[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Notices]
[Pages 2387-2413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00499]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99288; File No. SR-CboeBZX-2023-028]


Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of 
Filing of Amendment No. 5 to 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

January 8, 2024.
    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 (``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, which amended and replaced the 
proposed rule change, as modified by Amendment No. 2, in its entirety. 
On August 11, 2023, the Commission noticed Amendment No. 3 and 
instituted proceedings to determine whether to disapprove the proposed 
rule change, as modified by Amendment No. 3.\6\ On September 26, 2023, 
the Commission designated a longer period for Commission action on the 
proposed

[[Page 2388]]

rule change, as modified by Amendment No. 3.\7\ On October 24, 2023, 
the Exchange filed Amendment No. 4 to the proposed rule change, which 
amended and replaced the proposed rule change, as modified by Amendment 
No. 3, in its entirely. On January 5, 2024, the Exchange filed 
Amendment No. 5 to the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. Amendment No. 
5 amended and replaced the proposed rule change, as modified by 
Amendment No. 4, in its entirety. The Commission is publishing this 
notice to solicit comments on the proposed rule change, as modified by 
Amendment No. 5, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 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).
    \6\ See Securities Exchange Act Release No. 98112, 88 FR 55743 
(Aug. 16, 2023).
    \7\ See Securities Exchange Act Release No. 98530, 88 FR 67851 
(Oct. 2, 2023). The Commission designated January 10, 2024, as the 
date by which the Commission shall approve or disapprove the 
proposed rule change.
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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''),\8\ under BZX Rule 14.11(e)(4), Commodity-Based Trust 
Shares.
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    \8\ 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.
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    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. 5 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 on June 28, 2023, Amendment No. 2 on June 
30, 2023, and Amendment No. 3 on July 11, 2023, and Amendment No. 4 on 
October 24, 2023. The Exchange submits this Amendment No. 5 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),\9\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.10 11 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'').\12\ As further 
discussed below, the Commission has historically approved or 
disapproved exchange filings to list and trade series of Trust Issued 
Receipts,\13\ 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.\14\ 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.\15\

[[Page 2389]]

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 exchange-traded products (``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 \16\ and Commodity-Based 
Trust Shares, including gold, silver, platinum, palladium, copper, and 
other 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.'' \17\
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    \9\ 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).
    \10\ Any of the statements or representations regarding the 
index composition, the description of the portfolio or reference 
assets, limitations on portfolio holdings or reference assets, 
dissemination and availability of index, reference asset, and 
intraday indicative values, or the applicability of Exchange listing 
rules specified in this filing to list a series of Other Securities 
(collectively, ``Continued Listing Representations'') shall 
constitute continued listing requirements for the Shares listed on 
the Exchange.
    \11\ 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).
    \12\ See draft Amendment No. 5 to the Registration Statement on 
Form S-1, dated December 28, 2023 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.
    \13\ See Exchange Rule 14.11(f)(1).
    \14\ 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'').
    \15\ 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).
    \16\ See Exchange Rule 14.11(e)(5).
    \17\ See Winklevoss Order at 37592.
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    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 Chicago Mercantile Exchange (``CME'') bitcoin futures 
(``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.\18\ 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.
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    \18\ 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'').
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    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 trading platforms 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.\19\ The

[[Page 2390]]

first rule filing proposing to list an ETP to provide exposure to 
bitcoin in the U.S. was submitted by the Exchange on June 30, 2016.\20\ 
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.\21\ 
Similarly, regulated U.S. Bitcoin Futures contracts did not exist. The 
CFTC had determined that bitcoin is a commodity,\22\ 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.\23\ While the first over-the-counter 
bitcoin fund launched in 2013, public trading was limited and the fund 
had only $60 million in assets.\24\ 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 (``ICI'') and Securities Industry and 
Financial Markets Association (``SIFMA'') that it was not aware, at 
that time, of a single custodian providing fund custodial services for 
digital assets.\25\ 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 \26\ and 
shares in investment vehicles holding Bitcoin Futures.\27\ 
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; \28\ 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''); 
\29\ 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; \30\ 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,\31\ and multiple transfer agents who provide services for 
digital asset securities registered with the Commission.\32\
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    \19\ 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/.
    \20\ See Winklevoss Order.
    \21\ 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.
    \22\ 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.''
    \23\ 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.
    \24\ 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.
    \25\ 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.
    \26\ 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.
    \27\ 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.
    \28\ See Investment Advisers Act Release No. 6240 88 FR 14672 
(March 9, 2023) (Safeguarding Advisory Client Assets).
    \29\ 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).
    \30\ 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.
    \31\ 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.
    \32\ 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.
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    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.\33\ 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 CME Bitcoin Futures on a daily basis.\34\ 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.\35\ As of

