
while trading on other trading venues is ``still a concern today.'' 
Bitwise Submission III, supra note 9, at 45. See also Registration 
Statement, supra note 31, at 7 (``The nature of the assets held at 
bitcoin exchanges makes them appealing targets for hackers'' and 
``[n]o bitcoin exchange is immune from these risks.'').
    \144\ See Winklevoss Order, supra note 12, 83 FR at 37585-86. 
The Sponsor recognizes that ``[t]here is a theoretical risk that a 
malicious actor could attempt to exert control over the Bitcoin 
Network by conducting a so-called 51% attack, which would involve 
becoming the dominant source of mining power on the network,'' and 
that ``51% attacks can theoretically allow you to double spend 
bitcoin you already own or censor transactions of others.'' Bitwise 
Submission III, supra note 9, at 45.
    \145\ See Winklevoss Order, supra note 12, 83 FR at 37585-86. 
The Sponsor ``agree[s] with the Commission's argument that the 
potential for material nonpublic information about bitcoin exists.'' 
Bitwise Submission III, supra note 9, at 43.
---------------------------------------------------------------------------

    Moreover, even to the extent that the spot market has evolved as 
the Sponsor asserts, NYSE Arca and the Sponsor have not demonstrated 
that these changes will endure and thus have not demonstrated that the 
relevant market is inherently resistant to manipulation. As the Trust's 
Registration Statement acknowledges, bitcoin platforms are ``relatively 
new . . . and may be more exposed to fraud and security breaches than 
established, regulated exchanges for other financial assets or 
instruments.'' \146\ The Sponsor also argues that ``many bitcoin spot 
exchanges face significant regulation and are well-capitalized'' and 
that the Trust is designed in a way that would mitigate the impact that 
a failure of an individual platform would have on the Trust or its NAV 
or holdings.\147\ This argument, however, focuses on the presence of 
some regulation and design features of the Trust, and does not 
demonstrate that the nature of the spot platforms makes them inherently 
resistant to manipulation.
---------------------------------------------------------------------------

    \146\ See supra note 123 and accompanying text. Furthermore, the 
nature of trading in bitcoin markets could change over time as 
market participants gain more experience. For example, institutional 
market-makers and short-term lenders could decide to pull back from 
the bitcoin market, or bitcoin futures contract volume could 
decrease and make hedging more difficult and expensive, affecting 
the spot market. Moreover, the use or adoption of bitcoin could 
contract, leading to a lower demand for bitcoin in the spot market 
and a subsequent impact on volumes and volatility.
    \147\ See supra notes 124-125 and accompanying text.
---------------------------------------------------------------------------

    The Sponsor has made sweeping claims that up to 95% of the volume 
reported by bitcoin platforms is wash trading or simply fabricated, 
while asking the Commission to approve the

[[Page 55392]]

listing of a bitcoin ETP based upon a small segment of the market that 
it asserts is uniquely resistant to the influence of this 
activity.\148\ These claims, when combined with statements regarding 
the relatively new state of the bitcoin market and, as discussed 
further below, the proposed ETP's pricing mechanism,\149\ suggest that 
further development of the market is needed to establish that the 
Sponsor's representations remain sound.
---------------------------------------------------------------------------

    \148\ See infra Section III.B.1(c).
    \149\ See infra note 369 and accompanying text (quoting 
statements in the Registration Statement that the Bitwise Daily 
Bitcoin Reference Price ``is based on a new and untested calculation 
methodology''). In addition, see discussion infra note 465 and 
accompanying text regarding statements in the Registration Statement 
regarding the bitcoin futures market.
---------------------------------------------------------------------------

    Further, the record does not demonstrate that arbitrage in the 
``real'' spot market is as effective as the Sponsor claims.\150\ While 
the Sponsor describes its analysis on arbitrage in the ``real'' spot 
market,\151\ it provides a selective and incomplete analysis. For 
example, the Sponsor presents the average deviation from the 
consolidated price over an approximately five-month period as a single 
data point for each platform,\152\ which may obscure transient events. 
The Sponsor's analysis of the duration of 1% price deviations from the 
consolidated price also lumps together all deviations over 1%, 
regardless of size,\153\ and thus obscures whether some deviations were 
quite large and how long a large deviation persists.\154\
---------------------------------------------------------------------------

    \150\ Because the Sponsor does not include any markets in 
capital-controlled countries within its identified set of ``real'' 
platforms, based on difficulties in conducting arbitrage with 
platforms in such countries, the Commission does not consider the 
quality of arbitrage between the ``real'' platforms and such 
markets. See supra notes 100, 109-110, and accompanying text.
    \151\ See supra notes 78-90, 93, and accompanying text. The 
Sponsor also describes its earlier analysis utilizing similar 
metrics over slightly different time periods. See supra notes 81-82, 
87, and 93, and accompanying text.
    \152\ See supra note 82 and accompanying text.
    \153\ See supra notes 85-88 and accompanying text.
    \154\ In addition, the Sponsor ignores that on the platform-
level histograms, the scaling of the ``y'' axis that displays the 
deviation count varies considerably, reflecting the finding that on 
some of the platforms (e.g., bitFlyer) the 1% price deviations are 
more than ten times more frequent than on other platforms (e.g., 
Bitfinex). The Sponsor's histograms compare deviation counts on the 
``y'' axis of up to 120 for Binance and 700 for bitFlyer to 
deviation counts on the ``y'' axis of 20 for Bitfinex. See Bitwise 
Submission II, supra note 9, at 63-64. In addition, the Sponsor has 
generated a line graph showing the price of bitcoin on the ten 
``real'' platforms for an approximately seventeen-month period and 
concludes that it is ``difficult to see meaningful gaps'' between 
each line. See supra note 81 and accompanying text. Yet, given the 
scaling used, in which grid lines represent an increase in the price 
of bitcoin by 2,000 USD, a deviation would need to be very large to 
produce perceptible gaps.
---------------------------------------------------------------------------

    Moreover, in a separate context where the Sponsor attempts to 
explain why a particular market participant does not track prices for 
two of its identified ``real'' platforms, the Sponsor refers to one of 
these ``real'' platforms (Poloniex) as ``too small and illiquid to 
support meaningful arbitrage trading'' and states that another 
(Bitfinex) has a 3% fee on withdrawals that ``rais[es] certain 
challenges for institutional arbitrage activity.'' \155\ In addition, 
statements by commenters that assert that arbitrage on the spot 
platforms is effective are conclusory and not supported with data.\156\
---------------------------------------------------------------------------

    \155\ See supra note 77.
    \156\ See supra notes 104-108 and accompanying text. But see 
supra notes 109-111 (questioning the effectiveness of arbitrage on 
the bitcoin spot markets).
---------------------------------------------------------------------------

(B) Regulation of the Spot Market
    Even if the Commission assumes that the arbitrage among these 
``real'' platforms is effective, the record does not demonstrate that 
the level of regulation present in the ``real'' bitcoin spot market 
provides a unique ability to deter and detect fraud and 
manipulation.\157\ The Sponsor has not demonstrated that its selected 
platforms with ``real'' volumes are ``regulated markets'' comparable to 
a national securities exchange or futures exchange, although they may 
be registered with FinCEN or NYSDFS.\158\
---------------------------------------------------------------------------

    \157\ With respect to the assertion that all of the ``real'' 
platforms are domiciled or based in what the Sponsor terms 
``developed'' markets (see supra note 114 and accompanying text), 
nothing in the record explains how this characteristic would make 
the platforms resistant to fraud and manipulative activity.
    \158\ See supra note 115-116 and accompanying text. See also 
supra notes 119-122 and accompanying text.
---------------------------------------------------------------------------

    The Commission concludes, and the Sponsor itself expressly 
acknowledges, that the level of regulation on bitcoin spot platforms 
``varies'' and is not equivalent to the obligations and oversight of 
national securities exchanges or futures exchanges.\159\ The Sponsor 
does not argue that state or other federal regulation of the bitcoin 
spot platforms is a substitute for federal securities law standards, 
including the requirements of the Exchange Act. Indeed, the Sponsor 
agrees with the Commission that, irrespective of other applicable 
regulations, the Exchange Act here requires a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size relating to the underlying or reference assets.\160\
---------------------------------------------------------------------------

    \159\ See supra notes 123-125.
    \160\ The Sponsor ``believe[s] that the Commission has correctly 
identified the need for, value of, and definition of surveilled 
derivatives market of significant size,'' but argues that the CME 
futures market is ``significant in size'' compared to the ``real'' 
spot market it identifies. Bitwise Submission III, supra note 9, at 
151. See also id. at 97 (stating that the Sponsor ``agree[s] with 
the Commission and recognize[s] the importance of comprehensive 
surveillance-sharing agreements to detect and deter fraudulent and 
manipulative activity,'' and asserting that the CME bitcoin futures 
market is ``significant'' based on the Sponsor's ``understanding of 
the true size of the bitcoin spot market''). The argument that the 
CME bitcoin futures market is ``significant'' is addressed in 
Section III.B.3 below.
---------------------------------------------------------------------------

    Furthermore, there are substantial differences between the NYSDFS 
and FinCEN regulation versus the Commission's regulation of the 
national securities exchanges. While there may be overlap between the 
Commission's regulation and the NYSDFS's and FinCEN's regulation of 
digital assets,\161\ national securities exchanges are also, among 
other things, 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.'' \162\ Moreover, national 
securities exchanges must file proposed rules with the Commission 
regarding certain material aspects of their operations,\163\ and the 
Commission has the authority to disapprove any such rule that is not 
consistent with the requirements of the Exchange Act.\164\ Thus, 
national securities exchanges are subject to

[[Page 55393]]

Commission oversight of, among other things, their governance, 
membership qualifications, trading rules, disciplinary procedures, 
recordkeeping, and fees.\165\
---------------------------------------------------------------------------

    \161\ See CFTC v. McDonnell, 287 F. Supp. 3d 213, 220-23, 228 
(E.D.N.Y), adhered to on denial of reconsideration, 321 F. Supp. 3d 
366 (E.D.N.Y. 2018).
    \162\ 15 U.S.C. 78f(b)(5).
    \163\ 17 CFR 240.19b-4(a)(6)(i).
    \164\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rules 
changes with the Commission and provides the Commission with the 
authority to disapprove proposed rule changes that are not 
consistent with the Exchange Act. Designated Contract Markets 
(commonly called ``futures markets'') registered with and regulated 
by the CFTC must comply with, among other things, a similarly 
comprehensive range of regulatory principles and must file rule 
changes with the CFTC. See, e.g., Designated Contract Markets 
(DCMs), CFTC, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \165\ See Winklevoss Order, supra note 12, 83 FR at 37597. The 
Commission notes that the NYSDFS has issued ``guidance'' to 
supervised virtual currency business entities, stating that these 
entities must ``implement measures designed to effectively detect, 
prevent, and respond to fraud, attempted fraud, and similar 
wrongdoing.'' See Maria T. Vullo, Superintendent of Financial 
Services, NYSDFS, Guidance on Prevention of Market Manipulation and 
Other Wrongful Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS 
recognizes that its ``guidance is not intended to limit the scope or 
applicability of any law or regulation'' (id.), which would include 
the Exchange Act. One commenter asserts that, since the NYSDFS 
issued this guidance, ``BitLicense exchanges have implemented 
sophisticated market surveillance tools from reputable firms like 
NICE Actimize, Irisium and NASDAQ, helping to foster a safer and 
more established crypto asset market.'' Castle Island Ventures 
Letter, supra note 9, at 3. However, the commenter provides no 
additional information in support of these assertions, and the 
Commission cannot fully evaluate the NYSDFS guidance because, among 
other things, there is nothing further in the record before the 
Commission regarding how the NYSDFS guidance has been implemented 
either by the NYSDFS or by the purportedly ``real'' bitcoin trading 
platforms that hold BitLicenses. FinCEN's guidance regarding the 
application of its regulations to digital assets notes that its 
guidance does not ``affect the obligations of any of the 
participants described herein under other regulatory frameworks,'' 
for example, obligations under ``federal securities law.'' FinCEN 
Guidance No. FIN-2019-G001: Application of FinCEN's Regulation to 
Certain Business Models Involving Convertible Virtual Currencies, at 
24 n.75 (May 9, 2019), available at https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. See 
also FinCEN Guidance No. FIN-2013-G001: Application of FinCEN's 
Regulations to Persons Administering, Exchanging, or Using Virtual 
Currencies, at 1 n.1 (Mar. 18, 2013), available at https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (noting 
that FinCEN's guidance ``should not be interpreted as a statement by 
FinCEN about the extent to which [certain] activities comport with 
other federal or state statutes, rules, regulations, or orders.'').
---------------------------------------------------------------------------

    In any event, the Commission also finds persuasive several 
commenters that describe the deficiencies of regulation of the 
purportedly ``real'' spot market the Sponsor utilizes.\166\ 
Significantly, Binance, based in Malta and the single largest bitcoin 
trading platform among the platforms the Sponsor identifies as 
``real''--representing 39% of the purportedly ``real'' bitcoin volume 
\167\--has not registered with either FinCEN or the NYSDFS; four of the 
ten platforms the Sponsor utilizes--representing 69% of the purportedly 
``real'' bitcoin volume \168\--do not have a BitLicense from the 
NYSDFS; and half of the bitcoin platforms the Sponsor utilizes lack 
internal or third-party market surveillance tools.\169\
---------------------------------------------------------------------------

    \166\ See supra notes 129-131 and accompanying text.
    \167\ See Bitwise Submission II, supra note 9, 35 (based on 
April 2019 volume).
    \168\ See Bitwise Submission III, supra note 9, at 125.
    \169\ See supra notes 115, 117-122, and accompanying text. The 
Sponsor's discussion about what protections the platforms Binance 
and Kraken have in place in the absence of FinCEN or BitLicense 
registration, see supra notes 126-128 and accompanying text, 
arguably infers the presence of some of the protections that might 
otherwise be provided by these specific registrations, rather than 
show a unique level of protection. In addition, the Sponsor notes 
that one platform (Bittrex) pursued a BitLicense but was denied by 
the NYSDFS, see supra note 126, but does not explain how the mere 
fact that this platform applied for a BitLicense is relevant to the 
consideration of whether that platform is regulated.
---------------------------------------------------------------------------

    The Commission also notes that NYSE Arca has not stated that it has 
entered or will enter into surveillance-sharing agreements with those 
``real'' spot platforms that utilize surveillance tools. Moreover, even 
if NYSE Arca did enter into such agreements, it is not clear what 
ability NYSE Arca would have to compel the sharing of surveillance 
data. Unlike national securities exchanges, the bitcoin spot platforms 
are not self-regulatory organizations, and therefore do not have legal 
power to impose discipline upon their participants.
    Therefore, the Commission concludes that the record does not 
demonstrate that the identified ``real'' market is uniquely resistant 
to manipulation, such that a surveillance-sharing agreement with a 
significant, regulated market would not be needed to adequately deter 
and detect fraud and manipulation.
(c) The Sponsor's Methodology for Distinguishing the ``Real'' Volume on 
the Bitcoin Spot Market From Fake or Non-Economic Trading Volume
    In the previous section, the Commission examines the Sponsor's 
identified ``real'' spot market for bitcoin and asserted 
characteristics of that market, such as the presence of arbitrage and 
regulation, and considers whether the record establishes that this 
segment of the market is uniquely resistant to manipulation.\170\ And, 
as discussed further in the next section, the Sponsor generally 
proposes to use prices and volumes from its identified ``real'' 
platforms to calculate the Bitwise Bitcoin Daily Reference Price, which 
the Trust will use for NAV and IIV pricing.\171\ Yet, for the 
Commission to determine that effective arbitrage and regulation make 
this ``real'' segment of the market uniquely resistant to manipulation, 
the Commission would have to conclude that the Sponsor's analysis 
correctly identifies the segment of the market that represents ``real'' 
volume and establishes that this segment is not affected by trading in 
other segments of the market that the Sponsor concedes is fake or non-
economic. Therefore, the Commission examines below the Sponsor's 
analysis of the bitcoin market to identify ``real'' versus fake or non-
economic trading and the reliability of the Sponsor's claims that its 
ten identified platforms represent the ``real'' volume on the spot 
bitcoin market. Further, the Commission examines whether the Sponsor 
has shown that prices on the broader bitcoin market do not influence 
price discovery on the identified ``real'' platforms.
---------------------------------------------------------------------------

    \170\ See supra Section III.B.1(b).
    \171\ See infra Section III.B.1(d).
---------------------------------------------------------------------------

(i) Representations Made and Comments Received
    The Sponsor argues that through its research, it has identified 
certain platforms that represent substantially all of the ``real'' 
global spot market for bitcoin, as distinguished from the approximately 
95% of the bitcoin spot market that the Sponsor identifies as rife with 
trading that is fake or non-economic in nature.\172\ In this context, 
the Sponsor considers as ``fake volume'' any reported trading volume 
that does not reflect legitimate price discovery, including wash 
trading and reports of trades that did not occur.\173\ The Sponsor 
states that it has analyzed 83 platforms using three tests, described 
further below, and claims that, based on its analysis, the following 
ten platforms have ``real'' volume--Binance, Bitfinex, Coinbase Pro, 
Kraken, Bitstamp, bitFlyer, Gemini, itBit, Bittrex, and Poloniex.\174\ 
The Sponsor states that the average daily volume on these platforms for 
April 2019 was $554,488,345.\175\ According to the Sponsor, these 
results suggest that $10.5 billion of the $11 billion in reported 
average daily spot bitcoin volume, or roughly 95% of all reported 
volume, is fake volume or wash trading.\176\
---------------------------------------------------------------------------

    \172\ See Notice and OIP, supra note 7, 84 FR at 23129-30; 
Bitwise Submission I, supra note 6, at 60; Bitwise Submission II, 
supra note 9, at 34-35. The Sponsor states that the goal of its 
research was to identify those platforms with a significant 
prevalence of fake volume in a repeatable, data-driven manner. See 
Bitwise Submission II, supra note 9, at 19.
    \173\ See Bitwise Submission II, supra note 9, at 19; 
Registration Statement, supra note 31, at 3, 23-24. The Sponsor 
describes transactions that are reported by a platform without 
corresponding trading taking place as ``fraudulent prints.'' See 
Bitwise Submission II, supra note 9, at 19.
    \174\ See Bitwise Submission II, supra note 9, at 34-35.
    \175\ See id. at 35.
    \176\ See id.
---------------------------------------------------------------------------

    The Sponsor represents that platforms inflate or exaggerate trade 
volume in several ways, including by fraudulently

[[Page 55394]]

printing trades, engaging directly in wash trading on their own 
platforms, and paying market makers to engage in wash trading.\177\ The 
Sponsor further asserts that platforms have two powerful motives for 
exaggerating volume--attracting trader attention by appearing higher on 
data aggregators' league tables (i.e., rankings for trading platforms) 
and attracting listings and attendant listing fees from initial coin 
offerings.\178\ In addition to the Sponsor's efforts to distinguish 
platforms with predominantly fake or non-economic trading from 
platforms with ``real'' volume,\179\ the Sponsor provides other 
evidence of fake or non-economic trading in the bitcoin market.\180\
---------------------------------------------------------------------------

    \177\ See id. at 36-37. The Sponsor also represents that 
platforms economically incentivize trading activity by paying 
traders to trade and offer lower fee tiers or preferential trading 
to traders that attain high volumes of trade. See id. at 37. One 
commenter states that proprietary trading is standard on most 
platforms and makes up 20% of trading on some platforms. See Shenoy 
Letter III, supra note 69, at 1.
    \178\ See Bitwise Submission II, supra note 9, at 37.
    \179\ See infra Section III.B.1(c).
    \180\ See Notice and OIP, supra note 7, 84 FR at 23129 
(describing that, in connection with the Sponsor's initial analysis, 
the Sponsor has identified several widespread, superficial 
indicators of fake or non-economic trading volume, including 
perfectly consistent, alternating buy and sell orders of roughly 
equal size, relatively large reported spreads on platforms that 
report large volumes, relatively small real-world footprints for 
platforms with large reported volumes, multiple hours and days with 
zero volume not correlated with factors such as business hours or 
volatility, and roughly identical volume every hour of every day); 
Bitwise Submission I, supra note 6, at 24-39 (comparing Coinbase 
Pro, as a platform with a BitLicense that is generally well-known, 
with platforms CoinBene, RightBTC, and CHAOEX, and describing 
trading characteristics of the ``suspicious'' platform); Bitwise 
Submission II, supra note 9, at 6-12 (asserting that the current 
reported data on bitcoin trading volume is surprising and describing 
the history of concerns around data reliability in the bitcoin 
market).
---------------------------------------------------------------------------

    The Sponsor claims that the results of its analysis are consistent 
with the findings from a previous similar study by the Sponsor using 
data from an earlier time period that identified the same ten platforms 
as having ``actual volume.'' \181\ The Sponsor asserts that after the 
findings from its earlier study became public, it received extensive 
media coverage and support from social media and thought leaders.\182\ 
According to the Sponsor, the results were also widely embraced by 
leading data providers in the digital asset market, with several 
displaying volume statistics based on the ten identified ``real'' 
platforms or admitting that concerns about reported data are ``valid'' 
and subsequently working to improve data transparency.\183\ The Sponsor 
represents that nine of the platforms identified as having fake or non-
economic volume reported a drop in volume of over 90% after the 
Sponsor's analysis became public.\184\ In addition, the Sponsor asserts 
that data patterns on certain platforms rapidly shifted to match the 
real-world patterns identified by the Sponsor.\185\ Further, the 
Sponsor asserts that its findings are consistent with the ``common 
institutional understanding'' of the actual market.\186\
---------------------------------------------------------------------------

