[Federal Register Volume 88, Number 157 (Wednesday, August 16, 2023)]
[Notices]
[Pages 55743-55775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17603]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98112; File No. SR-CboeBZX-2023-028]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 3 to, and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove, a Proposed Rule Change To 
List and Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule 
14.11(e)(4), Commodity-Based Trust Shares

August 11, 2023.
    On April 25, 2023, Cboe BZX Exchange, Inc. (``BZX'' 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 of the ARK 21Shares 
Bitcoin ETF under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. 
The proposed rule change was published for comment in the Federal 
Register on May 15, 2023.\3\ On June 15, 2023, 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\ On June 28, 2023, the Exchange 
filed Amendment No. 1 to the proposed rule change, which amended and 
replaced the proposed rule change in its entirety. On June 30, 2023, 
the Exchange filed Amendment No. 2 to the proposed rule change, which 
amended and replaced the proposed rule change, as modified by Amendment 
No. 1, in its entirety. On July 11, 2023, the Exchange filed Amendment 
No. 3 to the proposed rule change as described in Items I and II below, 
which Items have been prepared by the Exchange. Amendment No. 3 amended 
and replaced the proposed rule change, as modified by Amendment No. 2, 
in its entirety. The Commission is publishing this notice and order to 
solicit comments on the proposed rule change, as modified by Amendment 
No. 3, from interested persons and to institute proceedings pursuant to 
section 19(b)(2)(B) of the Act \6\ to determine whether to approve or 
disapprove the proposed rule change, as modified by Amendment No. 3.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 97461 (May 9, 2023), 
88 FR 31045. Comments received on the proposed rule change can be 
found at: https://www.sec.gov/comments/SR-Cboebzx-2023-028/srcboebzx2023028.htm.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 97732, 88 FR 40877 
(June 22, 2023). The Commission designated August 13, 2023, as the 
date by which the Commission shall approve or disapprove, or 
institute proceedings to determine whether to disapprove, the 
proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (the ``Exchange'' or ``BZX'') is filing 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change to list and trade shares of the ARK 21Shares Bitcoin ETF 
(the ``Trust''),\7\ under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares.
---------------------------------------------------------------------------

    \7\ The Trust was formed as a Delaware statutory trust on June 
22, 2021 and is operated as a grantor trust for U.S. federal tax 
purposes. The Trust has no fixed termination date.
---------------------------------------------------------------------------

    The text of the proposed rule change is also available on the 
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This Amendment No. 3 to SR-CboeBZX-2023-028 amends and replaces in 
its entirety the proposal as originally submitted on April 25, 2023 and 
as amended by Amendment No. 1

[[Page 55744]]

on June 28, 2023 and Amendment No. 2 on June 30, 2023. The Exchange 
submits this Amendment No. 3 in order to clarify certain points and add 
additional details to the proposal.
    The Exchange proposes to list and trade the Shares under BZX Rule 
14.11(e)(4),\8\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.9 10 21Shares US LLC is 
the sponsor of the Trust (the ``Sponsor''). The Shares will be 
registered with the Commission by means of the Trust's registration 
statement on Form S-1 (the ``Registration Statement'').\11\ As further 
discussed below, the Commission has historically approved or 
disapproved exchange filings to list and trade series of Trust Issued 
Receipts, including spot-based Commodity-Based Trust Shares, on the 
basis of whether the listing exchange has in place a comprehensive 
surveillance sharing agreement with a regulated market of significant 
size related to the underlying commodity to be held.\12\ Prior orders 
from the Commission have pointed out that in every prior approval order 
for Commodity-Based Trust Shares, there has been a derivatives market 
that represents the regulated market of significant size, generally a 
Commodity Futures Trading Commission (the ``CFTC'') regulated futures 
market.\13\ Further to this point, the Commission's prior orders have 
noted that the spot commodities and currency markets for which it has 
previously approved spot ETPs are generally unregulated and that the 
Commission relied on the underlying futures market as the regulated 
market of significant size that formed the basis for approving the 
series of Currency and Commodity-Based Trust Shares, including gold, 
silver, platinum, palladium, copper, and other

[[Page 55745]]

commodities and currencies. The Commission specifically noted in the 
Winklevoss Order that the First Gold Approval Order ``was based on an 
assumption that the currency market and the spot gold market were 
largely unregulated.'' \14\
---------------------------------------------------------------------------

    \8\ The Commission approved BZX Rule 14.11(e)(4) in Securities 
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148 
(September 6, 2011) (SR-BATS-2011-018).
    \9\ All statements and representations made in this filing 
regarding (a) the description of the portfolio, (b) limitations on 
portfolio holdings or reference assets, or (c) the applicability of 
Exchange rules and surveillance procedures shall constitute 
continued listing requirements for listing the Shares on the 
Exchange.
    \10\ The Exchange notes that two different proposals to list and 
trade shares of the Trust were disapproved by the Commission on 
March 31, 2022 and January 26, 2023. See Exchange Act Release Nos. 
94571 (March 31, 2022), 87 FR 20014 (April 6, 2022) and 96751 
(January 26, 2023), 88 FR 628 (January 31, 2023).
    \11\ See draft Registration Statement on Form S-1, dated June 
28, 2021 submitted to the Commission by the Sponsor on behalf of the 
Trust. The descriptions of the Trust, the Shares, and the Index (as 
defined below) contained herein are based, in part, on information 
in the Registration Statement. The Registration Statement is not yet 
effective and the Shares will not trade on the Exchange until such 
time that the Registration Statement is effective.
    \12\ See Securities Exchange Act Release No. 83723 (July 26, 
2018), 83 FR 37579 (August 1, 2018). This proposal was subsequently 
disapproved by the Commission. See Securities Exchange Act Release 
No. 83723 (July 26, 2018), 83 FR 37579 (August 1, 2018) (the 
``Winklevoss Order'').
    \13\ See streetTRACKS Gold Shares, Exchange Act Release No. 
50603 (Oct. 28, 2004), 69 FR 64614, 64618-19 (Nov. 5, 2004) (SR-
NYSE-2004-22) (the ``First Gold Approval Order''); iShares COMEX 
Gold Trust, Exchange Act Release No. 51058 (Jan. 19, 2005), 70 FR 
3749, 3751, 3754-55 (Jan. 26, 2005) (SR-Amex-2004-38); iShares 
Silver Trust, Exchange Act Release No. 53521 (Mar. 20, 2006), 71 FR 
14967, 14968, 14973-74 (Mar. 24, 2006) (SR-Amex-2005-072); ETFS Gold 
Trust, Exchange Act Release No. 59895 (May 8, 2009), 74 FR 22993, 
22994-95, 22998, 23000 (May 15, 2009) (SR-NYSEArca-2009-40); ETFS 
Silver Trust, Exchange Act Release No. 59781 (Apr. 17, 2009), 74 FR 
18771, 18772, 18775-77 (Apr. 24, 2009) (SR-NYSEArca-2009-28); ETFS 
Palladium Trust, Exchange Act Release No. 61220 (Dec. 22, 2009), 74 
FR 68895, 68896 (Dec. 29, 2009) (SR-NYSEArca-2009-94) (notice of 
proposed rule change included NYSE Arca's representation that 
``[t]he most significant palladium futures exchanges are the NYMEX 
and the Tokyo Commodity Exchange,'' that ``NYMEX is the largest 
exchange in the world for trading precious metals futures and 
options,'' and that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which NYMEX is a member, 
Exchange Act Release No. 60971 (Nov. 9, 2009), 74 FR 59283, 59285-
86, 59291 (Nov. 17, 2009)); ETFS Platinum Trust, Exchange Act 
Release No. 61219 (Dec. 22, 2009), 74 FR 68886, 68887-88 (Dec. 29, 
2009) (SR-NYSEArca-2009-95) (notice of proposed rule change included 
NYSE Arca's representation that ``[t]he most significant platinum 
futures exchanges are the NYMEX and the Tokyo Commodity Exchange,'' 
that ``NYMEX is the largest exchange in the world for trading 
precious metals futures and options,'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
of which NYMEX is a member, Exchange Act Release No. 60970 (Nov. 9, 
2009), 74 FR 59319, 59321, 59327 (Nov. 17, 2009)); Sprott Physical 
Gold Trust, Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 
6758, 6760 (Feb. 10, 2010) (SR-NYSEArca-2009-113) (notice of 
proposed rule change included NYSE Arca's representation that the 
COMEX is one of the ``major world gold markets,'' that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' and that NYMEX, of which COMEX is a division, is a member 
of the Intermarket Surveillance Group, Exchange Act Release No. 
61236 (Dec. 23, 2009), 75 FR 170, 171, 174 (Jan. 4, 2010)); Sprott 
Physical Silver Trust, Exchange Act Release No. 63043 (Oct. 5, 
2010), 75 FR 62615, 62616, 62619, 62621 (Oct. 12, 2010) (SR-
NYSEArca-2010-84); ETFS Precious Metals Basket Trust, Exchange Act 
Release No. 62692 (Aug. 11, 2010), 75 FR 50789, 50790 (Aug. 17, 
2010) (SR-NYSEArca-2010-56) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant gold, silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62402 (Jun. 29, 2010), 75 FR 39292, 39295, 
39298 (July 8, 2010)); ETFS White Metals Basket Trust, Exchange Act 
Release No. 62875 (Sept. 9, 2010), 75 FR 56156, 56158 (Sept. 15, 
2010) (SR-NYSEArca-2010-71) (notice of proposed rule change included 
NYSE Arca's representation that ``the most significant silver, 
platinum and palladium futures exchanges are the COMEX and the 
TOCOM'' and that NYSE Arca ``may obtain trading information via the 
Intermarket Surveillance Group,'' of which COMEX is a member, 
Exchange Act Release No. 62620 (July 30, 2010), 75 FR 47655, 47657, 
47660 (Aug. 6, 2010)); ETFS Asian Gold Trust, Exchange Act Release 
No. 63464 (Dec. 8, 2010), 75 FR 77926, 77928 (Dec. 14, 2010) (SR-
NYSEArca-2010-95) (notice of proposed rule change included NYSE 
Arca's representation that ``the most significant gold futures 
exchanges are the COMEX and the Tokyo Commodity Exchange,'' that 
``COMEX is the largest exchange in the world for trading precious 
metals futures and options,'' and that NYSE Arca ``may obtain 
trading information via the Intermarket Surveillance Group,'' of 
which COMEX is a member, Exchange Act Release No. 63267 (Nov. 8, 
2010), 75 FR 69494, 69496, 69500-01 (Nov. 12, 2010)); Sprott 
Physical Platinum and Palladium Trust, Exchange Act Release No. 
68430 (Dec. 13, 2012), 77 FR 75239, 75240-41 (Dec. 19, 2012) (SR-
NYSEArca-2012–111) (notice of proposed rule change included 
NYSE Arca's representation that ``[f]utures on platinum and 
palladium are traded on two major exchanges: The New York Mercantile 
Exchange ... and Tokyo Commodities Exchange'' and that NYSE Arca 
``may obtain trading information via the Intermarket Surveillance 
Group,'' of which COMEX is a member, Exchange Act Release No. 68101 
(Oct. 24, 2012), 77 FR 65732, 65733, 65739 (Oct. 30, 2012)); APMEX 
Physical--1 oz. Gold Redeemable Trust, Exchange Act Release No. 
66930 (May 7, 2012), 77 FR 27817, 27818 (May 11, 2012) (SR-NYSEArca- 
2012-18) (notice of proposed rule change included NYSE Arca's 
representation that NYSE Arca ``may obtain trading information via 
the Intermarket Surveillance Group,'' of which COMEX is a member, 
and that gold futures are traded on COMEX and the Tokyo Commodity 
Exchange, with a cross-reference to the proposed rule change to list 
and trade shares of the ETFS Gold Trust, in which NYSE Arca 
represented that COMEX is one of the ``major world gold markets,'' 
Exchange Act Release No. 66627 (Mar. 20, 2012), 77 FR 17539, 17542-
43, 17547 (Mar. 26, 2012)); JPM XF Physical Copper Trust, Exchange 
Act Release No. 68440 (Dec. 14, 2012), 77 FR 75468, 75469-70, 75472, 
75485-86 (Dec. 20, 2012) (SR-NYSEArca-2012-28); iShares Copper 
Trust, Exchange Act Release No. 68973 (Feb. 22, 2013), 78 FR 13726, 
13727, 13729-30, 13739-40 (Feb. 28, 2013) (SR-NYSEArca-2012-66); 
First Trust Gold Trust, Exchange Act Release No. 70195 (Aug. 14, 
2013), 78 FR 51239, 51240 (Aug. 20, 2013) (SR-NYSEArca-2013-61) 
(notice of proposed rule change included NYSE Arca's representation 
that FINRA, on behalf of the exchange, may obtain trading 
information regarding gold futures and options on gold futures from 
members of the Intermarket Surveillance Group, including COMEX, or 
from markets ``with which [NYSE Arca] has in place a comprehensive 
surveillance sharing agreement,'' and that gold futures are traded 
on COMEX and the Tokyo Commodity Exchange, with a cross-reference to 
the proposed rule change to list and trade shares of the ETFS Gold 
Trust, in which NYSE Arca represented that COMEX is one of the 
``major world gold markets,'' Exchange Act Release No. 69847 (June 
25, 2013), 78 FR 39399, 39400, 39405 (July 1, 2013)); Merk Gold 
Trust, Exchange Act Release No. 71378 (Jan. 23, 2014), 79 FR 4786, 
4786-87 (Jan. 29, 2014) (SR-NYSEArca-2013-137) (notice of proposed 
rule change included NYSE Arca's representation that ``COMEX is the 
largest gold futures and options exchange'' and that NYSE Arca ``may 
obtain trading information via the Intermarket Surveillance Group,'' 
including with respect to transactions occurring on COMEX pursuant 
to CME and NYMEX's membership, or from exchanges ``with which [NYSE 
Arca] has in place a comprehensive surveillance sharing agreement,'' 
Exchange Act Release No. 71038 (Dec. 11, 2013), 78 FR 76367, 76369, 
76374 (Dec. 17, 2013)); Long Dollar Gold Trust, Exchange Act Release 
No. 79518 (Dec. 9, 2016), 81 FR 90876, 90881, 90886, 90888 (Dec. 15, 
2016) (SR-NYSEArca-2016-84).
    \14\ See Winklevoss Order at 37592.
---------------------------------------------------------------------------

