[Federal Register Volume 88, Number 136 (Tuesday, July 18, 2023)]
[Notices]
[Pages 45947-45971]
[FR Doc No: 2023-15127]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97884; File No. SR-NYSEARCA-2023-44]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing
of a Proposed Rule Change To List and Trade Shares of the Bitwise
Bitcoin ETP Trust Under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares)

July 12, 2023.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby given
that, on June 28, 2023, NYSE Arca, Inc. (``NYSE Arca'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The Exchange proposes to list and trade shares of the Bitwise
Bitcoin ETP Trust under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares). The proposed rule change is available on the Exchange's
website at www.nyse.com, at the principal office of the Exchange, 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 self-regulatory organization
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 those statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.

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

1. Purpose
    The Exchange proposes to list and trade shares (``Shares'') of the
Bitwise Bitcoin ETP Trust (the ``Trust''),\4\ under NYSE Arca Rule
8.201-E, which governs the listing and trading of Commodity-Based Trust
Shares.\5\
---------------------------------------------------------------------------

    \4\ The Trust is a Delaware statutory trust that was formerly
known as the Bitwise Bitcoin ETF Trust. On October 14, 2021, the
Trust filed with the Commission an initial registration statement
(the ``Registration Statement'') on Form S-1 under the Securities
Act of 1933 (15 U.S.C. 77a). The description of the operation of the
Trust herein is based, in part, on the Registration Statement.
    \5\ Commodity-Based Trust Shares are securities issued by a
trust that represents investors' discrete identifiable and undivided
beneficial ownership interest in the commodities deposited into the
trust.
---------------------------------------------------------------------------

    According to the Registration Statement, the Trust will not be
registered as an investment company under the Investment Company Act of
1940,\6\ and is not required to register thereunder. The Trust is not a
commodity pool for purposes of the Commodity Exchange Act.\7\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 80a-1.
    \7\ 17 U.S.C. 1.
---------------------------------------------------------------------------

    The Exchange represents that the Shares satisfy the requirements of
NYSE Arca Rule 8.201-E and thereby qualify for listing on the
Exchange.\8\
---------------------------------------------------------------------------

    \8\ With respect to the application of Rule 10A-3 (17 CFR
240.10A-3) under the Act, the Trust relies on the exemption
contained in Rule 10A-3(c)(7).
---------------------------------------------------------------------------

Bitwise Bitcoin ETP Trust
Operation of the Trust \9\
---------------------------------------------------------------------------

    \9\ The description of the operation of the Trust, the Shares
and the bitcoin market contained herein are based, in part, on the
Registration Statement. See note 4, supra.
---------------------------------------------------------------------------

    The Trust will issue the Shares, which represent units of undivided
beneficial ownership of the Trust. The Trust is a Delaware statutory
trust and will operate pursuant to a trust agreement (the ``Trust
Agreement'') between Bitwise Investment Advisers, LLC (the ``Sponsor''
or ``Bitwise'') and Delaware Trust Company, as the Trust's trustee (the
``Trustee''). The Trust will engage a third party custodian to act as
the bitcoin custodian for the Trust (the ``Bitcoin Custodian'') to
maintain custody of the Trust's bitcoin assets.\10\ The Trust will
engage a third party service provider to serve as the administrator and
transfer agent (in such capacities, the ``Administrator'' and the
``Transfer Agent'').
---------------------------------------------------------------------------

    \10\ When capitalized, references to ``Bitcoin'' are to the
Bitcoin network or the Bitcoin protocol. When lowercase, references
to ``bitcoin'' are to the digital asset native to the Bitcoin
network, which asset is the underlying commodity held by the Trust.
---------------------------------------------------------------------------