    \181\ See Bitwise Submission I, supra note 6, at 60; Bitwise 
Submission II, supra note 9, at 35. The earlier study focused on 
data from March 4, 2019, through March 9, 2019, and the later study 
focused on data from April 28, 2019, through May 5, 2019. See 
Bitwise Submission II, supra note 9, at 19, 35. The Sponsor states 
that the earlier study showed that the ``real'' average daily spot 
bitcoin volume was $273 million, as compared to $6 billion in 
reported volume, indicating that roughly 95% of the volume was fake. 
See id. at 35. See also Notice and OIP, supra note 7, 84 FR at 
23129-30; Bitwise Submission I, supra note 6, at 61. The Sponsor 
further represents that, in the earlier study, it excluded South 
Korean platforms from its analysis because they are an isolated 
market due to capital controls and that one additional platform 
passed all tests but was too small, with less than $1 million 
average daily volume, to include as an identified ``real'' platform. 
See Bitwise Submission I, supra note 6, at 60.
    \182\ See Bitwise Submission II, supra note 9, at 35-36. See 
also Bitwise Submission VI, supra note 9, at 13.
    \183\ See Bitwise Submission II, supra note 9, at 103-104; 
Bitwise Submission III, supra note 9, at 131. See also Bitwise 
Submission VI, supra note 9, at 14 (asserting that coinmarketcap.com 
confirmed that concerns raised in the report were ``valid'' and 
launched an initiative to improve its metrics, two digital asset 
data providers adopted the ten identified ``real'' platforms as 
representing the market, and one digital asset data provider 
launched transparency ratings that require verified data feeds for 
platforms with volume claims).
    \184\ See Bitwise Submission VI, supra note 9, at 15 (comparing 
average daily volume from March 2019 and August 2019). The Sponsor 
also represents that only three of the 73 platforms that it named as 
having fake or non-economic volume responded to the Sponsor's 
research. See id. at 16.
    \185\ See id. at 18-21.
    \186\ Bitwise Submission I, supra note 6, at 70. The Sponsor 
asserts that (1) every regulated digital asset product that has 
launched has drawn prices entirely, or almost entirely, from a 
subset of the ten ``real'' platforms; (2) the ten ``real'' platforms 
dominated the list of thirteen platforms that the New York Attorney 
General contacted as part of its Virtual Markets Integrity 
Initiative; (3) the Blockchain Transparency Institute identified 56 
platforms suspected of having fake volume, none of which are among 
the ten ``real'' platforms; and (4) other media-level investigations 
have reached similar conclusions. See id. at 70-71.
---------------------------------------------------------------------------

    Several commenters question the Sponsor's findings, which were made 
public after its initial study.\187\ One commenter argues that the 
Sponsor's analysis raises more questions than it answers and that, with 
manipulation a prime issue, if 95% of the platforms are reporting fake 
volume, then it is unwise to base an ETP on the remaining 5%.\188\ 
Another commenter asserts that articles about the Sponsor's initial 
study on online media were not a coincidence because online media has a 
financial interest in priming, or manipulating, the public to enhance 
its image, to poach customers, or to drive sales through fear of 
missing out on an investment.\189\ One commenter states that issues 
about manipulation on the platforms, as discussed in articles about the 
Sponsor's initial study, have not been satisfactorily resolved.\190\
---------------------------------------------------------------------------

    \187\ See Arssov Letter, supra note 6 (stating that he disputes 
and disagrees with most of the statements and findings in the 
Sponsor's initial analysis and that the Sponsor does not know what 
market manipulation in digital assets looks like); Denscombe Letter, 
supra note 6 (stating that the report is inaccurate, misleading, and 
unfair).
    \188\ See C. Ross Letter, supra note 6. See also Buckley Letter, 
supra note 6 (suggesting that the Sponsor is asking the Commission 
to grant approval based on its word that, while 95% of the bitcoin 
volume is manipulated, the other 5% is not).
    \189\ See Denscombe Letter, supra note 6.
    \190\ See Fitzgerald Letter I, supra note 6.
---------------------------------------------------------------------------

    The Sponsor describes that, to gather data for its analysis, it has 
built its own data collection system using the live trading information 
available on the bitcoin spot platforms' websites about the current 
order book and recent trades.\191\ The Sponsor represents that its data 
collection process scrapes data from these websites four times a 
second, collecting price, trade size, and on-screen timestamp for 
ongoing trades, and bid/ask price, order amount, and timestamp of 
recording the data for order book entries.\192\ The Sponsor states that 
it was common for the data collection process to break down, and that 
it monitored its data collection process to stop problems with the data 
scrapers and prepared fixes, but there were gaps in the data that it 
has accounted for in the analytical phase.\193\ In addition, the 
Sponsor states that it has acquired historical bitcoin trade data from 
third parties for parts of the analysis that require a continuous 
historical data set.\194\
---------------------------------------------------------------------------

    \191\ See Bitwise Submission II, supra note 9, at 14. The 
Sponsor states that the inability to gather granular market data 
from a comprehensive set of bitcoin platforms has made proving the 
existence of fake volume on platforms difficult. See id. The Sponsor 
asserts that it created and now maintains a website that captures 
the ``real'' spot bitcoin trading volume on an ongoing basis. See 
Bitwise Submission III, supra note 9, at 131.
    \192\ See Bitwise Submission II, supra note 9, at 16. See also 
Notice and OIP, supra note 7, 84 FR at 23129 (describing a similar 
data collection process in connection with the Sponsor's earlier 
analysis); Bitwise Submission I, supra note 6, at 41.
    \193\ See Bitwise Submission II, supra note 9, at 18. According 
to the Sponsor, the data collection process would break if the html 
structure of the web page being scraped changed in any meaningful 
way, which was a common occurrence. See id.
    \194\ See id.
---------------------------------------------------------------------------

    Several commenters raise concerns about the Sponsor's data 
collection methods. One commenter claims that accessing data through 
trading

[[Page 55395]]

platforms' websites is more appropriate for illustration than research 
because these websites are not updated in real time, or even within a 
quarter of a second, and therefore this collection method can access 
only a fraction of the trades.\195\ Another commenter asserts that it 
is plausible that a group of bad of actors have used trading bots to 
manipulate the data on the other platforms to secure approval of an 
ETP.\196\ This commenter also states that it has concerns about the 
data presented, because a single organization conducted the study, the 
methodology and data source are unclear, and the traffic data are only 
collected from a single source.\197\ A third commenter questions 
whether the data used to identify the platforms reporting fake volume 
are reliable.\198\
---------------------------------------------------------------------------

    \195\ See Arssov Letter, supra note 6.
    \196\ See Denscombe Letter, supra note 6.
    \197\ See id.
    \198\ See C. Ross Letter, supra note 6.
---------------------------------------------------------------------------

    The Sponsor states that it has selected the platforms to analyze by 
creating a list of 83 platforms that represent the top bitcoin trading 
pairs on coinmarketcap.com as of December 5, 2018.\199\ The Sponsor 
adds that it has considered all trading pairs where bitcoin is the base 
currency, or where the quote currency is either a fiat currency or a 
stablecoin.\200\ Further, the Sponsor argues that, while new platforms 
with astronomical volumes have appeared every week on 
coinmarketcap.com, leading the list of platforms representing the top 
bitcoin trading pairs to become stale quickly, that list is 
sufficiently consistent that the core analysis remains relevant.\201\
---------------------------------------------------------------------------

    \199\ See Bitwise Submission II, supra note 9, at 15. With 
respect to the Sponsor's earlier analysis, the Sponsor represents 
that it has generated a list of 81 platforms to analyze at that time 
by looking at all platforms reporting more than $1 million in 
average daily volume for bitcoin-fiat and bitcoin-stablecoin pairs 
to coinmarketcap.com on December 5, 2018. See Notice and OIP, supra 
note 7, 84 FR at 23129; Bitwise Submission I, supra note 6, at 41.
    \200\ See Bitwise Submission II, supra note 9, at 15.
    \201\ See id. at 18.
---------------------------------------------------------------------------

    With respect to the bitcoin over-the-counter (``OTC'') market, the 
Sponsor claims that its ``[c]onversations with leading market makers'' 
suggest that very little bitcoin OTC volume is crossed internally and 
that most volume is settled on the spot platforms.\202\ The Sponsor 
asserts that any incremental volume in the OTC or dark pool market is 
not a significant fraction of the global spot market for bitcoin, and 
that counting these trades separately would mostly lead to double 
counting.\203\
---------------------------------------------------------------------------

    \202\ See Bitwise Submission III, supra note 9, at 133.
    \203\ See id. In this context, the term ``dark pool'' is used as 
described in the registration statement for the Winklevoss Bitcoin 
Trust, which described ``dark pools'' as bitcoin trading platforms 
that do not publicly report limit order book data. See Winklevoss 
Bitcoin Trust, Form S-1/A (File No. 333-189752), at 62.
---------------------------------------------------------------------------

    Several commenters question the Sponsor's selection of certain 
bitcoin platforms for its analysis, to the exclusion of other platforms 
and the OTC market. One commenter argues that the Sponsor selectively 
analyzed data, excluding many factors.\204\ This commenter states that 
the Sponsor excluded platforms from South Korea on the basis of capital 
controls, but included platforms from China and Hong Kong, where 
capital controls are also in place.\205\ This commenter also claims 
that the Sponsor's selection of trading pairs is unusual because the 
market is not based solely on the chosen trading pairs and there are 
arbitrage opportunities in trading digital assets against other digital 
assets.\206\ Another commenter argues that, while the Sponsor suggests 
that virtually all trading occurs on non-Asian platforms, it is 
unlikely that Asian investors would use United States or European 
Union-based platforms and be subject to their capital controls, and 
that the Sponsor ignores trading on both the Hong Kong-based platform 
Bitmex and OTC trading.\207\ This commenter states that a previous ETP 
filer claimed that OTC volume among United States-based brokers is $500 
million a day, and that, even if this figure is overstated, it suggests 
that global average daily volume in bitcoin is significantly higher 
than $273 million.\208\ Another commenter argues that, even if capital-
controlled markets present difficulties for arbitrage, it does not mean 
that market participants in these capital-controlled markets cannot 
participate in, influence, or manipulate the bitcoin market.\209\ This 
commenter asserts that market participants in Venezuela, Zimbabwe, and 
other significant capital-controlled countries participate in the 
bitcoin market and that getting around capital controls to participate 
in and manipulate the market is not difficult.\210\
---------------------------------------------------------------------------

    \204\ See Fitzgerald Letter II, supra note 9. See also C. Ross 
Letter, supra note 6 (asserting that the ten identified platforms 
seem ``rather convenient'' for the Sponsor to build its case upon).
    \205\ See Fitzgerald Letter II, supra note 9.
    \206\ See id.
    \207\ See Blake Letter I, supra note 6. See also Arssov Letter, 
supra note 6 (stating that two-thirds or more of digital asset 
trading occurs outside of the United States, but most of the ten 
identified platforms on the list are based in the United States and 
reflect only a fraction of the total trades).
    \208\ See Blake Letter I, supra note 6. See also Shenoy Letter 
III, supra note 69, at 6, 9 (claiming that OTC bitcoin volume 
typically is 2-3 times larger than volumes on platforms and that an 
estimated 1 to 1.5 billion bitcoins are traded on the OTC market 
daily).
    \209\ See Robert Letter, supra note 9.
    \210\ See id.
---------------------------------------------------------------------------

    The Sponsor states that it used a single week time period--April 
28, 2019, through May 5, 2019--for its visualized data to balance 
concerns that too short a period may not give natural market patterns 
enough time to develop, and that too long a period may make anomalous 
patterns less distinct, because platforms attempting to fake volume may 
periodically change their algorithms.\211\ According to the Sponsor, it 
has based its analysis on data from the last week before it finalized 
the research, to be as current as possible, but the Sponsor asserts 
that any single week sample would lead to a similar conclusion.\212\
---------------------------------------------------------------------------

    \211\ See Bitwise Submission II, supra note 9, at 19. See also 
Notice and OIP, supra note 7, 84 FR at 23129 (stating that when 
selecting March 4, 2019, through March 8, 2019, as the time period 
for its earlier analysis, the Sponsor deliberately utilized a short 
time period to show that fake volume is a current problem in the 
bitcoin market and because platforms change algorithms used to fake 
volume over time, which obscures the results of data-driven analyses 
that consider longer time periods).
    \212\ See Bitwise Submission II, supra note 9, at 19.
---------------------------------------------------------------------------

    The Sponsor states that one tool that it has used for its analysis 
is a trade size histogram, which is a data visualization technique that 
allows one to see the percentage of trading volume on a platform that 
occurs at particular trade sizes over a specified period.\213\ The 
Sponsor asserts that it has cut off the histograms after 10 bitcoins 
because the vast majority of trade volume occurs in the 0-10 bitcoins 
range, and the Sponsor finds it ``visually helpful'' to focus on this 
range.\214\ The Sponsor has used the six platforms with BitLicenses as 
a baseline for what a group of legitimate trade size histograms look 
like, because, according to the Sponsor, the BitLicense establishes a 
conservative set of platforms that are not likely to have pervasive 
fake volume or wash trading.\215\ The Sponsor states that it finds two 
patterns among the platforms with BitLicenses--trade volume percentages 
generally trend downward as trade size increases and there are 
behavioral preferences around round numbers--and that these patterns 
are consistent with documented trading behavior in traditional 
markets.\216\ The Sponsor argues that, in contrast, six platforms 
outside the set of platforms with BitLicenses follow unnatural patterns 
and that the only realistic

[[Page 55396]]

explanation is that these platforms are reporting artificial 
volume.\217\
---------------------------------------------------------------------------

    \213\ See id.
    \214\ See id. at 20-21.
    \215\ See id. at 21.
    \216\ See id. at 22-23. See also Bitwise Submission I, supra 
note 6, at 26 (stating that the ``real'' platform Coinbase Pro has 
varying trade sizes, with a greater-than-random number of round 
trade sizes).
    \217\ See Bitwise Submission II, supra note 9, at 23-24. The 
Sponsor also argues that the discrepancy in trading patterns cannot 
be attributed to low volume, because the six platforms outside the 
reference set all report volumes that are greater than that of the 
largest platform with a BitLicense. See id. at 24. The Sponsor 
states that in its earlier analysis, it finds that the trade size 
histograms for the platforms that have passed all of its data tests 
show consistent, intuitive patterns, while those from other 
platforms reflect patterns that are idiosyncratic and often 
transparently programmatic (e.g., bell curve-like distributions or 
increasing volume for larger trade sizes). See Notice and OIP, supra 
note 7, 84 FR at 23129; Bitwise Submission I, supra note 6, at 42-
50. See also Bitwise Submission I, supra note 6, at 32, 55-57.
---------------------------------------------------------------------------

    The Sponsor states that the second tool it has used for its 
analysis is an examination of the alignment of volume spikes, asserting 
that, while the bitcoin spot market is fractured across multiple 
platforms, all of these platforms should respond to the same 
developments in the market.\218\ The Sponsor claims that the hourly 
trade volume for one platform with a BitLicense, Coinbase Pro, shows 
varying volume throughout the day, a pattern of volume that does not 
repeat across days, and several large volume spikes.\219\ The Sponsor 
further claims that the six platforms with BitLicenses all exhibit 
similar patterns, with an obvious alignment of volume spikes, 
particularly around May 3, 2019, and argues that this demonstrates a 
connected market.\220\ In contrast, the Sponsor points to the volume 
patterns of six platforms outside of the reference set of platforms 
with BitLicenses and asserts that they exhibit idiosyncratic and highly 
unusual volume patterns and lack volume spikes that align with 
platforms in the ``real'' bitcoin market, strongly suggesting that 
these platforms are posting fake volume.\221\
---------------------------------------------------------------------------

    \218\ See Bitwise Submission II, supra note 9, at 24.
    \219\ See id. at 25.
    \220\ See Bitwise Submission II, supra note 9, at 26-27. See 
also Bitwise Submission I, supra note 6, at 25, 27 (stating the 
``real'' platform Coinbase Pro has a trade volume that varies, with 
a mix between buys and sells that is unequal and streaky).
    \221\ See Bitwise Submission II, supra note 9, at 27-29. The 
Sponsor claims that none of the six platforms outside the reference 
set have volume spikes that align with the May 3, 2019, spike that 
was present in all platforms within the reference set. See id. at 
29. The Sponsor states that in its earlier analysis, it finds that 
volume spikes rise and fall concurrently across the platforms that 
have passed all data tests, but other platforms have no discernable 
volume spikes or patterns that are disconnected or wholly 
idiosyncratic and do not repeat on other platforms. See Notice and 
OIP, supra note 7, 84 FR at 23129; Bitwise Submission I, supra note 
6, at 51-52. See also Bitwise Submission I, supra note 6, at 29-31, 
35-36, 38-39, 55-57 (also noting that essentially all of the trades 
on one ``suspicious'' platform print inside the prevailing bid and 
ask).
---------------------------------------------------------------------------

    The third tool that the Sponsor says it has used for its analysis 
is a spread patterning analysis based on the spread between the highest 
price at which someone is willing to buy bitcoin and lowest price at 
which someone is willing to sell bitcoin, denominated in dollars.\222\ 
The Sponsor asserts that the spread on Coinbase Pro shows price 
oscillation and is generally quite low and anchored near zero.\223\ The 
Sponsor further claims that the spreads on the six platforms with 
BitLicenses generally have low spreads, that the spikes in spreads are 
short-lived, and that the spreads exhibit a consistently spiky form, 
suggesting that they are responding to current events.\224\ The Sponsor 
asserts that the differences between the spreads on the platforms with 
BitLicenses are driven by differences in fee structures, such as the 
use of a maker-taker fee model by some platforms.\225\ In contrast, the 
Sponsor claims that the spread analysis for six platforms outside the 
reference set shows spreads that are anchored on high dollar amounts 
and oscillate in artificial patterns.\226\ According to the Sponsor, 
there is no economic reason for these spread patterns if there is true 
liquidity on the platforms and these patterns indicate the presence of 
automated bots that perform wash trading.\227\
---------------------------------------------------------------------------

    \222\ See Bitwise Submission II, supra note 9, at 29.
    \223\ See id. at 29-30. See also Bitwise Submission I, supra 
note 6, at 28 (stating that the spread of bitcoin on the ``real'' 
platform Coinbase Pro was $0.01, or 0.0003% of bitcoin's current 
trading price).
    \224\ See Bitwise Submission II, supra note 9, at 31-32.
    \225\ See id. at 32.
    \226\ See id. at 33-34.
    \227\ See id. at 34. The Sponsor states that, in its earlier 
analysis, it finds that well-known platforms show a consistent 
pattern of spreads, anchoring on zero, with random variability and 
periodic spikes, while many platforms with very high levels of 
volume report average spreads that are 1,000% to 35,000% higher than 
spreads on platforms that have passed all of the Sponsor's tests and 
exhibit spread patterns that reveal artificial, programmatic 
drivers, including spreads that unnaturally anchor on arbitrarily 
high dollar values or stay fixed for extended periods. See Notice 
and OIP, supra note 7, 84 FR at 23130; Bitwise Submission I, supra 
note 6, at 53-54. See also Bitwise Submission I, supra note 6, at 
33, 37, 55-56.
---------------------------------------------------------------------------

    In conclusion, the Sponsor finds that only ten of the 83 platforms 
it analyzed have ``real'' volume because they passed all three tests, 
whereas 73 platforms failed one or more of its tests.\228\ As discussed 
further below, the Sponsor subsequently removed one platform, Bitfinex, 
from its selection of platforms used for the Trust's NAV and IIV 
pricing, due to a court order obtained by the New York Attorney General 
(``NYAG'') against Bitfinex's operator,\229\ but the Sponsor maintains 
that Bitfinex's volume is ``real.'' \230\
---------------------------------------------------------------------------

    \228\ See Bitwise Submission II, supra note 9, at 34-35. For the 
trade histograms, volume graphs, and spread graphs of all 83 
platforms that the Sponsor has analyzed, see id. at 86-102. The 
Sponsor states that it is excluding those platforms based in South 
Korea, because their volumes are isolated from the global bitcoin 
market due to capital controls. See id. at 34. However, the Sponsor 
also states that 73 of the 83 platforms failed one or more of the 
three tests (see id.), and the Commission notes that this figure 
includes the South Korean platforms.
    \229\ See infra notes 325, 331-338, and accompanying text.
    \230\ See Bitwise Submission V, supra note 9, at 5. The Sponsor 
argues that having real volume and being ineligible to contribute 
prices to the Trust's pricing mechanism are not mutually exclusive, 
and that Bitfinex has passed all of the Sponsor's tests for having 
real volume. See id. The Sponsor asserts that the Bitwise Crypto 
Index Committee reviewed the NYAG's court order against iFinex (the 
operator of Bitfinex) and subsequent legal documents, and found no 
evidence contradicting the Sponsor's finding that the Bitfinex 
volume is real. See id. at 5-6 (arguing that, as further evidence 
that trading on Bitfinex is real, the court documents confirm that 
investors deposited billions of dollars with the platform).
---------------------------------------------------------------------------

    Two commenters raise specific concerns about the Sponsor's methods 
of analysis.\231\ One commenter states that the Sponsor has not 
provided a longitudinal picture of all of the platforms and that the 
time period used for the visualized data is a very short snapshot.\232\ 
This commenter asserts that the narrative of the Sponsor's report could 
look very different if trades larger than 10.0 bitcoins were included 
and that the report is not complete due to this exclusion.\233\ This 
commenter also notes that the Sponsor focuses most of its analysis on 
the six platforms with a BitLicense, rather than all ten of the 
platforms that the Sponsor identifies as ``real.'' \234\ Another 
commenter disagrees with the Sponsor's assertion that market 
participants are more likely to trade small amounts of bitcoin than 
large amounts, and more likely to trade whole bitcoin than fractions of 
bitcoin, and claims that the order books on the ten ``real'' platforms 
show people trading more in fractions of bitcoin than whole amounts of 
bitcoin.\235\ This commenter argues that before being used as a basis 
for granting an ETP, the Sponsor's analysis should be scrutinized 
regarding the methodology and where data was acquired, independent 
verification of the claims, and multiple sources for data 
collection.\236\
---------------------------------------------------------------------------

    \231\ See Denscombe Letter, supra note 6; Fitzgerald Letter II, 
supra note 9.
    \232\ See Fitzgerald Letter II, supra note 9.
    \233\ See id.
    \234\ See id.
    \235\ See Denscombe Letter, supra note 6 (stating that the 
platforms show orders of 15 to 33 bitcoins).
    \236\ See id. (asserting that, to be fair to all of the 
organizations studied, there would need to be at least five years' 
worth of longitudinal data from the ten ``real'' platforms for 
independent analysis for any abnormalities and irregularities).
---------------------------------------------------------------------------

    Several commenters raise questions about specific platforms that 
the

[[Page 55397]]

Sponsor identifies as ``real.'' \237\ One commenter asserts that 
Bitfinex has long had questions raised about its operations, and that 
while the Sponsor has sound reasoning for dropping Bitfinex from its 
consolidated bitcoin price, the deletion raises questions about why the 
Sponsor ever included Bitfinex in its consolidated price, along with 
Binance, another non-United States domiciled platform with a ``colorful 
past.'' \238\ Another commenter asserts that it is ``essential'' to 
further analyze Binance and Kraken because Binance has not registered 
as an MSB and Kraken has not pursued a BitLicense, and both platforms 
have had recent negative press.\239\ A third commenter represents that, 
in April 2018, Kraken refused to answer the NYAG's inquiry into the 
bitcoin market, which heightens the need to independently analyze 
longitudinal data from the ``real'' platforms.\240\
---------------------------------------------------------------------------

