[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Notices]
[Pages 2413-2429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-00503]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99289; File No. SR-CboeBZX-2023-040]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of Amendment No. 2 to a Proposed Rule Change To List and Trade
Shares of the VanEck Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares
January 8, 2024.
On June 30, 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 VanEck Bitcoin Trust under
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares. On July 11, 2023,
the Exchange filed Amendment No. 1 to the proposed rule change, which
amended and replaced the proposed rule change in its entirety. The
proposed rule change, as modified by Amendment No. 1, was published for
comment in the Federal Register on July 19, 2023.\3\ On August 31,
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, as
modified by Amendment No. 1.\5\ On September 28, 2023, the Commission
instituted proceedings to determine whether to disapprove the proposed
rule change, as modified by Amendment No. 1.\6\ On January 5, 2024, the
Exchange filed Amendment No. 2 to the proposed rule change as described
in Items I and II below, which Items have been prepared by the
Exchange. Amendment No. 2 amended and replaced the proposed rule
change, as modified by Amendment No. 1, in its entirety. The Commission
is publishing this notice to solicit comments on the proposed rule
change, as modified by Amendment No. 2, 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. 97903 (July 13,
2023), 88 FR 46320. Comments on the proposed rule change, as
modified by Amendment No. 1, are available at: https://www.sec.gov/comments/sr-cboebzx-2023-040/srcboebzx2023040.htm.
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 98265, 88 FR 61641
(Sept. 7, 2023).
\6\ See Securities Exchange Act Release No. 98614, 88 FR 68785
(Oct. 4, 2023).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the VanEck Bitcoin
Trust (the ``Trust''),\7\ under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares.
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\7\ The Trust was formed as a Delaware statutory trust on
December 17, 2020 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
[[Page 2414]]
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. 2 to SR-CboeBZX-2023-040 amends and replaces in
its entirety the proposal as originally submitted on June 30, 2023, and
as amended by Amendment No. 1 on July 11, 2023. The Exchange submits
this Amendment No. 2 in order to clarify certain points and add
additional details to the proposal.
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\8\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\9\ VanEck Digital Assets, LLC is
the sponsor of the Trust (``Sponsor'').\10\ The Shares will be
registered with the Commission by means of the Trust's registration
statement on Form S-1 (the ``Registration Statement'').\11\ As further
discussed below, the Commission has historically approved or
disapproved exchange filings to list and trade series of Trust Issued
Receipts,\12\ 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.\13\ 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.\14\
[[Page 2415]]
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 \15\ 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.'' \16\
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\8\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
\9\ 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.
\10\ The Exchange notes that two other proposals to list and
trade shares of the Trust were previously disapproved pursuant to
delegated authority, one of which is currently pending Commission
Review pursuant to Rule 431 of the Commission's Rules of Practice,
17 CFR 201.431. See Securities Exchange Act Release Nos. 93559
(November 12, 2021) (SR-CboeBZX-2021-019), 86 FR 64539 (November 18,
2021); 95978 (October 4, 2022) 87 FR 61418 (October 11, 2022) (SR-
CboeBZX-2022-035). See also Letter from Assistant Secretary J.
Matthew DeLesDernier to Kyle Murray, Assistant General Counsel, Cboe
Global Markets, dated November 12, 2021.
\11\ See Amendment No. 6 to Registration Statement on Form S-1,
dated December 29, 2023, submitted to the Commission by the Sponsor
on behalf of the Trust (333-251808). The descriptions of the Trust,
the Shares, and the Benchmark contained herein are based, in part,
on information in the Registration Statement. The Registration
Statement is not yet effective and the Shares will not trade on the
Exchange until such time that the Registration Statement is
effective.
\12\ See Exchange Rule 14.11(f)(1).
\13\ 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'').
\14\ 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).
\15\ See Exchange Rule 14.11(e)(5).
\16\ 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.\17\ 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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\17\ 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, by using
professional custodians and other service providers, 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 the
offshore regulated centralized trading platforms that have since faced
bankruptcy proceedings or other insolvencies), then countless investors
might 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. The 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.\18\ 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.\19\ Similarly, regulated U.S. Bitcoin Futures contracts did
not exist. The CFTC had determined that bitcoin is a commodity,\20\ 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.\21\ While the first over-the-counter
bitcoin fund launched in 2013, public trading was limited and the fund
had only $60 million in assets.\22\ 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
[[Page 2416]]
was not aware, at that time, of a single custodian providing fund
custodial services for digital assets.\23\ 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 \24\ and shares in investment vehicles holding
Bitcoin Futures.\25\ 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; \26\ 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''); \27\ 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; \28\ 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,\29\ and multiple transfer agents who
provide services for digital asset securities registered with the
Commission.\30\
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\18\ See Winklevoss Order.