    According to the Registration Statement, the investment objective
of the Trust is to seek to provide exposure to the value of bitcoin
held by the Trust, less the expenses of the Trust's operations. In
seeking to achieve its investment objective, the Trust will hold
bitcoin and establish its Net Asset Value (``NAV'') at the end of every
business day by reference to the CF Bitcoin-Dollar US Settlement Price
(``CME US Reference Rate'').\11\
---------------------------------------------------------------------------

    \11\ The CME US Reference Rate is a daily reference rate of the
US Dollar price of one bitcoin, calculated at 4:00 p.m. E.T. The CME
US Reference Rate utilizes the same methodology as the CME CF
Bitcoin Reference Rate (the ``CME UK Reference Rate''), which is
calculated at 4:00 p.m. London time and was designed by the CME
Group and Crypto Facilities Ltd to facilitate the development of
financial products, including the cash settlement of bitcoin futures
traded on the Chicago Mercantile Exchange (``CME''). Andrew Paine
and William J. Knottenbelt, ``Analysis of the CME CF Bitcoin
Reference Rate and CME CF Bitcoin Real Time Index,'' Imperial
College Centre for Cryptocurrency Research and Engineering, November
14, 2016, available at https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf.
---------------------------------------------------------------------------

    Under normal circumstances, the Trust's only asset will be bitcoin,
and, under limited circumstances, cash. The Trust will not use
derivatives that may subject the Trust to counterparty and credit
risks.\12\ The Trust will process all creations and redemptions in-
kind, and accrue all ordinary fees in bitcoin (rather than cash), as a
way of seeking to ensure that the Trust holds the desired amount of
bitcoin-per-share. The Trust will not purchase or sell bitcoin, other
than if the Trust liquidates or must pay expenses not contractually
assumed by the Sponsor. Instead, financial institutions authorized to
create and redeem Shares (each, an ``Authorized Participant'') will
deliver, or cause to be delivered, bitcoin to the Trust in exchange for
Shares of the Trust, and the Trust will deliver bitcoin to Authorized
Participants when those Authorized Participants redeem Shares of the
Trust.
---------------------------------------------------------------------------

    \12\ The Trust may sell bitcoin and temporarily hold cash as
part of a liquidation of the Trust or to pay certain extraordinary
expenses not assumed by the Sponsor. Under the Trust Agreement, the
Sponsor has agreed to assume the normal operating expenses of the
Trust, subject to certain limitations. For example, the Trust will
bear any indemnification or litigation liabilities as extraordinary
expenses. In addition, the Trust may, from time to time, passively
receive, by virtue of holding bitcoin, certain additional digital
assets (``IR Assets'') or rights to receive IR Assets (``Incidental
Rights'') through a fork of the Blockchain or an airdrop of assets.
The Trust Agreement requires that the Sponsor analyze as soon as
possible, whether or not such Incidental Rights and IR Assets should
be disclaimed. In the event the Sponsor instructs the Bitcoin
Custodian to claim such Incidental Rights and IR Assets, it will
immediately distribute such Incidental Rights and IR Assets to
shareholders of record.
---------------------------------------------------------------------------

Bitcoin, Bitcoin Market, Bitcoin Trading Platforms and Regulation of
Bitcoin
    The following sections, drawn from the Registration Statement,
describe bitcoin, including the historical development of bitcoin and
the Bitcoin network, how a person holds bitcoin, how to use bitcoin in
transactions, the ``exchange'' market where bitcoin can be bought, held
and sold, and the bitcoin ``over-the-counter'' (``OTC'') market.
Bitcoin
    Bitcoin was first described in a white paper released in 2008 and
published under the name ``Satoshi Nakamoto.'' The protocol underlying
Bitcoin was subsequently released in 2009 as open source software and
currently operates on a worldwide network of computers.
    The Bitcoin network utilizes a digital asset known as ``bitcoin,''
which can be transferred among parties via the internet. Unlike other
means of electronic payments such as credit card transactions, one of
the advantages of bitcoin is that it can be transferred without the use
of a central administrator or clearing agency. As a central party is
not necessary to administer bitcoin transactions or maintain the
bitcoin ledger, the term decentralized is often used in descriptions of
bitcoin. Unless it is using a third party service provider, a party
transacting in bitcoin is generally not afforded some of the
protections that may be offered by intermediaries.
    The first step in using the Bitcoin network for transactions is to
download specialized software referred to as a ``bitcoin wallet.'' A
user's bitcoin wallet can run on a computer or smartphone, and can be
used both to send and to receive bitcoin. Within a bitcoin wallet, a
user can generate one or more unique ``bitcoin addresses,'' which are
conceptually similar to bank account numbers. After establishing a
bitcoin address, a user can send or receive bitcoin from his or her
bitcoin address to another user's bitcoin address. Sending bitcoin from
one bitcoin address to another is similar in concept to sending a bank
wire from one person's bank account to another person's bank account;
however, such transactions are not managed by an

