[Federal Register Volume 85, Number 42 (Tuesday, March 3, 2020)]
[Notices]
[Pages 12595-12616]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-04294]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88284; File No. SR-NYSEArca-2019-39]


Self-Regulatory Organizations; NYSE Arca, Inc.; 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

February 26, 2020.

I. Introduction

    On June 12, 2019, NYSE Arca, Inc. (``NYSE Arca'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act

[[Page 12596]]

of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed 
rule change to amend NYSE Arca Rule 8.201-E and to list and trade 
shares (``Shares'') of the United States Bitcoin and Treasury 
Investment Trust (``Trust'') under NYSE Arca Rule 8.201-E. The proposed 
rule change was published for comment in the Federal Register on July 
1, 2019.\3\ On August 12, 2019, pursuant to Section 19(b)(2) of the 
Exchange Act,\4\ the Commission designated a longer period within which 
to approve the proposed rule change, disapprove the proposed rule 
change, or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86195 (June 25, 
2019), 84 FR 31373 (``Original Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 86631, 84 FR 42028 
(Aug. 16, 2019). The Commission designated September 29, 2019, as 
the date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
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    On September 24, 2019, the Commission instituted proceedings under 
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change.\7\ On October 4, 2019, the 
Exchange filed Amendment No. 1 to the proposed rule change, which 
replaced and superseded the proposed rule change as originally 
filed.\8\ The Commission published the proposed rule change, as 
modified by Amendment No. 1, for comment in the Federal Register on 
October 21, 2019.\9\ And on December 20, 2019, the Commission 
designated a longer period for Commission action on the proposed rule 
change.\10\
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    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 87071, 84 FR 51646 
(Sept. 30, 2019) (``Order Instituting Proceedings'').
    \8\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-39/srnysearca201939.htm.
    \9\ See Securities Exchange Act Release No. 87301 (Oct. 15, 
2019), 84 FR 56219 (``Notice''). Comments received are available at 
https://www.sec.gov/comments/sr-nysearca-2019-39/srnysearca201939.htm.
    \10\ See Securities Exchange Act Release No. 87813, 84 FR 71993 
(Dec. 30, 2019).
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    This order disapproves the proposed rule change, as modified by 
Amendment No. 1. 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.'' \11\
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    \11\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list the Shares is 
designed to prevent fraudulent and manipulative acts and practices, the 
Commission applies the same standard used in its orders considering 
previous proposals to list commodity-based exchange-traded products 
(``ETPs''), including bitcoin \12\-based commodity trusts and bitcoin-
based trust issued receipts.\13\ As the Commission has explained, 
exchanges that list ETPs can meet their obligations under Exchange Act 
Section 6(b)(5) by demonstrating that there is a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size relating to the underlying assets.\14\ Neither NYSE Arca nor the 
Sponsor challenges this standard.
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    \12\ 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, 84 FR at 56222.
    \13\ 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, Relating to the Listing and Trading of Shares of the Bitwise 
Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E, Securities Exchange 
Act Release No. 87267 (Oct. 9, 2019), 84 FR 55382 (Oct. 16, 2019) 
(``Bitwise 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, which are 
under review before the Commission: Order Disapproving a Proposed 
Rule Change to List and Trade the Shares of the ProShares Bitcoin 
ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act 
Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) 
(NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a 
Proposed Rule Change Relating to Listing and Trading of the Direxion 
Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull 
Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily 
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares 
Under NYSE Arca Rule 8.200-E, Securities Exchange Act Release No. 
83912 (Aug. 22, 2018), 83 FR 43912 (Aug. 28, 2018) (SR-NYSEArca-
2018-02) (``Direxion Order''); 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'').
    \14\ See Winklevoss Order, 83 FR at 37580. See also id. 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 Commission has 
stated that it considers two markets that are members of the 
Intermarket Surveillance Group to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a 
separate bilateral surveillance-sharing agreement. See Winklevoss 
Order, 83 FR at 37580 n.19.
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    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.'' \15\ The Commission has 
emphasized that it is essential for an exchange listing a derivative 
securities product to enter into a surveillance-sharing agreement with 
markets trading underlying securities for the listing exchange to have 
the ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of exchange 
rules and applicable federal securities laws and rules.\16\ 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.\17\
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    \15\ Amendment to Rule Filing Requirements for Self-Regulatory 
Organizations Regarding New Derivative Securities Products, 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; Direxion Order, 83 FR at 
43914; GraniteShares Order, 83 FR at 43924; Bitwise Order, 84 FR 
55383.
    \16\ See NDSP Adopting Release, 63 FR at 70959.
    \17\ 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.
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    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

[[Page 12597]]

market.\18\ 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.''
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    \18\ 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.
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    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.\19\ Moreover, the 
Commission notes that surveillance-sharing agreements have been 
consistently present whenever it 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.\20\
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    \19\ See Winklevoss Order, 84 FR at 37593-94.
    \20\ See Bitwise Order, 84 FR at 55386, 55390 (citing Winklevoss 
Order, 84 FR at 37593); 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). 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'').
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    Sponsors of proposed bitcoin-based ETPs in particular have 
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 manipulation.\21\ For example, the Winklevoss Order 
addressed an assertion that ``bitcoin and bitcoin [spot] markets'' 
generally, as well as one bitcoin trading platform specifically, have 
unique resistance to fraud and manipulation; and the Bitwise Order 
addressed the assertion that prices from at least certain bitcoin 
trading platforms (``the `real' bitcoin spot market as opposed to the 
`fake' and non-economic bitcoin spot market'') possessed such unique 
resistance.\22\ While the listing exchanges there failed to satisfy 
their burden to demonstrate the validity of these contentions, the 
Commission agreed that if a listing exchange could establish that the 
underlying market inherently possessed 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.\23\ Such resistance to fraud and manipulation 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.\24\
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    \21\ See Winklevoss Order, 84 FR at 37580, 37582-91; see also 
Bitwise Order, 84 FR at 55383, 55385-406.
    \22\ See id.
    \23\ See id. The Commission has also recognized that a listing 
exchange could demonstrate that ``other means to prevent fraudulent 
and manipulative acts and practices'' are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement. 
Winklevoss Order, 84 FR at 37580. 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. Id. at 37582.
    \24\ See supra notes 19 and 20.
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    Here, Wilshire Phoenix Funds, LLC (``Sponsor'') would base the 
pricing mechanism for the proposed ETP on the Chicago Mercantile 
Exchange (``CME'') CF Bitcoin Reference Rate (``CME CF BRR'' or 
``Bitcoin Reference Rate''). As discussed further below, the Bitcoin 
Reference Rate is derived from trade prices of bitcoin on certain 
bitcoin spot platforms (``Constituent Platforms''). NYSE Arca and the 
Sponsor contend that the proposal satisfies the Commission's standard, 
as set forth in its prior orders, because (1) the segment of the 
bitcoin spot market represented by the spot bitcoin platforms that 
contribute to the Bitcoin Reference Rate is uniquely and inherently 
resistant to manipulation; and (2) NYSE Arca has entered into a 
surveillance-sharing agreement with a regulated bitcoin market of 
significant size.\25\ NYSE Arca also asserts that approval of the 
proposal is consistent with Section 6(b)(5) of the Exchange Act because 
it would protect investors and the public interest.\26\
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    \25\ See Notice, 84 FR at 56225-26.
    \26\ See id. at 56230.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change, as modified by Amendment No. 1, is consistent 
with Section 6(b)(5) of the Exchange Act by addressing in Section 
III.B.1 assertions that the relevant bitcoin market inherently 
possesses a unique resistance to manipulation; addressing in Section 
III.B.2 assertions that NYSE Arca has entered into a surveillance-
sharing agreement with a regulated market of significant size related 
to bitcoin; and addressing in Section III.C assertions that the 
proposal is consistent with the protection of investors and the public 
interest. The Commission concludes that NYSE Arca has not established 
that the relevant bitcoin market possesses a resistance to manipulation 
that is unique beyond that of traditional security or commodity markets 
such that it is inherently resistant to manipulation. The Commission 
further concludes that NYSE Arca has not established that an actor 
trying to manipulate the proposed ETP would be reasonably likely to 
trade in the CME bitcoin futures market. And the Commission concludes 
that NYSE Arca has not established that it has a surveillance-sharing 
agreement with the Constituent Platforms or that the Constituent 
Platforms constitute a regulated market, such that it has established 
that it has entered into a surveillance-sharing agreement with a 
regulated market of significant size with respect to bitcoin.
    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

[[Page 12598]]

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).
    Finally, the Commission recognizes that over time, bitcoin-related 
markets may develop in a way that would make it possible for a bitcoin-
based ETP to satisfy the requirements of the Exchange Act. For example, 
existing or newly created bitcoin futures markets that are regulated 
may achieve significant size, and an ETP listing exchange may be able 
to demonstrate in a proposed rule change that it will be able to 
address the risk of fraud and manipulation by sharing surveillance 
information with a regulated market of significant size related to 
bitcoin, as well as, where appropriate, with the relevant spot markets 
underlying such bitcoin derivatives. Should these circumstances 
develop, or conditions otherwise change in a manner that affects the 
Exchange Act analysis, the Commission would then have the opportunity 
to consider whether a particular bitcoin-based ETP would be consistent 
with the requirements of the Exchange Act.

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

    As described in detail in the Notice, NYSE Arca proposes to amend 
NYSE Arca Rule 8.201-E, which governs the listing and trading of 
Commodity-Based Trust Shares on the Exchange,\27\ and to list and trade 
Shares of the Trust under NYSE Arca Rule 8.201-E, as proposed to be 
amended.
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    \27\ NYSE Arca Rule 8.201-E defines the term ``Commodity-Based 
Trust Shares'' as a security (a) that is issued by a trust that 
holds a specified commodity deposited with the trust; (b) that is 
issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and 
(c) that, when aggregated in the same specified minimum number, may 
be redeemed at a holder's request by such trust, which will deliver 
to the redeeming holder the quantity of the underlying commodity.
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Proposed Amendments to NYSE Arca Rule 8.201-E

    NYSE Arca Rule 8.201-E(c)(1) currently states that Commodity-Based 
Trust Shares are issued by a trust in a specified aggregate minimum 
number in return for a deposit of a quantity of the underlying 
commodity, and may be redeemed in the same specified minimum number by 
a holder for the quantity of the underlying commodity. NYSE Arca 
proposes to amend Rule 8.201-E(c)(1) to provide that Commodity-Based 
Trust Shares may be issued and redeemed for the underlying commodity 
and/or cash. NYSE Arca further proposes to amend Rule 8.201-E(c)(2) to 
state that the term ``commodity'' is defined in Section 1(a)(9) of the 
Commodity Exchange Act.

Proposal To List and Trade Shares of the Trust

    The Shares would be issued by the Trust, a Delaware statutory 
trust. The Trust would operate pursuant to a trust agreement between 
the Sponsor and Delaware Trust Company. UMB Bank N.A. would act as 
custodian for the Trust's cash and U.S. treasury assets (``Cash and 
Treasury Custodian''), UMB Fund Services, Inc. would act as 
administrator of the Trust, and Broadridge Corporate Issuer Solutions, 
Inc. would act as the transfer agent for the Trust's Shares. Coinbase 
Custody Trust Company, LLC would act as the Bitcoin custodian for the 
Trust (``Bitcoin Custodian'').\28\
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    \28\ See Notice, 84 FR at 56221.
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    The investment objective of the Trust would be for the Shares to 
closely reflect the Bitcoin Treasury Index (``Index''), less the 
Trust's liabilities and expenses. The Trust would have no assets other 
than (a) bitcoin and (b) short-term U.S. Treasury securities with a 
maturity of less than one year (``T-Bills''). The Trust would also hold 
U.S. dollars for short periods of time in connection with (i) the 
maturity of any T-Bills, (ii) the purchase and sale of bitcoin and/or 
T-Bills, and (iii) the payment of redemptions, if any, and fees and 
expenses of the Trust. Bitcoin would be held by the Bitcoin Custodian 
on behalf of the Trust, and T-Bills and U.S. dollars would be held by 
the Cash and Treasury Custodian on behalf of the Trust. The amount of 
bitcoin and T-Bills held by the Trust would be determined by the 
Index.\29\
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    \29\ See id.
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    The Index is calculated and published by Solactive AG (``Index 
Calculation Agent'').\30\ The level of the Index is published on each 
business day at approximately 5:00 p.m. Eastern time and has two 
components: (1) A notional component representing bitcoin (``Bitcoin 
Component''); and (2) a notional component representing T-Bills 
(``Treasury Component''). On a monthly basis, the Index rebalances its 
weighting of the Bitcoin Component and the Treasury Component utilizing 
a mathematically derived passive rules-based methodology that is based 
on the daily volatility of the ``Bitcoin Price.'' The Bitcoin Price, 
which will be the price of bitcoin used to determine the weighting of 
the Bitcoin component and the Treasury Component of the Index, as well 
as the value of bitcoin held by the Trust, would be based on the 
Bitcoin Reference Rate. Following the calculation of the weighting of 
the components of the Index, the Trust would rebalance its holdings in 
bitcoin and T-Bills in order to closely replicate the Index.\31\
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    \30\ According to the Exchange, the Index is a passive, rules-
based index, and the Index Calculation Agent provides calculation 
services only. The Index Calculation Agent is not affiliated with 
the Sponsor and has represented that it and its employees are 
subject to market abuse laws and that the Index Calculation Agent 
has established and maintains processes and procedures to prevent 
the use and dissemination of material, non-public information 
regarding the Index. See Notice, 84 FR at 56222 n.17.
    \31\ See id. at 56222.
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    According to the proposal, the Trust may offer and sell Shares from 
time to time through underwriters, placement agents, or distributors, 
or such other means as the Sponsor may determine. The Sponsor also 
reserves the right to issue Shares of the Trust from time to time 
through direct placements. In addition, upon at least five business 
days' prior written notice, a shareholder may redeem all or a portion 
of its Shares on the last business day of each calendar month. All 
redemptions will be based on the net asset value (``NAV'') of Shares 
submitted for redemption, determined as of the last business day of the 
applicable calendar month. In general, redemptions would be deemed to 
occur on a ``first-in first-out'' basis among Shares held by a 
particular shareholder.\32\
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    \32\ See id. at 56224. Further details regarding the Trust and 
the Shares, including investment strategies, calculation of the NAV 
and indicative fund value, creation and redemption procedures, and 
additional background information about bitcoins and the bitcoin 
network, among other things, can be found in the Notice and the 
registration statement filed with the Commission on Form S-1/A (File 
No. 333-229187) under the Securities Act of 1933 (``Registration 
Statement''), as applicable.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is 
consistent with 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.'' \33\ 
Under the Commission's

[[Page 12599]]

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.'' \34\
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    \33\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78(f)(b)(5).
    \34\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\35\ 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.\36\ 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.\37\
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    \35\ See id.
    \36\ See id.
    \37\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the 
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and 
Practices

1. Assertions That the Bitcoin Market Is Inherently or Uniquely 
Resistant to Manipulation
    In analyzing whether NYSE Arca has met its burden to demonstrate 
that its proposal is consistent with Exchange Act Section 6(b)(5), the 
Commission first examines whether the record supports the Sponsor's 
assertions that the segment of the bitcoin spot market that the Sponsor 
asserts is relevant for purposes of the proposed ETP is inherently 
resistant to manipulation and fraudulent activity, such that a 
surveillance-sharing agreement with a regulated market of significant 
size is unnecessary. To do so, the Commission assesses whether the 
record establishes that the relevant segment of the bitcoin spot market 
possesses unique means to resist manipulation that are novel beyond 
those protections found in traditional securities or commodities 
markets.
    NYSE Arca and the Sponsor do not contest the general presence of 
manipulation in the bitcoin spot market; however, the Sponsor states 
that, for purposes of the proposed ETP, the relevant segment of the 
bitcoin spot market is composed of the Constituent Platforms and that 
an assessment of the trading activity on these platforms supports a 
conclusion that they are inherently resistant to manipulation.\38\ In 
addition, the Sponsor asserts that the regulation of the Constituent 
Platforms further establishes they are inherently resistant to 
manipulation.\39\ The Sponsor also states that the Bitcoin Reference 
Rate, which serves as the proposed ETP's bitcoin pricing mechanism, is 
inherently resistant to manipulation \40\ and that certain features of 
the proposed ETP establish its inherent resistance to manipulation.\41\
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    \38\ See Notice, 84 FR at 56224-25; Wilshire Phoenix Submission 
II at 3-4, 8; Registration Statement at 32.
    \39\ See Wilshire Phoenix Submission II at 6-7, 12-13.
    \40\ See Wilshire Phoenix Submission I at 5.
    \41\ See Notice, 84 FR at 56228; Wilshire Phoenix Submission II 
at 28-29.
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    The Commission concludes that the record does not establish that 
the segment of the bitcoin spot market made up of the Constituent 
Platforms is inherently resistant to manipulation, and therefore does 
not support the claim that the relevant underlying bitcoin market is 
inherently and uniquely resistant to manipulation such that the 
Commission should dispense with the need to require NYSE Arca to enter 
into a surveillance-sharing agreement with a regulated market of 
significant size. While mechanisms such as the use of the Bitcoin 
Reference Rate serve to mitigate the potential for manipulation of the 
proposed ETP, none of the Sponsor's assertions suggest that the 
underlying market possesses any unique measures to resist manipulation 
that are not present in other security or commodity markets, where the 
Commission has long concluded that surveillance-sharing agreements are 
necessary even when listing a derivative security whose underlying 
components are securities listed on national securities exchanges. 
Importantly, even if the Sponsor and NYSE Arca established each of the 
contentions addressed below, such assertions would render the proposed 
ETP as based on the relevant underlying bitcoin market no more 
resistant to manipulation than derivative products based on traditional 
commodities or securities markets. Thus, the record does not establish 
that NYSE Arca may satisfy Section 6(b)(5) of the Exchange Act without 
entering into a surveillance-sharing agreement with a regulated market 
of significant size.
(a) Assertions About the Nature of the Bitcoin Spot Market
(i) Assertions Regarding Trading Characteristics
(A) Representations Made and Comments Received
    The Sponsor asserts that, when determining whether the market for 
the asset underlying the proposed ETP is inherently resistant to 
manipulation, the relevant ``market'' is the segment of the bitcoin 
spot market formed by the Constituent Platforms, and that this spot 
market segment is inherently resistant to manipulation.\42\ The Sponsor 
states that its own analysis and an analysis performed by CME both show 
that the Constituent Platforms consistently exhibit prices that are 
closely aligned.\43\ The Sponsor asserts that this data implies the 
presence of market participants on the Constituent Platforms that are 
maintaining uniform pricing across the Constituent Platforms through 
the near-simultaneous buying and selling of bitcoin on different 
platforms to take advantage of any temporary price dislocations between 
those platforms (i.e., market arbitrage).\44\ As a result, according to 
the Sponsor, a would-be manipulator that places a trade on a 
Constituent Platform would often see any price dislocation eliminated 
by arbitrageurs that bring bitcoin prices on that platform in line with 
bitcoin prices on the other Constituent Platforms.\45\ NYSE Arca also 
asserts that the linkage between the bitcoin markets and the presence 
of arbitrageurs in those markets means that the manipulation of the 
price of bitcoin on any Constituent Platform would