\19\ 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.
\20\ 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.''
\21\ 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.
\22\ 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.
\23\ 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.
\24\ 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.
\25\ 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.
\26\ See Investment Advisers Act Release No. 6240 88 FR 14672
(March 9, 2023) (Safeguarding Advisory Client Assets).
\27\ 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).
\28\ 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.
\29\ 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.
\30\ 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.\31\ According to the CME Bitcoin Futures report, from October
2, 2023 through October 31, 2023, CFTC regulated Bitcoin Futures
represented between $633 million and $6.5 billion in notional trading
volume on CME Bitcoin Futures on a daily basis.\32\ Daily average open
interest was over $2.6 billion for the entirety of the period. 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.\33\ As of April 25, 2023 the NYDFS
has granted no fewer than thirty-four BitLicenses,\34\ including to
established public payment companies like PayPal Holdings, Inc. and
Square, Inc., and limited purpose trust charters to entities providing
cryptocurrency custody services. The Treasury's Office of Foreign
Assets Control (``OFAC'') has brought enforcement actions over apparent
violations of the sanctions laws in connection with the provision of
wallet management services for digital assets.\35\
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\31\ As of December 1, 2021, the total market cap of all bitcoin
in circulation was approximately $1.08 trillion.
\32\ Data sourced from Bloomberg as of October 31, 2023.
\33\ The CFTC's annual report for Fiscal Year 2022 (which ended
on September 30, 2022) noted that the CFTC completed the fiscal year
with 18 enforcement filings related to digital assets. ``Digital
asset actions included manipulation, a $1.7 billion fraudulent
scheme, and a decentralized autonomous organization (DAO) failing to
register as a SEF or FCM or to seek DCM designation.'' See CFTC FY
2022 Agency Financial Report, available at: https://www.cftc.gov/media/7941/2022afr/download. Additionally, the CFTC filed on March
27, 2023, a civil enforcement action against the owner/operators of
the Binance centralized digital asset trading platform, which is one
of the largest bitcoin derivative exchanges. See CFTC Release No.
8680-23 (March 27, 2023), available at: https://www.cftc.gov/PressRoom/PressReleases/8680-23.
\34\ See https://www.dfs.ny.gov/virtual_currency_businesses.
\35\ See U.S. Department of the Treasury Enforcement Release:
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent
Violations of Multiple Sanctions Programs Related to Digital
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf. See also U.S.
Department of the Treasury Enforcement Release: ``Treasury Announces
Two Enforcement Actions for over $24M and $29M Against Virtual
Currency Exchange, Bittrex, Inc.'' (October 11, 2022) available at:
https://home.treasury.gov/news/press-releases/jy1006. See also U.S.
Department of Treasure Enforcement Release ``OFAC Settles with
Virtual Currency Exchange Kraken for $362,158.70 Related to Apparent
Violations of the Iranian Transactions and Sanctions Regulations''
(November 28, 2022) available at: https://home.treasury.gov/system/files/126/20221128_kraken.pdf.
---------------------------------------------------------------------------
In addition to the regulatory developments laid out above, more
traditional financial market participants become more active in
cryptocurrency: large insurance companies, asset managers, university
endowments, pension funds, and even historically bitcoin skeptical fund
managers have allocated to bitcoin. As noted in the Financial Stability
Oversight Council (``FSOC'') report on Digital Asset Financial
Stability Risks and Regulation, ``[i]ndustry surveys suggest that the
scale of these investments grew quickly during the boom in crypto-asset
markets through late 2021. In June 2022, PwC estimated that the number
of crypto-specialist hedge funds was more than 300 globally, with $4.1
billion in assets under management. In addition, in a survey PwC found
that 38 percent of surveyed traditional hedge funds were currently
investing in `digital assets,' compared to 21 percent the year prior.''
\36\ The largest over-the-counter bitcoin fund previously filed a Form
10 registration statement, which the staff of the Commission reviewed
and which took effect automatically, and is now a reporting
company.\37\ Established companies like Tesla, Inc., MicroStrategy
Incorporated, and Square, Inc., among others, have announced
substantial investments in bitcoin in
[[Page 2417]]
amounts as large as $1.5 billion (Tesla) and $1 billion
(MicroStrategy).\38\ The foregoing examples demonstrate that bitcoin
has gained mainstream usage and recognition.
