Document ID: SEC-2022-0750-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2022-06-02T04:00Z

[Federal Register Volume 87, Number 106 (Thursday, June 2, 2022)]
[Notices]
[Pages 33548-33558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11819]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94999; File No. SR-NYSEArca-2021-67]

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

May 27, 2022.

I. Introduction

    On September 20, 2021, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to list and trade shares 
(``Shares'') of the One River Carbon Neutral Bitcoin 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 October 5, 2021.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 93171 (Sept. 29, 
2021), 86 FR 55073 (Oct. 5, 2021) (``Notice''). Comments on the 
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2021-67/srnysearca202167.htm.

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

[[Page 33549]]

    On November 10, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On December 21, 2021, the Commission 
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act 
\6\ to determine whether to approve or disapprove the proposed rule 
change.\7\ On March 18, 2022, the Commission designated a longer period 
for Commission action on the proposed rule change.\8\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 93553 (Nov. 10, 
2021), 86 FR 64276 (Nov. 17, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93840 (Dec. 21, 
2021), 86 FR 73826 (Dec. 28, 2021).
    \8\ See Securities Exchange Act Release No. 94475 (Mar. 18, 
2022), 87 FR 16808 (Mar. 24, 2022).
---------------------------------------------------------------------------

    This order disapproves the proposed rule change. The Commission 
concludes that NYSE Arca has not met its burden under the Exchange Act 
and the Commission's Rules of Practice to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5), 
and in particular, the requirement that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \9\
---------------------------------------------------------------------------

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

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

    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Notice, 86 FR at 55075.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change To 
List and Trade Shares of the Valkyrie Bitcoin Fund under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a 
Proposed Rule Change To List and Trade Shares of the Kryptoin 
Bitcoin ETF Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021), 
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust under 
NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares), Securities 
Exchange Act Release No. 94006 (Jan. 20, 2022), 87 FR 3869 (Jan. 25, 
2022) (SR-NYSEArca-2021-37) (``SkyBridge Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
Wise Origin Bitcoin Trust under BZX Rule 14.11(e)(4), Commodity-
Based Trust Shares, Securities Exchange Act Release No. 94080 (Jan. 
27 2022), 87 FR 5527 (Feb. 1, 2022) (SR-CboeBZX-2021-039) (``Wise 
Origin Order''); Order Disapproving a Proposed Rule Change To List 
and Trade Shares of the NYDIG Bitcoin ETF Under NYSE Arca Rule 
8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 94395 (Mar. 10, 2022), 87 FR 14932 (Mar. 16, 2022) (SR-
NYSEArca-2021-57) (``NYDIG Order''); Order Disapproving a Proposed 
Rule Change To List and Trade Shares of the Global X Bitcoin Trust 
Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities 
Exchange Act Release No. 94396 (Mar. 10, 2022), 87 FR 14912 (Mar. 
16, 2022) (SR-CboeBZX-2021-052) (``Global X Order''); and Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
To List and Trade Shares of the ARK 21Shares Bitcoin ETF under BZX 
Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities Exchange 
Act Release No. 94571 (Mar. 31, 2022), 87 FR 20014 (Apr. 6, 2022) 
(SR-CboeBZX-2021-052) (``ARK 21Shares Order''). See also Order 
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Listing and Trading of Shares of the SolidX Bitcoin 
Trust Under NYSE Arca Equities Rule 8.201, Securities Exchange Act 
Release No. 80319 (Mar. 28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR-
NYSEArca-2016-101) (``SolidX Order''). The Commission also notes 
that orders were issued by delegated authority on the following 
matters: Order Disapproving a Proposed Rule Change To List and Trade 
the Shares of the ProShares Bitcoin ETF and the ProShares Short 
Bitcoin ETF, Securities Exchange Act Release No. 83904 (Aug. 22, 
2018), 83 FR 43934 (Aug. 28, 2018) (SR-NYSEArca-2017-139) 
(``ProShares Order''); Order Disapproving a Proposed Rule Change To 
List and Trade the Shares of the GraniteShares Bitcoin ETF and the 
GraniteShares Short Bitcoin ETF, Securities Exchange Act Release No. 
83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-CboeBZX-2018-
001) (``GraniteShares Order''); Order Disapproving a Proposed Rule 
Change To List and Trade Shares of the VanEck Bitcoin Trust Under 
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, Securities 
Exchange Act Release No. 93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 
18, 2021) (SR-CboeBZX-2021-019) (``VanEck Order''); Order Granting 
Approval of a Proposed Rule Change, as Modified by Amendment No. 2, 
To List and Trade Shares of the Teucrium Bitcoin Futures Fund Under 
NYSE Arca Rule 8.200-E, Commentary .02 (Trust Issued Receipts), 
Securities Exchange Act Release No. 94620 (Apr. 6, 2022), 87 FR 
21676 (Apr. 12, 2022) (SR-NYSEArca-2021-53) (``Teucrium Order''); 
and Order Granting Approval of a Proposed Rule Change, as Modified 
by Amendment No. 2, To List and Trade Shares of the Valkyrie XBTO 
Bitcoin Futures Fund Under Nasdaq Rule 5711(g) (Commodity Futures 
Trust Shares), Securities Exchange Act Release No. 94853 (May 5, 
2022), 87 FR 28848 (May 11, 2022) (SR-NASDAQ-2021-066) (``Valkyrie 
XBTO Order'').
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
---------------------------------------------------------------------------

    The standard requires such surveillance-sharing agreements since 
they ``provide a necessary deterrent to manipulation because they 
facilitate the availability of information needed to fully investigate 
a manipulation if it were to occur.'' \13\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\14\ 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.\15\
---------------------------------------------------------------------------

    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at 
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at 
12596.
    \14\ See NDSP Adopting Release, 63 FR at 70959.
    \15\ See Winklevoss Order, 83 FR at 37592-93; Letter from 
Brandon Becker, Director, Division of Market Regulation, Commission, 
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group 
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.

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

[[Page 33550]]

    In the context of this standard, 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\ 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.'' \17\
---------------------------------------------------------------------------

    \16\ See Winklevoss Order, 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 USBT Order, 85 FR at 12597.
---------------------------------------------------------------------------

    Consistent with this standard, 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--whether gold, silver, platinum, palladium, or 
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group 
(``ISG'') membership in common with, that market.\18\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\19\
---------------------------------------------------------------------------

    \18\ See Winklevoss Order, 83 FR at 37594.
    \19\ See USBT Order, 85 FR at 12597; 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 
Depository Receipts (``ADRs'')). 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'').
---------------------------------------------------------------------------

    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\20\ In response, the Commission has agreed that, if a 
listing exchange could establish that the underlying market inherently 
possesses a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets, it 
would not necessarily need to enter into a surveillance-sharing 
agreement with a regulated significant market.\21\ Such resistance to 
fraud and manipulation, however, must be novel and beyond those 
protections that exist in traditional commodity markets or equity 
markets for which the Commission has long required surveillance-sharing 
agreements in the context of listing derivative securities 
products.\22\
---------------------------------------------------------------------------

    \20\ See USBT Order, 85 FR at 12597.
    \21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR at 
12597.
    \22\ See USBT Order, 85 FR at 12597.
---------------------------------------------------------------------------

    As discussed in more detail below, NYSE Arca does not assert that 
the Exchange has a comprehensive surveillance-sharing agreement with a 
regulated market of significant size.\23\ Rather, NYSE Arca contends 
that the proposal is consistent with Section 6(b)(5) of the Exchange 
Act because the design of the methodology and framework of the Index 
(as defined herein) is sufficiently resistant to market 
manipulation.\24\ In addition, NYSE Arca states that the ``significant 
liquidity in the spot market and resultant minimal impact of market 
orders on the overall price of bitcoin, in conjunction with the Trust's 
offering only in-kind creation and redemption of Shares with respect to 
[a]uthorized [p]articipants, further mitigates the risk associated with 
potential manipulation and financially disincentivizes manipulation of 
the Index.'' \25\
---------------------------------------------------------------------------

