[Federal Register Volume 86, Number 190 (Tuesday, October 5, 2021)]
[Notices]
[Pages 55090-55092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21622]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93191; File No. SR-NYSEArca-2021-57]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change To List and Trade Shares of the NYDIG Bitcoin ETF Under 
NYSE Arca Rule 8.201-E

September 29, 2021.
    On June 30, 2021, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
list and trade shares (``Shares'') of the NYDIG Bitcoin ETF (``Trust'') 
under NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares). The 
proposed rule change was published for comment in the Federal Register 
on July 19, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92395 (July 13, 
2021), 86 FR 38129 (July 19, 2021) (``Notice''). Comments on the 
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2021-57/srnysearca202157.htm.
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    On August 23, 2021, pursuant to Section 19(b)(2) of the 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\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine whether to approve or disapprove the 
proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92722 (Aug. 23, 
2021), 86 FR 48268 (Aug. 27, 2021). The Commission designated 
October 17, 2021, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ the Exchange proposes 
to list and trade the Shares of the Trust under NYSE Arca Rule 8.201-E, 
which governs the listing and trading of Commodity-Based Trust Shares 
on the Exchange.
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    \7\ See Notice, supra note 3.
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    The investment objective of the Trust is to reflect the performance 
of the price of bitcoin less the expenses of the Trust's operations.\8\ 
The Trust will not seek to reflect the performance of any benchmark or 
index. In seeking to achieve its investment objective, the Trust will 
only hold bitcoin.\9\ The Trust generally does not intend to hold cash 
or cash equivalents. However, the Trust may hold cash and cash 
equivalents on a temporary basis to pay extraordinary expenses.\10\
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    \8\ See id. at 38129. NYDIG Asset Management LLC (``Sponsor'') 
is the sponsor of the Trust, and Delaware Trust Company is the 
trustee. U.S. Bancorp Fund Services, LLC (``Administrator'') is the 
transfer agent and the administrator of the Trust. The bitcoin 
custodian for the Trust is NYDIG Trust Company LLC (``Bitcoin 
Custodian''). The Bitcoin Custodian is chartered as a limited 
purpose trust company by the New York State Department of Financial 
Services (``NYDFS'') and is authorized by NYDFS to provide digital 
asset custody services. Both the Sponsor and the Bitcoin Custodian 
are indirect wholly-owned subsidiaries of New York Digital 
Investment Group LLC. See id.
    \9\ See id.
    \10\ See id. at 38130. The Trust will enter into a cash custody 
agreement with U.S. Bank N.A. under which U.S. Bank N.A. will act as 
custodian of the Trust's cash and cash equivalents. See id.
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    The net asset value (``NAV'') of the Trust will be determined in 
accordance with Generally Accepted Accounting Principles (``GAAP'') as 
the total value of bitcoin held by the Trust, plus any cash or other 
assets, less any liabilities including accrued but unpaid expenses. The 
NAV of the Trust will typically be determined as of 4:00 p.m. E.T. on 
each day that the Exchange is open for regular trading (``Business 
Day''). The Administrator will calculate the NAV of the Trust once each 
Exchange trading day. The Exchange's Core Trading Session closes at 
4:00 p.m. E.T. The Trust's daily activities will generally not be 
reflected in the NAV determined for the Business Day on which the 
transactions are effected (the trade date), but rather on the following 
Business Day. The NAV for the Trust's Shares will be disseminated daily 
to all market participants at the same time.\11\
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    \11\ See id. at 38130-32.
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    The Trust will disseminate an intraday indicative value (``IIV'') 
per Share updated every 15 seconds. The IIV will be calculated by using 
the same methodology that the Trust uses to determine NAV, which is to 
follow GAAP. Generally, GAAP requires the fair value of an asset that 
is traded on a market to be measured by reference to orderly 
transactions on an active

[[Page 55091]]