[[Page 12600]]

likely require a large amount of capital to maintain a significant 
presence on the Constituent Platforms and thus outweigh trading by 
arbitrageurs who are potentially eliminating any pricing differences 
across platforms.\46\ NYSE Arca further states, in describing the 
Sponsor's analysis, that none of the Constituent Platforms exhibit a 
statistically significant average difference from the Bitcoin Reference 
Rate.\47\ The Constituent Platforms also show, according to NYSE Arca, 
a substantially similar degree of price volatility.\48\ Therefore, the 
Sponsor and NYSE Arca assert that the Sponsor's data supports the 
conclusion that robust arbitrage trading and sufficient liquidity 
provision occurs among the Constituent Platforms, which would reduce 
the possibility of manipulation in that segment of the bitcoin 
market.\49\
---------------------------------------------------------------------------

    \42\ See Notice, 84 FR at 56225; Letter from Wilshire Phoenix 
Funds, LLC (Dec. 18, 2019) (``Wilshire Phoenix Submission II'') at 
4-5. NYSE Arca, the Sponsor, and other commenters may refer to the 
spot trading of bitcoin on ``exchanges.'' The platforms that trade 
bitcoin in the bitcoin spot market are not registered with the 
Commission as national securities exchanges. See 15 U.S.C. 78e, 78f.
    \43\ See Wilshire Phoenix Submission II at 8. See also Notice, 
84 FR at 56225 (stating that, according to analysis performed by the 
Sponsor, price discovery is substantially similar among each of the 
Constituent Platforms).
    \44\ See Wilshire Phoenix Submission II at 8.
    \45\ See Wilshire Phoenix Submission II at 8.
    \46\ See Notice, 84 FR at 56225. See also Wilshire Phoenix 
Submission II at 7-8 (asserting that the capital necessary to 
maintain a significant presence on the Constituent Platforms renders 
manipulative trading prohibitively expensive).
    \47\ See Notice, 84 FR at 56225. NYSE Arca also states that, 
during one Bitcoin Reference Rate observation window, the volume of 
bitcoin trading among the five Constituent Platforms ranged from 
10.7% to 33.1%. See id.
    \48\ See Notice, 84 FR at 56225 (stating that the standard 
deviation of the difference of prices at 4:00 p.m. London time on 
the Constituent Platforms was 1.12% to 1.13% and that when prices 
deviate from the Bitcoin Reference Rate, 86.5% of the time they 
deviate in the same direction).
    \49\ See Wilshire Phoenix Submission II at 9. See also Notice, 
84 FR at 56225.
---------------------------------------------------------------------------

    In addition, the administrator of the Bitcoin Reference Rate, CF 
Benchmarks, Ltd. (``CF Benchmarks''), conducted an analysis of how 
closely the Constituent Platforms tracked each other during the period 
January 2018 through September 2019.\50\ CF Benchmarks states that the 
analysis showed an average variance of between 0.000% and 0.008% when a 
single Constituent Platform was omitted, and that this analysis seems 
to support NYSE Arca's assertion that there is substantially similar 
price discovery among the Constituent Platforms.\51\ In addition, CF 
Benchmarks states that it conducted an analysis of the correlation of 
prices observed among Constituent Platform pairs on a per minute basis 
during the Bitcoin Reference Rate's observation window over the 
previous twelve months.\52\ According to CF Benchmarks, this analysis 
showed mean correlations from 85.45% to 90.72% and median correlations 
from 90.25% to 94.73%, and these results indicate that the correlation 
is very strong, which therefore supports NYSE Arca's view that the 
degree of price volatility is substantially similar.\53\ The Sponsor 
also asserts that CF Benchmarks' analysis supports the Sponsor's 
conclusions regarding arbitrage and liquidity, which could reduce the 
likelihood of manipulation on the Constituent Platforms.\54\
---------------------------------------------------------------------------

    \50\ See Letter from CF Benchmarks LTD (Oct. 28, 2019) (``CF 
Benchmarks Letter'') at 5.
    \51\ See CF Benchmarks Letter at 5-6. This analysis also showed 
a maximum variance of between 0.049% and 1.079% when one of the 
Constituent Platforms was omitted. See id. at 6.
    \52\ See id. at 6.
    \53\ See CF Benchmarks Letter at 6.
    \54\ See Wilshire Phoenix Submission II at 9.
---------------------------------------------------------------------------

    The Sponsor also states that it is widely acknowledged that 
numerous markets have historically been subject to manipulation by 
``bad actors'' and that, despite continual efforts by regulators and 
other market participants, it is highly unlikely that all such ``bad 
actors'' and manipulation attempts can be fully mitigated in markets, 
including in the bitcoin markets.\55\ NYSE Arca and the Sponsor cite to 
the Commission's previous disapproval of proposals to list bitcoin-
based commodity trusts and bitcoin-based trust issued receipts, and 
note that the Commission has expressed concern that the bitcoin market 
at issue in such proposals may be subject to manipulation.\56\ In 
addition, as NYSE Arca states, the Sponsor recognizes that some of the 
Commission's concerns are that a significant portion of bitcoin trading 
occurs on unregulated platforms and that there is a concentration of a 
significant number of bitcoin in the hands of a small number of 
holders.\57\ NYSE Arca asserts that these aspects are not unique to 
bitcoin and are present in a number of markets, including commodity 
markets.\58\
---------------------------------------------------------------------------

    \55\ See Wilshire Phoenix Submission II at 3. See also Notice, 
84 FR at 56224 (stating that the Sponsor acknowledges that numerous 
markets have historically been subject to manipulation).
    \56\ See Notice, 84 FR at 56224; Wilshire Phoenix Submission II 
at 3.
    \57\ See Notice, 84 FR at 56225.
    \58\ See Notice 84 FR at 56225 (comparing bitcoin context to the 
trading of gold bullion on unregulated OTC markets and citing 
statistics that a significant percentage of gold is held by a 
relatively small number of holders).
---------------------------------------------------------------------------

    Several other commenters also address manipulation in the bitcoin 
market. One commenter states that ``[t]here is no doubt'' that the 
bitcoin market is insecure and manipulated, even with the recent 
introduction of a physically-settled futures product.\59\ Another 
commenter asserts that the proposal should be rejected because it is 
highly risky to build an ETP on bitcoin.\60\ A third commenter states 
that the proposal has not comprehensively or convincingly addressed the 
issues surrounding manipulation in the bitcoin market.\61\
---------------------------------------------------------------------------

    \59\ See Letter from Jenny Thompson (Oct. 12, 2019) (``Thompson 
Letter'').
    \60\ See Letter from Robert Musgrove (Oct. 12, 2019).
    \61\ See Letter from Avinash Shenoy (Oct. 16, 2019) (stating 
that there are similar problems in the traditional market).
---------------------------------------------------------------------------

(B) Analysis
    The record does not establish that the segment of the bitcoin spot 
market made up of the Constituent Platforms is inherently and uniquely 
resistant to manipulation. The Sponsor and other commenters state that 
manipulation is present in the spot bitcoin market generally.\62\ The 
Trust's Registration Statement concedes that ``the price of Bitcoin may 
be influenced by fraud and manipulation for a number of reasons,'' 
including that ``many Bitcoin spot markets are not regulated or 
supervised by a government agency.'' \63\ The Trust's Registration 
Statement also states that a ``bad actor could manipulate the Bitcoin 
Blockchain to adversely affect an investment in the Shares . . . if 
such a bad actor were to obtain control of more than fifty percent 
(50%) of the processing power on the Bitcoin Network.'' \64\ And the 
Trust's Registration Statement recognizes that it is ``reasonably 
likely'' that ``a small group of early Bitcoin adopters hold a 
significant proportion of the Bitcoin that has thus far been created,'' 
``[t]here are no regulations in place that would prevent a large holder 
of Bitcoin from selling their Bitcoin,'' and that such sales could 
``affect the price of Bitcoin.'' \65\
---------------------------------------------------------------------------

    \62\ See supra notes 55, 59-61, and accompanying text 
(discussing comments regarding bitcoin's susceptibility to 
manipulation).
    \63\ Registration Statement at 32 (also stating that additional 
reasons include that ``certain platforms may lack critical system 
safeguards, including customer protections; volatile market price 
swings or flash crashes; cyber risks, such as hacking customer 
wallets; and/or platforms selling from their own accounts and 
putting customers at an unfair disadvantage''). See also 
Registration Statement at 18-19 (stating that the ``Trust may be the 
target of malicious cyber-attacks'').
    \64\ Registration Statement at 26. See also supra note 57 and 
accompanying text.
    \65\ Registration Statement at 29. See also id. at 49 (``because 
the Bitcoin Blockchain records ownership of Bitcoin by reference to 
the unique addresses of each Bitcoin `wallet,' a certain pseudo-
anonymity of ownership is created'').
---------------------------------------------------------------------------

    NYSE Arca and the Sponsor also do not contest the presence of 
possible sources of fraud and manipulation in the bitcoin spot market 
generally that the Commission has raised in previous orders, which have 
included (1) ``wash'' trading, (2) persons with a dominant position in 
bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin 
network and trading platforms, (4) malicious control of the bitcoin 
network, (5) trading based on material,

[[Page 12601]]

non-public information, including the dissemination of false and 
misleading information, (6) manipulative activity involving Tether, and 
(7) fraud and manipulation at Mt. Gox, a bitcoin trading platform.\66\ 
Instead, NYSE Arca and the Sponsor focus their analysis on the 
Constituent Platforms, which the Sponsor asserts represent a segment of 
the bitcoin spot market that is inherently resistant to 
manipulation.\67\
---------------------------------------------------------------------------

    \66\ See supra note 56 and accompanying text; Winklevoss Order, 
83 FR at 37585-86; Bitwise Order, 84 FR at 55391 n.140, 55402 & 
n.331 (discussing pending litigation against a bitcoin trading 
platform for fraudulent conduct relating to Tether). See also 
Winklevoss Order, 83 FR at 37584-86 (discussing potential types of 
manipulation in the bitcoin spot market); Bitwise Order, 84 FR at 
55383 (stating that the sponsor of the proposed ETP presented an 
analysis of the bitcoin spot market that asserts that 95% of the 
spot market is dominated by fake and non-economic activity, such as 
wash trades), 55391 (discussing possible sources of fraud and 
manipulation in the bitcoin spot market). The Commission has also 
noted that fraud and manipulation in the bitcoin spot market could 
persist for a significant duration. See Bitwise Order, 84 FR at 
55405 & n.379.
    \67\ See supra note 42. The Commission notes that an academic 
paper, the ``Griffin-Shams Paper,'' suggesting that the price of 
bitcoin was manipulated with Tether, that the Commission cited in 
the Winklevoss Order and the Bitwise Order has recently been 
updated. See Griffin, John M. and Shams, Amin, Is Bitcoin Really Un-
Tethered? (October 28, 2019), available at https://ssrn.com/abstract=3195066. See also Winklevoss Order, 83 FR at 37585-86; 
Bitwise Order, 84 FR at 55405 n.379.
---------------------------------------------------------------------------

    Importantly, however, the record does not demonstrate that these 
possible sources of fraud and manipulation in the broader bitcoin spot 
market do not affect the Constituent Platforms that represent a slice 
of the bitcoin spot market.\68\ In the Bitwise Order, the Commission 
stated that, in the absence of a showing that fraudulent, manipulative, 
fake, or otherwise non-economic trading in the broader bitcoin market 
does not affect the smaller segment of the bitcoin market on which the 
proposed ETP was based, the listing exchange and the proposal's sponsor 
``will not be able to establish that the identified [segment of the] 
bitcoin market is uniquely resistant to fraud and manipulation, because 
prices based on fraudulent and manipulative activity on platforms with 
fake or non-economic volume could be used to affect prices on the 
identified . . . platforms.'' \69\ Similarly, with the current 
proposal, to the extent that fraudulent and manipulative trading on the 
broader bitcoin market could influence prices or trading activity on 
the Constituent Platforms, the Constituent Platforms would not be 
inherently resistant to manipulation.
---------------------------------------------------------------------------

    \68\ In fact, NYSE Arca or the Sponsor did not discuss the 
percentage of overall bitcoin spot market trading volume conducted 
on the Constituent Platforms nor did they attempt to verify 
previously established spot market volume figures showing the 
percentage of trading conducted on the Constituent Platforms. See, 
e.g., Bitwise Order, 84 FR at 55393.
    \69\ Bitwise Order, 84 FR at 55398.
---------------------------------------------------------------------------

    NYSE Arca, the Sponsor, and CF Benchmarks discuss evidence of a 
correlation of bitcoin prices among the Constituent Platforms,\70\ but 
do not address whether or not there is any lead/lag relationship 
between prices on the Constituent Platforms and prices on other bitcoin 
spot market platforms or where price formation occurs as between the 
Constituent Platforms and the rest of the spot market.\71\ Absent any 
evidence about the relationship between the Constituent Platforms and 
the rest of the spot market, as in the Bitwise Order, NYSE Arca and the 
Sponsor cannot establish that the Constituent Platforms are uniquely 
resistant to manipulation.
---------------------------------------------------------------------------

    \70\ See supra notes 43-54 and accompanying text.
    \71\ Reinforcing the Commission's conclusion, a recent study 
provides a preliminary indication that a significant degree of 
bitcoin price formation may occur on spot market platforms other 
than the Constituent Platforms. See An Analysis of Price Discovery 
in Bitcoin Spot Markets (Jan. 15, 2020), available at https://medium.com/digitalassetresearch/an-analysis-of-price-discovery-in-bitcoin-spot-markets-7563fbf1c890.
---------------------------------------------------------------------------

    In addition, the record does not contain any evidence that 
demonstrates that the asserted effectiveness of arbitrage in the 
identified segment of the spot bitcoin market would, by itself, provide 
unique resistance to manipulation sufficient to do away with the need 
for a surveillance-sharing agreement with a significant, regulated 
market.\72\ In the Bitwise Order, the Commission stated that its 
reliance on surveillance-sharing agreements for derivative securities 
products has not been limited to ETPs based on commodities, but has 
also extended to equity options based on securities listed on national 
securities exchanges.\73\ Accordingly, even efficient price arbitrage 
may not eliminate the need for surveillance-sharing agreements. As in 
the Bitwise Order, there is no evidence in the record here that 
arbitrage in the Constituent Platforms is of such unique effectiveness 
that it would essentially insulate the proposed ETP from attempts at 
manipulation.\74\
---------------------------------------------------------------------------

    \72\ See Bitwise Order, 84 FR at 55390.
    \73\ See Bitwise Order, 84 FR at 55390 (citing Winklevoss Order, 
84 FR at 37593; 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)). See 
also supra note 20 and accompanying text.
    \74\ See Bitwise Order, 84 FR at 55391.
---------------------------------------------------------------------------

    Moreover, the record does not demonstrate that arbitrage among the 
Constituent Platforms is as ``robust'' as the Sponsor claims. The 
Sponsor and CF Benchmarks (the administrator of the Bitcoin Reference 
Rate) provide certain metrics regarding price correlations, spread, and 
volatility,\75\ but these figures alone present a selective and 
incomplete analysis. The record does not provide any evidence about how 
these figures compare to other markets or how they might vary over 
time. Absent such context, the Commission concludes that these figures 
represent an insufficient basis upon which to justify a conclusion 
about a relevant market's inherent resistance to manipulation. Further, 
even if the record demonstrated that the quality of arbitrage and the 
depth of liquidity on the Constituent Platforms made manipulation more 
difficult or costly than it would be otherwise, that would, as the 
Commission stated in the Bitwise Order, speak to providing some 
resistance to manipulation. However, the presence of these factors 
would not be sufficient to establish a unique resistance to 
manipulation that would justify dispensing with the standard 
surveillance-sharing agreement with a significant, regulated 
market.\76\
---------------------------------------------------------------------------

    \75\ See supra notes 43, 48, 50-53 and accompanying text.
    \76\ See Bitwise Order, 84 FR at 55391.
---------------------------------------------------------------------------

(ii) Assertions Regarding Regulation of the Constituent Platforms
(A) Representations Made and Comments Received
    NYSE Arca and the Sponsor assert that each of the Constituent 
Platforms is regulated by various federal, state, and international 
regulators that impose a variety of obligations designed to, among 
other things, protect the Constituent Platforms from fraud and 
manipulation.
    NYSE Arca states that all of the Constituent Platforms are 
registered with the U.S. Department of the Treasury's Financial Crimes 
Enforcement Network (``FinCEN'') as money services businesses 
(``MSB''); three of the five Constituent Platforms have obtained state 
money transmitter licenses; and the other two Constituent Platforms are 
operated by trust companies chartered by the State of New York, which 
subjects them to New York anti-money-laundering (``AML'') requirements 
and enables them to operate in other states without separate money 
transmitter licenses.\77\ NYSE Arca and the Sponsor state that, as 
MSBs, the Constituent Platforms must fully comply with U.S. Bank 
Secrecy Act (``BSA'') and AML requirements, which include developing, 
implementing, and maintaining an

[[Page 12602]]

effective AML program.\78\ NYSE Arca represents that the Sponsor 
concludes that the presence of robust AML and know-your-customer 
(``KYC'') policies and procedures should lead to robust trading data 
and may inhibit trading on the Constituent Platforms that is intended 
to manipulate the Bitcoin Price.\79\
---------------------------------------------------------------------------

    \77\ See Notice, 84 FR at 56227 n.61.
    \78\ See id. at 56227; see also Wilshire Phoenix Submission II 
at 12. According to the Sponsor, recent guidance issued by the 
Financial Action Task Force (``FATF'') also requires the Constituent 
Platforms to comply with AML regulations. See Wilshire Phoenix 
Submission II at 6, 12.
    \79\ See Notice, 84 FR at 56227 n.64.
---------------------------------------------------------------------------