    \23\ See infra Section III.B.2.
    \24\ See Notice, 86 FR at 55080.
    \25\ Id. at 55082.
---------------------------------------------------------------------------

    In the analysis that follows, the Commission examines whether the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act by addressing: In Section III.B.1 assertions that other means 
besides surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices; and in Section III.B.2 
assertions relating to NYSE Arca's surveillance-sharing agreements 
related to bitcoin.
    Based on the analysis, the Commission concludes that NYSE Arca has 
not established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. And as mentioned above, NYSE 
Arca does not assert that it has a comprehensive surveillance-sharing 
agreement with a regulated market of significant size related to 
bitcoin. Moreover, as discussed further below, NYSE Arca repeats 
various assertions made in prior bitcoin-based ETP proposals that the 
Commission has previously addressed and rejected--and more importantly, 
NYSE Arca does not respond to the Commission's reasons for rejecting 
those assertions but merely repeats them. As a result, the Commission 
is unable to find that the proposed rule change is consistent with the 
statutory requirements of Exchange Act Section 6(b)(5).
    The Commission emphasizes that its disapproval of this proposed 
rule change does not rest on an evaluation of whether bitcoin, or 
blockchain technology more generally, has utility or value as an 
innovation or an investment. Rather, the Commission is disapproving 
this proposed rule change because, as discussed below, NYSE Arca has 
not met its burden to demonstrate that its proposal is consistent with 
the requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\26\ the Exchange 
proposes to list

[[Page 33551]]

and trade the Shares of the Trust under NYSE Arca Rule 8.201-E, which 
governs the listing and trading of Commodity-Based Trust Shares on the 
Exchange.
---------------------------------------------------------------------------

    \26\ See Notice, supra note 3. See also Amendment No. 1 to the 
Registration Statement on Form S-1, dated October 6, 2021, filed by 
the Trust with the Commission under the Securities Act of 1933 (File 
No. 333-256407) (``Registration Statement'').
---------------------------------------------------------------------------

    The investment objective of the Trust is to track the performance 
of bitcoin, as measured by the performance of the MVIS One River Carbon 
Neutral Bitcoin Index (``Index''), adjusted for the Trust's expenses 
and other liabilities.\27\ As discussed below, the Index is designed to 
reflect the performance of bitcoin in U.S. dollars on a carbon neutral 
basis. In seeking to achieve its investment objective, the Trust would 
hold bitcoin and would value its Shares based on the same methodology 
used to calculate the Index, as adjusted to reflect the expenses 
associated with offsetting carbon credits.\28\ The Trust would not 
purchase or sell bitcoin directly, although the Trust may direct the 
Custodian to sell or transfer bitcoin to pay certain expenses.\29\ The 
Trust would not hold cash or cash equivalents; however, there may be 
situations where the Trust would hold cash on a temporary basis.\30\ 
The Trust would not hold futures, options, or options on futures.\31\
---------------------------------------------------------------------------

    \27\ See Notice, 86 FR at 55073. The sponsor of the Trust is One 
River Digital Asset Management, LLC (``Sponsor''), a Delaware 
limited liability company and a wholly-owned subsidiary of One River 
Asset Management, LLC. The trustee for the Trust is Delaware Trust 
Company. The marketing agent for the Trust is Foreside Global 
Services, LLC. The Bank of New York Mellon (``BNY Mellon'') would 
act as the Trust's administrator and transfer agent. The custodian 
for the Trust, Coinbase Custody Trust Company, LLC (``Custodian''), 
would hold all of the Trust's bitcoin on the Trust's behalf and 
retain custody of the Trust's bitcoin in an account for the Trust 
(``Bitcoin Account''). See id.
    \28\ See id. at 55074. According to the Sponsor, ``[t]he Trust 
intends to offset the carbon footprint associated with the bitcoin 
it holds by paying for the retirement of voluntary carbon credits 
equal to the daily estimated carbon emissions associated with the 
bitcoins held by the Trust.'' See Registration Statement at 47. See 
also infra notes 39-41 and accompanying text (further describing 
``carbon credits'').
    \29\ See Notice, 86 FR at 55074.
    \30\ See id. The Trust has entered into a cash custody agreement 
with BNY Mellon under which BNY Mellon would act as custodian of the 
Trust's cash and cash equivalents. See id.
    \31\ See id.
---------------------------------------------------------------------------

    The Index value would be the benchmark value of the bitcoin, less 
the estimated daily cost of offsetting the carbon emissions \32\ of a 
single bitcoin.\33\ The Index is the aggregation of executed trade data 
for ``major'' bitcoin spot platforms.\34\ According to NYSE Arca, to be 
eligible for inclusion in the Index, a constituent bitcoin platform 
must enforce policies to ensure fair and transparent market conditions 
and have processes in place to impede illegal or manipulative trading 
practices. Additionally, each constituent bitcoin platform must comply 
with applicable law and regulation, including proper anti-money 
laundering (``AML'') and know-your-customer (``KYC'') procedures.\35\ 
More than 160 global spot platforms are evaluated monthly based on data 
transparency, KYC stringency, and transaction monitoring.\36\ The Index 
is constructed using bitcoin price feeds from eligible bitcoin spot 
markets \37\ and volume weighted median price averages, calculated over 
20 intervals in rolling three-minute increments, less the estimated 
cost of offsetting the daily carbon emissions attributable to each 
bitcoin in the network.\38\
---------------------------------------------------------------------------

    \32\ See infra note 44 and accompanying text (generally 
describing the connection between electricity usage and consumption 
with, and the carbon emission intensity of such electricity 
consumption relating to, the bitcoin mining network). See also 
Registration Statement at 3.
    \33\ See Notice, 86 FR at 55075. The Index methodology was 
developed by MV Index Solutions GmbH (``MVIS'') and is monitored by 
the One River Index Committee (``Committee''), an independent, 
third-party calculation agent for the Index. MVIS, with the 
assistance of its affiliates, is also the calculation agent for the 
Index and for the MVIS[supreg] CryptoCompare Bitcoin Benchmark Rate 
(``BBR''), which measures the value of the underlying bitcoin 
represented by, and is the bitcoin benchmark component for, the 
Index. The current constituent bitcoin platforms of the BBR are 
Coinbase, Gemini, Bitstamp, Kraken, and itBit. See id. at 55074-75.
    \34\ See id. at 55075. See also Sponsor Letter at 6-7 
(describing how the Index is transparent and rules-based).
    \35\ See Notice, 86 FR at 55075.
    \36\ See id.
    \37\ The Committee selects the Index's eligible spot markets and 
evaluates them semi-annually, with the final selections to be made 
on the third Friday of January and July or during market disruptions 
where a market review is warranted, as determined by the Committee. 
See id.
    \38\ See id. at 55074.
---------------------------------------------------------------------------

    The Trust intends to offset the carbon footprint associated with 
bitcoin once a quarter by paying for the instantaneous retirement of 
voluntary carbon credits equal to the daily estimated carbon emissions 
associated with the bitcoins held by the Trust.\39\ The Trust has 
entered into an agreement with LIRDES S.A., d/b/a Moss Earth 
(``Moss''), a company located in Uruguay, to pay for carbon credit 
tokens created by Moss (``MCO2 Tokens'') representing certified 
reductions in greenhouse gas emissions.\40\ The MCO2 Tokens issued by 
Moss are carbon offsets encrypted and tokenized, utilizing blockchain 
technology, and are stored on a registry managed by Verra.\41\ The 
Trust would purchase MCO2 Tokens from Moss at the end of March, June, 
September, and December at pre-negotiated prices, and Moss would 
instantaneously retire the tokens to the Ethereum blockchain.\42\ The 
number of MCO2 Tokens paid for by the Trust would equal the aggregated 
sum of offsets implied by the daily carbon emissions for a single 
bitcoin over the preceding quarter, multiplied by the average number of 
bitcoins held in the Trust's portfolio during the quarter, with a view 
towards tracking the carbon footprint offset estimate calculated by the 
Index.\43\ The Trust would not hold the carbon offset MCO2 Tokens as an 
asset. Instead, the Trust would pay for the MCO2 Tokens and retire the 
tokens to the Ethereum blockchain to reduce global carbon emissions by 
the carbon dioxide tonnage (or tonnage of other similar greenhouse 
gases) corresponding to such tokens.\44\
---------------------------------------------------------------------------