    \237\ See Blake Letter I, supra note 6; Blake Letter II, supra 
note 9; Denscombe Letter, supra note 6; Fitzgerald Letter II, supra 
note 9.
    \238\ See Blake Letter II, supra note 9 (stating that Tether and 
Bitfinex's connections to Tether ``are just too painful to even 
write about at this time''). See also Blake Letter I, supra note 6 
(questioning the Sponsor's claim that Binance is a European Union-
based Maltese company).
    \239\ See Fitzgerald Letter II, supra note 9 (representing that 
the Kraken CEO stated that, among other things, bitcoin traders want 
minimal documentation for onboarding and do not care about many of 
the things that concern regulators, including regulatory approval 
and protection from risky investments and market manipulation).
    \240\ See Denscombe Letter, supra note 6.
---------------------------------------------------------------------------

    One commenter asserts that it seems unlikely that there are zero 
platforms that have a mixture of some real and some fake volume, and 
that the more likely scenario is that some platforms are faking some of 
their volume and therefore the ``true'' volume in the ``real'' bitcoin 
market is certainly higher than the Sponsor's calculation.\241\ In 
response to this commenter, the Sponsor acknowledges that there is 
likely a gray area between platforms with 100% real volume and 100% 
fake volume.\242\ According to the Sponsor, the 73 platforms that it 
has not identified as ``real'' platforms include an occasional example 
that ``doesn't seem outright fake.'' \243\ The Sponsor cites as an 
example its analysis of the Gate.io platform, and the Sponsor 
acknowledges that there is room to reasonably argue whether Gate.io's 
volume is fake or whether some percentage of its volume should be 
included in the total ``real'' volume.\244\ However, the Sponsor 
asserts that Gate.io does not have enough volume to meaningfully alter 
the Sponsor's conclusions, which would not change even if the Sponsor 
counted all of Gate.io's volume as ``real.'' \245\
---------------------------------------------------------------------------

    \241\ See Blake Letter I, supra note 6.
    \242\ See Bitwise Submission II, supra note 9, at 38.
    \243\ See id.
    \244\ See id. (stating that the trade size histogram for Gate.io 
does not show the expected spikes around 1.0 or 2.0 bitcoins, that 
the volume spike analysis shows hourly volume that seems more 
patterned than the reference set with a muted volume peak on May 3, 
2019, and that the spread patterning analysis shows a high median 
spread around $4).
    \245\ See id. (comparing Gate.io's reported $12 million average 
daily volume in April 2019 to the $554 million total daily volume of 
the ten ``real'' platforms).
---------------------------------------------------------------------------

    The Sponsor argues that to address whether the total ``real'' 
volume should be higher, it should focus, among the platforms it has 
identified as ``fake,'' on those platforms with more significant 
reported volume.\246\ The Sponsor asserts that, when it shared its 
initial analysis on Twitter, the public closely examined its work and 
raised questions about certain platforms that were not included in the 
list of ``real'' platforms but that the public believed had real-world 
footprints; but only three of these platforms had ``meaningful'' 
volume--HitBTC, Huobi, and OKEx.\247\ The Sponsor claims that its 
analysis for OKEx shows that the vast majority of OKEx's bitcoin volume 
is entirely fake, based on the volume spike analysis for April 28, 
2019, through May 5, 2019, showing a nearly constant hourly volume with 
an extremely muted spike on May 3, 2019, along with a trade size 
histogram that shows no round-number spikes, an atypical rise in volume 
between 1 and 6 bitcoins, and an unusually long tail volume above 6 
bitcoins.\248\ In addition, the Sponsor states that it believes that 
HitBTC's volume is predominantly wash trading because the trade size 
histogram shows almost no volume after 0.5 bitcoin, with no spikes at 
round numbers, and the hourly volumes are completely detached from the 
reference set of platforms, with most volume happening on April 29 and 
30, 2019.\249\ The Sponsor further claims that while Huobi appeared to 
fare well on the Sponsor's tests, weekly trade size histograms for 
Huobi from the weeks before and after the Sponsor's initial analysis 
became public indicate that those engaging in wash trading at Huobi 
changed their trade size signatures to be more in line with, and 
thereby evade, the Sponsor's detection methods for fake volume.\250\
---------------------------------------------------------------------------

    \246\ See id.
    \247\ See id. at 38-39 (stating that the April 2019 average 
daily volume on HitBTC, Huobi, and OKEx was $127,010,643, 
$128,043,683, and $228,879,610, respectively).
    \248\ See id. at 39.
    \249\ See id.
    \250\ See id. at 40-42 (stating that trade size histograms from 
the period March 3, 2019, through April 14, 2019, show an anomalous 
pattern with a resurgence of trade volume between 5-11 bitcoins 
before the Sponsor's initial analysis became public on March 21, 
2019, followed by the complete disappearance of this pattern in the 
subsequent three weeks). The Sponsor asserts that while Huobi might 
have taken action to clean up wash trading after the Sponsor's 
initial analysis became public, that ``view is challenged'' because 
Huobi's reported trade volume did not meaningfully drop during that 
time period. See id. at 42-43. See also Bitwise Submission VI, supra 
note 9, at 18-21 (asserting that the trade size histograms for the 
platforms Coinsuper, CHAOEX, and IDAX similarly exhibited a change 
within the three weeks after the Sponsor's further analysis became 
public).
---------------------------------------------------------------------------

    The Sponsor also points to three independent, third-party 
researchers that estimated the amount of real volume at HitBTC, Huobi, 
and OKEx, and ``seem to agree'' that OKEx's volume is nearly entirely 
fake and that the vast majority of volume on HitBTC and Huobi is 
fake.\251\ The Sponsor states that, if it incorporates the simple 
weighted average of these estimates (as applied to the reported volume 
statistics for the three platforms for April 2019) to the Sponsor's 
calculations of ``real'' trading volume, it would increase the ``real'' 
average daily spot bitcoin trading volume in April 2019 to $622 
million, or 12% higher than the Sponsor's original figure.\252\ The 
Sponsor argues that while this adjustment is non-negligible, it would 
not materially change the Sponsor's conclusions.\253\
---------------------------------------------------------------------------

    \251\ See Bitwise Submission II, supra note 9, at 43.
    \252\ See id. at 43-44. See also Bitwise Submission VI, supra 
note 9, at 17.
    \253\ See Bitwise Submission II, supra note 9, at 44.
---------------------------------------------------------------------------

    The commenter that raised the likely mix of real and fake volume 
asserts in response to the Sponsor's argument that it ``seems a bit too 
pat an answer'' for the Sponsor to essentially focus on three large 
platforms that have mostly fake volume and conclude that any real 
portion of the volume that the Sponsor identified as fake is too small 
to matter.\254\ This commenter argues that the Sponsor's position 
ignores the hundreds of smaller platforms that might have real volume 
and that might, in the aggregate, make up a notable amount of total 
volume.\255\ This commenter represents that three small platforms that 
were not part of the Sponsor's analysis lost over $200 million in 
investor funds and argues that, if the vast majority of platforms have 
entirely fake volume or too little volume to matter, it could not be 
the case that these three platforms obtained

[[Page 55398]]

over $200 million in client funds to lose or steal.\256\
---------------------------------------------------------------------------

    \254\ See Blake Letter II, supra note 9.
    \255\ See id.
    \256\ See id.
---------------------------------------------------------------------------

    Finally, the Sponsor asserts that the fake or non-economic trading 
volume does not influence price discovery in the ``real'' bitcoin spot 
market represented by the ten identified platforms.\257\ According to 
the Sponsor, the only ways that prices on platforms with fake volume 
could influence prices on platforms with real volume are: (1) If 
arbitrage exists between platforms with fake volume and the ``real'' 
spot market, thus spreading the impact of the ``fake'' platforms' 
prices; or (2) if market participants take prices on platforms with 
fake volume as a legitimate market signal and adjust their view of the 
market as a result.\258\ The Sponsor argues that arbitrage cannot exist 
between two platforms if one platform does not have real and meaningful 
liquidity.\259\ Therefore, according to the Sponsor, platforms with a 
preponderance of fake volume cannot and do not participate in the 
coordinated central liquidity pool or ``automatically influence'' the 
consolidated price just by having a different price.\260\
---------------------------------------------------------------------------

    \257\ See Bitwise Submission II, supra note 9, at 2.
    \258\ See id. at 69.
    \259\ See id.
    \260\ See id.
---------------------------------------------------------------------------

    With respect to whether market participants view platforms with 
fake volume as providing legitimate market signals, the Sponsor asserts 
that a ``preponderance of the evidence'' suggests that investors do not 
view prices or volumes on platforms with fake volume as legitimate 
market signals.\261\ Instead, according to the Sponsor, ``real 
investors simply ignore these fake exchanges.'' \262\ In support of its 
argument, the Sponsor represents that all regulated financial products, 
including regulated bitcoin futures in the United States and listed 
bitcoin ETPs in Europe, draw prices almost exclusively from a subset of 
the bitcoin platforms that the Sponsor identifies as having real 
volume.\263\ The Sponsor states that Coinbase Pro has the highest 
volume amongst platforms used for pricing regulated bitcoin products, 
but was ranked as the 37th largest platform by average daily volume on 
coinmarketcap.com in April 2019.\264\ According to the Sponsor, the 
absence of any of the platforms with larger reported volumes from the 
pricing mechanisms for regulated financial products suggests that the 
institutional investor marketplace understands that real price 
discovery does not take place on these platforms and chooses to ignore 
them.\265\
---------------------------------------------------------------------------

    \261\ See id. at 69, 71.
    \262\ Id. at 71.
    \263\ See id. at 69.
    \264\ See id.
    \265\ See id. The Sponsor identifies the current pricing sources 
for CME bitcoin futures, CFE bitcoin futures, XBT Bitcoin Tracker 
One, and Amun Bitcoin ETF, and represents that these are all a 
subset of the platforms that the Sponsor identifies as ``real.'' See 
id. at 69-70.
---------------------------------------------------------------------------

    In further support of its argument, the Sponsor asserts that 
leading digital asset arbitrage and execution-focused firms track only 
those platforms that the Sponsor identifies as having real volume.\266\ 
The Sponsor represents that, for example, a digital asset dealer and 
trading platform, SFOX, tracks prices on only eight platforms, all of 
which are among the ten platforms that the Sponsor identifies as having 
real volume.\267\ The Sponsor asserts that, as a leading digital asset 
dealer, SFOX has every incentive to identify as many arbitrage 
opportunities as possible, so its focus on these platforms ``is 
telling.'' \268\ Finally, the Sponsor argues that data aggregator 
league tables are extremely volatile and that the volatility of the 
league tables ``stretches the boundaries of credulity.'' \269\ 
According to the Sponsor, volatility in reported volume rank has 
``historically strengthened'' the market's understanding that these 
platforms are fake and ``can safely be ignored.'' \270\
---------------------------------------------------------------------------

    \266\ See id. at 70.
    \267\ See id.
    \268\ See id. With respect to the two platforms that the Sponsor 
identifies as ``real'' platforms but SFOX does not include, Poloniex 
and Bitfinex, the Sponsor states that it ``guesses'' that SFOX 
excludes these because of difficulties conducting arbitrage. See id. 
at 70 n.182.
    \269\ See id. at 71. The Sponsor represents that the spot 
bitcoin platform Fcoin had $12 million, $802 million, and $1.7 
billion reported average daily volume in February, March, and April 
2019, respectively. See id. The Sponsor argues that it is ``hard to 
believe'' this rise in volume. See id.
    \270\ See id.
---------------------------------------------------------------------------

    One commenter states that, in a global digital asset market, if 
prices move on platforms with allegedly fake volume, the platforms with 
``good'' volume must follow or experience losses.\271\ Another 
commenter states that the bitcoin market is global and interconnected, 
and that if 95% of platforms are reporting fake volume, then it is 
unwise for the proposed ETP to be based on the remaining 5%.\272\
---------------------------------------------------------------------------

    \271\ See Arssov Letter, supra note 6.
    \272\ See C. Ross Letter, supra note 6.
---------------------------------------------------------------------------

(ii) Analysis
    The Sponsor asserts that 95% of reported bitcoin spot volume 
represents fake or non-economic trading, yet bases the proposed ETP on 
a set of platforms that the Sponsor has identified as representing real 
volume, will use these platforms for NAV and IIV pricing, and argues 
that this ``real'' portion of the bitcoin market is uniquely resistant 
to manipulation and not affected by the other 95%.\273\ The Sponsor and 
commenters recognize that a significant amount of fraudulent, 
manipulative, fake, or otherwise non-economic trading activity has 
occurred in the bitcoin market.\274\ Because Section 6(b)(5) of the 
Exchange Act requires that the proposal must be designed ``to prevent 
fraudulent and manipulative acts and practices,'' NYSE Arca and the 
Sponsor must show in this case that this fraudulent, manipulative, 
fake, or otherwise non-economic trading activity in the broader bitcoin 
market does not affect the smaller ``real'' portion of the bitcoin 
market on which the proposed ETP is based. Therefore, as a threshold 
matter, before discussing the Sponsor's methods of analysis or its 
conclusions regarding which platforms represent ``real'' trading 
volume, the Commission considers whether the record supports the 
Sponsor's assertion that ``fake volume does not influence price 
discovery in the real bitcoin spot market.'' \275\ In the absence of 
this showing, NYSE Arca and the Sponsor will not be able to establish 
that the identified ``real'' bitcoin market is uniquely resistant to 
fraud and manipulation, because prices based on fraudulent and 
manipulative activity on platforms with fake or non-economic volume 
could be used to affect prices on the identified ``real'' platforms.
---------------------------------------------------------------------------

    \273\ See supra notes 172, 257, and accompanying text.
    \274\ See supra notes 69-73, 176-186 and accompanying text. The 
Commission notes that while the Sponsor provides a response to a 
discussion in the Winklevoss Order about certain commenters and the 
concerns they raised about specific instances of manipulation (see 
Bitwise Submission III, supra note 9, at 41, 45, 49), those comments 
are not part of the record of the current proposed rule change under 
consideration.
    \275\ See Bitwise Submission II, supra note 9, at 2.
---------------------------------------------------------------------------

(A) Influence of Prices on Platforms With Fake or Non-Economic Volume 
on Prices on Platforms With ``Real'' Volume
    NYSE Arca and the Sponsor have failed to support the Sponsor's 
assertions that the prices on platforms with fake volume do not 
influence prices on the ``real'' platforms. In particular, the record 
contains no data on where in the bitcoin market price formation occurs 
and whether or not price movements on the ``real'' spot platforms 
evidence correlation with price movements on the platforms with 
``fake'' or non-economic volume, with one set of platforms moving at a 
later time than the other (i.e., a ``lead-lag

[[Page 55399]]

relationship''). Without data to show the lead-lag relationship between 
prices on the two sets of platforms or any evidence about the 
directionality of the lead-lag relationship--which might indicate that 
changes in prices on platforms with fake volume are or are not leading 
to changes in prices on the ``real'' platforms--the Commission has no 
basis on which to conclude that prices on the ``real'' platforms are 
insulated from prices in the rest of the market. Thus the Commission 
cannot conclude that it would be appropriate to consider the nature of 
these platforms alone in an analysis of whether the bitcoin market is 
uniquely resistant to manipulation.
    The Sponsor makes many unsupported, conclusory statements to 
support its contention that ``everyone knows where the real market 
is.'' \276\ The Sponsor argues that arbitrage ``cannot exist'' between 
platforms with real volume and platforms with a preponderance of fake 
volume,\277\ without presenting any data or real-world examples that 
might indicate the presence or absence of arbitrage between such 
platforms. Moreover, the Sponsor's contention that such arbitrage 
cannot exist rests on an assumption that platforms with a 
``preponderance of fake volume'' do not have any ``real and meaningful 
liquidity'' that could support arbitrage,\278\ without support for that 
assumption. As discussed further below, the Sponsor acknowledges that 
there is a gray area between platforms with entirely real volume and 
platforms with entirely fake volume.\279\ Yet the Sponsor does not 
address whether the presence of real volume on platforms with a 
significant amount of fake volume would significantly affect pricing.
---------------------------------------------------------------------------

    \276\ See id. at 71. See also supra notes 257-270 and 
accompanying text.
    \277\ See supra notes 259-260 and accompanying text.
    \278\ See supra notes 259-260 and accompanying text.
    \279\ See supra note 242 and accompanying text. See infra notes 
305-314 and accompanying text for discussion of whether the Sponsor 
has identified all ``real'' volume on the bitcoin spot platforms 
included in its analysis and whether ``real'' volume on other 
portions of the bitcoin spot market might undercut its assertions.
---------------------------------------------------------------------------

    In addition, the Sponsor concludes that the evidence that it cites 
``suggests'' that investors do not look to platforms with fake volume 
for legitimate market signals, but does not persuasively address 
alternative explanations for the cited evidence that would lead to a 
different conclusion.\280\ The Sponsor looks at which platforms other 
providers of financial products select for their pricing 
mechanisms,\281\ but other providers' reliance on certain bitcoin 
trading platforms does not demonstrate that prices on platforms with 
purportedly fake volume do not influence prices on the purportedly 
``real'' platforms. The Sponsor also fails to address alternative 
reasons for these products' reliance on certain platforms, including 
the presence of a degree of regulation on these platforms. Moreover, 
the platforms used for these pricing mechanisms do not line up exactly 
with the Sponsor's ten identified ``real'' platforms,\282\ indicating 
that at least some institutional market participants do not agree that 
all of the Sponsor's identified ``real'' platforms provide the most 
reliable prices. Further, while the Sponsor points to the platforms 
tracked by digital asset dealer and trading platform SFOX, the overlap 
with the Sponsor's ``real'' platforms is anecdotal evidence at best, 
and any incentives SFOX may have to identify arbitrage opportunities is 
not a substitute for an analysis of whether prices on certain platforms 
have an influence on general market pricing.\283\ And while the 
volatility of data aggregator league tables raises questions about 
reported trading volume that may be relevant to probe,\284\ mere belief 
that the reported trading volume is questionable is no substitute for 
data-driven analysis of how other market participants would adjust 
their pricing in response to prices on other platforms, even if they 
agree that those platforms have predominantly--but not entirely--fake 
volume. Further, the Sponsor's arguments rely on a description of how 
institutional market participants behave, but the Sponsor does not 
provide information regarding what portion of the market is made up of 
institutional versus retail participants. The Commission also notes 
that while the Sponsor asserts that coinmarketcap.com is the most 
widely cited source for bitcoin volume,\285\ as of October 6, 2019, 
coinmarketcap.com does not separate ``real'' versus ``fake'' platforms 
and prices.\286\ This shows that the focus on the Sponsor's identified 
``real'' platforms or a subset thereof, to the exclusion of the vast 
majority of platforms with reported volume on data aggregators such as 
coinmarketcap.com, is not necessarily shared by other participants in 
the bitcoin market.
---------------------------------------------------------------------------

    \280\ See supra notes 261-270 and accompanying text.
    \281\ See supra notes 263-265 and accompanying text.
    \282\ See supra note 265.
    \283\ See supra notes 266-268 and accompanying text.
    \284\ See supra notes 269-270 and accompanying text.
    \285\ See Bitwise Submission I, supra note 6, at 23.
    \286\ As of October 6, 2019, coinmarketcap.com lists the top 100 
digital asset platforms by reported volume and by ``adjusted 
volume,'' the latter of which it represents is ``[v]olume from spot 
markets excluding markets with no fees and transaction mining.'' See 
Top 100 Currency Exchanges by Trade Volume, CoinMarketCap, available 
at https://coinmarketcap.com/rankings/exchanges (last visited Oct. 
6, 2019). Although the ``adjusted volume list indicates some 
adjustment for certain types of trading activity, the identification 
of at least 100 platforms with ``adjusted volume'' differs 
considerably from the Sponsor's identification of only ten ``real'' 
platforms.
---------------------------------------------------------------------------

    For the reasons above, the Commission does not believe that NYSE 
Arca and the Sponsor have demonstrated that prices on platforms with 
fake or non-economic volume do not influence prices on platforms with 
real volume. Given the Sponsor's claims about the prevalence of fake or 
non-economic trading activity within the overall bitcoin market, the 
Commission considers this lack of proof to fundamentally undercut the 
Sponsor's contention that the ``real'' bitcoin market is uniquely 
resistant to fraudulent and manipulative activity.\287\
---------------------------------------------------------------------------

    \287\ If the platforms with fake or non-economic volume cannot 
be disambiguated from the platforms with ``real'' volume, this also 
undercuts the Sponsor's assertions about whether NYSE Arca has a 
surveillance-sharing agreement with a significant, regulated market. 
For further discussion, see infra Section III.B.3.
---------------------------------------------------------------------------

(B) The Sponsor's Identification of Platforms With Predominantly 
``Real'' Volume
    NYSE Arca and the Sponsor have not provided sufficient data to 
substantiate the Sponsor's claims that it has identified the ten 
platforms that have ``real'' volume, as distinguished from those 
platforms dominated by fake or non-economic trading \288\ and the 
Sponsor's data analysis is incomplete or inconsistent and limits the 
Commission's ability to evaluate the Sponsor's claims.\289\ For 
example, the Sponsor asserts that its data analysis of trade size 
distribution only includes trade sizes of 0 to 10 bitcoins because the 
vast majority of trade volume occurs in the lower range and because the 
Sponsor finds the histogram presentation of this range ``visually 
helpful.'' \290\ As two commenters recognize, however, this data 
presentation cuts off larger orders that occur in the bitcoin market, 
and the inclusion of larger orders could make

[[Page 55400]]

the Sponsor's analysis look materially different.\291\
---------------------------------------------------------------------------

    \288\ See supra notes 172-176, 191-194, 199-203, 211-228, and 
accompanying text.
    \289\ See supra notes 151-156 and accompanying text.
    \290\ See supra note 214 and accompanying text.
    \291\ See supra notes 233, 235, and accompanying text.
---------------------------------------------------------------------------