[[Page 2391]]

February 14, 2023 the NYDFS has granted no fewer than thirty-four 
BitLicenses,\36\ 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.\37\ 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.\38\
---------------------------------------------------------------------------

    \33\ As of February 1, 2023, the total market cap of all bitcoin 
in circulation was approximately $450 billion.
    \34\ Data sourced from the CME Bitcoin Futures Report: 30 March, 
2023, available at: https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.htm.
    \35\ 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 trading platforms. See CFTC 
Release No. 8680-23 (March 27, 2023), available at: https://www.cftc.gov/PressRoom/PressReleases/8680-23.
    \36\ See https://www.dfs.ny.gov/virtual_currency_businesses.
    \37\ The ``Custodian'' is Coinbase Trust Company, LLC.
    \38\ 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.'' 
\39\ 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.\40\ 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.
---------------------------------------------------------------------------

    \39\ 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.
    \40\ 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 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; \41\ 
(iii) purchasing shares of operating companies that they believe will 
provide proxy exposure to bitcoin with limited disclosure about the 
associated risks; \42\ or (iv) purchasing Bitcoin Futures exchange-
traded funds (``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 ETFs holding 
physical bitcoin) to gain exposure to bitcoin. Similarly, investors in 
Switzerland and across Europe have access to ETPs (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.\43\
---------------------------------------------------------------------------

    \41\ 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.
    \42\ 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.
    \43\ 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 
crypto asset 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,\44\ Celsius Network LLC,\45\ BlockFi Inc.\46\ and Voyager Digital 
Holdings, Inc.\47\ 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 crypto asset space. As further 
described below, the Trust, like all other series of Commodity-Based 
Trust Shares, is designed to protect investors against the

[[Page 2392]]

risk of losses through fraud and insolvency that arise by holding 
digital assets, including bitcoin, on centralized platforms.
---------------------------------------------------------------------------

    \44\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \45\ See Celsius Network LLC, et al., Case No. 22-10964.
    \46\ See BlockFi Inc., Case No. 22-19361.
    \47\ 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. ETFs 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.\48\ Leaving aside the analysis of that 
standard until later in this proposal,\49\ the Exchange believes 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:
---------------------------------------------------------------------------

    \48\ 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.
    \49\ 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.\50\
---------------------------------------------------------------------------

    \50\ 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'' \51\ 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 Sponsor's research.
---------------------------------------------------------------------------

    \51\ Grayscale Investments, LLC v. Securities and Exchange 
Commission, et al., Case No. 22-1142.
---------------------------------------------------------------------------

    The structure of Bitcoin Futures ETFs provides negative outcomes 
for buy and hold investors as compared to a Spot Bitcoin ETP.\52\ 
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.
---------------------------------------------------------------------------

    \52\ 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

[[Page 2393]]

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),\53\ 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 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.
---------------------------------------------------------------------------

    \53\ 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 \54\
---------------------------------------------------------------------------

    \54\ 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.\55\ 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.
---------------------------------------------------------------------------

    \55\ According to CME, the CME CF Bitcoin Reference Rate 
aggregates the trade flow of major bitcoin spot trading platforms 
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 \56\ (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 trading platforms \57\ 
(categorized as unregulated and used as the denominator) from January 
1, 2018 to January 31, 2023.
---------------------------------------------------------------------------

    \56\ Data on Bitcoin Futures is available at https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.volume.html.
    \57\ Data on bitcoin volume traded on cryptocurrency trading 
platforms is available at https://www.cryptocompare.com.