    As such, the regulated market of significant size test does not 
require that the spot bitcoin market be regulated in order for the 
Commission to approve this proposal, and precedent makes clear that an 
underlying market for a spot commodity or currency being a regulated 
market would actually be an exception to the norm. These largely 
unregulated currency and commodity markets do not provide the same 
protections as the markets that are subject to the Commission's 
oversight, but the Commission has consistently looked to surveillance 
sharing agreements with the underlying futures market in order to 
determine whether such products were consistent with the Act. With this 
in mind, the CME Bitcoin Futures market is the proper market to 
consider in determining whether there is a related regulated market of 
significant size.
    Further to this point, the Exchange notes that the Commission has 
approved proposals related to the listing and trading of funds that 
would primarily hold CME Bitcoin Futures that are registered under the 
Securities Act of 1933.\15\ In the Teucrium Approval, the Commission 
found the CME Bitcoin Futures market to be a regulated market of 
significant size as it relates to CME Bitcoin Futures, an odd 
tautological truth that is also inconsistent with prior disapproval 
orders for ETPs that would hold actual bitcoin instead of derivatives 
contracts (``Spot Bitcoin ETPs'') that use the exact same pricing 
methodology as the CME Bitcoin Futures. As further discussed below, 
both the Exchange and the Sponsor believe that this proposal and the 
included analysis are sufficient to establish that the CME Bitcoin 
Futures market represents a regulated market of significant size as it 
relates both to the CME Bitcoin Futures market and to the spot bitcoin 
market and that this proposal should be approved.
---------------------------------------------------------------------------

    \15\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR 
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5, 
2022) (collectively, with the Teucrium Approval, the ``Bitcoin 
Futures Approvals'').
---------------------------------------------------------------------------

    Finally, as discussed in greater detail below, the Trust provides 
investors interested in exposure to bitcoin with important protections 
that are not always available to investors that invest directly in 
bitcoin, including protection against insolvency, cyber attacks, and 
other risks. If U.S. investors had access to vehicles such as the Trust 
for their bitcoin investments, instead of directing their bitcoin 
investments into loosely regulated offshore vehicles (such as loosely 
regulated centralized exchanges that have since faced bankruptcy 
proceedings or other insolvencies), then countless investors would have 
protected their principal investments in bitcoin and thus benefited.
Background
    Bitcoin is a digital asset based on the decentralized, open-source 
protocol of the peer-to-peer computer network launched in 2009 that 
governs the creation, movement, and ownership of bitcoin and hosts the 
public ledger, or ``blockchain,'' on which all bitcoin transactions are 
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized 
nature of the Bitcoin Network allows parties to transact directly with 
one another based on cryptographic proof instead of relying on a 
trusted third party. The protocol also lays out the rate of issuance of 
new bitcoin within the Bitcoin Network, a rate that is reduced by half 
approximately every four years with an eventual hard cap of 21 million. 
It's generally understood that the combination of these two features--a 
systemic hard cap of 21 million bitcoin and the ability to transact 
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin 
its value.\16\ The first rule filing proposing to list an exchange-
traded product to provide exposure to bitcoin in the U.S. was submitted 
by the Exchange on June 30, 2016.\17\ At that time, blockchain 
technology, and digital assets that utilized it, were relatively new to 
the broader public. The market cap of all bitcoin in existence at that 
time was approximately $10 billion. No registered offering of digital 
asset securities or shares in an investment vehicle with exposure to 
bitcoin or any other cryptocurrency had yet been conducted, and the 
regulated infrastructure for conducting a digital asset securities 
offering had not begun to develop.\18\ Similarly, regulated U.S. 
bitcoin futures contracts did not exist. The CFTC had determined that 
bitcoin is a commodity,\19\ but had not engaged in significant 
enforcement actions in the space. The New York Department of Financial 
Services (``NYDFS'') adopted its final BitLicense regulatory framework 
in 2015, but had only approved four entities to engage in activities 
relating to virtual currencies (whether through granting a BitLicense 
or a limited-purpose trust charter) as of June 30, 2016.\20\ While the 
first over-the-counter bitcoin fund launched in 2013, public trading 
was limited and the fund had only $60 million in assets.\21\ There were 
very few, if any, traditional financial institutions engaged in the 
space, whether through investment or providing services to digital 
asset companies. In January 2018, the Staff of the Commission noted in 
a letter to the Investment Company Institute and SIFMA that it was not 
aware, at that time, of a single custodian providing fund custodial 
services for digital assets.\22\ Fast forward to today and the digital 
assets financial ecosystem, including bitcoin, has progressed 
significantly. The development of a regulated market for digital asset 
securities has significantly evolved, with market participants having 
conducted registered public offerings of both digital asset securities 
\23\ and shares

[[Page 55746]]

in investment vehicles holding bitcoin futures.\24\ Additionally, 
licensed and regulated service providers have emerged to provide fund 
custodial services for digital assets, among other services. For 
example, in February 2023, the Commission proposed to amend Rule 
206(4)-2 under the Advisers Act of 1940 (the ``custody rule'') to 
expand the scope beyond client funds and securities to include all 
crypto assets, among other assets; \25\ in May 2021, the Staff of the 
Commission released a statement permitting open-end mutual funds to 
invest in cash-settled bitcoin futures; in December 2020, the 
Commission adopted a conditional no-action position permitting certain 
special purpose broker-dealers to custody digital asset securities 
under Rule 15c3-3 under the Exchange Act (the ``Custody Statement''); 
\26\ in September 2020, the Staff of the Commission released a no-
action letter permitting certain broker-dealers to operate a non-
custodial Alternative Trading System (``ATS'') for digital asset 
securities, subject to specified conditions; \27\ in October 2019, the 
Staff of the Commission granted temporary relief from the clearing 
agency registration requirement to an entity seeking to establish a 
securities clearance and settlement system based on distributed ledger 
technology,\28\ and multiple transfer agents who provide services for 
digital asset securities registered with the Commission.\29\
---------------------------------------------------------------------------

    \16\ For additional information about bitcoin and the Bitcoin 
Network, see https://bitcoin.org/en/getting-started; https://www.fidelitydigitalassets.com/articles/addressing-bitcoin-criticisms; and https://www.vaneck.com/education/investment-ideas/investing-in-bitcoin-and-digital-assets/.
    \17\ See Winklevoss Order.
    \18\ Digital assets that are securities under U.S. law are 
referred to throughout this proposal as ``digital asset 
securities.'' All other digital assets, including bitcoin, are 
referred to interchangeably as ``cryptocurrencies'' or ``virtual 
currencies.'' The term ``digital assets'' refers to all digital 
assets, including both digital asset securities and 
cryptocurrencies, together.
    \19\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'') 
(CFTC Docket 15-29 (September 17, 2015)) (order instituting 
proceedings pursuant to sections 6(c) and 6(d) of the CEA, making 
findings and imposing remedial sanctions), in which the CFTC stated: 
``section 1a(9) of the CEA defines `commodity' to include, among 
other things, `all services, rights, and interests in which 
contracts for future delivery are presently or in the future dealt 
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See, 
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142 
(7th Cir. 1982). Bitcoin and other virtual currencies are 
encompassed in the definition and properly defined as commodities.''
    \20\ A list of virtual currency businesses that are entities 
regulated by the NYDFS is available on the NYDFS website. See 
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
    \21\ Data as of March 31, 2016 according to publicly available 
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016, 
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
    \22\ See letter from Dalia Blass, Director, Division of 
Investment Management, U.S. Securities and Exchange Commission to 
Paul Schott Stevens, President & CEO, Investment Company Institute 
and Timothy W. Cameron, Asset Management Group--Head, Securities 
Industry and Financial Markets Association (January 18, 2018), 
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
    \23\ See Prospectus supplement filed pursuant to Rule 424(b)(1) 
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \24\ See Prospectus filed by Stone Ridge Trust VI on behalf of 
NYDIG Bitcoin Strategy Fund Registration, available at: https://www.sec.gov/Archives/edgar/data/1764894/000119312519309942/d693146d497.htm.
    \25\ See Investment Advisers Act Release No. 6240 88 FR 14672 
(March 9, 2023) (Safeguarding Advisory Client Assets).
    \26\ See Securities Exchange Act Release No. 90788, 86 FR 11627 
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset 
Securities by Special Purpose Broker-Dealers).
    \27\ See letter from Elizabeth Baird, Deputy Director, Division 
of Trading and Markets, U.S. Securities and Exchange Commission to 
Kris Dailey, Vice President, Risk Oversight & Operational 
Regulation, Financial Industry Regulatory Authority (September 25, 
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \28\ See letter from Jeffrey S. Mooney, Associate Director, 
Division of Trading and Markets, U.S. Securities and Exchange 
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos 
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \29\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent 
LLC (CIK: 0001794142) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
---------------------------------------------------------------------------

    Outside the Commission's purview, the regulatory landscape has 
changed significantly since 2016, and cryptocurrency markets have grown 
and evolved as well. The market for bitcoin is approximately 100 times 
larger, having at one point reached a market cap of over $1 
trillion.\30\ According to the CME Bitcoin Futures Report, from 
February 13, 2023 through March 27, 2023, CFTC regulated bitcoin 
futures represented between $750 million and $3.2 billion in notional 
trading volume on Chicago Mercantile Exchange (``CME'') (``Bitcoin 
Futures'') on a daily basis.\31\ Open interest was over $1.4 billion 
for the entirety of the period and at one point was over $2 billion. 
The CFTC has exercised its regulatory jurisdiction in bringing a number 
of enforcement actions related to bitcoin and against trading platforms 
that offer cryptocurrency trading.\32\ As of February 14, 2023 the 
NYDFS has granted no fewer than thirty-four BitLicenses,\33\ including 
to established public payment companies like PayPal Holdings, Inc. and 
Square, Inc., and limited purpose trust charters to entities providing 
cryptocurrency custody services, including the Trust's Custodian.\34\ 
In addition, the Treasury's Office of Foreign Assets Control (``OFAC'') 
has brought enforcement actions over apparent violations of the 
sanctions laws in connection with the provision of wallet management 
services for digital assets.\35\
---------------------------------------------------------------------------

    \30\ As of February 1, 2023, the total market cap of all bitcoin 
in circulation was approximately $450 billion.
    \31\ Data sourced from the CME Bitcoin Futures Report: 30 March, 
2023, available at: https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.htm.
    \32\ The CFTC's annual report for Fiscal Year 2022 (which ended 
on September 30, 2022) noted that the CFTC completed the fiscal year 
with 18 enforcement filings related to digital assets. ``Digital 
asset actions included manipulation, a $1.7 billion fraudulent 
scheme, and a decentralized autonomous organization (DAO) failing to 
register as a SEF or FCM or to seek DCM designation.'' See CFTC FY 
2022 Agency Financial Report, available at: https://www.cftc.gov/media/7941/2022afr/download. Additionally, the CFTC filed on March 
27, 2023, a civil enforcement action against the owner/operators of 
the Binance centralized digital asset trading platform, which is one 
of the largest bitcoin derivative exchanges. See CFTC Release No. 
8680-23 (March 27, 2023), available at: https://www.cftc.gov/PressRoom/PressReleases/8680-23.
    \33\ See https://www.dfs.ny.gov/virtual_currency_businesses.
    \34\ The ``Custodian'' is Coinbase Trust Company, LLC.
    \35\ See U.S. Department of the Treasury Enforcement Release: 
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent 
Violations of Multiple Sanctions Programs Related to Digital 
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf. See also U.S. 
Department of the Treasury Enforcement Release: ``Treasury Announces 
Two Enforcement Actions for over $24M and $29M Against Virtual 
Currency Exchange, Bittrex, Inc.'' (October 11, 2022) available at: 
https://home.treasury.gov/news/press-releases/jy1006. See also U.S. 
Department of Treasure Enforcement Release ``OFAC Settles with 
Virtual Currency Exchange Kraken for $362,158.70 Related to Apparent 
Violations of the Iranian Transactions and Sanctions Regulations'' 
(November 28, 2022) available at: https://home.treasury.gov/system/files/126/20221128_kraken.pdf.
---------------------------------------------------------------------------

    In addition to the regulatory developments laid out above, more 
traditional financial market participants have become more active in 
cryptocurrency: large insurance companies, asset managers, university 
endowments, pension funds, and even historically bitcoin skeptical fund 
managers have allocated to bitcoin. As noted in the Financial Stability 
Oversight Council (``FSOC'') Report on Digital Asset Financial 
Stability Risks and Regulation, ``[i]ndustry surveys suggest that the 
scale of these investments grew quickly during the boom in crypto-asset 
markets through late 2021. In June 2022, PwC estimated that the number 
of crypto-specialist hedge funds was more than 300 globally, with $4.1 
billion in assets under management. In addition, in a survey PwC found 
that 38 percent of surveyed traditional hedge funds were currently 
investing in `digital assets,' compared to 21 percent the year prior.'' 
\36\ The largest over-the-counter bitcoin fund previously filed a Form 
10 registration statement, which the Staff of the Commission reviewed 
and which took effect automatically, and is now a reporting 
company.\37\ Established companies like Tesla, Inc., MicroStrategy 
Incorporated, and Square, Inc., among others, announced substantial 
investments in bitcoin in amounts as large as $1.5 billion (Tesla) and 
$425 million (MicroStrategy). The foregoing examples demonstrate that 
bitcoin has gained mainstream usage and recognition.
---------------------------------------------------------------------------

    \36\ See the FSOC ``Report on Digital Asset Financial Stability 
Risks and Regulation 2022'' (October 3, 2022) (at footnote 26) at 
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
    \37\ See Letter from Division of Corporation Finance, Office of 
Real Estate & Construction to Barry E. Silbert, Chief Executive 
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
---------------------------------------------------------------------------

    Despite these developments, access for U.S. retail investors to 
gain exposure to bitcoin via a transparent and U.S. regulated, U.S. 
exchange-traded vehicle remains limited. Instead current options 
include: (i) facing the counter-party risk, legal uncertainty, 
technical risk, and

[[Page 55747]]

complexity associated with accessing spot bitcoin; (ii) over-the-
counter bitcoin funds (``OTC Bitcoin Funds'') with high management fees 
and potentially volatile premiums and discounts; \38\ (iii) purchasing 
shares of operating companies that they believe will provide proxy 
exposure to bitcoin with limited disclosure about the associated risks; 
\39\ or (iv) purchasing Bitcoin Futures ETFs, as defined below, which 
represent a sub-optimal structure for long-term investors that will 
cost them significant amounts of money every year compared to Spot 
Bitcoin ETPs, as further discussed below. Meanwhile, investors in many 
other countries, including Canada and Brazil, are able to use more 
traditional exchange listed and traded products (including exchange-
traded funds holding physical bitcoin) to gain exposure to bitcoin. 
Similarly, investors in Switzerland and across Europe have access to 
Exchange Traded Products (issued by 21Shares, among others) which trade 
on regulated exchanges and provide exposure to a broad array of spot 
crypto assets. U.S. investors, by contrast, are left with fewer and 
more risky means of getting bitcoin exposure, as described above.\40\
---------------------------------------------------------------------------