    Further, the Sponsor admits that the inability to gather 
comprehensive market data ``has made proving the existence of fake 
volume on exchanges in a comprehensive manner difficult.'' \292\ The 
Sponsor acknowledges that its data scraping methodology broke down 
frequently, resulting in gaps in the data that it accounted for in the 
analytical phase,\293\ but does not address what steps it took to 
ensure that these data gaps did not affect its analysis. The use here 
of a single one-week period of data may reflect selection bias and is 
insufficient to reveal the full picture regarding platforms over time 
or during different periods.\294\ While the Sponsor asserts that any 
single week sample would ``exhibit the same characteristics and lead to 
a similar conclusion,'' \295\ the Sponsor has not provided any support 
for this assertion or any explanation why the selected one-week period 
is or is not representative of the properties of the bitcoin spot 
market in other periods. Several commenters also raise questions and 
concerns about the Sponsor's methodology for selecting what data to 
collect and analyze, collecting the data, and analyzing the data.\296\ 
For many parts of the analysis, the Sponsor first looks to the trade 
sizes, volume spikes, and spread patterns for its reference set of 
platforms with BitLicenses, and then compares these to other 
platforms.\297\ The Sponsor makes observations about how trade sizes, 
volume spikes, or spread patterns differ for platforms outside of its 
reference set of platforms with BitLicenses, and assumes that these 
differences are indications of fake or non-economic volume. The Sponsor 
does not appear to acknowledge that there could be other reasons for 
observed differences in trading patterns among the platforms, such as 
artefacts of algorithmic trading. In addition, the Commission notes 
that anecdotal recitations of support for the Sponsor's initial 
analysis in the news or social media are no substitute for full, 
independent analysis or replication of the results.\298\
---------------------------------------------------------------------------

    \292\ See supra note 191.
    \293\ See supra note 193 and accompanying text.
    \294\ See supra notes 211-212 and accompanying text. See also 
supra note 232 and accompanying text (asserting that the time period 
used is a ``very short snapshot'' and a longitudinal picture is 
lacking).
    \295\ Bitwise Submission II, supra note 9, at 19.
    \296\ See supra notes 195-198, 204-210, 231-236, and 
accompanying text.
    \297\ See supra notes 215-217, 219-221, 223-227, and 
accompanying text.
    \298\ See supra notes 182-183 and accompanying text. But see 
supra notes 187-190 and accompanying text (questioning the Sponsor's 
findings in its initial analysis).
---------------------------------------------------------------------------

    The Commission notes that the Sponsor relies heavily on conclusory 
statements that are insufficient to support its findings. For example, 
the Sponsor's assertions that the findings in its initial analysis are 
consistent with the ``common institutional understanding of the true 
nature of the actual market'' are conclusory and unsupported.\299\ The 
Commission notes that several commenters raise questions about specific 
platforms that the Sponsor identifies as having ``real'' volume, 
casting doubt on the contention that there is common understanding of 
the ``real'' market.\300\ With respect to the Sponsor's initial 
selection of platforms to analyze, the Sponsor states that its list of 
platforms became stale quickly, but asserts that its ``core analysis'' 
remains relevant.\301\ This representation simply assumes without any 
support that significant volume on new platforms would be fake or non-
economic volume, and it provides the Commission with no basis to 
conclude that this would be the case. Similarly, the Sponsor's 
statement that any incremental volume in the OTC dark pool market is 
not a significant fraction of the spot market and would mostly lead to 
double-counting is conclusory, relies solely on anecdotal 
evidence,\302\ and is inconsistent with a commenter's estimate of the 
size of the OTC bitcoin market.\303\ Moreover, with respect to the 
Sponsor's argument that the NYAG's inquiry concerning Bitfinex's 
operator does not alter the Sponsor's conclusion that Bitfinex has real 
volume, the Sponsor makes the conclusory and insufficient assertion 
that it found no evidence in legal documents contradicting this 
finding, without describing the types of evidence it found and why such 
evidence would not change the Sponsor's analysis.\304\
---------------------------------------------------------------------------

    \299\ See supra note 186 and accompanying text.
    \300\ See supra notes 237-240 and accompanying text.
    \301\ See supra note 201 and accompanying text.
    \302\ See supra notes 202-203 and accompanying text.
    \303\ See supra note 208 and accompanying text (asserting that 
U.S.-based OTC volume in bitcoin may be as high as $500 million a 
day; the Commission notes that this volume is comparable to the $554 
million in total daily volume for the same period across all ten of 
the ``real'' platforms). See also Registration Statement, supra note 
31, at 20 (``OTC trading tends to be in large blocks of bitcoin.'').
    \304\ See supra note 230 and accompanying text; infra notes 331-
338 and accompanying text (discussing, among other things, the NYAG 
allegations). See also supra note 238 and accompanying text 
(asserting that the recent actions regarding Bitfinex raises 
questions about why it was ever included in the Sponsor's list of 
``real'' platforms).
---------------------------------------------------------------------------

    Further, the Sponsor has not shown that it has identified all 
``real'' volume on the bitcoin spot platforms included in its analysis. 
In response to a commenter, the Sponsor acknowledges that there is a 
``gray area'' between platforms with all real volume and all fake 
volume, and that some of the 73 platforms that failed one or more of 
its tests may include some amount of real volume.\305\ The Sponsor 
cites one example, the Gate.io platform, and asserts that Gate.io does 
not have enough volume to meaningfully alter the Sponsor's conclusion, 
even if it was made up of entirely real volume, because Gate.io's 
reported average daily volume in April 2019 of $12 million is 
significantly lower than the $554 million in total daily volume for the 
same period across all ten of the ``real'' platforms.\306\ However, the 
Sponsor does not acknowledge that the average daily volume per platform 
within its set of ten selected platforms was $55.4 million in April 
2019, or that $12 million is higher than the average daily volume for 
two of the ten platforms and almost as much average daily volume as a 
third.\307\ This shows that the inclusion of an additional $12 million 
in real volume is not immaterial to the Sponsor's claims. Further, the 
Sponsor does not consider the possibility that any other platform with 
volume comparable to that found on Gate.io would also have a material 
amount of ``real'' trading.
---------------------------------------------------------------------------

    \305\ See supra notes 241-243 and accompanying text.
    \306\ See supra notes 244-245 and accompanying text.
    \307\ See Bitwise Submission II, supra note 9, at 35 (providing 
a table with the average daily volume on each of the ten ``real'' 
platforms for April 2019).
---------------------------------------------------------------------------

    The Sponsor then discusses the HitBTC, Huobi, and OKEx platforms, 
because, according to the Sponsor, these were the only platforms that 
were cited by ``the public'' as having ``real-world footprints'' that 
have ``meaningful'' volume but that were excluded from the Sponsor's 
list of ``real'' platforms.\308\ Reliance on the set of platforms that 
``the public'' raised to set the scope for further analysis presents an 
incomplete picture. The Sponsor does not describe any means by which it 
might know what motivations other individuals had to identify 
particular platforms as having a real-world footprint or how extensive 
those individuals' efforts were to identify other platforms for

[[Page 55401]]

consideration. Moreover, the Sponsor does not define what it considers 
to be ``meaningful'' volume. The Commission notes that the April 2019 
average daily volume for each of HitBTC, Huobi, and OKEx is 
significantly higher than the April 2019 average daily volume for all 
but one of the identified ``real'' platforms.\309\
---------------------------------------------------------------------------

    \308\ See supra notes 246-247 and accompanying text.
    \309\ See supra notes 247, 307.
---------------------------------------------------------------------------

    The Sponsor's analysis of HitBTC and OKEx relies on circular 
reasoning and uses evidence that suggests the presence of fake or non-
economic trading to conclude that the trading volume on these platforms 
is ``almost entirely fake,'' without discussing how the presence of 
some real volume affects the results.\310\ The Sponsor further 
dismisses volume on Huobi as fake based on trade size histograms over 
time, suggesting that changes in the trade size histograms after the 
Sponsor's initial analysis became public indicate that wash traders 
adjusted their trade size signatures to avoid the Sponsor's detection 
methods.\311\ The Sponsor's assertion is conclusory and does not 
address the possible presence of real volume on Huobi. Moreover, the 
Commission notes that, if market participants changed their trading 
behavior to avoid detection of fake or non-economic trading after the 
Sponsor's first analysis became public, the Sponsor's methodology may 
have been tainted when it conducted its later analysis, and these 
efforts to disguise fake or non-economic volume may prevent the Sponsor 
or market participants from distinguishing ``real'' volume from 
``fake'' volume in the future.
---------------------------------------------------------------------------

    \310\ See supra notes 248-249 and accompanying text.
    \311\ See supra note 250 and accompanying text.
---------------------------------------------------------------------------

    The Sponsor then considers estimates from third-party researchers 
about the amount of real volume on these three platforms and 
acknowledges that the estimated amounts might increase the Sponsor's 
calculated real volume in the spot market by a non-negligible amount, 
but asserts that this volume would not ``materially'' change the 
Sponsor's conclusions.\312\ The Sponsor's assertion is unsupported and 
does not address that the researchers' estimated real volume, at 
between approximately $16 million and $25 million per platform, is 
similar to the average daily volume reported for the individual 
``real'' platforms. The presence of this volume indicates that there 
may be more non-negligible real volume on other platforms, but the 
Sponsor does not explain whether or how more real volume from other 
platforms would change its analysis.\313\ Instead, the Sponsor merely 
asserts in conclusory fashion that the additional real volume, as 
estimated by the third-party researchers, would not ``materially'' 
impact its analysis and does not address how real volume on a platform 
dominated by fake or non-economic volume would interact with the 
market.
---------------------------------------------------------------------------

    \312\ See supra notes 251-253 and accompanying text.
    \313\ The Commission notes that a commenter questions the 
Sponsor's focus on three large platforms and argues that the Sponsor 
has ignored smaller platforms that might, in the aggregate, contain 
a notable amount of real volume. See supra notes 254-256 and 
accompanying text.
---------------------------------------------------------------------------

    Finally, NYSE Arca and the Sponsor do not address the potential 
effect on the ten identified platforms of real volume on other portions 
of the bitcoin spot market not included in the set of 83 platforms that 
the Sponsor analyzed. For example, the Sponsor does not consider real 
volume on newer platforms or the OTC market and how such volume would 
affect its analysis. Moreover, while the Sponsor excludes South Korean 
platforms on the basis that trading volumes on those platforms are 
isolated from the globally connected market due to capital controls, 
this does not mean that the trading volume is not real.\314\ The 
Sponsor also does not indicate whether trading on those portions of the 
market represents ``real'' trading or fake or non-economic trading, or 
address whether pricing on those segments of the market would affect 
prices on the ``real'' platforms.
---------------------------------------------------------------------------

    \314\ See supra note 228 and accompanying text. The Commission 
notes that the Sponsor does not clearly explain how it handled the 
South Korean platforms in its analysis. While the Sponsor states 
that it has excluded these platforms, it still includes the trade 
size histograms, volume graphs, and spread graphs for the South 
Korean platforms, and its statement that 73 platforms have failed 
one or more of its tests includes the South Korean platforms among 
the 73. In contrast, when describing its first analysis, the Sponsor 
indicates that it has excluded the South Korean platforms at the 
outset. See supra note 181.
---------------------------------------------------------------------------

    For these reasons, the Commission determines that the record does 
not support a conclusion that the Sponsor has identified a segment of 
the bitcoin spot market, representing real volume and forming the basis 
of the Trust's NAV and IIV pricing, that is uniquely resistant to 
manipulation.\315\
---------------------------------------------------------------------------

    \315\ For discussion about how the Sponsor's analysis impacts 
arguments about whether the bitcoin futures market is a market of 
significant size, see infra Section III.B.3.
---------------------------------------------------------------------------

(d) Features of the Bitwise Bitcoin ETF Trust
(i) Representations Made and Comments Received
    NYSE Arca represents that the Sponsor believes that several 
additional features of the structure of the Trust would provide unique 
resistance to fraudulent and manipulative practices.\316\ The Sponsor 
asserts that, because the Trust's NAV is based on substantially all 
``real'' spot bitcoin trading volume and is volume-weighted, any 
attempt to manipulate the NAV must involve a majority of spot bitcoin 
trading volume over a significant period of time.\317\ The Sponsor also 
asserts that the unique design of the Bitwise Daily Bitcoin Reference 
Price, and thus the Trust's NAV, the exclusive use of in-kind creations 
and redemptions, and the decision to accrue fees in bitcoin, provide 
unique resistance to short term attempts at manipulation.\318\
---------------------------------------------------------------------------

    \316\ See Notice and OIP, supra note 7, 84 FR at 23133. See also 
Bitwise Submission III, supra note 9, at 13 (arguing that the 
Trust's pricing methodology makes market manipulation of the NAV 
more difficult, because a bad actor must manipulate the majority of 
trading volume to impact the price, and easier to identify, because 
the manipulative activity must be repeated to have a significant 
effect). See supra Section III.B.1(b) for additional discussion 
about how the ``exchange-tradability'' of bitcoin and the nature of 
the bitcoin market impact the proposed ETP's resistance to 
manipulation.
    \317\ See Notice and OIP, supra note 7, 84 FR at 23133.
    \318\ See id.
---------------------------------------------------------------------------

    The Sponsor represents that the Trust will value its shares daily 
based on the Bitwise Daily Bitcoin Reference Price, which is based on 
prices drawn from selected platforms that represent substantially all 
of the economically significant spot trading volume on global bitcoin 
platforms, excluding those in countries that impose capital 
controls.\319\ The Sponsor describes the calculation of the Bitwise 
Daily Bitcoin Reference Price separately from its description of how it 
has identified the ``real'' market for bitcoin, as discussed 
above.\320\ The Sponsor states that to calculate the Bitwise Daily 
Bitcoin Reference Price, it relies on a methodology that begins with 
the Sponsor's tracking of over 200 on-line digital-asset trading 
platforms and eliminating a significant portion of those platforms, 
based on a number of factors.\321\ According to the Sponsor, these 
factors serve to eliminate platforms that, for example, are domiciled 
in emerging market countries or countries that have capital controls; 
lack a functioning and stable Application Programming Interface \322\

[[Page 55402]]

for the transmission of price and volume data; have issues with 
significant downtime, problems with customer withdrawals, or known 
security issues; are or may be subject to extraordinary legal or 
regulatory activity; or do not have at least $1 million average daily 
volume for bitcoin-fiat or bitcoin-stablecoin trading pairs over the 
past calendar quarter.\323\ The Sponsor represents that, at least 
quarterly, the Bitwise Crypto Index Committee reviews published trading 
data from all platforms that pass this screening process and removes 
platforms that show persistent signs of artificial or inflated 
volume.\324\ The Sponsor further represents that, through this process, 
it has identified ten platforms to use for the Bitwise Daily Bitcoin 
Reference Price, and has more recently eliminated one platform, 
Bitfinex, due to the recent NYAG inquiry of its operator.\325\
---------------------------------------------------------------------------

    \319\ See id. at 23126, 23128.
    \320\ See supra notes 172-176 and accompanying text.
    \321\ See Notice and OIP, supra note 7, 84 FR at 23131.
    \322\ An ``Application Programming Interface,'' or ``API,'' is 
``a set of clearly defined methods of communication between various 
software components which can make it easier to develop a computer 
program by providing all the building blocks, which are then put 
together by programmers.'' Securities Exchange Act Release No. 82873 
(Mar. 14, 2018), 83 FR 13008, 13028 n.158 (Mar. 26, 2018) 
(Transaction Fee Pilot for NMS Stocks Proposing Release) (File No. 
S7-05-18).
    \323\ See Notice and OIP, supra note 7, 84 FR at 23131.
    \324\ See id. The Sponsor states that this analysis includes a 
review of bid/ask spreads, actual claimed executed trades with price 
and volume, and any other factors that the Committee deems relevant. 
See id.
    \325\ See id. at 23130 n.20, 23131.
---------------------------------------------------------------------------

    As noted above, the Sponsor argues that the ten platforms it 
selected for the Bitwise Daily Bitcoin Reference Price's pricing 
mechanism currently account for substantially all of the ``real'' spot 
global volume of bitcoin, excluding capital-controlled countries, 
although the number of platforms and percentage of global volume 
represented is subject to change.\326\ The Sponsor asserts that this 
composition mitigates against idiosyncratic platform risk because the 
failure of any individual platform will not materially affect pricing 
for the Trust.\327\ Moreover, the Sponsor asserts that using a larger 
number of platforms to calculate the NAV supports liquidity of the 
Trust and mitigates idiosyncratic risks that can exist at an individual 
platform over short periods of time.\328\ The Sponsor also asserts that 
the use of a large number of platforms contributing prices to the NAV, 
in a well-arbitraged and fractured market, makes market manipulation 
more difficult because the malicious actor would need to manipulate 
multiple platforms simultaneously or dramatically skew the historical 
distribution of volume to impact the NAV.\329\ The Sponsor further 
asserts that the reliance on substantially all of spot trading volume 
in bitcoin for pricing the Trust increases this difficulty, because 
significantly more capital would be required to attempt to influence 
NAV and it would be difficult to profit from that manipulation.\330\
---------------------------------------------------------------------------

    \326\ See id. at 23131.
    \327\ See id. at 23131-32; Bitwise Submission I, supra note 6, 
at 92. See also Bitwise Submission III, supra note 9, at 171 
(asserting that the Trust's procedures to incorporate prices from a 
large number of spot bitcoin platforms, and allow the Bitwise Crypto 
Index Committee to remove a platform from contributing to prices 
when it faces a disruption, ensures that the Trust's NAV always 
draws prices from platforms trading at a globally integrated price). 
The Sponsor represents that, while in the past trading has been 
disrupted at individual bitcoin platforms, there is no history of 
systemic disruptions across all platforms in the ``modern 
evolution'' of the bitcoin market. See Bitwise Submission III, supra 
note 9, at 171.
    \328\ See Bitwise Submission III, supra note 9, at 127. See also 
Bitwise Submission V, supra note 9, at 2-3 (representing that 
individual platforms may experience idiosyncratic issues, including 
hacking, withdrawal issues, regulatory actions, and legal actions, 
that cause their prices to temporarily detach from the globally 
integrated price when the idiosyncratic issues break or weaken the 
arbitrage mechanism). One commenter asserts that it agrees with the 
Sponsor that a benefit of a multi-platform approach is that it 
minimizes the potential adverse impact of any single platform going 
off-line due to technical problems or other concerns, and mutes the 
impact of potentially manipulated prices or volume stemming from a 
single platform. See Omniex Letter, supra note 9, at 3.
    \329\ See Notice and OIP, supra note 7, 84 FR at 23132; Bitwise 
Submission I, supra note 6, at 96.
    \330\ See Notice and OIP, supra note 7, 84 FR at 23132; Bitwise 
Submission I, supra note 6, at 93, 97.
---------------------------------------------------------------------------

    The Sponsor states that on April 25, 2019, the Bitwise Crypto Index 
Committee voted to immediately remove Bitfinex from the list of 
platforms that contribute prices to the Bitwise Daily Bitcoin Reference 
Price, along with other Bitwise Crypto Indexes, because the NYAG had 
obtained a court order against iFinex Inc., operator of Bitfinex, based 
on allegations of fraudulent conduct.\331\ The Sponsor asserts that the 
removal of Bitfinex was in keeping with the committee's rule to exclude 
platforms subject to extraordinary regulatory action, which requirement 
exists to limit platforms included in the pricing mechanism to those 
that are positive actors in the market and limit the potential for 
interruptions in service or unusual pricing due to government or 
regulatory enforcement actions.\332\ According to the Sponsor, 
extraordinary legal or regulatory action increases the risk that a 
platform will exhibit idiosyncratic pricing issues or have to halt 
withdrawals, shut down, or face other challenges.\333\ The Sponsor 
asserts that the removal of Bitfinex from the pricing mechanism on the 
same day that the extraordinary legal threat emerged suggests that the 
screening rules and ongoing monitoring process are useful, proactive, 
and constructive, and protect the Bitwise Daily Bitcoin Reference Price 
from the ``slightest possibility'' of anomalous pricing arising from 
the developments.\334\ The Sponsor further asserts that heightened 
scrutiny of stablecoins after this incident makes it extremely unlikely 
that the fraudulent printing of a stablecoin asset could easily happen 
in the future.\335\
---------------------------------------------------------------------------

    \331\ See Bitwise Submission III, supra note 9, at 47; Bitwise 
Submission V, supra note 9, at 1. See also Notice and OIP, supra 
note 7, 84 FR at 23130 n.20. The NYAG, which began its investigation 
in November 2018, alleges ``that the operators of the `Bitfinex' 
trading platform, who also control the `tether' virtual currency, 
engaged in a cover-up to hide the apparent loss of $850 million of 
co-mingled client and corporate funds.'' Press Release, New York 
State Office of the Attorney General, Attorney General James 
Announces Court Order Against ``Crypto'' Currency Company under 
Investigation for Fraud (Apr. 25, 2019), available at https://ag.ny.gov/press-release/2019/attorney-general-james-announces-court-order-against-crypto-currency-company. The NYAG further alleges, 
``The filings explain how Bitfinex no longer has access to over $850 
million dollars of co-mingled client and corporate funds that it 
handed over, without any written contract or assurance, to a 
Panamanian entity . . . a loss Bitfinex never disclosed to 
investors. In order to fill the gap, executives of Bitfinex and 
Tether engaged in a series of conflicted corporate transactions 
whereby Bitfinex gave itself access to up to $900 million of 
Tether's cash reserves, which Tether for years repeatedly told 
investors fully backed the tether virtual currency `1-to-1.' ''). 
Id. The NYAG explained, however, that it ``does not seek to enjoin 
or interfere with the orderly operations of Bitfinex or Tether's 
legitimate businesses, if any, including orders by legitimate 
traders on the Bitfinex platform, or legitimate tether holders, to 
redeem their tethers for dollars. Indeed, protecting legitimate 
traders using the Bitfinex platform, and legitimate holders of 
tether, primarily those residing in New York, is why a preliminary 
injunction is necessary now to preserve the status quo pending the 
completion of OAG's investigation.'' Affirmation of Brian M. 
Whitehurst in Support of OAG's Ex Parte Application for an Order 
Pursuant to General Business Law Sec.  354, James v. iFinex, Inc., 
et al., No. 450545/2019, 2019 WL 2176835 (N.Y. Sup. Ct. Apr. 25, 
2019), Doc. No. 1, at para. 96. The court subsequently denied a 
motion to dismiss brought by iFinex Inc. and its related entities. 
James v. iFinex Inc., et al., No. 450545/2019, 2019 WL 3891172 (N.Y. 
Sup. Ct. Aug. 19, 2019). iFinex Inc. and its related entities have 
appealed the court's denial of their motion to dismiss. Notice of 
Appeal, James v. iFinex Inc., et al., No. 450545/2019 (N.Y. Sup. Ct. 
Aug. 19, 2019), Doc. No. 117.
    \332\ See Bitwise Submission V, supra note 9, at 1.
    \333\ See id. at 3.
    \334\ See id. at 5-6. See also id. at 3 (asserting that the 
benefit of proactively removing Bitfinex as a pricing source is that 
it protects against potential short-term downstream impacts if a 
negative idiosyncratic event occurs in the future). One commenter 
states that the Sponsor's reasons for removing Bitfinex are sound 
and follow the outlined index procedures, but raise a flag. See 
Blake Letter II, supra note 9.
    \335\ See Bitwise Submission III, supra note 9, at 47.
---------------------------------------------------------------------------