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

[[Page 2394]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.051

    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 trading platforms, ETP providers, and 
the CME from January 20, 2021 to February 1, 2023,\58\ the Sponsor 
calculates the Pearson correlation of returns \59\ across these markets 
and find a high degree of correlation.
---------------------------------------------------------------------------

    \58\ The calculation of daily correlations used the period 
January 20, 2021 to February 1, 2023 as this is the common period 
across all the trading platforms and data sources being analyzed.
    \59\ 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 trading platforms 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

[[Page 2395]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.052

    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 trading 
platforms and between the CME Bitcoin Futures and centralized trading 
platforms on an hourly basis, and no less than 78% on a minutely basis. 
This suggests that bitcoin prices on centralized trading platforms 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.

[[Page 2396]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.053


[[Page 2397]]


[GRAPHIC] [TIFF OMITTED] TN12JA24.054

    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.\60\ 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.
---------------------------------------------------------------------------

    \60\ 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 2398]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.055

    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] TN12JA24.056

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 2399]]

that Bitcoin Futures lead the bitcoin spot market in price 
formation.\61\
---------------------------------------------------------------------------

    \61\ 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 . . .''
---------------------------------------------------------------------------

Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued 
Receipts,\62\ including Commodity-Based Trust Shares,\63\ 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; 
\64\ 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.
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    \62\ See Exchange Rule 14.11(f).
    \63\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \64\ 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 trading platforms 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 trading platforms 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 trading platform 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.
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(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 \65\ with a regulated market of significant size. 
Both the Exchange and CME are members of the Intermarket Surveillance 
Group (``ISG'').\66\ 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.\67\
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    \65\ 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 constitutes such a surveillance 
sharing agreement. See Wilshire Phoenix Disapproval.
    \66\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \67\ See Wilshire Phoenix Disapproval.
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    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.\68\
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    \68\ 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.
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(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 \69\) 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. 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.
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    \69\ As further described below, the ``Index'' for the Trust is 
the CME CF Bitcoin Reference Rate--New York Variant. The current 
trading platform composition of the Index is Coinbase, Bistamp, 
Kraken, itBit, LMAX Digital, and Gemini (the ``Constituent 
Platforms'').
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(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

[[Page 2400]]

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-platforms spreads in bitcoin have been 
declining consistently over the past several years. Based on the daily 
bitcoin price series from several popular centralized trading platforms 
\70\ the Sponsor has calculated the largest cross-platform 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 trading platforms (i). Formally, this is expressed 
as:
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    \70\ The trading platforms include Binance, Bitfinex, Bithumb, 
Bitstamp, Cexio, Coinbase, Coinone, Gateio, Gemini, HuobiPro, itBit, 
Kraken, Kucoin, and OKEX.
[GRAPHIC] [TIFF OMITTED] TN12JA24.057

    The results show a clear and sharp decline in the %C-Spread, 
indicating that the bitcoin market has become more efficient as cross-
platform prices have converged over time.
[GRAPHIC] [TIFF OMITTED] TN12JA24.058

    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 trading 
platforms and a more efficient market.

[[Page 2401]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.059

    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 trading platforms has decreased over time, indicating that prices 
on all the considered trading platforms 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.

[[Page 2402]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.060

    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.
[GRAPHIC] [TIFF OMITTED] TN12JA24.061

    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 trading platforms 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.

[[Page 2403]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.062

    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 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.
BILLING CODE 8011-01-P

[[Page 2404]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.063

    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 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.