    \38\ The premium and discount for OTC Bitcoin Funds is known to 
move rapidly. For example, over the period of 12/21/20 to 1/21/21, 
the premium for the largest OTC Bitcoin Fund went from 40.18% to 
2.79%. While the price of bitcoin appreciated significantly during 
this period and NAV per share increased by 41.25%, the price per 
share increased by only 3.58%. This means that investors are buying 
shares of a fund that experiences significant volatility in its 
premium and discount outside of the fluctuations in price of the 
underlying asset. Even operating within the normal premium and 
discount range, it's possible for an investor to buy shares of an 
OTC Bitcoin Fund only to have those shares quickly lose 10% or more 
in dollar value excluding any movement of the price of bitcoin. That 
is to say--the price of bitcoin could have stayed exactly the same 
from market close on one day to market open the next, yet the value 
of the shares held by the investor decreased only because of the 
fluctuation of the premium. As more investment vehicles, including 
mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest 
option for a buy and hold strategy for such vehicles is often an OTC 
Bitcoin Fund, meaning that even investors that do not directly buy 
OTC Bitcoin Funds can be disadvantaged by extreme premiums (or 
discounts) and premium volatility.
    \39\ A number of operating companies engaged in unrelated 
businesses--such as Tesla (a car manufacturer) and MicroStrategy (an 
enterprise software company)--have announced investments as large as 
$5.3 billion in bitcoin. Without access to bitcoin exchange-traded 
products, retail investors seeking investment exposure to bitcoin 
may end up purchasing shares in these companies in order to gain the 
exposure to bitcoin that they seek. In fact, mainstream financial 
news networks have written a number of articles providing investors 
with guidance for obtaining bitcoin exposure through publicly traded 
companies (such as MicroStrategy, Tesla, and bitcoin mining 
companies, among others) instead of dealing with the complications 
associated with buying spot bitcoin in the absence of a bitcoin ETP. 
See e.g., ``7 public companies with exposure to bitcoin'' (February 
8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want to get 
in the crypto trade without holding bitcoin yourself? Here are some 
investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
    \40\ The Exchange notes that the list of countries above is not 
exhaustive and that securities regulators in a number of additional 
countries have either approved or otherwise allowed the listing and 
trading of Spot Bitcoin ETPs.
---------------------------------------------------------------------------

    To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor 
assets to significant risk because investors that would otherwise seek 
cryptoasset exposure through a Spot Bitcoin ETP are forced to find 
alternative exposure through generally riskier means. For instance, 
many U.S. investors that held their digital assets in accounts at 
FTX,\41\ Celsius Network LLC,\42\ BlockFi Inc.\43\ and Voyager Digital 
Holdings, Inc.\44\ have become unsecured creditors in the insolvencies 
of those entities. If a Spot Bitcoin ETP was available, it is likely 
that at least a portion of the billions of dollars tied up in those 
proceedings would still reside in the brokerage accounts of U.S. 
investors, having instead been invested in a transparent, regulated, 
and well-understood structure--a Spot Bitcoin ETP. To this point, 
approval of a Spot Bitcoin ETP would represent a major win for the 
protection of U.S. investors in the cryptoasset space. As further 
described below, the Trust, like all other series of Commodity-Based 
Trust Shares, is designed to protect investors against the risk of 
losses through fraud and insolvency that arise by holding digital 
assets, including bitcoin, on centralized platforms.
---------------------------------------------------------------------------

    \41\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \42\ See Celsius Network LLC, et al., Case No. 22-10964.
    \43\ See BlockFi Inc., Case No. 22-19361.
    \44\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

    Additionally, investors in other countries, specifically Canada, 
generally pay lower fees than U.S. retail investors that invest in OTC 
Bitcoin Funds due to the fee pressure that results from increased 
competition among available bitcoin investment options. Without an 
approved and regulated Spot Bitcoin ETP in the U.S. as a viable 
alternative, U.S. investors could seek to purchase shares of non-U.S. 
bitcoin vehicles in order to get access to bitcoin exposure. 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. In addition to the benefits to U.S. 
investors articulated throughout this proposal, approving this proposal 
(and others like it) would provide U.S. exchange-traded funds and 
mutual funds with a U.S.-listed and regulated product to provide such 
access rather than relying on either flawed products or products listed 
and primarily regulated in other countries.
Bitcoin Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the 
launch of ETFs registered under the Investment Company Act of 1940, as 
amended (the ``1940 Act'') and the Bitcoin Futures Approvals that 
provide exposure to bitcoin primarily through CME Bitcoin Futures 
(``Bitcoin Futures ETFs''). Allowing such products to list and trade is 
a productive first step in providing U.S. investors and traders with 
transparent, exchange-listed tools for expressing a view on bitcoin. 
The Bitcoin Futures Approvals, however, have created a logical 
inconsistency in the application of the standard the Commission applies 
when considering bitcoin ETP proposals.
    As discussed further below, the standard applicable to bitcoin ETPs 
is whether the listing exchange has in place a comprehensive 
surveillance sharing agreement with a regulated market of significant 
size in the underlying asset. Previous disapproval orders have made 
clear that a market that constitutes a regulated market of significant 
size is generally a futures and/or options market based on the 
underlying reference asset rather than the spot commodity markets, 
which are often unregulated.\45\ Leaving aside the analysis of that 
standard until later in this proposal,\46\ the Exchange believes

[[Page 55748]]

that the following rationale the Commission applied to a Bitcoin 
Futures ETF should result in the Commission approving this and other 
Spot Bitcoin ETP proposals:
---------------------------------------------------------------------------

    \45\ See Winklevoss Order at 37593, specifically footnote 202, 
which includes the language from numerous approval orders for which 
the underlying futures markets formed the basis for approving series 
of ETPs that hold physical metals, including gold, silver, 
palladium, platinum, and precious metals more broadly; and 37600, 
specifically where the Commission provides that ``when the spot 
market is unregulated--the requirement of preventing fraudulent and 
manipulative acts may possibly be satisfied by showing that the ETP 
listing market has entered into a surveillance-sharing agreement 
with a regulated market of significant size in derivatives related 
to the underlying asset.'' As noted above, the Exchange believes 
that these citations are particularly helpful in making clear that 
the spot market for a spot commodity ETP need not be ``regulated'' 
in order for a spot commodity ETP to be approved by the Commission, 
and in fact that it's been the common historical practice of the 
Commission to rely on such derivatives markets as the regulated 
market of significant size because such spot commodities markets are 
largely unregulated.
    \46\ As further outlined below, both the Exchange and the 
Sponsor believe that the CME Bitcoin Futures market represents a 
regulated market of significant size and that this proposal and 
others like it should be approved on this basis.

    The CME ``comprehensively surveils futures market conditions and 
price movements on a real-time and ongoing basis in order to detect 
and prevent price distortions, including price distortions caused by 
manipulative efforts.'' Thus, the CME's surveillance can reasonably 
be relied upon to capture the effects on the CME bitcoin futures 
market caused by a person attempting to manipulate the proposed 
futures ETP by manipulating the price of CME bitcoin futures 
contracts, whether that attempt is made by directly trading on the 
CME bitcoin futures market or indirectly by trading outside of the 
CME bitcoin futures market. As such, when the CME shares its 
surveillance information with Arca, the information would assist in 
detecting and deterring fraudulent or manipulative misconduct 
related to the non-cash assets held by the proposed ETP.\47\
---------------------------------------------------------------------------

    \47\ See Teucrium Approval at 21679.

    CME Bitcoin Futures pricing is based on pricing from spot bitcoin 
markets. The statement from the Teucrium Approval that ``CME's 
surveillance can reasonably be relied upon to capture the effects on 
the CME bitcoin futures market caused by a person attempting to 
manipulate the proposed futures ETP by manipulating the price of CME 
bitcoin futures contracts . . . indirectly by trading outside of the 
CME bitcoin futures market,'' makes clear that the Commission believes 
that CME's surveillance can capture the effects of trading on the 
relevant spot markets on the pricing of CME Bitcoin Futures. This was 
further acknowledged in the ``Grayscale lawsuit'' \48\ when Judge Rao 
stated `` . . . the Commission in the Teucrium order recognizes that 
the futures prices are influenced by the spot prices, and the 
Commission concludes in approving futures ETPs that any fraud on the 
spot market can be adequately addressed by the fact that the futures 
market is a regulated one . . .'' The Exchange agrees with the 
Commission on this point and notes that the pricing mechanism 
applicable to the Shares is similar to that of the CME Bitcoin Futures. 
As further discussed below, this view is also consistent with the 
Advisor's research.
---------------------------------------------------------------------------

    \48\ Grayscale Investments, LLC v. Securities and Exchange 
Commission, et al., Case No. 22-1142.
---------------------------------------------------------------------------

    Further to this point, a Bitcoin Futures ETF is potentially more 
susceptible to potential manipulation than a Spot Bitcoin ETP that 
offers only in-kind creation and redemption because settlement of CME 
Bitcoin Futures (and thus the value of the underlying holdings of a 
Bitcoin Futures ETF) occurs at a single price derived from spot bitcoin 
pricing, while shares of a Spot Bitcoin ETP would represent interest in 
bitcoin directly and authorized participants for a Spot Bitcoin ETP (as 
proposed herein) would be able to source bitcoin from any exchange and 
create or redeem with the applicable trust regardless of the price of 
the underlying index. It is not logically possible to conclude that the 
CME Bitcoin Futures market represents a significant market for a 
futures-based product, but also conclude that the CME Bitcoin Futures 
market does not represent a significant market for a spot-based 
product.
    In addition to potentially being more susceptible to manipulation 
than a Spot Bitcoin ETP, the structure of Bitcoin Futures ETFs provides 
negative outcomes for buy and hold investors as compared to a Spot 
Bitcoin ETP.\49\ Specifically, the cost of rolling CME Bitcoin Futures 
contracts will cause the Bitcoin Futures ETFs to lag the performance of 
bitcoin itself and, at over a billion dollars in assets under 
management, would cost U.S. investors significant amounts of money on 
an annual basis compared to Spot Bitcoin ETPs. Such rolling costs would 
not be required for Spot Bitcoin ETPs that hold bitcoin. Further, 
Bitcoin Futures ETFs could potentially hit CME position limits, which 
would force a Bitcoin Futures ETF to invest in non-futures assets for 
bitcoin exposure and cause potential investor confusion and lack of 
certainty about what such Bitcoin Futures ETFs are actually holding to 
try to get exposure to bitcoin, not to mention completely changing the 
risk profile associated with such an ETF. While Bitcoin Futures ETFs 
represent a useful trading tool, they are clearly a sub-optimal 
structure for U.S. investors that are looking for long-term exposure to 
bitcoin that will, based on the calculations above, unnecessarily cost 
U.S. investors significant amounts of money every year compared to Spot 
Bitcoin ETPs and the Exchange believes that any proposal to list and 
trade a Spot Bitcoin ETP should be reviewed by the Commission with this 
important investor protection context in mind.
---------------------------------------------------------------------------

    \49\ See e.g., ``Bitcoin ETF's Success Could Come at 
Fundholders' Expense,'' Wall Street Journal (October 24, 2021), 
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin 
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available 
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&__cf_chl_jschl_tk__=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
---------------------------------------------------------------------------

    To the extent the Commission may view differential treatment of 
Bitcoin Futures ETFs and Spot Bitcoin ETPs as warranted based on the 
Commission's concerns about the custody of physical Bitcoin that a Spot 
Bitcoin ETP would hold (compared to cash-settled futures 
contracts),\50\ the Sponsor believes this concern is mitigated to a 
significant degree by the custodial arrangements that the Trust has 
contracted with the Custodian to provide, as further outlined below. In 
the Custody Statement, the Commission stated that the fourth step that 
a broker-dealer could take to shield traditional securities customers 
and others from the risks and consequences of digital asset security 
fraud, theft, or loss is to establish, maintain, and enforce reasonably 
designed written policies, procedures, and controls for safekeeping and 
demonstrating the broker-dealer has exclusive possession or control 
over digital asset securities that are consistent with industry best 
practices to protect against the theft, loss, and unauthorized and 
accidental use of the private keys necessary to access and transfer the 
digital asset securities the broker-dealer holds in custody. While 
bitcoin is not a security and the Custodian is not a broker-dealer, the 
Sponsor believes that similar considerations apply to the Custodian's 
holding of the Trust's bitcoin. After diligent investigation, the 
Sponsor believes that the Custodian's policies, procedures, and 
controls for safekeeping, exclusively possessing, and controlling the 
Trust's bitcoin holdings are consistent with industry best practices to 
protect against the theft, loss, and unauthorized and accidental use of 
the private keys. As a trust company chartered by the NYDFS, the 
Sponsor notes that the Custodian is subject to extensive regulation and 
has among longest track records in the industry of providing custodial 
services for digital asset private keys. Under the circumstances, 
therefore, to the extent the Commission believes that its concerns 
about the risks of spot bitcoin custody justifies differential 
treatment of a Bitcoin Futures ETF versus a Spot Bitcoin ETP, the 
Sponsor believes that the fact that the Custodian employs the same 
types of policies, procedures, and

[[Page 55749]]

safeguards in handling spot bitcoin that the Commission has stated that 
broker-dealers should implement with respect to digital asset 
securities would appear to weaken the justification for treating a 
Bitcoin Futures ETF compared to a Spot Bitcoin ETP differently due to 
spot bitcoin custody concerns.
---------------------------------------------------------------------------

    \50\ See, e.g., Division of Investment Management Staff, Staff 
Statement on Funds Registered Under the Investment Company Act 
Investing in the Bitcoin Futures Market, May 11, 2021 (``The Bitcoin 
futures market also has not presented the custody challenges 
associated with some cryptocurrency-based investing because the 
futures are cash-settled'').
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any 
objective review of the proposals to list Spot Bitcoin ETPs compared to 
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead 
to the conclusion that Spot Bitcoin ETPs should be available to U.S. 
investors and, as such, this proposal and other comparable proposals to 
list and trade Spot Bitcoin ETPs should be approved by the Commission. 
Stated simply, U.S. investors will continue to lose significant amounts 
of money from holding Bitcoin Futures ETFs as compared to Spot Bitcoin 
ETPs, losses which could be prevented by the Commission approving Spot 
Bitcoin ETPs. Additionally, any concerns related to preventing 
fraudulent and manipulative acts and practices related to Spot Bitcoin 
ETPs would apply equally to the spot markets underlying the futures 
contracts held by a Bitcoin Futures ETF. Both the Exchange and Sponsor 
believe that the CME Bitcoin Futures market is a regulated market of 
significant size and that such manipulation concerns are mitigated, as 
described extensively below. After allowing and approving the listing 
and trading of Bitcoin Futures ETFs that hold primarily CME Bitcoin 
Futures, however, the only consistent outcome would be approving Spot 
Bitcoin ETPs on the basis that the CME Bitcoin Futures market is a 
regulated market of significant size.
    Given the current landscape, approving this proposal (and others 
like it) and allowing Spot Bitcoin ETPs to be listed and traded 
alongside Bitcoin Futures ETFs would establish a consistent regulatory 
approach, provide U.S. investors with choice in product structures for 
bitcoin exposure, and offer flexibility in the means of gaining 
exposure to bitcoin through transparent, regulated, U.S. exchange-
listed vehicles.
Bitcoin Futures \51\
---------------------------------------------------------------------------