    \39\ See id. According to the Exchange, voluntary carbon credits 
are certified and standardized under the Verra Verified Carbon 
Standard (``Verra''), an organization that establishes and manages 
standards and programs in connection with voluntary carbon credits, 
and the Trust would only utilize carbon credits that meet the Verra 
standards. See id. at 55074-75.
    \40\ See id. at 55075. Upon expiration of its agreement with 
Moss in April 2031, the Trust would either enter into a replacement 
agreement or pay for the retirement of MCO2 Tokens or similar carbon 
credits at then-current spot prices for such instruments. See id.
    \41\ See id. According to the Exchange, the MCO2 Token is a 
digital representation of a carbon credit that is stored on a 
registry by Verra and can be acquired in over-the-counter (``OTC'') 
or publicly-traded markets. Moss purchases carbon credits from 
projects that are certified under Verra's Verified Carbon Standard. 
Each circulating MCO2 Token is intended to represent a claim on a 
certified carbon credit held in an aggregated pool of carbon credits 
within the Moss account on the Verra registry. Tokenized carbon 
credits are fungible and do not represent a claim on a specific 
underlying carbon credit issued to a specific carbon reduction 
project. See id.
    \42\ See id. at 55075 & n.10.
    \43\ See id. at 55075.
    \44\ See id. at 55075 & n.10. According to the Exchange, the 
cost of the carbon offset used in the Index is calculated in the 
following steps. First, electricity consumption for the bitcoin 
mining network is recorded daily. Second, geolocation of bitcoin 
miners identifies the location of electricity usage. Third, for each 
location, the average production of electricity by its source of 
production (e.g., solar, coal) is recorded. This estimates the 
carbon emission intensity of electricity consumption in the bitcoin 
network. Fourth, total electricity consumption is multiplied by the 
carbon intensity of the bitcoin network to estimate total carbon 
emissions. These steps allow MVIS to obtain a daily estimate of the 
carbon emissions necessary to run the bitcoin network. The total 
carbon emissions of the bitcoin network are divided by the total 
number of bitcoins in circulation to estimate the carbon emissions 
attributable to each bitcoin on each day. Finally, the carbon 
emission attributable to each bitcoin is multiplied by the MCO2 
Token market price of a carbon offset. See id. at 55074. The daily 
accumulation of the carbon offset component of the Index measures 
the totality of the cost of the carbon offset required for holding a 
single bitcoin over the accumulation period. See id. at 55075.
---------------------------------------------------------------------------

    BNY Mellon would calculate the net asset value (``NAV'') of the 
Trust once each Exchange trading day. The NAV for a normal trading day 
would be released after 4:00 p.m. E.T. (often by 5:30 p.m. E.T. and 
almost always by

[[Page 33552]]

8:00 p.m. E.T.).\45\ The NAV per Share of the Trust would be equal to 
the median price of the bitcoin used in the calculation of the Index, 
less the Trust's liabilities, including the cost of carbon measured in 
the Index, divided by the total number of outstanding Shares. The 
accumulation of the daily carbon offset costs calculated in the Index 
would act as an expense to the Trust. The payment for the retirement of 
carbon offsets by the Trust would occur once per quarter of the 
calendar year, and the number of MCO2 Tokens retired would equal the 
aggregated sum of offsets implied by the daily carbon footprint for 
each bitcoin held by the Trust during the quarter. The NAV would accrue 
the estimated carbon cost daily.\46\
---------------------------------------------------------------------------

    \45\ See id. at 55076-77.
    \46\ See id. at 55076.
---------------------------------------------------------------------------

    The Trust would provide website disclosure of its bitcoin holdings 
daily.\47\ The Intraday Indicative Value (``IIV'') per Share would be 
widely disseminated every 15 seconds during the NYSE Arca Core Trading 
Session (normally 9:30 a.m. E.T. to 4:00 p.m. E.T.) by the Trust and by 
one or more major market data vendors and would be available through 
on-line information services. The IIV would be calculated by using the 
prior day's closing NAV per Share of the Trust as a base and updating 
that value throughout the trading day to reflect changes in the most 
recently reported price level of the Index as reported by Bloomberg, 
L.P. or another reporting service.\48\
---------------------------------------------------------------------------

    \47\ See id. at 55082.
    \48\ See id. at 55077.
---------------------------------------------------------------------------

    The Trust would process all creations and redemptions in-kind and 
only in one or more blocks of 50,000 Shares (``Baskets'').\49\ When 
creating Shares, authorized participants would deliver, or facilitate 
the delivery of, bitcoin to the Bitcoin Account in exchange for Shares, 
and when redeeming Shares, the Trust, through the Custodian, would 
deliver bitcoin to authorized participants.
---------------------------------------------------------------------------

    \49\ See id. at 55074, 55077.
---------------------------------------------------------------------------

    Although the Trust would create Baskets only upon the receipt of 
bitcoins, and redeem Baskets only by distributing bitcoins, a separate 
cash exchange process would be made available to authorized 
participants. Under the cash exchange process, an authorized 
participant would be able to deposit cash with BNY Mellon, which would 
facilitate the purchase or sale of bitcoins through a liquidity 
provider (``Liquidity Provider'') on behalf of an authorized 
participant. The bitcoin purchased (or sold) by the Liquidity Provider 
in connection with the cash exchange process would, in turn, be 
delivered to (or from, as appropriate) the Custodian, on behalf of the 
Trust, in exchange for Baskets.\50\
---------------------------------------------------------------------------

    \50\ See id. at 55074.
---------------------------------------------------------------------------

III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is 
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act 
requires, in relevant part, that the rules of a national securities 
exchange be designed ``to prevent fraudulent and manipulative acts and 
practices'' and ``to protect investors and the public interest.'' \51\ 
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.'' \52\
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \52\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\53\ 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.\54\ 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.\55\
---------------------------------------------------------------------------

    \53\ See id.
    \54\ See id.
    \55\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

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

1. Assertions That Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\56\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\57\
---------------------------------------------------------------------------

    \56\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \57\ See id. at 12597.
---------------------------------------------------------------------------

(a) Assertions Regarding Bitcoin and Bitcoin Markets
    NYSE Arca does not assert that the bitcoin market as a whole or the 
relevant underlying bitcoin market is uniquely and inherently resistant 
to fraud and manipulation. The Exchange, however, does assert that the 
``significant liquidity in the spot market and resultant minimal impact 
of market orders on the overall price of bitcoin, in conjunction with 
the Trust's offering only in-kind creation and redemption of Shares . . 
. mitigates the risk associated with potential manipulation and 
financially disincentivizes manipulation of the Index.'' \58\
---------------------------------------------------------------------------

    \58\ See Notice, 86 FR at 55082.
---------------------------------------------------------------------------

    In support of the proposal, the Exchange states that ``bitcoin is 
dominant, accounting for more than 49% of the total market 
capitalization of cryptoassets'' and that, ``[a]s of June 2021, the 
market cap for [b]itcoin is over $600 billion.'' \59\ In addition, NYSE 
Arca

[[Page 33553]]

states that bitcoin has the ``longest history of any cryptoasset'' and 
ranks as one of the most widely used, if not the most widely used, 
cryptoassets in the global token market, with ``more than 38 million 
unique bitcoin wallet addresses holding a positive balance, which shows 
a steady increase in the number of bitcoin owners and depth of 
ownership over the last four years.'' \60\ Moreover, the Exchange 
provides that bitcoin investors hold bitcoin for a relatively long 
time, as ``58% of owners maintain ownership for longer than a one-year 
period, and 70% of all holders are in profitable positions.'' \61\
---------------------------------------------------------------------------

