[Federal Register Volume 87, Number 16 (Tuesday, January 25, 2022)]
[Notices]
[Pages 3869-3882]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01384]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94006; File No. SR-NYSEArca-2021-37]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
First Trust SkyBridge Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E

January 20, 2022.

I. Introduction

    On May 6, 2021, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to list and trade shares (``Shares'') of the First Trust 
SkyBridge Bitcoin ETF Trust (``Trust'') under NYSE Arca Rule 8.201-E 
(Commodity-Based Trust Shares). The proposed rule change was published 
for comment in the Federal Register on May 27, 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. 91962 (May 21, 
2021), 86 FR 28646 (May 27, 2021) (``Notice''). Comments on the 
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2021-37/srnysearca202137.htm.
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    On July 7, 2021, pursuant to Section 19(b)(2) of the Exchange 
Act,\4\ the Commission designated a longer period within which to 
approve the proposed rule change, disapprove the proposed rule change, 
or institute proceedings to determine whether to disapprove the 
proposed rule change.\5\ On August 20, 2021, the Commission instituted 
proceedings under Section 19(b)(2)(B) of the Exchange Act \6\ to 
determine whether to approve or disapprove the proposed rule change.\7\ 
On November 15, 2021, the Commission designated a longer period for 
Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92333, 86 FR 36826 
(July 13, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 92714, 86 FR 47662 
(Aug. 26, 2021).
    \8\ See Securities Exchange Act Release No. 93570, 86 FR 64975 
(Nov. 19, 2021).
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    This order disapproves the proposed rule change. The Commission 
concludes that NYSE Arca has not met its burden under the Exchange Act 
and the Commission's Rules of Practice to demonstrate that its proposal 
is consistent with the requirements of Exchange Act Section 6(b)(5), 
and in particular, the requirement that the rules of a national 
securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list and trade the 
Shares is designed to prevent fraudulent and manipulative acts and 
practices, the Commission applies the same standard used in its orders 
considering previous proposals to list bitcoin \10\-based commodity 
trusts and bitcoin-based trust issued receipts.\11\ As the Commission 
has explained, an exchange that lists bitcoin-based exchange-traded 
products (``ETPs'') can meet its obligations under Exchange Act Section 
6(b)(5) by demonstrating that the exchange has a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to the underlying or reference bitcoin assets.\12\
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    \10\ Bitcoins are digital assets that are issued and transferred 
via a decentralized, open-source protocol used by a peer-to-peer 
computer network through which transactions are recorded on a public 
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin 
protocol governs the creation of new bitcoins and the cryptographic 
system that secures and verifies bitcoin transactions. See, e.g., 
Notice, 86 FR at 28646-47.
    \11\ See Order Setting Aside Action by Delegated Authority and 
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1 
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust, 
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR 
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order''); 
Order Disapproving a Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust 
Shares) and To List and Trade Shares of the United States Bitcoin 
and Treasury Investment Trust Under NYSE Arca Rule 8.201-E, 
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR 
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``USBT Order''); Order 
Disapproving a Proposed Rule Change To List and Trade Shares of the 
WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based 
Trust Shares, Securities Exchange Act Release No. 93700 (Dec. 1, 
2021), 86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) 
(``WisdomTree Order''); Order Disapproving a Proposed Rule Change to 
List and Trade Shares of the Valkyrie Bitcoin Fund under NYSE Arca 
Rule 8.201-E (Commodity-Based Trust Shares), Securities Exchange Act 
Release No. 93859 (Dec. 22, 2021), 86 FR74156 (Dec. 29, 2021) (SR-
NYSEArca-2021-31) (``Valkyrie Order''); Order Disapproving a 
Proposed Rule Change to List and Trade Shares of the Kryptoin 
Bitcoin ETF Trust under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares, Securities Exchange Act Release No. 93860 (Dec. 22, 2021), 
86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029) (``Kryptoin 
Order''). See also Order Disapproving a Proposed Rule Change, as 
Modified by Amendment No. 1, Relating to the Listing and Trading of 
Shares of the SolidX Bitcoin Trust Under NYSE Arca Equities Rule 
8.201, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82 
FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order''). 
The Commission also notes that orders were issued by delegated 
authority on the following matters: Order Disapproving a Proposed 
Rule Change To List and Trade the Shares of the ProShares Bitcoin 
ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act 
Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (SR-
NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a 
Proposed Rule Change To List and Trade the Shares of the 
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF, 
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR 
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares 
Order''); Order Disapproving a Proposed Rule Change To List and 
Trade Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4), 
Commodity-Based Trust Shares, Securities Exchange Act Release No. 
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019).
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order, 
83 FR at 37592 n.202 and accompanying text (discussing previous 
Commission approvals of commodity-trust ETPs); GraniteShares Order, 
83 FR at 43925-27 nn.35-39 and accompanying text (discussing 
previous Commission approvals of commodity-futures ETPs).
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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

[[Page 3870]]

were to occur.'' \13\ The Commission has emphasized that it is 
essential for an exchange listing a derivative securities product to 
enter into a surveillance-sharing agreement with markets trading the 
underlying assets for the listing exchange to have the ability to 
obtain information necessary to detect, investigate, and deter fraud 
and market manipulation, as well as violations of exchange rules and 
applicable federal securities laws and rules.\14\ The hallmarks of a 
surveillance-sharing agreement are that the agreement provides for the 
sharing of information about market trading activity, clearing 
activity, and customer identity; that the parties to the agreement have 
reasonable ability to obtain access to and produce requested 
information; and that no existing rules, laws, or practices would 
impede one party to the agreement from obtaining this information from, 
or producing it to, the other party.\15\
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    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities 
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998), 
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See 
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at 
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at 
12596.
    \14\ See NDSP Adopting Release, 63 FR at 70959.
    \15\ See Winklevoss Order, 83 FR at 37592-93; Letter from 
Brandon Becker, Director, Division of Market Regulation, Commission, 
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group 
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
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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 market.\16\ A surveillance-sharing 
agreement must be entered into with a ``significant market'' to assist 
in detecting and deterring manipulation of the ETP, because a person 
attempting to manipulate the ETP is reasonably likely to also engage in 
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that will provide guidance to market 
participants. See id.
    \17\ See USBT Order, 85 FR at 12597.
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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.\18\ Moreover, the 
surveillance-sharing agreements have been consistently present whenever 
the Commission has approved the listing and trading of derivative 
securities, even where the underlying securities were also listed on 
national securities exchanges--such as options based on an index of 
stocks traded on a national securities exchange--and were thus subject 
to the Commission's direct regulatory authority.\19\
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    \18\ See Winklevoss Order, 83 FR at 37594.
    \19\ See USBT Order, 85 FR at 12597; Securities Exchange Act 
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) 
(SR-Amex-93-28) (order approving listing of options on American 
Depository Receipts (``ADRs'')). The Commission has also required a 
surveillance-sharing agreement in the context of index options even 
when (i) all of the underlying index component stocks were either 
registered with the Commission or exempt from registration under the 
Exchange Act; (ii) all of the underlying index component stocks 
traded in the U.S. either directly or as ADRs on a national 
securities exchange; and (iii) effective international ADR arbitrage 
alleviated concerns over the relatively smaller ADR trading volume, 
helped to ensure that ADR prices reflected the pricing on the home 
market, and helped to ensure more reliable price determinations for 
settlement purposes, due to the unique composition of the index and 
reliance on ADR prices. See Securities Exchange Act Release No. 
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the 
exchange on which the index option trades and the markets that trade 
the underlying securities are necessary'' and that ``[t]he exchange 
of surveillance data by the exchange trading a stock index option 
and the markets for the securities comprising the index is important 
to the detection and deterrence of intermarket manipulation.''). And 
the Commission has required a surveillance-sharing agreement even 
when approving options based on an index of stocks traded on a 
national securities exchange. See Securities Exchange Act Release 
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure 
the availability of information necessary to detect and deter 
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other 
means besides surveillance-sharing agreements will be sufficient to 
prevent fraudulent and manipulative acts and practices, including that 
the bitcoin market as a whole or the relevant underlying bitcoin market 
is ``uniquely'' and ``inherently'' resistant to fraud and 
manipulation.\20\ In response, the Commission has agreed that, if a 
listing exchange could establish that the underlying market inherently 
possesses a unique resistance to manipulation beyond the protections 
that are utilized by traditional commodity or securities markets, it 
would not necessarily need to enter into a surveillance-sharing 
agreement with a regulated significant market.\21\ Such resistance to 
fraud and manipulation, however, must be novel and beyond those 
protections that exist in traditional commodity markets or equity 
markets for which the Commission has long required surveillance-sharing 
agreements in the context of listing derivative securities 
products.\22\ No listing exchange has satisfied its burden to make such 
demonstration.\23\
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    \20\ See USBT Order, 85 FR at 12597.
    \21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing 
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as 
well as one bitcoin trading platform specifically, have unique 
resistance to fraud and manipulation); see also USBT Order, 85 FR at 
12597.
    \22\ See USBT Order, 85 FR at 12597.
    \23\ See supra note 11.
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    In its proposed rule change to list and trade Shares, NYSE Arca 
contends that approval of the proposal is consistent with Section 
6(b)(5) of the Exchange Act, in particular Section 6(b)(5)'s 
requirement that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices and 
to protect investors and the public interest.\24\ As discussed in more 
detail below, NYSE Arca asserts that the proposal is consistent with 
Section 6(b)(5) of the Exchange Act because the Exchange has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size,\25\ and there exist other means to prevent fraudulent 
and manipulative acts and practices that are sufficient to justify 
dispensing with the requisite surveillance-sharing agreement.\26\
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    \24\ See Notice, 86 FR at 28660-61.
    \25\ See id. at 28656-58.
    \26\ See id. at 28658.
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    Moreover, although NYSE Arca recognizes the Commission's focus on 
potential manipulation of bitcoin ETPs in prior disapproval orders, 
NYSE Arca states that the Commission should also consider the direct, 
quantifiable investor protection issues in determining whether to 
approve the proposal.\27\ Specifically, NYSE Arca believes that the 
proposal would give U.S. investors access to bitcoin in a regulated and 
transparent exchange-traded vehicle that would act to limit risk to 
U.S. investors by: (i) Reducing premium and discount volatility; (ii) 
reducing management fees through meaningful competition; (iii) reducing 
risks associated with investing in operating companies that are 
imperfect proxies for