    \51\ Unless otherwise noted, all data and analysis presented in 
this section and referenced elsewhere in the filing has been 
provided by the Sponsor.
---------------------------------------------------------------------------

    CME began offering trading in Bitcoin Futures in 2017. Each 
contract represents five bitcoin and is based on the CME CF Bitcoin 
Reference Rate.\52\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric 
related to Bitcoin Futures has trended consistently up since launch.
---------------------------------------------------------------------------

    \52\ According to CME, the CME CF Bitcoin Reference Rate 
aggregates the trade flow of major bitcoin spot exchanges during a 
specific calculation window into a once-a-day reference rate of the 
U.S. dollar price of bitcoin. Calculation rules are geared toward 
maximum transparency and real-time replicability in underlying spot 
markets, including Bitstamp, Coinbase, Gemini, itBit, and Kraken. 
For additional information, refer to https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html?redirect=/trading/cf-bitcoin-reference-rate.html.
---------------------------------------------------------------------------

    According to the Sponsor, the increase in the volume on CME, over 
the past few years, is reflected in a higher proportion of the bitcoin 
market share. This is illustrated by plotting the proportion of monthly 
volume traded in bitcoin on the CME \53\ (categorized as regulated in 
the chart and used as the numerator) in relation to the total bitcoin 
market, which is comprised of the sum of the volume of bitcoin futures 
on the CME and the spot volume on cryptocurrency exchanges \54\ 
(categorized as unregulated and used as the denominator) from January 
1, 2018 to January 31, 2023.
---------------------------------------------------------------------------

    \53\ Data on Bitcoin futures is available at https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html.
    \54\ Data on Bitcoin volume traded on cryptocurrency exchanges 
is available at https://www.cryptocompare.com.
[GRAPHIC] [TIFF OMITTED] TN16AU23.004


[[Page 55750]]


    The proportion of volume traded on CME has increased from less than 
1% at inception, to more than 10% over three and a half years. 
Furthermore, the CME market, as well as other crypto-linked markets, 
and the spot market are highly correlated. In markets that are globally 
and efficiently integrated, one would expect that changes in prices of 
an asset across all markets to be highly correlated. The rationale 
behind this is that quick and efficient arbitrageurs would capture 
potentially profitable opportunities, consequently converging prices to 
the average intrinsic value very rapidly.
    Bitcoin markets exhibit a high degree of correlation. Using daily 
Bitcoin prices from centralized exchanges, ETP providers, and the CME 
from January 20, 2021 to February 1, 2023,\55\ the Sponsor calculates 
the Pearson correlation of returns \56\ across these markets and find a 
high degree of correlation.
---------------------------------------------------------------------------

    \55\ The calculation of daily correlations used the period 
January 20, 2021 to February 1, 2023 as this is the common period 
across all the exchanges and data sources being analyzed.
    \56\ The Pearson correlation is a measure of linear association 
between two variables and indicates the magnitude as well as 
direction of this relationship. The value can range between -1 
(suggesting a strong negative association) and 1 (suggesting a 
strong positive association).
---------------------------------------------------------------------------

    Correlations are between 57% and 99%, with the latter found mainly 
across centralized exchanges due to their higher level of 
interconnectedness. The lower correlations pertain mainly to the ETPs, 
which are relatively newer products and are mainly offered by a few 
competing market makers who are required to trade in large blocks, thus 
making it economically infeasible to capture small mispricings. As 
additional investors and arbitrageurs enter the market and capture the 
mispricing opportunities between these markets, it is likely that there 
will be much higher levels of correlations across all markets.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN16AU23.005


[[Page 55751]]


    Pair-wise correlations of Bitcoin returns are also calculated on 
hourly and minute-by-minute sampling frequencies in order to estimate 
the intra-day associations across the different Bitcoin markets. The 
results show correlations no less than 92% among centralized exchanges 
and between the Bitcoin CME futures and centralized exchanges on an 
hourly basis, and no less than 78% on a minutely basis. This suggests 
that Bitcoin prices on centralized exchanges and the CME markets move 
very similarly and in a very efficient manner to quickly reflect 
changes in market conditions, not only on a daily basis, but also at 
much higher intra-day frequencies.
[GRAPHIC] [TIFF OMITTED] TN16AU23.006


[[Page 55752]]


[GRAPHIC] [TIFF OMITTED] TN16AU23.007

    According to the Sponsor's research, this relationship holds true 
during periods of extreme price volatility. This implies that no single 
Bitcoin market can deviate significantly from the consensus, such that 
the market is sufficiently large and has an inherent unique resistance 
to manipulation. Hence, the Sponsor introduces a statistical co-moment 
called co-kurtosis, which measures to what extent two random variables 
change together.\57\ If two returns series exhibit a high degree of co-
kurtosis, this means that they tend to undergo extreme positive and 
negative changes simultaneously. A co-kurtosis value larger than +3 or 
less than -3 is considered statistically significant. The following 
table shows that the level of co-kurtosis is positive and very high 
between all market combinations of hourly returns, which suggests that 
Bitcoin markets tend to move very similarly especially for extreme 
price deviations.
---------------------------------------------------------------------------

    \57\ Co-skewness and Co-kurtosis are higher order cross-moments 
used in finance to examine how assets move together. Co-skewness 
measures the extent to which two variables undergo extreme 
deviations at the same time, whereby a positive (negative) value 
means that both values exhibit positive (negative) values 
simultaneously. While this measure is useful for estimating co-
movements in one direction or the other, it does not allow us to 
test whether two variables comove similarly in either direction. For 
that, we apply the co-kurtosis, which measures the extent to which 
two variables undergo both extreme positive and negative deviations 
at the same time.
---------------------------------------------------------------------------

Co-Kurtosis of Bitcoin Hourly Returns Across Centralized Exchanges, 
ETPs, and the CME

[[Page 55753]]

[GRAPHIC] [TIFF OMITTED] TN16AU23.008

    As a robustness check, the co-kurtosis metric is also calculated 
using minute-by-minute returns, and the conclusion remains the same, 
suggesting that all Bitcoin markets move in tandem especially during 
extreme market movements.

Co-Kurtosis of Bitcoin Minutely Returns Across Centralized Exchanges, 
ETPs, and the CME
[GRAPHIC] [TIFF OMITTED] TN16AU23.009

BILLING CODE 8011-01-C
    These results present evidence of a robust global Bitcoin market 
that quickly reacts in a unanimous manner to extreme price movements 
across both the spot markets, futures and ETP markets.
    The Sponsor further believes that academic research corroborates 
the overall trend outlined above and supports the thesis that the 
Bitcoin Futures pricing leads the spot market and, thus, a person 
attempting to manipulate the Shares would also have to trade on that 
market to manipulate the ETP. Specifically, the Sponsor believes that 
such research indicates

[[Page 55754]]

that bitcoin futures lead the bitcoin spot market in price 
formation.\58\
---------------------------------------------------------------------------

    \58\ See Hu, Y., Hou, Y. and Oxley, L. (2019). ``What role do 
futures markets play in Bitcoin pricing? Causality, cointegration 
and price discovery from a time-varying perspective'' (available at: 
https://www.ncbi.nlm./nih.gov/pmc/articles/PMC7481826/). This 
academic research paper concludes that ``There exist no episodes 
where the Bitcoin spot markets dominates the price discovery 
processes with regard to Bitcoin futures. This points to a 
conclusion that the price formation originates solely in the Bitcoin 
futures market. We can, therefore, conclude that the Bitcoin futures 
markets dominate the dynamic price discovery process based upon 
time-varying information share measures. Overall, price discovery 
seems to occur in the Bitcoin futures markets rather than the 
underlying spot market based upon a time-varying perspective.'' See 
also Matthew Hougan, Hong Kim, and Satyajeet Pal (2021). ``Price 
Discovery in the Modern Bitcoin Market: Examining Lead-Lag 
Relationships Between the Bitcoin Spot and Bitcoin Futures Market'' 
(available at https://static.bitwiseinvestments.com/Bitwise-Bitcoin-ETP-White-Paper-1.pdf). This academic research paper also concluded 
that ``the CME bitcoin futures market is the dominant source of 
price discovery when compared with the bitcoin spot market, and that 
prices on the CME bitcoin futures market lead prices on bitcoin spot 
markets. . .''
    \59\ See Exchange Rule 14.11(f).
    \60\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \61\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such pricing does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. Moreover, the 
linkage between the bitcoin markets and the presence of arbitrageurs 
in those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\59\ including Commodity-Based Trust Shares,\60\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\61\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
section 6(b)(5) of the Act and that this filing sufficiently 
demonstrates that the CME Bitcoin Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the Commission are sufficiently 
mitigated to the point that they are outweighed by quantifiable 
investor protection issues that would be resolved by approving this 
proposal.
(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \62\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\63\ The only remaining 
issue to be addressed is whether the Bitcoin Futures market constitutes 
a market of significant size, which both the Exchange and the Sponsor 
believe that it does. 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 
manipulate the ETP, so that a surveillance-sharing agreement would 
assist the listing exchange 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.\64\
---------------------------------------------------------------------------

    \62\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. 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.'' The 
Commission has historically held that joint membership in the 
Intermarket Surveillance Group (``ISG'') constitutes such a 
surveillance sharing agreement. See Wilshire Phoenix Disapproval.
    \63\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \64\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\65\
---------------------------------------------------------------------------

    \65\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    According to the Sponsor's research presented above, the Bitcoin 
Futures market is the leading market for bitcoin price formation. Where 
Bitcoin Futures lead the price in the spot market such that a potential 
manipulator of the bitcoin spot market (beyond just the constituents of 
the Index \66\) would have to participate in the Bitcoin Futures 
market, it follows that a potential manipulator of the Shares would 
similarly have to transact in the Bitcoin
---------------------------------------------------------------------------

    \66\ As further described below, the ``Index'' for the Fund is 
the S&P Bitcoin Index. The current exchange composition of the Index 
is Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, 
Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.
---------------------------------------------------------------------------

Futures market because the Index is based on spot prices. Further, the 
Trust only allows for in-kind creation and redemption, which, as 
further described below, reduces the potential for manipulation of the 
Shares through manipulation of the Index or any of its individual 
constituents, again emphasizing that a potential manipulator of the 
Shares would have to manipulate the entirety of the bitcoin spot 
market, which is led by the Bitcoin Futures market. As such, the 
Exchange believes that part (a) of the significant market test outlined 
above is satisfied and that common membership in ISG between the 
Exchange and CME would

[[Page 55755]]

assist the listing exchange in detecting and deterring misconduct in 
the Shares.
(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the Bitcoin Futures 
market or spot market for a number of reasons, including the 
significant volume in the Bitcoin Futures market, the size of bitcoin's 
market cap, and the significant liquidity available in the spot market. 
In addition to the Bitcoin Futures market data points cited above, the 
spot market for bitcoin is also very liquid.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present.
    The Exchange is proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares. On June 21, 
2023, the Exchange reached an agreement on terms with Coinbase, Inc. 
(``Coinbase''), an operator of a United States-based spot trading 
platform for Bitcoin that represents a substantial portion of US-based 
and USD denominated Bitcoin trading,\67\ to enter into a surveillance-
sharing agreement (``Spot BTC SSA'') and executed an associated term 
sheet. Based on this agreement on terms, the Exchange and Coinbase will 
finalize and execute a definitive agreement that the parties expect to 
be executed prior to allowing trading of the Commodity-Based Trust 
Shares.
---------------------------------------------------------------------------

    \67\ According to a Kaiko Research report dated June 26, 2023, 
Coinbase represented roughly 50% of exchange trading volume in USD-
BTC trading on a daily basis during May 2023.
---------------------------------------------------------------------------

    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between the Exchange and Coinbase that is intended to 
supplement the Exchange's market surveillance program. The Spot BTC SSA 
is expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares.\68\ This 
means that the Exchange expects to receive market data for orders and 
trades from Coinbase, which it will utilize in surveillance of the 
trading of Commodity-Based Trust Shares. In addition, the Exchange can 
request further information from Coinbase related to spot bitcoin 
trading activity on the Coinbase exchange platform, if the Exchange 
determines that such information would be necessary to detect and 
investigate potential manipulation in the trading of the Commodity-
Based Trust Shares.\69\
---------------------------------------------------------------------------

    \68\ For additional information regarding ISG and the hallmarks 
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
    \69\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC 
and Cboe Clear Digital, LLC.
---------------------------------------------------------------------------

    According to the Sponsor, a significant portion of the 
considerations around crypto pricing have historically stemmed from a 
lack of consistent pricing across markets. However, according to the 
Sponsor's research, cross-exchange spreads in Bitcoin have been 
declining consistently over the past several years. Based on the daily 
Bitcoin price series from several popular centralized exchanges \70\ 
the Sponsor has calculated the largest cross-exchange percentage spread 
(labelled as %C-Spread) by deducting the highest or maximum price (P) 
at time t from the lowest or minimum, and dividing by the lowest across 
all exchanges (i). Formally, this is expressed as:
---------------------------------------------------------------------------

    \70\ The exchanges include Binance, Bitfinex, Bithumb, Bitstamp, 
Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, Kraken, 
Kucoin, and OKEX.
[GRAPHIC] [TIFF OMITTED] TN16AU23.010

    The results show a clear and sharp decline in the %C-Spread, 
indicating that the Bitcoin market has become more efficient as cross-
exchange prices have converged over time.
BILLING CODE 8011-01-P

[[Page 55756]]

[GRAPHIC] [TIFF OMITTED] TN16AU23.011

    In addition, the magnitude of outlier % C-spreads has also declined 
over time. This boxplot shows that, not only did the median value of 
the %C-Spread decline over time, but also the extreme outlier values. 
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, 2021, 
2022, and 2023 (up until February 01, 2023) are 29.14%, 14.12%, 8.54%, 
6.04%, 3.65%, 5.56%, and 0.63%, respectively. The market has 
experienced a 38% year-on-year decline in the annual median %C-Spread 
indicating a greater degree of Bitcoin price convergence across 
exchanges and a more efficient market.
[GRAPHIC] [TIFF OMITTED] TN16AU23.012


[[Page 55757]]


    The dispersion ([sigma]) of Bitcoin Prices has also declined over 
the same period. This chart shows the 7-day rolling standard deviation 
of the %C-Spread from January 1, 2017 to February 1, 2023. The 
Sponsor's research finds that the dispersion in Bitcoin prices across 
all exchanges has decreased over time, indicating that prices on all 
the considered exchanges converge towards the intrinsic average much 
more efficiently. This suggests that the market has become better at 
quickly reaching a consensus price for Bitcoin.
    As the pricing of the crypto market becomes increasingly efficient, 
pricing methodologies become more accurate and less susceptible to 
manipulation. The clustering of prices across a variety of sources 
within the primary market points towards robust price discovery 
mechanisms and efficient arbitrage.
[GRAPHIC] [TIFF OMITTED] TN16AU23.013

    One factor that has contributed to the overall efficiency of, and 
improved price discovery within the Bitcoin market is the increase in 
the number of participants, and subsequently, the total dollar amount 
allocated to this market. This can be illustrated by the following 
chart, which shows the number of wallet addresses holding Bitcoin from 
January 2016 to February 2023.