intermediary and erroneous transactions generally may not be reversed
or remedied once sent.
    The amount of bitcoin associated with each bitcoin address, as well
as each bitcoin transaction to or from such bitcoin address, is
transparently reflected in the Bitcoin network's distributed ledger
(``Blockchain'') and can be viewed by websites that operate as
``Blockchain explorers.'' Copies of the Blockchain exist on thousands
of computers on the Bitcoin network throughout the internet. A user's
bitcoin wallet will either contain a copy of the Blockchain or be able
to connect with another computer that holds a copy of the Blockchain.
The innovative design of the Bitcoin network protocol allows each
Bitcoin user to trust that their copy of the Blockchain will generally
be updated consistent with each other user's copy.
    When a Bitcoin user wishes to transfer bitcoin to another user, the
sender must first request a Bitcoin address from the recipient. The
sender then uses his or her Bitcoin wallet software to create a
proposed transaction that is confirmed and settles when included in the
Blockchain. The transaction would reduce the amount of bitcoin
allocated to the sender's address and increase the amount allocated to
the recipient's address, in each case by the amount of bitcoin desired
to be transferred. The transaction is completely digital in nature,
similar to a file on a computer, and it can be sent to other computers
participating in the Bitcoin network; however, the use of cryptographic
verification is believed to prevent the ability to duplicate or
counterfeit bitcoin.
Bitcoin Protocol
    The Bitcoin protocol is built using open source software allowing
for any developer to review the underlying code and suggest changes.
There is no official company or group responsible for making
modifications to Bitcoin. There are, however, a number of individual
developers that regularly contribute to the reference software known as
``Bitcoin Core,'' a specific distribution of Bitcoin software that
provides the de-facto standard for the Bitcoin protocol.
    Significant changes to the Bitcoin protocol are typically
accomplished through a so-called ``Bitcoin Improvement Proposal'' or
BIP. Such proposals are generally posted on websites, and the proposals
explain technical requirements for the protocol change as well as
reasons why the change should be accepted by users. Because Bitcoin has
no central authority, updating the reference software's Bitcoin
protocol will not immediately change the Bitcoin network's operations.
Instead, the implementation of a change is achieved by users (including
transaction validators known as ``miners'') downloading and running the
updated versions of Bitcoin Core or other Bitcoin software that abides
by the new Bitcoin protocol. Users and miners must accept any changes
made to the Bitcoin source code by downloading a version of their
Bitcoin software that incorporates the proposed modification of the
Bitcoin network's source code. A modification of the Bitcoin network's
source code or protocol is only effective with respect to those Bitcoin
users and miners who download it. If an incompatible modification is
accepted by a less than overwhelming percentage of users and miners, a
division in the Bitcoin network will occur such that one network will
run the pre-modification source code and the other network will run the
modified source code. Such a division is known as a ``fork'' in the
Bitcoin network.
Bitcoin Transactions
    A bitcoin transaction is similar in concept to an irreversible
digital check. The transaction contains the sender's bitcoin address,
the recipient's bitcoin address, the amount of bitcoin to be sent, a
transaction fee and the sender's digital signature. Bitcoin