market. Among all active markets with orderly transactions, the market 
that is used to determine the fair value of an asset is the principal 
market. The Sponsor expects that the principal market will initially 
generally be the NYDFS-regulated trading venue with the highest trading 
volume and level of activity.\12\
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    \12\ See id. at 38132.
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    The Trust will create and redeem Shares from time to time, but only 
in one or more blocks of 10,000 Shares (``Creation Baskets''). Creation 
Baskets will only be made in exchange for delivery to the Trust or the 
distribution by the Trust of the amount of bitcoin represented by the 
Shares being created or redeemed, the amount of which will be based on 
the quantity of bitcoin attributable to each Share of the Trust (net of 
accrued but unpaid Sponsor fees, extraordinary expenses or liabilities) 
being created or redeemed determined as of 4:00 p.m. E.T. on the day 
the order is properly received.\13\
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    \13\ See id.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2021-57 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \14\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \14\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\15\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, 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.'' \16\
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    \15\ Id.
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\17\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
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    \17\ See Notice, supra note 3.
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    1. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
bitcoin markets, the bitcoin markets' susceptibility to manipulation, 
and thus the suitability of bitcoin as an underlying asset for an 
exchange-traded product?
    2. The Exchange asserts that the ``significant increase in trading 
volume and open interest in the bitcoin futures market, growth of 
liquidity in the spot market for bitcoin, and certain features of the 
Shares mitigate the manipulation concerns expressed by the Commission 
when it last reviewed exchange proposals to list a bitcoin exchange-
traded product.'' \18\ The Exchange concludes ``that, on the whole, the 
manipulation concerns previously articulated by the Commission have 
since been significantly mitigated, and do not exceed those that exist 
in the markets for other commodities that underly [sic] securities 
listed on U.S. national securities exchanges.'' \19\ Do commenters 
agree or disagree? Are the changes that the Exchange identifies 
sufficient to support the determination that the proposal to list and 
trade the Shares is designed to protect investors and the public 
interest and is consistent with the other applicable requirements of 
Section 6(b)(5) of the Act?
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    \18\ See id. at 38134.
    \19\ See id.
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    3. The Exchange states that the ``Trust would provide investors 
with exposure to bitcoin in a manner that may be more efficient, more 
convenient and more regulated than the purchase of bitcoin or other 
investment products that provide exposure to bitcoin.'' \20\ The 
Exchange asserts that ``investors in [over-the-counter] bitcoin funds . 
. . have historically borne significantly higher fees and expenses than 
those that would be borne by investors in the Trust'' and that 
investors holding bitcoin often face ``credit risk'' and ``risk of loss 
or theft of their bitcoin.'' \21\ What are commenters' views regarding 
the Exchange's assertions? Do these reasons provide an appropriate 
basis for the determination that the proposal is consistent with the 
applicable requirements of Section 6(b)(5) of the Act?
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    \20\ See id.
    \21\ See id.
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    4. The Exchange asserts that the Chicago Mercantile Exchange 
(``CME'') represents a regulated market of significant size relating to 
bitcoin.\22\ The Exchange states that ``proprietary research, including 
lead-lag analyses, . . . demonstrates that prices in the CME bitcoin 
futures market . . . lead prices in the bitcoin spot market, including 
non-U.S. bitcoin spot markets.'' According to the Exchange, ``[t]his 
finding supports the thesis that a market participant attempting to 
manipulate the Shares would have to trade on that market.'' \23\ The 
Exchange, however, does not provide any information regarding the 
proprietary research. What are commenters' views regarding these 
assertions?
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    \22\ See id.
    \23\ See id. at 38135.
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    5. According to the Exchange, ``the bitcoin futures market is one 
of the primary venues that market participants use to transact large 
exposures to bitcoin,'' and, ``[i]n contrast to the efficient leverage 
offered through the futures market, many bitcoin spot trading venues 
require full pre-funding of trading, which means it would be highly 
capital intensive to `spoof' or `layer' order books on spot trading 
venues.'' \24\ The Exchange therefore concludes that if a market 
participant intended to manipulate the price of bitcoin, and thereby 
the Shares, the bitcoin futures market is the one that would be 
manipulated first.\25\ Do commenters agree with the Exchange's analysis 
and conclusion?
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    \24\ See id.
    \25\ See id.
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    6. What are commenters' views of the Exchange's assertion that (a) 
the significant volume in the bitcoin futures market; (b) the overall 
size of the bitcoin market; (c) the significant liquidity available in 
the bitcoin spot markets; and (d) the ability of market participants to 
buy or sell large amounts of bitcoin without significant market impact 
demonstrate that the Shares would not become the predominant force on 
pricing in either the bitcoin spot or futures markets? \26\
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    \26\ See id. at 38136.
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    7. What are commenters' views on the Exchange's statements that 
``the cost to buy or sell $5 million worth of bitcoin

[[Page 55092]]

averages roughly 20 basis points'' and that, ``[f]or a $10 million 
market order, the cost to buy or sell is roughly 40 basis points.'' 
\27\ What are commenters' views of the Exchange's assertion that these 
metrics are comparable to the liquidity of existing commodity exchange-
traded products? \28\ What are commenters' views on the Exchange's 
assertion that the fact that ``the Trust receives and holds only 
bitcoin . . . substantially reduces the potential for manipulation of 
the number of Shares created or redeemed, which therefore substantially 
reduces the potential for shareholders to be harmed by manipulation.''? 
\29\
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    \27\ See id.
    \28\ See id.
    \29\ See id. at 38135.
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\30\
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    \30\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by October 26, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
November 9, 2021.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2021-57 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2021-57. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2021-57 and should be submitted 
by October 26, 2021. Rebuttal comments should be submitted by November 
9, 2021.
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    \31\ 17 CFR 200.30-3(a)(57).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21622 Filed 10-4-21; 8:45 am]
BILLING CODE 8011-01-P