[[Page 55758]]

[GRAPHIC] [TIFF OMITTED] TN16AU23.014

    The large number of participants in the Bitcoin market has 
manifested itself in high liquidity in the market. This is exhibited in 
the following chart, which shows the daily aggregated dollar notional 
of the bid and ask order books within the first 100 price levels across 
several of the largest centralized crypto exchanges from February 2022 
to January 2023. Specifically, the dollar notional that is allocated 
closest to the mid price has hovered between $2.6 million and $12 
million over that period.
[GRAPHIC] [TIFF OMITTED] TN16AU23.015

    An increased notional order book suggests that there is a higher 
degree of consensus among investors regarding the price of Bitcoin. 
Moreover, this market characteristic hampers any attempt of price 
manipulation by any single large entity.
    As a robustness check, the Sponsor investigates whether the dollar 
notional in the order book changes significantly prior to and post an 
extreme price event. Specifically, for events constituting large 
increases in the price of Bitcoin, if the ask (or sell) side of the 
order book experiences a significant shrinkage in

[[Page 55759]]

the dollar notional right before the event, then this may be an 
indication of market manipulation whereby the ask-side of the order 
book becomes sufficiently thin for a large order to move the price 
upward. Similarly, for events constituting large decreases in the price 
of Bitcoin, if the bid (or buy) side of the order book experiences a 
significant shrinkage in the dollar notional prior to such events, then 
this may be an indication of market manipulation whereby the thinner 
bid-side of the order book may potentially lead to significant downward 
price movements.
    Using the top and bottom 0.1% of hourly price changes from February 
1, 2022 to February 1, 2023 as events of extreme upward and downward 
market movements, respectively, the Sponsor plotted the bid (left 
charts) and ask (right charts) dollar notional of the Bitcoin order 
book within a six-hour window around these events in the chart below, 
which shows the results for extreme upward price movements. The extreme 
price events (indicated by the dashed green lines) perfectly coincide 
with the decrease in dollar notional of the ask-side of the order book. 
This is indicative of an efficient market, whereby large market 
movements are quickly and dynamically absorbed by a thick orderbook. 
Moreover, the dollar notional on the ask side after the event is 
replenished back to its pre-event level, which implies that market 
participants' reactions are quick to restore the market back to its 
equilibrium level.
[GRAPHIC] [TIFF OMITTED] TN16AU23.016

    The same results and conclusions are found for extreme downward 
price movements. The charts below show that such price events perfectly 
coincide with shrinkages on the bid side of the order book (left 
charts), indicating an

[[Page 55760]]

efficient and dynamic Bitcoin market. Moreover, the bid-side of the 
order book after the event is also restored back to its pre-event 
level, which suggests that the market is symmetrically efficient in 
moving back to equilibrium.
[GRAPHIC] [TIFF OMITTED] TN16AU23.017

BILLING CODE 8011-01-C
    Finally, offering only in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Index which it uses to value the 
Trust's bitcoin is itself resistant to manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Index significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\71\ When authorized participants are 
creating with the Trust, they need to deliver a certain number of 
bitcoin per share (regardless of the valuation used) and when they're 
redeeming, they can similarly expect to receive a certain number of 
bitcoin per share. As such, even if the price used to value the Trust's 
bitcoin is manipulated (which the Sponsor believes that its methodology 
is resistant to), 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. This 
not only mitigates the risk associated with potential manipulation, but 
also

[[Page 55761]]

discourages and disincentivizes manipulation of the Index because there 
is little financial incentive to do so.
---------------------------------------------------------------------------

    \71\ While the Index will not be particularly important for the 
creation and redemption process, it will be used for calculating 
fees.
---------------------------------------------------------------------------

(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to bitcoin through OTC Bitcoin Funds has grown into 
the tens of billions of dollars, including through Bitcoin Futures 
ETFs. With that growth, so too has grown the quantifiable investor 
protection issues to U.S. investors through roll costs for Bitcoin 
Futures ETFs and premium/discount volatility and management fees for 
OTC Bitcoin Funds. The Exchange believes that the concerns related to 
the prevention of fraudulent and manipulative acts and practices have 
been sufficiently addressed to be consistent with the Act and, to the 
extent that the Commission disagrees with that assertion, such concerns 
are now outweighed by investor protection concerns. As such, the 
Exchange believes that approving this proposal (and comparable 
proposals) provides the Commission with the opportunity to allow U.S. 
investors with 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 
and costs associated with investing in Bitcoin Futures ETFs and 
operating companies that are imperfect proxies for bitcoin exposure; 
and (iv) providing an alternative to custodying spot bitcoin.
ARK 21Shares Bitcoin ETF
    Delaware Trust Company is the trustee (``Trustee''). The Bank of 
New York Mellon will be the administrator (``Administrator'') and 
transfer agent (``Transfer Agent''). Foreside Global Services, LLC will 
be the marketing agent (``Marketing Agent'') in connection with the 
creation and redemption of ``Baskets'' of Shares. ARK Investment 
Management LLC (``ARK'') will provide assistance in the marketing of 
the Shares. Coinbase Custody Trust Company, LLC, a third-party 
regulated custodian (the ``Custodian''), will be responsible for 
custody of the Trust's bitcoin.
    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the bitcoin held by the 
Trust. The Trust's assets will consist of bitcoin held by the Custodian 
on behalf of the Trust. The Trust generally does not intend to hold 
cash or cash equivalents. However, there may be situations where the 
Trust will unexpectedly hold cash on a temporary basis.
    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\72\ nor a commodity pool for purposes of the Commodity 
Exchange Act (``CEA''), and neither the Trust nor the Sponsor is 
subject to regulation as a commodity pool operator or a commodity 
trading adviser in connection with the Shares.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 80a-1.
---------------------------------------------------------------------------

    When the Trust sells or redeems its Shares, it will do so in ``in-
kind'' transactions in blocks of 5,000 Shares (a ``Creation Basket'') 
at the Trust's NAV. Authorized participants will deliver, or facilitate 
the delivery of, bitcoin to the Trust's account with the Custodian in 
exchange for Shares when they purchase Shares, and the Trust, through 
the Custodian, will deliver bitcoin to such authorized participants 
when they redeem Shares with the Trust. Authorized participants may 
then offer Shares to the public at prices that depend on various 
factors, including the supply and demand for Shares, the value of the 
Trust's assets, and market conditions at the time of a transaction. 
Shareholders who buy or sell Shares during the day from their broker 
may do so at a premium or discount relative to the NAV of the Shares of 
the Trust.
    As noted above, the Trust is designed to protect investors against 
the risk of losses through fraud and insolvency that arise by holding 
digital assets, including bitcoin, on centralized platforms. 
Specifically, the Trust is designed to protect investors as follows:
(i) Assets of the Trust Protected From Insolvency
    The Trust's bitcoin will be held by its Custodian,\73\ which is a 
New York chartered trust company overseen by the NYDFS and a qualified 
custodian under Rule 206-4 of the Investment Adviser Act. The Custodian 
will custody the Trust's bitcoin pursuant to a custody agreement, which 
requires the Custodian to maintain the Trust's bitcoin in segregated 
accounts that clearly identify the Trust as owner of the accounts and 
assets held on those accounts; the segregation will be both from the 
proprietary property of the Custodian and the assets of any other 
customer. Such an arrangement is generally deemed to be ``bankruptcy 
remote,'' that is, in the event of an insolvency of the Custodian, 
assets held in such segregated accounts would not become property of 
the Custodian's estate and would not be available to satisfy claims of 
creditors of the Custodian. In addition, according to the Registration 
Statement, the Custodian carries fidelity insurance, which covers 
assets held by the Custodian in custody from risks such as theft of 
funds. These arrangements provide significant protections to investors 
and could have mitigated the type of losses incurred by investors in 
the numerous crypto-related insolvencies, including Celsius, Voyager, 
BlockFi and FTX.
---------------------------------------------------------------------------

    \73\ According to the Registration Statement, the Trust's cash 
will be held at The Bank of New York Mellon pursuant to a cash 
custody agreement.
---------------------------------------------------------------------------

(ii) Trust's Transfer Agent Will Instruct Disposition of Trust's 
Bitcoin
    According to the Registration Statement, except with respect to 
sale of bitcoin from time to time to cover expenses of the Trust, the 
only time bitcoin will move into or out from the Trust will be with 
respect to creations or redemptions of Shares of the Trust. Authorized 
Participants will deliver bitcoin to the Trust's account with the 
Custodian or Subcustodian, as applicable, in exchange for Shares of the 
Trust, and the Trust, through the Custodian, will deliver bitcoin to 
Authorized Participants when those Authorized Participants redeem 
Shares of the Trust. The creation and redemption procedures are 
administered by the Transfer Agent, the Bank of New York Mellon, an 
independent third party. In other words, according to the Registration 
Statement, with very limited exceptions, the Sponsor will not give 
instructions with respect to the transfer or disposition of the Trust's 
bitcoin. Bitcoin owned by the Trust will at all times be held by, and 
in the control of, the Custodian (or Subcustodian, as applicable), and 
transfer of such bitcoin to or from the Custodian (or Subcustodian) 
will occur only in connection with creation and redemptions of Shares. 
This will provide safeguards against the movement of bitcoin owned by 
the Trust by or to the Sponsor or affiliates of the Sponsor.
(iii) Trust's Assets Are Subject to Regular Audit
    According to the Registration Statement, audit trails exist for all 
movement of bitcoin within Custodian-controlled bitcoin wallets and are 
audited annually for accuracy and completeness by an independent 
external audit firm. In addition, the Trust will be audited by an 
independent registered public accounting firm on a regular basis.

[[Page 55762]]

(iv) Trust is Subject to the Exchange's Obligations of Companies Listed 
on the Exchange and Applicable Corporate Governance Requirements
    The Trust will be subject to the obligations of companies listed on 
the Exchange set forth in BZX Rule 14.6, which require the listed 
companies to make public disclosure of material events and any 
notifications of deficiency by the Exchange, file and distribute period 
financial reports, engage independent public accountants registered 
with the Exchange, among other things. Such disclosures serve a key 
investor protection role. In addition, the Trust will be subject to the 
corporate governance requirements for companies listed on the Exchange 
set forth in BZX Rule 14.10.
Investment Objective
    According to the Registration Statement and as further described 
below, the investment objective of the Trust is to seek to track the 
performance of bitcoin, as measured by the performance of the S&P 
Bitcoin Index (the ``Index''), adjusted for the Trust's expenses and 
other liabilities. In seeking to achieve its investment objective, the 
Trust will hold bitcoin and will value the Shares daily based on the 
Index. The Trust will process all creations and redemptions in-kind in 
transactions with authorized participants. The Trust is not actively 
managed.
The Index
    As described in the Registration Statement, the Fund will use the 
Index to calculate the Trust's NAV. The Index is a U.S. dollar-
denominated composite reference rate for the price of bitcoin. There is 
no component other than bitcoin in the Index. The underlying exchanges 
are sourced by Lukka Inc. (the ``Data Provider'') \74\ based on a 
combination of qualitative and quantitative metrics to analyze a 
comprehensive data set and evaluate factors including legal/regulation, 
KYC/transaction risk, data provision, security, team/exchange, asset 
quality/diversity, market quality and negative events. The Index price 
is currently sourced from the following set of exchanges: Binance, 
Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, Gemini, HitBTC, 
Huobi, Kraken, KuCoin, and Poloniex. As the digital ecosystem continues 
to evolve, the Data Provider can add additional or remove exchanges 
based on the processes established by Lukka's Pricing Integrity 
Oversight Board.\75\
---------------------------------------------------------------------------

    \74\ Lukka is an independent third-party digital asset data 
company engaged by the Sponsor to provide fair market value (FMV) 
bitcoin prices. This price, commercially available from Lukka, will 
form the basis for determining the value of the Trust's Bitcoin 
Holdings. Lukka is not affiliated with the Trust or the Sponsor 
other than through a commercial relationship. All of Lukka's 
products are also SOC 1 and 2 Type 2 certified.
    \75\ The purpose of Lukka's Pricing Integrity Oversight Board is 
to ensure (i) the integrity and validity of the Lukka pricing and 
valuation products and (ii) the Lukka pricing and valuation products 
remain fit for purpose in the rapidly evolving market and 
corresponding regulatory environments.
---------------------------------------------------------------------------