    \59\ See Notice, 86 FR at 55078. See also letter from Sponsor 
(Jan. 16, 2022) (``Sponsor Letter'') at 1 (stating that the 
expansion of bitcoin market capitalization to nearly one trillion 
dollars and average daily turnover of $18.7 billion is above many 
well-known single name equity trading volumes such as Apple Inc.).
    \60\ See Notice, 86 FR at 55078.
    \61\ See id.
---------------------------------------------------------------------------

    NYSE Arca also states that the bitcoin marketplace is maturing. The 
Exchange cites to increased institutional participation, noting that 
public and established companies now hold bitcoin, and that other 
financial market participants (e.g., insurance companies and pension 
funds) appear to be ``embracing cryptoassets.'' \62\ The Exchange also 
provides that ``the rise in the digital economy has led to an increase 
in activity within the regulated banking system, reflecting increased 
institutional demand.'' \63\ Moreover, according to the Exchange, 
``licensed and regulated service providers have emerged to provide fund 
custodial services for digital assets, among other services.'' \64\
---------------------------------------------------------------------------

    \62\ See id. Specifically, NYSE Arca states that ``[e]stablished 
companies like Tesla, Inc., MicroStrategy Incorporated, and Square, 
Inc., among others, have recently announced substantial investments 
in bitcoin in amounts as large as $1.5 billion (Tesla) and $425 
million (MicroStrategy)'' and that ``MassMutual Insurance Company, 
one of the nation's oldest private companies and a historically 
conservative investor, has purchased over $100 million in bitcoin.'' 
Id.
    \63\ Id. See also letter from Paul Grewal, Chief Legal Officer, 
Coinbase (Jan. 11, 2022) (``Coinbase Letter'') at 3-4 (restating 
NYSE Arca's assertions and generally observing ``growth in the use 
of crypto assets to participate in decentralized finance, or DeFi, 
applications such as peer-to-peer borrowing and lending, with the 
total value allocated towards decentralized finance globally growing 
from under $1 billion to over $15 billion from December 31, 2019 to 
December 31, 2020,'' and ``a positive trend in the total market 
capitalization of crypto assets which indicates increased 
adoption''); Sponsor Letter at 1-2 (generally asserting that the 
rising value of bitcoin has accompanied advancement in information 
around its operational quality and the development of novel 
techniques designed to increase transparency and negate the risk of 
manipulation).
    \64\ See Notice, 86 FR at 55078.
---------------------------------------------------------------------------

    Additionally, NYSE Arca states that the Commodity Futures Trading 
Commission (``CFTC'') has ``exercised its regulatory jurisdiction in 
bringing a number of enforcement actions related to bitcoin and against 
trading platforms that offer cryptoasset trading, including, in certain 
cases, against defendants for direct trading of cryptoassets.'' \65\ 
Specifically, NYSE Arca contends that the CFTC ``has historically 
asserted jurisdiction over spot market commodities trading, where 
manipulative trading in the spot market can affect its derivatives 
market.'' \66\
---------------------------------------------------------------------------

    \65\ See id. at 55079.
    \66\ See id. at 55079-80. The Exchange specifically cites to two 
cases, CFTC v. Gelfman Blueprint (No. 17-7181) (S.D.N.Y. Sept. 21, 
2017) and CFTC v. Patrick K. McDonnell & Cabbagetech Corp., d/b/a 
Coin Drop Markets, (No. 18-CV-0361) (E.D.N.Y. Aug. 24, 2018), where, 
according to the Exchange, the CFTC asserted jurisdiction over the 
spot market when ``there was little to no derivatives trading in the 
United States'' or the ``case did not indicate that there was any 
derivatives trading conducted,'' respectively. See id. NYSE Arca 
surmises that the ``[c]ourts have taken an expansive interpretation 
of the CFTC's jurisdiction over trading in particular virtual 
currency products on the basis that futures trading in such products 
as a class already occurs.'' See id. See also Coinbase Letter at 5 
(asserting that the Commission should rely on the CFTC to exercise 
its traditional fraud authority to ensure the underlying bitcoin 
market is free of manipulation, and that these safeguards should 
satisfy the Commission).
---------------------------------------------------------------------------

    Finally, according to NYSE Arca, certain other regulatory bodies, 
such as the U.S. Department of the Treasury's Financial Crimes 
Enforcement Network (``FinCEN''), the U.S. Office of the Comptroller of 
the Currency (``OCC''), and the Board of Governors of the Federal 
Reserve System (``Federal Reserve'') have recently proposed or 
clarified rules to enhance transparency,\67\ custody,\68\ and account 
services \69\ relating to ``cryptoassets'' or ``digital assets,'' 
respectively.\70\
---------------------------------------------------------------------------

    \67\ See Notice, 86 FR at 55078-79. NYSE Arca states that FinCEN 
has proposed rulemaking initiatives aimed at enhancing transparency, 
which would require certain financial institutions to collect, 
retain, share, and report to FinCEN information related to certain 
transactions involving convertible virtual currency or certain 
digital assets, including identification information of persons 
engaged in such transactions. See id. According to NYSE Arca, such 
proposed rules ``are intended to reduce anonymity and promote 
transparency within the cryptoasset markets generally and of 
cryptoasset exchanges specifically, including the exchanges that 
compose the bitcoin component of the Index.'' Id. NYSE Arca also 
provides that, in March 2021, the Financial Action Task Force 
(``FATF'') issued updated draft guidance that, ``when issued in 
final form, would significantly broaden the reach of certain anti-
money laundering, including know-your-customer, compliance 
requirements applicable to transactions in virtual assets or 
involving virtual asset service providers.'' Id. While NYSE Arca 
acknowledges that ``FinCEN has not finalized its proposed rules yet, 
and the FATF guidance does not have the force of law,'' NYSE Arca 
argues that ``these actions signal a concerted effort among 
regulatory bodies to introduce requirements that would reduce 
anonymity of cryptoasset transactions and implement stronger anti-
money laundering compliance measures among industry participants.'' 
Id.
    \68\ See Notice, 86 FR at 55080. According to the Exchange, 
``the [OCC] has made clear that federally-chartered banks are able 
to provide custody services for cryptoassets and other digital 
assets.'' Id.
    \69\ See id. According to the Exchange, ``the [Federal Reserve] 
proposed guidelines to evaluate the requests for account services at 
Federal Reserve Banks in light of recent changes to the financial 
payments landscape.'' Id.
    \70\ The Exchange also mentions technological advancements in 
the bitcoin protocol, as well as advancements in regulatory 
frameworks, both on a global and national scale, such as the Bank of 
International Settlements' provision of consultation on prudential 
treatment of cryptoassets. See Notice, 86 FR at 55079.
---------------------------------------------------------------------------

    As with the previous proposals, the Commission here concludes that 
the Exchange's assertions about the general liquidity, growth, and 
acceptance of the bitcoin market do not constitute other means to 
prevent fraud and manipulation sufficient to justify dispensing with 
the requisite surveillance-sharing agreement. While the Exchange states 
that the significant liquidity in the spot market and resultant minimal 
impact of market orders on the overall price of bitcoin mitigates the 
risk associated with potential manipulation, such assertion is general 
and conclusory. Indeed, apart from the market capitalization of bitcoin 
and the number of unique bitcoin wallet addresses, NYSE Arca provides 
no analysis or evidence of liquidity in the bitcoin spot market or its 
assertion that there is ``minimal impact of market orders'' on the 
price of bitcoin. Likewise, NYSE Arca provides no analysis or evidence 
to demonstrate how liquidity or minimal impact of market orders serves 
to detect and deter potential fraud and manipulation.\71\ As stated 
above, ``unquestioning reliance'' on an SRO's representations in a 
proposed rule change is not sufficient to justify Commission approval 
of a proposed rule change.\72\
---------------------------------------------------------------------------