[[Page 2405]]

[GRAPHIC] [TIFF OMITTED] TN12JA24.064

BILLING CODE 8011-01-C
(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 (the

[[Page 2406]]

``Subadviser'') \71\ is the sub-adviser of the Trust and will provide 
data, research, and, as needed, operational support to the Trust, 
including with respect to assistance in the marketing of the Shares. As 
noted above, Coinbase Custody Trust Company, LLC, is the Custodian and 
will be responsible for custody of the Trust's bitcoin. The Bank of New 
York Mellon (the ``Cash Custodian'') will act as custodian of the 
Trust's cash and cash equivalents.
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    \71\ The Subadviser is an investment adviser. An investment 
adviser to an open-end fund is required to be registered under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). As a result, 
the Adviser and its related personnel are subject to the provisions 
of Rule 204A-1 under the Advisers Act relating to codes of ethics. 
This Rule requires investment advisers to adopt a code of ethics 
that reflects the fiduciary nature of the relationship to clients as 
well as compliance with other applicable securities laws. 
Accordingly, procedures designed to prevent the communication and 
misuse of non-public information by an investment adviser must be 
consistent with Rule 204A-1 under the Advisers Act. In addition, 
Rule 206(4)-7 under the Advisers Act makes it unlawful for an 
investment adviser to provide investment advice to clients unless 
such investment adviser has (i) adopted and implemented written 
policies and procedures reasonably designed to prevent violation, by 
the investment adviser and its supervised persons, of the Advisers 
Act and the Commission rules adopted thereunder; (ii) implemented, 
at a minimum, an annual review regarding the adequacy of the 
policies and procedures established pursuant to subparagraph (i) 
above and the effectiveness of their implementation; and (iii) 
designated an individual (who is a supervised person) responsible 
for administering the policies and procedures adopted under 
subparagraph (i) above.
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    According to the Registration Statement, each Share will represent 
a fractional undivided beneficial interest in the Trust. The Trust's 
assets will only consist of bitcoin, cash, and cash equivalents.\72\
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    \72\ Cash equivalents are short-term instruments with maturities 
of less than 3 months.
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    According to the Registration Statement, the Trust is neither an 
investment company registered under the Investment Company Act of 1940, 
as amended,\73\ 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.
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    \73\ 15 U.S.C. 80a-1.
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    When the Trust creates or redeems its Shares, it will do so in cash 
transactions in blocks of 5,000 Shares (a ``Creation Basket'') at the 
Trust's net asset value (``NAV''). Authorized participants will 
deliver, or facilitate the delivery of, cash to the Trust's account 
with the Cash Custodian, in exchange for Shares when they create 
Shares, and the Trust, through the Cash Custodian, will deliver cash 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.
    As noted above, the Trust is designed to protect investors against 
the risk of losses through fraud and insolvency that arise by holding 
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,\74\ 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.
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    \74\ 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.
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(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. In such 
cases, a third party will use cash to buy and deliver bitcoin to create 
Shares or withdraw and sell bitcoin for cash to redeem Shares, on 
behalf of the Trust. Authorized participants will deliver cash to the 
Trust's account with the Cash Custodian in exchange for Shares of the 
Trust, and the Trust, through the Cash Custodian, will deliver cash to 
authorized participants when those authorized participants redeem 
Shares of the Trust. The Transfer Agent will facilitate the settlement 
of Shares in response to the placement of creation orders and 
redemption orders from authorized participants. The creation and 
redemption procedures are administered by the Transfer Agent, an 
independent third party. Specifically, Shares are issued in registered 
form in accordance with the Trust agreement.\75\ The Transfer Agent has 
been appointed registrar and transfer agent for the purpose of 
transferring Shares in certificated form. The Transfer Agent keeps a 
record of all shareholders and holder of the Shares in certified form 
in the registry. The Sponsor recognizes transfers of Shares in 
certified form only if done in accordance with the Trust agreement. 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, and transfer of such bitcoin to or from the Custodian 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.
---------------------------------------------------------------------------

    \75\ The Trust agreement refers to the ``Amended and Restated 
Trust Agreement of Ark 21Shares Bitcoin ETF.''
---------------------------------------------------------------------------

(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.
(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,

[[Page 2407]]