    The Index methodology is intended to determine the fair market 
value (``FMV'') for bitcoin by determining the principal market for 
bitcoin as of 4pm ET daily. The Index methodology uses a ranking 
approach that considers several exchange characteristics including 
oversight and intra-day trading volume. Specifically, to rank the 
credibility and quality of each exchange, the Data Provider dynamically 
assigns a Base Exchange Score (``BES'') score to the key 
characteristics for each exchange.
    The BES reflects the fundamentals of an exchange and determines 
which exchange should be designated as the principal market at a given 
point of time. This score is determined by computing a weighted average 
of the values assigned to four different exchange characteristics. The 
exchange characteristics are as follows: (i) oversight; (ii) 
microstructure efficiency; (iii) data transparency and (iv) data 
integrity.
Oversight
    This score reflects the rules in place to protect and to give 
access to the investor. The score assigned for exchange oversight will 
depend on parameters such as jurisdiction, regulation, ``Know Your 
Customer and Anti-Money Laundering Compliance'' (KYC/AML), among other 
proprietary factors.
Microstructure Efficiency
    The effective bid ask spread is used as a proxy for efficiency. For 
example, for each exchange and currency pair, the Data Provider takes 
an estimate of the ``effective spread'' relative to the price.
Data Transparency
    Transparency is the term used for a quality score that is 
determined by the level of detail of the data offered by an exchange. 
The most transparent exchanges offer order-level data, followed by 
order book, trade-level, and then candles.
Data Integrity
    Data integrity reconstructs orders to ensure the transaction 
amounts that make up an order equal the overall order amount matching 
on both a minute and daily basis. This data would help expose nefarious 
actions such as wash trading or other potential manipulation of data.
    The methodology then applies a five-step weighting process for 
identifying a principal exchange and the last price on that exchange. 
Following this weighting process, an executed exchange price is 
assigned for bitcoin as of 4pm ET. The Index price is determined 
according to the following procedure:
     Step 1: Assign each exchange a Base Exchange Score 
(``BES'') reflecting static exchange characteristics such as oversight, 
microstructure and technology, as discussed below.
     Step 2: Adjust the BES based on the relative monthly 
volume each exchange services. This new score is the Volume Adjusted 
Score (``VAS'').
     Step 3: Decay the VAS based on the time passed since the 
last trade on the exchange. Here, the Data Provider is assessing the 
level of activity in the market by considering the frequency (volume) 
of trades. The decay factor reflects the time since the last trade on 
the exchange. This is the final Decayed Volume Adjusted Score 
(``DVAS''), which tracks the freshness of the data by tracking most 
recent trades.
     Step 4: Rank the exchanges by the DVAS score and designate 
the highest-ranking exchange as the principal market for that point in 
time. The principal market is the exchange with the highest DVAS.
     Step 5: After selecting a primary exchange, an executed 
exchange price is used for bitcoin representing FMV at 4pm ET. The Data 
Provider takes the last traded prices at that moment in time on that 
trading venue for the relevant pair (Bitcoin/USD) when determining the 
Index price.
    As discussed in the Registration Statement, the fact that there are 
multiple bitcoin spot markets that may contribute prices to the Index 
price makes manipulation more difficult in a well-arbitraged and 
fractured market, as a malicious actor would need to manipulate 
multiple spot markets simultaneously to impact the Index price, or 
dramatically skew the historical distribution of volume between the 
various exchanges.
    The Data Provider has designed a series of automated algorithms 
designed to supplement the core Lukka Prime Methodology in enhancing 
the ability to detect potentially anomalous price activity which could 
be detrimental to the goal of obtaining a Fair Market

[[Page 55763]]

Value price that is representative of the market at a point in 
time.\76\
---------------------------------------------------------------------------

    \76\ Upon request, Lukka can provide additional information and 
detail to the Commission regarding the algorithms and data quality 
checks that are put in place, with confidential treatment requested.
---------------------------------------------------------------------------

    In addition to the automated algorithms, the Data Provider has 
dedicated resources and has established committees to ensure all prices 
are representative of the market. Any price challenges will result in 
an independent analysis of the price. This includes assessing whether 
the price from the selected exchange is biased according to analyses 
designed to recognize patterns consistent with manipulative activity, 
such as a quick reversion to previous traded levels following a sharp 
price change or any significant deviations from the volume weighted 
average price on a particular exchange or pricing on any other exchange 
included in the Lukka Prime eligibility universe. Policies and 
procedures for any adjustments to prices or changes to core parameters 
(e.g., exchange selection) are described in the Lukka Price Integrity 
Manual.\77\
---------------------------------------------------------------------------

    \77\ Upon request, Lukka can provide the Commission the Lukka 
Pricing Integrity Manual, with confidential treatment requested.
---------------------------------------------------------------------------

    Upon detection or external referral of suspect manipulative 
activities, the case is raised to the Price Integrity Oversight Board. 
These checks occur on an on-going, intraday basis and any 
investigations are typically resolved promptly, in clear cases within 
minutes and in more complex cases same business day. The evidence 
uncovered shall be turned over to the Data Provider's Price Integrity 
Oversight Board for final decision and action. The Price Integrity 
Oversight Board may choose to pick an alternative primary market and 
may exclude such market from future inclusion in the Index methodology 
or choose to stand by the original published price upon fully 
evaluating all available evidence. It may also initiate an 
investigation of prior prices from such markets and shall evaluate 
evidence presented on a case-by-case basis.
    After the Lukka Prime price is generated, the S&P DJI (``The Index 
Provider'') performs independent quality checks as a second layer of 
validation to those employed by the Data Provider, including checks 
against assets with large price movements, assets with missing prices, 
assets with zero prices, assets with unchanged prices, assets that have 
ceased pricing and assets where the price does not match the Lukka 
Prime primary exchange. The Index Provider may submit a price challenge 
to Lukka if any of the checks listed above are found to be material. 
Lukka will perform an independent review of the price challenge to 
ensure the price is representative of the fair value of a particular 
cryptocurrency. If there is a change, the process will follow that 
described in the Recalculation Policy found on The Index Provider 
Digital Assets Indices Policies & Practices and Index Mathematics 
Methodology.
    In addition, The Index Provider currently provides the below 
additional quality assurance mechanisms with respect to crypto price 
validation. These checks are based on current market conditions, 
internal system processes and other assessments. The Index Provider 
reserves the right within its sole discretion to supplement, modify 
and/or remove individual checks and/or the parameters used within the 
checks, at any time without notice.
Crypto Price and Exchange Validation
     Check for any assets with no price received from Lukka;
     Check for any assets with a zero price received from 
Lukka;
     Check for any assets with a large change from the previous 
day. (Outliers  40%);
     Check for any assets with a stale price, aggregating the 
number of days the price remains stale;
     Confirm the Lukka price matches the Lukka Prime primary 
exchange price;
     Confirm the Lukka price is consistent with other Lukka 
Prime exchange prices;
     Check the volume of the Lukka Prime exchanges and 
challenge the Lukka primary exchange if the exchange is not within the 
top percentile of the trading volume for that asset;
     Aggregation of Lukka Prime primary exchange changes.
Availability of Information
    In addition to the price transparency of the Index, the Trust will 
provide information regarding the Trust's bitcoin holdings as well as 
additional data regarding the Trust. The Trust will provide an Intraday 
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 Regular Trading Hours (9:30 a.m. to 4:00 p.m. 
E.T.). The IIV will be calculated by using the prior day's closing NAV 
per Share as a base and updating that value during Regular Trading 
Hours to reflect changes in the value of the Trust's bitcoin holdings 
during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price \78\ in relation to the NAV 
as of the time the NAV is calculated and a calculation of the premium 
or discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will also disseminate the Trust's 
holdings on a daily basis on the Trust's website. The price of bitcoin 
will be made available by one or more major market data vendors, 
updated at least every 15 seconds during Regular Trading Hours. 
Information about the Index, including key elements of how the Index is 
calculated, will be publicly available at https://www.spglobal.com/spdji/en/indices/digital-assets/sp-bitcoin-index//.
---------------------------------------------------------------------------

    \78\ As defined in Rule 11.23(a)(3), the term ``BZX Official 
Closing Price'' shall mean the price disseminated to the 
consolidated tape as the market center closing trade.
---------------------------------------------------------------------------

    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the Consolidated Tape 
Association (``CTA'').
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.

[[Page 55764]]

The Bitcoin Custodian
    The Custodian carefully considers the design of the physical, 
operational and cryptographic systems for secure storage of the Trust's 
private keys in an effort to lower the risk of loss or theft. The 
Custodian utilizes a variety of security measures to ensure that 
private keys necessary to transfer digital assets remain uncompromised 
and that the Trust maintains exclusive ownership of its assets. The 
operational procedures of the Custodian are reviewed by third-party 
advisors with specific expertise in physical security. The devices that 
store the keys will never be connected to the internet or any other 
public or private distributed network--this is colloquially known as 
``cold storage.'' Only specific individuals are authorized to 
participate in the custody process, and no individual acting alone will 
be able to access or use any of the private keys. In addition, no 
combination of the executive officers of the Sponsor or the investment 
professionals managing the Trust, acting alone or together, will be 
able to access or use any of the private keys that hold the Trust's 
bitcoin.
Net Asset Value
    NAV means the total assets of the Trust including, but not limited 
to, all bitcoin and cash less total liabilities of the Trust, each 
determined on the basis of generally accepted accounting principles. 
The Administrator determines the NAV of the Trust on each day that the 
Exchange is open for regular trading, as promptly as practical after 
4:00 p.m. EST. The NAV of the Trust is the aggregate value of the 
Trust's assets less its estimated accrued but unpaid liabilities (which 
include accrued expenses). In determining the Trust's NAV, the 
Administrator values the bitcoin held by the Trust based on the price 
set by the Index as of 4:00 p.m. EST. The Administrator also determines 
the NAV per Share.
Creation and Redemption of Shares
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
baskets. Purchase orders must be placed by 4:00 p.m. Eastern Time, or 
the close of regular trading on the Exchange, whichever is earlier. The 
day on which an order is received is considered the purchase order 
date. The total deposit of bitcoin required is an amount of bitcoin 
that is in the same proportion to the total assets of the Trust, net of 
accrued expenses and other liabilities, on the date the order to 
purchase is properly received, as the number of Shares to be created 
under the purchase order is in proportion to the total number of Shares 
outstanding on the date the order is received. Each night, the Sponsor 
will publish the amount of bitcoin that will be required in exchange 
for each creation order. The Administrator determines the required 
deposit for a given day by dividing the number of bitcoin held by the 
Trust as of the opening of business on that business day, adjusted for 
the amount of bitcoin constituting estimated accrued but unpaid fees 
and expenses of the Trust as of the opening of business on that 
business day, by the quotient of the number of Shares outstanding at 
the opening of business divided by 5,000. The procedures by which an 
authorized participant can redeem one or more Creation Baskets mirror 
the procedures for the creation of Creation Baskets.
Rule 14.11(e)(4)--Commodity-Based Trust Shares
    The Shares will be subject to BZX Rule 14.11(e)(4), which sets 
forth the initial and continued listing criteria applicable to 
Commodity-Based Trust Shares. The Exchange will obtain a representation 
that the Trust's NAV will be calculated daily and that these values and 
information about the assets of the Trust will be made available to all 
market participants at the same time. The Exchange notes that, as 
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a 
trust that holds a specified commodity \79\ deposited with the trust; 
(b) issued by such trust in a specified aggregate minimum number in 
return for a deposit of a quantity of the underlying commodity; and (c) 
when aggregated in the same specified minimum number, may be redeemed 
at a holder's request by such trust which will deliver to the redeeming 
holder the quantity of the underlying commodity.
---------------------------------------------------------------------------

    \79\ For purposes of Rule 14.11(e)(4), the term commodity takes 
on the definition of the term as provided in the Commodity Exchange 
Act. As noted above, the CFTC has opined that Bitcoin is a commodity 
as defined in section 1a(9) of the Commodity Exchange Act. See 
Coinflip.
---------------------------------------------------------------------------

    Upon termination of the Trust, the Shares will be removed from 
listing. The Trustee, Delaware Trust Company, is a trust company having 
substantial capital and surplus and the experience and facilities for 
handling corporate trust business, as required under Rule 
14.11(e)(4)(E)(iv)(a) and that no change will be made to the trustee 
without prior notice to and approval of the Exchange. The Exchange also 
notes that, pursuant to Rule 14.11(e)(4)(F), neither the Exchange nor 
any agent of the Exchange shall have any liability for damages, claims, 
losses or expenses caused by any errors, omissions or delays in 
calculating or disseminating any underlying commodity value, the 
current value of the underlying commodity required to be deposited to 
the Trust in connection with issuance of Commodity-Based Trust Shares; 
resulting from any negligent act or omission by the Exchange, or any 
agent of the Exchange, or any act, condition or cause beyond the 
reasonable control of the Exchange, its agent, including, but not 
limited to, an act of God; fire; flood; extraordinary weather 
conditions; war; insurrection; riot; strike; accident; action of 
government; communications or power failure; equipment or software 
malfunction; or any error, omission or delay in the reports of 
transactions in an underlying commodity. Finally, as required in Rule 
14.11(e)(4)(G), the Exchange notes that any registered market maker 
(``Market Maker'') in the Shares must file with the Exchange in a 
manner prescribed by the Exchange and keep current a list identifying 
all accounts for trading in an underlying commodity, related commodity 
futures or options on commodity futures, or any other related commodity 
derivatives, which the registered Market Maker may have or over which 
it may exercise investment discretion. No registered Market Maker shall 
trade in an underlying commodity, related commodity futures or options 
on commodity futures, or any other related commodity derivatives, in an 
account in which a registered Market Maker, directly or indirectly, 
controls trading activities, or has a direct interest in the profits or 
losses thereof, which has not been reported to the Exchange as required 
by this Rule. In addition to the existing obligations under Exchange 
rules regarding the production of books and records (see, e.g., Rule 
4.2), the registered Market Maker in Commodity-Based Trust Shares shall 
make available to the Exchange such books, records or other information 
pertaining to transactions by such entity or registered or non-
registered employee affiliated with such entity for its or their own 
accounts for trading the underlying physical commodity, related 
commodity futures or options on commodity futures, or any other related 
commodity derivatives, as may be requested by the Exchange.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant factors in exercising its discretion to halt or suspend 
trading in the Shares. The Exchange will halt trading in the Shares 
under the conditions specified in BZX Rule 11.18. Trading may be halted

[[Page 55765]]

because of market conditions or for reasons that, in the view of the 
Exchange, make trading in the Shares inadvisable. These may include: 
(1) the extent to which trading is not occurring in the bitcoin 
underlying the Shares; or (2) whether other unusual conditions or 
circumstances detrimental to the maintenance of a fair and orderly 
market are present. Trading in the Shares also will be subject to Rule 
14.11(e)(4)(E)(ii), which sets forth circumstances under which trading 
in the Shares may be halted.
Trading Rules
    The Exchange deems the Shares to be equity securities, thus 
rendering trading in the Shares subject to the Exchange's existing 
rules governing the trading of equity securities. BZX will allow 
trading in the Shares during all trading sessions on the Exchange. The 
Exchange has appropriate rules to facilitate transactions in the Shares 
during all trading sessions. As provided in BZX Rule 11.11(a), the 
minimum price variation for quoting and entry of orders in securities 
traded on the Exchange is $0.01 where the price is greater than $1.00 
per share or $0.0001 where the price is less than $1.00 per share.
Surveillance
    The Exchange believes that its surveillance procedures are adequate 
to properly monitor the trading of the Shares on the Exchange during 
all trading sessions and to deter and detect violations of Exchange 
rules and the applicable federal securities laws. Trading of the Shares 
through the Exchange will be subject to the Exchange's surveillance 
procedures for derivative products, including Commodity-Based Trust 
Shares. The issuer has represented to the Exchange that it will advise 
the Exchange of any failure by the Trust or the Shares to comply with 
the continued listing requirements, and, pursuant to its obligations 
under section 19(g)(1) of the Exchange Act, the Exchange will surveil 
for compliance with the continued listing requirements. If the Trust or 
the Shares are not in compliance with the applicable listing 
requirements, the Exchange will commence delisting procedures under 
Exchange Rule 14.12. The Exchange may obtain information regarding 
trading in the Shares and Bitcoin Futures via ISG, from other exchanges 
who are members or affiliates of the ISG, or with which the Exchange 
has entered into a comprehensive surveillance sharing agreement.\80\
---------------------------------------------------------------------------