[[Page 3871]]

bitcoin exposure; and (iv) providing an alternative to custodying spot 
bitcoin.\28\
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    \27\ See id. at 28650.
    \28\ See id. at 28649.
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    In the analysis that follows, the Commission examines whether the 
proposed rule change is consistent with Section 6(b)(5) of the Exchange 
Act by addressing: In Section III.B.1 assertions that other means 
besides surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices; in Section III.B.2 
assertions that NYSE Arca has entered into a comprehensive 
surveillance-sharing agreement with a regulated market of significant 
size related to bitcoin; and in Section III.C assertions that the 
proposal is consistent with the protection of investors and the public 
interest.
    Based on the analysis, the Commission concludes that NYSE Arca has 
not established that other means to prevent fraudulent and manipulative 
acts and practices are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Commission further 
concludes that NYSE Arca has not established that it has a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to bitcoin. As discussed further below, NYSE 
Arca repeats various assertions made in prior bitcoin-based ETP 
proposals that the Commission has previously addressed and rejected--
and more importantly, NYSE Arca does not respond to the Commission's 
reasons for rejecting those assertions but merely repeats them. As a 
result, the Commission does not find that the proposed rule change is 
consistent with the statutory requirements of Exchange Act Section 
6(b)(5).
    The Commission again emphasizes that its disapproval of this 
proposed rule change does not rest on an evaluation of whether bitcoin, 
or blockchain technology more generally, has utility or value as an 
innovation or an investment. Rather, the Commission is disapproving 
this proposed rule change because, as discussed below, NYSE Arca has 
not met its burden to demonstrate that its proposal is consistent with 
the requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\29\ 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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    \29\ See Notice, supra note 3. See also Registration Statement 
on Form S-1/A, dated May 6, 2021 (File No. 333-254529), filed with 
the Commission on behalf of the Trust (``Registration Statement'').
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    The investment objective of the Trust will be for the Shares to 
reflect the performance of the value of bitcoin, less the Trust's 
liabilities and expenses.\30\ The Trust will not seek to reflect the 
performance of any benchmark or index. In order to pursue its 
investment objective, the Trust will seek to purchase and sell such 
number of bitcoin so that the total value of the bitcoin held by the 
Trust is as close to 100 percent of the net assets of the Trust as is 
reasonably practicable to achieve.\31\
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    \30\ See Notice, 86 FR at 28652. First Trust Advisors L.P. is 
the sponsor of the Trust, and Delaware Trust Company is the trustee. 
The sub-adviser for the Trust is SkyBridge Capital II, LLC (``Sub-
Adviser''). The Bank of New York Mellon (``Administrator'') is the 
transfer agent and the administrator of the Trust. The bitcoin 
custodian for the Trust is NYDIG Trust Company LLC (``Bitcoin 
Custodian''). See id. at 28646.
    \31\ See id. at 28652.
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    The Shares would represent units of fractional undivided beneficial 
interest in, and ownership of, the Trust. The Trust will hold only 
bitcoins, which the Bitcoin Custodian will custody on behalf of the 
Trust. The Trust generally will not hold cash or cash equivalents; 
however, the Trust may hold cash and cash equivalents on a temporary 
basis to pay extraordinary expenses.\32\
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    \32\ See id. at 28652, 28654. The Administrator acts as 
custodian of the Trust's cash and cash equivalents. See id. at 
28654. While the Trust may from time to time incur certain 
extraordinary, non-recurring expenses that must be paid in U.S. 
dollars or other fiat currency, such events would only impact the 
amount of bitcoin represented by a Share of the Trust. See id. at 
28655.
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    The net asset value (``NAV'') of the Trust will be determined in 
accordance with Generally Accepted Accounting Principles 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 be determined as of 4:00 p.m. ET on each day that the Shares 
trade on the Exchange (``Business Day'').\33\ The Trust will use the CF 
Bitcoin US Settlement Price (``Reference Rate'') to calculate the 
Trust's NAV.
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    \33\ 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. See id. at 28654.
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    The Reference Rate is administered by CF Benchmarks Ltd. 
(``Benchmark Administrator'') and serves as a once-a-day benchmark rate 
of the U.S. dollar price of bitcoin (USD/BTC), calculated as of 4:00 
p.m. ET \34\ The Reference Rate aggregates the trade flow of several 
bitcoin platforms during an observation window between 3:00 p.m. and 
4:00 p.m. ET into the U.S. dollar price of one bitcoin at 4:00 p.m., ET 
The current constituent bitcoin platforms of the Reference Rate are 
Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent 
Platforms''). In calculating the Reference Rate, the methodology 
creates a joint list of all ``Relevant Transactions'' \35\ from the 
Constituent Platforms. The methodology divides this list into a number 
of equally sized time intervals and calculates the volume-weighted 
median trade price for each of those time intervals.\36\ The Reference 
Rate is the equally weighted average of the volume-weighted median 
trade prices of all intervals.\37\
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    \34\ According to NYSE Arca, the Reference Rate is based on 
materially the same methodology (except calculation time) as the 
Benchmark Administrator's CME CF Bitcoin Reference Rate (``CME CF 
BRR''), which was first introduced on November 14, 2016, and is the 
rate on which bitcoin futures contracts are cash-settled in U.S. 
dollars on the Chicago Mercantile Exchange (``CME''). See id. at 
28654.
    \35\ According to the Exchange, a ``Relevant Transaction'' is 
any cryptocurrency versus U.S. dollar spot trade that occurs during 
the observation window between 3:00 p.m. and 4:00 p.m., ET, on a 
Constituent Platform in the BTC/USD pair that is reported and 
disseminated by a Constituent Platform through its publicly 
available Automatic Programming Interface (``API'') and observed by 
the Benchmark Administrator. See id. at 28655.
    \36\ According to the Exchange, a volume-weighted median differs 
from a standard median in that a weighting factor, in this case 
trade size, is factored into the calculation. See id. at 28655 n.64.
    \37\ See id. at 28654-55.
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    The Trust's website, as well as one or more major market data 
vendors, will provide an intra-day indicative value (``IIV'') per Share 
updated every 15 seconds, as calculated by the Exchange or a third 
party financial data provider during the Exchange's Core Trading 
Session (9:30 a.m. to 4:00 p.m. ET). The IIV will be calculated by 
using the prior day's closing NAV per Share as a base and updating that 
value during the Exchange's Core Trading Session to reflect changes in 
the value of the Trust's NAV during the trading day.\38\
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    \38\ See id. at 28659.
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    The Trust will issue and redeem Shares to authorized participants 
on an ongoing basis in blocks of 50,000 Shares (``Creation Units''). 
The creation and redemption of Creation Units will be effected in ``in-
kind'' transactions based on the quantity of bitcoin attributable to 
each Share. The creation and redemption of Creation Units require the 
delivery to the Trust, or the distribution by the Trust, of the number 
of bitcoins represented by the Creation Units being created or 
redeemed.\39\
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    \39\ See id. at 28658-59.

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[[Page 3872]]

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.'' \40\ 
Under the Commission's Rules of Practice, the ``burden to demonstrate 
that a proposed rule change is consistent with the Exchange Act and the 
rules and regulations issued thereunder . . . is on the self-regulatory 
organization [`SRO'] that proposed the rule change.'' \41\
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    \40\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the 
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a 
proposed rule change filed by a national securities exchange if it 
does not find that the proposed rule change is consistent with the 
applicable requirements of the Exchange Act. Exchange Act Section 
6(b)(5) states that an exchange shall not be registered as a 
national securities exchange unless the Commission determines that 
``[t]he rules of the exchange are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, 
to protect investors and the public interest; and are not designed 
to permit unfair discrimination between customers, issuers, brokers, 
or dealers, or to regulate by virtue of any authority conferred by 
this title matters not related to the purposes of this title or the 
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \41\ 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,\42\ 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.\43\ 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.\44\
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    \42\ See id.
    \43\ See id.
    \44\ 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 Other Means Besides Surveillance-Sharing Agreements 
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and 
Practices
    As stated above, the Commission has recognized that a listing 
exchange could demonstrate that other means to prevent fraudulent and 
manipulative acts and practices are sufficient to justify dispensing 
with a comprehensive surveillance-sharing agreement with a regulated 
market of significant size, including by demonstrating that the bitcoin 
market as a whole or the relevant underlying bitcoin market is uniquely 
and inherently resistant to fraud and manipulation.\45\ Such resistance 
to fraud and manipulation must be novel and beyond those protections 
that exist in traditional commodities or securities markets.\46\
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    \45\ See USBT Order, 85 FR at 12597 n.23. The Commission is not 
applying a ``cannot be manipulated'' standard. Instead, the 
Commission is examining whether the proposal meets the requirements 
of the Exchange Act and, pursuant to its Rules of Practice, places 
the burden on the listing exchange to demonstrate the validity of 
its contentions and to establish that the requirements of the 
Exchange Act have been met. See id.
    \46\ See id. at 12597.
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    NYSE Arca asserts that certain aspects of the market for bitcoin 
help to mitigate the potential for fraud and manipulation in connection 
with bitcoin pricing.\47\ Specifically, according to NYSE Arca, the 
significant liquidity in the bitcoin spot market and the impact of 
market orders on the overall price of bitcoin have made attempts to 
move the price of bitcoin increasingly expensive over the past 
year.\48\ The Exchange states that, in January 2020, for example, the 
cost to buy or sell $5 million worth of bitcoin averaged roughly 30 
basis points (compared to 10 basis points in February 2021) with a 
market impact of 50 basis points (compared to 30 basis points in 
February 2021). For a $10 million market order, the cost to buy or sell 
was roughly 50 basis points (compared to 20 basis points in February 
2021) with a market impact of 80 basis points (compared to 50 basis 
points in February 2021). NYSE Arca contends that, as the liquidity in 
the bitcoin spot market increases, it follows that the impact of $5 
million and $10 million orders will continue to decrease.\49\
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    \47\ See Notice, 86 FR at 28658.
    \48\ See id.
    \49\ See id.
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    The Exchange's assertions about the bitcoin market do not 
constitute other means to prevent fraud and manipulation sufficient to 
justify dispensing with the requisite surveillance-sharing agreement. 
First, the data furnished by NYSE Arca regarding the cost to move the 
price of bitcoin, and the market impact of such attempts, are 
incomplete. NYSE Arca does not provide meaningful analysis pertaining 
to how these figures compare to other markets or why one must conclude, 
based on the numbers provided, that the bitcoin market is costly to 
manipulate. Further, NYSE Arca's analysis of the market impact of a 
mere two sample transactions is not sufficient evidence to conclude 
that the bitcoin market is resistant to manipulation.\50\ Even assuming 
that the Commission agreed with NYSE Arca's premise, that it is costly 
to manipulate the bitcoin market, and it is becoming increasingly so, 
any such evidence speaks only to establish that there is some 
resistance to manipulation, not that it establishes unique resistance 
to manipulation to warrant dispensing with the standard surveillance-
sharing agreement.\51\
---------------------------------------------------------------------------

    \50\ Aside from stating that the ``statistics are based on 
samples of bitcoin liquidity in USD (excluding stablecoins or Euro 
liquidity) based on executable quotes on Coinbase Pro, Gemini, 
Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during 
February 2021,'' the Exchange provides no other information 
pertaining to the methodology used to enable the Commission to 
evaluate these findings or their significance. See Notice, 86 FR at 
28658 n.91.
    \51\ See USBT Order, 85 FR at 12601.
---------------------------------------------------------------------------

    Moreover, NYSE Arca does not sufficiently 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, non-public information (such as 
plans of market participants to significantly increase or decrease 
their holdings in bitcoin; new sources of demand for bitcoin; the 
decision of a bitcoin-based investment vehicle on how to respond to a 
``fork'' in the bitcoin blockchain), or based on the dissemination of 
false and misleading information; (6) manipulative activity involving 
the purported ``stablecoin'' Tether (USDT); and (7) fraud and 
manipulation at bitcoin trading platforms.\52\
---------------------------------------------------------------------------

    \52\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J. 
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28, 
2019), available at https://ssrn.com/abstract=3195066 and published 
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86; 
Valkyrie Order, 86 FR at 74160.