transactions are secured by cryptography known as ``public-private key
cryptography,'' represented by the bitcoin addresses and digital
signature in a transaction's data file. Each Bitcoin network address,
or wallet, is associated with a unique ``public key'' and ``private
key'' pair, both of which are lengthy alphanumeric codes, derived
together and possessing a unique relationship.
    The use of key pairs is a cornerstone of the Bitcoin network
technology. This is because the use of a private key is the only
mechanism by which a bitcoin transaction can be signed. If a private
key is lost, the corresponding bitcoin is thereafter permanently non-
transferable. Moreover, the theft of a private key provides the thief
immediate and unfettered access to the corresponding bitcoin. Bitcoin
users must therefore understand that in this regard, bitcoin is similar
to cash: that is, the person or entity in control of the private key
corresponding to a particular quantity of bitcoin has de facto control
of the bitcoin.
    The public key is visible to the public and analogous to the
Bitcoin network address. The private key is a secret and is used to
digitally sign a transaction in a way that proves the transaction has
been signed by the holder of the public-private key pair, and without
having to reveal the private key. A user's private key must be kept
safe in accordance with appropriate controls and procedures to ensure
it is used only for legitimate and intended transactions. If an
unauthorized third person learns of a user's private key, that third
person could apply the user's digital signature without authorization
and send the user's bitcoin to their or another bitcoin address,
thereby stealing the user's bitcoin. Similarly, if a user loses his
private key and cannot restore such access (e.g., through a backup),
the user may permanently lose access to the bitcoin associated with
that private key and bitcoin address.
    To prevent the possibility of double-spending of bitcoin, each
validated transaction is recorded, time stamped and publicly displayed
in a ``block'' in the Blockchain, which is publicly available. Thus,
the Bitcoin network provides confirmation against double-spending by
memorializing every transaction in the Blockchain, which is publicly
accessible and downloaded in part or in whole by all users of the
Bitcoin network software program. Any user may validate, through their
Bitcoin wallet or a Blockchain explorer, that each transaction in the
Bitcoin network was authorized by the holder of the applicable private
key, and Bitcoin network mining software consistent with reference
software requirements validates each such transaction before including
it in the Blockchain. This cryptographic security ensures that bitcoin
transactions may not generally be counterfeited, although it does not
protect against the ``real world'' theft or coercion of use of a
Bitcoin user's private key, including the hacking of a Bitcoin user's
computer or a service provider's systems.
    A Bitcoin transaction between two parties is recorded if included
in a valid block added to the Blockchain, when that block is accepted
as valid through consensus formation among Bitcoin network
participants. A block is validated by confirming the cryptographic hash
value included in the block's data and by the block's addition to the
longest confirmed Blockchain on the Bitcoin network. For a transaction,
inclusion in a block in the Blockchain constitutes a ``confirmation''
of validity. As each block contains a reference to the immediately
preceding block, additional blocks appended to and incorporated into
the Blockchain constitute additional confirmations of the transactions
in such prior blocks, and a transaction included in a block for the
first time is confirmed once against