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 CME CF 
Bitcoin Reference Rate--New York Variant (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 cash transactions with authorized participants. The 
Trust is not actively managed.
The Index
    As described in the Registration Statement, the Trust will use the 
Index to calculate the Trust's NAV. The Trust will determine the 
bitcoin Index price and value its Shares daily based on the value of 
bitcoin as reflected by the Index. The Index is calculated daily and 
aggregates the notional value of bitcoin trading activity across major 
bitcoin spot trading platforms. The Index currently uses substantially 
the same methodology as the CME CF Bitcoin Reference Rate (``BRR''), 
including utilizing the same constituent bitcoin trading platforms, 
which is the underlying rate to determine settlement of CME Bitcoin 
Futures contracts, except that the Index is calculated as of 4 p.m. ET, 
whereas the BRR is calculated as of 4 p.m. London time. The Index is 
designed based on the International Organization of Securities 
Commissions (``IOSCO'') Principals for Financial Benchmarks. The 
administrator of the Index is CF Benchmarks Ltd. (the ``Index 
Provider''). The Trust also uses the bitcoin Index price to calculate 
its bitcoin holdings, which is the aggregate U.S. Dollar value of 
bitcoins in the Trust, based on the bitcoin Index price, less its 
liabilities and expenses.
    The Index was created to facilitate financial products based on 
bitcoin. It serves as a once-a-day benchmark rate of the U.S. dollar 
price of bitcoin (USD/BTC), calculated as of 4 p.m. ET. The Index, 
which has been calculated and published since February 28, 2022, 
aggregates the trade flow of several bitcoin trading platforms, during 
an observation window between 3:00 p.m. and 4:00 p.m. ET into the U.S. 
dollar price of one bitcoin at 4:00 p.m. ET. Specifically, the Index is 
calculated based on the ``Relevant Transactions'' (as defined below) of 
all of its constituent bitcoin trading platforms, which are currently 
Coinbase, Bitstamp, Kraken, itBit, LMAX Digital and Gemini (the 
``Constituent Platforms''), as follows:
     All Relevant Transactions are added to a joint list, 
recording the time of execution, trade price and size for each 
transaction.
     The list is partitioned by timestamp into 12 equally-sized 
time intervals of 5 (five) minute length.
     For each partition separately, the volume-weighted median 
trade price is calculated from the trade prices and sizes of all 
Relevant Transactions, i.e., across all Constituent Platforms. A 
volume-weighted median differs from a standard median in that a 
weighting factor, in this case trade size, is factored into the 
calculation.
     The Index is then determined by the equally-weighted 
average of the volume medians of all partitions.
Description of the Index, Index Construction and Maintenance
    The Index does not include any futures prices in its methodology. A 
``Relevant Transaction'' is any cryptocurrency versus U.S. dollar spot 
trade that occurs during the observation window between 3:00 p.m. and 
4:00 p.m. ET on a Constituent Platform in the BTC/USD pair that is 
reported and disseminated by a Constituent Platform through its 
publicly available Application Programming Interface (``API'') and 
observed by the Index Provider.
    An oversight function is implemented by the Index Provider in 
seeking to ensure that the Index is administered through the Index 
Provider's codified policies for Index integrity, which include a 
conflicts of interest policy, a control framework, an accountability 
framework, and an input data policy. The Index is subject to oversight 
by the CME CF Oversight Committee. The CME CF Oversight Committee shall 
be comprised of at least five members, including at least: (i) two who 
are representatives of CME (``CME Members''); (ii) one who is a 
representative of CF (``CF Member''); and (iii) two who bring expertise 
and industry knowledge relating to benchmark determination, issuance 
and operations. The CME CF Oversight Committee meets no less frequently 
than quarterly. The CME CF Oversight Committee's Founding Charter and 
quarterly meeting minutes are publicly available.
    The Sponsor believes that the use of the Index is reflective of a 
reasonable valuation of the average spot price of bitcoin and that 
resistance to manipulation is a priority aim of its design methodology. 
The methodology: (i) takes an observation period and divides it into 
equal partitions of time; (ii) then calculates the volume-weighted 
median of all transactions within each partition; and (iii) the value 
is determined from the arithmetic mean of the volume-weighted medians, 
equally weighted. By employing the foregoing steps, the Index thereby 
seeks to ensure that transactions in bitcoin conducted at outlying 
prices do not have an undue effect on the value of a specific 
partition, large trades or clusters of trades transacted over a short 
period of time will not have an undue influence on the index level, and 
the effect of large trades at prices that deviate from the prevailing 
price are mitigated from having an undue influence on the benchmark 
level.
    Index data and the description of the Index are based on 
information made publicly available by the Index Provider on its 
website at https://www.cfbenchmarks.com.
Net Asset Value
    NAV means the total assets of the Trust (which includes all bitcoin 
and cash and cash equivalents) less total liabilities of the Trust. 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.
    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.
    If the Index is not available, or if the Sponsor determines in good 
faith that the Index does not reflect an accurate bitcoin price, then 
the Administrator will employ an alternative method to determine the 
fair value of the Trust's assets.\76\
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    \76\ Such alternative method will only be employed on an ad hoc 
basis. Any permanent change to the calculation of the NAV would 
require a proposed rule change under Rule 19b-4.