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

[[Page 3873]]

    In addition, NYSE Arca does not address risk factors specific to 
the bitcoin blockchain and bitcoin platforms described in the Trust's 
Registration Statement that undermine its assertions about the bitcoin 
market. For example, the Registration Statement acknowledges that 
``platforms on which users trade bitcoin are relatively new and, in 
some cases, largely unregulated, and, therefore, may be more exposed to 
fraud and security breaches than established, regulated exchanges for 
other financial assets or instruments;'' that the bitcoin blockchain 
could be vulnerable to a ``51% attack,'' in which a malicious actor(s) 
or botnet that controls a majority of the processing power dedicated to 
mining on the bitcoin network may be able to alter the bitcoin 
blockchain on which the bitcoin network and bitcoin transactions rely; 
that the nature of the assets held at bitcoin platforms makes them 
``appealing targets for hackers'' and that ``a number of bitcoin 
platforms have been victims of cybercrimes;'' that ``in 2019 there were 
reports claiming that 80-95% of bitcoin trading volume on [bitcoin 
platforms] was false or non-economic in nature;'' and that, over the 
past several years, bitcoin trading platforms ``have been closed due to 
fraud and manipulative activity, business failure or security 
breaches.'' \53\
---------------------------------------------------------------------------

    \53\ See Registration Statement at 16, 18, 20-21.
---------------------------------------------------------------------------

    NYSE Arca also asserts that other means to prevent fraud and 
manipulation are sufficient to justify dispensing with the requisite 
surveillance-sharing agreement. The Exchange states that the Reference 
Rate, which is used to determine the value of the Trust's bitcoin and 
NAV, is itself resistant to manipulation based on the Reference Rate's 
methodology.\54\ The Reference Rate mitigates the effects of potential 
manipulation of the bitcoin market because the Reference Rate is 
exclusively based on Constituent Platforms.\55\ According to the 
Exchange, the capital necessary to maintain a significant presence on 
any Constituent Platform would make manipulation of the Reference Rate 
unlikely.\56\ The Exchange, moreover, asserts that ``[b]itcoin trades 
in a well-arbitraged and distributed market'', and ``[t]he 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 [(and, as implied by the Exchange, the Reference 
Rate)] would likely require overcoming the liquidity supply of such 
arbitrageurs who are potentially eliminating any cross-market pricing 
differences.'' \57\
---------------------------------------------------------------------------

    \54\ See Notice, 86 FR at 28658.
    \55\ See id. at 28661.
    \56\ See id.
    \57\ See id.
---------------------------------------------------------------------------

    Simultaneously with the Exchange's assertions regarding the 
Reference Rate, the Exchange also states that, because the Trust will 
engage in in-kind creations and redemptions only, the ``manipulability 
of the Reference Rate [is] significantly less important.'' \58\ The 
Exchange elaborates further that, ``because the Trust will not accept 
cash to buy bitcoin in order to create or redeem Shares, the price that 
the Sponsor uses to value the Trust's bitcoin is not particularly 
important.'' \59\ According to NYSE Arca, when authorized participants 
create Shares with the Trust, they would need to deliver a certain 
number of bitcoin per Share (regardless of the valuation used), and 
when they redeem with the Trust, they would similarly expect to receive 
a certain number of bitcoin per Share.\60\ As such, NYSE Arca argues 
that, even if the price used to value the Trust's bitcoin has been 
manipulated, the ratio of bitcoin per Share does not change, and the 
Trust will either accept (for creations) or distribute (for 
redemptions) the same number of bitcoin regardless of the value.\61\ 
This, according to NYSE Arca, not only mitigates the risk associated 
with potential manipulation, but also discourages and disincentivizes 
manipulation of the Reference Rate because there is little financial 
incentive to do so.\62\
---------------------------------------------------------------------------

    \58\ See id. at 28658.
    \59\ See id.
    \60\ See id.
    \61\ See id.
    \62\ See id.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the 
Commission can find no basis to conclude that NYSE Arca has articulated 
other means to prevent fraud and manipulation that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement. 
The record does not demonstrate that the proposed methodology for 
calculating the Reference Rate would make the proposed ETP resistant to 
fraud or manipulation such that a surveillance-sharing agreement with a 
regulated market of significant size is unnecessary.\63\
---------------------------------------------------------------------------

    \63\ The Commission has previously considered and rejected 
similar arguments about the valuation of bitcoin according to a 
benchmark or reference price. See, e.g., SolidX Order, 82 FR at 
16258; Winklevoss Order, 83 FR at 37587-90; USBT Order, 85 FR at 
12599-601; WisdomTree Order, 86 FR at 69326-28; Valkyrie Order, 86 
FR at 74160-63; Kryptoin Order, 86 FR at 74172-73.
---------------------------------------------------------------------------

    NYSE Arca has not shown that its proposed use of a number of 
equally-sized time intervals over the observation window between 3:00 
p.m. and 4:00 p.m., E.T., to calculate the Reference Rate would 
effectively be able to eliminate fraudulent or manipulative activity 
that is not transient. Fraud and manipulation in the bitcoin spot 
market could persist for a ``significant duration.'' \64\ The Exchange 
does not connect the use of such partitions to the duration of the 
effects of fraud and manipulation in the bitcoin spot market.\65\ Thus, 
the Exchange fails to establish how the Reference Rate's methodology 
eliminates fraudulent or manipulative activity that is not 
transient.\66\
---------------------------------------------------------------------------

    \64\ See USBT Order, 85 FR at 12601 n.66; see also id. at 12607.
    \65\ See WisdomTree Order, 86 FR at 69327.
    \66\ See USBT Order, 85 FR at 12607.
---------------------------------------------------------------------------

    Moreover, the record does not demonstrate that the Benchmark 
Administrator's reliance solely on the Constituent Platforms to 
calculate the Reference Rate make the proposed ETP resistant to fraud 
or manipulation. For example, even assuming, as the Exchange asserts, 
that the capital necessary to maintain a significant presence on any 
Constituent Platform make the Reference Rate resistant to manipulation, 
the Exchange has not assessed the possible influence that spot 
platforms not included among the Constituent Platforms would have on 
bitcoin prices used to calculate the Reference Rate. As discussed 
above, the Exchange has not sufficiently addressed the presence of 
possible sources of fraud and manipulation in the broader spot market 
previously raised by the Commission or by the Trust's Registration 
Statement.\67\ Accordingly, to the extent that trading on platforms not 
directly used to calculate the Reference Rate affects prices on the 
Constituent Platforms, the characteristics of those other platforms--
where various kinds of fraud and manipulation from a variety of sources 
may be present and persist--may affect whether the Reference Rate is 
resistant to manipulation.
---------------------------------------------------------------------------

    \67\ See supra notes 52-53 and accompanying text.
---------------------------------------------------------------------------

    Likewise, the Commission is unpersuaded by NYSE Arca's assertion 
that arbitrage across bitcoin markets makes it unlikely that the price 
of bitcoin on the Constituent Platforms would be manipulated. Here, the 
Exchange provides insufficient evidence to support its assertion of 
price arbitrage across bitcoin platforms and does not

[[Page 3874]]

take into account that a market participant with a dominant ownership 
position would not find it prohibitively expensive to overcome the 
liquidity supplied by arbitrageurs and could use dominant market share 
to engage in manipulation.\68\
---------------------------------------------------------------------------

    \68\ See, e.g., Winklevoss Order, 83 FR at 37584; USBT Order, 85 
FR at 12600-01.
---------------------------------------------------------------------------

    In addition, the Exchange's assertions about the Reference Rate are 
contradicted by the Registration Statement, which states that ``the 
[Reference Rate] has a limited history and there are limitations with 
the price of bitcoin reflected there.'' \69\ The Registration Statement 
further states that ``platforms on which users trade bitcoin. . . may 
be more exposed to fraud and security breaches than established, 
regulated exchanges for other financial assets or instruments, which 
could have a negative impact on the performance of the Trust.'' \70\ 
The Constituent Platforms are a subset of the bitcoin platforms 
currently in existence. Although the Sponsor raises concerns regarding 
fraud and security of bitcoin platforms in the Registration Statement, 
which would include the Constituent Platforms, the Exchange does not 
explain how or why such concerns are consistent with its assertion that 
the use of the Reference Rate mitigates the effects of potential 
manipulation of the bitcoin market.
---------------------------------------------------------------------------

    \69\ See Registration Statement at 35.
    \70\ See id. at 18.
---------------------------------------------------------------------------

    NYSE Arca also does not explain the significance of the Reference 
Rate's purported resistance to manipulation to the overall analysis of 
whether the proposal to list and trade the Shares is designed to 
prevent fraud and manipulation. Even assuming that the Exchange's 
argument is that, if the Reference Rate is resistant to manipulation, 
the Trust's NAV, and thereby the Shares as well, would be resistant to 
manipulation, the Exchange has not established in the record a basis 
for such conclusion. That assumption aside, the Commission notes that 
the Shares would trade at market-based prices in the secondary market, 
not at NAV, which then raises the question of the significance of the 
NAV calculation to the manipulation of the Shares.
    The Exchange's arguments are also contradictory. While arguing that 
the Reference Rate is resistant to manipulation, the Exchange 
simultaneously downplays the importance of the Reference Rate in light 
of the Trust's in-kind creation and redemption mechanism.\71\ The 
Exchange points out that the Trust will create and redeem Shares in-
kind, not in cash, which renders the NAV calculation, and thereby the 
ability to manipulate NAV, ``significantly less important.'' \72\ The 
Trust will not accept cash to buy bitcoin in order to create Shares or 
sell bitcoin to pay cash for redeemed Shares. Accordingly, in NYSE 
Arca's own words, the price that the Sponsor uses to value the Trust's 
bitcoin ``is not particularly important.'' \73\ If the Reference Rate 
that the Trust uses to value the Trust's bitcoin ``is not particularly 
important,'' it follows that the Reference Rate's resistance to 
manipulation is not material to the Shares' susceptibility to fraud and 
manipulation. As the Exchange does not address or provide any analysis 
with respect to these issues, the Commission cannot conclude that the 
Reference Rate aids in the determination that the proposal to list and 
trade the Shares is designed to prevent fraudulent and manipulative 
acts and practices.
---------------------------------------------------------------------------