    With respect to the removal of Bitfinex, which represented 14.1% of 
all ``real'' spot bitcoin volume in April 2019, the Sponsor argues that 
``the loss

[[Page 55403]]

of any single exchange does not impact the Bitwise Daily Bitcoin 
Reference Price in a meaningful way.'' \336\ The Sponsor asserts that, 
with prices tightly aligned, removing one or two platforms would not 
meaningfully impact the calculated price.\337\ In addition, the Sponsor 
states that, while having more platforms to calculate the price is 
better, there are diminishing returns for each additional platform and 
at some point it is enough to calculate a good price and not be exposed 
to idiosyncratic risk, especially with a pricing methodology that 
mitigates against the impact of outlier prices.\338\
---------------------------------------------------------------------------

    \336\ See Bitwise Submission V, supra note 9, at 4.
    \337\ See id. (representing that the average deviation in price 
as compared to the consolidated price in 2019 was 0.11% for 
Bitfinex, which falls in the middle of the 0.05% to 0.20% range seen 
across the ten ``real'' platforms).
    \338\ See id. at 4-5.
---------------------------------------------------------------------------

    The Sponsor asserts that the procedures by which it relies on the 
prices and volumes from the selected platforms to calculate the Bitwise 
Daily Bitcoin Reference Price are designed to protect the price, and 
thereby the Trust's NAV, from potential manipulation.\339\ The Sponsor 
argues that the use of six consecutive five-minute segments over a 
thirty-minute period means that malicious actors would need to sustain 
efforts to manipulate the market over an extended period of time or 
replicate efforts multiple times, which could trigger review by 
platforms, market participants, and regulators.\340\ The Sponsor 
asserts that the use of a median price eliminates the ability of 
outlier prices to impact the NAV, because the methodology 
systematically excludes outliers from the NAV calculation.\341\ The 
Sponsor also asserts that the use of a volume-weighted median, instead 
of a traditional median, protects against attempts to manipulate the 
NAV by executing multiple low-dollar trades, because any manipulation 
attempt would have to involve a majority of global spot bitcoin volume 
in a five-minute window to impact the pricing mechanism.\342\ According 
to the Sponsor, the methodology it uses for the Bitwise Daily Bitcoin 
Reference Price is similar to the settlement pricing methodology for 
the CME CF Bitcoin Reference Rate used for CME futures, which the 
Sponsor represents has documented protection against the impact of 
pricing variance.\343\ Finally, the Sponsor asserts that the 
``carefully designed lag'' between the strike time of the NAV at 4:00 
p.m. E.T. and the time the NAV is distributed allows time for the 
Sponsor to algorithmically and manually review contributed prices for 
any anomalous behavior and correct unusual pricing if it occurs.\344\
---------------------------------------------------------------------------

    \339\ See Notice and OIP, supra note 7, 84 FR at 23131.
    \340\ See id.; Bitwise Submission I, supra note 6, at 98 
(asserting that the extended thirty-minute period supports 
Authorized Participant activity by capturing volume over a longer 
time period, rather than forcing Authorized Participants to mark an 
individual close or auction). See also Omniex Letter, supra note 9, 
at 4 (asserting that the Trust's NAV process is uniquely resistant 
to manipulation because a bad actor would need to manipulate 
multiple platforms over an extended period of time to impact the 
NAV).
    \341\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise 
Submission I, supra note 6, at 99. See also Bitwise Submission III, 
supra note 9, at 127 (asserting that the Sponsor's pricing 
methodology is designed to systematically exclude aberrant prices as 
an extra protection against idiosyncratic platform risks at 
individual platforms).
    \342\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise 
Submission I, supra note 6, at 99.
    \343\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise 
Submission I, supra note 6, at 99; Bitwise Submission III, supra 
note 9, at 15. The Sponsor argues that a cited study shows the 
protective qualities of using volume-weighted median pricing, and 
that while the Sponsor's approach differs in drawing from a larger 
number of platforms and using a shorter time window, the shorter 
time window maintains the protective qualities of the approach while 
improving the timeliness of the NAV price. See Bitwise Submission I, 
supra note 6, at 99 (citing Andrew Paine and William J. Knottenbelt, 
Imperial College Centre for Cryptocurrency Research and Engineering, 
``Analysis of the CME CF Bitcoin Reference Rate and CME CF Bitcoin 
Real Time Index'' (Nov. 14, 2016)).
    \344\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission I, supra note 6, at 100. The Sponsor notes that the NAV 
would generally be distributed by 5:30 p.m. E.T. See Notice and OIP, 
supra note 7, 84 FR at 23133; Bitwise Submission I, supra note 6, at 
100.
---------------------------------------------------------------------------

    The Sponsor asserts that the Trust's method of calculating the NAV 
differs from that proposed for use by the Winklevoss Bitcoin Trust, and 
that these differences help make the NAV calculation and the Trust 
itself uniquely resistant to manipulation.\345\ One commenter asserts 
that the current proposal is better than that discussed in the 
Winklevoss Order because the Trust proposes to use many bitcoin 
platforms that account for a majority of total global volume of 
bitcoin, as compared to using a small related platform that represents 
perhaps 1% of global bitcoin trading.\346\
---------------------------------------------------------------------------

    \345\ See Bitwise Submission III, supra note 9, at 81. The 
Commission notes that the Sponsor discusses several points of 
comparison between the specifics of its proposal and the Winklevoss 
Trust, see supra note 9, at 75, 77, 79, and 81, but these particular 
comparisons are not relevant to the question of whether the proposal 
is consistent with the standards of the Exchange Act.
    \346\ See Anonymous Letter I, supra note 6. This commenter 
favorably compares the proposal to United States bitcoin futures, 
which also use a ``tiny'' number of platforms for their pricing 
methodology, and the now-withdrawn proposal from Cboe BZX Exchange, 
Inc., for another bitcoin ETP (the VanEck SolidX Bitcoin Trust) that 
would have used prices from a few OTC desks, when there is no reason 
to use OTC pricing due to lack of an alternative. See id. See also 
Securities Exchange Act Release No. 85119 (Feb. 13, 2019), 84 FR 
5140 (Feb. 20, 2019) (Notice of Filing of Proposed Rule Change to 
List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck 
SolidX Bitcoin Trust, Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares) (SR-CboeBZX-2019-004).
---------------------------------------------------------------------------

    Other commenters also support the Sponsor's proposed method of 
calculating the Trust's NAV.\347\ One commenter argues that to the 
extent that the NAV becomes aberrant, stale, or incorrect, the real 
price discovery would occur in the proposed ETP.\348\ This commenter 
cites as an example ETPs with foreign-listed equities that have NAVs 
that are out-of-sync with the trading day in the United States.\349\ 
However, another commenter points to risks disclosed in a prior version 
of the Trust's registration statement that states that the NAV may not 
always correspond to market price and investors may be adversely 
affected.\350\
---------------------------------------------------------------------------

    \347\ See Omniex Letter, supra note 9, at 3-4; Donostia Ventures 
Letter, supra note 9, at 3-4.
    \348\ See Donostia Ventures Letter, supra note 9, at 3-4.
    \349\ See id.
    \350\ See C. Ross Letter, supra note 6.
---------------------------------------------------------------------------

    The Sponsor asserts that its methodology for calculating the 
Bitwise Real-Time Bitcoin Price, which will be the basis for the 
Trust's IIV, is similar to the approach used for the NAV, but brought 
into real time.\351\ The Sponsor argues that the use of ten platforms 
to calculate the Bitwise Real-Time Bitcoin Price mitigates against 
idiosyncratic platform risk and against pricing disruptions at an 
individual platform due to a halt, hacking, or data error.\352\ The 
Sponsor also argues that the use of contributory weights based on the 
trailing thirty-minute volume, rather than the last trade size or 
volume over a short time period, protects against attempts to 
manipulate the IIV by capturing more volume, while using the price of 
the most recent trade on each platform ensures the timeliness of the 
IIV.\353\ The Sponsor asserts that the use of a median price eliminates 
the influence of outlier prices and the use of a volume-weighted median 
protects against attempts to manipulate the price by executing multiple 
low-dollar trades.\354\ According to the Sponsor, it expects the IIV 
will closely track the globally integrated bitcoin price on the

[[Page 55404]]

selected platforms, but that the IIV may differ from the NAV due to the 
IIV's use of real-time prices.\355\ The Sponsor asserts that this will 
not create confusion in the marketplace, because Authorized 
Participants are the only investors that interact with the NAV and the 
Sponsor will communicate clearly its NAV calculation method.\356\
---------------------------------------------------------------------------

    \351\ See Bitwise Submission I, supra note 6, at 174-181. The 
Commission notes that the Sponsor uses the terminology ``Indicative 
Index Value'' in Bitwise Submission I, but the terminology ``Bitwise 
Real-Time Bitcoin Price'' in other places. For consistency, in this 
Order the Commission will refer to this price as the ``Bitwise Real-
Time Bitcoin Price.''
    \352\ See id. at 176.
    \353\ See id. at 177-178.
    \354\ See id. at 179.
    \355\ See id. at 180-181.
    \356\ See id. at 181. The Sponsor represents that there are many 
instances in the ETP market where the IIV and NAV differ due to the 
calculation methodology, market hours overlap, or other factors, and 
the Sponsor does not observe negative impacts on trading, liquidity, 
or otherwise for these ETFs. See id. The Sponsor further represents 
that the CME bitcoin futures market similarly relies on and 
distributes a Reference Rate (comparable to the NAV) and a Real-Time 
Rate (similar to the IIV), and the market is able to understand and 
evaluate the differences between these two rates. See id.
---------------------------------------------------------------------------

    One commenter states that an inaccurate NAV will break the 
arbitrage mechanism because redemptions are made based on NAV.\357\ 
According to this commenter, while most ETPs have NAVs that are 
calculated once per day, the bitcoin market is so volatile that intra-
day NAV measures are required for an ETP with bitcoin as the underlying 
asset.\358\ This commenter also represents that non-concurrent trading 
hours between digital asset platforms and the ETP market may increase 
the gap between the ETP price and the NAV.\359\
---------------------------------------------------------------------------

    \357\ See Shenoy Letter III, supra note 69, at 6.
    \358\ See id.
    \359\ See id. at 6-7.
---------------------------------------------------------------------------

    The Sponsor argues that the exclusive use of in-kind creations, 
redemptions, and fee accruals (except in the case of liquidation) 
provides long-term investors in the Trust with significant, redundant, 
and strong protection against attempts to manipulate the Bitwise Daily 
Bitcoin Reference Price and thus the NAV.\360\ According to the 
Sponsor, denominating those transactions exclusively in bitcoin ensures 
that the Trust would maintain the appropriate amount of bitcoin-per-
Share, even if the NAV or the Bitwise Daily Bitcoin Reference Price 
were manipulated.\361\ The Sponsor also asserts that exclusive use of 
in-kind creations and redemptions externalizes the cost and risk of 
transacting in the underlying spot market for bitcoin.\362\
---------------------------------------------------------------------------

    \360\ See Notice and OIP, supra note 7, 84 FR at 23132-33; 
Bitwise Submission I, supra note 6, at 103-104 (citing letter from 
Jeffrey Yass, Managing Director, Susquehanna International Group, 
LLP (May 15, 2017), regarding SR-BatsBZX-2016-30 (``Susquehanna 
Letter''), available at https://www.sec.gov/comments/sr-batsbzx-2016-30/batsbzx201630-1761310-152159.pdf, for additional explanation 
of the protective benefits of in-kind creations and redemptions). A 
commenter on a previous bitcoin ETP proposal asserts that in-kind 
creation and redemption allows market participants to source primary 
market liquidity freely and at the most efficiently priced levels 
across multiple platforms and OTC counterparties, thus largely 
insulating investors from manipulative activity on any single 
platform. See Susquehanna Letter, id. at 6.
    \361\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise 
Submission III, supra note 9, at 13.
    \362\ See Bitwise Submission III, supra note 9, at 13.
---------------------------------------------------------------------------

    One commenter supports the Sponsor's assertions and argues that 
processing all creations and redemptions in-kind and requiring payment 
of the Trust's expenses exclusively in bitcoin would ``cause[ ] the 
fund to exist in a `bitcoin-denominated world,' where even grotesque 
manipulation of the Trust's NAV would not harm holders of the fund.'' 
\363\ This commenter represents that the current proposal is unique in 
promising to accrue all fees in bitcoin, in addition to exclusively 
using in-kind creations and redemptions, meaning that the Trust's 
entire economic life would be denominated in bitcoin and the Trust 
would insulate investors from the potential negative long-term impact 
of NAV manipulation.\364\ In addition, this commenter asserts that 
investors on the secondary market would ignore an incorrect NAV and 
instead focus price discovery efforts on the proposed ETP itself.\365\
---------------------------------------------------------------------------

    \363\ Donostia Ventures Letter, supra note 9, at 2. See also 
Castle Island Ventures Letter, supra note 9, at 3 (asserting that 
the exclusive use of in-kind creations and redemptions, and accrual 
of all fees in-kind, provides significant protections to investors 
against an attempt to manipulate the NAV, and citing the Donostia 
Ventures Letter for further articulation of the reasons).
    \364\ See Donostia Ventures Letter, supra note 9, at 3.
    \365\ See id. at 3-4. Another commenter questions this 
assertion, asks how an investor would know the actual price of 
bitcoin, and disputes that market participants are always rational. 
See Robert Letter, supra note 9. This commenter also questions 
whether traders on the CME bitcoin futures market who own bitcoin on 
the spot market could be actively involved in price manipulation 
through mechanisms available on CME and simultaneous trading across 
global platforms. See Robert Letter, supra note 9.
---------------------------------------------------------------------------

    The Sponsor asserts that it does not anticipate a situation in 
which it would need to fair-value bitcoin, because the loss of one, 
two, or even many platforms would still leave the Sponsor with 
sufficient pricing feeds to adequately price bitcoin according to its 
rules.\366\ According to the Sponsor, in the extraordinarily unlikely 
event that all, or all but one, of the platforms stopped providing 
prices, the Sponsor's pricing procedures allow for fair valuing the 
asset based on all available pricing inputs, which would likely include 
prices on the remaining platform (if one exists), futures prices, 
exchange-traded swap prices, or other sources.\367\ The Sponsor asserts 
that it could also temporarily halt creations and redemptions in such 
circumstances.\368\
---------------------------------------------------------------------------

    \366\ See Bitwise Submission I, supra note 6, at 212.
    \367\ See id.
    \368\ See id. The Sponsor represents that, in the past, other 
ETPs have halted creation and redemption activity due to fundamental 
disruptions of their underlying markets, such as was the case for 
the Van Eck Vectors Egypt Index ETF during the spring of 2014, when 
the Egyptian stock market closed for multiple days. See id.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that NYSE Arca has not demonstrated that 
additional features of the Trust, including its NAV and IIV pricing and 
its use of in-kind creations, redemptions, and accrual of fees, would 
make the proposed ETP uniquely resistant to manipulation. Specifically, 
NYSE Arca has not demonstrated that the design of the Bitwise Daily 
Bitcoin Reference Price, and the Trust's NAV, would make the proposed 
ETP uniquely resistant to manipulation. The Trust's Registration 
Statement acknowledges risks associated with the Bitwise Daily Bitcoin 
Reference Price--specifically, that the Bitwise Daily Bitcoin Reference 
Price ``was recently developed,'' ``has a limited history,'' and ``is 
based on a new and untested calculation methodology.'' \369\ NYSE Arca 
and the Sponsor do not address these representations in the 
Registration Statement or why a new and untested pricing methodology 
could be counted upon to provide unique resistance to manipulation. As 
discussed elsewhere, the Trust's Registration Statement also 
acknowledges that bitcoin spot platforms are ``relatively new, and in 
some cases, largely unregulated,'' and that the bitcoin futures market 
has ``limited trading history and operational experience.'' \370\ The 
Sponsor has made sweeping claims that up to 95% of the volume reported 
by bitcoin platforms is wash trading or simply fabricated, while asking 
the Commission to approve a bitcoin ETP based upon a small segment of 
the market that it asserts is uniquely resistant to the influence of 
this activity.\371\ These untested claims, when combined with 
statements regarding the relatively new state of the bitcoin market and 
the proposed ETP's pricing mechanism, show that further

[[Page 55405]]

development of the market is needed to establish the Sponsor's 
representations.
---------------------------------------------------------------------------

    \369\ See Registration Statement, supra note 31, at 6, 9-10 
(stating that the Sponsor ``does not guarantee the validity of any 
of these [pricing] inputs, which may be subject to technological 
error, manipulative activity, or fraudulent reporting from their 
initial source''). The Trust's Registration Statement contains 
similar stated risks for the Bitwise Real-Time Bitcoin Price, which 
the Trust would use to calculate the IIV. See id. at 10.
    \370\ See supra note 123 and accompanying text; infra note 465 
and accompanying text.
    \371\ See supra Section III.B.1(c).
---------------------------------------------------------------------------

    In addition, the Sponsor's use of the Bitwise Crypto Index 
Committee to remove platforms facing a disruption from the Trust's 
pricing mechanism, such as what occurred with the removal of 
Bitfinex,\372\ is an ad hoc, ex post adjustment and cannot be counted 
upon to provide unique resistance to manipulation. Moreover, the 
Sponsor's assertion that--after the court order against Bitfinex's 
operator--fraudulent printing of a stablecoin asset in the future is 
extremely unlikely, is unpersuasive.\373\ The Commission does not 
believe that the deterrent value, if any, of past accusations of fraud 
involving stablecoins on future stablecoin schemes is sufficient to 
show resistance, let alone unique resistance, to manipulation. 
Additionally, even assuming that the designed lag time between the 
strike time of the NAV and the time of NAV distribution may allow a 
limited period of time for the Sponsor to review for and correct some 
anomalous behavior before the NAV is distributed, this ad hoc process 
cannot be relied upon as a sufficient antidote to fraud and 
manipulation on the underlying platforms, especially sustained 
manipulation, and is no substitute for a comprehensive surveillance-
sharing agreement.\374\
---------------------------------------------------------------------------

    \372\ See supra notes 331-334 and accompanying text.
    \373\ See supra note 335 and accompanying text.
    \374\ See supra note 344 and accompanying text. The Sponsor also 
describes that in certain circumstances it could fair-value bitcoin 
or temporarily halt creations and redemptions, see supra notes 366-
368 and accompanying text, but does not assert that these 
characteristics would make the Trust uniquely resistant to 
manipulation.
---------------------------------------------------------------------------

    Further, the record does not demonstrate that the Sponsor's 
proposed methodology for calculating the Bitwise Daily Bitcoin 
Reference Price, and thus the Trust's NAV, using prices and volumes 
from the selected platforms would make the proposed ETP uniquely 
resistant to manipulation. As discussed above, NYSE Arca and the 
Sponsor have not shown that fake or non-economic volume in the spot 
market would not affect prices on the selected platforms used to 
calculate the Bitwise Daily Bitcoin Reference Price, including 
prolonged effects.\375\ Moreover, NYSE Arca and the Sponsor have not 
shown that other parts of the spot market, including OTC trading, and 
trading in capital-controlled countries, would not affect the prices on 
the selected platforms.\376\ To the extent that trading on platforms 
not used to calculate the Bitwise Daily Bitcoin Reference Price affects 
prices on the selected platforms, the characteristics of those other 
platforms affect whether the Trust is uniquely resistant to 
manipulation. While the proposed procedures for calculating the Trust's 
NAV using prices from the selected platforms might provide some 
protections against attempts at manipulation,\377\ these procedures 
would not sufficiently reduce the risk of fraudulent or manipulative 
trading activity or the need to monitor this risk through a 
surveillance-sharing agreement with a regulated market of significant 
size. In particular, the Sponsor has not shown that its proposed use of 
six consecutive five-minute segments over a thirty-minute period to 
calculate the Trust's NAV would effectively be able to eliminate 
fraudulent or manipulative activity that is not transient.\378\ The 
Sponsor does not connect the five or thirty minute windows to the 
duration of the effects of the wash and fictitious trading that the 
Sponsor concedes exists in the bitcoin spot market. Indeed, the Sponsor 
recognizes that many bitcoin trading platforms in what it calls the 
``fake and non-economic'' bitcoin market engage in sustained 
manipulation every hour of every day, and often for the entire week the 
Sponsor examined.\379\ Because the Sponsor concedes that bitcoin 
trading platforms with ``fake and non-economic'' trading manipulate 
their prices every hour of every day, and the Commission has concluded 
that the Sponsor has failed to isolate the pricing on these ``fake'' 
platforms that the Sponsor eschews and the ``real'' platforms that the 
Sponsor employs, the Commission concludes that the Sponsor has not 
demonstrated that its NAV pricing--including its use of five and thirty 
minute windows--make the proposed ETP uniquely resistant to 
manipulation.
---------------------------------------------------------------------------