---------------------------------------------------------------------------
\36\ See the FSOC ``Report on Digital Asset Financial Stability
Risks and Regulation 2022'' (October 3, 2022) (at footnote 26) at
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
\37\ See Letter from Division of Corporation Finance, Office of
Real Estate & Construction to Barry E. Silbert, Chief Executive
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
\38\ See https://www.microstrategy.com/en/investor-relations/press/microstrategy-acquires-additional-19452-bitcoins-for-1-026-billion_02-24-2021.
---------------------------------------------------------------------------
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; \39\
(iii) purchasing shares of operating companies that they believe will
provide proxy exposure to bitcoin with limited disclosure about the
associated risks; \40\ 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 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.\41\
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\39\ 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.
\40\ 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.
\41\ 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,\42\ Celsius Network LLC,\43\ BlockFi Inc.\44\ and Voyager Digital
Holdings, Inc.\45\ 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 risk of
losses through fraud and insolvency that arise by holding digital
assets, including bitcoin, on centralized platforms.
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\42\ See FTX Trading Ltd., et al., Case No. 22-11068.
\43\ See Celsius Network LLC, et al., Case No. 22-10964.
\44\ See BlockFi Inc., Case No. 22-19361.
\45\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
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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 regulCated 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.\46\ Leaving aside the
[[Page 2418]]
analysis of that standard until later in this proposal,\47\ 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:
---------------------------------------------------------------------------
\46\ 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.
\47\ As further outlined below, both the Exchange and the
Sponsor believe that the 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.\48\
---------------------------------------------------------------------------
\48\ 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'' \49\ 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.
---------------------------------------------------------------------------
\49\ 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.\50\
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.
---------------------------------------------------------------------------
\50\ 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.
---------------------------------------------------------------------------
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.
Spot and Proxy Exposure to Bitcoin
Exposure to bitcoin through an ETP also presents certain advantages
for retail investors compared to buying spot bitcoin directly. The most
notable advantage from the Sponsor's perspective is the elimination of
the need for an individual retail investor to either manage their own
private keys or to hold bitcoin through a cryptocurrency trading
platform that lacks sufficient protections. Typically, retail trading
platforms hold most, if not all, retail investors' bitcoin in ``hot''
(internet-connected) storage and do not make any commitments to
indemnify retail investors or to observe any particular cybersecurity
standard. Meanwhile, a retail investor holding spot bitcoin directly in
a self-hosted wallet may suffer from inexperience in private key
management (e.g., insufficient password protection, lost key, etc.),
which could cause them to lose some or all of their bitcoin holdings.
Thus, with respect to custody of the Trust's bitcoin assets, the Trust
presents advantages from an investment protection standpoint for retail
investors compared to owning spot bitcoin directly.
[[Page 2419]]
Finally, as described in the Background section above, a number of
operating companies largely engaged in unrelated businesses--such as
Tesla (a car manufacturer) and MicroStrategy (an enterprise software
company)--have announced significant investments 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.\51\
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.\52\ Such operating companies, however, are
imperfect bitcoin proxies and provide investors with partial bitcoin
exposure paired with a host of additional risks associated with
whichever operating company they decide to purchase. Additionally, the
disclosures provided by the aforementioned operating companies with
respect to risks relating to their bitcoin holdings are generally
substantially smaller than the registration statement of a bitcoin ETP,
including the Registration Statement, typically amounting to a few
sentences of narrative description and a handful of risk factors.\53\
In other words, investors seeking bitcoin exposure through publicly
traded companies are gaining only partial exposure to bitcoin and are
not fully benefitting from the risk disclosures and associated investor
protections that come from the securities registration process.
---------------------------------------------------------------------------
\51\ In August 2017, the Commission's Office of Investor
Education and Advocacy warned investors about situations where
companies were publicly announcing events relating to digital coins
or tokens in an effort to affect the price of the company's publicly
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
\52\ 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.
\53\ See, e.g., Tesla 10-K for the year ended December 31, 2020,
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
---------------------------------------------------------------------------
Bitcoin Futures
CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate.\54\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric
related to Bitcoin Futures has generally trended up since launch,
although certain notional volume calculations have decreased roughly in
line with the decrease in the price of bitcoin. For example, there were
286,519 Bitcoin Futures contracts traded in October 2023 (approximately
$43.5 billion) compared to 93,611 ($3.9 billion), 162,403 ($9.9
billion), 266,975 ($79.2 billion), and 279,399 ($27.5 billion)
contracts traded in October 2019, October 2020, October 2021, and
October 2022, respectively.\55\
---------------------------------------------------------------------------
\54\ The CME CF Bitcoin Reference Rate is based on a publicly
available calculation methodology based on pricing sourced from
several crypto trading platforms, including Bitstamp, Coinbase,
Gemini, itBit, Kraken, and LMAX Digital.