    \71\ See supra notes 58-62 and accompanying text.
    \72\ See Notice, 86 FR at 28658 (``While the Sponsor believes 
that the Reference Rate used to value the Trust's bitcoin is itself 
resistant to manipulation based on the methodology described above, 
the fact that creations and redemptions are only available in-kind 
makes the manipulability of the Reference Rate significantly less 
important.'').
    \73\ See id.
---------------------------------------------------------------------------

    The Commission thus concludes that the Exchange has not 
demonstrated that its use of the Reference Rate makes the proposed ETP 
resistant to manipulation. While the proposed procedures for 
calculating the Reference Rate using only prices from the Constituent 
Platforms are intended to provide some degree of protection against 
attempts to manipulate the Reference Rate, these procedures are not 
sufficient for the Commission to dispense with the requisite 
surveillance-sharing agreement with a regulated market of significant 
size.
    Finally, the Commission finds that NYSE Arca has not demonstrated 
that in-kind creations and redemptions provide the Shares with a unique 
resistance to manipulation. The Commission has previously addressed 
similar assertions.\74\ As the Commission stated before, in-kind 
creations and redemptions are a common feature of ETPs, and the 
Commission has not previously relied on the in-kind creation and 
redemption mechanism as a basis for excusing exchanges that list ETPs 
from entering into surveillance-sharing agreements with significant, 
regulated markets related to the portfolio's assets.\75\ Accordingly, 
the Commission is not persuaded here that the Trust's in-kind creations 
and redemptions afford it a unique resistance to manipulation.
---------------------------------------------------------------------------

    \74\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR 
at 12607-08.
    \75\ See, e.g., iShares COMEX Gold Trust, Securities Exchange 
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26, 
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange 
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24, 
2006) (SR-Amex-2005-072).
---------------------------------------------------------------------------

(2) Assertions That NYSE Arca Has Entered Into a Comprehensive 
Surveillance-Sharing Agreement With a Regulated Market of Significant 
Size
    As NYSE Arca has not demonstrated that other means besides 
surveillance-sharing agreements will be sufficient to prevent 
fraudulent and manipulative acts and practices, the Commission next 
examines whether the record supports the conclusion that NYSE Arca has 
entered into a comprehensive surveillance-sharing agreement with a 
regulated market of significant size relating to the underlying assets. 
In this context, the term ``market of significant size'' includes a 
market (or group of markets) as to which (i) there is a reasonable 
likelihood that a person attempting to manipulate the ETP would also 
have to trade on that market to successfully manipulate the ETP, so 
that a surveillance-sharing agreement would assist in detecting and 
deterring misconduct, and (ii) it is unlikely that trading in the ETP 
would be the predominant influence on prices in that market.\76\
---------------------------------------------------------------------------

    \76\ See Winklevoss Order, 83 FR at 37594. This definition is 
illustrative and not exclusive. There could be other types of 
``significant markets'' and ``markets of significant size,'' but 
this definition is an example that provides guidance to market 
participants. See id.
---------------------------------------------------------------------------

    In its proposal, NYSE Arca asserts that the CME, either alone as 
the sole market for bitcoin futures or as a group of markets together 
with the Constituent Platforms, is a ``market of significant size.'' 
\77\ As the Commission has stated in the past, it considers two markets 
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate 
bilateral surveillance-sharing agreement.\78\ Accordingly, based on the 
common membership of NYSE Arca and the CME in the ISG,\79\ NYSE Arca 
has the equivalent of a comprehensive surveillance-sharing agreement 
with the CME. However, while the Commission recognizes that the 
Commodity Futures Trading Commission (``CFTC'') regulates the CME 
futures market,\80\ including the

[[Page 3875]]

CME bitcoin futures market, and thus such market is ``regulated'' in 
the context of the proposed ETP, the record does not, as explained 
further below, establish that the CME bitcoin futures market, either 
alone as the sole market for bitcoin futures or as a group of markets 
together with the Constituent Platforms, is a ``market of significant 
size'' as that term is used in the context of the applicable standard 
here.
---------------------------------------------------------------------------

    \77\ See Notice, 86 FR at 28656-58, 28661.
    \78\ See Winklevoss Order, 83 FR at 37580 n.19.
    \79\ See Notice, 86 FR at 28656.
    \80\ 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 Winklevoss 
Order, 83 FR at 37587, 37599. See also infra notes 125-127 and 
accompanying text.
---------------------------------------------------------------------------

(a) Whether There Is a Reasonable Likelihood That a Person Attempting 
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin 
Futures Market, Alone or Together With Constituent Platforms, To 
Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures 
market constitutes a ``market of significant size'' is the 
determination that there is a reasonable likelihood that a person 
attempting to manipulate the ETP would have to trade on the CME bitcoin 
futures market to successfully manipulate the ETP.\81\
---------------------------------------------------------------------------

    \81\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    NYSE Arca notes that the CME began to offer trading in bitcoin 
futures in 2017.\82\ According to NYSE Arca, nearly every measurable 
metric related to CME bitcoin futures contracts, which trade and settle 
like other cash-settled commodity futures contracts, has ``trended 
consistently up since launch and/or accelerated upward in the past 
year.'' \83\ For example, according to NYSE Arca, there was 
approximately $28 billion in trading in the CME bitcoin futures in 
December 2020 compared to $737 million, $1.4 billion, and $3.9 billion 
in total trading in December 2017, December 2018, and December 2019, 
respectively.\84\ Additionally, CME bitcoin futures traded over $1.2 
billion per day in December 2020 and represented $1.6 billion in open 
interest compared to $115 million in December 2019.\85\ Similarly, NYSE 
Arca contends that the number of large open interest holders \86\ has 
continued to increase, even as the price of bitcoin has risen, as have 
the number of unique accounts trading CME bitcoin futures.\87\
---------------------------------------------------------------------------

    \82\ According to NYSE Arca, each contract represents five 
bitcoin and is based on the CME CF BRR. See Notice, 86 FR at 28651.
    \83\ See id.
    \84\ See id.
    \85\ See id.
    \86\ NYSE Arca represents that a large open interest holder in 
CME bitcoin futures is an entity that holds at least 25 contracts, 
which is the equivalent of 125 bitcoin. According to NYSE Arca, at a 
price of approximately $30,000 per bitcoin on December 31, 2020, 
more than 80 firms had outstanding positions of greater than $3.8 
million in CME bitcoin futures. See id. at 28652 n.60.
    \87\ See id. at 28652.
---------------------------------------------------------------------------

    In addition, NYSE Arca states that there was approximately $4.321 
billion in trading volume and $2.582 billion in open interest in CME 
bitcoin futures as of April 7, 2021, compared to $433 million in 
trading volume and $238 million in open interest as of February 26, 
2020.\88\ NYSE Arca states that the growth of the CME bitcoin futures 
market has coincided with similar growth in the bitcoin spot market and 
that the market for CME bitcoin futures is rapidly approaching the size 
of markets for other commodity interests.\89\ NYSE Arca concludes that, 
as the CME bitcoin futures market continues to develop and more closely 
resemble other commodity futures markets, it can be reasonably expected 
that the relationship between the CME bitcoin futures market and the 
bitcoin spot market will behave similar to other future/spot market 
relationships, including periods where a lead-lag relationship between 
the CME bitcoin futures market and bitcoin spot market exists.\90\
---------------------------------------------------------------------------

    \88\ See id. at 28657.
    \89\ See id.
    \90\ See id. at 28657-58.
---------------------------------------------------------------------------

    NYSE Arca also asserts that the CME is the primary market for 
bitcoin futures and ``compares favorably'' with other markets that were 
deemed to be markets of significant size in past precedents.\91\ In 
particular, NYSE Arca states that the bitcoin market is similar to the 
gold market and that the CME is similarly situated to COMEX with 
respect to gold ETPs.\92\ Namely, the Exchange states that, when the 
Commission approved the listing of gold ETPs and other commodity trust 
ETPs, rather than requiring surveillance-sharing agreements with the 
relevant OTC markets, the Commission relied on the surveillance-sharing 
agreements between the listing exchange and the regulated markets for 
trading futures on the underlying commodity.\93\
---------------------------------------------------------------------------

    \91\ See id. at 28656.
    \92\ See id. at 28656-57.
    \93\ See id. at 28657.
---------------------------------------------------------------------------

    In addition, NYSE Arca asserts that a would-be manipulator of 
bitcoin prices would be reasonably likely to do so through the CME 
bitcoin futures market in order to take advantage of the leverage 
inherent in trading futures contracts.\94\ The Exchange argues that, 
given the tremendous growth in the spot bitcoin market since 2019, the 
chances of succesfully deploying a manipulative scheme are ``increased 
exponentially'' if a would-be manipulator can affect the CME bitcoin 
futures market (and thus the spot market) by posting only the minimum 
margin required.\95\ According to the Exchange, because the CME bitcoin 
futures market is the ``cheapest'' route to manipulate bitcoin, it is 
highly likely such manipulators would attempt to do so there rather 
than any spot market.\96\
---------------------------------------------------------------------------

    \94\ See id. at 28657.
    \95\ See id. The Exchange states that, as of April 12, 2021, the 
initial margin required in connection with CME bitcoin futures for 
the April 2021 contract ranged from 42% to 38%. See id. at 28657 
n.88.
    \96\ See id. at 28657.
---------------------------------------------------------------------------

    Further, NYSE Arca maintains that, due to the decentralized nature 
of the bitcoin network, bitcoin manipulators would be much more likely 
to attempt to manipulate a limited number of futures markets rather 
than attempt simultaneous executions on potentially dozens of different 
spot bitcoin platforms.\97\ NYSE Arca states that, even if a would-be 
manipulator does attempt to manipulate bitcoin across platforms, such a 
scheme would also necessarily include some attempt to manipulate the 
price of bitcoin futures, including the CME.\98\
---------------------------------------------------------------------------

    \97\ See id.
    \98\ See id.
---------------------------------------------------------------------------