    In addition, the Sponsor asserts that by virtue of being 
Constituent Platforms for calculation of the Bitcoin Reference Rate, 
the CME and, in turn, the Commodity Futures Trading Commission 
(``CFTC'') oversee the activity on the Constituent Platforms in a 
manner that renders them inherently resistant to manipulation. The 
Sponsor states that the CME CF Oversight Committee (``CME Committee'') 
determines the membership of platforms used to calculate the Bitcoin 
Reference Rate.\80\ NYSE Arca states that, according to the Sponsor, 
CME's criteria for each of the Constituent Platforms requires that the 
platform facilitate spot trading of the relevant cryptocurrency against 
the corresponding fiat currency (``Relevant Pair'') and make trade data 
and order data available through an Automatic Programming Interface 
(``API'') with sufficient reliability, detail, and timeliness.\81\ In 
addition, (1) the platform's Relevant Pair spot trading volume must 
meet minimum thresholds; (2) the platform must publish policies to 
ensure fair and transparent market conditions at all times and have 
processes in place to identify and impede illegal, unfair, or 
manipulative trading practices; (3) the platform must not impose undue 
barriers to entry or restrictions on market participants, and utilizing 
the platform must not expose market participants to undue credit risk, 
operational risk, legal risk, or other risks; (4) the platform must 
comply with applicable law and regulation, including, but not limited 
to, capital markets regulations, money transmission regulations, client 
money custody regulations, KYC regulations, and AML regulations; and 
(5) the platform must cooperate with inquiries and investigations of 
regulators and CF Benchmarks upon request and must execute data-sharing 
agreements with CME.\82\ Furthermore, the Sponsor asserts that, as an 
additional protection from fraud and manipulation, the Constituent 
Platforms are required to maintain transparent and accurate trade and 
order data, and that compliance with this requirement is under the 
oversight of the CME Committee.\83\
---------------------------------------------------------------------------

    \80\ See Wilshire Phoenix Submission II at 6.
    \81\ See Notice, 84 FR at 56227.
    \82\ See Notice, 84 FR at 56227. See also Wilshire Phoenix 
Submission II at 7. NYSE Arca states that the CME monitors the 
Constituent Platforms to ensure compliance with its criteria and 
removed two platforms in April 2017 for failing to meet its 
criteria. See Notice, 84 FR at 56227 n.60.
    \83\ See Wilshire Phoenix Submission II at 7.
---------------------------------------------------------------------------

    The Sponsor also states that CF Benchmarks, among other things, 
must establish appropriate monitoring processes and procedures designed 
to identify any breaches of its practice standards and any attempted 
manipulation or manipulative behavior and report any such incidents in 
a timely manner.\84\ The Sponsor states that pursuant to this 
authority, Constituent Platforms must make trade and order data 
available through an API with sufficient reliability, detail, and 
timeliness to meet CF Benchmarks' standards.\85\ Furthermore, according 
to the Sponsor, Constituent Platforms must have processes to detect and 
prevent manipulative trading.\86\
---------------------------------------------------------------------------

    \84\ See Wilshire Phoenix Submission II at 6, 16.
    \85\ See id. at 5, 7.
    \86\ See id. at 5, 6. The Sponsor argues that such rules, and 
the review of such rules by CF Benchmarks, are comparable to those 
used by a national securities exchanges or the futures exchanges 
associated with the assets underlying the commodity-trust ETPs 
approved to date. See id. at 14.
---------------------------------------------------------------------------

    Adherence to the membership eligibility criteria is monitored by CF 
Benchmarks and the CME Committee, and the CME Committee may remove or 
suspend a Constituent Platform from the Bitcoin Reference Rate in the 
event such criteria are not being met.\87\ According to the Sponsor, 
the CME Committee was established to protect the integrity of the 
methodology and calculation process, and is responsible for reviewing 
and ``providing challenge on'' all aspects of the methodology and 
calculation process and providing effective oversight of CF Benchmarks 
as it relates to the Bitcoin Reference Rate, including CF Benchmarks' 
manipulation surveillance.\88\ In addition, the CME Committee is 
responsible for reviewing reports on any complaints or concerns 
regarding the Bitcoin Reference Rate's relevance, resistance to 
manipulation, ``replicability,'' transparency and/or compliance with 
the applicable methodology, and overseeing the related investigation 
and remedial actions, if any.\89\ As such, the Sponsor states that the 
CME Committee is responsible for reviewing and enforcing CF Benchmarks' 
manipulation surveillance and enforcement as it relates to the 
Constituent Platforms.\90\
---------------------------------------------------------------------------

    \87\ See Wilshire Phoenix Submission II at 6, 15.
    \88\ See Wilshire Phoenix Submission II at 16-17.
    \89\ See Wilshire Phoenix Submission II at 17.
    \90\ See Wilshire Phoenix Submission II at 17.
---------------------------------------------------------------------------

    The Sponsor further asserts that the CME, as a designated contract 
market (``DCM''), is required, among other things, to ensure 
appropriate mechanisms to surveil, detect, and share information 
regarding any manipulation or price distortion on its market.\91\ The 
Sponsor states that the CME uses a combination of real-time monitoring, 
position limits, and information-sharing agreements with underlying 
cash markets to prevent and detect manipulative practices.\92\ In 
addition, the Sponsor states that as part of the CFTC staff's 
heightened review of CME bitcoin futures, CME, among other things, 
monitors data from cash markets with respect to price settlements and 
other bitcoin prices more broadly, and identifies anomalies and 
disproportionate moves in the cash markets as compared to the futures 
markets.\93\ Lastly, NYSE Arca and the Sponsor assert that the CFTC, by 
virtue of its oversight of the CME, has anti-fraud and anti-
manipulation authority over the spot bitcoin markets, including the 
Constituent Platforms.\94\
---------------------------------------------------------------------------

    \91\ See Wilshire Phoenix Submission II at 23. The Sponsor 
asserts that a DCM may not list a contract that is readily 
susceptible to manipulation and that, pursuant to the Commodity 
Exchange Act, ``a DCM must establish, monitor and enforce rules of 
trading on its contract market, including access requirements, terms 
and conditions for trading, and rules prohibiting manipulation on 
the contract market.'' See Wilshire Phoenix Submission II at 23.
    \92\ See Wilshire Phoenix Submission II at 23-24.
    \93\ See id. at 24.
    \94\ See Notice, 84 FR at 56226 n.43; Wilshire Phoenix 
Submission II at 12-13.
---------------------------------------------------------------------------

    Finally, the Sponsor states that surveillance of the Constituent 
Platforms is further reinforced by the UK Financial Conduct Authority's 
(``FCA'') oversight of CF Benchmarks and CF Benchmarks' obligations as 
a benchmark administrator under European Union regulations.\95\ 
According to the Sponsor, under the EU Benchmark Regulation (``EU 
BMR''), CF Benchmarks must establish adequate systems and effective 
controls to detect any attempted manipulation on each of the 
Constituent Platforms and report

[[Page 12603]]

any such attempts to the FCA.\96\ The Sponsor argues that, like the 
Commission's regulation of national securities exchanges, the 
requirements of the EU BMR are designed to detect and deter 
manipulation on the Constituent Platforms and that, by requiring CF 
Benchmarks to establish procedures to identify and report such 
manipulation to the FCA, the EU BMR increases market surveillance and 
deters would-be manipulators by mandating information sharing through 
governmental oversight of the Bitcoin Reference Rate.\97\ According to 
the Sponsor, the EU BMR also fosters information flow, cooperation, and 
coordination between the Constituent Platforms, CME, and ultimately 
NYSE Arca.\98\
---------------------------------------------------------------------------

    \95\ See Wilshire Phoenix Submission II at 17 (further noting 
that CF Benchmarks was authorized by the United Kingdom FCA and was 
granted permission to carry on the regulated activity of 
administering a benchmark, and that, as a result, CF Benchmarks is 
subject to regulatory oversight by the FCA).
    \96\ See Wilshire Phoenix Submission II at 13. According to CF 
Benchmarks, any cases of suspected benchmark manipulation are 
escalated through the appropriate regulatory channels in accordance 
with its obligations under EU BMR. See CF Benchmarks Letter at 5.
    \97\ See Wilshire Phoenix Submission II at 13.
    \98\ See Wilshire Phoenix Submission II at 13.
---------------------------------------------------------------------------

(B) Analysis
    The record does not demonstrate that the level of regulation 
present with respect to the Constituent Platforms makes that segment of 
the bitcoin spot market inherently and uniquely resistant to fraud and 
manipulation. The Sponsor concedes that, despite the efforts of 
regulators or other market participants, bad actors and manipulation 
attempts may continue to exist in the bitcoin markets.\99\ The Sponsor 
likewise admits that the price of bitcoin may be influenced by fraud 
and manipulation because, among other things, ``many bitcoin spot 
markets are not regulated or supervised by a government agency,'' and 
because ``certain platforms may lack critical system safeguards, 
including customer protections.'' \100\
---------------------------------------------------------------------------

    \99\ See Wilshire Phoenix Submission II at 3. The Sponsor 
acknowledges that any of the foregoing issues ``may adversely affect 
an investment in the Shares.'' See id. See also Registration 
Statement at 26 (acknowledging that a bad actor may be able to, 
among other things, alter the bitcoin blockchain on which the 
bitcoin network and most bitcoin transactions rely, control, 
exclude, or modify the ordering of bitcoin transactions, ``double-
spend'' its own bitcoin (i.e., spend the same bitcoin in more than 
one transaction) and prevent the confirmation of other users' 
transactions).
    \100\ Registration Statement at 32.
---------------------------------------------------------------------------

    In addition, the record establishes that the level of regulation on 
the Constituent Platforms is not equivalent to the obligations and 
oversight of national securities exchanges or futures exchanges. While 
the Sponsor points to the Constituent Platforms' registrations with 
FinCEN as money services businesses, and two Constituent Platforms that 
are chartered by New York, the Commission stated in the Bitwise Order 
that there are substantial differences between FinCEN and New York 
state regulation compared to the Commission's regulation of the 
national securities exchanges.\101\ For example, while there may be 
some overlap,\102\ national securities exchanges are also, among other 
things, required to have rules that are ``designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.'' \103\ Moreover, national 
securities exchanges must file proposed rules with the Commission 
regarding certain material aspects of their operations,\104\ and the 
Commission has the authority to disapprove any such rule that is not 
consistent with the requirements of the Exchange Act.\105\ Thus, 
national securities exchanges are subject to Commission oversight of, 
among other things, their governance, membership qualifications, 
trading rules, disciplinary procedures, recordkeeping, and fees.\106\
---------------------------------------------------------------------------

    \101\ See Bitwise Order, 84 FR at 55392 (``[t]here are 
substantial differences between the NYSDFS and FinCEN regulation 
versus the Commission's regulation of the national securities 
exchanges.''). The Commission notes that AML and KYC policies and 
procedures have been referenced in other bitcoin-based ETP proposals 
as a purportedly alternative means by which such ETPs would be 
uniquely resistant to manipulation. See, e.g., Bitwise Order, 84 FR 
at 55386 n.55 & 55390. The Commission concludes here that such AML 
and KYC policies and procedures 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.
    \102\ See CFTC v. McDonnell, 287 F. Supp. 3d 213, 220-23, 228 
(E.D.N.Y.), adhered to on denial of reconsideration, 321 F. Supp. 3d 
366 (E.D.N.Y. 2018).
    \103\ 15 U.S.C. 78f(b)(5).
    \104\ 17 CFR 240.19b-4(a)(6)(i).
    \105\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rules 
changes with the Commission and provides the Commission with the 
authority to disapprove proposed rule changes that are not 
consistent with the Exchange Act. DCMs (commonly called ``futures 
markets'') registered with and regulated by the CFTC must comply 
with, among other things, a similarly comprehensive range of 
regulatory principles and must file rule changes with the CFTC. See, 
e.g., Designated Contract Markets (DCMs), CFTC, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \106\ See Winklevoss Order, 83 FR at 37597. The Commission notes 
that the NYSDFS has issued ``guidance'' to supervised virtual 
currency business entities, stating that these entities must 
``implement measures designed to effectively detect, prevent, and 
respond to fraud, attempted fraud, and similar wrongdoing.'' See 
Maria T. Vullo, Superintendent of Financial Services, NYSDFS, 
Guidance on Prevention of Market Manipulation and Other Wrongful 
Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its 
``guidance is not intended to limit the scope or applicability of 
any law or regulation'' (id.), which would include the Exchange Act. 
The Commission further notes that nothing in the record evidences 
whether the Constituent Platforms have complied with this NYSDFS 
guidance. FinCEN's guidance regarding the application of its 
regulations to digital assets notes that its guidance does not 
``affect the obligations of any of the participants described herein 
under other regulatory frameworks,'' for example, obligations under 
``federal securities law.'' FinCEN Guidance No. FIN-2019-G001: 
Application of FinCEN's Regulation to Certain Business Models 
Involving Convertible Virtual Currencies, at 24 n.75 (May 9, 2019), 
available at https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. See also FinCEN Guidance 
No. FIN-2013-G001: Application of FinCEN's Regulations to Persons 
Administering, Exchanging, or Using Virtual Currencies, at 1 n.1 
(Mar. 18, 2013), available at https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (noting that FinCEN's guidance 
``should not be interpreted as a statement by FinCEN about the 
extent to which [certain] activities comport with other federal or 
state statutes, rules, regulations, or orders'').
---------------------------------------------------------------------------

    The Commission finds that the Constituent Platforms are materially 
different. While the Sponsor asserts that various regulatory entities 
require the Constituent Platforms to adopt certain policies and 
processes, such requirements are fundamentally different from the 
Exchange Act's requirements for national securities exchanges, and it 
is unclear the extent to which a federal regulator must approve or 
disapprove of the rules of the Constituent Platforms and directly 
oversee their implementation and enforcement. Thus, the Exchange Act 
explicitly tasks the Commission with the responsibility of ensuring 
that the rules of a national securities exchange, as an SRO, are fully 
responsive to regulatory needs and that there is no decrement between 
regulatory needs and SRO performance.\107\ Currently, there is no 
regulatory authority that maintains similar obligations with respect to 
any policies or processes adopted by bitcoin spot trading platforms. 
Furthermore, unlike national

[[Page 12604]]

securities exchanges, the Constituent Platforms are not SROs and 
therefore do not have authority to impose discipline upon their 
participants. Accordingly, the Commission maintains that the level of 
regulation on the Constituent Platforms, as asserted by the Sponsor, is 
not equivalent to the obligations and oversight of national securities 
exchanges, and the Commission likewise rejects the Sponsor's factual 
assertion that this level of regulation present with respect to the 
Constituent Platforms makes that segment of the bitcoin spot market 
inherently or uniquely resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \107\ See 15 U.S.C. 78s(b). See also S. Rep. No. 94-75, at 30 
(1975).
---------------------------------------------------------------------------

    As to the Sponsor's contention that the self-certification of 
bitcoin futures establishes the oversight of the Constituent Platforms 
by the CFTC, as an initial matter, the Commission observed in the 
Winklevoss Order, the CFTC's statutory authority to review new 
derivative products differs substantially from the Commission's 
authority, under Section 19(b) of the Exchange Act,\108\ with respect 
to the review of proposed rule changes by SROs.\109\ For example, while 
there are ``limited grounds'' for the CFTC to take affirmative action 
to stay new product self-certifications,\110\ the Commission must, to 
approve a proposed rule change, make an affirmative finding that the 
proposed rule change is consistent with the Exchange Act, with the 
burden of demonstrating consistency with the Exchange Act resting with 
the SRO proposing the rule change.\111\ The Commission is also mindful 
that the primarily institutional markets that the CFTC supervises are 
materially different from the securities markets in which many retail 
investors participate directly.\112\ The Exchange Act's requirements 
for SROs, who serve as ``front-line'' regulators in the protection of 
retail investors,\113\ to establish rules that protect investors and 
promote the public interest reflects the extent of such retail 
participation in our public equity markets. In contrast, the CFTC 
acknowledges that ``[m]ost participants in the futures markets are 
commercial or institutional commodities producers or consumers'' and 
``[t]rading commodity futures and options is a volatile, complex and 
risky venture that is rarely suitable for individual investors or 
`retail customers.' '' \114\ The Commission concludes that the 
Sponsor's assertions that oversight by the CFTC establishes that the 
Constituent Platforms are regulated markets are not supported by the 
record. While the Commission recognizes that the CFTC maintains some 
jurisdiction over the bitcoin spot market, under the Commodity Exchange 
Act, the CFTC does not have regulatory authority over bitcoin spot 
trading platforms, including the Constituent Platforms.\115\ 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.\116\ 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.'' \117\ Based on the foregoing differences in 
the types and levels of regulations governing the bitcoin spot market, 
the Commission cannot conclude that the record has adequately 
demonstrated that the level of regulation present with respect to the 
Constituent Platforms' segment of the bitcoin spot market renders such 
segment of the spot market inherently or uniquely resistant to fraud 
and manipulation.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78s(b).
    \109\ See Winklevoss Order, 83 FR at 37587.
    \110\ See CFTC Backgrounder on Oversight of and Approach to 
Virtual Currency Futures Markets (Jan. 4, 2018) at 2, available at 
http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf (``Virtual Currency 
Backgrounder''). See also Winklevoss Order, 83 FR at 37587.
    \111\ See supra notes 33-34 and accompanying text. Compare 7 
U.S.C. 7a-2(c) and 17 CFR 40.6 with 15 U.S.C. 78(b)(1) and 17 CFR 
240.19b-4.
    \112\ See Winklevoss Order, 83 FR at 37587.
    \113\ See Securities Exchange Act Release No. 12737 (Aug. 25, 
1976), 41 FR 38847, 38854 (Sept. 13, 1976); Securities Exchange Act 
Release No. 50699 (Nov. 18, 2004), 69 FR 71126, 71132 (Dec. 8, 
2004).
    \114\ Futures Market Basics, CFTC, available at http://www.cftc.gov/ConsumerProtection/EducationCenter/FuturesMarketBasics/index.htm. See also Winklevoss Order, 83 FR at 37587.
    \115\ See Written Testimony of J. Christopher Giancarlo, 
Chairman, Commodity Futures Trading Commission, Before the Senate 
Banking Committee (Feb. 6, 2018) (``Giancarlo Testimony''), 
available at https://cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo37.
    \116\ See Winklevoss Order, 83 FR at 37599.
    \117\ See Winklevoss Order, 83 FR at 37599 n.288.
---------------------------------------------------------------------------

    The Commission similarly is not persuaded by the Sponsor's 
assertions that oversight by CF Benchmarks establishes that the 
Constituent Platforms are regulated markets. CF Benchmarks--the 
administrator of the Bitcoin Reference Rate--does not itself exercise 
governmental regulatory authority. Rather, CF Benchmarks is a 
registered, privately-held company in England.\118\ CF Benchmarks' 
relationship with the Constituent Platforms is based on the Constituent 
Platforms' participation in the determination of CF Benchmarks' 
reference rates, such as the Bitcoin Reference Rate. While CF 
Benchmarks is regulated by the FCA as a benchmark administrator, FCA 
regulations do not extend to the Constituent Platforms by virtue of 
their trade prices serving as the input data underlying the Bitcoin 
Reference Rate.\119\
---------------------------------------------------------------------------