    \71\ See supra note 58 and accompanying text. The Exchange does 
not directly tie the asserted liquidity or development of the 
bitcoin market to an argument that such market evolution provides 
sufficient means to justify dispensing with the requisite 
surveillance sharing agreement. In addition, the Exchange makes no 
assertions that bitcoin is resistant to price manipulation.
    \72\ See supra note 55. The Commission has previously considered 
and rejected similar arguments about the liquidity and growth of the 
bitcoin spot market and general statements about the maturation of 
the bitcoin market. See, e.g., Valkyrie Order, 86 FR at 74159.
---------------------------------------------------------------------------

    While the Sponsor and NYSE Arca provide figures describing the size 
of the bitcoin spot market,\73\ such information is not sufficient to 
support the finding that other means besides surveillance-sharing 
agreements exist to prevent fraud or manipulation. NYSE Arca does

[[Page 33554]]

not provide meaningful analysis, based on data points provided, that 
the concerns previously articulated by the Commission relating to fraud 
and manipulation of the bitcoin market have been mitigated. For 
example, NYSE Arca does not sufficiently refute the presence of 
possible sources of fraud and manipulation in the bitcoin spot market 
generally that the Commission has raised in previous orders. Such 
possible sources have included (1) ``wash'' trading,\74\ (2) persons 
with a dominant position in bitcoin manipulating bitcoin pricing,\75\ 
(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 and misleading 
information, (6) manipulative activity involving purported 
``stablecoins,'' including Tether (USDT), and (7) fraud and 
manipulation at bitcoin trading platforms.\76\ Additionally, although 
NYSE Arca represents that ``there are more than 38 million unique 
bitcoin wallet addresses holding a positive balance, which shows a 
steady increase in the number of bitcoin owners and depth of ownership 
over the last four years,'' \77\ such figure, on its own, regarding the 
number of wallet addresses holding bitcoin do not provide any 
information on the concentration of bitcoin within or among such 
wallets, or take into account that a market participant with a dominant 
ownership position could use dominant market share to engage in 
manipulation.\78\
---------------------------------------------------------------------------

    \73\ See supra note 59 and accompanying text.
    \74\ See infra note 107 and accompanying text.
    \75\ See infra note 78 and accompanying text.
    \76\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 
2019), available at https://ssrn.com/abstract=3195066 and published 
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86.
    \77\ See supra note 60 and accompanying text.
    \78\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01; WisdomTree Order, 86 FR at 69325; Valkyrie Order, 86 
FR at 74160; Kryptoin Order, 86 FR at 74170; Skybridge Order, 87 FR 
at 3783-84; Wise Origin Order, 87 FR at 5531; ARK 21Shares Order, 87 
FR at 20019. See also Registration Statement at 21 (disclosing that: 
(a) Some entities hold large amounts of bitcoin relative to other 
market participants, (b) as of the date of the [Registration 
Statement], the ``largest [100] bitcoin wallets held a substantial 
amount of the outstanding supply of bitcoin and it is possible that 
some of these wallets are controlled by the same person or entity,'' 
and (c) ``it is possible that other persons or entities control 
multiple wallets that collectively hold a significant number of 
bitcoin, even if each wallet individually only holds a small 
amount,'' and ``[a]s a result of this concentration of ownership, 
large sales by such holders could have an adverse effect on the 
market price of bitcoin'').
---------------------------------------------------------------------------

    Further, although the Exchange describes the bitcoin marketplace as 
maturing with increased institutional participation and acceptance,\79\ 
the Exchange does not elaborate on how such participation and 
acceptance would mitigate against fraud and manipulation.
---------------------------------------------------------------------------

    \79\ See supra notes 62-64 and accompanying text.
---------------------------------------------------------------------------

    In support of its proposal, NYSE Arca also states that the ``CFTC 
has exercised its regulatory jurisdiction in bringing a number of 
enforcement actions related to bitcoin and against trading platforms 
that offer cryptoasset trading.'' \80\ The Commission has long 
recognized that the CFTC maintains some jurisdiction over the bitcoin 
spot market. However, under the Commodity Exchange Act, the CFTC does 
not have regulatory authority over bitcoin spot trading platforms.\81\ 
Except in certain limited circumstances, bitcoin spot trading platforms 
are not required to register with the CFTC, and the CFTC does not set 
standards for, approve the rules of, examine, or otherwise regulate 
bitcoin spot markets.\82\ As the CFTC itself stated, while the CFTC 
``has an important role to play,'' U.S. law ``does not provide for 
direct, comprehensive Federal oversight of underlying Bitcoin or 
virtual currency spot markets.'' \83\ In addition, while certain 
bitcoin derivatives exchanges that trade bitcoin futures and options on 
bitcoin futures are regulated by the CFTC, the CFTC's regulations do 
not extend to the bitcoin spot platforms, including the bitcoin spot 
platforms comprising the Index.
---------------------------------------------------------------------------

    \80\ See Notice, 86 FR at 55079.
    \81\ See USBT Order, 85 FR at 12604; WisdomTree Order, 86 FR at 
69328; Valkyrie Order, 86 FR at 74162; SkyBridge Order, 87 FR at 
3877; ARK 21Shares Order, 87 FR at 20023.
    \82\ See id.
    \83\ See Winklevoss Order, 83 FR at 37599 n.288 (quoting CFTC 
Backgrounder on Oversight of and Approach to Virtual Currency 
Futures Markets (Jan. 4, 2018), at 1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf).
---------------------------------------------------------------------------

    Moreover, even if, as the Exchange maintains, the CFTC ``has 
historically asserted jurisdiction over spot market commodities 
trading, where manipulative trading in the spot market can affect its 
derivatives market'' \84\ (emphasis added), the Exchange fails to 
explain why the CFTC's ability to bring enforcement action is a 
sufficient basis for the Exchange to dispense with the requirement to 
enter into a surveillance-sharing agreement with a regulated market of 
significant size. Specifically, where here the Shares of the proposed 
ETP would trade on a securities market, the Exchange fails to explain 
why it is relevant to the proposal that the CFTC can bring enforcement 
actions when spot trading affects the derivatives market. Moreover, the 
Commission also has the ability to bring enforcement actions for a wide 
array of causes, including fraud and manipulation, in the securities 
market. Despite this, as stated above, surveillance-sharing agreements 
have been consistently present whenever the Commission has approved the 
listing and trading of derivative securities, even where the underlying 
securities were also listed on national securities exchanges--such as 
options based on an index of stocks traded on a national securities 
exchange--and were thus subject to the Commission's direct regulatory 
authority.\85\
---------------------------------------------------------------------------

    \84\ See supra note 66 and accompanying text.
    \85\ See supra note 19 and accompanying text.
---------------------------------------------------------------------------

    Further, while the Exchange describes how other U.S. regulatory 
bodies have clarified or considered rulemaking initiatives to enhance 
transparency, custody, and account services relating to cryptoassets 
and other digital assets,\86\ NYSE Arca fails to explain how such 
initiatives serve as a suitable substitute or regulatory supplement to 
dispense with the need for the Exchange to enter into a surveillance-
sharing agreement with a regulated market of significant size. As 
discussed above, it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading the underlying assets for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\87\ Such 
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

[[Page 33555]]

party to the agreement from obtaining this information from, or 
producing it to, the other party.\88\ NYSE Arca fails to explain how 
the additional regulatory clarifications or rulemaking initiatives 
serve the function of a surveillance-sharing agreement in preventing, 
and sharing information about, fraud and manipulation.\89\
---------------------------------------------------------------------------