    \80\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

Information Circular
    Prior to the commencement of trading, the Exchange will inform its 
members in an Information Circular of the special characteristics and 
risks associated with trading the Shares. Specifically, the Information 
Circular will discuss the following: (i) the procedures for the 
creation and redemption of Baskets (and that the Shares are not 
individually redeemable); (ii) BZX Rule 3.7, which imposes suitability 
obligations on Exchange members with respect to recommending 
transactions in the Shares to customers; (iii) how information 
regarding the IIV and the Trust's NAV are disseminated; (iv) the risks 
involved in trading the Shares outside of Regular Trading Hours \81\ 
when an updated IIV will not be calculated or publicly disseminated; 
(v) the requirement that members deliver a prospectus to investors 
purchasing newly issued Shares prior to or concurrently with the 
confirmation of a transaction; and (vi) trading information.
---------------------------------------------------------------------------

    \81\ Regular Trading Hours is the time between 9:30 a.m. and 
4:00 p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, the Information Circular will advise members, prior to 
the commencement of trading, of the prospectus delivery requirements 
applicable to the Shares. Members purchasing the Shares for resale to 
investors will deliver a prospectus to such investors. The Information 
Circular will also discuss any exemptive, no-action and interpretive 
relief granted by the Commission from any rules under the Act.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act \82\ in general and section 6(b)(5) of the Act \83\ in 
particular in that it is 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 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.
---------------------------------------------------------------------------

    \82\ 15 U.S.C. 78f.
    \83\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\84\ including Commodity-Based Trust Shares,\85\ to be listed 
on U.S. national securities exchanges. In order for any proposed rule 
change from an exchange to be approved, the Commission must determine 
that, among other things, the proposal is consistent with the 
requirements of section 6(b)(5) of the Act, specifically including: (i) 
the requirement that a national securities exchange's rules are 
designed to prevent fraudulent and manipulative acts and practices; 
\86\ and (ii) the requirement that an exchange proposal be designed, in 
general, to protect investors and the public interest. The Exchange 
believes that this proposal is consistent with the requirements of 
section 6(b)(5) of the Act and that this filing sufficiently 
demonstrates that the CME Bitcoin Futures market represents a regulated 
market of significant size and that, on the whole, the manipulation 
concerns previously articulated by the Commission are sufficiently 
mitigated to the point that they are outweighed by quantifiable 
investor protection issues that would be resolved by approving this 
proposal.
---------------------------------------------------------------------------

    \84\ See Exchange Rule 14.11(f).
    \85\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \86\ As the Exchange has stated in a number of other public 
documents, it continues to believe that bitcoin is resistant to 
price manipulation and that ``other means to prevent fraudulent and 
manipulative acts and practices'' exist to justify dispensing with 
the requisite surveillance sharing agreement. The geographically 
diverse and continuous nature of bitcoin trading render it difficult 
and prohibitively costly to manipulate the price of bitcoin. The 
fragmentation across bitcoin platforms, the relatively slow speed of 
transactions, and the capital necessary to maintain a significant 
presence on each trading platform make manipulation of bitcoin 
prices through continuous trading activity challenging. To the 
extent that there are bitcoin exchanges engaged in or allowing wash 
trading or other activity intended to manipulate the price of 
bitcoin on other markets, such activity does not normally impact 
prices on other exchange because participants will generally ignore 
markets with quotes that they deem non-executable. The reason is 
that wash trading aims to manipulate the volume rather than the 
price of an asset to give the impression of heightened market 
activity in hopes of attracting investors to that asset. Moreover, 
wash trades are executed within an exchange rather than cross 
exchange since the entity executing the wash trades would aim to 
trade against itself, and as such, this can only happen within an 
exchange. Should the wash trades of that entity result in a 
deviation of the price on that exchange relative to others, 
arbitrageurs would then be able to capitalize on this mispricing, 
and bring the manipulated price back to equilibrium, resulting in a 
loss to the entity executing the wash trades. Moreover, the linkage 
between the bitcoin markets and the presence of arbitrageurs in 
those markets means that the manipulation of the price of bitcoin 
price on any single venue would require manipulation of the global 
bitcoin price in order to be effective. Arbitrageurs must have funds 
distributed across multiple trading platforms in order to take 
advantage of temporary price dislocations, thereby making it 
unlikely that there will be strong concentration of funds on any 
particular bitcoin exchange or OTC platform. As a result, the 
potential for manipulation on a trading platform would require 
overcoming the liquidity supply of such arbitrageurs who are 
effectively eliminating any cross-market pricing differences.

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

[[Page 55766]]

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a 
series of Commodity-Based Trust Shares, the Commission requires that an 
exchange demonstrate that there is a comprehensive surveillance-sharing 
agreement in place \87\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\88\ The only remaining 
issue to be addressed is whether the Bitcoin Futures market constitutes 
a market of significant size, which both the Exchange and the Sponsor 
believe that it does. 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 
manipulate the ETP, so that a surveillance-sharing agreement would 
assist the listing exchange 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.\89\
---------------------------------------------------------------------------

    \87\ As previously articulated by the Commission, ``The standard 
requires such surveillance-sharing agreements since ``they provide a 
necessary deterrent to manipulation because they facilitate the 
availability of information needed to fully investigate a 
manipulation if it were to occur.'' The Commission has emphasized 
that it is essential for an exchange listing a derivative securities 
product to enter into a surveillance-sharing agreement with markets 
trading underlying securities for the listing exchange to have the 
ability to obtain information necessary to detect, investigate, and 
deter fraud and market manipulation, as well as violations of 
exchange rules and applicable federal securities laws and rules. 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.'' The 
Commission has historically held that joint membership in ISG 
constitutes such a surveillance sharing agreement. See Wilshire 
Phoenix Disapproval.
    \88\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \89\ See Wilshire Phoenix Disapproval.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of 
significant size'' standard is not the only means for satisfying 
section 6(b)(5) of the act, specifically providing that a listing 
exchange could demonstrate that ``other means to prevent fraudulent and 
manipulative acts and practices'' are sufficient to justify dispensing 
with the requisite surveillance-sharing agreement.\90\
---------------------------------------------------------------------------

    \90\ See Winklevoss Order at 37580. The Commission has also 
specifically noted that it ``is not applying a `cannot be 
manipulated' standard; instead, the Commission is examining whether 
the proposal meets the requirements of the Exchange Act and, 
pursuant to its Rules of Practice, places the burden on the listing 
exchange to demonstrate the validity of its contentions and to 
establish that the requirements of the Exchange Act have been met.'' 
Id. at 37582.
---------------------------------------------------------------------------

(a) Manipulation of the ETP
    According to the Sponsor's research presented above, the Bitcoin 
Futures market is the leading market for bitcoin price formation. Where 
Bitcoin Futures lead the price in the spot market such that a potential 
manipulator of the bitcoin spot market (beyond just the constituents of 
the Index \91\) would have to participate in the Bitcoin Futures 
market, it follows that a potential manipulator of the Shares would 
similarly have to transact in the Bitcoin Futures market because the 
Index is based on spot prices. Further, the Trust only allows for in-
kind creation and redemption, which, as further described below, 
reduces the potential for manipulation of the Shares through 
manipulation of the Index or any of its individual constituents, again 
emphasizing that a potential manipulator of the Shares would have to 
manipulate the entirety of the bitcoin spot market, which is led by the 
Bitcoin Futures market. As such, the Exchange believes that part (a) of 
the significant market test outlined above is satisfied and that common 
membership in ISG between the Exchange and CME would assist the listing 
exchange in detecting and deterring misconduct in the Shares.
---------------------------------------------------------------------------

    \91\ As further described below, the ``Index'' for the Fund is 
the S&P Bitcoin Index. The current exchange composition of the Index 
is Binance, Bitfinex, Bitflyer, Bittrex, Bitstamp, Coinbase Pro, 
Gemini, HitBTC, Huobi, Kraken, KuCoin, and Poloniex.
---------------------------------------------------------------------------

(b) Predominant Influence on Prices in Spot and Bitcoin Futures
    The Exchange and Sponsor also believe that trading in the Shares 
would not be the predominant force on prices in the Bitcoin Futures 
market or spot market for a number of reasons, including the 
significant volume in the Bitcoin Futures market, the size of bitcoin's 
market cap, and the significant liquidity available in the spot market. 
In addition to the Bitcoin Futures market data points cited above, the 
spot market for bitcoin is also very liquid.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and 
Practices
    As noted above, the Commission also permits a listing exchange to 
demonstrate that ``other means to prevent fraudulent and manipulative 
acts and practices'' are sufficient to justify dispensing with the 
requisite surveillance-sharing agreement. The Exchange and Sponsor 
believe that such conditions are present. According to the Sponsor, a 
significant portion of the considerations around crypto pricing have 
historically stemmed from a lack of consistent pricing across markets. 
However, according to the Sponsor's research, cross-exchange spreads in 
Bitcoin have been declining consistently over the past several years. 
Based on the daily Bitcoin price series from several popular 
centralized exchanges \92\ the Sponsor has calculated the largest 
cross-exchange percentage spread (labelled as %C-Spread) by deducting 
the highest or maximum price
---------------------------------------------------------------------------

    \92\ The exchanges include Binance, Bitfinex, Bithumb, Bitstamp, 
Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, Kraken, 
Kucoin, and OKEX.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN16AU23.018

    (P) at time t from the lowest or minimum, and dividing by the 
lowest across all exchanges (i). Formally, this is expressed as:
    The results show a clear and sharp decline in the %C-Spread, 
indicating that the Bitcoin market has become more efficient as cross-
exchange prices have converged over time.

[[Page 55767]]

[GRAPHIC] [TIFF OMITTED] TN16AU23.019

    In addition, the magnitude of outlier % C-spreads has also declined 
over time. This boxplot shows that, not only did the median value of 
the %C-Spread decline over time, but also the extreme outlier values. 
For instance, the maximum %C-Spread for 2017, 2018, 2019, 2020, 2021, 
2022 and 2023 are 29.14%, 14.12%, 8.54%, 6.04%, 3.65%, 5.56% and 0.63%, 
respectively. The market has experienced a 22.68% year-on-year decline 
in the annual median %C-Spread indicating a greater degree of Bitcoin 
price convergence across exchanges and a more efficient market.
[GRAPHIC] [TIFF OMITTED] TN16AU23.020


[[Page 55768]]


    The dispersion ([sigma]) of Bitcoin Prices has also declined over 
the same period. This chart shows the 7-day rolling standard deviation 
of the %C-Spread from January 1, 2017 to February 1, 2023. The 
Sponsor's research finds that the dispersion in Bitcoin prices across 
all exchanges has decreased over time, indicating that prices on all 
the considered exchanges converge towards the intrinsic average much 
more efficiently. This suggests that the market has become better at 
quickly reaching a consensus price for Bitcoin.
    As the pricing of the crypto market becomes increasingly efficient, 
pricing methodologies become more accurate and less susceptible to 
manipulation. The clustering of prices across a variety of sources 
within the primary market points towards robust price discovery 
mechanisms and efficient arbitrage.
[GRAPHIC] [TIFF OMITTED] TN16AU23.021

    It is very important to note that the cross-exchange spreads, and 
therefore the process of price discovery in the Bitcoin market has 
improved significantly over time despite the market experiencing rather 
uniform albeit sinusoidal volatility. This can be shown in the graphs 
below where we can clearly observe a slightly decreasing yet consistent 
level of volatility in the Bitcoin market based on daily and hourly 
returns across the considered exchanges. Again, this further supports 
the argument that the Bitcoin market has exhibited significant 
improvements in terms of price discovery over time, irrespective and 
despite of the volatility of the asset itself, which can be attributed 
to efficient arbitrage operations.

[[Page 55769]]

[GRAPHIC] [TIFF OMITTED] TN16AU23.022

    One factor that has contributed to the overall efficiency of, and 
improved price discovery within the Bitcoin market is the increase in 
the number of participants, and subsequently, the total dollar amount 
allocated to this market. This can be illustrated by the following 
chart, which shows the number of wallet addresses holding Bitcoin from 
January 2016 to February 2023.

