[Federal Register Volume 87, Number 25 (Monday, February 7, 2022)]
[Notices]
[Pages 6903-6906]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02433]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94126; File No. SR-NYSEArca-2021-89]


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

February 1, 2022.
    On October 14, 2021, NYSE Arca, Inc. (``NYSE Arca'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to list and trade shares (``Shares'') of the 
Bitwise Bitcoin ETP 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 November 3, 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. 93445 (Oct. 28, 
2021), 86 FR 60695 (``Notice''). No comments have been received on 
the proposed rule change.
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    On December 15, 2021, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\5\ This order institutes proceedings under Section 19(b)(2)(B) 
of the Act \6\ to determine whether to approve or disapprove the 
proposed rule change.
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 93790, 86 FR 72300 
(Dec. 21, 2021). The Commission designated February 1, 2022, as the 
date by which it should approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal

    As described in more detail in the Notice,\7\ the Exchange proposes 
to list and trade the Shares of the Trust under NYSE Arca Rule 8.201-E, 
which governs the listing and trading of Commodity-Based Trust Shares 
on the Exchange.
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    \7\ See Notice, supra note 3.
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    The investment objective of the Trust is to seek to provide 
exposure to the value of bitcoin held by the Trust, less the expenses 
of the Trust's operations.\8\

[[Page 6904]]

The Shares will represent units of undivided beneficial ownership of 
the Trust.\9\ Under normal circumstances, the Trust's only asset will 
be bitcoin, and, under limited circumstances, cash.\10\ The Trust will 
not use derivatives that may subject the Trust to counterparty and 
credit risks.\11\
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    \8\ See id. at 60696. Bitwise Investment Advisers, LLC 
(``Sponsor'') is the sponsor of the Trust, and Delaware Trust 
Company is the trustee. The Trust will engage a third party 
custodian to maintain custody of the Trust's bitcoin assets. The 
Trust also will engage a third party service provider to serve as 
the administrator (``Administrator'') and transfer agent of the 
Trust. See id.
    \9\ See id. at 60699.
    \10\ See id. at 60696. The Trust may sell bitcoin and 
temporarily hold cash as part of a liquidation of the Trust or to 
pay certain extraordinary expenses not assumed by the Sponsor. 
According to the Exchange, the Trust also may, from time to time, 
passively receive, by virtue of holding bitcoin, certain additional 
digital assets or rights to receive such digital assets through a 
fork of the Blockchain or an airdrop of assets. See id. n.12.
    \11\ See id. at 60696.
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    The Trust's net asset value (``NAV'') and NAV per Share will be 
determined by the Administrator once each Exchange trading day as of 
4:00 p.m. E.T., or as soon thereafter as practicable, by reference to 
the CF Bitcoin-Dollar US Settlement Price (``CME US Reference 
Rate'').\12\ The Administrator will calculate the NAV by multiplying 
the number of bitcoin held by the Trust by the CME US Reference Rate 
for such day, and subtracting the accrued but unpaid expenses and 
liabilities of the Trust.\13\ The CME US Reference Rate is a daily 
reference rate of the U.S. dollar price of one bitcoin, calculated at 
4:00 p.m. E.T.\14\
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    \12\ See id. at 60696, 60699.
    \13\ See id. at 60699.
    \14\ The Exchange states that the CME US Reference Rate utilizes 
the same methodology as the CME CF Bitcoin Reference Rate, which is 
calculated at 4:00 p.m. London time and is used to settle bitcoin 
futures on the CME. See id. at 60696 n.11; 60698-99.
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    The CME US Reference Rate aggregates during a calculation window 
the trade flow of several spot bitcoin trading platforms into the U.S. 
dollar price of one bitcoin as of its calculation time. The current 
constituent bitcoin platforms of the CME US Reference Rate are 
Bitstamp, Coinbase, Gemini, itBit, and Kraken (``Constituent 
Platforms''). In calculating the CME US Reference Rate, the methodology 
creates a joint list of certain trade prices and sizes from the 
Constituent Platforms. The methodology then divides this list into a 
number of equally sized time intervals, and it calculates the volume-
weighted median trade price for each of those intervals. The CME US 