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[[Page 2408]]

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 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 \77\ 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 
aforementioned information will be published as of the close of 
business and available on the Sponsor's website at www.21shares.com, or 
any successor thereto.
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    \77\ 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 Intraday Indicative Value (``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 may differ from the NAV due to the 
differences in the time window of trades used to calculate each price 
(the NAV uses the Index price as of 4 p.m. ET, whereas the IIV draws 
prices from the last trade on each Constituent Platform in an effort to 
produce a relevant, real-time price). 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 widely 
disseminated on a per Share basis every 15 seconds during the 
Exchange's Regular Trading Hours through the facilities of the 
consolidated tape association (CTA) and Consolidated Quotation System 
(CQS) high speed lines. In addition, the IIV will be available through 
on-line information services such as Bloomberg and Reuters.
    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.
    As noted above, the Index is calculated daily and aggregates the 
notional value of bitcoin trading activity across major bitcoin spot 
trading platforms. Index data, value, and the description of the Index 
are based on information made publicly available by the Index Provider 
on its website at https://www.cfbenchmarks.com.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. Information relating to trading, including price 
and volume information, in bitcoin is available from major market data 
vendors and from the trading platforms on which bitcoin are traded. 
Depth of book information is also available from bitcoin trading 
platforms. The normal trading hours for bitcoin trading platforms are 
24 hours per day, 365 days per year.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last-sale information regarding 
the Shares will be disseminated through the facilities of the 
Consolidated Tape Association (``CTA'').
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.
Creation and Redemption of Shares
    When the Trust creates or redeems its Shares, it will do so in cash 
transactions in blocks of 5,000 Shares that are based on the quantity 
of bitcoin attributable to each Share of the Trust (e.g., a Creation 
Basket) at the Trust's NAV. The authorized participants will deliver 
only cash to create shares and will receive only cash when redeeming 
shares. Further, authorized participants will not directly or 
indirectly purchase, hold, deliver, or receive bitcoin as part of the 
creation or redemption process or otherwise direct the Trust or a third 
party with respect to purchasing, holding, delivering, or receiving 
bitcoin as part of the creation or redemption process. The Trust will 
create shares by receiving bitcoin from a third party that is not the 
authorized participant and the Trust--not the authorized participant--
is responsible for selecting the third party to deliver the bitcoin. 
Further, the third party will not be acting as an agent of the 
authorized participant with respect to the delivery of the bitcoin to 
the Trust or acting at the direction of the authorized participant with 
respect to the delivery of the bitcoin to the Trust. The Trust will 
redeem shares by delivering bitcoin to a third party that is not the 
authorized participant and the Trust--not the authorized participant--
is responsible for selecting the third party to receive the bitcoin. 
Further, the third party will not be acting as an agent of the 
authorized participant with respect to the receipt of the bitcoin from 
the Trust or acting at the direction of the authorized participant with 
respect to the receipt of the bitcoin from the Trust.
    According to the Registration Statement, on any business day, an 
authorized participant may place an order to create one or more 
Creation Basket. Purchase orders must be placed by 12:00 p.m. Eastern 
Time, the close of regular trading on the Exchange, or another time 
determined by the Sponsor. The day on which an order is received is 
considered the purchase order date. The total deposit of cash required 
is an amount of cash sufficient to purchase such amount of bitcoin, the 
amount of which is equal to the combined NAV of the number of Shares 
included in the Creation Baskets being created determined as promptly 
as practicable after 4:00 p.m. ET on the date the order to purchase is 
properly received. The Administrator determines the quantity of bitcoin 
used to calculate the cash deposit in the Creation Basket