[[Page 55770]]

[GRAPHIC] [TIFF OMITTED] TN16AU23.023

    The large number of participants in the Bitcoin market has 
manifested itself in high liquidity in the market. This is exhibited in 
the following chart, which shows the daily aggregated dollar notional 
of the bid and ask order books within the first 100 price levels across 
several of the largest centralized crypto exchanges from February 2022 
to January 2023. Specifically, the dollar notional that is allocated 
closest to the mid price has hovered between $2.6 million and $12 
million over that period.
[GRAPHIC] [TIFF OMITTED] TN16AU23.024

    An increased notional order book suggests that there is a higher 
degree of consensus among investors regarding the price of Bitcoin. 
Moreover, this market characteristic hampers any attempt of price 
manipulation by any single large entity.
    As a robustness check, the Sponsor investigates whether the dollar 
notional in the order book changes significantly prior to and post an 
extreme price event. Specifically, for events constituting large 
increases in the price of Bitcoin, if the ask (or sell) side of the 
order book experiences a significant shrinkage in

[[Page 55771]]

the dollar notional right before the event, then this may be an 
indication of market manipulation whereby the ask-side of the order 
book becomes sufficiently thin for a large order to move the price 
upward. Similarly, for events constituting large decreases in the price 
of Bitcoin, if the bid (or buy) side of the order book experiences a 
significant shrinkage in the dollar notional prior to such events, then 
this may be an indication of market manipulation whereby the thinner 
bid-side of the order book may potentially lead to significant downward 
price movements.
    Using the top and bottom 0.1% of hourly price changes from February 
2022 to February 2023 as events of extreme upward and downward market 
movements, respectively, the Sponsor plotted the bid (left charts) and 
ask (right charts) dollar notional of the Bitcoin order book within a 
six-hour window around these events in the chart below, which shows the 
results for extreme upward price movements. The extreme price events 
(indicated by the dashed green lines) perfectly coincide with the 
decrease in dollar notional of the ask-side of the order book. This is 
indicative of an efficient market, whereby large market movements are 
quickly and dynamically absorbed by a thick orderbook. Moreover, the 
dollar notional on the ask side after the event is replenished back to 
its pre-event level, which implies that market participants' reactions 
are quick to restore the market back to its equilibrium level.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN16AU23.025

    The same results and conclusions are found for extreme downward 
price movements. The charts below show that such price events perfectly 
coincide with shrinkages on the bid side of the order book (left 
charts), indicating an

[[Page 55772]]

efficient and dynamic Bitcoin market. Moreover, the bid-side of the 
order book after the event is also restored back to its pre-event 
level, which suggests that the market is symmetrically efficient in 
moving back to equilibrium.
[GRAPHIC] [TIFF OMITTED] TN16AU23.026

BILLING CODE 8011-01-C
    The Exchange is proposing to take additional steps to those 
described above to supplement its ability to obtain information that 
would be helpful in detecting, investigating, and deterring fraud and 
market manipulation in the Commodity-Based Trust Shares. On June 21, 
2023, the Exchange reached an agreement on terms with Coinbase, Inc. 
(``Coinbase''), an operator of a United States-based spot trading 
platform for Bitcoin that represents a substantial portion of US-based 
and USD denominated Bitcoin trading,\93\ to enter into a surveillance-
sharing agreement (``Spot BTC SSA'') and executed an associated term 
sheet. Based on this agreement on terms, the Exchange and Coinbase will 
finalize and execute a definitive agreement that the parties expect to 
be executed prior to allowing trading of the Commodity-Based Trust 
Shares.
---------------------------------------------------------------------------

    \93\ According to a Kaiko Research report dated June 26, 2023, 
Coinbase represented roughly 50% of exchange trading volume in USD-
BTC trading on a daily basis during May 2023.
---------------------------------------------------------------------------

    The Spot BTC SSA is expected to be a bilateral surveillance-sharing 
agreement between the Exchange and Coinbase that is intended to 
supplement the Exchange's market surveillance program. The Spot BTC SSA 
is expected to have the hallmarks of a surveillance-sharing agreement 
between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot Bitcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the

[[Page 55773]]

Commodity-Based Trust Shares.\94\ This means that the Exchange expects 
to receive market data for orders and trades from Coinbase, which it 
will utilize in surveillance of the trading of Commodity-Based Trust 
Shares. In addition, the Exchange can request further information from 
Coinbase related to spot bitcoin trading activity on the Coinbase 
exchange platform, if the Exchange determines that such information 
would be necessary to detect and investigate potential manipulation in 
the trading of the Commodity-Based Trust Shares.\95\
---------------------------------------------------------------------------

    \94\ For additional information regarding ISG and the hallmarks 
of surveillance-sharing between ISG members, see https://isgportal.org/overview.
    \95\ The Exchange also notes that it already has in place ISG-
like surveillance sharing agreement with Cboe Digital Exchange, LLC 
and Cboe Clear Digital, LLC.
---------------------------------------------------------------------------

    Finally, offering only in-kind creation and redemption will provide 
unique protections against potential attempts to manipulate the Shares. 
While the Sponsor believes that the Index which it uses to value the 
Trust's bitcoin is itself resistant to manipulation based on the 
methodology further described below, the fact that creations and 
redemptions are only available in-kind makes the manipulability of the 
Index significantly less important. Specifically, because the Trust 
will not accept cash to buy bitcoin in order to create new shares or, 
barring a forced redemption of the Trust or under other extraordinary 
circumstances, be forced to sell bitcoin to pay cash for redeemed 
shares, the price that the Sponsor uses to value the Trust's bitcoin is 
not particularly important.\96\ When authorized participants are 
creating with the Trust, they need to deliver a certain number of 
bitcoin per share (regardless of the valuation used) and when they're 
redeeming, they can similarly expect to receive a certain number of 
bitcoin per share. As such, even if the price used to value the Trust's 
bitcoin is manipulated (which the Sponsor believes that its methodology 
is resistant to), 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. This 
not only mitigates the risk associated with potential manipulation, but 
also discourages and disincentivizes manipulation of the Index because 
there is little financial incentive to do so.
---------------------------------------------------------------------------

    \96\ While the Index will not be particularly important for the 
creation and redemption process, it will be used for calculating 
fees.
---------------------------------------------------------------------------

(ii) Designed To Protect Investors and the Public Interest
    The Exchange believes that the proposal is designed to protect 
investors and the public interest. Over the past several years, U.S. 
investor exposure to bitcoin through OTC Bitcoin Funds has grown into 
the tens of billions of dollars and more than a billion dollars of 
exposure through Bitcoin Futures ETFs. With that growth, so too has 
grown the quantifiable investor protection issues to U.S. investors 
through roll costs for Bitcoin Futures ETFs and premium/discount 
volatility and management fees for OTC Bitcoin Funds. The Exchange 
believes that the concerns related to the prevention of fraudulent and 
manipulative acts and practices have been sufficiently addressed to be 
consistent with the Act and, to the extent that the Commission 
disagrees with that assertion, also believes that such concerns are now 
outweighed by these investor protection concerns. As such, the Exchange 
believes that approving this proposal (and comparable proposals) 
provides the Commission with the opportunity to allow U.S. investors 
with 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 and costs associated with 
investing in Bitcoin Futures ETFs and operating companies that are 
imperfect proxies for bitcoin exposure; and (iv) providing an 
alternative to custodying spot bitcoin.
Commodity-Based Trust Shares
    The Exchange believes that the proposed rule change is designed to 
prevent fraudulent and manipulative acts and practices in that the 
Shares will be listed on the Exchange pursuant to the initial and 
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange 
believes that its surveillance procedures are adequate to properly 
monitor the trading of the Shares on the Exchange during all trading 
sessions and to deter and detect violations of Exchange rules and the 
applicable federal securities laws. Trading of the Shares through the 
Exchange will be subject to the Exchange's surveillance procedures for 
derivative products, including Commodity-Based Trust Shares. The issuer 
has represented to the Exchange that it will advise the Exchange of any 
failure by the Trust or the Shares to comply with the continued listing 
requirements, and, pursuant to its obligations under section 19(g)(1) 
of the Exchange Act, the Exchange will surveil for compliance with the 
continued listing requirements. If the Trust or the Shares are not in 
compliance with the applicable listing requirements, the Exchange will 
commence delisting procedures under Exchange Rule 14.12. The Exchange 
may obtain information regarding trading in the Shares and listed 
bitcoin derivatives via the ISG, from other exchanges who are members 
or affiliates of the ISG, or with which the Exchange has entered into a 
comprehensive surveillance sharing agreement.
Availability of Information
    The Exchange also believes that the proposal promotes market 
transparency in that a large amount of information is currently 
available about bitcoin and will be available regarding the Trust and 
the Shares. In addition to the price transparency of the Index, the 
Trust will provide information regarding the Trust's bitcoin holdings 
as well as additional data regarding the Trust. The Trust will provide 
an IIV per Share updated every 15 seconds, as calculated by the 
Exchange or a third-party financial data provider during the Exchange's 
Regular Trading Hours (9:30 a.m. to 4:00 p.m. E.T.). The IIV will be 
calculated by using the prior day's closing NAV per Share as a base and 
updating that value during Regular Trading Hours to reflect changes in 
the value of the Trust's bitcoin holdings during the trading day.
    The IIV disseminated during Regular Trading Hours should not be 
viewed as an actual real-time update of the NAV, which will be 
calculated only once at the end of each trading day. The IIV will be 
widely disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours by one or more major market data 
vendors. In addition, the IIV will be available through on-line 
information services.
    The website for the Trust, which will be publicly accessible at no 
charge, will contain the following information: (a) the current NAV per 
Share daily and the prior business day's NAV and the reported closing 
price; (b) the BZX Official Closing Price in relation to the NAV as of 
the time the NAV is calculated and a calculation of the premium or 
discount of such price against such NAV; (c) data in chart form 
displaying the frequency distribution of discounts and premiums of the 
Official Closing Price against the NAV, within appropriate ranges for 
each of the four previous calendar quarters (or for the life of the 
Trust, if shorter); (d) the prospectus; and (e) other applicable 
quantitative information. The Trust will

[[Page 55774]]

also disseminate the Trust's holdings on a daily basis on the Trust's 
website. The price of bitcoin will be made available by one or more 
major market data vendors, updated at least every 15 seconds during 
Regular Trading Hours. Information about the Index, including key 
elements of how the Index is calculated, will be publicly available at 
https://www.spglobal.com/spdji/en/indices/digital-assets/sp-bitcoin-index/.
    The NAV for the Trust will be calculated by the Administrator once 
a day and will be disseminated daily to all market participants at the 
same time. Quotation and last-sale information regarding the Shares 
will be disseminated through the facilities of the CTA.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters, as well as the Index. Information relating to 
trading, including price and volume information, in bitcoin is 
available from major market data vendors and from the exchanges on 
which bitcoin are traded. Depth of book information is also available 
from bitcoin exchanges. The normal trading hours for bitcoin exchanges 
are 24 hours per day, 365 days per year.
    In sum, the Exchange believes that this proposal is consistent with 
the requirements of section 6(b)(5) of the Act, that this filing 
sufficiently demonstrates that the CME Bitcoin Futures market 
represents a regulated market of significant size, and that on the 
whole the manipulation concerns previously articulated by the 
Commission are sufficiently mitigated to the point that they are 
outweighed by investor protection issues that would be resolved by 
approving this proposal.
    The Exchange believes that the proposal is, in particular, designed 
to protect investors and the public interest. The investor protection 
issues for U.S. investors has grown significantly over the last several 
years, through roll costs for Bitcoin Futures ETFs and premium/discount 
volatility and management fees for OTC Bitcoin Funds. As discussed 
throughout, this growth investor protection concerns need to be re-
evaluated and rebalanced with the prevention of fraudulent and 
manipulative acts and practices concerns that previous disapproval 
orders have relied upon. Finally, the Exchange notes that in addition 
to all of the arguments herein which it believes sufficiently establish 
the CME Bitcoin Futures market as a regulated market of significant 
size, it is logically inconsistent to find that the CME Bitcoin Futures 
market is a significant market as it relates to the CME Bitcoin Futures 
market, but not a significant market as it relates to the bitcoin spot 
market for the numerous reasons laid out above.
    For the above reasons, the Exchange believes that the proposed rule 
change is consistent with the requirements of section 6(b)(5) of the 
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purpose of the Act. The Exchange notes that the 
proposed rule change, rather will facilitate the listing and trading of 
an additional exchange-traded product that will enhance competition 
among both market participants and listing venues, to the benefit of 
investors and the marketplace.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2023-028, as Modified by Amendment No. 3, and Grounds for 
Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to section 
19(b)(2)(B) of the Act \97\ to determine whether the proposed rule 
change, as modified by Amendment No. 3, 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, as modified by Amendment No. 3.
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to section 19(b)(2)(B) of the Act,\98\ 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.'' \99\
---------------------------------------------------------------------------

    \98\ Id.
    \99\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission asks that commenters address the sufficiency of the 
Exchange's statements in support of the proposal, which are set forth 
in Amendment No. 3, in addition to any other comments they may wish to 
submit about the proposed rule change, as modified by Amendment No. 3. 
In particular, the Commission seeks comment on the following questions 
and asks commenters to submit data where appropriate to support their 
views:
    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. Based on data and analysis provided and the academic research 
cited by the Exchange,\100\ do commenters agree with the Exchange that 
the CME, on which CME Bitcoin Futures trade, represents a regulated 
market of significant size related to spot bitcoin?\101\ 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 
the CME to manipulate the Shares? Do commenters agree with the 
Exchange's assertion that trading in the Shares would not be the 
predominant force on prices in the CME Bitcoin Futures market or spot 
market, due to ``the significant volume in the Bitcoin Futures market, 
the size of bitcoin's market cap, and the significant liquidity 
available in the spot market''? \102\
---------------------------------------------------------------------------

    \100\ See supra Item II.A.
    \101\ See id.
    \102\ See id.
---------------------------------------------------------------------------

    3. The Exchange states that bitcoin is resistant to price 
manipulation and that other means to prevent fraudulent and 
manipulative acts and practices ``exist to justify dispensing with the 
requisite surveillance sharing agreement'' with a regulated market of 
significant size related to spot bitcoin.\103\ In support of its 
assertion, the Exchange provides data

[[Page 55775]]

and analysis \104\ to indicate that the spot bitcoin market is 
``increasingly efficient,'' with ``high liquidity'' and a ``higher 
degree of consensus among investors regarding the price of [b]itcoin,'' 
making it ``less susceptible to manipulation.'' \105\ Do commenters 
believe the Exchange has shown that the bitcoin market is resistant to 
price manipulation?
---------------------------------------------------------------------------

    \103\ See id.
    \104\ See id.
    \105\ See id.
---------------------------------------------------------------------------

    4. The Exchange also states that it will execute a surveillance-
sharing agreement with Coinbase that is intended to supplement the 
Exchange's market surveillance program. According to the Exchange, the 
agreement is ``expected to have the hallmarks of a surveillance-sharing 
agreement between two members of the ISG, which would give the Exchange 
supplemental access to data regarding spot [b]itcoin trades on Coinbase 
where the Exchange determines it is necessary as part of its 
surveillance program for the Commodity-Based Trust Shares.'' \106\ 
Based on the description of the surveillance-sharing agreement as 
provided by the Exchange herein, what are commenters' views of such an 
agreement if finalized and executed? Do commenters agree with the 
Exchange's assertion that such an agreement with Coinbase would be 
``helpful in detecting, investigating, and deterring fraud and 
manipulation in the Commodity-Based Trust Shares''? \107\
---------------------------------------------------------------------------

    \106\ See id. The Exchange states that ``[t]his means that the 
Exchange expects to receive market data for orders and trades from 
Coinbase, which it will utilize in surveillance of the trading of 
Commodity-Based Trust Shares.'' Id.
    \107\ See id.
---------------------------------------------------------------------------

IV. 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.\108\
---------------------------------------------------------------------------

    \108\ 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).
---------------------------------------------------------------------------

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change, as modified by 
Amendment No. 3, should be approved or disapproved by September 6, 
2023. Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by September 20, 2023.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
file number SR-CboeBZX-2023-028 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-CboeBZX-2023-028. 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 (https://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 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. Do not 
include personal identifiable information in submissions; you should 
submit only information that you wish to make available publicly. We 
may redact in part or withhold entirely from publication submitted 
material that is obscene or subject to copyright protection. All 
submissions should refer to file number SR-CboeBZX-2023-028 and should 
be submitted on or before September 6, 2023. Rebuttal comments should 
be submitted by September 20, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\109\
---------------------------------------------------------------------------

    \109\ 17 CFR 200.30-3(a)(12); 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2023-17603 Filed 8-15-23; 8:45 am]
BILLING CODE 8011-01-P