Reference Rate is the equally weighted average of the volume-weighted 
medians of all intervals.\15\
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    \15\ See id. at 60699.
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    The Trust will provide website disclosure of its holdings 
daily.\16\ In addition, each trading day, the Exchange will calculate 
and disseminate an intraday trust value (``ITV'') every 15 seconds 
during the NYSE Arca Core Trading Session.\17\ The ITV will be 
calculated throughout the trading day by using the prior day's holdings 
at close of business and the most recently reported price level of the 
CME Bitcoin Real Time Price \18\ as reported by Bloomberg, L.P., or 
another reporting service, or another price of bitcoin derived from 
updated bids and offers indicative of the spot price of bitcoin.\19\
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    \16\ See id. at 60715.
    \17\ See id. at 60699. The ITV will also be widely disseminated 
by one or more major market data vendors during the NYSE Arca Core 
Trading Session. See id.
    \18\ The CME Bitcoin Real Time Price is a continuous real-time 
bitcoin price index published by the CME Group and Crypto Facilities 
Ltd. using data from the Constituent Platforms. See id.
    \19\ See id.
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    The Trust will create and redeem Shares from time to time, but only 
in one or more Creation Units. A Creation Unit will initially consist 
of at least 25,000 Shares, but may be subject to change.\20\ The Trust 
will process all creations and redemptions in-kind, and accrue all 
ordinary fees in bitcoin (rather than cash), as a way of seeking to 
ensure that the Trust holds the desired amount of bitcoin-per-share. 
The Trust will not purchase or sell bitcoin, other than if the Trust 
liquidates or must pay expenses not contractually assumed by the 
Sponsor. Instead, financial institutions authorized to create and 
redeem Shares (``Authorized Participants'') will deliver, or cause to 
be delivered, bitcoin to the Trust in exchange for Shares of the Trust, 
and the Trust will deliver bitcoin to Authorized Participants when 
those Authorized Participants redeem Shares of the Trust.\21\
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    \20\ See id.
    \21\ See id. at 60696.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2021-89 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \22\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed below. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, as 
described below, the Commission seeks and encourages interested persons 
to provide comments on the proposed rule change.
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    \22\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\23\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with Section 6(b)(5) 
of the Act, which requires, among other things, that the rules of a 
national securities exchange be ``designed to prevent fraudulent and 
manipulative acts and practices'' and ``to protect investors and the 
public interest.'' \24\
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    \23\ Id.
    \24\ 15 U.S.C. 78f(b)(5).
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    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in the Notice,\25\ in addition to any other comments they may wish to 
submit about the proposed rule change. In particular, the Commission 
seeks comment on the following questions and asks commenters to submit 
data where appropriate to support their views:
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    \25\ See Notice, supra note 3.
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    1. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
bitcoin markets, the bitcoin markets' susceptibility to manipulation, 
and thus the suitability of bitcoin as an underlying asset for an 
exchange-traded product (``ETP'')?
    2. The Exchange asserts that ``the exclusive use of in-kind 
creations, redemptions and fee accruals, in all situations except when 
the Trust is required to liquidate or to pay extraordinary expenses, 
provides long-term investors in the Trust with redundant but strong 
protection.'' \26\ The Exchange further asserts that ``[t]he in-kind 
structure ensures that the Trust maintains the appropriate amount of 
bitcoin-per-Share in all scenarios, regardless of the U.S. dollar 
calculation of NAV or the CME US Reference Rate.'' \27\ What are 
commenters' views of these assertions?
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    \26\ See id. at 60700.
    \27\ See id.
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    3. The Exchange asserts that, ``through extensive statistical 
analysis and careful