[[Page 2409]]

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. For example, assume the total bitcoin 
held by the Trust less any estimated accrued but unpaid fees and 
expenses is 1,000 bitcoin and the total number of Shares outstanding is 
10,000. The Administrator would determine the required deposit as 
follows:
[GRAPHIC] [TIFF OMITTED] TN12JA24.065

    Total deposited cash as described in the example above would be 500 
multiplied by the purchase price of bitcoin.
    The procedures by which an authorized participant can redeem one or 
more Creation Baskets mirror the procedures for the creation of 
Creation Baskets. A third party, that is unaffiliated with the Trust 
and the Sponsor, will use cash to buy and deliver bitcoin to create 
Shares or withdraw and sell bitcoin for cash to redeem Shares, on 
behalf of the Trust.
    The Sponsor will maintain ownership and control of bitcoin in a 
manner consistent with good delivery requirements for spot commodity 
transactions.
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 represents that, for initial 
and continued listing, the Trust must be in compliance with Rule 10A-3 
under the Act. A minimum of 10,000 Shares will be outstanding at the 
commencement of listing on the Exchange. The Exchange will obtain a 
representation that the NAV will be calculated daily and information 
about the NAV and 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 (1) a specified commodity \78\ deposited with the 
trust, or (2) a specified commodity and, in addition to such specified 
commodity, cash; (b) issued by such trust in a specified aggregate 
minimum number in return for a deposit of a quantity of the underlying 
commodity and/or cash; 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 and/or cash.
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    \78\ 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.
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    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.
    The Exchange is able to obtain information regarding trading in the 
Shares and the underlying bitcoin, Bitcoin Futures contracts, options 
on Bitcoin Futures, or any other bitcoin derivative through members 
acting as registered Market Makers, in connection with their 
proprietary or customer trades.
    As a general matter, the Exchange has regulatory jurisdiction over 
its members, and their associated persons. The Exchange also has 
regulatory jurisdiction over any person or entity controlling a member, 
as well as a subsidiary or affiliate of a member that is in the 
securities business. A subsidiary or affiliate of a member organization 
that does business only in commodities would not be subject to Exchange 
jurisdiction, but the Exchange could obtain information regarding the 
activities of such subsidiary or affiliate through surveillance sharing 
agreements with regulatory organizations of which such subsidiary or 
affiliate is a member.
Trading Halts
    With respect to trading halts, the Exchange may consider all 
relevant

[[Page 2410]]

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 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.
    If the IIV or the value of the Index is not being disseminated as 
required, the Exchange may halt trading during the day in which the 
interruption to the dissemination of the IIV or the value of the Index 
occurs. If the interruption to the dissemination of the IIV or the 
value of the Index persists past the trading day in which it occurred, 
the Exchange will halt trading no later than the beginning of the 
trading day following the interruption.
    In addition, if the Exchange becomes aware that the NAV with 
respect to the Shares is not disseminated to all market participants at 
the same time, it will halt trading in the Shares until such time as 
the NAV is available to all market participants.
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. The 
Shares of the Trust will conform to the initial and continued listing 
criteria set forth in BZX Rule 14.11(e)(4).
Surveillance
    The Exchange represents 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. FINRA conducts certain cross-market surveillances 
on behalf of the Exchange pursuant to a regulatory services agreement. 
The Exchange is responsible for FINRA's performance under this 
regulatory services agreement.
    The Exchange or FINRA, on behalf of the Exchange, or both, will 
communicate as needed regarding trading in the Shares and Bitcoin 
Futures with other markets and other entities that are members of the 
ISG, and the Exchange, or FINRA, on behalf of the Exchange, or both, 
may obtain trading information regarding trading in the Shares and 
Bitcoin Futures from such markets and other entities.\79\ 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.
---------------------------------------------------------------------------