double-spending. This layered confirmation process makes changing
historical blocks (and reversing transactions) exponentially more
difficult the further back one goes in the Blockchain.
    The process by which bitcoin are created and bitcoin transactions
are verified is called ``mining.'' To begin mining, a user, or
``miner,'' can download and run a mining ``client,'' which, like
regular Bitcoin network software programs, turns the user's computer
into a ``node'' on the Bitcoin network, and in this case has the
ability to validate transactions and add new blocks of transactions to
the Blockchain.
    Miners, through the use of the bitcoin software program, engage in
a set of prescribed, complex mathematical calculations in order to
verify transactions and compete for the right to add a block of
verified transactions to the Blockchain and thereby confirm bitcoin
transactions included in that block's data. The miner who successfully
``solves'' the complex mathematical calculations has the right to add a
block of transactions to the Blockchain and is then rewarded by a grant
of bitcoin, known as a ``coinbase,'' plus any transaction fees paid for
the transactions included in such block. Bitcoin is created and
allocated by the Bitcoin network protocol and distributed through
mining, subject to a strict, well-known issuance schedule. The supply
of bitcoin is programmatically limited to 21 million bitcoin in total.
As of June 16, 2023, approximately 19,401,000 bitcoin had been mined.
    Confirmed and validated bitcoin transactions are recorded in blocks
added to the Blockchain. Each block contains the details of some or all
of the most recent transactions that are not memorialized in prior
blocks, as well as a record of the award of bitcoin to the miner who
added the new block. Each unique block can only be solved and added to
the Blockchain by one miner, therefore, all individual miners and
mining pools on the Bitcoin network must engage in a competitive
process of constantly increasing their computing power to improve their
likelihood of solving for new blocks. As more miners join the Bitcoin
network and its processing power increases, the Bitcoin network adjusts
the complexity of a block-solving equation to maintain a predetermined
pace of adding a new block to the Blockchain approximately every ten
minutes.
The Bitcoin Market and Bitcoin Trading Platforms
    In addition to using bitcoin to engage in transactions, investors
may purchase and sell bitcoin to speculate as to the value of bitcoin
in the bitcoin market, or as a long-term investment to diversify their
portfolio. The value of bitcoin within the market is determined, in
part, by (i) the supply of and demand for bitcoin in the bitcoin
market, (ii) market expectations for the expansion of investor interest
in bitcoin and the adoption of bitcoin by users, (iii) the number of
merchants that accept bitcoin as a form of payment, and (iv) the volume
of private end-user-to-end-user transactions.
    Although the value of bitcoin is determined by the value that two
transacting market participants place on bitcoin through their
transaction, the most common means of determining a reference value is
by surveying one or more trading platforms where secondary markets for
bitcoin exist. The most prominent bitcoin trading platforms are often
referred to as ``exchanges'', although they neither report trade
information nor are they regulated in the same way as a national
securities exchange. As such, there is some difference in the form,
transparency and reliability of trading data from bitcoin trading
platforms. Generally speaking, bitcoin data is available from these
trading platforms with publicly disclosed valuations for each executed
trade, measured against a fiat currency such as the US Dollar or Euro,
or against another digital asset (for example, bitcoin trades against
the US Dollar are reflected in the ``USD-BTC Pair'').
    Currently, there are many bitcoin trading platforms operating
worldwide and trading platforms represent a substantial percentage of
bitcoin buying and selling activity, and, therefore, provide large data
sets for the market valuation of bitcoin. A bitcoin trading platform
provides investors with a way to purchase and sell bitcoin, similar to
stock exchanges like the New York Stock Exchange or NASDAQ, which
provide ways for investors to buy stocks and bonds in the so-called
``secondary market.'' Unlike stock exchanges, which are regulated to
monitor securities trading activity, bitcoin trading platforms are
largely regulated as money services businesses (or a foreign regulatory
equivalent) and are required to monitor for and detect money-laundering
and other illicit financing activities that may take place on their
platform. Bitcoin trading platforms operate websites designed to permit
investors to open accounts with the trading platform and then purchase
and sell bitcoin.
    As with conventional stock exchanges, an investor opening a trading
account and wishing to transact at a bitcoin trading platform must
deposit an accepted government-issued currency into their account, or a
previously acquired digital asset. The process of establishing an
account with a bitcoin trading platform and trading bitcoin is
different from, and should not be confused with, the process of users
sending bitcoin from one bitcoin address to another bitcoin address,
such as to pay for goods and services. This latter process is an
activity that occurs wholly within the confines of the Bitcoin network,
while the former is an activity that occurs largely on private websites
and databases owned by the trading platform.
    In addition to the bitcoin trading platforms that provide spot
markets for bitcoin, an OTC trading market has emerged for digital
assets. The bitcoin OTC market demonstrates flexibility in terms of
quotes, price, size, and other factors. The OTC market has no formal
structure and no open-outcry meeting place, and typically involves
bilateral agreements on a principal-to-principal basis. Parties
engaging in OTC transactions will agree upon a price--often via phone,
email, or chat--and then one of the two parties will initiate the
transaction. For example, a seller of bitcoin could initiate the
transaction by sending the bitcoin to the buyer's bitcoin address. The
buyer would then wire US Dollars to the seller's bank account. OTC
trading tends to occur in large blocks of bitcoin. All risks and issues
related to creditworthiness are between the parties directly involved
in the transaction. OTC market participants include institutional
entities, such as hedge funds, family offices, private wealth managers,
high-net-worth individuals that trade bitcoin on a proprietary basis,
and brokers that offer two-sided liquidity for bitcoin.
    Beyond the spot bitcoin trading platforms and the OTC market, a
number of unregulated bitcoin derivatives trading platforms exist that
offer traders the ability to gain leveraged and/or short exposure to
the price of bitcoin through perpetual futures, quarterly futures, and
other derivative contracts.
    Finally, the trading of regulated bitcoin futures contracts
launched on the CME in December 2017.\13\ A further discussion of the
CME bitcoin futures market (``CME Market'') is included in