    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. The Exchange's assertions about the size 
of the CME bitcoin futures market, including the trading volume and 
open interest of, and number of large open interest holders and unique 
accounts trading in, CME bitcoin futures, and its assertion that the 
CME is the primary market for bitcoin futures, do not establish that 
the CME bitcoin futures market is of significant size. While NYSE Arca 
provides data showing absolute growth in the size of the CME bitcoin 
futures market, it provides no data relative to the concomitant growth 
in either the bitcoin spot markets or other bitcoin futures markets 
(including unregulated futures markets). Morover, even if the CME has 
grown in relative size, as the Commission has previously articulated, 
the interpretation of the term ``market of significant size'' or 
``significant market'' depends on the interrelationship between the 
market with which the listing exchange has a surveillance-sharing 
agreement and the proposed ETP.\99\ NYSE Arca's recitation of data 
reflecting the size of the CME bitcoin futures market and its 
unsupported claim that the CME is the primary

[[Page 3876]]

market for bitcoin futures are not sufficient to establish an 
interrelationship between the CME bitcoin futures market and the 
proposed ETP.\100\
---------------------------------------------------------------------------

    \99\ See USBT Order, 85 FR at 12611.
    \100\ See id. at 12612.
---------------------------------------------------------------------------

    Further, the econometric evidence in the record for this proposal 
also does not support the conclusion that an interrelationship exists 
between the CME bitcoin futures market and the bitcoin spot market such 
that it is reasonably likely that a person attempting to manipulate the 
proposed ETP would also have to trade on the CME bitcoin futures market 
to successfully manipulate the proposed ETP.\101\ The Exchange asserts 
that the relationship between the CME bitcoin futures market and the 
bitcoin spot market ``can be reasonably expected'' to behave similarly 
to other future/spot market relationships, including periods where a 
lead-lag relationship between the CME bitcoin futures market and 
bitcoin spot market exists,\102\ but the only data NYSE Arca presents 
to support its ``expectation'' is the growth in and current size of the 
CME bitcoin futures market. NYSE Arca's ``expectation'', without any 
supporting evidence or analysis, constitutes an insufficient basis for 
approving a proposed rule change in circumstances where, as here, the 
Exchange's assertion would form such an integral role in the 
Commission's analysis.\103\
---------------------------------------------------------------------------

    \101\ See id. at 12611. Listing exchanges have attempted to 
demonstrate such an ``interrelationship'' by presenting the results 
of various econometric ``lead-lag'' analyses. The Commission 
considers such analyses to be central to understanding whether it is 
reasonably likely that a would-be manipulator of the ETP would need 
to trade on the CME bitcoin futures market. See id. at 12612.
    \102\ See Notice, 86 FR at 28657-58.
    \103\ See Susquehanna, 866 F.3d at 447.
---------------------------------------------------------------------------

    Likewise, the Exchange's comparison of the bitcoin spot market to 
the gold spot market is inapposite and does not establish the CME 
bitcoin futures market's significance. First, the Exchange provides no 
data or analysis to support its assertion that the bitcoin market is 
similar to the gold market or that the COMEX gold futures market is 
similar to the CME bitcoin futures market. Further, as discussed above, 
for the commodity-trust ETPs approved to date for listing and trading, 
including where the underlying commodity is gold, there has been in 
every case at least one significant, regulated market for trading 
futures.\104\ The Exchange's unsupported assertions that the bitcoin 
market is similar to the gold market or that the CME is similarly 
situated to COMEX with respect to futures does not establish that the 
CME bitcoin futures market is a significant market or that it is 
reasonably likely that an actor attempting to manipulate the price of 
the proposed ETP's assets would have to trade in the CME bitcoin 
futures market.
---------------------------------------------------------------------------

    \104\ See Winklevoss Order, 83 FR at 37594.
---------------------------------------------------------------------------

    The Exchange also asserts that it is ``highly likely'' that would-
be manipulators of bitcoin prices would attempt to do so in the CME 
bitcoin futures market because it is the ``cheapest'' route to 
manipulate bitcoin.\105\ However, the only data the Exchange provides 
to support its assertion is the initial margin requirement for CME 
bitcoin futures as of April 12, 2021.\106\ The Exchange does not 
provide any additional data or analysis to support its conclusions or 
any examples that would demonstrate that such assertions are 
reasonable. Furthermore, the Exchange does not provide any information 
on the margin requirements for bitcoin futures markets other than the 
CME. As stated above, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\107\
---------------------------------------------------------------------------

    \105\ See Notice, 86 FR at 28657.
    \106\ See supra note 95.
    \107\ See supra note 44.
---------------------------------------------------------------------------

    Indeed, although the Exchange implies that the ``cheapest'' route 
to manipulate bitcoin price is through CME bitcoin futures because of 
its margin requirement, other bitcoin futures platforms require even 
less margin than the CME. For example, the contract specifications for 
a bitcoin futures contract on BitMex (XBTUSD) specifies a maximum 
initial leverage ratio of 100-to-1,\108\ meaning that the required 
margin for bitcoin futures on BitMex is 1% of the notional value of the 
open contract position versus, according to the Exchange, 38% to 42% 
for CME bitcoin futures.\109\ Thus, applying the Exchange's logic, it 
would appear to be ``cheaper,'' i.e., require less capital commitment, 
to manipulate the bitcoin price using bitcoin futures traded on BitMex 
or other unregulated futures platforms rather than the CME, given the 
lower margin requirements on such unregulated platforms. The Exchange, 
however, does not address the significance of other futures markets' 
lower margin requirements to its assertion that a person attempting to 
manipulate the ETP would also have to trade on the CME bitcoin futures 
market.
---------------------------------------------------------------------------

    \108\ See https://www.bitmex.com/app/contract/XBTUSD (last 
visited Dec. 1, 2021). Other unregulated platforms that trade 
bitcoin futures have similar margin requirements. For example, 
Deribit has an initial minimum margin requirement of 1% for bitcoin 
futures. See https://legacy.deribit.com/pages/docs/futures (last 
visited Dec. 1, 2021). Binance has an initial minimum margin 
requirement of 2% for trading bitcoin futures. See https://www.binance.com/en/support/announcement/34801a0c405a4b058f9ae18a1a34cad3 (last visited Dec. 1, 2021).
    \109\ See Notice, 86 FR at 28657 n.88.
---------------------------------------------------------------------------

    Similarly, although the Exchange asserts that, due to the 
decentralized nature of the bitcoin network, bitcoin manipulators would 
be more likely to attempt to manipulate a limited number of bitcoin 
futures markets rather than attempt simultaneous executions on 
potentially dozens of different bitcoin spot platforms, NYSE Arca 
provides no evidence to back up its assertions. The Exchange also 
claims that, even if a would-be manipulator does attempt to manipulate 
bitcoin across platforms, such a scheme would also necessarily include 
some attempts to manipulate the price of bitcoin futures, including the 
CME. The Exchange, however, does not explain, or provide supporting 
evidence to establish, why one must ``necessarily'' conclude such 
outcome, especially as it relates to the CME. In other words, even 
assuming that the Commission concurred with the Exchange's premise that 
a would-be manipulator would attempt to manipulate the ETP by trading 
on the bitcoin futures market, the Exchange does not explain why such 
manipulator would do so specifically on the CME.
    NYSE Arca also asserts that the CME, if not alone as the sole 
market for bitcoin futures, then together with the Constituent 
Platforms, is a ``market of significant size.'' The Exchange argues 
that, because CME bitcoin futures are cash-settled by reference to a 
final settlement price based on the CME CF BRR, anyone attempting to 
manipulate the CME CF BRR would have to trade on the Constituent 
Platforms, and the resulting manipulative trading patterns would be 
detectable by the Benchmark Administrator and the CME because of the 
CME's and the Benchmark Administrator's oversight of the Constituent 
Platforms.\110\ The Exchange, moreover, states that each Constituent 
Platform must: (1) Enter into a data sharing agreement with the CME; 
(2) cooperate with inquiries and investigations of regulators and the 
Benchmark Administrator; and (3) submit each of its clients to its 
Know-

[[Page 3877]]

Your Customer (``KYC'') procedures.\111\ As a result, in the case of 
any suspicious trades, the CME and the Exchange would be able to 
discover all material trade information, including the identities of 
the customers placing the trades.\112\
---------------------------------------------------------------------------

    \110\ See Notice, 86 FR at 28657. The Exchange states that 
because the CME CF BRR is based solely on price data from the 
Constituent Platforms, manipulating the CME CF BRR must necessarily 
entail manipulating the price data at one or more Constituent 
Platforms. The Exchange also states that the CME CF BRR calculation 
agent receives trading data from the Constituent Platforms through 
its API. See id. at 28657 nn.85-86.
    \111\ See id. at 28657.
    \112\ See id.
---------------------------------------------------------------------------

    The Commission is not persuaded by the Exchange's arguments. The 
Exchange does not explain the significance of its assertions, including 
its assertion that the CME and the Benchmark Administrator would be 
able to detect manipulative trading patterns on the Constituent 
Platforms, in the overall analysis of whether 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 ETP.\113\ In other words, even assuming that the 
Commission concurs with NYSE Arca's assertion that the CME and the 
Benchmark Administrator can detect manipulation on the Constituent 
Platforms because CME bitcoin futures are cash-settled by reference to 
the CME CF BRR, the Exchange does not establish how this aids in the 
determination that either the CME bitcoin futures market, alone or 
together with the Constituent Platforms, is a significant market with 
respect to bitcoin. Moreover, the Exchange provides nothing to support 
its assertion that, to manipulate the CME CF BRR, the would-be 
manipulator would have to trade on the Constituent Platforms. Similar 
to the discussion above with respect to Constituent Platforms and the 
Reference Rate, the Exchange has not assessed the possible influence 
that spot platforms not included among the Constituent Platforms would 
have on the spot price of bitcoin on the Constituent Platforms and 
bitcoin prices used to calculate the CME CF BRR. To the extent that 
trading on platforms not directly used to calculate the CME CF BRR 
affects prices on the Constituent Platforms, transactions on those 
other platforms could affect the CME CF BRR.
---------------------------------------------------------------------------

    \113\ As further discussed below, the Commission finds that the 
level of regulation of the Constituent Platforms, including the 
oversight by the CME and the Benchmark Administrator, is not 
equivalent to the obligations, authority, and oversight of national 
securities exchanges or futures exchanges and therefore is not an 
appropriate substitute. See infra notes 118-132 and accompanying 
text.
---------------------------------------------------------------------------

    Furthermore, even assuming that the record does establish that the 
CME, together with the Constituent Platforms, is a market of 
significant size, NYSE Arca acknowledges that it has not entered into a 
surveillance-sharing agreement with any of the Constituent 
Platforms.\114\ 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 manipulative misconduct.\115\ Although 
NYSE Arca states that the Constituent Platforms must enter into a data 
sharing agreement with the CME, and the CME and NYSE Arca, by virtue of 
their ISG membership, have a comprehensive surveillance-sharing 
agreement with one another, NYSE Arca does not have a surveillance 
sharing agreement with any of the Constituent Platforms.\116\ 
Accordingly, the Exchange fails to provide a basis for the Commission 
to conclude that it has entered into a comprehensive surveillance-
sharing agreement with a regulated market of significant size relating 
to the underlying assets.\117\
---------------------------------------------------------------------------