    \79\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
---------------------------------------------------------------------------

    In addition, the Exchange also has a general policy prohibiting the 
distribution of material, non-public information by its employees.
    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.
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 \80\ 
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. The 
Information Circular will also reference the fact that there is no 
regulated source of last sale information regarding bitcoin, that the 
Commission has no jurisdiction over the trading of bitcoin as a 
commodity, and that the CFTC has regulatory jurisdiction over the 
trading of Bitcoin Futures contracts and options on Bitcoin Futures 
contracts.
---------------------------------------------------------------------------

    \80\ 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 \81\ in general and section 6(b)(5) of the Act \82\ 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.
---------------------------------------------------------------------------

    \81\ 15 U.S.C. 78f.
    \82\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission has approved numerous series of Trust Issued 
Receipts,\83\ including Commodity-Based Trust Shares,\84\ 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

[[Page 2411]]

manipulative acts and practices; \85\ 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.
---------------------------------------------------------------------------

    \83\ See Exchange Rule 14.11(f).
    \84\ Commodity-Based Trust Shares, as described in Exchange Rule 
14.11(e)(4), are a type of Trust Issued Receipt.
    \85\ 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 trading platforms 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 trading platforms 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 a trading platform rather 
than cross trading platforms since the entity executing the wash 
trades would aim to trade against itself, and as such, this can only 
happen within a trading platform. Should the wash trades of that 
entity result in a deviation of the price on that trading platform 
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 trading platform 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.
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(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 \86\ with a regulated market of significant size. 
Both the Exchange and CME are members of ISG.\87\ 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.\88\
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    \86\ 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.
    \87\ For a list of the current members and affiliate members of 
ISG, see www.isgportal.com.
    \88\ 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.\89\
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    \89\ 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.
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(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 \90\) 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. 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.
---------------------------------------------------------------------------

    \90\ As further described below, the ``Index'' for the Trust is 
the CME CF Bitcoin Reference Rate--New York Variant. The current 
trading platform composition of the Index is Coinbase, Bistamp, 
Kraken, itBit, LMAX Digital, and Gemini (the ``Constituent 
Platforms'').
---------------------------------------------------------------------------

(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 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

[[Page 2412]]

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 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 \91\ 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 aforementioned information will be published as of the close of 
business and available on the Sponsor's website at www.21shares.com, or 
any successor thereto.
---------------------------------------------------------------------------

    \91\ 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 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 widely disseminated on a per Share basis every 
15 seconds during the Exchange's Regular Trading Hours through the 
facilities of the consolidated tape association (CTA) and Consolidated 
Quotation System (CQS) high speed lines. In addition, the IIV will be 
available through on-line information services such as Bloomberg and 
Reuters.
    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.
    As noted above, the Index is calculated daily and aggregates the 
notional value of bitcoin trading activity across major bitcoin spot 
trading platforms. Index data, value, and the description of the Index 
are based on information made publicly available by the Index Provider 
on its website at https://www.cfbenchmarks.com.
    Quotation and last sale information for bitcoin is widely 
disseminated through a variety of major market data vendors, including 
Bloomberg and Reuters. Information relating to trading, including price 
and volume information, in bitcoin is available from major market data 
vendors and from the trading platforms on which bitcoin are traded. 
Depth of book information is also available from bitcoin trading 
platforms. The normal trading hours for bitcoin trading platforms are 
24 hours per day, 365 days per year.
    Information regarding market price and trading volume of the Shares 
will be continually available on a real-time basis throughout the day 
on brokers' computer screens and other electronic services. Information 
regarding the previous day's closing price and trading volume 
information for the Shares will be published daily in the financial 
section of newspapers. Quotation and last-sale information regarding 
the Shares will be disseminated through the facilities of the 
Consolidated Tape Association (``CTA'').
    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.

[[Page 2413]]

    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. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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 February 2, 2024.
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    \92\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\92\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00499 Filed 1-11-24; 8:45 am]
BILLING CODE 8011-01-P