    \86\ According to the Exchange, the OCC clarified that 
``federally-chartered banks are able to provide custody services for 
cryptoassets and other digital assets''; the Federal Reserve 
proposed guidelines to evaluate the requests for account services; 
and FinCEN has proposed rulemaking initiatives to ``require certain 
cryptoasset transactions to be subject to [AML] compliance''; FATF 
has issued updated draft guidance that ``would significantly broaden 
the reach of certain anti-money laundering, including [KYC], 
compliance requirements applicable to transactions in virtual assets 
or involving virtual asset service providers''; and the Treasury's 
Office of Foreign Assets Control (``OFAC'') has ``brought 
enforcement actions over apparent violations of the sanctions laws 
in connection with the provision of wallet management services for 
digital assets.'' See supra notes 67-70 and accompanying text.
    \87\ See NDSP Adopting Release, 63 FR at 70959.
    \88\ See supra note 15 and accompanying text.
    \89\ NYSE Arca provides no data, information, or analysis as to 
how clarifications by the OCC regarding custody or by the Federal 
Reserve regarding account services address the Commission's concerns 
about fraud and manipulation. Likewise, initiatives by FinCEN, FATF, 
and OFAC related to AML, KYC, and sanctions do not serve as a 
substitute for, and are not otherwise the dispositive factor in the 
analysis regarding, the importance of having a surveillance-sharing 
agreement with a regulated market of significant size relating to 
bitcoin. For example, AML and KYC policies and procedures do not 
substitute for the sharing of information about market trading 
activity or clearing activity, and do not substitute for regulation 
of national securities exchanges. See USBT Order, 85 FR at 12603 
n.101 and accompanying text. See also Kryptoin Order, 86 FR at 74172 
n.79 (discussing how a commenter asserts that global bitcoin and 
cryptocurrency markets are subject to increasing levels of 
regulation, oversight, and enforcement actions by global governments 
and regulatory bodies, but provides no data, information, or 
analysis as to how, among other things, any such regulation makes 
the listing and trading of the ETP shares inherently resistant to 
fraud and manipulation).
---------------------------------------------------------------------------

    In addition, NYSE Arca does not address risk factors specific to 
the bitcoin blockchain and bitcoin platforms, described in the Trust's 
Registration Statement, that undermine the argument that the concerns 
previously articulated by the Commission relating to fraud and 
manipulation of the bitcoin market have been mitigated.\90\ For 
example, the Registration Statement acknowledges that the ``spot 
markets through which bitcoin and other digital assets trade are new 
and largely unregulated, and therefore, may be more exposed to fraud 
and security breaches that established, regulated exchanges for other 
financial assets or instruments''; that there is a risk of 
``manipulation of bitcoin spot markets by customers and/or the closure 
or temporary shutdown of such exchanges due to fraud''; that ``many 
spot markets and OTC market venues, do not provide the public with 
significant information regarding their ownership structure, management 
teams, corporate practices or oversight of customer trading''; that 
``[o]ver the past several years, a number of bitcoin spot markets have 
been closed or faced issues due to fraud''; that ``[t]he nature of the 
assets held at bitcoin spot markets makes them appealing targets for 
hackers and a number of bitcoin spot markets have been victims of 
cybercrimes''; that the bitcoin blockchain could be vulnerable to a 
``51% attack,'' in which a bad actor (or actors) or botnet that 
controls a majority of the processing power of the bitcoin network may 
be able to alter the bitcoin blockchain on which the bitcoin network 
and bitcoin transactions rely; and that ``digital asset networks have 
been subject to malicious activity achieved through control of over 50% 
of the processing power on the network.'' \91\
---------------------------------------------------------------------------

    \90\ See, e.g., SkyBridge Order, 87 FR at 3873; ARK 21Shares 
Order, 87 FR at 20019-20.
    \91\ See Registration Statement at 4, 10-11, 15.
---------------------------------------------------------------------------

(b) Assertions Regarding the Index
    The Exchange states that the ``use of the Index eliminates those 
bitcoin spot markets with indicia of suspicious, fake, or non-economic 
volume from the NAV calculation methodology pursuant to which the Trust 
prices its Shares.'' \92\ In addition, the Exchange asserts that the 
use of multiple eligible bitcoin spot markets is designed to mitigate 
the potential for idiosyncratic market risk.\93\ NYSE Arca also 
contends that the use of 20 rolling three-minute increments in the 
construction of the Index means that a malicious actor would need 
sustained efforts to ``manipulate the market over an extended period of 
time, or would need to replicate efforts multiple times, potentially 
triggering review from the spot market or regulators, or both.'' \94\ 
The Exchange also states that ``[a]ny attempt to manipulate the NAV 
would require a substantial amount of capital distributed across a 
majority of the eligible spot markets, and potentially coordinated 
activity across those markets, making it more difficult to conduct, 
profit from, or avoid the detection of market manipulation.'' \95\
---------------------------------------------------------------------------

    \92\ See Notice, 86 FR at 55080.
    \93\ Id.
    \94\ Id.
    \95\ Id. See also Sponsor Letter at 2 (further asserting that 
novel indices, such as the Index, ``provide not only a robust price 
for the spot bitcoin market but also negate the risk of market 
manipulation,'' and that to manipulate the Index would require 
sustained intervention across multiple exchanges during a period of 
peak market liquidity).
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the 
Commission can find no basis to conclude that NYSE Arca has articulated 
other means to prevent fraud and manipulation that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement. 
The record does not demonstrate that the proposed methodology for 
calculating the Index would make the proposed ETP resistant to fraud or 
manipulation such that a surveillance-sharing agreement with a 
regulated market of significant size is unnecessary. Specifically, NYSE 
Arca has not assessed the possible influence that spot platforms not 
included among the Index's underlying bitcoin platforms would have on 
the Index.\96\ The record does not establish that the broader bitcoin 
market is inherently and uniquely resistant to fraud and manipulation. 
Accordingly, to the extent that trading on platforms not directly used 
to calculate the Index affects prices on the Index's underlying bitcoin 
platforms, the characteristics of those other platforms--where various 
kinds of fraud and manipulation from a variety of sources may be 
present and persist--may affect whether the Index is resistant to 
manipulation.
---------------------------------------------------------------------------

    \96\ While NYSE Arca asserts that the Index's use of a median 
price limits the ability of outlier prices to affect the Index, the 
Commission has no basis on which to conclude that the Index's 
constituent bitcoin platforms are insulated from prices of others 
that engage in or permit fraud or manipulation. See supra notes 37-
38 and accompanying text.
---------------------------------------------------------------------------

    Moreover, NYSE Arca's assertions that the Index's methodology helps 
make the Index resistant to manipulation are contradicted by the 
Registration Statement's own statements. Specifically, the Registration 
Statement states, among other things, that ``a number of bitcoin spot 
markets have been closed or faced issues due to fraud'' and that 
``[t]he nature of the assets held at bitcoin spot markets makes them 
appealing targets for hackers and a number of bitcoin spot markets have 
been victims of cybercrimes.'' \97\ The Index's constituent bitcoin 
platforms are a subset of the bitcoin trading venues currently in 
existence.
---------------------------------------------------------------------------

    \97\ See Registration Statement at 10, 25.
---------------------------------------------------------------------------

    With respect to the Index specifically, the Registration Statement 
also states that ``[p]ricing sources used by the Index are digital 
asset spot markets that facilitate the buying and selling of bitcoin 
and other digital assets''; ``[a]lthough many pricing sources refer to 
themselves as ``exchanges,'' they are not registered with, or 
supervised by, the [Commission] or CFTC and do not meet the regulatory 
standards of a national securities exchange or designated contract 
market.'' \98\ The Sponsor further states in the Registration Statement 
that ``[t]he Index is based on various inputs which include price data 
from various third-party bitcoin spot markets'' and ``[t]he [MVIS] does 
not guarantee the validity of any of these inputs, which may be subject 
to technological error, manipulative activity, or fraudulent

[[Page 33556]]

reporting from their initial source.'' \99\ And, although the Sponsor 
raises concerns regarding fraud and security of bitcoin platforms, as 
well as concerns specific to the Index's constituent bitcoin platforms, 
the Exchange does not explain how or why such concerns are consistent 
with its assertion that the Index is resistant to fraud and 
manipulation. Indeed, the Trust's Registration Statement undermines 
NYSE Arca's arguments and assertions about how the Index is resistant 
fraud and manipulation.
---------------------------------------------------------------------------

    \98\ See id. at 29.
    \99\ See id.
---------------------------------------------------------------------------