the section entitled ``Standard for Approval--The CME Market,'' below.
---------------------------------------------------------------------------

    \13\ See note 32, infra.
---------------------------------------------------------------------------

    Authorized Participants will have the option of purchasing and
selling bitcoin used in Creation Unit transactions with the Trust
either on bitcoin trading platforms, in the OTC markets, or in direct
bilateral transactions. In addition, Authorized Participants may
utilize futures to hedge bitcoin exposure relating to the purchase and
redemption of Creation Units.
Valuation of the Trust's Bitcoin
The CME US Reference Rate, CME UK Reference Rate and CME Bitcoin Real
Time Price
    According to the Registration Statement, the CME UK Reference Rate
was established by the CME Group and Crypto Facilities Ltd. to be used
in the creation of financial products tied to bitcoin. The CME UK
Reference Rate is fixed once per day at 4:00 p.m. London time, based on
the methodology set forth below and applying data from constituent
trading platforms (``Constituent Platforms''). The CME US Reference
Rate was introduced in February 2021 and is designed to apply the CME
UK Reference Rate methodology, but with a fix once per day at 4:00 p.m.
Eastern time (``E.T.''). Although the CME UK Reference Rate has a
longer history and is used to settle bitcoin futures on the CME Market,
the Trust has determined to utilize the CME US Reference Rate to
establish the NAV because the CME US Reference Rate is calculated as of
the same time as the NAV and is based on the same methodology and data
sources as the CME UK Reference Rate.
    The CME Group and Crypto Facilities Ltd. also publish a continuous
real-time bitcoin price index, known as the ``CME Bitcoin Real Time
Price,'' using data from the Constituent Platforms.
    The CME US Reference Rate, CME UK Reference Rate and CME Bitcoin
Real Time Price are administered by Crypto Facilities Ltd., with the
selection of Constituent Platforms performed by an oversight
committee.\14\ A trading platform is eligible to be selected as a
Constituent Platform if it facilitates spot trading of bitcoin against
the USD-BTC Pair and makes trade data and order data available through
an Automatic Programming Interface with sufficient reliability, detail
and timeliness. Additional initial and continuing eligibility
requirements apply to the Constituent Platforms.
---------------------------------------------------------------------------