    \114\ See Notice, 86 FR at 28656 n.72.
    \115\ See Winklevoss Order, 83 FR at 37549.
    \116\ See Notice, 86 FR at 28657.
    \117\ See, e.g., USBT Order, 85 FR at 12614-15.
---------------------------------------------------------------------------

    The Constituent Platforms, moreover, are not ``regulated.'' The 
level of regulation of the Constituent Platforms is not equivalent to 
the obligations, authority, and oversight of national securities 
exchanges or futures exchanges and therefore is not an appropriate 
substitute.\118\ National securities exchanges are required to have 
rules that are ``designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.'' \119\ Moreover, national securities exchanges must file 
proposed rules with the Commission regarding certain material aspects 
of their operations,\120\ and the Commission has the authority to 
disapprove any such rule that is not consistent with the requirements 
of the Exchange Act.\121\ Thus, national securities exchanges are 
subject to Commission oversight of, among other things, their 
governance, membership qualifications, trading rules, disciplinary 
procedures, recordkeeping, and fees.\122\
---------------------------------------------------------------------------

    \118\ See id., 85 FR at 12603-05.
    \119\ See 15 U.S.C. 78f(b)(5).
    \120\ 17 CFR 240.19b-4(a)(6)(i).
    \121\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires 
national securities exchanges to register with the Commission and 
requires an exchange's registration to be approved by the 
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), 
requires national securities exchanges to file proposed rules 
changes with the Commission and provides the Commission with the 
authority to disapprove proposed rule changes that are not 
consistent with the Exchange Act. Designated contract markets 
(``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.
    \122\ See Winklevoss Order, 83 FR at 37597.
---------------------------------------------------------------------------

    The Constituent Platforms, on the other hand, have none of these 
requirements (none are registered as a national securities 
exchange).\123\ While the Exchange asserts that the Constituent 
Platforms must submit their clients to KYC procedures, such 
requirements are fundamentally different from the Exchange Act's 
requirements for national securities exchanges.\124\ In addition, 
although 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.\125\ 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.\126\ 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.'' \127\
---------------------------------------------------------------------------

    \123\ See 15 U.S.C. 78e, 78f.
    \124\ See USBT Order, 85 FR at 12603. The Commission has 
previously concluded that such KYC policies and procedures do not 
serve as a substitute for, and are not otherwise dispositive in the 
analysis regarding the importance of having a surveillance sharing 
agreement with a regulated market of significant size relating to 
bitcoin. For example, 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 a national 
securities exchange. See USBT Order, 85 FR at 12603 n.101.
    \125\ See USBT Order, 85 FR at 12604.
    \126\ See id.
    \127\ See Winklevoss Order, 83 FR at 37599 n.288 (quoting CFTC 
Backgrounder on Oversight of and Approach to Virtual Currency 
Futures Markets (Jan. 4, 2018), at 1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf).
---------------------------------------------------------------------------

    And while NYSE Arca asserts that the Constituent Platforms must 
enter into data sharing agreements with the CME, it does not provide 
any information on the scope, terms, or enforcement authority for such 
data sharing

[[Page 3878]]

agreements. Nor has NYSE Arca put any information in the record as to 
whether and how it would use or enforce such agreements. Moreover, such 
agreements are contractual in nature and do not satisfy the regulatory 
requirements or purposes of national securities exchanges and the 
Exchange Act. The CME (and the CFTC, as discussed above) does not have 
regulatory authority over the spot bitcoin trading platforms,\128\ and, 
while the CME is regulated by the CFTC,\129\ the CFTC's regulations do 
not extend to the Constituent Platforms by virtue of such contractual 
agreements.
---------------------------------------------------------------------------

    \128\ See supra notes 125-127 and accompanying text.
    \129\ See supra note 80 and accompanying text.
---------------------------------------------------------------------------

    Further, although NYSE Arca states that the Constituent Platforms 
must cooperate with inquiries and investigations of regulators and the 
Benchmark Administrator, it does not describe the scope of such 
requirements or what authority the Benchmark Administrator or 
regulators would have to compel the platforms' cooperation or provide 
meaningful supporting evidence of the extent of such cooperation. 
Moreover, the Benchmark Administrator does not itself exercise 
governmental regulatory authority. Rather, the Benchmark Administrator 
is a registered, privately-held company in England.\130\ The Benchmark 
Administrator's relationship with the Constituent Platforms is based on 
their participation in the determination of reference rates, such as 
the Reference Rate. While the Benchmark Administrator is regulated by 
the UK FCA as a benchmark administrator, the UK FCA's regulations do 
not extend to the Constituent Platforms by virtue of their trade prices 
serving as input data underlying the Reference Rate.\131\
---------------------------------------------------------------------------

    \130\ See https://blog.cfbenchmarks.com/legal/ (stating that the 
Benchmark Administrator is authorized and regulated by the UK 
Financial Conduct Authority (``UK FCA'') as a registered Benchmark 
Administrator (FRN 847100) under the EU benchmark regulation, and 
further noting that the Benchmark Administrator 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 
is one of the Constituent Platforms underlying the Reference Rate.
    \131\ See USBT Order, 85 FR at 12604. The Benchmark 
Administrator is also not required to apply certain provisions of EU 
benchmark regulation to the Constituent Platforms because the 
Reference Rate's input data is not ``contributed.'' See Benchmark 
Statement, at 5 available at https://docs-cfbenchmarks.s3.amazonaws.com/CME+CF+Benchmark+Statement.pdf.
---------------------------------------------------------------------------

    Further, the oversight performed by the Benchmark Administrator 
serves a fundamentally different purpose as compared to the regulation 
of national securities exchanges and the requirements of the Exchange 
Act. While the Commission recognizes that the Benchmark Administrator's 
oversight functions may be important for ensuring the integrity of the 
Reference Rate, such requirements do not imbue either the Benchmark 
Administrator or the Constituent Platforms with regulatory authority 
similar to that the Exchange Act confers upon self-regulatory 
organizations such as national securities exchanges.\132\
---------------------------------------------------------------------------

    \132\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    The Commission accordingly concludes that the information provided 
in the record does not establish a reasonable likelihood that a would-
be manipulator of the proposed ETP would have to trade on the CME 
bitcoin futures market to successfully manipulate the proposed ETP. 
Moreover, NYSE Arca has not entered into a surveillance-sharing 
agreement with the Constituent Platforms, and the Constituent Platforms 
are not ``regulated'' markets. Accordingly, the information in the 
record also does not establish that the CME bitcoin futures market, 
alone or together with the Constituent Platforms, is a ``market of 
significant size'' with respect to the proposed ETP or that NYSE Arca 
has a surveillance-sharing agreement with such a market.

(b) Whether It Is Unlikely That Trading in the Proposed ETP Would be 
the Predominant Influence on Prices in the CME Bitcoin Futures Market 
or Constituent Platforms

    The second prong in establishing whether a market (or group of 
markets) constitutes a ``market of significant size'' is the 
determination that it is unlikely that trading in the proposed ETP 
would be the predominant influence on prices in that market.\133\ As 
discussed above, NYSE Arca asserts that CME, either alone as the sole 
market for bitcoin futures or as a group of markets together with the 
Constituent Platforms, satisfies this prong.\134\
---------------------------------------------------------------------------

    \133\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at 
12596-97.
    \134\ See Notice, 86 FR at 28656.
---------------------------------------------------------------------------

    First, NYSE Arca asserts that trading in the Shares would not be 
the predominant force on prices in the CME bitcoin futures market (or 
spot market) because of the significant volume in the CME bitcoin 
futures market, the size of bitcoin's market capitalization, which is 
approximately $1 trillion, and the significant liquidity available in 
the spot market.\135\
---------------------------------------------------------------------------

    \135\ See id. at 28657.
---------------------------------------------------------------------------

    To support its assertion about the growth of the CME bitcoin 
futures market, NYSE Arca states that there was approximately $4.321 
billion in trading volume and $2.582 billion in open interest in CME 
bitcoin futures as of April 7, 2021, compared to $433 million in 
trading volume and $238 million in open interest as of February 26, 
2020.\136\ Based on these figures, NYSE Arca concludes that, as the CME 
bitcoin futures market continues to develop, it can be reasonably 
expected that the relationship between the bitcoin futures market and 
bitcoin spot market will behave similarly to other future/spot market 
relationships, including periods where a lead-lag relationship between 
the bitcoin futures market and bitcoin spot market exists.
---------------------------------------------------------------------------

    \136\ See id. at 28657.
---------------------------------------------------------------------------

    NYSE Arca also provides that, according to February 2021 data, the 
cost to buy or sell $5 million worth of bitcoin averages roughly 10 
basis points with a market impact of 30 basis points.\137\ For a $10 
million market order, the cost to buy or sell is roughly 20 basis 
points with a market impact of 50 basis points. Stated another way, 
NYSE Arca states that a market participant could enter a market buy or 
sell order for $10 million of bitcoin and only move the market 0.5 
percent.\138\ NYSE Arca further asserts that more strategic purchases 
or sales (such as using limit orders and executing through OTC bitcoin 
trade desks) would likely have less obvious impact on the market, which 
is consistent with MicroStrategy, Tesla, and Square being able to 
collectively purchase billions of dollars in bitcoin.\139\ Thus, NYSE 
Arca concludes that the combination of CME bitcoin futures' important 
role in price discovery, the overall size of the bitcoin market, and 
the ability for market participants (including authorized participants 
creating and redeeming in-kind with the Trust) to buy or sell large 
amounts of bitcoin without significant market impact, will help prevent 
the Shares from becoming the predominant force on pricing in either the 
bitcoin spot or the CME bitcoin futures market.\140\
---------------------------------------------------------------------------

    \137\ See id. at 28658. According to NYSE Arca, these statistics 
are based on samples of bitcoin liquidity in U.S. dollars (excluding 
stablecoins or Euro liquidity) based on executable quotes on 
Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, 
and OKCoin during February 2021. See id. at 28658 n.89.
    \138\ See id. at 28658.
    \139\ See id.
    \140\ See id.
---------------------------------------------------------------------------

    NYSE Arca also provides the results from a study conducted by the 
Benchmark Administrator (``CF

[[Page 3879]]