[[Page 6905]]

consideration of third-party evaluations of these markets, the Sponsor 
has demonstrated that the CME [bitcoin futures] Market leads the 
bitcoin spot market and the unregulated bitcoin futures market, such 
that it is reasonably likely that a person attempting to manipulate the 
ETP would also have to trade on the CME [bitcoin futures] Market.'' 
\28\ The Exchange further asserts ``both existing academic literature 
and the Sponsor's own studies show that the CME [bitcoin futures] 
Market leads price discovery relative to the bitcoin spot market.'' 
\29\ Do commenters agree or disagree?
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    \28\ See id. at 60704.
    \29\ See id. at 60716.
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     Specifically, what are commenters' views of the Sponsor's 
methodology used to arrive at this conclusion? The Exchange describes 
how the Sponsor used data from the CME Group and Coin Metrics, 
supplemented with data from CoinAPI, to perform pairwise information 
share/component share (``IS/CS'') price discovery analysis and pairwise 
time-shift lead-lag (``TSLL'') analysis between the CME bitcoin futures 
market and 10 bitcoin spot markets and seven unregulated futures 
markets.\30\ What are commenters' views on, for example, the Sponsor's 
choices for, and level of explanation of: The sources for the tick-
level trade data; the aggregation (if any) the Sponsor performed on the 
tick-level trade data; the spot and unregulated futures trading 
platforms the Sponsor included in its pairwise analyses; the particular 
IS/CS and TSLL paradigms used to perform its pairwise analyses; the 
full-period and monthly results of its pairwise analyses; the 
statistical significance of the results; and the sensitivity of the 
results to the Sponsor's methodological choices?
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    \30\ See id. at 60704-11.
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     What are commenters' views on how the Commission should 
weigh the Sponsor's pairwise results compared to the previous academic 
and industry lead-lag studies that the Sponsor cites? \31\ What are 
commenters' views on the accuracy of the Sponsor's summaries of such 
past studies?
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    \31\ See id. at 60705-07.
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     What are commenters' views on the robustness of the 
Sponsor's two-dimensional, pairwise results? Do commenters believe the 
Exchange has adequately addressed the extent of any relationship 
between prices on unregulated bitcoin futures markets and the CME 
bitcoin futures market, the bitcoin spot markets, and/or the 
Constituent Platforms, or where price formation occurs when the 
entirety of bitcoin futures markets, not just the CME, is considered?
     What are commenters' views on whether the Sponsor's lead-
lag results sufficiently demonstrate 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? Do 
commenters believe that the Exchange has adequately explained and/or 
demonstrated how the Sponsor's market-level, statistical results 
provide sufficient evidence of the likely trading behavior of a would-
be manipulator?
    4. The Exchange asserts that ``the Sponsor's analysis shows that 
trading in the Trust is unlikely to become the predominant influence on 
prices in the CME [bitcoin futures] Market, even when assuming 
aggressive estimates of first-year flows of $4.7 billion and average 
daily trading volume of $143 million.'' \32\ Do commenters agree or 
disagree?
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    \32\ See id. at 60711.
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     Specifically, what are commenters' views of the Exchange's 
estimates of the Trust's first-year flows? What are commenters' views 
of the methodology used to arrive at those estimates? \33\ Do 
commenters agree with the Exchange that ``it is unlikely that a bitcoin 
ETP will experience the highest first-year flows in history,'' \34\ and 
that the 2020 inflows to the Grayscale Bitcoin Trust (GBTC) of $4.7 
billion is an ``aggressive'' working estimate for first-year flows into 
a new bitcoin ETP? \35\
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    \33\ See id. at 60711-12.
    \34\ See id. at 60711.
    \35\ See id. at 60712.
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     The Exchange describes how the Sponsor correlated the 
daily and weekly flows into GBTC with the corresponding daily or weekly 
price of bitcoin (calculated using the 4:00 p.m. E.T. bitcoin reference 
rate from Coin Metrics), and concludes that ``there is no meaningful 
relationship between daily and weekly flows into GBTC and changes in 
the price of bitcoin.'' \36\ What are commenters' views on the data 
sources used, methodology selected, and results obtained by the 
Sponsor? The Exchange states that the Sponsor concluded from this 
analysis that ``it is unlikely that the aggressive estimate of first-
year flows into a bitcoin ETP ($4.7 billion) would cause it to become 
the predominant influence on prices in the CME [bitcoin futures] 
Market.'' \37\ What are commenters' views on how well the Sponsor's 
analysis of the historical correlation between GBTC inflows and the 
spot price of bitcoin predicts the future impact of inflows into the 
proposed ETP on prices in the CME bitcoin futures market?
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    \36\ See id. at 60712-13.
    \37\ See id. at 60713.
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     What are commenters' views of the Exchange's estimate of 
the likely average daily trading volume of the Shares ($143 million)? 
What are commenters' views on the methodology used to arrive at that 
estimate (which was based on an assessment of GBTC's and SPDR Gold 
(GLD)'s ratios of average daily trading volume to assets under 
management)? \38\ Do commenters agree with the Exchange that $143 
million is an ``aggressive'' working estimate for average daily trading 
volume of a new bitcoin ETP? \39\
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    \38\ See id. at 60713-14.
    \39\ See id. at 60714.
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     The Exchange states that ``[g]iven that the average daily 
trading volume of the CME [bitcoin futures] Market in 2020 was 174% 
higher at $392 million than the Sponsor's aggressive estimate of a new 
bitcoin ETP's potential trading volume of $143 million, the Sponsor 
found that it is unlikely that trading in a new bitcoin ETP will cause 
such ETP to become the predominant influence on prices in the CME 
[bitcoin futures] Market.'' \40\ Do commenters agree or disagree with 
the Sponsor's conclusion? Why or why not?
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    \40\ See id. at 60715.
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III. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposal. In particular, the Commission invites the written 
views of interested persons concerning whether the proposal is 
consistent with Section 6(b)(5) or any other provision of the Act, and 
the rules and regulations thereunder. Although there do not appear to 
be any issues relevant to approval or disapproval that would be 
facilitated by an oral presentation of views, data, and arguments, the 
Commission will consider, pursuant to Rule 19b-4, any request for an 
opportunity to make an oral presentation.\41\
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    \41\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).

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[[Page 6906]]

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by February 28, 2022. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 14, 2022.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NYSEArca-2021-89 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2021-89. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NYSEArca-2021-89 and should be submitted 
by February 28, 2022. Rebuttal comments should be submitted by March 
14, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02433 Filed 2-4-22; 8:45 am]
BILLING CODE 8011-01-P