    \375\ See supra notes 276-287 and accompanying text.
    \376\ See supra Section III.B.1(c).
    \377\ See supra notes 339-343 and accompanying text.
    \378\ See supra note 340 and accompanying text.
    \379\ See Bitwise Submission I, supra note 6, at 43-50, 52, 54-
57; Bitwise Submission II, supra note 9, at 28-29, 33-34. While the 
Sponsor's own analysis of wash trading sufficiently demonstrates 
that fraud or manipulation of bitcoin spot pricing could exceed 
thirty minutes, evidence of other types of fraud and manipulation 
provide additional support. See supra notes 69-73, 138, 140-145, 
331. See also Winklevoss Order, supra note 12, 83 FR at 37585 
(discussing an academic paper concluding that hacking and 
manipulation of the Mt. Gox bitcoin trading platform affected the 
global price of bitcoin between April 2011 and November 2013), 
37586-87 (stating that a person or persons with a dominant position 
in bitcoin would be able to hold that position for longer than 
thirty minutes and that ``early bitcoin adopters'' have held such a 
position for a much longer period), 37585-86 (noting an academic 
paper, the ``Griffin-Shams Paper,'' suggesting that the price of 
bitcoin was manipulated with Tether from March 1, 2017, to March 31, 
2018); Affirmation of Brian M. Whitehurst in Support of OAG's Ex 
Parte Application for an Order Pursuant to General Business Law 
Sec.  354, James v. iFinex, Inc., et al., No. 450545/2019, 2019 WL 
2176835 (N.Y. Sup. Ct. Apr. 25, 2019), Doc. No. 1, at paras. 48-93 
(describing allegedly improper conduct over the course of many 
months involving Bitfinex). Regarding the academic findings that the 
price of bitcoin was manipulated with Tether, the Sponsor contends 
that these ``findings unwind if you assume that all (or even most) 
of the growth in issuance of Tether . . . reflects organic demand,'' 
but the Sponsor does not offer any support for such an assumption. 
Bitwise Submission III, supra note 9, at 47. Instead, the Sponsor 
claims that allegations in the NYAG investigation, see supra note 
331, do not in and of themselves ``suggest that the Tether issuance 
was fraudulent or reflected anything other than organic investor 
demand,'' and therefore, ``while worrisome, do not support the 
accusations in the Griffin-Shams paper at this time,'' but nothing 
in the NYAG action casts any doubt on the conclusion that the price 
of bitcoin is susceptible to manipulation through activity on 
bitcoin trading venues. See Winklevoss Order, supra note 12, 83 FR 
at 37585-86.
---------------------------------------------------------------------------

    Moreover, the Sponsor's identification of differences between the 
NAV process for another proposed bitcoin ETP and the NAV process for 
the current proposal does not establish that the Sponsor's proposed NAV 
process would make the Trust uniquely resistant to manipulation.\380\ 
In addition, these concerns about the Sponsor's process for calculating 
the NAV would apply to the IIV, which would be calculated using a 
similar process, and the Commission notes that publishing the IIV every 
fifteen seconds would not ameliorate the risk of manipulation if the 
underlying pricing mechanism is not demonstrably resistant to 
manipulation.\381\
---------------------------------------------------------------------------

    \380\ See supra note 345 and accompanying text. The Commission 
notes that, in the Winklevoss Order, the Commission raised concerns 
based on the relative size of the volume of the auction that would 
serve as the basis for the pricing mechanism as compared to the size 
of the creation or redemption basket. See Winklevoss Order, supra 
note 12, 83 FR at 37589-90. While the Sponsor and a commenter 
provide comparative information about the liquidity of the Trust's 
proposed pricing mechanism (see supra notes 345-346 and accompanying 
text), the Commission concludes that this is not a relevant 
comparison because the Commission does not use the liquidity of the 
platforms selected for the Trust's pricing mechanism as a basis for 
its current decision.
    \381\ See supra notes 351-356 and accompanying text.
---------------------------------------------------------------------------

    Because, as discussed above, the Sponsor has not established that 
its research identified those platforms in the spot market with 
``real'' trading volume,\382\ NYSE Arca and the Sponsor have also 
failed to demonstrate that the Bitwise Daily Bitcoin Reference Price 
would draw prices from selected platforms that represent 
``substantially all'' of the economically significant spot trading 
volume, outside of capital-

[[Page 55406]]

controlled countries.\383\ The Sponsor acknowledges that there is some 
additional real volume to be found on other platforms, but simply 
asserts that any adjustments to account for such additional real volume 
would not materially change the Sponsor's conclusions.\384\ In 
addition, in response to a law enforcement action by the NYAG, the 
Sponsor removed the second largest ``real'' bitcoin platform from the 
calculation of the Bitwise Daily Bitcoin Reference Price--Bitfinex, at 
purportedly 14.1% of the ``real'' market in April 2019--but provides 
only a cursory and insufficient analysis to support its assertion that 
this removal does not meaningfully impact the Bitwise Daily Bitcoin 
Reference Price.\385\ The Sponsor asserts that Bitfinex's average 
deviation from the consolidated price falls ``comfortably in the 
middle'' of the average deviation from the consolidated price for each 
of the ten identified ``real'' platforms,\386\ but does not, for 
example, provide any data about how this might translate to any price 
difference in the Bitwise Daily Bitcoin Reference Price if calculated 
with and without Bitfinex. The Sponsor asserts that there are 
diminishing returns to the value of each additional platform in 
protecting against idiosyncratic platform risk.\387\ But the Sponsor 
does not adequately address the effect of the reliance on less of the 
``real'' volume in the spot market to support the Trust's pricing 
mechanism, including the impact of removal of this segment of ``real'' 
volume from the Trust's pricing mechanism on the Sponsor's assertion 
that any attempt to manipulate the NAV must involve a majority of spot 
bitcoin trading volume.\388\
---------------------------------------------------------------------------

    \382\ See supra Section III.B.1(c).
    \383\ See supra notes 319-338 and accompanying text.
    \384\ See supra notes 242-253 and accompanying text.
    \385\ See supra notes 331-338 and accompanying text. The 
Commission notes that Amendment No. 1 states throughout that the 
Trust's pricing mechanism will be based on ten platforms and that 
these ten platforms represent substantially all of the ``real'' spot 
market for bitcoin, and contains only one reference in a footnote to 
the removal of Bitfinex and reduction in the number of platforms 
contributing to the Bitwise Daily Bitcoin Reference Price from ten 
to nine. See Notice and OIP, supra note 7, 84 FR at 23130 n.20. In 
addition, the Sponsor's submission detailing its analysis of the 
bitcoin spot market does not mention the removal of Bitfinex from 
the Trust's pricing mechanism. See Bitwise Submission II, supra note 
9. The Commission does not believe that the Sponsor has fully 
explained the impact of removing Bitfinex on many of its 
representations and assertions.
    \386\ See supra note 337 and accompanying text.
    \387\ See supra note 338 and accompanying text.
    \388\ See supra note 317 and accompanying text.
---------------------------------------------------------------------------

    In addition, while the Sponsor describes at length the analysis 
that it conducted to identify spot platforms with real volume, NYSE 
Arca and the Sponsor have not established that the Bitwise Daily 
Bitcoin Reference Price would continue to rely on those platforms that 
the Sponsor identifies (or might in the future identify) as 
representing substantially all of the ``real'' spot trading volume. The 
Sponsor acknowledges that the number of platforms used to construct the 
Bitwise Daily Bitcoin Reference Price and the percentage of global 
volume that they represent is subject to change.\389\
---------------------------------------------------------------------------

    \389\ See supra note 326 and accompanying text.
---------------------------------------------------------------------------

    Moreover, the methodology the Sponsor uses to select the platforms 
from which it draws the Bitwise Daily Bitcoin Reference Price differs 
from the methodology it uses for the analysis that purports to identify 
those spot platforms with real volume.\390\ For example, one factor for 
eliminating platforms from the Trust's pricing mechanism is whether the 
platform is domiciled in an emerging market country,\391\ but the 
Sponsor does not articulate this factor as a basis for considering a 
platform's volume not to be ``real.'' While the Sponsor has currently 
identified the same ten platforms for inclusion in the Bitwise Daily 
Bitcoin Reference Price as it designated as ``real'' during the course 
of its described analysis--before removing one platform due to a state 
law enforcement action--the current overlap does not demonstrate that 
the methodologies would generate the same results. And the Sponsor has 
not explained how--if the differing methodologies identify different 
sets of bitcoin platforms in the future--such divergences would affect 
its representations that the Bitwise Daily Bitcoin Reference Price is 
based on platforms that represent substantially all of the ``real'' 
spot trading volume.
---------------------------------------------------------------------------

    \390\ Compare supra notes 321-325 and accompanying text with 
supra notes 199-200, 211-228 and accompanying text.
    \391\ See supra note 323 and accompanying text.
---------------------------------------------------------------------------

    Finally, the record does not demonstrate that in-kind creations and 
redemptions, or the decision to accrue the Trust's fees exclusively in 
bitcoin, would provide unique resistance to manipulation.\392\ In-kind 
creations and redemptions are a common feature of ETPs, and the 
Commission has not excused exchanges that list ETPs that rely on this 
mechanism from the need to enter into surveillance-sharing agreements 
with regulated markets related to the portfolios assets.\393\ Further, 
the accrual of the Trust's fees in bitcoin does not protect buyers and 
sellers of the Shares in the secondary market, because these secondary 
market participants will not trade at NAV but at market-based 
prices.\394\ Moreover, the Trust's Registration Statement recognizes 
the risk that disruptions at bitcoin trading platforms ``could 
adversely affect the availability of bitcoin and the ability of 
Authorized Participants to purchase or sell bitcoin and therefore their 
ability to create and redeem shares of the Trust.'' \395\
---------------------------------------------------------------------------

    \392\ See supra notes 360-362 and accompanying text. See also 
supra notes 363-365 and accompanying text.
    \393\ See, e.g., iShares COMEX Gold Trust, Securities Exchange 
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26, 
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange 
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24, 
2006) (SR-Amex-2005-072).
    \394\ The Sponsor emphasizes that, at most, only ``shareholders 
[of the Trust] would be protected'' by in-kind creations and 
redemptions. Bitwise Submission III, supra note 9, at 13. See also 
Registration Statement, supra note 31, at 28 (in-kind creation and 
redemptions protect ``shareholders of the Trust'').
    \395\ Registration Statement, supra note 31, at 6.
---------------------------------------------------------------------------

    Therefore the Commission concludes that the record does not 
establish that features of the Trust would make the Trust's NAV or the 
proposed ETP uniquely resistant to manipulation.
2. Assertions That Other Means Are Available To Detect and Deter Fraud 
and Manipulation
(a) Comment Received
    One commenter asserts that NYSE Arca's rules are designed to 
prevent fraudulent and manipulative acts and practices, because trading 
in the Shares would be subject to rules governing equity securities 
that are aimed at preventing fraud and manipulation.\396\ This 
commenter represents that such rules include regulations addressing 
initial and continued listing standards, restrictions on market maker 
accounts, trading halt procedures, and trading surveillance.\397\ With 
respect to surveillance, the commenter states that trading in the 
Shares will be subject to trading surveillances by NYSE Arca, and the 
Financial Industry Regulatory Authority (``FINRA'') on NYSE Arca's 
behalf, and that NYSE Arca and FINRA can communicate with Intermarket 
Surveillance Group members and obtain information regarding trading in 
the Shares and underlying bitcoin from NYSE Arca members registered as 
market makers.\398\ This commenter further asserts that NYSE Arca can 
obtain trading surveillance from a

[[Page 55407]]

regulated bitcoin futures market of significant size.\399\
---------------------------------------------------------------------------

    \396\ See Omniex Letter, supra note 9, at 3.
    \397\ See id.
    \398\ See id. See also Notice and OIP, supra note 7, 84 FR at 
23135.
    \399\ See Omniex Letter, supra note 9, at 3-4.
---------------------------------------------------------------------------

(b) Analysis
    The Commission finds that, although one commenter raises aspects of 
NYSE Arca's existing rules that it asserts might provide other means to 
prevent fraud and manipulation,\400\ these alternative procedures would 
not, without a surveillance-sharing agreement with a regulated market 
of significant size, be sufficient to satisfy the requirement of 
Exchange Act Section 6(b)(5) that an exchange's rules be designed to 
prevent fraudulent and manipulative acts and practices.\401\ In the 
Winklevoss Order, the Commission considered an assertion by the listing 
exchange that its surveillance procedures, which included pre-existing 
procedures, information available from the Bitcoin blockchain, and a 
surveillance-sharing agreement with a spot bitcoin platform, would 
provide ``traditional means'' of preventing fraud and manipulation, 
sufficient to prevent fraudulent and manipulative acts and 
practices.\402\ The Commission found that the listing exchange had not 
demonstrated that the alternative surveillance procedures would be, by 
themselves, sufficient to satisfy Exchange Act Section 6(b)(5).\403\
---------------------------------------------------------------------------

    \400\ See supra notes 396-399 and accompanying text.
    \401\ See 15 U.S.C. 78f(b)(5). See infra Section 0 for further 
discussion about whether NYSE Arca's surveillance-sharing agreement 
with the bitcoin futures market is with a regulated market of 
significant size.
    \402\ See Winklevoss Order, supra note 12, 83 FR at 37590-91.
    \403\ See id. at 37591.
---------------------------------------------------------------------------

    Here, as in the Winklevoss Order, while NYSE Arca would, pursuant 
to its listing rules, be able to obtain certain information regarding 
trading in the Shares and in the underlying bitcoin or any bitcoin 
derivative through registered market makers,\404\ this trade 
information would be limited to the activities of members who were 
registered with NYSE Arca as market makers in the Shares and would not 
encompass all NYSE Arca market participants.\405\ Furthermore, as in 
the Winklevoss Order, neither NYSE Arca's ability to surveil trading in 
the Shares nor its ability to share information with other securities 
exchanges trading the Shares would give NYSE Arca insight into the 
activity and identity of market participants trading in the underlying 
bitcoin in the OTC market or on other bitcoin trading platforms.\406\ 
Additionally, while the commenter asserts that NYSE Arca rules 
addressing initial and continued listing standards and trading halt 
procedures also are aimed at preventing fraud and manipulation,\407\ 
these aspects of NYSE Arca's rules, on their own, would not be 
sufficient to detect, investigate, or prevent fraudulent and 
manipulative acts and practices. The Commission finds that the argument 
raised by the commenter that NYSE Arca's rules would prevent fraud and 
manipulation are essentially the same as those arguments made by the 
listing exchange in the Winklevoss Order, and therefore the Commission 
must reach the same conclusion that the alternative surveillance 
procedures raised by the commenter are not sufficient, by themselves, 
to satisfy Exchange Act Section 6(b)(5).\408\
---------------------------------------------------------------------------

    \404\ See supra note 398 and accompanying text.
    \405\ See Winklevoss Order, supra note 12, 83 FR at 37591.
    \406\ See supra note 398 and accompanying text. See also 
Winklevoss Order, supra note 12, 83 FR at 37591.
    \407\ See supra note 396-397 and accompanying text.
    \408\ See Winklevoss Order, supra note 12, 83 FR at 37591.
---------------------------------------------------------------------------

3. Assertions That NYSE Arca Has Entered Into a Surveillance-Sharing 
Agreement With a Regulated Market of Significant Size Related to 
Bitcoin
(a) Representations Made and Comments Received
    The Sponsor asserts that, in light of its understanding of the 
small size of the ``real'' bitcoin spot market, the bitcoin futures 
market represents a large, surveilled, and regulated market, as the 
Commission has defined that requirement.\409\ The Sponsor further 
asserts that, given the significant size of the bitcoin futures market, 
and the close relationship in prices between the derivatives market and 
the spot market, there is a reasonable likelihood that a person 
attempting to manipulate the proposed ETP would have to trade on that 
market to successfully manipulate the proposed ETP, because arbitrage 
between the derivative and spot markets would tend to counter an 
attempt to manipulate the spot market alone.\410\ According to the 
Sponsor, NYSE Arca's ability to obtain information regarding trading in 
the Shares and futures from markets and other entities that are members 
of the Intermarket Surveillance Group, which includes CME (and CFE), 
would assist NYSE Arca in detecting and deterring misconduct.\411\
---------------------------------------------------------------------------

    \409\ See Notice and OIP, supra note 7, 84 FR at 23134. In this 
context, the Sponsor refers to the bitcoin futures market as 
consisting of the market for cash-settled bitcoin futures contracts 
on CFE and CME. See Bitwise Submission II, supra note 9, at 56. As 
noted above, CFE ceased offering new bitcoin futures contracts as of 
March 2019, see supra note 38, and therefore the Commission 
considers here whether CME bitcoin futures market is a regulated 
market of significant size. See infra note 457.
    \410\ See Notice and OIP, supra note 7, 84 FR at 23134.
    \411\ See id. See also Omniex Letter, supra note 9, at 5 
(asserting that NYSE Arca would have the ability itself to obtain 
information regarding trading in the Shares and could obtain 
information regarding futures trading from CME as a member of 
Intermarket Surveillance Group); Collaborative Funds Letter, supra 
note 9, at 2 (asserting that NYSE Arca's surveillance agreement with 
CME and CFE satisfies the concerns in the Winklevoss Order regarding 
mitigation of market manipulation). But see Ahn Letter II, supra 
note 9 (questioning the presumption that the bitcoin futures market 
is regulated because, according to the commenter, the bitcoin 
futures market does not contain all the regulatory features that the 
Commission requires in the context of a surveillance-sharing 
agreement).
---------------------------------------------------------------------------

    The Sponsor asserts that its assessment that the CME bitcoin 
futures market is significant is based on its understanding of the true 
size of the bitcoin spot market, which, according to the Sponsor, is 
significantly smaller than commonly understood, as well as on the 
recent and significant growth in trading volume on the CME bitcoin 
futures exchange.\412\ The Sponsor argues that, while the bitcoin 
futures market volume appears to be small in comparison to the reported 
spot bitcoin volume, it looks ``much more important'' in comparison to 
the ``real'' bitcoin spot market.\413\ In particular, the Sponsor 
represents that the combined average daily volume for the CME and CFE 
futures markets in April 2019 was $268 million, which is 2.4% of 
April's reported spot market volume (approximately $11 billion), but 
48.4% of the Sponsor's calculated ``real'' spot market volume 
(approximately $554 million).\414\ The Sponsor asserts that in April 
2019, the average daily volume on the CME of $258 million was larger 
than that of any of the ten identified ``real'' spot bitcoin platforms, 
ahead of Binance and more than twice as large as Bitfinex.\415\ The 
Sponsor also asserts that the bitcoin futures market compares similarly 
to the ``real'' bitcoin spot

[[Page 55408]]

market in surrounding months.\416\ According to the Sponsor, while the 
bitcoin futures market ``would clearly not satisfy'' the requirement 
that someone attempting to manipulate the spot market would be 
reasonably likely to have to trade in the derivatives market if the 
bitcoin spot market were trading $11 billion per day, the Sponsor's 
``new understanding of the true size of the bitcoin spot market 
reshapes this discussion considerably.'' \417\
---------------------------------------------------------------------------

    \412\ See Bitwise Submission III, supra note 9, at 97.
    \413\ See Bitwise Submission II, supra note 9, at 57; Bitwise 
Submission III, supra note 9, at 11.
    \414\ See Bitwise Submission II, supra note 9, at 57; Bitwise 
Submission III, supra note 9, at 11. The Sponsor also asserts that 
in April 2019, the CME futures contract traded an average daily 
volume of over 67,000 bitcoin (on a notional basis), while 
coinmarketcap.com reported an average daily volume of over 2.2 
million bitcoin, but the ``real'' average daily spot volume was 
roughly 108,000 bitcoin. See Bitwise Submission III, supra note 9, 
at 155.
    \415\ See Bitwise Submission II, supra note 9, at 58; Bitwise 
Submission III, supra note 9, at 11.
    \416\ The Sponsor asserts that at the time of its first 
analysis, in March 2019, the average daily volume of the bitcoin 
futures market was $91 million, as compared to reported daily volume 
in the spot market of approximately $6 billion and ``real'' daily 
volume in the spot market of around $273 million. See Notice and 
OIP, supra note 7, 84 FR at 23134; Bitwise Submission I, supra note 
6, at 121. The Sponsor further asserts that bitcoin futures market 
average daily volume in March 2019 was nearly as large as the 
average daily volume for the largest ``real'' spot platform, 
Binance, and larger than the rest. See Notice and OIP, supra note 7, 
84 FR at 23134; Bitwise Submission I, supra note 6, at 65, 123. The 
Sponsor has graphed futures volume as expressed as a percentage of 
``real'' spot volume from December 2017 through February 2019 and 
asserts that this chart shows an increase to approximately 35% in 
February 2019. See Bitwise Submission I, supra note 6, at 122. The 
Sponsor asserts that, while in earlier periods bitcoin futures 
volume was consistently less than 10% the size of ``real'' spot 
volume, since February 2019, bitcoin futures volume has consistently 
averaged more than 25% as a percentage of ``real'' spot volume, and 
was more than 50% of ``real'' spot volume in May 2019. See Bitwise 
Submission III, supra note 9, at 157, 159. The Sponsor also asserts 
that in May 2019, the CME bitcoin futures market had a higher 
average daily trading volume than any of the ten ``real'' bitcoin 
spot platforms and set new average daily trading volume records. See 
Bitwise Submission IV, supra note 9, at 5. In addition, the Sponsor 
asserts that in August 2019, the average daily volume of the bitcoin 
futures market was $234 million, as compared to reported daily 
volume in the spot market of approximately $17 billion and ``real'' 
daily volume in the spot market of around $1 billion. See Bitwise 
Submission VI, supra note 9, at 29. See also id. at 25 (showing 
aggregate average daily volume of the ten ``real'' spot bitcoin 
platforms from December 2017 through August 2019 and asserting that, 
since March 2019, volume has increased substantially).
    \417\ Bitwise Submission II, supra note 9, at 59.
---------------------------------------------------------------------------

    In addition, the Sponsor asserts that, since the CME and CFE 
contracts launched in December 2017, the volume and significance of 
bitcoin futures contracts has grown substantially, with the vast 
majority of the volume linked to CME's contract.\418\ The Sponsor 
represents that, from December 2017 to April 2019, the combined average 
daily notional volume of CME and CFE bitcoin futures grew from 9,286 
bitcoin to 69,177 bitcoin, showing a growth of 645%.\419\ The Sponsor 
asserts that, while CME's bitcoin futures notional volume in dollars 
has shown some variability, and declined along with a decline in prices 
in late 2018, volumes have strongly picked up in 2019.\420\ The Sponsor 
also asserts that CME's bitcoin futures notional volume in bitcoin 
shows strong and steady growth, with a ``remarkable'' expansion in 
2019.\421\ The Sponsor further asserts that CME bitcoin futures 
notional volume as a percentage of ``real'' bitcoin spot volume has 
been strong and steadily growing, with further acceleration in April 
and May 2019.\422\
---------------------------------------------------------------------------