Benchmarks Analysis'') to determine the extent of ``slippage'' (i.e., 
the difference between the expected price of a trade and the price at 
which the trade was actually executed), which the Exchange states 
offers further evidence that trading in the Shares is unlikely to be 
the predominant influence in the bitcoin spot market.\141\ According to 
NYSE Arca, the CF Benchmarks Analysis simulated the purchase of 50 
bitcoins a day for 686 days (an amount chosen specifically to replicate 
hypothetical trades by an ETP) and found that the maximum amount of 
slippage on a particular day was 0.3%, with the remainder of values 
between 0% and 0.15%.\142\ According to NYSE Arca, the CF Benchmarks 
Analysis demonstrates that the slippage in the study could be described 
as having been largely negligible or, at most, minor during the 
observation period.\143\
---------------------------------------------------------------------------

    \141\ See id. at 28658 & n.90 (citing CF Benchmarks, ``An 
Analysis of the Suitability of the CME CF BRR for the Creation of 
Regulated Financial Products,'' December 2020 (``CF Benchmarks 
Analysis''), available at: https://docsend.com/view/kizk7rarzaba6jxf).
    \142\ See id. at 28658.
    \143\ See id.
---------------------------------------------------------------------------

    The record does not demonstrate that it is unlikely that trading in 
the proposed ETP would be the predominant influence on prices in the 
CME bitcoin futures market or the spot market, including the 
Constituent Platforms.\144\ As the Commission has already addressed and 
rejected one of the bases of NYSE Arca's assertion--CME bitcoin 
futures' role in price discovery \145\--it will only address below the 
other bases--the overall size of, and the impact of buys and sells on, 
the bitcoin market and slippage.
---------------------------------------------------------------------------

    \144\ See USBT Order, 85 FR at 12613-14. The Exchange asserts 
that the CME, either alone as the sole market for the bitcoin 
futures or as a group of markets together with the Constituent 
Platforms, is a ``market of significant size.'' As noted above, the 
second prong in establishing whether a market (or group of markets) 
constitutes a ``market of significant size'' is the determination 
that it is unlikely that trading in the proposed ETP would be the 
predominant influence on prices in that market. The Exchange states 
throughout its filing that trading in the Shares would not be the 
predominant influence on prices in the CME bitcoin futures market or 
spot market rather than the Constituent Platforms. See supra notes 
135, 140, and 141 and accompanying text. Since the Constituent 
Platforms are a subset of the the bitcoin spot platforms currently 
in existence, the Commission's analysis with respect to the spot 
market applies equally to the Constituent Platforms.
    \145\ See supra notes 102-103 and accompanying text.
---------------------------------------------------------------------------

    NYSE Arca's assertions about the potential effect of trading in the 
Shares on the CME bitcoin futures market and bitcoin spot market are 
general and conclusory, repeating the aforementioned trade volume of 
the CME bitcoin futures market, and providing general statements about 
the size and liquidity of the bitcoin spot market as well as the market 
impact of a large transaction in the spot market, without any analysis 
or evidence to support these assertions. For example, there is no limit 
on the amount of mined bitcoin that the Trust may hold. Yet NYSE Arca 
does not provide any information on the expected growth in the size of 
the Trust and the resultant increase in the amount of bitcoin held by 
the Trust over time, or on the overall expected number, size, and 
frequency of creations and redemptions--or how any of the foregoing 
could (if at all) influence prices in the CME bitcoin futures market or 
the spot market.
    Moreover, in the Trust's Registration Statement, the Sponsor 
acknowledges that there is no limit on the number of bitcoins that the 
Trust may acquire and that the Trust itself may have an impact on the 
supply and demand of bitcoins. Specifically, the Registration Statement 
states that the if the number of bitcoins acquired by the Trust is 
large enough relative to global bitcoin supply and demand, further 
creations and redemptions of Shares could have an impact on the supply 
of and demand for bitcoins and that such an impact could affect the 
price of bitcoin in U.S. dollars.\146\ Although the Trust's 
Registration Statement concedes that the Trust could impact the price 
of bitcoin, NYSE Arca does not address this in the proposal or discuss 
how impacting the price of bitcoin can be consistent with the assertion 
that the Shares are unlikely to be the predominant influence on the 
prices of the CME bitcoin futures market or the spot market. Thus, the 
Commission cannot conclude, based on NYSE Arca's statements alone and 
absent any evidence or analysis in support of NYSE Arca's assertions, 
that it is unlikely that trading in the ETP would be the predominant 
influence on prices in the CME bitcoin futures market or the spot 
market.
---------------------------------------------------------------------------

    \146\ See Registration Statement at 21.
---------------------------------------------------------------------------

    The Commission also is not persuaded by NYSE Arca's assertions 
about the minimal effect a large market order to buy or sell bitcoin 
would have on the bitcoin market.\147\ While NYSE Arca concludes by way 
of a $10 million market order example that buying or selling large 
amounts of bitcoin would have insignificant market impact, the 
conclusion does not analyze the extent of any impact on the CME bitcoin 
futures market, the market that the Exchange, in the proposal, argues 
is the significant market under consideration. Even assuming, however, 
that NYSE Arca is suggesting that a single $10 million order in bitcoin 
would have immaterial impact on the prices in the CME bitcoin futures 
market, this prong of the ``market of significant size'' determination 
concerns the influence on prices from trading in the proposed ETP, 
which is broader than just trading by the proposed ETP. While 
authorized participants of the Trust might only transact in the bitcoin 
spot market as part of their creation or redemption of Shares, the 
Shares themselves would be traded in the secondary market on NYSE Arca. 
The record does not discuss the expected number or trading volume of 
the Shares, or establish the potential effect of the Shares' trade 
prices on CME bitcoin futures prices, or the spot market prices. For 
example, NYSE Arca does not provide any data or analysis about the 
potential effect the quotations or trade prices of the Shares might 
have on market-maker quotations in CME bitcoin futures contracts and 
whether those effects would constitute a predominant influence on the 
prices of those futures contracts.
---------------------------------------------------------------------------

    \147\ See Notice, 86 FR at 28659 (``For a $10 million market 
order, the cost to buy or sell is roughly 20 basis points with a 
market impact of 50 basis points. Stated another way, a market 
participant could enter a market buy or sell order for $10 million 
of bitcoin and only move the market 0.5%.'').
---------------------------------------------------------------------------

    Similarly, although NYSE Arca cites to the CF Benchmark Analysis as 
evidence that trading in the Shares is unlikely to be the predominant 
influence in the bitcoin spot market, NYSE Arca states that the 
simulation in the analysis was done specifically to replicate 
hypothetical trades by an ETP. The study further states that the 
simulation was performed to ``represent a large [b]itcoin trade of the 
kind that institutional traders might need to undertake for a major 
client, or that an issuer of a financial product (such as an ETF or a 
derivative) would be required to execute in order to facilitate trading 
of that product.'' \148\ As discussed above, this prong concerns the 
influence on prices from trading in the proposed ETP. Under the 
proposal, the Shares themselves would be traded in the secondary market 
on NYSE Arca, and the CF Benchmark Analysis does not discuss the effect 
of the trade prices of ETP shares or other bitcoin derivatives on the 
bitcoin market, or more importantly, CME bitcoin futures market. 
Likewise, the CF Benchmark Analysis only analyzes the prices of 
hypothetical bitcoin spot transactions as compared to the CME CF BRR--a 
spot price index--and does not analyze the

[[Page 3880]]

extent of any impact of such hypothetical transactions on prices in the 
CME bitcoin futures market specifically.
---------------------------------------------------------------------------

    \148\ See CF Benchmark Analysis, at 16.
---------------------------------------------------------------------------

    Thus, because NYSE Arca has not provided sufficient information to 
establish both prongs of the ``market of significant size'' 
determination, the Commission cannot conclude that the CME bitcoin 
futures market, either alone as the sole market for bitcoin futures or 
as a group of markets together with the Constituent Platforms, is a 
``market of significant size'' such that NYSE Arca would be able to 
rely on a surveillance-sharing agreement with the CME to provide 
sufficient protection against fraudulent and manipulative acts and 
practices.
    The requirements of Section 6(b)(5) of the Exchange Act apply to 
the rules of national securities exchanges. Accordingly, the relevant 
obligation for a comprehensive surveillance-sharing agreement with a 
regulated market of significant size, or other means to prevent 
fraudulent and manipulative acts and practices that are sufficient to 
justify dispensing with the requisite surveillance-sharing agreement, 
resides with the listing exchange. Because there is insufficient 
evidence in the record demonstrating that NYSE Arca has satisfied this 
obligation, the Commission cannot approve the proposed ETP for listing 
and trading on NYSE Arca.

C. Whether NYSE Arca Has Met Its Burden To Demonstrate That the 
Proposal Is Designed To Protect Investors and the Public Interest

    NYSE Arca contends that, if approved, the proposed ETP would 
protect investors and the public interest. However, the Commission must 
consider these potential benefits in the broader context of whether the 
proposal meets each of the applicable requirements of the Exchange 
Act.\149\ 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.
---------------------------------------------------------------------------

    \149\ See Winklevoss Order, 83 FR at 37601. See also 
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at 
43941; USBT Order, 85 FR at 12615.
---------------------------------------------------------------------------

    NYSE Arca asserts that, with the growth of U.S. investor exposure 
to bitcoin through OTC bitcoin funds, so too has grown the potential 
risk to U.S. investors.\150\ Specifically, NYSE Arca argues that 
premium and discount volatility, high fees, insufficient disclosures, 
and technical hurdles are exposing U.S. investors to risks that could 
potentially be eliminated through access to a bitcoin ETP.\151\ As 
such, the Exchange believes that approving this proposal (and 
comparable proposals) represents an opportunity for U.S. investors to 
gain exposure to bitcoin in a regulated and transparent exchange-traded 
vehicle that limits risks by: (i) Reducing premium and discount 
volatility; (ii) reducing management fees through meaningful 
competition; (iii) providing an alternative to custodying spot bitcoin; 
and (iv) reducing risks associated with investing in operating 
companies that are imperfect proxies for bitcoin exposure.\152\
---------------------------------------------------------------------------

    \150\ See Notice, 86 FR at 28649.
    \151\ See id. NYSE Arca states that while it understands the 
Commission's previous focus on potential manipulation of a bitcoin 
ETP in prior disapproval orders, it believes that ``such concerns 
have been sufficiently mitigated and may be outweighed by the 
growing and quantifiable investor protection concerns related to OTC 
[b]itcoin [f]unds.'' See id.
    \152\ See id.
---------------------------------------------------------------------------