    Moreover, although the Exchange states that the Index's ``oversight 
[is] managed by an independent committee'' \100\ and that the Committee 
selects the Index's constituent platforms from multiple eligible 
markets (and thus mitigate the potential for idiosyncratic market 
risk), the record does not provide any other details about the 
oversight of the Committee and how its selection processes mitigate 
fraud and manipulation of the constituent bitcoin platforms. Given the 
lack of information, the record does not suggest that the oversight or 
the selection process represents a unique measure to resist or prevent 
manipulation beyond mechanisms that exist in securities or commodities 
markets.\101\ Rather, the oversight performed by the Committee appears 
to be for the purpose of ensuring the accuracy and integrity of the 
Index.\102\ Such oversight serves a fundamentally different purpose as 
compared to the regulation of national securities exchanges and the 
requirements of the Exchange Act. While the Commission recognizes that 
this may be an important function in ensuring the integrity of the 
Index, such requirements do not imbue either the Committee or the 
Index's underlying bitcoin platforms with regulatory authority similar 
to that the Exchange Act confers upon self-regulatory organizations 
such as national securities exchanges.\103\
---------------------------------------------------------------------------

    \100\ See Notice, 86 FR at 55080.
    \101\ Further, the Commission has previously considered and 
rejected arguments about the valuation of bitcoin according to a 
benchmark or reference price mitigating concerns about fraud and 
manipulation. See, e.g., SolidX Order, 82 FR at 16258; Winklevoss 
Order, 83 FR at 37587-90; USBT Order, 85 FR at 12599-601.
    \102\ See supra notes 33 & 37 and accompanying text.
    \103\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    NYSE Arca also argues that the use of 20 rolling three-minute 
increments means that a malicious actor would need to sustain efforts 
to manipulate the market over an extended period of time, or would need 
to replicate efforts multiple times, potentially triggering review from 
the spot market or regulators, or both.\104\ However, NYSE Arca does 
not show or explain how the proposed use of 20 rolling three-minute 
increments to calculate the Index value would effectively be able to 
eliminate fraudulent or manipulative activity that is not transient. 
Fraud and manipulation in the bitcoin spot market could persist for a 
``significant duration.'' \105\ The Exchange also does not connect the 
use of the partitions \106\ to the duration of the effects of the wash 
and fictitious trading that may exist in the bitcoin spot market.\107\
---------------------------------------------------------------------------

    \104\ See supra notes 94-95 and accompanying text.
    \105\ See USBT Order, 85 FR at 12601 n.66; see also id. at 
12607; Kryptoin Order, 86 FR at 74172.
    \106\ See supra notes 37-38 and accompanying text.
    \107\ See WisdomTree Order, 86 FR at 69327; Kryptoin Order, 86 
FR at 74172.
---------------------------------------------------------------------------

    NYSE Arca also does not explain the significance of the Index's 
unsubstantiated resistance to manipulation to the overall analysis of 
whether the proposal to list and trade the Shares is designed to 
prevent fraud and manipulation. Even assuming that NYSE Arca's argument 
is that, if the Index is resistant to manipulation, the Trust's NAV, 
and thereby the Shares as well, would be resistant to manipulation, 
NYSE Arca has not established in the record a basis for such 
conclusion.\108\ That assumption aside, the Commission notes that the 
Shares would trade at market-based prices in the secondary market, not 
at NAV, which then raises the question of the significance of the NAV 
calculation to the manipulation of the Shares.\109\
---------------------------------------------------------------------------

    \108\ Putting aside NYSE Arca's various assertions about bitcoin 
and developments of the bitcoin market, the Index, and the Shares, 
NYSE Arca also does not address concerns the Commission has 
previously identified, including the susceptibility of bitcoin 
markets to potential trading on material, non-public information 
(such as plans of market participants to significantly increase or 
decrease their holdings in bitcoin; new sources of demand for 
bitcoin; the decision of a bitcoin-based investment vehicle on how 
to respond to a ``fork'' in the bitcoin blockchain, which would 
create two different, non-interchangeable types of bitcoin), or to 
the dissemination of false or misleading information. See Winklevoss 
Order, 83 FR at 37585. See also USBT Order, 85 FR at 12600-01; 
WisdomTree Order, 86 FR at 69329 n.114; Kryptoin Order, 86 FR at 
74174 n.107; Skybridge Order, 87 FR at 3872; Wise Origin Order, 87 
FR at 5533 n.89; ARK 21Shares Order, 87 FR at 20022 n.117.
    \109\ See Registration Statement at 5 (stating that the NAV of 
the Trust may deviate from the market price of its Shares for a 
number of reasons, including price volatility, trading activity, 
normal trading hours for the Trust, the calculation methodology of 
the NAV, and/or the closing of bitcoin trading platforms due to 
fraud, failure, security breaches or otherwise); Registration 
Statement at 30 (disclosing that shareholders should be aware that 
the public trading price per Share may be different from the NAV for 
a number of reasons, including price volatility, trading activity, 
the closing of bitcoin trading platforms due to fraud, failure, 
security breaches or otherwise, and the fact that supply and demand 
forces at work in the secondary trading market for Shares are 
related, but not identical, to the supply and demand forces 
influencing the market price of bitcoin).
---------------------------------------------------------------------------

    Because NYSE Arca does not address or provide any analysis with 
respect to these issues, the Commission cannot conclude that the Index 
aids in the determination that the proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices. The Exchange has not demonstrated that the Index methodology 
makes the proposed ETP resistant to manipulation. While the proposed 
procedures for calculating the Index using prices from the constituent 
bitcoin platforms may be intended to provide some degree of protection 
against attempts to manipulate the Index, these procedures are not 
sufficient for the Commission to dispense with the requisite 
surveillance-sharing agreement with a regulated market of significant 
size.
(c) Assertion Regarding the Create/Redeem Process
    NYSE Arca also asserts that, because the Trust will, in ordinary 
circumstances, not purchase or sell bitcoin, but instead process all 
creations and redemptions in-kind in transactions with authorized 
participants, ``the Trust is uniquely protected against potential 
attempts by bad actors to manipulate the price of bitcoin on spot 
markets contributing to the Index and thereby the Trust's NAV 
calculation.'' \110\ According to NYSE Arca, this is true even with 
respect to transactions with authorized participants who rely on the 
cash exchange process described above because the Trust will create (or 
redeem, as appropriate) Baskets only upon the receipt (or distribution, 
as appropriate) of bitcoin, and will not create or redeem any Baskets 
based on the receipt or distribution of cash alone.\111\ Thus, as NYSE 
Arca argues, ``even if a bad actor were able to temporarily manipulate 
the price of bitcoin on a spot market or manipulate enough of the 
volume of the markets to overwhelm the protections designed into the 
Index and thereby the NAV, the fact that the Trust will create or 
redeem Baskets only upon receipt or distribution of bitcoin (in all 
circumstances barring a forced redemption) means that the amount of

[[Page 33557]]

bitcoin per Share held by the Trust would not be impacted.'' \112\
---------------------------------------------------------------------------

    \110\ See Notice, 86 FR at 55080. According to the Exchange, 
except to pay certain expenses or in the case of a forced redemption 
or other ordinary circumstances, the Trust will not purchase or sell 
bitcoin directly. See id. at 55080 n.43. See also Coinbase Letter at 
2.
    \111\ See Notice, 86 FR at 55080.
    \112\ See id. The Exchange asserts that, because the Trust will 
generally not accept cash in order to create new Shares or, barring 
a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
Shares, ``the ratio of bitcoin per Share that [a]uthorized 
[p]articipants will tender (for creations) or receive (for 
distributions) will not change as a result of any changes in the 
price per Share, even if the [a]uthorized [p]articipant relies on 
the cash exchange process to facilitate such creation or 
redemption.'' Id.
---------------------------------------------------------------------------

    NYSE Arca has not demonstrated that in-kind creations and 
redemptions provide the Shares with a unique resistance to 
manipulation.\113\ The Commission has previously addressed similar 
assertions.\114\ As the Commission stated before, in-kind creations and 
redemptions are a common feature of ETPs, and the Commission has not 
previously relied on the in-kind creation and redemption mechanism as a 
basis for excusing exchanges that list ETPs from entering into 
surveillance-sharing agreements with significant, regulated markets 
related to the portfolio's assets.\115\ Accordingly, the Commission is 
not persuaded here that the Trust's in-kind creations and redemptions 
afford it a unique resistance to manipulation.
---------------------------------------------------------------------------

