[Federal Register Volume 87, Number 28 (Thursday, February 10, 2022)]
[Notices]
[Pages 7889-7891]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-02781]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94151; File No. SR-NYSEArca-2021-90]


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 Grayscale Bitcoin Trust (BTC) 
Under NYSE Arca Rule 8.201-E

February 4, 2022.
    On October 19, 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 Grayscale 
Bitcoin Trust (BTC) (``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 8, 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. 93504 (Nov. 2, 
2021), 86 FR 61804 (``Notice''). Comments received on the proposed 
rule change are available at: https://www.sec.gov/comments/sr-nysearca-2021-90/srnysearca202190.htm.
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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. 93788, 86 FR 72291 
(Dec. 21, 2021). The Commission designated February 6, 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 for the value of the 
Shares (based on bitcoin per Share) to reflect the value of the 
bitcoins held by the Trust, as determined by reference to the ``Index 
Price,'' less the Trust's expenses and other liabilities.\8\ The 
``Index Price'' is the U.S. dollar value of a bitcoin as represented by 
the ``Index,'' calculated at 4:00 p.m., New York time, on each business 
day.\9\ According to the Exchange, the Index Provider develops, 
calculates, and publishes the Index on

[[Page 7890]]

a continuous basis using the volume-weighted price at certain bitcoin 
spot trading platforms selected by the Index Provider. As of June 30, 
2021, the bitcoin spot trading platforms included in the Index were: 
Coinbase Pro, Bitstamp, Kraken, and LMAX Digital (``Constituent 
Platforms''). The Index applies an algorithm to the 24-hour volume-
weighted average price of bitcoin on the Constituent Platforms 
calculated on a per second basis.\10\ To calculate volume weighted 
price, the weighting algorithm is applied to the price and volume of 
all inputs for the immediately preceding 24-hour period at 4:00 p.m., 
New York time, on the trade date.\11\ The Trust's assets will consist 
solely of bitcoins; Incidental Rights; \12\ IR Virtual Currency; \13\ 
proceeds from the sale of bitcoins, Incidental Rights, and IR Virtual 
Currency pending use of such cash for payment of Additional Trust 
Expenses \14\ or distribution to the shareholders; and any rights of 
the Trust pursuant to any agreements, other than the Trust Agreement, 
to which the Trust is a party. Each Share represents a proportional 
interest, based on the total number of Shares outstanding, in each of 
the Trust's assets as determined in the case of bitcoin by reference to 
the Index Price, less the Trust's expenses and other liabilities (which 
include accrued but unpaid fees and expenses).\15\
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    \8\ See id. at 61805. Grayscale Investments, LLC (``Sponsor'') 
is the sponsor of the Trust and is a wholly-owned subsidiary of 
Digital Currency Group, Inc. Delaware Trust Company (``Trustee'') is 
the trustee of the Trust, the custodian for the Trust is Coinbase 
Custody Trust Company, LLC (``Custodian''), and the distribution and 
marketing agent for the Trust is Genesis. The Trust operates 
pursuant to a trust agreement (``Trust Agreement'') between the 
Sponsor and the Trustee. See id.
    \9\ See id. at 61810. The index provider for the Trust is 
TradeBlock, Inc. (``Index Provider''). See id. at 61805. While the 
Exchange does not name the Index that the Trust would use to value 
the bitcoin held by the Trust, the Exchange provides that the value 
of the Index, as well as additional information regarding the Index, 
may be found at: https://tradeblock.com/markets/index/xbx. See id. 
at 61817.
    \10\ See id. at 61809.
    \11\ See id.
    \12\ ``Incidental Rights'' are rights to acquire, or otherwise 
establish dominion and control over, any virtual currency or other 
asset or right, which rights are incident to the Trust's ownership 
of bitcoins and arise without any action of the Trust, or of the 
Sponsor or Trustee on behalf of the Trust. See id. at 61805 n.9.
    \13\ ``IR Virtual Currency'' is any virtual currency tokens, or 
other asset or right, acquired by the Trust through the exercise 
(subject to the applicable provisions of the Trust Agreement) of any 
Incidental Right. See id. at 61805 n.10.
    \14\ ``Additional Trust Expenses'' are any expenses incurred by 
the Trust in addition to the Sponsor's fee that are not Sponsor-paid 
expenses. See id. at 61805 n.11.
    \15\ See id. at 61805, 61807.
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    On each business day at 4:00 p.m., New York time, or as soon 
thereafter as practicable, the Sponsor will evaluate the bitcoin held 
by the Trust and calculate and publish the ``Digital Asset Holdings'' 
\16\ of the Trust. 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., E.T.). The IIV will be 
calculated using the same methodology as the Digital Asset Holdings of 
the Trust, specifically by using the prior day's closing Digital Asset 
Holdings per Share as a base and updating that value during the NYSE 
Arca Core Trading Session to reflect changes in the value of the 
Trust's Digital Asset Holdings during the trading day.\17\ In addition, 
according to the Exchange, ``each investor will have access to the 
current Digital Asset Holdings of the Trust through the Trust's 
website, as well as from one or more major market data vendors.'' \18\
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    \16\ The Exchange does not define this term in the proposed rule 
change. Additional information about the calculation of the Digital 
Asset Holdings can be found in the Notice. See id. at 61807.
    \17\ See id. at 61817.
    \18\ See id.
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    The Trust will issue Shares to authorized participants from time to 
time, but only in one or more Baskets (each ``Basket'' being a block of 
100 Shares).\19\ The creation of Baskets will be made only in exchange 
for the delivery to the Trust of the number of whole and fractional 
bitcoins represented by each Basket being created. The Trust may redeem 
Shares from time to time but only in Baskets. The redemption of Baskets 
requires the distribution by the Trust of the number of bitcoins 
represented by the Baskets being redeemed. The redemption of a Basket 
will be made only in exchange for the distribution by the Trust of the 
number of whole and fractional bitcoins represented by each Basket 
being redeemed.\20\
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    \19\ See id. at 61815.
    \20\ See id. at 61816.
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II. Proceedings To Determine Whether To Approve or Disapprove SR-
NYSEArca-2021-90 and Grounds for Disapproval under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \21\ 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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    \21\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\22\ 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.'' \23\
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    \22\ Id.
    \23\ 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,\24\ 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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    \24\ See Notice, supra note 3.
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    1. What are commenters' views on whether the proposed Trust and 
Shares would be susceptible to manipulation? What are commenters' views 
generally on whether the Exchange's proposal is designed to prevent 
fraudulent and manipulative acts and practices? What are commenters' 
views generally with respect to the liquidity and transparency of the 
bitcoin markets, the bitcoin markets' susceptibility to manipulation, 
and thus the suitability of bitcoin as an underlying asset for an 
exchange-traded product?
    2. The Exchange asserts that ``the Index represents a novel means 
to prevent fraud and manipulation from impacting a reference price for 
[b]itcoin and that it offers protections beyond those that exist in 
traditional commodity markets or equity markets.'' \25\ Specifically, 
the Exchange states that the Index Price is determined through a 
process in which trade data is cleansed and compiled ``in such a manner 
as to algorithmically reduce the impact of anomalistic or manipulative 
trading . . . by adjusting the weight of each data input based on price 
deviation relative to the observable set, as well as recent and long-
term trading volume at each venue relative to the observable set'' \26\ 
and that the Index Price only includes data from executed trades on 
Constituent [Platforms] that charge trading fees to its users ``in 
order to attach a real, quantifiable cost to any manipulation 
attempts.'' \27\ The Exchange concludes that, ``[b]y referencing 
multiple trading venues and