    \14\ This summary does not represent a complete description of
the CME US Reference Rate, the CME UK Reference Rate and CME Bitcoin
Real Time Price. Additional information on administration and
methodologies, may be found at CF Benchmarks' website, available at
https://www.cfbenchmarks.com/indices/XBTUSD_US_RR, https://www.cfbenchmarks.com/indices/BRR, and https://www.cfbenchmarks.com/indices/BRTI. The CME US Reference Rate, the CME UK Reference Rate
and CME Bitcoin Real Time Price are registered benchmarks under the
European Benchmarks Regulation.
---------------------------------------------------------------------------

    Each of the CME US Reference Rate, which has been calculated and
published since February 2021, and CME UK Reference Rate, which has
been calculated and published since November 2016, aggregates during a
calculation window the trade flow of several spot bitcoin trading
platforms into the US Dollar price of one bitcoin as of their
respective calculation time. Specifically, the CME US Reference Rate is
calculated based on the ``Relevant Transactions'' (as defined below) of
each of its Constituent Platforms, which are currently Bitstamp,
Coinbase, Gemini, itBit, Kraken and LMAX, as follows:
    1. All Relevant Transactions are added to a joint list, recording
the trade price and size for each transaction.
    2. The list is partitioned into a number of equally-sized time
intervals.
    3. For each partition separately, the volume-weighted median trade
price is calculated from the trade prices and sizes of all Relevant
Transactions. A volume-weighted median differs from a standard median
in that a weighting factor, in this case trade size, is factored into
the calculation.
    4. The CME US Reference Rate or CME UK Reference Rate, as
applicable, is then determined by the equally-weighted average of the
volume-weighted medians of all partitions.
    The CME Bitcoin Real Time Price uses similar data sources, but is
calculated once per second based on the weighted mid-price-volume
curve, which is a measure of the active bid and ask volume present on a
Constituent Platform's order book.
    The CME US Reference Rate, CME UK Reference Rate, and CME Bitcoin
Real Time Price do not include any bitcoin futures prices in their
respective methodologies. A ``Relevant Transaction'' is any
``cryptocurrency versus legal tender spot trade that occurs during the
TWAP [Time Weighted Average Price] Period'' on a Constituent Platform
in the USD-BTC Pair that is reported and disseminated by Crypto
Facilities Ltd., as calculation agent for the CME US Reference Rate,
CME UK Reference Rate and CME Bitcoin Real Time Price.
Net Asset Value
    Under normal circumstances, the Trust's only asset will be bitcoin.
The Trust's bitcoin are carried, for financial statement purposes, at
fair value, as required by the U.S. generally accepted accounting
principles (``GAAP''). The Trust's NAV and NAV per Share will be
determined by the Administrator once each Exchange trading day as of
4:00 p.m. E.T., or as soon thereafter as practicable. The Administrator
will calculate the NAV by multiplying the number of bitcoin held by the
Trust by the CME US Reference Rate for such day, and subtracting the
accrued but unpaid expenses and liabilities of the Trust. The NAV per
Share is calculated by dividing the NAV by the number of Shares then
outstanding. The Administrator will determine the price of the Trust's
bitcoin by reference to the CME US Reference Rate, which is published
and calculated as set forth above.
Intraday Trust Value
    In order to provide updated pricing information relating to the
Shares for use by investors and market professionals throughout the
domestic trading day, the Exchange will calculate and disseminate
throughout the core trading session, every 15 seconds each trading day,
an intraday trust value (``ITV''). The ITV will be calculated
throughout the trading day by using the prior day's holdings at close
of business and the most recently reported price level of the CME
Bitcoin Real Time Price as reported by Bloomberg, L.P. or another
reporting service, or another price of bitcoin derived from updated
bids and offers indicative of the spot price of bitcoin. The ITV will
be widely disseminated by one or more major market data vendors during
the NYSE Arca Core Trading Session.
Creation and Redemption of Shares; In-Kind Transaction Activity
The Trust Shares
    According to the Registration Statement, the Shares shall represent
undivided beneficial ownership of the Trust. The Trust creates and
redeems Shares from time to time, but only in one or more Creation
Units. A Creation Unit is only made in exchange for delivery to the
Trust or the distribution by the Trust of the amount of bitcoin
represented by the Creation Unit being created or redeemed, the amount
of which is representative of the combined NAV of the number of Shares
included in the Creation Units being created or redeemed determined as
of 4:00 p.m. E.T. on the day the order to create or redeem Creation
Units is properly received. Except when aggregated in Creation Units or
under extraordinary circumstances permitted under the