\55\ Source: Bloomberg as of October 31, 2023.
[GRAPHIC] [TIFF OMITTED] TN12JA24.012
The number of large open interest holders \56\ and unique accounts
trading Bitcoin Futures have both increased.
---------------------------------------------------------------------------
\56\ A large open interest holder in Bitcoin Futures is an
entity that holds at least 25 contracts, which is the equivalent of
125 bitcoin. At a price of approximately $36,304.40 per bitcoin on
November 14, 2023, more than 131 firms had outstanding positions of
greater than $4.5 million in Bitcoin Futures.
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[[Page 2420]]
[GRAPHIC] [TIFF OMITTED] TN12JA24.013
The Sponsor further believes that publicly available research,
including research done as part of rule filings proposing to list and
trade shares of Spot Bitcoin ETPs, 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 that
Bitcoin Futures lead the bitcoin spot market in price formation.\57\
---------------------------------------------------------------------------
\57\ See Exchange Act Releases No. 94080 (January 27, 2022), 87
FR 5527 (April 12, 2022) (specifically ``Amendment No. 1 to the
Proposed Rule Change To List and Trade Shares of the Wise Origin
Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity-Based Trust
Shares''); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844
(May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28,
2021), 86 FR 60695 (November 3, 2021). See also 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.''
---------------------------------------------------------------------------
Section 6(b)(5) and the Applicable Standards
The Commission has approved numerous series of Trust Issued
Receipts,\58\ including Commodity-Based Trust Shares,\59\ 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;
\60\ 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.
---------------------------------------------------------------------------
\58\ See Exchange Rule 14.11(f).
\59\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\60\ 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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[[Page 2421]]
(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 \61\ with a regulated market of significant size.
Both the Exchange and CME are members of the Intermarket Surveillance
Group (``ISG'').\62\ 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.\63\
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\61\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the
Intermarket Surveillance Group (``ISG'') constitutes such a
surveillance sharing agreement. See Securities Exchange Act Release
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval'').
\62\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\63\ 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.\64\
---------------------------------------------------------------------------
\64\ 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 Benchmark \65\) 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
Benchmark is based on spot prices.
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\65\ As further described below, the ``Benchmark'' for the Fund
is the MarketVector Bitcoin Benchmark Rate.
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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 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.
(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. As noted above, many U.S. investors that held
digital assets in accounts at FTX, Celsius Network LLC, BlockFi Inc,
and Voyager Digital Holdings Inc, have become unsecured creditors in
the insolvencies of those entities and, consequently, have suffered
monetary losses. Moreover, most of those U.S. investors do not have
access to any of their assets at this time due to such bankruptcy
proceedings or other insolvencies. 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.
VanEck Bitcoin Trust
Delaware Trust Company is the trustee (``Trustee''). The State
Street Bank and Trust Company will be the administrator
(``Administrator''), transfer agent (``Transfer Agent'') and will be
responsible for the custody of the Trust's cash and cash equivalents
\66\ (the ``Cash Custodian''). Van Eck Securities Corporation will be
the marketing agent (``Marketing Agent'') in connection with the
creation and redemption of ``Creation Baskets'', as defined below, of
Shares. Van Eck Securities Corporation (``VanEck'') provides assistance
in the marketing of the Shares. Gemini Trust Company, LLC (the
``Custodian'') will be responsible for custody of the Trust's bitcoin.
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\66\ Cash equivalents are short-term instruments with maturities
of less than 3 months.
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According to the Registration Statement, each Share will represent
a fractional undivided beneficial interest in the Trust's net assets.
The Trust's
[[Page 2422]]
assets will only consist of bitcoin, cash and cash equivalents.
According to the Registration Statement, the Trust is neither an
investment company registered under the Investment Company Act of 1940,
as amended,\67\ 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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\67\ 15 U.S.C. 80a-1.
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When the Trust sells or redeems its Shares, it will do so in cash
transactions in blocks of 50,000 Shares (a ``Creation Basket'') at the
Trust's net asset value (``NAV''). 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. For creations,
authorized participants will deliver cash to the Trust's account with
the Cash Custodian in exchange for Shares. Upon receipt of an approved
creation order, the Sponsor, on behalf of the Trust, will submit an
order to buy the amount of bitcoin represented by a Creation Basket.