    \118\ See https://www.cfbenchmarks.com/legal (stating that CF 
Benchmarks is authorized and regulated by the UK FCA as a registered 
Benchmark Administrator (FRN 847100) under the EU BMR, and further 
noting that CF Benchmarks is a member of the Crypto Facilities group 
of companies which is in turn a member of the Payward, Inc. group of 
companies, and Payward, Inc. is the owner and operator of the Kraken 
Exchange, a venue that facilitates the trading of cryptocurrencies). 
The Commission notes that the Kraken Exchange is a source of input 
data for CF Benchmarks indices and is one of the Constituent 
Platforms underlying the Bitcoin Reference Rate.
    \119\ CF Benchmarks is also not required to apply certain 
provisions of EU benchmark regulation to the Constituent Platforms 
because the Bitcoin Reference Rate's input data is not 
``contributed.'' See Benchmark Statement, at 4 available at https://www.cryptofacilities.com/cms/storage/resources/cme-cf-benchmark-statement.pdf.
---------------------------------------------------------------------------

    According to the Sponsor, the oversight performed by CF Benchmarks 
of the Constituent Platforms is contractual in nature and is for the 
purpose of CF Benchmarks satisfying its obligations under EU 
regulations designed to ensure the accuracy and integrity of 
benchmarks.\120\ Such oversight serves a fundamentally different 
purpose as compared to the regulation of national securities exchanges 
and the mandates of the Exchange Act, because, as the Sponsor explains, 
the purpose of oversight by a benchmark administrator is to ensure that 
the data provided to calculate the benchmark rate accurately reflects 
the prices that were traded, or available to trade, on trading 
venues.\121\ While the Commission recognizes that this may be an 
important function in ensuring the integrity of reference rates, such 
requirements do not imbue either CF Benchmarks or the Constituent 
Platforms with regulatory authority similar to that the Exchange Act 
confers upon SROs such as national securities exchanges.\122\
---------------------------------------------------------------------------

    \120\ See supra note 95 and accompanying text.
    \121\ See infra note 207 and accompanying text.
    \122\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    The Sponsor also asserts that CF Benchmarks reviews the ``rules'' 
(meaning policies and procedures, rather than regulatory obligations) 
of the Constituent Platforms in a manner comparable to the Commission's 
oversight of national securities exchanges. However, neither the 
Sponsor nor NYSE Arca has provided evidence establishing matters such 
as the specific regulatory requirements applicable to the Constituent 
Platforms' rules, the process for codifying such

[[Page 12605]]

rules, the requirement of a regulatory body to approve or disapprove 
rules pursuant to a statutory mandate, and the ability of Constituent 
Platforms and regulatory authorities to enforce such rules.\123\ 
National securities exchanges are entities that possess governmental 
authority such that they must carry out their self-regulatory 
responsibilities effectively and fairly while protecting investors and 
promoting the public trust.\124\ Accordingly, the Exchange Act subjects 
the rules of national securities exchanges to the same standards of 
policy justification as those which apply to the Commission and also 
specifically requires the Commission to approve or disapprove rules in 
accordance with articulated statutory mandates.\125\ The record does 
not establish that, due to CF Benchmarks' oversight, the Constituent 
Platforms are subject to a regulatory regime that includes, at a 
minimum, requirements comparable to these core elements of national 
securities exchange regulation such that Constituent Platforms are 
regulated markets.
---------------------------------------------------------------------------

    \123\ See Registration Statement at 31-32 (describing the 
Sponsor's own acknowledgement of the lack of regulation and 
transparency with respect to bitcoin spot markets, specifically 
noting that many bitcoin spot markets ``are not regulated or 
supervised by a government agency,'' and that ``certain platforms 
may lack critical system safeguards, including customer 
protections'').
    \124\ 15 U.S.C. 78f(b)(5). See also S. Rep. No. 94-75, at 29-30 
(1975).
    \125\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    Furthermore, because the purported oversight by CF Benchmarks, does 
not represent a unique measure to resist manipulation beyond mechanisms 
that exist in securities or commodities markets, the record does not 
establish that the Constituent Platforms are inherently resistant to 
manipulation such that it would justify dispensing with a surveillance-
sharing agreement with a significant, regulated market.\126\ Other 
commodity-based and equity index ETPs approved by the Commission for 
listing and trading utilize reference rates or indices administered by 
similar benchmark administrators and the Commission did not dispense 
with the need for a surveillance-sharing agreement with a significant, 
regulated market in those instances.\127\ Thus, while measures such as 
those represented by the Sponsor may facilitate detection or perhaps 
even deterrence of fraud and manipulation, they do not render those 
markets inherently or uniquely resistant to manipulation.
---------------------------------------------------------------------------

    \126\ See also supra notes 101-107 and accompanying text finding 
that the purported oversight by NYSDFS and FinCEN does not establish 
that the Constituent Platforms are inherently or uniquely resistant 
to manipulation.
    \127\ See, e.g., Securities Exchange Act Release No. 80840 (June 
1, 2017) 82 FR 26534 (June 7, 2017) (NYSEArca-2017-33) (approving 
the listing and trading of shares of the Euro Gold Trust, Pound Gold 
Trust, and the Yen Gold Trust); Securities Exchange Act Release No. 
83046 (Apr. 13, 2018) 83 FR 17462 (Apr. 19, 2018) (Nasdaq-2018-012) 
(approving the listing and trading of shares of an exchange-traded 
fund that seeks to track an equity index, the CBOE Russell 2000 30-
Delta BuyWrite V2 Index).
---------------------------------------------------------------------------

    The Commission also notes that NYSE Arca has not stated that it has 
entered into surveillance-sharing agreements with each of the 
individual Constituent Platforms that utilize surveillance tools. 
Moreover, even if NYSE Arca did enter into such agreements, it is not 
clear what ability NYSE Arca would have to compel the sharing of 
surveillance data, and NYSE Arca has not established that it would be 
able to compel such sharing. Unlike national securities exchanges, the 
bitcoin spot platforms are not self-regulatory organizations, and 
therefore do not have authority to impose discipline upon their 
participants.
    The Commission thus concludes that the record does not demonstrate 
that the current oversight of the Constituent Platforms renders the 
bitcoin spot market uniquely resistant to manipulation, such that a 
surveillance-sharing agreement with a significant, regulated market 
would not be needed to adequately deter and detect fraud and 
manipulation.
(b) Assertions About the Design of the Bitcoin Reference Rate (the CME 
CF BRR)
(i) Representations Made and Comments Received
    The Sponsor asserts that the Bitcoin Reference Rate methodology 
makes the Bitcoin Reference Rate inherently resistant to 
manipulation.\128\ The Sponsor and NYSE Arca state that CME's own 
analysis and an independent examination of the Bitcoin Reference Rate 
methodology support this assertion.\129\ In particular, NYSE Arca and 
the Sponsor state that the Bitcoin Reference Rate aggregates the 
bitcoin-to-U.S. dollar trade flow of its Constituent Platforms during a 
one-hour calculation window, partitions that window into twelve, five-
minute intervals, calculates a volume-weighted median price for each 
partition, and then calculates an equally-weighted average of the 
volume-weighted median of all partitions.\130\ The Sponsor argues that, 
because of these design choices, influencing the Bitcoin Reference Rate 
would require price manipulation on multiple exchanges over an extended 
period of time, which, according to the Sponsor, would be unreasonably 
costly and operationally intensive.\131\ Further, NYSE Arca states that 
the Bitcoin Reference Rate's use of a volume-weighted average median 
price, determined over twelve five-minute windows in a specific 60-
minute period, and the capital necessary to maintain a significant 
presence on any Constituent Platform would make any attempted 
manipulation of the Bitcoin Reference Rate unlikely.\132\
---------------------------------------------------------------------------

    \128\ The Sponsor provided the Commission with a written 
presentation at a meeting on October 16, 2019. See Commission Staff 
Memorandum to File re: Meeting with Wilshire Phoenix, Mayer Brown 
LLP, NYSE Arca, Inc., and Seward & Kissel LLP (Oct. 16, 2019) 
(attaching Presentation to the Commission by Wilshire Phoenix 
(``Wilshire Phoenix Submission I'')), available at https://www.sec.gov/comments/sr-nysearca-2019-39/srnysearca201939-6297119-193433.pdf. See Wilshire Phoenix Submission I at 5. According to the 
Sponsor, development of the Bitcoin Reference Rate relied on 
recognized best principles for financial benchmarks and the expert 
oversight committee oversees the scope of the Index to ensure it 
remains relevant and robust. See Wilshire Phoenix Submission I at 5.
    \129\ See Wilshire Phoenix Submission I at 8 (citing Wilshire 
Phoenix Submission I at Appendix 1); Notice, 84 FR at 56225 (citing 
Andrew Paine and William J. Knottenbelt, Analysis of the CME CF 
Bitcoin Reference Rate and Real Time Index, Section 2.2.2, Oct. 
2016, available at https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf (``Paine & Knottenbelt'')). The Sponsor includes in 
its first submission an analysis of the Bitcoin Reference Rate 
written by the CME Group that describes the Bitcoin Reference Rate 
and its methodology, and analyzes the degree to which Bitcoin 
Reference Rate is representative of the underlying spot market that 
it tracks. See Wilshire Phoenix Submission I at 11-57.
    \130\ See Notice, 84 FR at 56223, 56225; Wilshire Phoenix 
Submission I at 5.
    \131\ See Wilshire Phoenix Submission I at 5. See also Notice, 
84 FR at 56225 (citing Paine & Knottenbelt, Section 2.2.2) (`` `The 
chosen specification makes the [Bitcoin Reference Rate] highly 
resistant against manipulation. . . . Influencing the [Bitcoin 
Reference Rate] would therefore require price manipulation . . . 
over an extended period of time.' ''); Wilshire Phoenix Submission I 
at 12.
    \132\ See Notice, 84 FR at 56225. The Sponsor asserts that the 
interconnectivity required to be eligible to be a Constituent 
Platform, combined with the volume and depth of liquidity among the 
Constituent Platforms and capital necessary to maintain a 
significant presence on the Constituent Platforms, makes 
manipulation prohibitively expensive because a would be manipulator 
would need to influence multiple platforms. See Wilshire Phoenix 
Submission II at 8.
---------------------------------------------------------------------------

    In addition, CF Benchmarks states that, while ``[a]ll benchmarks 
are susceptible to manipulation,'' the design of the Bitcoin Reference 
Rate methodology provides several benefits related to manipulation 
resistance.\133\ According to CF Benchmarks, the use of partitions, as 
well as the use of equal-weighting instead of volume-weighting among 
the partitions, limits the influence of individual trades of large size 
or a cluster of trades in a short period of time because such trades 
would only influence the level of the

[[Page 12606]]

volume-weighted mean for the partition or partitions in which they were 
conducted and as such would not have undue influence on the overall 
benchmark price.\134\
---------------------------------------------------------------------------

    \133\ See CF Benchmarks Letter at 3-4.
    \134\ See CF Benchmarks Letter at 4. CF Benchmarks also cites 
the use of volume-weighted medians (instead of volume-weighted 
means), the arithmetic mean of the partitions, and equal weighting 
of Constituent Platforms as preventing the undue influence of trades 
at outlier prices or large trades and the ability of potential 
manipulators from targeting one platform. See id. In addition, CF 
Benchmarks states that the Bitcoin Reference Rate methodology will 
identify a Constituent Platform with trades over a certain deviation 
from the volume-weighted median and exclude transactions from such 
Constituent Platform from the benchmark calculation. See id. at 5.
---------------------------------------------------------------------------

    CF Benchmarks also asserts that, due to the Bitcoin Reference Rate 
methodology ``certain types of manipulative trading would have little 
or no impact on the level of the [Bitcoin Reference Rate].'' \135\ As 
examples, CF Benchmarks states that the influence of a single large 
volume trade placed during the observation window would be confined due 
to the averaging component of the methodology, and that the influence 
of twelve large-volume trades placed in each five-minute partition 
during the observation window would be nullified due to the use of 
volume-weighted means.\136\ CF Benchmarks further asserts that, to be 
sure to have a meaningful impact on the Bitcoin Reference Rate, a 
trader would need to be responsible for more than 50% of the volume of 
a partition through trades executed at a significant deviation to the 
prevailing price, for a period of 45 minutes--in other words, for nine 
of the twelve partitions--to overcome the averaging effect of the 
methodology.\137\ CF Benchmarks estimates that the capital required to 
manipulate the Bitcoin Reference Rate would likely exceed $20 million, 
and asserts that the presence of arbitrageurs would likely require the 
commitment of additional capital depending on the degree of impact the 
manipulator sought to make.\138\ CF Benchmarks also asserts that a 
manipulator would need to maintain a significant presence across all 
Constituent Platforms.\139\
---------------------------------------------------------------------------

    \135\ CF Benchmarks Letter at 2.
    \136\ See CF Benchmarks Letter at 2-3.
    \137\ See CF Benchmarks Letter at 3.
    \138\ See CF Benchmarks Letter at 3.
    \139\ See CF Benchmarks Letter at 3. Cf. Notice, 84 FR at 56225.
---------------------------------------------------------------------------

    In addition, according to CF Benchmarks, use of the Bitcoin 
Reference Rate would mitigate against potential manipulation that could 
arise if an alternative pricing source or index used a wider set of 
markets and trading pairs that did not offer the traceability of the 
Bitcoin Reference Rate.\140\ CF Benchmarks states that only 
manipulation of the bitcoin-U.S. dollar markets operated by the 
Constituent Platforms can impact the integrity of the Bitcoin Reference 
Rate, because the benchmark exclusively uses transaction data in 
bitcoin-U.S. dollar trading pairs from the Constituent Platforms and 
does not use transaction data from transactions conducted in parallel 
markets, such as bitcoin trading against ``stablecoins'' or other 
cryptocurrencies.\141\
---------------------------------------------------------------------------

    \140\ See CF Benchmarks Letter at 1-2.
    \141\ See id. at 1. CF Benchmarks states that bitcoin-U.S. 
dollar markets rely on traditional banking operators to facilitate 
deposits and withdrawals of U.S. dollars, and that this facilitation 
requires disclosure of users' personal information. See id. at 1-2. 
According to CF Benchmarks, this disclosure requirement would act as 
a deterrent to manipulation that would likely be absent where 
alternative trading pairs that utilize ``stablecoins'' and other 
cryptocurrencies are utilized as input data to the calculations. See 
id. at 2. The term ``stablecoin'' is a marketing term broadly used 
in the industry to refer to a digital asset that purports to 
minimize price volatility. However, the Commission notes that the 
use of the term to refer to a digital asset does not mean that the 
asset does in fact exhibit stability. See Bitwise Order, 84 FR at 
55389 n.101.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that NYSE Arca and the Sponsor have not 
demonstrated that the design of the Bitcoin Reference Rate makes the 
underlying market of the proposed ETP inherently and uniquely resistant 
to manipulation. The Commission recognizes that the Bitcoin Reference 
Rate is the U.S. dollar rate used to settle the CME's cash-settled 
bitcoin futures contracts, and that the Commodity Exchange Act and CFTC 
regulations require futures contracts and their cash-settlement 
processes to not be ``readily susceptible to manipulation.'' \142\ The 
Commission does not assert that the Bitcoin Reference Rate fails to 
meet that standard. Rather, the Commission finds that the record does 
not establish that the underlying market is uniquely and inherently 
resistant to manipulation such that it would be consistent with the 
Exchange Act for NYSE Arca to dispense with entering into a 
surveillance-sharing agreement with a regulated market of significant 
size.
---------------------------------------------------------------------------

    \142\ 7 U.S.C. 7(d)(3); 17 CFR 38.200.
---------------------------------------------------------------------------

    The Commission's conclusion on this point is consistent with the 
CFTC's actions with respect to bitcoin futures products. CFTC 
regulations require a designated contract market (DCM) like CME's cash-
settled bitcoin futures market to enter into information-sharing 
agreements with settlement rate providers to detect and deter 
manipulative behavior.\143\ Specifically with respect to bitcoin 
futures products, the CFTC further requires such DCMs to enter into 
information-sharing agreements with spot market platforms that make up 
the underlying settlement price index to allow DCMs access to pertinent 
trade and trader data.\144\ Accordingly, in the case of bitcoin futures 
products, not only has the CFTC employed its traditional standards of 
entering into information-sharing agreements with settlement rate 
providers, but it also has required DCMs to enter into data-sharing 
agreements with spot market platforms to facilitate the detection and 
deterrence of manipulative behavior.
---------------------------------------------------------------------------

    \143\ See 17 CFR 38.253; Appendix C to Part 38 of CFTC's 
regulations.
    \144\ See Giancarlo Testimony; Virtual Currency Backgrounder at 
3.
---------------------------------------------------------------------------

    The Commission concludes that the CFTC's heightened review specific 
to bitcoin futures, including the information-sharing requirements that 
it imposes despite the use of the Bitcoin Reference Rate, underscore 
that the Bitcoin Reference Rate does not possess unique characteristics 
such that a surveillance-sharing agreement would not be necessary to 
list the proposed ETP in a manner that satisfies the requirements of 
the Exchange Act.\145\ While the methodologies of the Bitcoin Reference 
Rate could provide protections that mitigate the potential effects of 
certain types of manipulation, as identified by CF Benchmarks, the 
Commission concludes that neither the evidence in the record, nor the 
actions of the CFTC, establish that either the Bitcoin Reference Rate 
or the relevant segment of the bitcoin spot market maintains a unique 
resistance to manipulation such that there would be no need to enter 
into a surveillance-sharing agreement with a regulated significant 
market to detect and deter fraudulent and manipulative activity.\146\
---------------------------------------------------------------------------

    \145\ See Giancarlo Testimony (explaining that heightened review 
included ``a set of enhanced monitoring and risk management steps'' 
to ensure that the bitcoin futures products and their cash-
settlement processes were not readily susceptible to manipulation); 
Virtual Currency Backgrounder at 3 (listing the terms and conditions 
of heightened review, including DCMs entering into agreements with 
spot market platforms to allow access to trade and trader data).
    \146\ The Commission concludes that the methodologies of the 
Bitcoin Reference Rate as other means of preventing fraud and 
manipulation taken by itself or in combination with any of the other 
means described in this Order are not sufficient to dispense with 
the need for a comprehensive surveillance-sharing agreement with a 
regulated market of significant size relating to the underlying 
assets.
---------------------------------------------------------------------------

    In any event, the Commission is unpersuaded that CF Benchmarks' 
assertions about the Bitcoin Reference