    \418\ See id. at 56, 58-59; Bitwise Submission III, supra note 
9, at 11.
    \419\ See Bitwise Submission II, supra note 9, at 56. See also 
Bitwise Submission III, supra note 9, at 155 (asserting that in 
April 2019, the CME futures contract traded an average daily volume 
of more than 67,000 bitcoin on a notional basis, representing a 
roughly 630% increase over the median daily notional trading volume 
on CME since inception). The Sponsor also has graphed the average 
number of futures contracts traded daily and regulated bitcoin 
futures volume as a percentage of ``real'' bitcoin spot volume from 
December 2017 through May 2019. See Bitwise Submission II, supra 
note 9, at 56, 59.
    \420\ See Bitwise Submission II, supra note 9, at 74-75. The 
Sponsor represents that in the first 20 days of May 2019, the 
average daily volume for CME futures contracts was $517 million, the 
highest level ever for a month, and dollar volume hit an all-time 
high on May 13, 2019, with $1.3 billion in notional volume traded 
and a record of 33,677 bitcoin contracts traded. See id. at 74; 
Bitwise Submission III, supra note 9, at 11. The Sponsor has graphed 
CME average daily volume in USD to provide more detail on this 
trend. See Bitwise Submission II, supra note 9, at 75; Bitwise 
Submission VI, supra note 9, at 26. In addition, the Sponsor 
represents that the average daily volume for CME futures contracts 
in August 2019 was $234,385,300 and that the volume ``increased 
substantially'' since March 2019. See Bitwise Submission VI, supra 
note 9, at 9, 26.
    \421\ See Bitwise Submission II, supra note 9, at 75-76. The 
Sponsor has graphed CME average daily volume in bitcoin. See id. at 
76.
    \422\ See id. at 76-77. The Sponsor represents that in April and 
May 2019, volumes on the CME bitcoin futures market often exceeded 
those on the largest ``real'' spot platform, and sometimes 
significantly. See id. at 77. According to the Sponsor, on May 13, 
2019, CME volumes, at $1.3 billion, were two times as large as the 
largest spot bitcoin platform, Binance, at approximately $650 
million. See id.; Bitwise Submission III, supra note 9, at 11. The 
Sponsor has graphed CME bitcoin futures volume as a percentage of 
``real'' bitcoin spot volume. See Bitwise Submission II, supra note 
9, at 77; Bitwise Submission VI, supra note 9, at 9, 28.
---------------------------------------------------------------------------

    With respect to CFE's decision in March 2019 to stop further 
issuance of its bitcoin futures, the Sponsor asserts that the consensus 
is that the limited volume on CFE will migrate to the already dominant 
CME contract.\423\ The Sponsor argues that CFE's decision to stop 
offering new bitcoin futures contracts suggests that CFE lost a 
competitive battle with CME to attract investors and traders to its 
contract, and does not suggest anything about the long-term health of 
the bitcoin futures market, noting that, after CFE's announcement, CME 
bitcoin futures volume set new monthly records in April and May 
2019.\424\ The Sponsor also represents that it is common for futures 
volumes to concentrate on a single contract and a single exchange 
because there is an advantage to aggregating liquidity.\425\
---------------------------------------------------------------------------

    \423\ See Bitwise Submission I, supra note 6, at 123; Bitwise 
Submission II, supra note 9, at 74; Bitwise Submission IV, supra 
note 9, at 4. The Sponsor asserts that the CME futures contract has 
dominated the market and that, on May 13, 2019, the CME futures 
contract traded at $1.2 billion in notional value, while the CFE 
contract traded at $62 million in notional value. See Bitwise 
Submission II, supra note 9, at 73-74. See also id. at 56 
(representing that from December 2017 to April 2019, the CME futures 
contract grew from 57% to 98% of the total regulated bitcoin futures 
market); Bitwise Submission IV, supra note 9, at 3-4 (showing the 
average daily trading volume in most active monthly contract for CME 
and CFE, and discussing reasons why the CME contract became 
dominant). In addition, the Sponsor asserts, based on a graph it has 
prepared showing the average daily volume for CME and CFE bitcoin 
futures from December 2017 through August 2019, that CFE's decision 
to stop issuing its bitcoin futures has not diminished the trend of 
increased bitcoin futures volume. See Bitwise Submission VI, supra 
note 9, at 27.
    \424\ See Bitwise Submission IV, supra note 9, at 4.
    \425\ See id.
---------------------------------------------------------------------------

    The Sponsor argues that prices on the bitcoin futures market are 
closely aligned with the Bitwise Daily Bitcoin Reference Price and the 
Bitwise Real-Time Bitcoin Price, and that strong arbitrage exists 
between these prices.\426\ The Sponsor asserts that there is a logical 
connection between the prices, because the CME futures settlement price 
is based on prices pulled from four of the platforms that contribute to 
the Bitwise Daily Bitcoin Reference Price and Bitwise Real-Time Bitcoin 
Price, and the CFE futures settlement price is based on prices pulled 
from one such platform.\427\ The Sponsor further asserts that its 
analysis demonstrates that all ``real'' bitcoin spot markets trade 
effectively at a single price, suggesting that the CME bitcoin futures 
market must trade at a price tightly linked to the consolidated spot 
price.\428\ The Sponsor acknowledges that the correlation between the 
prices is limited by the term structure of the futures contract and the 
asymmetric cost of hedging a futures position, because it is less 
expensive to hedge a short position in bitcoin futures than a long 
position in bitcoin futures.\429\
---------------------------------------------------------------------------

    \426\ See Notice and OIP, supra note 7, 84 FR at 23134; Bitwise 
Submission II, supra note 9, at 77-82.
    \427\ See Notice and OIP, supra note 7, 84 FR at 23134; Bitwise 
Submission I, supra note 6, at 124; Bitwise Submission II, supra 
note 9, at 77.
    \428\ See Bitwise Submission II, supra note 9, at 77.
    \429\ See Notice and OIP, supra note 7, 84 FR at 23134.

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

[[Page 55409]]

    The Sponsor asserts that there are low levels of average deviation 
between the CME futures contract price and the consolidated spot 
price.\430\ According to the Sponsor, a line graph comparing the CME 
bitcoin futures contract price with the consolidated spot price from 
January 2018 through May 2019 shows some ``minor discrepancies'' in 
January to March 2018, but the Sponsor asserts that, following that 
period, ``the two lines are virtually identical.'' \431\ The Sponsor 
has also examined the average deviation of the price of the CME 
contract and consolidated spot price on a second-by-second basis from 
December 2017 through April 2019.\432\ The Sponsor asserts that in 
December 2017, average deviations were nearly 2%, but then came down 
substantially, largely hovering below 0.25%.\433\ According to the 
Sponsor, these average deviations are similar to the 0.05% to 0.20% 
average deviation for individual spot platforms over the same time 
frame, with slightly wider deviations in the futures market that are to 
be expected because of futures markets' term structure.\434\
---------------------------------------------------------------------------

    \430\ See Bitwise Submission II, supra note 9, at 78-81.
    \431\ See id. at 78. See also Bitwise Submission I, supra note 
6, at 125 (providing a line graph of a global spot price as compared 
to the CME futures price from 2018 through early March 2019 that, 
according to the Sponsor, shows that arbitrage between the CME 
futures price and global spot price is ``firmly established'').
    \432\ See Bitwise Submission II, supra note 9, at 78-79.
    \433\ See id. at 79.
    \434\ See id.
---------------------------------------------------------------------------

    The Sponsor represents that all futures markets exhibit contango, 
when futures contracts trade at a higher price than the spot market, 
and backwardation, when futures contracts trade at a lower price than 
the spot market.\435\ According to the Sponsor, bitcoin futures have 
traded essentially in-line with the spot market, without significant 
contango or backwardation, but backwardation and contango have appeared 
occasionally, with backwardation appearing much more frequently than 
contango.\436\ The Sponsor asserts that the most significant periods of 
backwardation in the bitcoin futures market occurred during pronounced 
pullbacks in the bitcoin spot market.\437\ The Sponsor further asserts 
that the level of backwardation in the bitcoin futures market is 
strictly constrained by arbitrage, but that backwardation can emerge 
and persist because the cost of borrowing bitcoin to short in the spot 
market is relatively high.\438\ The Sponsor argues that the ``extremely 
low'' average deviation between prices in normal months and rationally 
constrained deviations during stress periods, such as November 2018, 
suggests that institutional-quality arbitrageurs are enforcing strong 
arbitrage between the CME futures market and the spot market at all 
times.\439\
---------------------------------------------------------------------------

    \435\ See id.
    \436\ See id.
    \437\ See id. The Sponsor represents that on November 14, 2018, 
the bitcoin spot market fell from $6,200 to $5,500 over concerns 
about a bitcoin cash fork and that this downward move and concerns 
about bitcoin's outlook drove the futures market into backwardation, 
which generally persisted through January 2019, when the bitcoin 
market stabilized. See id. at 79-80. According to the Sponsor, the 
average backwardation during this period was 0.74%, which explains 
the higher average deviation between the CME futures price and spot 
bitcoin price from November 2018 through January 2019, but the 
average deviation settled back to below 0.25% as the term structure 
of the futures market normalized. See id. at 80.
    \438\ See id. at 80 (representing that the cost of borrowing 
bitcoin to short historically ranges from 5% to 10% per year, or 
0.4% to 0.8% per month, and that this monthly cost is directly in-
line with levels of observed backwardation in November 2018 through 
January 2019).
    \439\ See id. at 80-81.
---------------------------------------------------------------------------

    The Sponsor asserts that the speed at which price discrepancies are 
arbitraged away also demonstrates the quality of arbitrage between the 
CME bitcoin futures price and bitcoin spot price.\440\ The Sponsor has 
created a histogram displaying the speed at which pricing discrepancies 
above 1% between the CME bitcoin futures price and consolidated bitcoin 
spot price were arbitraged away.\441\ The Sponsor represents that these 
data show that more than 50% of all pricing discrepancies greater than 
1% were arbitraged away within 1 second, and that more than 90% of all 
pricing discrepancies greater than 1% were arbitraged away within 49 
seconds.\442\ According to the Sponsor, the results demonstrate that 
the CME bitcoin futures price and the consolidated spot price trade 
closely together and their disparities are rapidly arbitraged away, 
meeting the Commission's criteria for demonstrating effective arbitrage 
between markets.\443\
---------------------------------------------------------------------------

    \440\ See id. at 81.
    \441\ See id.
    \442\ See id. (asserting that these data echo the data comparing 
individual spot bitcoin platforms against one another).
    \443\ See id.
---------------------------------------------------------------------------

    Several commenters assert that the CME bitcoin futures market 
constitutes a significant market.\444\ One commenter represents that 
the bitcoin futures market is larger than those associated with other 
ETPs that the Commission has previously approved, such as the palladium 
futures market associated with the Aberdeen Standard Physical Palladium 
Shares ETF, formerly known as ETFS Palladium Trust, and the freight 
futures market associated with the Breakwave Dry Bulk Shipping 
ETF.\445\ Another commenter states that the bitcoin futures market is 
now large and robust, regularly trading over $100 million in daily 
notional trading volume, and represents a material proportion of the 
overall bitcoin market.\446\ A third commenter states that the bitcoin 
futures market had low volumes until recently, although there has been 
an increase in volume since April 2019, and that the size of the 
bitcoin futures market pales in comparison to others futures 
markets.\447\ This commenter asserts that the futures market has not 
even completed one calendar year and so cannot be considered 
mature.\448\
---------------------------------------------------------------------------

    \444\ See Castle Island Ventures Letter, supra note 9, at 2; 
Collaborative Fund Letter, supra note 9, at 1-2 (asserting that the 
Sponsor's study identifying the ten platforms with ``real and 
verifiable volume'' means that the CME futures market is of 
significant size ``by nearly any definition''); Omniex Letter, supra 
note 9, at 4-5 (asserting that the Sponsor's analysis shows CME's 
bitcoin futures market is a large, surveilled, and regulated market, 
when compared with the ``real'' bitcoin market, and that there is a 
close relationship in pricing between the bitcoin futures market and 
the spot market).
    \445\ See Collaborative Fund Letter, supra note 9, at 2.
    \446\ See Castle Island Ventures Letter, supra note 9, at 2.
    \447\ See Shenoy Letter III, supra note 69, at 10.
    \448\ See id.; see also id. at 13 (recommending a longitudinal 
observation over a period of at least another cycle of the futures 
market to observe the stability of the market and allow for the 
emergence of genuine price discovery and reduction of opaqueness).
---------------------------------------------------------------------------

    Finally, the Sponsor asserts that it examined the net inflows in 
the first year of existence for two types of ETPs--commodity ETPs that 
were first to market in the United States and blockchain-technology-
related ETPs--and that, given the size of these inflows as compared to 
the size of the ``real'' bitcoin market, it is unlikely that trading in 
the proposed ETP would become the predominant influence on prices in 
that market.\449\ The Sponsor represents that the net inflows of these 
comparable ETPs in their first year on the market ranged from 
approximately $2 million to approximately $3 billion, with a median on 
the lower end of that range.\450\ The Sponsor asserts that, over the 
course of a year, a spot market that is trading $273 million per day 
could easily absorb $3 billion in total inflows.\451\ The Sponsor also 
asserts that the CoinShares Bitcoin Tracker One ETN and CoinShares 
Tracker Euro ETN, both listed on Nasdaq Stockholm, each attracted 
approximately $50 million in

[[Page 55410]]

assets in the first year.\452\ The Sponsor further asserts that the GLD 
ETP, which attracted $469 million in its first day on the market and 
more than $1 billion over its first three days, was an outlier that was 
more than two times larger than any other ETP and orders of magnitude 
larger than the average result.\453\ According to the Sponsor, a 
similar outcome is extremely unlikely for the proposed ETP because the 
gold market is significantly larger and more established than the 
bitcoin market, and conditions have changed in the ETP market such that 
brokerage and advisory platforms now have detailed due diligence and 
approval processes that smooth out asset growth.\454\
---------------------------------------------------------------------------

    \449\ See Notice and OIP, supra note 7, 84 FR at 23134.
    \450\ See id.; Bitwise Submission I, supra note 6, at 128, 130.
    \451\ See Bitwise Submission I, supra note 6, at 130.
    \452\ See id. at 129.
    \453\ See id. at 131.
    \454\ See id.
---------------------------------------------------------------------------

(b) Analysis
    The Commission concludes that NYSE Arca has not entered into a 
surveillance-sharing agreement with a regulated bitcoin futures market 
of significant size. The Sponsor acknowledges that the ``Commission has 
correctly identified the need for, value of, and definition of a 
surveilled derivatives market of significant size,'' and contends that 
the CME futures market is ``significant in size'' compared to the 
``real'' spot market that the Sponsor identifies.\455\ The Sponsor 
argues that, given the relative size of the bitcoin futures markets and 
the close relationship in prices between the derivatives market and the 
``real'' spot market, there is a reasonable likelihood that a person 
attempting to manipulate the proposed ETP would also have to trade on 
the derivatives market to successfully manipulate the ETP.\456\ While 
the Commission recognizes that the CFTC regulates the CME and CFE 
futures markets, the evidence that the Sponsor presents regarding the 
relative size of the bitcoin futures market and the relationship in 
prices between the spot and futures markets does not, as explained 
further below, establish the interrelationship between the futures 
market and the proposed ETP, or directionality of that 
interrelationship, that would make the bitcoin futures market a 
``market of significant size'' in the context of the proposed ETP.\457\
---------------------------------------------------------------------------

    \455\ Bitwise Submission III, supra note 9, at 151. See also 
supra note 124.
    \456\ See supra note 410 and accompanying text. The Commission 
notes that, based on the common membership of NYSE Arca, CME, and 
CFE in the Intermarket Surveillance Group, see supra note 411 and 
accompanying text, NYSE Arca has the equivalent of a comprehensive 
surveillance-sharing agreement with CME and CFE. See supra note 15. 
In addition, although one commenter questions whether the bitcoin 
futures market is regulated, see supra note 411, the Commission 
recognizes that the CFTC comprehensively regulates CME and CFE. 
However, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying bitcoin spot market. See Winklevoss 
Order, supra note 12, 83 FR at 37587, 37599.
    \457\ While the Sponsor's assertions about the bitcoin futures 
market address trading on the both the CME and the CFE, as noted 
above, the CFE ceased offering new bitcoin futures contracts as of 
March 2019, see supra note 38. Therefore any surveillance sharing 
between NYSE Arca and the CFE would not cover an actively traded 
bitcoin futures market. While the Commission considers evidence in 
the record concerning the CFE bitcoin futures market in the context 
of the overall bitcoin futures market, the Commission does not take 
a position on whether the CFE bitcoin futures market would 
constitute a significant, regulated market if it were still offering 
new bitcoin futures contracts. The Commission notes that the ICE 
Futures U.S. exchange began offering bitcoin futures contracts as of 
September 2019. See BAKKT Bitcoin (USD) Monthly And Daily Futures 
Contracts Trading to Begin on Monday, September 23, 2019, ICE 
Futures U.S. (Aug. 16, 2019), available at https://www.theice.com/publicdocs/futures_us/exchange_notices/ICE_Futures_US_BTC_Launch2019_20190816.pdf (last visited Oct. 7, 
2019). However, the record contains no information about the volume 
of ICE Futures U.S.'s bitcoin futures product or whether the Sponsor 
has a relevant surveillance-sharing agreement with ICE Futures U.S.
---------------------------------------------------------------------------

    The Sponsor's assertions about the size of the bitcoin futures 
market, either in an absolute sense or in comparison to the size of 
what the Sponsor identifies as the ``real'' spot market, do not 
establish that the bitcoin futures market is significant.\458\ As 
described in the Winklevoss Order and Commission orders considering 
bitcoin-related trust issued receipts, the Commission's interpretation 
of the term ``market of significant size'' depends on the 
interrelationship between the market with which the listing exchange 
has a surveillance-sharing agreement and the proposed ETP.\459\ This 
interrelationship must be such that there is a reasonable likelihood 
that a person attempting to manipulate the proposed ETP would also have 
to trade on that market to successfully manipulate the ETP.\460\ The 
Sponsor's assertions about the size of the bitcoin futures market, 
including in comparison to the ``real'' bitcoin spot market that serves 
as the basis for the proposed ETP's pricing mechanism, are not 
sufficient to establish an interrelationship between the bitcoin 
futures market and the proposed ETP.
---------------------------------------------------------------------------

    \458\ See supra notes 412-422 and accompanying text. Several 
commenters similarly make arguments that rely on the absolute or 
relative size of the bitcoin futures market. See supra notes 444-448 
and accompanying text.
    \459\ See Winklevoss Order, supra note 12, 83 FR at 37594; 
ProShares Order, supra note 12, 83 FR at 43936; GraniteShares Order, 
supra note 12, 83 FR at 43925; Direxion Order, supra note 12, 83 FR 
at 43914.
    \460\ See supra note 16 and accompanying text.
---------------------------------------------------------------------------

    As discussed above, the Sponsor has not shown that it has 
identified all of the ``real'' volume in the bitcoin spot market, and 
it has failed to support its assertion that the presence of more 
``real'' volume in the market would not materially change its 
conclusions, which would include its conclusions about whether the 
bitcoin futures market is ``significant.'' \461\ Therefore, the 
approximately $554 million in average daily volume in the spot market 
that the Sponsor cites may be significantly understated--and the 
relative size of the bitcoin futures market may be respectively 
overstated.\462\ In any event, without accurate information about the 
size of the ``real'' bitcoin spot market, the Sponsor cannot 
substantiate its arguments about the relative sizes of the futures and 
spot markets for bitcoin, and thus has not met its burden to 
demonstrate that the proposed rule change is consistent with the 
Exchange Act. In addition, while the Sponsor cites growth in the 
bitcoin futures market, particularly during April and May 2019,\463\ 
this growth will not necessarily continue without a slowdown or even 
reversal.\464\ The Trust's Registration Statement acknowledges that the 
bitcoin futures market ``has limited trading history and operational 
experience and may be less liquid, more volatile and more vulnerable to 
economic, market and industry changes than more established futures 
markets.'' \465\ NYSE Arca and the Sponsor do not address this 
statement or whether future volatility in bitcoin futures market 
volumes would affect whether this market is significant.\466\
---------------------------------------------------------------------------

    \461\ See supra Section III.B.1(c).
    \462\ See supra note 414 and accompanying text.
    \463\ See supra notes 418-422 and accompanying text.
    \464\ While the Sponsor asserts that a graph of the average 
daily volume for CME and CFE bitcoin futures from December 2017 
through August 2019 shows a continuing trend of increased bitcoin 
futures volume since the CFE stopped issuing new bitcoin futures, 
this graph shows lower volume in July and August 2019, as compared 
to April and May 2019. See supra note 423.
    \465\ Registration Statement, supra note 31, at 11.
    \466\ The Sponsor's assertions that the volume on the CFE 
futures market in recent months will likely migrate to the CME 
contract now that the CFE has stopped further issuance of its 
bitcoin futures is speculative. See supra notes 423-425 and 
accompanying text. However, particularly given the limited size of 
the CFE bitcoin futures market in recent months, the Commission's 
analysis does not depend on whether or not this volume migrates to 
the CME bitcoin futures market.
---------------------------------------------------------------------------

    In addition, the record does not establish that there is a close 
alignment between the ``real'' bitcoin spot market, which serves as the 
basis for the Trust's NAV and IIV pricing, and the bitcoin futures 
market.\467\ The Sponsor presents

[[Page 55411]]

an analysis of the level of average deviation between the CME futures 
contract price and the consolidated spot price, and of the speed at 
which pricing discrepancies of over 1% between the CME bitcoin futures 
price and the consolidated spot price are arbitraged away.\468\ 
However, the Sponsor's comparison between the spot and futures markets 
suffers from the same flaws seen in its analysis of arbitrage among the 
``real'' spot platforms.\469\
---------------------------------------------------------------------------

    \467\ See supra notes 426-443 and accompanying text.
    \468\ See supra notes 430-443 and accompanying text. See supra 
Section III.B.1(b) for discussion about the Sponsor's calculation of 
a ``consolidated price'' for the bitcoin spot market.
    \469\ See supra notes 151-154 and accompanying text.
---------------------------------------------------------------------------

    The Sponsor's argument relies heavily on conclusory statements that 
are insufficient. For example, the Sponsor asserts that evidence 
``suggests'' that institutional-quality arbitrageurs are enforcing 
strong arbitrage between the futures and spot markets at all times, but 
this is post hoc reasoning, rather than an analysis of the underlying 
reasons for any price correlation, and, further, the Sponsor simply 
assumes that its descriptions of the reasons for contango and 
backwardation in bitcoin futures trading explain the observed 
deviations between spot and futures prices.\470\ The Sponsor also 
points to overlap between certain ``real'' platforms used in the 
Trust's pricing mechanism and the pricing mechanism for the CME bitcoin 
futures (and the CFE bitcoin futures that are no longer traded), and 
asserts that its analysis showing that all ``real'' bitcoin spot 
markets trade effectively at a single price suggests that the bitcoin 
futures market trades at a price tightly linked to the consolidated 
spot price calculated by the Sponsor.\471\ However, as discussed above, 
the Sponsor has not provided sufficient evidence to support its 
assertions regarding the effectiveness of arbitrage in the ``real'' 
spot market.\472\ In addition, the Sponsor has not demonstrated that 
its consolidated spot price is comparable to the price that would be 
generated by the Trust's pricing mechanism.\473\
---------------------------------------------------------------------------