    \113\ The Sponsor also asserts that the creation/redemption 
process is at the core of bringing the ``[NAV] of the underlying 
holdings as close to the traded value of the product as possible'' 
and notes that the ``in-kind exchange for redemption and creation of 
Shares is more efficient than cash,'' but the Sponsor provides no 
other explanation as to whether in-kind creations and redemptions 
mitigate against the Commission's concerns regarding fraud and 
manipulation in the bitcoin market or justify dispensing with the 
requisite surveillance-sharing agreement. See Sponsor Letter at 6.
    \114\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08; VanEck Order, 86 FR at 64546; WisdomTree Order, 86 FR 
at 69329; Kryptoin Order, 86 FR at 74174; SkyBridge Order, 87 FR at 
3874; Wise Origin Order, 87 FR at 5533; ARK 21Shares Order, 87 FR at 
20022.
    \115\ 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).
---------------------------------------------------------------------------

2. Assertions That NYSE Arca Has Entered Into a Comprehensive 
Surveillance-Sharing Agreement With a Regulated Market of Significant 
Size
    As NYSE Arca has not demonstrated that other means besides 
surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices, the Commission next 
examines whether the record supports the conclusion that NYSE Arca has 
entered into a comprehensive surveillance-sharing agreement with a 
regulated market of significant size relating to the underlying assets. 
In this context, the term ``market of significant size'' includes a 
market (or group of markets) as to which (i) there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist in detecting and 
deterring misconduct, and (ii) it is unlikely that trading in the ETP 
would be the predominant influence on prices in that market.\116\
---------------------------------------------------------------------------

    \116\ See Winklevoss Order, 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 provides guidance to market 
participants. See id.
---------------------------------------------------------------------------

    In its proposal, however, NYSE Arca does not identify any market as 
a ``market of significant size'' and accordingly makes no assertions 
regarding, and provides no information to establish, either prong of 
the ``market of significant size'' determination.\117\ The requirements 
of Section 6(b)(5) of the Exchange Act apply to the rules of national 
securities exchanges. Accordingly, the relevant obligation for a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size, or other means to prevent fraudulent and manipulative 
acts and practices that are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement, resides with the listing 
exchange. Because there is insufficient evidence in the record 
demonstrating that NYSE Arca has satisfied this obligation, the 
Commission cannot approve the proposed ETP for listing and trading on 
NYSE Arca.
---------------------------------------------------------------------------

    \117\ See Valkyrie Order, 86 FR at 74163.
---------------------------------------------------------------------------

    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.\118\
---------------------------------------------------------------------------

    \118\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    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),\119\ and, accordingly, the Commission must disapprove 
the proposal.\120\
---------------------------------------------------------------------------

    \119\ 15 U.S.C. 78f(b)(5).
    \120\ In disapproving the proposed rule change, the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f). The Sponsor argues that the growth 
of digitalized U.S. dollars demonstrates that the technological 
advancements in bitcoin are symbiotic with fiat currencies, 
reinforcing the operational efficiencies to be gained from final and 
virtually instantaneous settlement. See Sponsor Letter at 4. The 
Sponsor also asserts that, just as an in-kind exchange for 
redemption and creation of Shares is more efficient than cash, 
establishing this precedent may also lead to the natural extension 
of investors seeking in-kind delivery as they consume custodial and 
other financial services directly, and that, in this case, 
``exchange traded products would be a transition to a more 
digitalized, personalized, and efficient form of automated financial 
services.'' See Sponsor Letter at 6. For the reasons discussed 
throughout, however, see supra note 51, the Commission is 
disapproving the proposed rule change because it does not find that 
the proposed rule change is consistent with the Exchange Act. See 
also USBT Order, 85 FR at 12615.
---------------------------------------------------------------------------

C. Other Comments

    One commenter argues that the approval of a futures-based ETP 
should allow for the Commission to approve NYSE Arca's proposal because 
a futures-based ETP and the Trust are both reliant on bitcoin's 
underlying price, and ETPs that invest in bitcoin futures contracts 
present substantially similar risk of manipulation as the Trust.\121\
---------------------------------------------------------------------------

    \121\ See Coinbase Letter at 2.
---------------------------------------------------------------------------

    The Commission disagrees with the premise of the argument. The 
proposed rule change does not relate to the same underlying holdings as 
either exchange-traded funds registered under the Investment Company 
Act of 1940 that provide exposure to bitcoin through CME bitcoin 
futures or bitcoin futures ETPs. The Commission considers the proposed 
rule change on its own merits and under the standards applicable to it. 
Namely, with respect to this proposed rule change, the Commission must 
apply the standards as provided by Section 6(b)(5) of the Exchange Act, 
which it has applied in connection with its orders considering previous 
proposals to list bitcoin-based commodity trusts and bitcoin-based 
trust issued receipts.\122\
---------------------------------------------------------------------------

    \122\ See supra note 12. See also VanEck Order, 86 FR at 64552; 
Skybridge Order, 87 FR at 3881 n.177. See generally Teucrium Order & 
Valkyrie XBTO Order, supra note 11.
---------------------------------------------------------------------------

    Moreover, when the Commission recently approved proposals by NYSE 
Arca and Nasdaq to list and trade shares of ETPs holding bitcoin 
futures contracts that trade on the Chicago Mercantile Exchange, Inc. 
(``CME'') as their only non-cash holdings, the Commission found that 
each listing exchange had met its obligations under Exchange Act 
Section 6(b)(5) by demonstrating that the exchange had a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to CME bitcoin futures contracts. In each such case, 
however, the proposed ``significant'' regulated market (i.e., the CME) 
with

[[Page 33558]]

which the listing exchange had a surveillance-sharing agreement was the 
same market on which the underlying bitcoin assets (i.e., CME bitcoin 
futures contracts) traded; and thus in each such case, the CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME bitcoin futures market caused by a person attempting to 
manipulate a futures ETP by manipulating the price of CME bitcoin 
futures contracts, whether that attempt is made by directly trading on 
the CME bitcoin futures market or indirectly by trading outside of the 
CME bitcoin futures market. However, as the Commission stated, this 
reasoning does not extend to spot bitcoin ETPs. Spot bitcoin markets 
are not currently ``regulated.'' As explained in the Teucrium Order and 
the Valkyrie XBTO Order, if an exchange seeking to list a spot bitcoin 
ETP relies on the CME as the regulated market with which it has a 
comprehensive surveillance-sharing agreement, the assets held by the 
spot bitcoin ETP would not be traded on the CME; and because of this 
important difference, with respect to a spot bitcoin ETP, there would 
be reason to question whether a surveillance-sharing agreement with the 
CME would, in fact, assist in detecting and deterring fraudulent and 
manipulative misconduct affecting the price of the spot bitcoin held by 
that ETP. In any event, however, in the current proposal, NYSE Arca 
does not identify any market as a ``market of significant size.''
    The Commission also received comment letters that addressed the 
general nature of bitcoin \123\ and the maturation of custodial 
practices relating to the safekeeping of bitcoin.\124\ 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.
---------------------------------------------------------------------------

    \123\ See Letter from Sam Ahn (Oct. 7, 2021).
    \124\ See Coinbase Letter at 4.
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.\125\
---------------------------------------------------------------------------

    \125\ As the Commission, for the reasons stated above, does not 
find the proposed rule change is consistent with the requirements of 
the Exchange Act and the rules and regulations thereunder, the 
Commission does not address here the Exchange's proposal as it 
pertains the Trust's investment objective to reflect the performance 
of bitcoin in U.S. dollars on a carbon neutral basis through MCO2 
Tokens.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2021-67 be, and 
hereby is, disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-11819 Filed 6-1-22; 8:45 am]
BILLING CODE 8011-01-P