Based off bitcoin executions, the Cash Custodian will request the
required cash from the authorized participant; the Transfer Agent will
only issue ETF shares when the authorized participant has made delivery
of the cash. Following receipt by the Cash Custodian of the cash from
an authorized participant, the Sponsor, on behalf of the Trust, will
approve an order with one or more previously onboarded trading partners
to purchase the amount of bitcoin represented by the Creation Basket.
This purchase of bitcoin will normally be cleared through an affiliate
of the Custodian (although the purchase may also occur directly with
the trading partner) and the bitcoin will settle directly into the
Trust's account at the Custodian.\68\ Authorized participants may then
offer Shares to the public at prices that depend on various factors,
including the supply and demand for Shares, the value of the Trust's
assets, and market conditions at the time of a transaction.
Shareholders who buy or sell Shares during the day from their broker
may do so at a premium or discount relative to the NAV of the Shares of
the Trust.
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\68\ For redemptions, the process will occur in the reverse
order. Upon receipt of an approved redemption order, the Sponsor, on
behalf of the Trust, will submit an order to sell the amount of
bitcoin represented by a Creation Basket and the cash proceeds will
be remitted to the authorized participant when the 50,000 Shares are
received by the Transfer Agent.
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Investment Objective
According to the Registration Statement and as further described
below, the investment objective of the Trust is for the Shares to
reflect the performance of bitcoin less the expenses of the Trust's
operations. In seeking to achieve its investment objective, the Trust
will hold bitcoin and will value its Shares daily based on the reported
Benchmark and process all creations and redemptions in cash
transactions with authorized participants. The Trust is not actively
managed.
The Benchmark
As described in the Registration Statement, the Fund will use the
Benchmark to calculate the Trust's NAV. The Benchmark is designed to be
a robust price for bitcoin in USD and there is no component other than
bitcoin in the Benchmark. The underlying bitcoin platforms are sourced
from the industry leading CryptoCompare Exchange Benchmark review
report. CryptoCompare Exchange Benchmark was established in 2019 as a
tool designed to bring clarity to the digital asset trading platform
sector by providing a framework for assessing risk and in turn bringing
transparency and accountability to a complex and rapidly evolving
market.\69\ The current bitcoin platform composition of the Benchmark
is Bitstamp, Coinbase, Bitfinex, LMAX and Kraken. The MarketVector
Indexes GmbH (``MarketVector'') is the index sponsor and index
administrator for the Benchmark. Data is the calculation agent for the
Benchmark. The Benchmark is calculated daily between 00:00 and 24:00
(CET) and the Benchmark values are disseminated to data vendors every
fifteen seconds. The Benchmark is disseminated in USD and the closing
value is calculated at 16:00:00 ET with fixed 16:00 bitcoin platform
rates.
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\69\ The CryptoCompare Exchange Benchmark methodology utilizes a
combination of qualitative and quantitative metrics to analyze a
comprehensive data set across eight categories of evaluation legal/
regulation, KYC/transaction risk, data provision, security, team/
trading platform, asset quality/diversity, market quality and
negative events. The CryptoCompare Exchange Benchmark review report
assigns a grade to each trading platform which helps identify what
it believes to be the lowest risk trading platforms in the industry.
Based on the CryptoCompare Exchange Benchmark, the Benchmark
initially selects the top five trading platforms by rank for
inclusion in the Benchmark. If an eligible trading platform is
downgraded by two or more notches in a semi-annual review and is no
longer in the top five by rank, it is replaced by the highest ranked
non-component trading platform. Adjustments to trading platform
coverage are announced four business days prior to the first
business day of each of March and September at 23:00 CET. The
Benchmark is rebalanced at 16:00:00 GMT/BST on the last business day
of each of February and August.
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In calculating the closing price of the Benchmark, the methodology
captures trade prices and sizes from bitcoin platforms and examines
twenty three-minute periods leading up to 4:00 p.m. EST. It then
calculates an equal-weighted average of the volume-weighted median
price of these twenty three-minute periods, removing the highest and
lowest contributed prices. Using twenty consecutive three-minute
segments over a sixty-minute period means malicious actors would need
to sustain efforts to manipulate the market over an extended period of
time, or would need to replicate efforts multiple times across bitcoin
platforms, potentially triggering review. This extended period also
supports authorized participant activity by capturing volume over a
longer time period, rather than forcing authorized participants to mark
an individual close or auction. The use of a median price reduces the
ability of outlier prices to impact the NAV, as it systematically
excludes those prices from the NAV calculation. The use of a volume-
weighted median (as opposed to a traditional median) serves as an
additional protection against attempts to manipulate the NAV by
executing a large number of low-dollar trades, because, any
manipulation attempt would have to involve a majority of global spot
bitcoin volume in a three-minute window to have any influence on the
NAV. As discussed in the Registration Statement, removing the highest
and lowest prices further protects against attempts to manipulate the
NAV, requiring bad actors to act on multiple bitcoin platforms at once
to have any ability to influence the price.