[[Page 12607]]

Rate's resistance to manipulation dispense with the need for the 
requisite surveillance-sharing agreement. As analyzed above in Section 
III.B.1.(a)(i)(B), the record does not establish that the Constituent 
Platforms are inherently or uniquely resistant to fraud and 
manipulation because the record does not address the influence of the 
broader bitcoin spot market--where various kinds of fraud and 
manipulation from a variety of sources may be present and persist for a 
substantial duration--on the Constituent Platforms.\147\
---------------------------------------------------------------------------

    \147\ See supra note 66 and accompanying text.
---------------------------------------------------------------------------

(c) Other Features of the Trust
(i) Representations Made and Comments Received
    According to NYSE Arca, the Sponsor maintains that certain aspects 
of the Trust enhance its resistance to market manipulation. 
Specifically, NYSE Arca represents that the Trust was created as a way 
for market participants to gain reasonable exposure to bitcoin through 
a vehicle that mitigates the volatility that has historically been 
associated with bitcoin.\148\ NYSE Arca states the Trust will have no 
assets other than (a) bitcoin and (b) T-Bills in proportions that seek 
to closely replicate the Index, which is calculated and published by 
the Index Calculation Agent.\149\ NYSE Arca asserts that T-Bills are 
among the most liquid and widely traded assets in the world and are 
deemed to be risk free.\150\ According to the Sponsor, the selection of 
T-Bills as a constituent of the Trust will dampen the volatility of 
bitcoin as it relates to the Trust, and consequently the Shares.\151\ 
The Sponsor states that, because bitcoin is not the only constituent of 
the Trust (and the other constituent, T-Bills, has historically been a 
stable and risk-free investment), any potential manipulation of the 
Trust and the Shares would be extremely difficult and therefore 
unlikely.\152\
---------------------------------------------------------------------------

    \148\ See Notice, 84 FR at 56228.
    \149\ See id.
    \150\ See id.
    \151\ See id.
    \152\ See id.
---------------------------------------------------------------------------

    The Sponsor also asserts that the ability of a holder of Shares to 
redeem only monthly affects the Shares' resistance to manipulation 
because (i) of the significant passage of time between when a 
redemption request must be submitted and when the redemption is priced 
and distributed and (ii) it limits the window during which someone 
could successfully manipulate the Shares in order to profit from such 
redemption.\153\ The Sponsor further argues that this redemption method 
also reduces operational risk, counterparty risk, and other risks thus 
increasing investor protection.\154\
---------------------------------------------------------------------------

    \153\ See Wilshire Phoenix Submission II at 28-29. The Sponsor 
states that it is critical that the redemption order cutoff time, 
which is five (5) business days prior to the applicable redemption 
date, be prior to any of the daily valuation determination times of 
the assets of the Trust (i.e., bitcoin and T-Bills). If this is not 
the case, the Sponsor asserts that a potential manipulator could 
redeem the Trust's Shares at the prior price at the time of the 
asset value determination versus the current trading price, which 
would allow the potential manipulator to reap a benefit to the 
detriment of others. If the redemption order cut-off is properly set 
before any asset value determination times, then there is no 
possibility of redeeming Shares of the Trust after any of the asset 
valuation times, regardless of when NAV itself is actually 
published. The Sponsor concludes that this is accomplished in the 
Trust's case because the redemption order cut-off is five (5) 
business days before the determination of the NAV on the redemption 
date. See Wilshire Phoenix Submission II at 27.
    \154\ See Wilshire Phoenix Submission II at 29.
---------------------------------------------------------------------------

(ii) Analysis
    NYSE Arca has not demonstrated that these additional features of 
the Trust, such as its T-Bills holdings and its redemption method, 
would render the relevant segment of the underlying bitcoin market 
uniquely resistant to manipulation, such that it would be consistent 
with the Exchange Act to dispense with the need for the listing 
exchange to enter into a surveillance-sharing agreement with a 
significant regulated market to detect and deter fraudulent and 
manipulative activity.
    While the proposed ETP would hold T-Bills in addition to bitcoin, 
this aspect is insufficient to support a finding that the bitcoin held 
in the Trust would be inherently or uniquely resistant to manipulation. 
Previously disapproved bitcoin-based ETP proposals, including proposals 
to list and trade bitcoin futures-based ETPs, have contemplated 
holdings in similarly liquid instruments, such as government securities 
and cash.\155\ There is nothing in the record to suggest that including 
holdings in assets more liquid than bitcoin would render the bitcoin 
assets to be inherently or uniquely resistant to manipulation, such 
that there would be no need for a surveillance-sharing agreement with a 
regulated market of significant size. Furthermore, even if the Sponsor 
were correct in its assertion that holding T-Bills might make the 
proposed ETP more resistant to volatility,\156\ there is nothing in the 
record to suggest that the percentage of the Trust's holdings comprised 
of bitcoin would be of such size that it would meaningfully reduce the 
potential to manipulate the Trust.
---------------------------------------------------------------------------

    \155\ See, e.g., SolidX Order, 82 FR at 16247 (describing the 
holdings to include bitcoin and cash); Notice of Filing of Proposed 
Rule Change To List and Trade the Shares of the ProShares Bitcoin 
ETF and the ProShares Short Bitcoin ETF Under NYSE Arca Rule 8.200-
E, Commentary .02, Securities Exchange Act Release No. 82350 (Dec. 
19, 2017), 82 FR 61100, 61102 (Dec. 26, 2017) (SR-NYSEArca-2017-139) 
(describing the holdings to include, in addition to bitcoin futures 
contracts, cash or cash equivalents and/or U.S. Treasury securities 
or other high credit quality, short-term fixed-income or similar 
securities); Notice of Filing of Proposed Rule Change Relating to 
Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares, 
Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin 
1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares and Direxion 
Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200-E, 
Securities Exchange Act Release No. 82532 (Jan. 18, 2018), 83 FR 
3380, 3383 (Jan. 24, 2018) (SR-NYSEArca-2018-02) (describing the 
holdings to include, in addition to bitcoin futures contracts, cash 
or cash equivalents, such as U.S. Treasury Securities or other high 
credit quality short-term fixed-income or similar securities); and 
Notice of Filing of a Proposed Rule Change To List and Trade Shares 
of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin 
ETF, a Series of the GraniteShares ETP Trust, Under Rule 
14.11(f)(4), Trust Issued Receipts, Securities Exchange Act Release 
No. 82484 (Jan. 11, 2018), 83 FR 2704, 2705-06 (Jan.18, 2018) (SR-
CboeBZX-2018-001) (describing the holdings to include, in addition 
to bitcoin futures contracts, cash and cash equivalents).
    \156\ See supra note 151 and accompanying text.
---------------------------------------------------------------------------

    With respect to redemption of the Shares, the Sponsor's assertions 
that the proposed ETP's redemption method positively affects the 
Shares' resistance to manipulation do not support a finding that the 
bitcoin held in the Trust would be inherently or uniquely resistant to 
manipulation. The proposed ETP's monthly redemption method is not 
novel. Previously, the Commission has approved the listing and trading 
of several commodity-based trust ETPs with a monthly redemption 
feature.\157\ However, in each instance the Commission noted that the 
listing

[[Page 12608]]

market had a surveillance-sharing agreement in place, or had common 
membership in ISG, with a regulated market of significant size related 
to the underlying commodity or commodities.\158\ Moreover, establishing 
a period of time, whether it be significant or not, between the time of 
receipt of the redemption request and the time of pricing of the 
redemption is not a unique feature that would distinguish the proposed 
ETP from other bitcoin-related ETP proposals where the Commission 
likewise did not find the underlying market to be inherently or 
uniquely resistant to manipulation.\159\
---------------------------------------------------------------------------

    \157\ See, e.g., Notice of Filing of Amendment No. 2 and Order 
Approving on an Accelerated Basis a Proposed Rule Change, as 
Modified by Amendment No. 2, To List and Trade Shares of the Sprott 
Physical Gold and Silver Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 82448 (Jan. 5, 2018), 83 FR 1428 
(Jan. 11, 2018) (SR-NYSEArca-2017-131) (``Gold and Silver Order''); 
Order Approving a Proposed Rule Change, as Modified by Amendment No. 
1, To List and Trade Units of the Sprott Physical Platinum and 
Palladium Trust Pursuant to NYSE Arca Equities Rule 8.201, 
Securities Exchange Act Release No. 68430 (Dec. 13, 2012), 77 FR 
75239 (Dec. 19, 2012) (SR-NYSEArca-2012-111) (``Platinum and 
Palladium Order''); Notice of Filing and Order Granting Accelerated 
Approval of a Proposed Rule Change To List and Trade Shares of the 
Sprott Physical Silver Trust, Securities Exchange Act Release No. 
63043 (Oct. 5, 2010), 75 FR 62615 (Oct. 12, 2010) (SR-NYSEArca-2010-
84) (``Silver Order''); and Order Granting Approval of a Proposed 
Rule Change To List and Trade the Sprott Physical Gold Trust, 
Securities Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 6758 
(Feb. 10, 2010) (SR-NYSEArca-2009-113) (``Gold Order'').
    \158\ See, e.g., Gold and Silver Order, 83 FR at 1436 & n.43; 
Platinum and Palladium Order, 77 FR at 75240-21 n.21; Silver Order, 
75 FR at 62621; and Gold Order, 75 FR at 6760 & n.18.
    \159\ See, e.g., Notice of Filing of a Proposed Rule Change to 
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, To List and 
Trade Winklevoss Bitcoin Shares Issued by the Winklevoss Bitcoin 
Trust, Securities Exchange Act Release No. 78262 (July 8, 2016), 81 
FR 45554, 45569 (July 14, 2016) (SR-BatsBZX-2016-30) (describing the 
redemption settlement to be no more than five business days 
following the redemption order date).
---------------------------------------------------------------------------

2. Assertions That NYSE Arca Has Entered Into a Surveillance-Sharing 
Agreement With a Regulated Market of Significant Size
    The Commission next examines whether the record supports the 
assertion by NYSE Arca and the Sponsor that NYSE Arca has entered into 
a surveillance-sharing agreement with a regulated market of significant 
size by virtue of NYSE Arca's surveillance-sharing agreement with the 
CME bitcoin futures market.\160\ As was the case in the Bitwise Order, 
based on the common membership of NYSE Arca and CME in the ISG,\161\ 
NYSE Arca has the equivalent of a comprehensive surveillance-sharing 
agreement with CME.\162\ While the Commission recognizes that the CFTC 
regulates the CME futures market,\163\ the record does not, as 
explained further below, establish that the CME bitcoin futures market 
is a ``market of significant size'' in the context of the proposed 
ETP.\164\
---------------------------------------------------------------------------

    \160\ See Notice, 84 FR at 56225-26; Wilshire Phoenix Submission 
II at 19-24.
    \161\ See Notice, 84 FR at 56226; Wilshire Phoenix Submission II 
at 24.
    \162\ See supra note 14. See also Notice, 84 FR at 56226 & n.43; 
Wilshire Phoenix Submission II at 23-24.
    \163\ While the Commission recognizes that the CFTC regulates 
the CME, the CFTC is not responsible for direct, comprehensive 
regulation of the underlying bitcoin spot market. See Bitwise Order, 
84 FR at 55410 n.456; Winklevoss Order, 83 FR at 37587, 37599.
    \164\ The Commission notes that the ICE Futures U.S. exchange 
began offering bitcoin futures contracts as of September 2019. See 
Bakkt Bitcoin (USD) Monthly And Daily Futures Contracts Trading to 
Begin on Monday, September 23, 2019, ICE Futures U.S. (Aug. 16, 
2019), available at https://www.theice.com/publicdocs/futures_us/exchange_notices/ICE_Futures_US_BTC_Launch2019_20190816.pdf (last 
visited Jan. 14, 2020). However, the record contains no information 
about the volume of ICE Futures U.S.'s bitcoin futures product or 
whether the Sponsor has a relevant surveillance-sharing agreement 
with ICE Futures U.S. Also, the CME began offering options on 
bitcoin futures contracts as of January 13, 2020. See FAQ: CME 
Options on Bitcoin Futures (Oct. 29, 2019), available at https://www.cmegroup.com/trading/cryptocurrency-indices/cme-options-bitcoin-futures-frequently-asked-questions.html. Trading began after the 
comment period for this proposed rule change ended and there is no 
data in the record regarding such options trading.
---------------------------------------------------------------------------

    In addition, the Sponsor points to the group of Constituent 
Platforms as providing an avenue for the proposal to satisfy the 
requirement that NYSE Arca enter into a surveillance-sharing agreement 
with a regulated market of significant size.\165\ According to NYSE 
Arca, while it has not entered into a surveillance-sharing agreement 
with any spot bitcoin platform, each Constituent Platform has entered 
into a data-sharing agreement with CME.\166\ The Sponsor asserts that 
CME can share any information that it receives from the Constituent 
Platforms with NYSE Arca.\167\ However, as discussed below, this 
arrangement does not satisfy the standard articulated by the Commission 
in its prior orders that the listing exchange for a proposed ETP may 
satisfy its obligations under Section 6(b)(5) of the Exchange Act by 
entering into bilateral surveillance-sharing agreements with regulated 
markets of significant size relating to underlying assets.\168\ 
Moreover, the record does not support a conclusion that the regulation 
of the Constituent Platforms is comparable to the obligations and 
oversight of national securities exchanges or futures exchanges.\169\ 
Given that the record does not establish that NYSE Arca has a 
surveillance-sharing agreement with the Constituent Platforms or that 
the Constituent Platforms constitute a ``regulated market,'' the 
Commission does not reach the question of whether the Constituent 
Platforms represent a market of significant size.
---------------------------------------------------------------------------

    \165\ See Wilshire Phoenix Submission II at 11-19.
    \166\ See Notice, 84 FR at 56225 n.41. See also Wilshire Phoenix 
Submission II at 15 (stating that each Constituent Platform must 
enter into surveillance-sharing agreements with CME).
    \167\ See Wilshire Phoenix Submission II at 15-16.
    \168\ See supra notes 14, 19-20 and accompanying text. For a 
discussion about why the surveillance-sharing agreements between CME 
and the Constituent Platforms, along with NYSE Arca's and the CME's 
common membership in the ISG, do not suffice to make the spot 
bitcoin market inherently or uniquely resistant to manipulation, see 
supra Section III.B.1(a)(ii).
    \169\ See supra Section III.B.1(a)(ii). See also Winklevoss 
Order, 83 FR at 37597 (``The record, however, does not support a 
conclusion that the Gemini Exchange is a `regulated market' 
comparable to a national securities exchange or to the futures 
exchanges that are associated with the underlying assets of the 
commodity-trust ETPs approved to date.''). For a discussion about 
why regulation of the Constituent Platforms does not suffice to make 
the spot bitcoin market inherently or uniquely resistant to 
manipulation, see supra Section III.B.1(a)(ii).
---------------------------------------------------------------------------

(a) Representations Made and Comments Received
(i) CME as a Regulated Market of Significant Size
    NYSE Arca and the Sponsor assert that the CME bitcoin futures 
market is a regulated market of significant size with which NYSE Arca 
has a surveillance-sharing agreement.\170\ NYSE Arca and the Sponsor 
assert that the CME bitcoin futures market is a market of significant 
size because it is the main market for bitcoin futures and compares 
favorably to other markets that were deemed to be markets of 
significant size in previous approvals of commodity-based trust 
ETPs.\171\ In particular, the Sponsor argues that the size of the 
bitcoin futures market as a percentage of bitcoin spot trading 
represented by trading on the Constituent Platforms is larger than the 
size of the gold futures market as a percentage of the gold OTC 
market.\172\ According to NYSE Arca, the Sponsor also represents that 
the volume of the bitcoin futures market is comparable with volumes on 
other markets deemed to be markets of significant size in a previous 
approval order by the Commission.\173\
---------------------------------------------------------------------------

    \170\ See Notice, 84 FR at 56226; Wilshire Phoenix Submission II 
at 10-11, 19-24. NYSE Arca and the Sponsor state that NYSE Arca and 
the CME are both members of the ISG. See Notice, 84 FR at 56226; 
Wilshire Phoenix Submission II at 24. NYSE Arca and the Sponsor also 
state that the CME is regulated by the CFTC. See Notice, 84 FR at 
56226; Wilshire Phoenix Submission II at 23-24.
    \171\ See Notice, 84 FR at 56226. NYSE Arca states that on 
September 12, 2019, the CME notified the CFTC that it was increasing 
the spot month position limits for bitcoin futures contracts from 
1,000 to 2,000 net contracts, or a notionally deliverable quantity 
of 10,000 bitcoins. See id. at 56226 n.48.
    \172\ See Notice, 84 FR at 56226 (stating that in 2016 the daily 
trading volume of gold futures on the COMEX was $28.9 billion and 
the daily trading volume on gold OTC markets was $167.9 billion, for 
a ratio of 17.2%; and that from October 1, 2018 to March 31, 2019, 
the daily trading volume of bitcoin futures on the CME was $90.4 
million and the daily trading volume of bitcoin-U.S. dollar spot was 
$149.5 million, for a ratio of 60.5%); Wilshire Phoenix Submission 
II at 19-20 (also stating the cited bitcoin-U.S. dollar spot volume 
is based on the Constituent Platforms).
    \173\ See Notice, 84 FR at 56226 n.56. The Sponsor made a third 
submission in which it sought to compare the size, liquidity, and 
transparency of the CME bitcoin futures market to other futures 
markets on which the underlying components of approved ETPs trade. 
See Letter from Marlon Q. Paz, Partner, Mayer Brown (Feb. 20, 2020) 
(``Wilshire Phoenix Submission III'').