    According to NYSE Arca, OTC bitcoin funds are generally designed to 
provide exposure to bitcoin in a manner similar to the Shares. However, 
unlike the Shares, NYSE Arca states that ``OTC [b]itcoin [f]unds are 
unable to freely offer creation and redemption in a way that 
incentivizes market participants to keep their shares trading in line 
with their NAV and, as a result, shares of OTC [b]itcoin [f]unds 
frequently trade at a price that is out-of-line with the value of their 
assets held.'' \153\ NYSE Arca represents that, historically, OTC 
bitcoin funds have traded at a significant premium to NAV.\154\ 
Although the Exchange concedes that trading at a premium or a discount 
is not unique to OTC bitcoin funds and not inherently problematic, NYSE 
Arca believes that it raises certain investor protections issues. 
First, according to NYSE Arca, investors are buying shares of a fund 
for a price that is not reflective of the per share value of the fund's 
underlying assets.\155\ Second, according to NYSE Arca, because only 
accredited investors, generally, are able to purchase shares directly 
from the issuing fund at NAV (in exchange for either cash or bitcoin) 
without having to pay the premium or sell into the discount, these 
investors that are allowed to purchase directly with the fund are able 
to hedge their bitcoin exposure as needed to satisfy holding 
requirements and collect on the premium or discount opportunity.\156\ 
NYSE Arca argues, therefore, that the premium in OTC bitcoin funds 
essentially creates a transfer in value from retail investors to more 
sophisticated investors.\157\ NYSE Arca further asserts that the risk 
of manipulation of a bitcoin ETP is also present in and potentially 
magnified by OTC bitcoin funds.\158\
---------------------------------------------------------------------------

    \153\ See id. NYSE Arca also states that, unlike the Shares, 
because OTC bitcoin funds are not listed on an exchange, they are 
not subject to the same transparency and regulatory oversight by a 
listing exchange. NYSE Arca further asserts that the existence of a 
surveillance-sharing agreement between NYSE Arca and the CME bitcoin 
futures market would result in increased investor protections for 
the Shares compared to OTC bitcoin funds. See id. at 28649 n.44.
    \154\ See id. at 28649. NYSE Arca further represents that the 
inability to trade in line with NAV may at some point result in OTC 
bitcoin funds trading at a discount to their NAV, which has occurred 
more recently with respect to one prominent OTC bitcoin fund. 
According to NYSE Arca, while that has not historically been the 
case, and it is not clear whether such discounts will continue, such 
a prolonged, significant discount scenario would give rise to nearly 
identical potential issues related to trading at a premium. See id. 
at 28649 n.45.
    \155\ See id. at 28650.
    \156\ See id.
    \157\ See id.
    \158\ See id.
---------------------------------------------------------------------------

    NYSE Arca also asserts that exposure to bitcoin through an ETP 
presents advantages for retail investors compared to buying spot 
bitcoin directly.\159\ NYSE Arca asserts that, without the advantages 
of an ETP, an individual retail investor holding bitcoin through a 
cryptocurrency trading platform lacks protections.\160\ NYSE Arca 
explains that, typically, retail platforms hold most, if not all, 
retail investors' bitcoin in ``hot'' (internet-connected) storage and 
do not make any commitments to indemnify retail investors or to observe 
any particular cybersecurity standard.\161\ Meanwhile, a retail 
investor holding spot bitcoin directly in a self-hosted wallet may 
suffer from inexperience in private key management (e.g., insufficient 
password protection, lost key, etc.), which could cause them to lose 
some or all of their bitcoin holdings.\162\ NYSE Arca represents that 
the Bitcoin Custodian would, by contrast, use ``cold'' (offline) 
storage to hold private keys, meet a certain degree of cybersecurity 
measures and operational best practices, be highly experienced in 
bitcoin custody, and be accountable for failures.\163\ In addition, 
NYSE Arca explains that retail investors would be able to hold the 
Shares in traditional brokerage accounts, which provide SIPC protection 
if a brokerage firm fails.\164\ Thus, with respect to custody of the 
Trust's bitcoin assets, NYSE Arca concludes that, compared to

[[Page 3881]]

owning spot bitcoin directly, the Trust presents advantages from an 
investment protection standpoint for retail investors.\165\
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    \159\ See id.
    \160\ See id.
    \161\ See id.
    \162\ See id.
    \163\ See id. at 28650-51. NYSE Arca represents that the Sub-
Adviser has previously conducted substantial due diligence on the 
capabilities of the Bitcoin Custodian. See id. at 28651 n.54.
    \164\ See id. at 28651.
    \165\ See id.
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    NYSE Arca further asserts that a number of operating companies 
engaged in unrelated businesses have recently announced investments as 
large as $1.5 billion in bitcoin.\166\ Without access to bitcoin ETPs, 
NYSE Arca argues that retail investors seeking investment exposure to 
bitcoin may purchase shares in these companies in order to gain the 
exposure to bitcoin that they seek.\167\ NYSE Arca contends that such 
operating companies, however, are imperfect bitcoin proxies and provide 
investors with partial bitcoin exposure paired with additional risks 
associated with whichever operating company they decide to 
purchase.\168\ NYSE Arca concludes that investors seeking bitcoin 
exposure through publicly traded companies are gaining only partial 
exposure to bitcoin, without the full benefit of the risk disclosures 
and associated investor protections that come from the securities 
registration process.\169\
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    \166\ See id.
    \167\ See id.
    \168\ See id.
    \169\ See id.
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    NYSE Arca also states that investors in many other countries, 
including Canada, are able to use more traditional exchange listed and 
traded products to gain exposure to bitcoin, disadvantaging U.S. 
investors and leaving them with riskier, more expensive, and less 
regulated means of getting bitcoin exposure.\170\ NYSE Arca anticipates 
that with the addition of more bitcoin ETPs in non-U.S. jurisdictions 
expected to grow, such risks will only continue to grow.\171\
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    \170\ See Notice, 86 FR at 28649. NYSE Arca represents that the 
Purpose Bitcoin ETF, a retail bitcoin-based ETP launched in Canada, 
reportedly reached $421.8 million in assets under management in two 
days and has achieved $993 million in assets as of April 14, 2021, 
demonstrating the demand for a North American market listed bitcoin 
ETP. NYSE Arca contends that the demand for the Purpose Bitcoin ETF 
is driven primarily by investors' desire to have a regulated and 
accessible means of exposure to bitcoin. NYSE Arca further 
represents that the Purpose Bitcoin ETF offers a class of units that 
is U.S. dollar denominated, which could appeal to U.S. investors. 
NYSE Arca argues that without an approved bitcoin ETP in the U.S. as 
a viable alternative, U.S. investors could seek to purchase these 
shares in order to get access to bitcoin exposure. NYSE Arca 
believes that, given the separate regulatory regime and the 
potential difficulties associated with any international litigation, 
such an arrangement would create more risk exposure for U.S. 
investors than they would otherwise have with a U.S. exchange-listed 
ETP. See id.
    \171\ See id.
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    NYSE Arca further asserts that several funds registered under the 
Investment Company Act of 1940 (``1940 Act'') have effective 
registration statements that contemplate bitcoin exposure through a 
variety of means, including through investments in bitcoin futures 
contacts and through OTC bitcoin funds and that it is anticipated that 
other 1940 Act funds will begin to pursue bitcoin through other 
means.\172\ NYSE Arca asserts that these funds that have already 
invested in bitcoin instruments have no reported issues regarding 
custody, valuation, or manipulation of the instruments held by these 
funds.\173\ NYSE Arca argues that, while these funds offer investors 
some means of exposure to bitcoin, the current offerings fall short of 
giving investors an accessible, regulated product that provides 
concentrated exposure to bitcoin.\174\
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    \172\ See id.
    \173\ See id.
    \174\ See id.
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    In essence, NYSE Arca asserts that the risky nature of a direct 
investment in the underlying bitcoin and the unregulated markets on 
which bitcoin and OTC bitcoin funds trade compel approval of the 
proposed rule change. In addition, NYSE Arca essentially argues that, 
unlike other regulated products available, the Shares would offer more 
concentrated exposure to bitcoin and should therefore be approved.
    The Commission disagrees. Pursuant to Section 19(b)(2) of the 
Exchange Act, the Commission must approve a proposed rule change filed 
by a national securities exchange if it finds that the proposed rule 
change is consistent with the applicable requirements of the Exchange 
Act--including the requirement under Section 6(b)(5) that the rules of 
a national securities exchange be designed to prevent fraudulent and 
manipulative acts and practices--and it must disapprove the filing if 
it does not make such a finding.\175\ Thus, even if a proposed rule 
change purports to protect investors from a particular type of 
investment risk, such as the susceptibility of an asset to loss or 
theft, or to provide more efficient exposure to an asset class than 
another product, the proposed rule change may still fail to meet the 
requirements under the Exchange Act.\176\
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    \175\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C. 
78s(b)(2)(C).
    \176\ See SolidX Order, 82 FR at 16259; WisdomTree Order, 86 FR 
at 69334.
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    Here, even if it were true that, compared to trading in unregulated 
bitcoin spot markets or OTC bitcoin funds, trading a bitcoin-based ETP 
on a national securities exchange provides some additional protection 
to investors, or that the Shares would provide more concentrated 
exposure to bitcoin than other products on the market, 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.\177\ As explained above, for bitcoin-based ETPs, the Commission 
has consistently required that the listing exchange have a 
comprehensive surveillance-sharing agreement with a regulated market of 
significant size related to bitcoin, or demonstrate that other means to 
prevent fraudulent and manipulative acts and practices are sufficient 
to justify dispensing with the requisite surveillance-sharing 
agreement. The listing exchange has not met that requirement here. 
Therefore the Commission is unable to find that the proposed rule 
change is consistent with the statutory standard.
---------------------------------------------------------------------------

    \177\ See supra note 149. The Commission notes that the proposed 
rule change does not relate to a product regulated under the 1940 
Act. The Commission considers the proposed rule change on its own 
merits and under the standards applicable to it. Namely, with 
respect to this proposed rule change, the Commission must apply the 
standards as provided by Section 6(b)(5) of the Exchange Act, which 
it has applied in connection with its orders considering previous 
proposals to list bitcoin-based commodity trusts and bitcoin-based 
trust issued receipts.
---------------------------------------------------------------------------

    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.\178\
---------------------------------------------------------------------------

    \178\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, NYSE Arca has not met its burden 
of demonstrating that the proposal is consistent with Exchange Act 
Section 6(b)(5),\179\ and, accordingly, the Commission must disapprove 
the proposal.\180\
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    \179\ 15 U.S.C. 78f(b)(5).
    \180\ In disapproving the proposed rule change the Commission 
has considered its impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
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D. Other Comments

    The Commission received a comment letter that addressed the general 
nature and value of bitcoin.\181\ Ultimately, however, additional 
discussion of this topic is unnecessary, as it does not bear

[[Page 3882]]

on the basis for the Commission's decision to disapprove the proposal.
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    \181\ See letter from Sam Ahn, dated June 4, 2021.
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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 is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to a national 
securities exchange, and in particular, with Section 6(b)(5) of the 
Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act, that proposed rule change SR-NYSEArca-2021-37 be, and 
hereby is, disapproved.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-01384 Filed 1-24-22; 8:45 am]
BILLING CODE 8011-01-P