Net Asset Value
NAV means the total assets of the Trust (which includes all
bitcoin, 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. ET based on the Benchmark. 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
NAV, the Administrator values the Shares of the Trust based on the
closing price of the Benchmark as of 4:00 p.m. Eastern time. 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
[[Page 2423]]
all market participants at the same time. The Sponsor will monitor for
significant events related to crypto assets that may impact the value
of bitcoin and will determine, in good faith, and in accordance with
its valuation policies and procedures, whether to fair value the
Trust's bitcoin on a given day based on whether certain pre-determined
criteria have been met. For example, if the Benchmark deviates by more
than a pre-determined amount from an alternate benchmark available to
the Sponsor, the Sponsor may determine to utilize an alternate
benchmark, such as the MarketVector\TM\ Bitcoin Index or the S&P
Bitcoin Index. The Sponsor may also fair value the Trust's bitcoin
using observed market transactions from various trading platforms,
including some or all of the trading platforms included in the
Benchmark.\70\
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\70\ Any alternative method to determining NAV 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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Availability of Information
In addition to the price transparency of the Benchmark, 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 \71\ 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 available on the Sponsor's website at www.vaneck.com, or any
successor thereto. The NAV for the Trust will be calculated by the
Administrator once a day and will be disseminated daily to all market
participants at the same time. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
Consolidated Tape Association (``CTA''). The Trust will also
disseminate its holdings on a daily basis on its website.
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\71\ 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 updated during
Regular Trading Hours to reflect changes in the value of the Trust's
bitcoin holdings during the trading day. The IIV may differ from the
NAV because NAV is calculated, using the closing price of the
Benchmark, once a day at 4:00 p.m. Eastern time whereas the IIV draws
prices from the last trade on each bitcoin platform to produce a
relevant, real-time price. 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
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 Benchmark is calculated every 15 seconds and
information about the Benchmark and Benchmark value, including index
data and key elements of how the Benchmark is calculated, will be
publicly available at https://www.marketvector.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.
The Custodian
The Custodian's services (i) allow bitcoin to be deposited from a
public blockchain address to the Trust's bitcoin account and (ii) allow
bitcoin to be withdrawn from the bitcoin account to a public blockchain
address as instructed by the Trust. The custody agreement requires the
Custodian to hold the Trust's bitcoin in cold storage, unless required
to facilitate withdrawals as a temporary measure. The Custodian will
use segregated cold storage bitcoin addresses for the Trust which are
separate from the bitcoin addresses that the Custodian uses for its
other customers and which are directly verifiable via the Bitcoin
Blockchain. The Custodian will safeguard the private keys to the
bitcoin associated with the Trust's bitcoin account. The Custodian will
at all times record and identify in its books and records that such
bitcoins constitute the property of the Trust. The Custodian will not
withdraw the Trust's bitcoin from the Trust's account with the
Custodian, or loan, hypothecate, pledge or otherwise encumber the
Trust's bitcoin, without the Trust's instruction. If the custody
agreement terminates, the Sponsor may appoint another custodian and the
Trust may enter into a custodian agreement with such custodian.
Creation and Redemption of Shares
When the Trust sells or redeems its Shares, it will do so in cash
transactions in blocks of 50,000 Shares that are based on the amount of
bitcoin held by the Trust on a per unit (i.e., 50,000 Share) basis.
According to the Registration Statement, on any business day, an
authorized participant may place an order to create one or more
Creation Baskets. Purchase orders must be placed by 4:00 p.m. ET, or
the close of regular trading on the Exchange, whichever is earlier. The
day on which an order is received is considered the purchase order
date. The total deposit of 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 of 4:00 p.m. ET on the
date the order to purchase is properly received. The Administrator
determines the required deposit for a given day by dividing the number
of bitcoin held by the Trust as of the opening of business on that
business day, adjusted for the amount of bitcoin constituting estimated
accrued but unpaid fees and expenses of the Trust as of the opening of
business on that business day, by the quotient of the
[[Page 2424]]
number of Shares outstanding at the opening of business divided by
50,000. The procedures by which an authorized participant can redeem
one or more Creation Baskets mirror the procedures for the creation of
Creation Baskets. For example, assume the total bitcoin held by the
Trust less any estimated accrued but unpaid fees and expenses is 10,000
bitcoin and the total number of Shares outstanding is 100,000. The
Administrator would determine the required deposit as follows:
[GRAPHIC] [TIFF OMITTED] TN12JA24.066
Total deposited cash as described in the example above would be 5,000
multiplied by the price of bitcoin.