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

[[Page 12609]]

    The Sponsor acknowledges that the Commission's interpretation of 
the term ``market of significant size'' depends on the 
interrelationship between the market with which the listing exchange 
has a surveillance-sharing agreement and the proposed ETP.\174\ This 
interrelationship must be such that there is a reasonable likelihood 
that a person attempting to manipulate the proposed ETP would also have 
to trade on that market to successfully manipulate the ETP.\175\ To 
demonstrate the existence of an interrelationship between the CME and 
the Constituent Platforms, the Sponsor states that it conducted an 
independent analysis of bitcoin price discovery and that this analysis, 
along with the findings of multiple publications, shows that the 
contribution from CME bitcoin futures to price formation is greater 
than the contribution from the Constituent Platforms and has increased 
over time.\176\ Said another way, the Sponsor asserts that in most 
instances prices on the CME bitcoin futures market lead prices on the 
Constituent Platforms, and that this underscores that a would-be 
manipulator of the Trust would need to trade on the CME bitcoin futures 
market to successfully manipulate prices on the Constituent Platforms, 
which are used to price the Trust's bitcoin.\177\
---------------------------------------------------------------------------

    \174\ See id. at 19.
    \175\ See id. at 19 (citing Winklevoss Order, 83 FR at 37594; 
Bitwise Order, 84 FR at 55410).
    \176\ See Wilshire Phoenix Submission II at 20-21.
    \177\ See Wilshire Phoenix Submission II at 23.
---------------------------------------------------------------------------

    The Sponsor states that for its analysis it has used CME bitcoin 
futures trades and the CME CF Bitcoin Real Time Index (``CME CF 
BRTI''), which is a real-time intraday spot rate constructed from the 
real-time spot prices on the Constituent Platforms.\178\ According to 
the Sponsor, using a two-component model of futures and spot markets, 
the component share of CME bitcoin futures contracts as compared to the 
CME CF BRTI spot rate to bitcoin price formation was 62.69% in the 
second half of 2019, ``indicating that futures contracts contributed 
more to price formation than spot.'' \179\
---------------------------------------------------------------------------

    \178\ See Wilshire Phoenix Submission II at 20. The Sponsor 
states that market data for bitcoin futures, the Bitcoin Reference 
Rate, and the CME CF BRTI are available via the CME DataMine market 
data facility. See id. at 20 n.90. The Sponsor also states that 
rolling futures trade prices and CME CF BRTI levels are aggregated 
into 1-minute intervals using the respective median value in each 
interval during trading hours, with previous values used if data is 
unavailable. See id.
    \179\ See Wilshire Phoenix Submission II at 21. The Sponsor 
states that the methodology that it has used to analyze the 
contribution of the futures and the spot markets to bitcoin price 
formation is based on the price discovery methodology utilized in 
other bitcoin price formation studies. See id. at 20-21 (citing 
Edwin Hu, Securities and Exchange Commission Department of Economic 
Risk Analysis, Intentional Access Delays, Market Quality, and Price 
Discovery: Evidence from IEX Becoming an Exchange, Mar. 15, 2019; S. 
Ozturk et al., Intraday Price Discovery in Fragmented Markets, 32 J. 
Fin. Markets 28 (2017); F. De Jong & P. Schotman, Price discovery in 
fragmented markets, 8 J. Fin. Econometrics 1 (2010); Jesus Gonzalo & 
Clive Granger, Estimation of common long-memory components in 
cointegrated systems, 13 J. Bus. & Econ. Stat. 27 (1995), available 
at https://www.jstor.org/stable/1392518).
---------------------------------------------------------------------------

    The Sponsor asserts that its finding corroborates several recent 
journal articles that also have found that the CME bitcoin futures have 
a larger component share contribution to bitcoin price formation than 
the bitcoin spot market.\180\ According to the Sponsor, this research 
confirms that the majority of price discovery for bitcoin takes place 
in the futures market.\181\ The Sponsor states that research indicates 
that the bitcoin futures market often leads the spot market due to 
inherent leverage, low transaction costs, the absence of short-selling 
transactions, and greater transparency.\182\ The Sponsor also states 
that research suggests that a majority of long run price information is 
derived from the futures market and that price movements in the futures 
market are often accompanied or followed by price movements of the spot 
market in the same direction.\183\ And the Sponsor points to 
conclusions that the CME futures market has become a major driver of 
bitcoin spot prices and that high-volume trades from large 
institutional investor clients effectively arbitrage away spikes in the 
basis within seconds or minutes.\184\
---------------------------------------------------------------------------

    \180\ See id. (citing Bruce Mizrach & Saketh Aleti, Bitcoin Spot 
and Futures Market Microstructure, Sept. 24, 2019, available at 
https://ssrn.com/abstract=3459111) (``Mizrach & Aleti''); Carol 
Alexander & Daniel F. Heck, Price Discovery, High-Frequency Trading 
and Jumps in Bitcoin Markets, May 5, 2019, available at https://ssrn.com/abstract=3383147 (``Alexander & Heck''); Oliver Entrop et 
al., The Determinants of Price Discovery on Bitcoin Markets, July 
2019, available at https://acfr.aut.ac.nz/_data/assets/pdf_file/0009/296424/B-Frijns-Bitcoin_Paper.pdf (``Entrop et al.''); Burcu 
Kapar & Jose Olmo, An analysis of price discovery between Bitcoin 
futures and spot markets, 174 Econ. Letters 62 (2019), available at 
https://www.sciencedirect.com/science/article/pii/S0165176518304440 
(``Kapar & Olmo''); Erdinc Akyildirim et al., The development of 
Bitcoin futures: Exploring the interactions between cryptocurrency 
derivatives, Fin. Res. Letters, July 10, 2019, available at https://www.sciencedirect.com/science/article/pii/S1544612319304714; 
Athanasios P. Fassas et al., Price discovery in bitcoin futures, 52 
Res. Int'l Bus. Fin. 101116 (2020), available at https://www.sciencedirect.com/science/article/abs/pii/S0275531919305628).
    \181\ See id. at 21-22. The Sponsor also asserts that its 
conclusions are consistent with research about price formation about 
futures and spot prices generally that often finds that the futures 
market leads price formation. See id. at 21.
    \182\ See id. at 22 (citing Alexander & Heck; Kapar & Olmo at 
62-64).
    \183\ See id. at 22.
    \184\ See id.
---------------------------------------------------------------------------

    In addition to the static time invariant approaches used in the 
research discussed above, the Sponsor cites research using a time-
varying approach that it states confirms that bitcoin futures 
consistently lead the bitcoin spot market in price formation.\185\ The 
authors of this research paper separately comment that their analysis 
of data from the CME and Cboe Futures Exchange (``CFE'') \186\ from 
December 2017 through June/July 2019 found that the CME and CFE bitcoin 
futures prices generally cause the underlying spot prices.\187\ This 
commenter states that with respect to CFE bitcoin futures, the futures 
market caused the underlying spot market prices between August/November 
2018 and June 2019, and that there was no evidence of causality running 
from the spot market to the futures market.\188\ This commenter further 
states that with respect to CME bitcoin futures, there was a very short 
causality episode that ran from spot prices to futures prices between 
March and June 2019, but that such episodes in which causality runs 
from the spot market to futures prices are short and occasionally bi-
directional.\189\ According to this commenter, except for some short 
periods, the ``overwhelming evidence'' is that bitcoin futures prices 
cause or lead bitcoin spot prices, as one would expect in an 
informationally efficient market.\190\
---------------------------------------------------------------------------

    \185\ See id. (citing Yang Hu et al., What Role Do Futures 
Markets Play in Bitcoin Pricing? Causality, Cointegration and Price 
Discovery From a Time-Varying Perspective, Aug. 26, 2019, available 
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3442706).
    \186\ The Commission notes that CFE ceased offering new bitcoin 
futures contracts as of March 2019. See New CFE Products Being Added 
in March 2019--Update, Cboe (Mar. 14, 2019), available at https://markets.cboe.com/resources/product_update/2019/New-CFE-Products-Being-Added-in-March-2019-Update.pdf (last visited Jan. 14, 2020).
    \187\ See Letter from Dr. Yang Hu, Dr. Greg (Yang) Hou, & 
Professor Les Oxley (Jan. 7, 2020).
    \188\ See id.
    \189\ See id.
    \190\ See id. This commenter also states that the bitcoin 
futures markets dominate the price discovery process using a time-
varying version of an information share measure of two types, and 
that both types indicate that bitcoin price discovery takes place in 
the futures market rather than the spot market. See id.
---------------------------------------------------------------------------

    The Sponsor also asserts that trade volume and trade size can be 
determinants of price discovery, and that the Constituent Platforms 
have a higher average trade volume than the CME bitcoin futures market, 
while the average size of trades on the CME bitcoin futures market is 
much larger than the average size of trades on the

[[Page 12610]]

Constituent Platforms.\191\ According to the Sponsor, a relative number 
of small trades in a given bitcoin market is statistically 
insignificant for purposes of price discovery.\192\ The Sponsor argues 
that the average trade size on the CME futures market facilitates its 
lead in price discovery versus the Constituent Platforms.\193\ The 
Sponsor also states that the trading volume of the CME bitcoin futures 
market is higher than the trading volume on each Constituent Platform 
when considered individually, and that this also facilitates price 
discovery within the futures market.\194\
---------------------------------------------------------------------------

    \191\ See Wilshire Phoenix Submission II at 22-23.
    \192\ See id. at 23.
    \193\ See id.
    \194\ See id.
---------------------------------------------------------------------------

(ii) Constituent Platforms as a Regulated Market of Significant Size
    The Sponsor also asserts that the Constituent Platforms constitute 
a regulated market of significant size and that surveillance-sharing 
agreements are in place to give NYSE Arca the ability to obtain the 
information necessary to detect and deter market manipulation.\195\ The 
Constituent Platforms compose a market of significant size, according 
to the Sponsor, because there is a reasonable likelihood that a would-
be manipulator would have to trade on the Constituent Platforms to 
successfully manipulate the Shares.\196\ The Sponsor states that 
trading data from the Constituent Platforms is used to derive the 
Bitcoin Reference Rate and the Bitcoin Reference Rate is used by the 
Trust to value the Trust's bitcoin assets.\197\ Therefore, according to 
the Sponsor, the most direct way to attempt to manipulate the Shares is 
to manipulate the Constituent Platforms and thereby manipulate the 
price of bitcoin utilized by the Trust to value its assets.\198\ The 
Sponsor further states that potential countervailing forces in the CME 
futures market make it more difficult to manipulate the Constituent 
Platforms, and therefore a would-be manipulator would likely need to 
trade in the CME bitcoin futures market and on the Constituent 
Platforms.\199\
---------------------------------------------------------------------------

    \195\ See Wilshire Phoenix Submission II at 10-19. See also 
Notice, 84 FR at 56226 (asserting that the CME bitcoin futures 
market alone or as a group of markets together with the Constituent 
Platforms is a ``market of significant size'').
    \196\ See Wilshire Phoenix Submission II at 12.
    \197\ See Wilshire Phoenix Submission II at 12; Notice, 84 FR at 
56227.
    \198\ See Wilshire Phoenix Submission II at 12; Notice, 84 FR at 
56227. See also Notice, 84 FR at 56227 n.57 (stating that 
manipulating the Bitcoin Reference Rate must entail manipulating the 
price data at one or more Constituent Platforms).
    \199\ See Wilshire Phoenix Submission II at 12.
---------------------------------------------------------------------------

    The Sponsor asserts that the Constituent Platforms are regulated 
because each of the Constituent Platforms uses established, non-
discretionary methods under which orders interact with each other and 
buyers and sellers entering such orders must agree to these terms, and 
each of the Constituent Platforms is regulated by federal and state 
regulators.\200\ The Sponsor states that the Constituent Platforms are 
each registered with FinCEN as an MSB, and that as a result the 
Constituent Platforms must fully comply with BSA and AML 
requirements.\201\ According to the Sponsor, the CFTC has jurisdiction 
to police fraud and manipulation in the cash or spot markets, including 
the Constituent Platforms, and the CME has executed contracts with the 
Constituent Platforms to explicitly adhere to the regulations.\202\ The 
Sponsor states that the Constituent Platforms are subject to regulatory 
oversight by the FCA because CF Benchmarks is a registered benchmark 
administrator under the EU BMR, and CF Benchmarks has executed 
contracts with the Constituent Platforms to explicitly adhere to those 
regulations, which include requirements designed to detect manipulation 
of a benchmark.\203\ With respect to the rules concerning the processes 
of the Constituent Platforms, the Sponsor states that these rules must 
be in line with CME standards for inclusion in the reference rate 
calculation.\204\ The Sponsor states that these non-discretionary rules 
explicitly address manipulation and fraudulent activity, and that these 
rules and the review of such rules by CF Benchmarks are comparable to 
those used by national securities exchanges or the futures exchanges 
associated with the underlying assets of the commodity-trust ETPs 
approved to date.\205\
---------------------------------------------------------------------------

    \200\ See Wilshire Phoenix Submission II at 12.
    \201\ See Wilshire Phoenix Submission II at 12. See also supra 
notes 77-79 and accompanying text. The Sponsor also states that this 
is consistent with recent FATF guidance that directs certain 
platforms, including the Constituent Platforms, to comply with AML 
regulations. See Wilshire Phoenix Submission II at 12. See also 
supra note 78.
    \202\ See Wilshire Phoenix Submission II at 12-13. See also 
supra notes 91-94 and accompanying text.
    \203\ See Wilshire Phoenix Submission II at 13. See also supra 
notes 95-98 and accompanying text.
    \204\ See Wilshire Phoenix Submission II at 13. See also id. at 
16-17 (stating that the CME Committee is responsible for overseeing 
the Bitcoin Reference Rate's methodology and calculation process and 
providing effective oversight of CF Benchmarks as it relates to the 
Bitcoin Reference Rate, and that the scope of this oversight 
includes CF Benchmarks' manipulation surveillance).
    \205\ See id. at 13-14.
---------------------------------------------------------------------------

    The Sponsor states that to be eligible for consideration as a 
Constituent Platform, a platform must comply with specific eligibility 
criteria established by CF Benchmarks, which provides each Constituent 
Platform with all material trade information, including information 
that can identify customers placing trades.\206\ The Sponsor states 
that the Constituent Platforms must make trade data and order book data 
available to CF Benchmarks, have controls and processes in place 
against, among other things, market abuse, and ensure that the data 
provided to CF Benchmarks accurately represents the prices that were 
available or traded on their trading venues at the relevant times.\207\ 
CF Benchmarks and the CME Committee, according to the Sponsor, monitor 
each Constituent Platform for continued compliance with these 
requirements.\208\
---------------------------------------------------------------------------

    \206\ See Wilshire Phoenix Submission II at 14 (stating that a 
platform must (i) have policies in place that ensure fair and 
transparent market conditions at all times; (ii) have processes in 
place to identify and impede illegal, unfair, or manipulative 
trading practices; and (iii) comply with applicable laws and 
regulations, including regulations concerning capital markets, money 
transmission, client money custody, KYC, and AML). See also id. at 
16 (stating that CF Benchmarks is independently tasked with 
overseeing each Constituent Platform for potential manipulation and 
that that this responsibility includes establishing appropriate 
monitoring processes and procedures to identify attempted 
manipulation or manipulative behavior and reporting any such 
incidents to the CME Committee in a timely manner).
    \207\ See Wilshire Phoenix Submission II at 14-15. See also id. 
at 18-19. The Sponsor asserts that the ability of a Constituent 
Platform to fully share relevant trade data, not just with CF 
Benchmarks, but also publicly, is an integral factor on whether to 
include a platform as a Constituent Platform for purposes of the 
Bitcoin Reference Rate. See id. at 15.
    \208\ See Wilshire Phoenix Submission II at 15. NYSE Arca states 
that the BRR Calculation Agent receives trading data from the 
Constituent Platforms through its API, noting that ``[CF Benchmarks] 
will have primary responsibility for all of the following in respect 
of Bitcoin Pricing Products: . . . Establishing appropriate 
monitoring processes and procedures designed to identify any 
breaches of these Practice Standards and any attempted manipulation 
or manipulative behavior and reporting any such incidents to the 
[CME Committee] in a timely manner.'' See Notice, 84 FR at 56227 
n.58.
---------------------------------------------------------------------------

    The Sponsor and NYSE Arca also state that each Constituent Platform 
is required to enter into data-sharing agreements with the CME.\209\ 
The Sponsor states that, through these surveillance-sharing agreements, 
the

[[Page 12611]]

CME receives information related to customer identification, trade 
data, order book data, and other relevant information and data.\210\ 
Thus, the Sponsor and NYSE Arca assert that the CME can effectively 
share any information that it receives from the Constituent Platforms 
with NYSE Arca and this arrangement satisfies the requirement that a 
listing exchange have surveillance-sharing agreements in place with 
such markets.\211\
---------------------------------------------------------------------------

    \209\ See Notice, 84 FR at 56227 (stating that the Constituent 
Platforms must also cooperate with inquiries and investigations of 
regulators and CF Benchmarks and submit each of its clients to its 
KYC procedures); Wilshire Phoenix Submission II at 15. The Sponsor 
asserts that this requirement of cooperation would allow NYSE Arca 
to directly request from each Constituent Platform any information 
that may be relevant to detecting potential manipulation. See 
Wilshire Phoenix Submission II at 17.
    \210\ See Wilshire Phoenix Submission II at 15.
    \211\ See Wilshire Phoenix Submission II at 16. See also Notice, 
84 FR at 56227 (stating that CME and NYSE Arca would be able, in the 
case of any suspicious trades, to discover all material trade 
information including the identities of the customers placing the 
trades).
---------------------------------------------------------------------------

    Moreover, the Sponsor asserts that the Commission, the CFTC, and 
the FCA have a long-standing history of consultation, cooperation, and 
information sharing in relation to the securities markets.\212\ As 
such, the Commission, according to the Sponsor, would be able to access 
any information regarding an attempt at manipulating the Constituent 
Platforms by requesting such information from the FCA.\213\
---------------------------------------------------------------------------

    \212\ See Wilshire Phoenix Submission II at 18 (stating that the 
FCA is obligated to take appropriate steps to cooperate with 
oversees regulators, including the Commission).
    \213\ See Wilshire Phoenix Submission II at 18.
---------------------------------------------------------------------------

(iii) Whether Trading in the ETP Would Be the Predominant Influence on 
Prices in the Relevant Market
    The second component of the Commission's interpretation of the term 
``market of significant size'' is that it is unlikely that trading in 
the ETP would be the predominant influence on prices in the market of 
significant size.\214\ NYSE Arca and the Sponsor assert that it is 
unlikely that the Trust would be the predominant influence on prices in 
the identified markets of significant size.\215\ The Sponsor asserts 
that the three critical factors it used to arrive at this conclusion 
are the events causing the Trust to buy or sell bitcoin, the frequency 
with which it will do so, and the composition of assets of the 
Trust.\216\
---------------------------------------------------------------------------

    \214\ See supra note 18 and accompanying text.
    \215\ See Notice, 84 FR at 56228; Wilshire Phoenix Submission II 
at 25.
    \216\ See Wilshire Phoenix Submission II at 25.
---------------------------------------------------------------------------

    First, NYSE Arca and the Sponsor state that the Trust will only buy 
and sell bitcoin in connection with the issuance of Shares, the 
redemption of Shares by holders, or potentially in connection with 
monthly balancing of the Trust's assets.\217\ NYSE Arca and the Sponsor 
state that the Trust will not buy or sell bitcoin as a result of 
trading of the Shares on NYSE Arca.\218\ The Sponsor asserts that it 
structured the Trust in this manner to limit any effect the Trust could 
potentially have on the underlying market.\219\
---------------------------------------------------------------------------