    \470\ See supra note 439 and accompanying text. The Commission 
notes that the Sponsor's discussion of backwardation and contango in 
the bitcoin futures market, see supra notes 435-439 and accompanying 
text, is generally not relevant because it does not bear directly on 
whether the bitcoin futures market is a market ``of significant 
size.''
    \471\ See supra notes 427-428 and accompanying text.
    \472\ See supra notes 151-154 and accompanying text.
    \473\ While the Notice and OIP refers to alignment of the 
bitcoin futures market with the Bitwise Daily Bitcoin Reference 
Price and the Bitwise Real-Time Bitcoin Price, see supra note 426 
and accompanying text, the Sponsor's analysis compares the futures 
market to its calculated consolidated spot price, which is not the 
same as the price that would be generated by the Trust's pricing 
mechanism. The Commission notes that an earlier analysis by the 
Sponsor compared the CME futures market to a global spot price, see 
supra note 431, which again is not the same as the Trust's pricing 
mechanism.
---------------------------------------------------------------------------

    The Commission also notes that the record contains no evidence 
about the lead-lag relationship between the bitcoin futures market and 
the spot market, which 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. Additionally, NYSE Arca and the Sponsor have not provided 
sufficient data to support the Sponsor's assertions that it is unlikely 
that trading in the proposed ETP would become the predominant influence 
on prices in the bitcoin market.\474\ The Sponsor's assertions about 
the likely inflows for the proposed ETP are speculative, and the 
Sponsor has not provided the data underlying its cited analysis.
---------------------------------------------------------------------------

    \474\ See supra notes 449-454 and accompanying text.
---------------------------------------------------------------------------

    Finally, the Commission notes that the charts and graphs that the 
Sponsor has prepared present a particular view of its analysis that 
vary based on choices made, including scaling. For example, the Sponsor 
provides a line graph of the CME bitcoin futures contract price versus 
the consolidated spot price from January 2018 through May 2019 and 
asserts that, ``[w]hile some minor discrepancies exist in the January-
March 2018 time frame, after that, the two lines are virtually 
identical.'' \475\ Due to the scaling of the line graph--the graph 
covers over 16 months and the ``y'' axis ranges from 2,500 to 20,000 
USD--it is very difficult to see differences between the lines 
representing the CME futures contract price and the consolidated spot 
price, even during the January through March 2018 period that had noted 
``minor discrepancies.'' \476\ In contrast, as part of the Sponsor's 
discussion of contango and backwardation, the Sponsor has prepared a 
line graph of the CME bitcoin futures contract price versus the 
consolidated spot price from November 13, 2018, through November 16, 
2018--this time scaled to show a four-day period and with a ``y'' axis 
ranging from 5,200 to 6,200 USD--that shows visible differences between 
the lines.\477\ In addition, the Sponsor's presentation of average 
deviation, without accompanying information about median, minimum, or 
maximum deviations, may obscure transient events. Further, the 
Sponsor's choice to group together all deviations over 1%, regardless 
of size, obscures whether some deviations were quite large and how long 
a large deviation would persist.
---------------------------------------------------------------------------

    \475\ Bitwise Submission II, supra note 9, at 78. See also supra 
note 431 and accompanying text.
    \476\ The Commission notes that the Sponsor does not elaborate 
on the reasons for these discrepancies and why they do not affect 
its conclusions.
    \477\ See Bitwise Submission II, supra note 9, at 80.
---------------------------------------------------------------------------

    Therefore the Commission cannot conclude, based on the current 
record, that the CME bitcoin futures market is a ``market of 
significant size,'' such that NYSE Arca would be able to rely on 
surveillance-sharing with the CME to provide sufficient protection 
against fraudulent and manipulative acts and practices.\478\ The 
Commission recognizes that, over time, bitcoin-related markets may 
continue to grow and develop. For example, existing or newly created 
bitcoin futures markets that are regulated may achieve significant 
size, and an ETP listing exchange may be able to demonstrate in a 
proposed rule change that it will be able to address the risk of fraud 
and manipulation by sharing surveillance information with a regulated 
market of significant size related to bitcoin, as well as, where 
appropriate, with the relevant spot markets underlying such bitcoin 
derivatives. Should these circumstances develop, or conditions 
otherwise change in a manner that affects the Exchange Act analysis, 
the Commission would then have an opportunity to consider whether a 
bitcoin ETP would be consistent with the requirements of the Exchange 
Act.\479\
---------------------------------------------------------------------------

    \478\ The Commission notes that a surveillance-sharing agreement 
with a bitcoin futures exchange is distinguishable from a 
surveillance-sharing agreement with a spot bitcoin platform, which 
would lack the ability of a self-regulatory organization to 
discipline its members to compel compliance with surveillance-
sharing requirements. Further, unlike the record underlying the 
Winklevoss Order, the record here does not contain evidence that 
NYSE Arca would have a surveillance-sharing agreement with one or 
more of the underlying spot platforms.
    \479\ See Winklevoss Order, supra note 12, 83 FR at 37580.
---------------------------------------------------------------------------

4. Assertions That Arguments Are Mutually Reinforcing
    The Sponsor asserts that, while each of its two main arguments that 
it has

[[Page 55412]]

satisfied the standard set forth in the Commission's orders concerning 
bitcoin-based commodity trusts and trust issued receipts is convincing 
on its own--that the underlying bitcoin market and the Trust's NAV 
process are uniquely resistant to market manipulation and fraudulent 
activity, and that NYSE Arca has entered into a surveillance-sharing 
agreement with a regulated bitcoin futures market of significant size--
the two arguments together are ``mutually reinforcing and positive.'' 
\480\ The Sponsor also states that while it does not intend to suggest 
that the bitcoin market is immune from all forms of potential 
manipulation, the risks of trading on a platform must be weighed 
against the benefits, and that, as with past Commission approvals of 
ETPs, the unique quality of the bitcoin market adds comfort to the 
presence of a surveillance-sharing agreement between the listing 
exchange and a regulated market of significant size.\481\ The Sponsor 
draws a comparison to the Commission's approval of the streetTRACKS 
Gold Shares ETP, in which, according to the Sponsor, the Commission 
hinged its approval on the existence of a surveilled market for gold 
futures, but took ``comfort'' in the liquidity and diversity of the OTC 
market for gold.\482\
---------------------------------------------------------------------------

    \480\ See Bitwise Submission III, supra note 9, at 51, 107.
    \481\ See id. at 43.
    \482\ See id. (citing Securities Exchange Act Release No. 50603 
(Oct. 28, 2004), 69 FR 64614, 64619 (Nov. 5, 2004) (SR-NYSE-2004-22) 
(``Gold Order''), which describes the importance of information 
sharing agreements with markets trading securities underlying a 
derivative, the presence of the information sharing agreement 
between the listing exchange and the gold futures market, and the 
nature of both the OTC and futures markets for gold). See also id. 
at 107; Notice and OIP, supra note 7, 84 FR at 23128; Bitwise 
Submission I, supra note 6, at 89.
---------------------------------------------------------------------------

    Despite the Sponsor's assertions that its arguments are mutually 
reinforcing,\483\ NYSE Arca and the Sponsor do not articulate any basis 
for applying a lesser standard for either measure as set forth in the 
Commission's orders concerning bitcoin-based commodity trusts and trust 
issued receipts.\484\ As the Commission has stated above, in the 
absence of a showing that the bitcoin market is uniquely resistant to 
manipulation, or that other alternative means are present to prevent 
fraud and manipulation, a surveillance-sharing agreement with a 
regulated market of significant size related to bitcoin is required to 
ensure that, in compliance with the Exchange Act, the proposal is 
designed to prevent fraudulent and manipulative acts and 
practices.\485\
---------------------------------------------------------------------------

    \483\ See supra notes 480-482 and accompanying text.
    \484\ Even if NYSE Arca could show that bitcoin or the bitcoin 
market had certain properties that provided some resistance to 
manipulation, it would not lessen the need for a surveillance-
sharing agreement with a significant, regulated market related to 
bitcoin or bitcoin derivatives. Conversely, the Commission concludes 
that even if NYSE Arca could show that it had entered into a 
surveillance-sharing agreement with a regulated market of 
substantial, but not ``significant,'' size, it would not lessen the 
need to show that bitcoin or the bitcoin market is uniquely 
resistant to manipulation.
    \485\ See supra note 15 and accompanying text.
---------------------------------------------------------------------------

    The Sponsor asserts that, in the Gold Order, the Commission ``found 
comfort'' in the liquidity and diversity of the gold OTC market.\486\ 
Yet the Sponsor acknowledges that the Commission's approval in the Gold 
Order ``hinged'' on the existence of a surveilled market for gold 
futures.\487\ The Gold Order both recognized these characteristics of 
the gold OTC market and reflected the Commission's view that 
``[i]nformation sharing agreements with markets trading securities 
underlying a derivative are an important part of a self-regulatory 
organization's ability to monitor for trading abuses in derivative 
products.'' \488\ Further, the Gold Order states that ``the Commission 
believes that the unique liquidity and depth of the gold market, 
together with the MOU [Memorandum of Understanding] with NYMEX (of 
which COMEX is a Division) and NYSE Rules 1300(b) and 1301, create the 
basis for the [ETP listing exchange] to monitor for fraudulent and 
manipulative practices in the trading of the Shares.'' \489\ Moreover, 
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 membership in common with, that 
market.\490\ Thus, even if the Commission accepted the representations 
by the Sponsor about the liquidity and depth of the spot market for 
bitcoin, the Commission's disapproval of NYSE Arca's proposal would 
nonetheless be consistent with the Gold Order and the Commission's 
other approvals of commodity-trust ETPs.
---------------------------------------------------------------------------

    \486\ See supra note 482 and accompanying text.
    \487\ See supra note 482 and accompanying text.
    \488\ See Gold Order, supra note 482, 69 FR at 64619.
    \489\ Id. (emphasis added). See also Winklevoss Order, supra 
note 12, 83 FR at 37594-95 (discussing Commission approvals of gold, 
platinum, palladium, and copper ETPs). The Sponsor acknowledges that 
the ``availability of a surveillance-sharing agreement with a 
derivatives market of significant size'' relating to the ``gold 
market'' provides protection against market manipulation. Bitwise 
Submission III, supra note 9, at 107.
    \490\ See Winklevoss Order, supra note 12, 83 FR at 37594.
---------------------------------------------------------------------------

C. Whether NYSE Arca Has Met Its Burden To Demonstrate That the 
Proposal Is Consistent With the Protection of Investors and the Public 
Interest

    NYSE Arca contends that, if approved, its ETP would protect 
investors and the public interest, but the Commission finds that NYSE 
Arca has not made such a showing on the current record. The Commission 
must consider any potential benefits in the broader context of whether 
the proposal meets each of the applicable requirements of the Exchange 
Act. And because NYSE Arca has not demonstrated that its proposed rule 
change is designed to prevent fraudulent and manipulative acts and 
practices, the Commission must disapprove the proposal.
1. Representations Made and Comments Received
    NYSE Arca asserts that the proposal will facilitate the listing and 
trading of a new type of ETP based on the price of bitcoin that will 
enhance competition among market participants, to the benefit of 
investors and the marketplace.\491\ In addition, the Sponsor asserts 
that the proposed bitcoin ETP would provide many benefits to the 
bitcoin market and potential benefits to investors, and would be an 
incremental positive to the market by creating another regulated market 
for price discovery.\492\ According to the Sponsor, the design of the 
Trust and the fundamental nature of the bitcoin market would help 
mitigate risk factors that come from pricing, valuation, market 
manipulation, and related concerns.\493\ The Sponsor represents that 
broker-dealers have expressed a desire for the ability to offer clients 
a bitcoin ETP as a way to allow their clients to have institutionally-
managed exposure to bitcoin, rather than buying bitcoin individually 
from platforms.\494\
---------------------------------------------------------------------------

    \491\ See Notice and OIP, supra note 7, 84 FR at 23136.
    \492\ See Bitwise Submission I, supra note 6, at 202; Bitwise 
Submission III, supra note 9, at 167.
    \493\ See Bitwise Submission I, supra note 6, at 202.
    \494\ See id. at 204.
---------------------------------------------------------------------------

    One commenter states that the proposed ETP would provide investors 
with a familiar, easily accessible, and secure financial product that 
would be subject to disclosure requirements and a more substantive 
regulatory regime than that imposed by the spot platforms.\495\ This 
commenter also states that the

[[Page 55413]]

proposed ETP would reduce risks that investors face when directly 
transacting in bitcoin via spot platforms, including risks relating to 
cryptographic key maintenance, hacking attacks, and computer 
errors.\496\ This commenter further asserts that the proposed ETP would 
enhance protections for all investors by encouraging disciplined and 
sophisticated institutional participants to join the market, and would 
reduce retail-specific risks because Shares would be purchased through 
brokerage accounts with associated client risk tolerance and 
suitability obligations.\497\ Another commenter states that the ETP 
structure has allowed investors easy, secure, and low-cost access to 
important markets, and that it would be a ``win'' for investors if this 
protection and the related opportunity was extended to bitcoin.\498\ In 
addition, one commenter states that the proposed Shares would provide 
certain investors with the opportunity to acquire investment exposure 
in bitcoin, without participating directly in the spot market and 
having to make arrangements to custody bitcoin.\499\
---------------------------------------------------------------------------

    \495\ See Omniex Letter, supra note 9, at 2.
    \496\ See id. (stating that bitcoin spot platforms may be 
pressured to improve their services to compete with the proposed 
ETP).
    \497\ See id.
    \498\ See Donostia Ventures Letter, supra note 9, at 5.
    \499\ See Tagomi Letter, supra note 9, at 1.
---------------------------------------------------------------------------

    The Sponsor states that investors in the proposed ETP would need to 
consider and study the risk factors in the Trust's Registration 
Statement, including the high historical volatility of bitcoin, 
uncertainty regarding its long-term prospects for adoption, new 
technological advances, and regulatory changes.\500\ The Sponsor 
asserts that the primary risks of the proposed ETP would be those 
inherent to the underlying asset's returns, volatility, and 
functioning, rather than unique risks that pertain to custody, pricing, 
liquidity, arbitrage, or market manipulation.\501\ The Sponsor also 
asserts that issues that might be relevant to investment advisors 
investing in digital-asset-related funds on behalf of retail investors 
are whether bitcoin can be valued as a non-cashflow-generating asset, 
its high volatility, concerns over custody and locating bitcoin, and 
the ability of advisors or investors to understand bitcoin.\502\
---------------------------------------------------------------------------

    \500\ See Bitwise Submission I, supra note 6, at 202.
    \501\ See id. at 203.
    \502\ See id. at 205.
---------------------------------------------------------------------------

    One commenter asserts that the proposed ETP is not motivated by a 
legitimate desire to protect consumers or drive regulation, and that 
the primary intentions behind the proposal are to allow bitcoin to 
become part of the mainstream investor's portfolio, increase the mass 
adoption of cryptocurrencies and thus drive up the price through mass 
speculation.\503\ This commenter also asserts that disreputable 
individuals are operating in the bitcoin market and it is important not 
to send the wrong signal by supporting an ETP without the proper legal 
and regulatory framework in place to protect the public.\504\ Another 
commenter states that the Sponsor's presentation is ``condescending'' 
and assumes that the public needs protecting by an ETP, and that the 
public should keep control of its digital assets and accept the risks 
that come with self-ownership.\505\ A third commenter states that if 
the root causes of manipulation by the platforms are not identified and 
eliminated, an ETP based on bitcoin would not only fail to solve them, 
but would compound them before any meaningful and sustainable risk 
measures and fail-safes have been identified and implemented to 
guarantee investor protection.\506\
---------------------------------------------------------------------------

    \503\ See Kumar Letter, supra note 6.
    \504\ See id.
    \505\ See Buckley Letter, supra note 6.
    \506\ See Fitzgerald Letter I, supra note 6. See also Shenoy 
Letter III, supra note 69, at 11 (asserting that the proposed ETP 
would not reduce the opaqueness of the marketplace or provide 
meaningful price discovery because the underlying root-cause of 
issues such as regulation, manipulation, and transparency have not 
been addressed at a trading platform level).
---------------------------------------------------------------------------

2. Analysis
    As it has in disapproving previous proposals for bitcoin-related 
ETPs, the Commission acknowledges that, as compared to trading in 
unregulated bitcoin spot markets, trading a bitcoin-based ETP on a 
national securities exchange may provide some additional protection to 
investors, but 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.\507\ 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.\508\ Thus, even if a proposed rule change would provide 
certain benefits to investors and the markets, the proposed rule change 
may still fail to meet other requirements under the Exchange Act.
---------------------------------------------------------------------------

    \507\ See Winklevoss Order supra note 12, 83 FR at 37602; 
GraniteShares Order, supra note 12, 83 FR at 43931; ProShares Order, 
supra note 12, 83 FR at 43941; Direxion Order, supra note 12, 83 FR 
at 43919.
    \508\ See 15 U.S.C. 78s(b)(2)(C). The Sponsor acknowledges that, 
``[n]otwithstanding all'' the purported benefits that the ``launch 
of a bitcoin ETP would provide'' to the bitcoin market and 
investors, ``it is critical and primary that any bitcoin ETP 
proposal meet each of the applicable requirements of the Exchange 
Act prior to approval.'' Bitwise Submission III, supra note 9, at 
167.
---------------------------------------------------------------------------

    For the reasons discussed above, NYSE Arca has not met its burden 
of demonstrating that the proposal is consistent with Exchange Act 
Section 6(b)(5),\509\ and, accordingly, the Commission must disapprove 
the proposal.\510\
---------------------------------------------------------------------------

    \509\ 15 U.S.C. 78f(b)(5).
    \510\ In disapproving the proposed rule change, as modified by 
Amendment No. 1, the Commission has considered its impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f); see also supra notes 491-498 and accompanying text. 
According to NYSE Arca, the proposal will facilitate the listing and 
trading of a new type of ETP based on the price of bitcoin, which 
will enhance competition among market participants, to the benefit 
of investors and the marketplace. See Notice and OIP, supra note 7, 
84 FR at 23136. Additionally, the Sponsor asserts that the proposed 
ETP would incrementally improve the market by creating another 
regulated market for price discovery. See Bitwise Submission I, 
supra note 6, at 202. The Sponsor also asserts that the launch of a 
bitcoin ETP would be supportive of the United States' digital asset 
market, which may have important economic advantages for the United 
States from a competitiveness standpoint. See Bitwise Submission 
III, supra note 9, at 167 (stating that bitcoin ETPs have been 
approved on the Nasdaq Nordic exchange in Sweden and the Six Swiss 
Exchange in Switzerland). The Commission recognizes that NYSE Arca 
and the Sponsor assert the economic benefits discussed above, but, 
for the reasons discussed throughout, the Commission is disapproving 
the proposed rule change because it does not find that the proposed 
rule change is consistent with the Exchange Act.
---------------------------------------------------------------------------

D. Other Comments

    Comment letters also addressed the general nature and uses of 
bitcoin; \511\ the state of development of bitcoin as a digital asset; 
\512\ the inherent value of, and risks of investing in, bitcoin; \513\ 
the volatility of bitcoin prices; \514\ the desire of investors to gain 
access to bitcoin

[[Page 55414]]

through an ETP; \515\ the legitimacy or enhanced regulatory protection 
that Commission approval of the proposed ETP might confer upon bitcoin 
as a digital asset; \516\ the potential impact of Commission approval 
of the proposed ETP on the price of bitcoin and on the U.S. economy; 
\517\ insurance and custody of fund holdings; \518\ handling of fund 
holdings after a hard fork or ``airdrop'' (i.e., an unsolicited 
distribution of digital assets free of charge); \519\ and the 
protection of individual freedom, privacy, and property rights.\520\ 
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.
---------------------------------------------------------------------------

    \511\ See Blockchain Capital Letter, supra note 9; Puddifoot 
Letter, supra note 6; Santos Letter, supra note 6.
    \512\ See Blockchain Capital Letter, supra note 9; Page Letter, 
supra note 9; Puddifoot Letter, supra note 6; Santos Letter, supra 
note 6; Xia Letter, supra note 9.
    \513\ See Ahn Letter II, supra note 9; Ahn Letter III, supra 
note 9; Chris Letter, supra note 6; Mallya Letter, supra note 6; 
Neil Letter, supra note 6; Page Letter, supra note 9.
    \514\ See Bitwise Submission I, supra note 6, at 205; Bird 
Letter, supra note 9; Perrott Letter, supra note 6; Pinto Letter, 
supra note 6; Shenoy Letter III, supra note 69, at 6-7.
    \515\ See Blockchain Association Letter, supra note 9; 
Collaborative Fund Letter, supra note 9; Mallon Letter, supra note 
9; Omniex Letter, supra note 9; Puddifoot Letter, supra note 6; J. 
Ross Letter, supra note 9; Shenoy Letter II, supra note 9.
    \516\ See Anonymous Letter I, supra note 6; Anonymous Letter II, 
supra note 9; Barnwell Letter, supra note 6; Blockchain Association 
Letter, supra note 9; Castle Island Ventures Letter, supra note 9; 
Collaborative Fund Letter, supra note 9; J. Ross Letter, supra note 
9; Santos Letter, supra note 6; Shenoy Letter II, supra note 9.
    \517\ See Bitwise Submission III, supra note 9, at 167; Mallon 
Letter, supra note 9; Neal Letter, supra note 9.
    \518\ See Bitwise Submission I, supra note 6, at 133-167, 205-
210; Castle Island Ventures Letter, supra note 9; Coinbase Custody 
Letter, supra note 9; Monterio Letter, supra note 6; Santos Letter, 
supra note 6.
    \519\ See Bitwise Submission I, supra note 6, at 182-188, 213-
215.
    \520\ See Ahn Letter III, supra note 9; Blockchain Association 
Letter, supra note 9; Omniex Letter, supra note 9; Rob Letter, supra 
note 6; Santos Letter, supra note 6.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with Section 6(b)(5) of the Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2019-01, as 
modified by Amendment No. 1, is disapproved.
---------------------------------------------------------------------------

    \521\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\521\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-22486 Filed 10-15-19; 8:45 am]
 BILLING CODE 8011-01-P