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
facilitate the delivery of 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. When fulfilling a redemption request, the Trust will
deliver bitcoin to a third party that is not the authorized participant
and the Trust--not the authorized participant- is responsible for
selecting such 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.
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 100,000 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 that the NAV
and information about the assets of the Trust will be made available to
all market participants at the same time. The Exchange notes that, as
defined in Rule 14.11(e)(4)(C)(i), the Shares will be: (a) issued by a
trust that holds (1) a specified commodity \72\ 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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\72\ 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
[[Page 2425]]
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 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 Benchmark 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
Benchmark occurs. If the interruption to the dissemination of the IIV
or the value of the Benchmark 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.\73\ 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.
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\73\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
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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 \74\
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.
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\74\ Regular Trading Hours is the time between 9:30 a.m. and
4:00 p.m. Eastern Time.
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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.
[[Page 2426]]
2. Statutory Basis
The Exchange believes that the proposal is consistent with section
6(b) of the Act \75\ in general and section 6(b)(5) of the Act \76\ 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.
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\75\ 15 U.S.C. 78f.
\76\ 15 U.S.C. 78f(b)(5).
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The Commission has approved numerous series of Trust Issued
Receipts,\77\ including Commodity-Based Trust Shares,\78\ 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;
\79\ 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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\77\ See Exchange Rule 14.11(f).
\78\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
\79\ 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 \80\ with a regulated market of significant size.
Both the Exchange and CME are members of ISG.\81\ 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.\82\
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\80\ 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.
\81\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
\82\ 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.\83\
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\83\ 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) Reasonable Likelihood That a Person Attempting To Manipulate the
ETP Would Also Have To Trade on That Market To Manipulate the ETP
Bitcoin Futures represent a growing influence on pricing in the
spot bitcoin market as has been laid out above and in other proposals
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is
based on pricing from spot bitcoin markets. As noted above, 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 Bitcoin Futures. While the Commission makes
clear in the Teucrium Approval that the analysis only applies to the
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin
Futures as its only non-cash or cash equivalent holding, if CME's
surveillance is sufficient to mitigate concerns related to trading in
[[Page 2427]]
Bitcoin Futures for which the pricing is based directly on pricing from
spot bitcoin markets, it's not clear how such a conclusion could apply
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin
ETPs.
(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. According to data from
Skew, the cost to buy or sell $5 million worth of bitcoin averages
roughly 48 basis points with a market impact of $139.08.\84\ Stated
another way, a market participant could enter a market buy or sell
order for $5 million of bitcoin and only move the market 0.48%. More
strategic purchases or sales (such as using limit orders and executing
through OTC bitcoin trade desks) would likely have less obvious impact
on the market--which is consistent with MicroStrategy, Tesla, and
Square being able to collectively purchase billions of dollars in
bitcoin.
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\84\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase, FTX and Kraken during the one year period ending
May 2022.
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As such, the combination of the Bitcoin Futures leading price
discovery, the overall size of the bitcoin market, and the ability for
market participants to buy or sell large amounts of bitcoin without
significant market impact will help prevent the Shares from becoming
the predominant force on pricing in either the bitcoin spot or Bitcoin
Futures markets, satisfying part (b) of the test outlined above.
(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.
(ii) Designed To Protect Investors and the Public Interest
The Exchange believes that the proposal is designed to protect
investors and the public interest. Over the past several years, U.S.
investor exposure to bitcoin through OTC Bitcoin Funds has grown into
the tens of billions of dollars and more than a billion dollars of
exposure through Bitcoin Futures ETFs. With that growth, so too has
grown the quantifiable investor protection issues to U.S. investors
through roll costs for Bitcoin Futures ETFs and premium/discount
volatility and management fees for OTC Bitcoin Funds. The Exchange
believes that the concerns related to the prevention of fraudulent and
manipulative acts and practices have been sufficiently addressed to be
consistent with the Act and, to the extent that the Commission
disagrees with that assertion, also believes that such concerns are now
outweighed by these investor protection concerns. As such, the Exchange
believes that approving this proposal (and comparable proposals)
provides the Commission with the opportunity to allow U.S. investors
with access to bitcoin in a regulated and transparent exchange-traded
vehicle that would act to limit risk to U.S. investors by: (i) reducing
premium and discount volatility; (ii) reducing management fees through
meaningful competition; (iii) reducing risks and costs associated with
investing in Bitcoin Futures ETFs and operating companies that are
imperfect proxies for bitcoin exposure; and (iv) providing an
alternative to custodying spot bitcoin.