    \217\ See Notice, 84 FR at 56228; Wilshire Phoenix Submission II 
at 25.
    \218\ See Notice, 84 FR at 56228 (asserting that trading the 
Shares will therefore not influence the price of bitcoin); Wilshire 
Phoenix Submission II at 25.
    \219\ See Wilshire Phoenix Submission II at 25.
---------------------------------------------------------------------------

    Second, NYSE Arca and the Sponsor state that the Trust will only 
redeem Shares and rebalance the Trust on limited occasions and will not 
have a daily or continuous effect, or be the predominant influence, on 
CME bitcoin futures prices or prices on the Constituent Platforms.\220\
---------------------------------------------------------------------------

    \220\ See Notice, 84 FR at 56228; Wilshire Phoenix Submission II 
at 25 (stating that the Trust will redeem Shares and rebalance its 
assets monthly, with a requirement on a holder of Shares to submit a 
notice of redemption at least five business days prior to the 
redemption date, and the Trust will only issue Shares in offerings 
that will occur from time to time).
---------------------------------------------------------------------------

    Third, NYSE Arca and the Sponsor state that the Trust's assets 
consist of bitcoin and T-Bills and that the presence of T-Bills 
reinforces that the Trust would not be the predominant influence on 
prices in the CME bitcoin futures market or on the Constituent 
Platforms.\221\ According to NYSE Arca, the Sponsor notes that even if 
it was possible to influence the price of bitcoin or the Bitcoin 
Reference Rate through trading shares of the Trust, the influence of 
such trades would be muted by the presence of the T-Bills held by the 
Trust.\222\ The Sponsor asserts that the Trust and Shares of the Trust 
are imperfect substitutes for bitcoin pricing due to the Trust's T-
Bills component, and that therefore prices of the Shares would not be 
an appropriate or accurate proxy for the pricing of stand-alone bitcoin 
on the Constituent Platforms or the CME bitcoin futures market.\223\ 
The Sponsor states that the impact of any issuance of Shares on the 
identified markets will be muted relative to the value of the Shares 
issued because only a portion of the cash received in connection with 
the issuance would be used to purchase bitcoin.\224\ The Sponsor also 
states that the Trust's allocation of its bitcoin and T-Bill assets 
will change on a monthly basis based on the allocations determined by 
the Index, based on the realized volatility of the Bitcoin Reference 
Rate; therefore, trading in the Shares will not have a direct effect on 
the re-allocation of the Index and thus will not have an impact on the 
determination of the Trust to buy or sell bitcoin in connection with 
such rebalancing.\225\
---------------------------------------------------------------------------

    \221\ See Notice, 84 FR at 56228; Wilshire Phoenix Submission II 
at 25.
    \222\ See Notice, 84 FR at 56228.
    \223\ See Wilshire Phoenix Submission II at 25.
    \224\ See Wilshire Phoenix Submission II at 25.
    \225\ See Wilshire Phoenix Submission II at 26. The Sponsor 
states that the more volatility that bitcoin exhibits, the lower the 
ration of bitcoin to T-Bills in the Index, and the fewer the amount 
of bitcoin that the Trust would buy in connection with rebalancing. 
See id.
---------------------------------------------------------------------------

(b) Analysis
    The record before the Commission does not demonstrate that NYSE 
Arca has entered into a surveillance-sharing agreement with a regulated 
market of significant size related to the underlying assets. As stated 
in the Winklevoss Order, as well as the Bitwise Order and Commission 
orders considering bitcoin-related trust issued receipts, the 
Commission's interpretation of the term ``market of significant size'' 
depends on the interrelationship between the market with which the 
listing exchange has a surveillance-sharing agreement and the proposed 
ETP.\226\ This interrelationship must be such that there is a 
reasonable likelihood that a person attempting to manipulate the 
proposed ETP would also have to trade on that market to successfully 
manipulate the ETP.\227\ Thus, a surveillance-sharing agreement must be 
entered into with a ``significant market'' to assist in detecting and 
deterring manipulation of the ETP, because a person attempting to 
manipulate the ETP is reasonably likely to also engage in trading 
activity on that ``significant market.'' NYSE Arca and the Sponsor do 
not challenge this standard.
---------------------------------------------------------------------------

    \226\ See Winklevoss Order, 83 FR at 37594; Bitwise Order, 84 FR 
at 55410; ProShares Order, 83 FR at 43936; GraniteShares Order, 83 
FR at 43925; Direxion Order, 83 FR at 43914.
    \227\ See supra note 18 and accompanying text.
---------------------------------------------------------------------------

    The Commission first considers assertions by NYSE Arca and the 
Sponsor that the CME bitcoin futures market constitutes such a market 
and concludes that the record does not demonstrate that there is a 
reasonable likelihood that a person attempting to manipulate the 
proposed ETP would have to trade on the CME bitcoin futures market to 
successfully manipulate the proposed ETP, nor does it demonstrate that 
it is unlikely that trading in the proposed ETP would be the 
predominant influence on prices in that market. The Commission then 
considers assertions regarding the Constituent Platforms. NYSE Arca has 
not entered into a surveillance-sharing agreement with any Constituent 
Platform and the record does not demonstrate that the regulation of the 
Constituent Platforms is sufficient to constitute a ``regulated 
market.'' Therefore, the Commission concludes that NYSE Arca's 
relationship with the Constituent

[[Page 12612]]

Platforms likewise does not satisfy the standard through which the 
listing exchange for a proposed ETP may satisfy its obligations under 
Section 6(b)(5) of the Exchange Act.
(i) CME as a Regulated Market of Significant Size
(A) Reasonable Likelihood
    Regarding the CME bitcoin futures market, while the Commission 
recognizes that the CFTC regulates the CME futures market, the evidence 
that NYSE Arca and the Sponsor present, including that concerning the 
relative size of the bitcoin futures market and the relationship 
between prices in the spot and futures markets, does not, as explained 
further below, establish that there is a reasonable likelihood that a 
person attempting to manipulate the proposed ETP would also have to 
trade on the CME to successfully manipulate the ETP. Therefore, the 
record does not establish that the CME bitcoin futures market 
constitutes a ``market of significant size'' in the context of the 
proposed ETP.
    The Sponsor's assertions about the size of the bitcoin futures 
market, either as compared to the size of the segment of the spot 
market composed of the Constituent Platforms or as compared to the 
futures market for other commodities, do not establish that the bitcoin 
futures market is significant.\228\ As stated above, the Commission's 
interpretation of the term ``market of significant size'' depends on 
the interrelationship between the market with which the listing 
exchange has a surveillance-sharing agreement and the proposed 
ETP.\229\ The Sponsor's assertions regarding the size of the CME 
bitcoin futures market, either in an absolute sense or in relation to 
other futures markets that underlie existing ETPs, are not sufficient 
to establish an interrelationship between the CME bitcoin futures 
market and the proposed ETP.\230\
---------------------------------------------------------------------------

    \228\ See supra notes 171-173. The Sponsor asserts that the 
trading volume on the CME bitcoin futures market is greater than the 
EUA futures market underlying the AirShares EU Carbon Allowances 
Fund. See Wilshire Phoenix Submission III at 2. Wilshire Phoenix 
Submission III is improperly focused on the absolute size of the 
futures market and the length of existence of the futures market for 
purposes of establishing its significance.
    \229\ See supra note 226.
    \230\ See Bitwise Order, 84 FR at 55410.
---------------------------------------------------------------------------

    Likewise, the Sponsor's comparisons to approvals of ETPs that hold 
futures contracts and for which the listing exchanges entered into 
surveillance-sharing agreements with regulated, significant markets 
trading those futures contracts are inapposite and do not establish the 
CME bitcoin futures market's significance.\231\ First, in the approval 
orders cited by the Sponsor the Commission noted a number of factors 
supporting its findings that surveillance-sharing agreements were in 
place with significant regulated markets. For example, the approval 
order for the AirShares EU Carbon Allowances Fund stated ``the Exchange 
has an information sharing agreement in place with ICE Futures for the 
purpose of providing information in connection with trading in, or 
related to, futures contracts traded on ICE Futures.'' \232\ In the 
case of the iShares GSCI Commodity-Indexed Trust the Commission 
specifically addressed whether the futures on which the ETP was based, 
which were futures on an index of well-established commodity futures, 
were illiquid or susceptible to manipulation and concluded, as the 
Sponsor concedes, that the requirements of Exchange Act Section 6(b)(5) 
had been met because, among other things, the ETP's listing exchange 
had a comprehensive surveillance-sharing agreement not only with the 
regulated market for the index futures, but also with the regulated 
markets for the component futures.\233\ And as concerns the Breakwave 
Dry Bulk Shipping ETF, the Commission specifically found, as the 
Sponsor also concedes, that the exchange would be able to ``share 
surveillance information with a significant regulated market for 
trading futures on dry bulk freight.'' \234\ Second, unlike the ETPs 
that were the subject of the approvals cited by the Sponsor, the 
proposed ETP would hold bitcoin as assets, not futures contracts, and 
the comparisons made by the Sponsor do not establish that an actor 
attempting to manipulate the price of the proposed ETP's assets would 
be reasonably likely to trade in the regulated bitcoin futures market.
---------------------------------------------------------------------------

    \231\ See Wilshire Phoenix Submission III at 2-4 (citing to 
Securities Exchange Act Release No. 57838 (May 20, 2008), 73 FR 
30649 (May 28, 2008) (SR-NYSEArca-2008-09) (order approving listing 
of shares of the AirShares EU Carbon Allowances Fund); Securities 
Exchange Act Release No. 54013 (June 16, 2006), 71 FR 36372 (June 
26, 2006) (SR-NYSE-2006-17) (order approving listing of shares of 
iShares GSCI Commodity-Indexed Trust); Securities Exchange Act 
Release No. 82390 (Dec. 22, 2017), 82 FR 61625 (Dec. 28, 2017) (SR-
NYSEArca-2017-107) (order approving listing of shares of the 
Breakwave Dry Bulk Shipping ETF).
    \232\ 73 FR at 30652.
    \233\ See 71 FR at 36379. The Commission distinguished the 
iShares GSCI Commodity-Indexed Trust in previous orders concerning 
proposals to list bitcoin-based trust issued receipts. See 
GraniteShares Order, 83 FR at 43927 n.39; Direxion Order, 83 FR at 
43916 n.40; ProShares Order, 83 FR at 43938 n.37. The Sponsor also 
asserts that it was ``highly likely'' that trading in this ETP would 
be a predominant influence on the price of the index futures. See 
Wilshire Phoenix Submission III at 3 n.13. However, the Sponsor 
offers no data or evidence to support this contention. And in any 
event, the Commission in that previous order rejected such a 
contention. See 71 FR at 36379.
    \234\ See 82 FR at 61633-34. The Commission distinguished the 
Breakwave Dry Bulk Shipping ETF in a previous order concerning a 
proposal to list bitcoin-based trust issued receipts. See 
GraniteShares Order, 83 FR at 43930 n.87. The Sponsor also asserts 
that as compared to the CME bitcoin futures market, the freight 
futures market is conducted through ``a largely unregulated network 
of brokers.'' See Wilshire Phoenix Submission III at 3-4. However, 
the Commission specifically noted in the approval order that all 
freight futures are listed and cleared through a number of regulated 
futures exchanges, including the CME. See 82 FR at 61629.
---------------------------------------------------------------------------

    The evidence in the record also does not support a conclusion that 
price formation on the CME bitcoin futures market leads the bitcoin 
spot market in such a manner that the CME bitcoin futures market is a 
``market of significant size.'' As the Commission has previously 
stated, establishing a lead-lag relationship between the bitcoin 
futures market and the spot market is central to understanding whether 
it is reasonably likely that a would-be manipulator of the ETP would 
need to trade on the bitcoin futures market to successfully manipulate 
prices on those spot platforms that feed into the proposed ETP's 
pricing mechanism.\235\ In particular, if the spot market leads the 
futures market, this would indicate that it would not be necessary to 
trade on the futures market to manipulate the proposed ETP, even if 
arbitrage worked efficiently, because the futures price would move to 
meet the spot price.
---------------------------------------------------------------------------

    \235\ See Bitwise Order, 84 FR at 55411.
---------------------------------------------------------------------------

    While the Sponsor asserts that its analysis indicates ``that 
futures contracts contributed more to price formation than spot,'' the 
Sponsor has not provided sufficient details supporting this conclusion, 
and unquestioning reliance by the Commission on representations in the 
record is an insufficient basis for approving a proposed rule change in 
circumstances where, as here, the proponent's assertion would form such 
an integral role in the Commission's analysis and the assertion is 
subject to several challenges.\236\ For example, the Sponsor has not 
provided sufficient information explaining its underlying analysis, 
including detailed information on the analytic methodology used, the 
specific time period analyzed, or any information that would enable the 
Commission to evaluate whether the findings are statistically 
significant or time varying.
---------------------------------------------------------------------------

    \236\ See Susquehanna, 866 F.3d at 447.
---------------------------------------------------------------------------

    In addition, the Sponsor has not assessed the possible influence 
that spot market platforms not included among

[[Page 12613]]

the Constituent Platforms may have on the proposed ETP's pricing 
mechanism. The record does not demonstrate that the Sponsor addressed 
whether or not there is any lead/lag relation between prices on the 
Constituent Platforms and prices on other bitcoin spot market platforms 
or where price formation occurs as between the Constituent Platforms 
and the rest of the spot market.\237\ The Commission thus cannot agree 
with the Sponsor's assertion that its analysis demonstrates that it is 
reasonably likely that a would-be manipulator of the proposed ETP would 
transact on the CME bitcoin futures market absent additional 
information supporting such an assertion.
---------------------------------------------------------------------------

    \237\ See supra note 71 and accompanying text.
---------------------------------------------------------------------------

    The academic literature on the lead-lag relationship between 
bitcoin spot and futures markets is unsettled.\238\ Contrary to the 
Sponsor's assertion, the academic evidence on this topic is, in fact, 
mixed, and thus the Commission cannot conclude--based solely on the 
papers cited by the Sponsor in relatively new markets--that it is 
reasonably likely that a would-be manipulator of the proposed ETP would 
transact on the CME bitcoin futures market.
---------------------------------------------------------------------------

    \238\ See infra notes 239-244 and accompanying text.
---------------------------------------------------------------------------

    Furthermore, the findings of the papers cited by the Sponsor are 
responsive to choices made regarding time period, futures contracts, 
spot market platforms, spot market prices, and analytic methodologies 
that do not sufficiently establish the general proposition that the CME 
bitcoin futures market leads the spot market such that the CME bitcoin 
futures market is ``significant'' for purposes of this proposal. 
Indeed, the findings of the cited studies run counter to those of other 
studies that have analyzed the lead-lag relationship between the 
bitcoin spot and futures markets. For example, a study on this topic 
that was published in a peer reviewed journal found that the spot 
market price leads the CME futures price.\239\ A working (that is, 
nonpublished and non-peer reviewed) paper cited by the Sponsor for the 
proposition that the futures market prices lead the spot market 
surmises that its findings differ from this published study because of 
choices regarding the particular spot prices and futures contracts used 
in the two analyses.\240\ However, another working paper cited by the 
Sponsor followed a similar approach, yet arrived at a different 
conclusion, finding that price discovery measures vary significantly 
over time without one market being clearly dominant over the 
other.\241\ Moreover, this second working paper found that the spot 
market was the leading market during the months at the end of the 
sample period, which concluded in March of 2019.\242\ The documented 
time variation from this study also limits the reliability of the 
findings of another working paper cited by the Sponsor which used only 
two months of data to support its results.\243\ This data choice limits 
the applicability of its results to other time periods. The Commission 
concludes that, in light of the mixed results found in these academic 
studies, the Sponsor has not demonstrated that the bitcoin futures 
market constitutes a market of significant size.\244\
---------------------------------------------------------------------------

    \239\ See D. Baur & T. Dimpfl, Price discovery in Bitcoin spot 
or futures?, 39 J. Futures Mkts. 803 (2019).
    \240\ See Alexander & Heck at 24.
    \241\ See Entrop et al. Figure 1 of this working paper shows 
that price discovery measures of the spot market fluctuate between 
15% and more than 80%. Such a fluctuation could suggest that the 
market has not yet found its natural equilibrium.
    \242\ See id. at 2. The record does not include evidence to 
explain why, because this shift occurred at the end of the study 
period, it would not indicate a shift toward prices in the spot 
market leading the futures market that would be expected to persist 
into the future.
    \243\ See Mizrach & Aleti.
    \244\ The Commission notes that two other papers cited by the 
Sponsor utilize daily spot market prices, as opposed to intraday 
prices. See Kapar & Olmo; Hu et al. In seeking to draw conclusions 
regarding which market leads price discovery, studies based on daily 
price data may not be able to distinguish which market incorporates 
new information faster, because the time gap between two consecutive 
observations in the data samples could be longer than the typical 
information processing time in such markets. The Sponsor has not 
provided evidence to support the assertion that daily price data is 
sufficiently able to capture information flows in the bitcoin 
market. Furthermore, one study that used daily trading data found 
inconclusive evidence that futures prices lead bitcoin spot market 
prices. For example, for a period of time spanning over 20% of the 
study, prices in the bitcoin spot market led futures market prices. 
Such time inconsistency in the direction of price discovery could 
suggest that the market has not yet found its natural equilibrium. 
Moreover, this period spanned the end of the study period and the 
record does not include evidence to explain why this would not 
indicate a shift towards prices in the spot market leading the 
futures market that would be expected to persist into the future. 
See supra notes 187-190 and accompanying text.
---------------------------------------------------------------------------

    In addition, none of the papers cited by the Sponsor assesses the 
possible influence that spot market platforms not included among the 
Constituent Platforms may have on bitcoin prices on the Constituent 
Platforms or the bitcoin futures prices. Specifically, the papers cited 
by the Sponsor do not address whether or not there is any lead/lag 
relation between prices on the Constituent Platforms in particular and 
prices on other bitcoin spot market platforms or where price formation 
occurs as between the Constituent Platforms and the rest of the spot 
market.\245\ Accordingly, the Commission cannot conclude that the 
papers cited by the Sponsor establish that it is reasonably likely that 
a would-be manipulator of the proposed ETP would transact on the CME 
bitcoin futures market.
---------------------------------------------------------------------------

    \245\ See supra note 71 and accompanying text.
---------------------------------------------------------------------------