[[Page 7891]]

weighting them based on trade activity, . . . the impact of any 
potential fraud, manipulation or anomalous trading activity occurring 
on any single venue is reduced.'' \28\ What are commenters' views of 
these assertions and conclusion?
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    \25\ See id. at 61812.
    \26\ See id. at 61808-09.
    \27\ See id. at 61809-10.
    \28\ See id.
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    3. The Exchange also asserts that, although the global spot bitcoin 
market ``is not inherently resistant to fraud and manipulation, the 
Index serves as a means sufficient to mitigate the impact of instances 
of fraud and manipulation on a reference price for [b]itcoin.'' \29\ 
Are the characteristics of the Index that the Exchange identifies 
sufficient to support a determination that the proposal to list and 
trade the Shares is designed to protect investors and the public 
interest and is consistent with the other applicable requirements of 
Section 6(b)(5) of the Act?
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    \29\ See id. at 61818.
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    4. The Exchange asserts that the Sponsor ``conducted a lead/lag 
analysis of per minute data comparing the [b]itcoin futures maker, as 
represented by the [Chicago Mercantile Exchange (``CME'')] futures 
market, to the [b]itcoin spot market, as represented by the Index'' and 
that ``[b]ased on this analysis, the Sponsor has concluded that there 
does not appear to be a significant lead/lag relationship between the 
two instruments for the period of November 1, 2019 to August 31, 
2021.'' \30\ What are commenters' views on this assertion?
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    \30\ See id. at 61814.
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    5. The Exchange states that, ``[a]lthough there is no significant 
lead/lag relationship'' between the bitcoin futures and the bitcoin 
spot market, ``the CME futures market represents a large, surveilled 
and regulated market.'' \31\ The Exchange also asserts that ``[g]iven 
the significant size of the CME futures markets . . . 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, since arbitrage between the derivative and spot markets would tend 
to counter an attempt to manipulate the spot market alone.'' \32\ What 
are commenters' views regarding these assertions? Do these assertions 
provide an appropriate basis for determining that the proposal is 
consistent with the applicable requirements of Section 6(b)(5) of the 
Act? Based on data provided by the Exchange, do commenters agree that 
the CME bitcoin futures market now represents a regulated market of 
significant size? \33\ What are commenters' views on whether there is a 
reasonable likelihood that a person attempting to manipulate the Shares 
would also have to trade on CME to manipulate the Shares?
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    \31\ See id.
    \32\ See id. at 61815.
    \33\ See id. at 61814-15.
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    6. The Exchange states that, if ``the Commission is open to 
reviewing and potentially approving proposals for [b]itcoin-based ETPs 
registered under the [Investment Act of 1940], then it should take a 
similar view towards proposals for [b]itcoin based ETPs registered 
under the [Securities Act of 1933], given that both products would be 
reliant on [b]itcoin's underlying price in the spot markets.'' \34\ The 
Exchange further states that ``any potential fraud or manipulation in 
the underlying [bitcoin spot market] would impact both types of ETP 
proposals.'' \35\ What are commenters' views on such assertions?
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    \34\ See id. at 61815.
    \35\ See id.
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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.\36\
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    \36\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Pub. L. 94-29 (June 4, 1975), grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposal should be approved or 
disapproved by March 3, 2022. Any person who wishes to file a rebuttal 
to any other person's submission must file that rebuttal by March 17, 
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-2021-90 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-2021-90. 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-2021-90 and should be submitted 
by March 3, 2022. Rebuttal comments should be submitted by March 17, 
2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(57).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-02781 Filed 2-9-22; 8:45 am]
BILLING CODE 8011-01-P