Commodity-Based Trust Shares
The Exchange believes that the proposed rule change is designed to
prevent fraudulent and manipulative acts and practices in that the
Shares will be listed on the Exchange pursuant to the initial and
continued listing criteria in Exchange Rule 14.11(e)(4). The Exchange
believes that its surveillance procedures are adequate to properly
monitor the trading of the Shares on the Exchange during all trading
sessions and to deter and detect violations of Exchange rules and the
applicable federal securities laws. Trading of the Shares through the
Exchange will be subject to the Exchange's surveillance procedures for
derivative products, including Commodity-Based Trust Shares. The issuer
has represented to the Exchange that it will advise the Exchange of any
failure by the Trust or the Shares to comply with the continued listing
requirements, and, pursuant to its obligations under section 19(g)(1)
of the Exchange Act, the Exchange will surveil for compliance with the
continued listing requirements. If the Trust or the Shares are not in
compliance with the applicable listing requirements, the Exchange will
commence delisting procedures under Exchange Rule 14.12. The Exchange
may obtain information regarding trading in the Shares and listed
bitcoin derivatives via the ISG, from other exchanges who are members
or affiliates of the ISG, or with which the Exchange has entered into a
comprehensive surveillance sharing agreement.
Availability of Information
The Exchange also believes that the proposal promotes market
transparency in that a large amount of information is currently
available about bitcoin and will be available regarding the Trust and
the Shares. In addition to the price transparency of the Benchmark, 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 \85\ 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 available on the Sponsor's website at www.vaneck.com, or any
successor thereto. The NAV for the Trust will be calculated by the
Administrator once a day and will be disseminated daily to all market
participants at the same time. Quotation and last-sale information
regarding the Shares will be disseminated through the facilities of the
CTA. The Trust will also disseminate its holdings on a daily basis on
its website.
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\85\ 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.
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The IIV will be updated during Regular Trading Hours to reflect
changes in the value of the Trust's bitcoin holdings during the trading
day. The IIV may differ from the NAV because NAV is calculated, using
the closing price of the Benchmark, once a day at 4:00 p.m. Eastern
time whereas the IIV draws prices from the last trade
[[Page 2428]]
on each bitcoin platform to produce a relevant, real-time price. 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 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 Benchmark is calculated every 15 seconds and
information about the Benchmark and Benchmark value, including index
data and key elements of how the Benchmark is calculated, will be
publicly available at https://www.marketvector.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.
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. Premium and discount
volatility, high fees, rolling costs, insufficient disclosures, and
technical hurdles are putting U.S. investor money at risk on a daily
basis that could potentially be eliminated through access to a Spot
Bitcoin ETP. As such, the Exchange believes that this proposal acts to
limit the risk to U.S. investors that are increasingly seeking exposure
to bitcoin by providing direct, 1-for-1 exposure to bitcoin in a
regulated, transparent, exchange-traded vehicle, specifically by: (i)
reducing premium volatility; (ii) reducing management fees through
meaningful competition; (iii) providing an alternative to Bitcoin
Futures ETFs which will eliminate roll cost; (iv) reducing risks
associated with investing in operating companies that are imperfect
proxies for bitcoin exposure; and (v) providing an alternative to
custodying spot bitcoin. 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 reevaluated 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 establishes the CME Bitcoin
Futures market as a regulated market of significant size, it is
logically inconsistent to find that the CME Bitcoin Futures market is a
significant market as it relates to the CME Bitcoin Futures market, but
not a significant market as it relates to the bitcoin spot market for
the numerous reasons laid out above.
For the above reasons, the Exchange believes that the proposed rule
change is consistent with the requirements of section 6(b)(5) of the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purpose of the Act. The Exchange notes that the
proposed rule change, rather will facilitate the listing and trading of
an additional exchange-traded product that will enhance competition
among both market participants and listing venues, to the benefit of
investors and the marketplace.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received 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-2023-040 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-2023-040. 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
[[Page 2429]]
submitted material that is obscene or subject to copyright protection.
All submissions should refer to file number SR-CboeBZX-2023-040 and
should be submitted on or before February 2, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\86\
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\86\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-00503 Filed 1-11-24; 8:45 am]
BILLING CODE 8011-01-P