    Similarly, neither the Sponsor, nor NYSE Arca, has provided 
sufficient data to support their contentions that comparative trade 
volumes and trade sizes between the CME bitcoin futures market and the 
Constituent Platforms are evidence that prices on the bitcoin futures 
market lead the relevant spot markets.\246\ For example, the Sponsor 
neither provided any explanation nor otherwise demonstrated that 
comparatively larger average trade sizes suggest that one market's 
prices lead those of another. Thus, the evidence provided concerning 
trade volumes and trade sizes does not demonstrate that the futures 
market leads the relevant segment of the spot market such that it would 
establish a reasonable likelihood that a would-be manipulator of the 
ETP would need to trade on the bitcoin futures market to successfully 
manipulate prices on those spot platforms that feed into the proposed 
ETP's pricing mechanism.
---------------------------------------------------------------------------

    \246\ See supra notes 191-194.
---------------------------------------------------------------------------

    Finally, the Commission is not persuaded by the Sponsor's citations 
to academic studies about the interrelationship of spot and futures 
markets for other asset classes,\247\ because NYSE Arca has the burden 
of showing that the relevant market at issue here--the bitcoin futures 
market--is of significant size.
---------------------------------------------------------------------------

    \247\ See supra note 181.
---------------------------------------------------------------------------

(B) Predominant Influence
    The record similarly does not establish that NYSE Arca has 
satisfied the second aspect of the assessment of significance, as NYSE 
Arca and the Sponsor have not sufficiently supported the Sponsor's 
assertions that it is unlikely that trading in the proposed ETP would 
become the predominant influence on prices in either the Constituent 
Platforms or the CME bitcoin futures market.\248\ The Sponsor's 
assertions about the potential effect of issuances or redemptions on 
trading in the bitcoin spot market are speculative and the Sponsor has 
not provided any analysis to support its assertions concerning, for 
example, whether it is possible for issuances or redemptions to be of 
such size that it would be the

[[Page 12614]]

predominant influence on prices in the Constituent Platforms. Moreover, 
in the Trust's Registration Statement, the Sponsor acknowledges that 
its buying activity, as a result of issuances or rebalances, as well as 
its selling activity, as a result of redemptions or rebalances, may 
cause the price of bitcoin to increase or decrease.\249\ Furthermore, 
the Sponsor states that because there is no limit on the number of 
bitcoin that the Trust may acquire, growth of the Trust could have an 
impact on the supply and demand of bitcoin.\250\ Thus, the Commission 
cannot conclude based on the Sponsor's statements that its trading in 
the ETP would not be the predominant influence on prices in the 
Constituent Platforms absent any evidence or analysis in support of the 
Sponsor's assertions.
---------------------------------------------------------------------------

    \248\ See supra notes 215-225 and accompanying text.
    \249\ See Registration Statement at 31.
    \250\ See id. at 32.
---------------------------------------------------------------------------

    The Commission is also not persuaded by the Sponsor's assertions 
that the proposed ETP would not be the predominant influence on prices 
in the relevant market because the Trust will only purchase or sell 
bitcoin at certain specified dates, as opposed to on a daily or 
continuous basis, and pursuant to specific Index allocations. As stated 
in the Winklevoss Order, this component of the interpretation of 
significance concerns the influence on prices from trading in the 
proposed ETP, which is broader than just trading by the proposed ETP. 
While the Trust might only transact in the bitcoin market on certain 
specified dates, the proposed ETP will be traded in the secondary 
market in the interim. The record does not establish the potential 
effect of the ETP's trade prices on prices for either bitcoin or 
bitcoin futures. For example, the Sponsor does not provide any data or 
analysis about the potential effect the quotations or trade prices of 
the proposed ETP might have on market-maker quotations in bitcoin 
futures contracts and whether those effects would constitute a 
predominant influence on the prices of those futures contracts.
    Lastly, the Sponsor asserts that, because the Trust will also hold 
T-Bills it is an imperfect substitute for bitcoin pricing and that its 
impact on bitcoin markets will be muted. But this assertion is not 
supported by evidence or analysis regarding the value and size of the 
Trust's bitcoin holdings and whether that may likely be the predominant 
influence on prices notwithstanding that the Trust will also own T-
Bills. Irrespective of the weighting of the Trust's two components, 
there is no cap on the notional amount of bitcoin that the Trust may 
hold. The record does not include any analysis regarding whether the 
notional amount of bitcoin held by the Trust would be of such size that 
it would be the predominant influence on prices in the underlying 
market. To that end, the Commission reiterates that the Sponsor states 
that, because there is no limit on the number of bitcoin the Trust may 
acquire, growth of the Trust could have an impact on the supply and 
demand of bitcoin.\251\
---------------------------------------------------------------------------

    \251\ See id.
---------------------------------------------------------------------------

    Thus, the Commission cannot conclude that, based on the current 
record, the CME bitcoin futures market is a ``market of significant 
size,'' such that NYSE Arca would be able to rely on surveillance-
sharing with the CME to provide sufficient protection against 
fraudulent and manipulative acts and practices.
(ii) Constituent Platforms as a Regulated Market of Significant Size
    The Commission is not persuaded by the Sponsor's contention that 
NYSE Arca has satisfied the requirements of Section 6(b)(5) of the 
Exchange Act because the Constituent Platforms constitute a regulated 
market of significant size and the CME, as well as other entities, can 
obtain information regarding trading activity on the Constituent 
Platforms and then share that information with NYSE Arca pursuant to 
NYSE Arca's surveillance-sharing agreement with the CME, or through 
other means. As discussed above, the Commission concludes that the 
record does not establish that the Constituent Platforms are subject to 
a level of regulation comparable to that of a national securities 
exchange or to futures exchanges, and as such, the Constituent 
Platforms do not constitute a regulated market.\252\
---------------------------------------------------------------------------

    \252\ See supra Section III.B.1(a)(ii)(B) for a discussion of 
the Commission's conclusion that the Constituent Platforms are not 
regulated in a manner equivalent to that of a national securities 
exchange or a futures exchange.
---------------------------------------------------------------------------

    Furthermore, even if the Constituent Platforms were ``regulated,'' 
the record would not support a conclusion that NYSE Arca has 
demonstrated that it has satisfied Section 6(b)(5) of the Exchange Act 
because NYSE Arca concedes that it has not entered into bilateral 
surveillance-sharing agreements with the Constituent Platforms. NYSE 
Arca represents that it has entered into surveillance-sharing 
agreements with the CME, through which the Sponsor asserts would be 
able to obtain certain information from the Constituent Platforms by 
virtue of data-sharing agreements the CME has entered into with the 
Constituent Platforms.\253\ As the Commission has previously stated, a 
surveillance-sharing agreement with a regulated, significant market 
facilitates the ETP listing exchange's ability to obtain the necessary 
information to detect and deter such manipulative misconduct.\254\ 
Here, NYSE Arca has not entered into bilateral surveillance-sharing 
agreements with the Constituent Platforms and therefore NYSE Arca lacks 
a surveillance-sharing agreement that could be sufficient to satisfy 
the requirements of the Exchange Act as set forth in the Winklevoss 
Order.
---------------------------------------------------------------------------

    \253\ See supra note 211 and accompanying text.
    \254\ See Winklevoss Order, 83 FR at 37549.
---------------------------------------------------------------------------

    The Commission is also not convinced by the Sponsor's assertion 
that the Constituent Platforms must make trade data and order book data 
publicly available in order for the platform to be included in the 
Bitcoin Reference Rate.\255\ Trade data and order book data only 
represent a small subset of the information that the Commission has 
said represent the hallmarks of a surveillance-sharing agreement.\256\ 
For example, the Constituent Platforms do not make information 
regarding clearing activity or customer identity publicly available. 
Accordingly, the record does not establish that NYSE Arca would have 
access to necessary information to detect and deter fraudulent and 
manipulative activity through the data that the Sponsor asserts is 
publicly available.
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    \255\ See supra note 207.
    \256\ See Winklevoss Order, 83 FR at 37592-93.
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    Furthermore, a surveillance-sharing agreement with the spot bitcoin 
platforms at issue here would not be a sufficient substitute for such 
an agreement with a futures market, because the spot platforms at issue 
here lack the ability of a self-regulatory organization to discipline 
its members to compel compliance with surveillance-sharing 
requirements.\257\ Accordingly, the Commission cannot conclude that a 
surveillance-sharing agreement between NYSE Arca and CME satisfies the 
requirements of the Exchange Act if the regulated market of significant 
size is not, in fact, the CME, but rather is the Constituent Platforms.
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    \257\ See Bitwise Order, 84 FR at 55393, 55411 n.478.
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    The Commission also is not persuaded by the Sponsor's assertions 
that NYSE Arca has satisfied the requirements of the Exchange Act by 
virtue of the Commission's ability to obtain information from other 
Federal and international regulators.\258\ First, the requirements of 
Section 6(b)(5) of

[[Page 12615]]

the Exchange Act apply to the rules of national securities exchanges. 
As the Commission previously explained, MOUs with foreign or domestic 
regulators are tools to assist the Commission in performing its 
regulatory functions, not a mechanism for the Commission to assume an 
SRO's obligations under the Exchange Act.\259\ Accordingly, the 
relevant obligation for a surveillance-sharing agreement resides with 
the listing exchange, not the Commission. When a listing exchange 
enters into a surveillance-sharing agreement, such agreement 
establishes the exchange's ability to obtain relevant information to 
detect and deter manipulation in furtherance of the listing exchange's 
obligation to ensure that its rules are designed to prevent fraudulent 
and manipulative acts and practices. Absent evidence in the record 
demonstrating that the listing exchange has satisfied its obligations, 
the Commission cannot approve a proposed ETP for listing and trading on 
a national securities exchange. Second, the Commission's ability to 
obtain information from other regulators is not a factor that affects 
whether an exchange needs to enter into a surveillance-sharing 
agreement with a regulated market of significant size for purposes of 
detecting and deterring fraud or manipulation. Indeed, in prior 
instances where the Commission has relied on the existence of 
surveillance-sharing agreements in approving ETPs, the Commission's 
ability to obtain relevant information from other regulatory 
authorities was not impeded.
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    \258\ See supra note 213.
    \259\ See Winklevoss Order, 83 FR at 37591.
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    Thus, because (1) the Constituent Platforms are not ``regulated 
markets'' and (2) because NYSE Arca has not entered into a 
surveillance-sharing agreement with the Constituent Platforms, the 
Commission does not reach the question of whether the Constituent 
Platforms constituent a market of significant size.
    The Commission recognizes that, over time, bitcoin-related 
markets--including bitcoin futures markets--may continue to grow and 
develop. Should circumstances or conditions change in a manner that 
affects the Exchange Act analysis, the Commission would then have an 
opportunity to consider whether such a bitcoin ETP would be consistent 
with the requirements of the Exchange Act.\260\
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    \260\ See supra at p.8; Winklevoss Order, 83 FR at 37580; 
Bitwise Order, 84 FR at 55411.
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C. Whether NYSE Arca Has Met Its Burden To Demonstrate That the 
Proposal Is Consistent With the Protection of Investors and the Public 
Interest

    NYSE Arca contends that, if approved, its ETP would protect 
investors and the public interest, but the Commission finds that NYSE 
Arca has not made such a showing on the current record. The Commission 
must consider any potential benefits in the broader context of whether 
the proposal meets each of the applicable requirements of the Exchange 
Act. And because NYSE Arca has not demonstrated that its proposed rule 
change is designed to prevent fraudulent and manipulative acts and 
practices, the Commission must disapprove the proposal.
1. Representations Made and Comments Received
    The Sponsor asserts that the Trust was formed to provide retail 
investors with access to bitcoin through a regulated and transparent 
investment vehicle.\261\ The Sponsor states that investors in the Trust 
will receive full disclosure about the Trust; that the Trust was 
created to mitigate the volatility of bitcoin; that the Trust's 
structure provides an understandable, efficient, and cost-effective 
investment product; that the Trust will utilize qualified custodians 
and its bitcoin assets will be covered by the Bitcoin Custodian's 
fidelity insurance; that investors in the Trust will be able to trade 
the Shares on NYSE Arca and hold them through accounts with Commission-
registered broker-dealers; and that any adviser or broker who 
recommends the Shares to a client will be required to undertake a 
suitability analysis.\262\ The Sponsor also asserts that the Trust's 
monthly redemption schedule increases investor protection by reducing 
operational risk, counterparty risk, and other risks.\263\
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    \261\ See Wilshire Phoenix Submission I at 6. See also Notice, 
84 FR at 56225.
    \262\ See Wilshire Phoenix Submission I at 6-7.
    \263\ See Wilshire Phoenix Submission II at 28-29.
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    A commenter states that introducing a digital-asset related ETP 
that would be traded on national securities exchanges will benefit the 
bitcoin spot market by improving price discovery, reducing volatility, 
and diminishing the potential for manipulation and money laundering to 
affect bitcoin's price.\264\ The same commenter also asserts that the 
ability of market participants to engage in short selling with respect 
to digital asset ETPs would bring more information about their 
intrinsic value into the market--which would result in a more fair and 
orderly market.\265\ This commenter also states that U.S.-traded 
digital asset ETPs would facilitate the development of U.S.-traded 
derivatives such as options and futures, and that these additional 
hedging tools would permit even more information to be incorporated in 
digital asset prices.\266\
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    \264\ See Letter from James J. Angel (Dec. 15, 2019) (``Angel 
Letter'') at 2, 6-7.
    \265\ See Angel Letter at 6.
    \266\ See Angel Letter at 6.
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2. Analysis
    As it has in disapproving previous proposals for bitcoin-related 
ETPs, the Commission acknowledges that, as compared to trading in 
unregulated bitcoin spot markets, trading a bitcoin-based ETP on a 
national securities exchange may provide some additional protection to 
investors, but the Commission must consider this potential benefit in 
the broader context of whether the proposal meets each of the 
applicable requirements of the Exchange Act.\267\ 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.\268\ Thus, even if a proposed rule change would provide 
certain benefits to investors and the markets, the proposed rule change 
may still fail to meet other requirements under the Exchange Act.
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    \267\ See Winklevoss Order, 83 FR at 37602; GraniteShares Order, 
83 FR at 43931; ProShares Order, 83 FR at 43941; Direxion Order, 83 
FR at 43919; Bitwise Order, 84 FR at 55413.
    \268\ See 15 U.S.C. 78s(b)(2)(C).
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    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),\269\ and, accordingly, the Commission must disapprove 
the proposal.\270\
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    \269\ 15 U.S.C. 78f(b)(5).
    \270\ In disapproving the proposed rule change, as modified by 
Amendment No. 1, the Commission has considered its impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f). For the reasons discussed throughout, the Commission is 
disapproving the proposed rule change because it does not find that 
the proposed rule change is consistent with the Exchange Act.
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D. Proposed Amendments to NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares)

    Rule 8.201-E(c)(1) currently states that Commodity-Based Trust 
Shares

[[Page 12616]]

may be issued and redeemed for the underlying commodity. NYSE Arca 
proposes to amend this rule to also allow issuances and redemptions in 
cash, or in a combination of the underlying commodity and cash.\271\ 
Rule 8.201-E(c)(2) currently states that the term ``commodity'' is 
defined in Section 1(a)(4) of the Commodity Exchange Act. NYSE Arca 
proposes to update the reference for the definition of the term 
``commodity'' to Section 1(a)(9) of the Commodity Exchange Act.\272\
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    \271\ See Notice, 84 FR at 56220.
    \272\ See id. at 56221.
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1. Representations Made and Comments Received
    NYSE Arca states that the Commission has previously approved 
listing and trading on NYSE Arca of Commodity-Based Trust Shares that 
permit issuance and redemption of shares for cash in whole or in 
part.\273\ NYSE Arca states that it believes that such an alternative 
would allow a trust issuing Commodity Based Trust Shares to structure 
the procedures for issuance and redemption of shares in a manner that 
may provide operational efficiencies and accommodate investors who may 
wish to deliver or receive cash rather than the underlying 
commodity.\274\ NYSE Arca further asserts that the proposed change will 
facilitate the listing and trading of additional types of exchange-
traded derivative securities products that will enhance competition 
among market participants, to the benefit of investors and the 
marketplace.\275\
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    \273\ See id. at 56220 & n.11.
    \274\ See id. at 56220.
    \275\ See id.
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    With regard to its proposed change to Rule 8.201-E(c)(2), NYSE Arca 
states that the change in cross-reference to the definition of 
``commodity'' in the Commodity Exchange Act is to reflect an amendment 
to the Commodity Exchange Act included in the Dodd-Frank Wall Street 
Reform and Consumer Protection Act of 2010.\276\
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    \276\ See id. at 56221.
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2. Analysis
    The Commission is disapproving the proposed rule change, as 
modified by Amendment No. 1, on the basis that NYSE Arca has not 
demonstrated that its proposal to list and trade the Shares is 
consistent with Section 6(b)(5) of the Exchange Act. As such, in this 
order the Commission does not reach the question of whether these 
proposed amendments to Rule 8.201-E are consistent with the Exchange 
Act.

E. Other Comments

    Comment letters also addressed the general nature and uses of 
bitcoin; \277\ the state of development of bitcoin as a digital asset; 
\278\ the inherent value of, and risks of investing in, bitcoin; \279\ 
the desire of investors to gain access to bitcoin through an ETP; \280\ 
the volatility of the spot price of bitcoin and the potential 
volatility of the price of the ETP; \281\ the legitimacy or enhanced 
regulatory protection that Commission approval of the proposed ETP 
might confer upon bitcoin as a digital asset; \282\ the potential 
impact of Commission approval of the proposed ETP on the price of 
bitcoin and on bitcoin markets; \283\ the level of fees proposed by the 
Sponsor; \284\ the role of the U.S. in promoting innovation through 
bitcoin; \285\ and the bitcoin network's effect on the 
environment.\286\ Ultimately, however, additional discussion of these 
topics beyond that included above is unnecessary, as they do not 
further bear on the basis for the Commission's decision to disapprove 
the proposal.
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    \277\ See Angel Letter at 3.
    \278\ See id. at 14; Letter from Alex Heuer (Oct. 16, 2019); 
Letter from James Williams (Dec. 19, 2019).
    \279\ See, e.g., Angel Letter; Thompson Letter; Letter from 
Alastair Holdsworth (Dec. 20, 2019).
    \280\ See, e.g., Angel Letter; Letter from Scott Page (July 5, 
2019) (``Page Letter'').
    \281\ See, e.g., Notice, 84 FR at 56228.
    \282\ See, e.g., Angel Letter; Page Letter.
    \283\ See, e.g., Angel Letter.
    \284\ See, e.g., Letter from Avinash Shenoy (May 22, 2019).
    \285\ See, e.g., Page Letter.
    \286\ See Thompson Letter.
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IV. Conclusion

    For the reasons set forth above, the Commission does not find, 
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed 
rule change, as modified by Amendment No. 1, is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, with Section 6(b)(5) of the Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2019-39, as 
modified by Amendment No. 1, is disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-04294 Filed 3-2-20; 8:45 am]
 BILLING CODE 8011-01-P