Trust Agreement, the Shares are not redeemable securities. A Creation
Unit will initially consist of at least 25,000 Shares, but may be
subject to change.
    Authorized Participants are the only persons that may place orders
to create and redeem Creation Units. Authorized Participants must be
(i) registered broker-dealers or other securities market participants,
such as banks and other financial institutions, that are not required
to register as broker-dealers to engage in securities transactions
described below, and (ii) Depository Trust Company (``DTC'')
Participants. To become an Authorized Participant, a person must enter
into an Authorized Participant Agreement with the Trust and/or the
Trust's marketing agent (the ``Marketing Agent'').
Creation Procedures
    On any business day, an Authorized Participant may create Shares by
placing an order to purchase one or more Creation Units with the
Transfer Agent through the Marketing Agent. Such orders are subject to
approval by the Marketing Agent and the Transfer Agent. For purposes of
processing creation and redemption orders, a ``business day'' means any
day other than a day when the Exchange is closed for regular trading.
To be processed on the date submitted, creation orders generally must
be placed before 4 p.m. E.T. or the close of regular trading on the
Exchange, whichever is earlier. The day on which an order is received
by the Transfer Agent and approved by the Marketing Agent, is
considered the creation order date. All Creation Units are processed
in-kind. By placing a creation order, an Authorized Participant agrees
to deposit, or cause to be deposited, bitcoin with the Trust by
initiating a Bitcoin transaction to a Bitcoin network address
identified by the Trust. Prior to the delivery of Creation Units for a
creation order, the Authorized Participant must also have wired to the
Transfer Agent the nonrefundable transaction fee due for the creation
order. Authorized Participants may not withdraw a creation request. If
an Authorized Participant fails to consummate the foregoing, the order
may be cancelled.
    The total creation deposit amount required to create each Creation
Unit is an amount of bitcoin that is in the same proportion to the
total assets of the Trust, net of accrued expenses and other
liabilities, on the date the order to purchase is properly received, as
the number of Shares to be created under the creation order is in
proportion to the total number of Shares outstanding on the date the
order is received. The Sponsor causes to be published each business day
morning, prior to the commencement of trading on the Exchange, the
amount of bitcoin that will be required to be deposited in exchange for
one Creation Unit for such business day.
Redemption Procedures
    According to the Registration Statement, the procedures by which an
Authorized Participant can redeem one or more Creation Units mirror the
procedures for the creation of Creation Units. On any business day, an
Authorized Participant may place an order with the Transfer Agent
through the Marketing Agent to redeem one or more Creation Units. To be
processed on the date submitted, redemption orders generally must be
placed before 4 p.m. E.T. or the close of regular trading on the
Exchange, whichever is earlier. A redemption order will be effective on
the date it is received by the Administrator and approved by the
Marketing Agent (``Redemption Order Date''). The redemption procedures
allow Authorized Participants to redeem Creation Units and do not
entitle an individual shareholder to redeem any Shares in an amount
less than a Creation Unit, or to redeem Creation Units other than
through an Authorized Participant.
    The redemption distribution from the Trust will consist of a
transfer to the redeeming Authorized Participant, or its agent, of an
amount of bitcoin representing the amount of bitcoin held by the Trust
evidenced by the Shares being redeemed. The redemption distribution
amount is determined in the same manner as the determination of the
bitcoin deposit amount discussed above. The Sponsor causes to be
published each business day morning, prior to the commencement of
trading on the Exchange, the redemption distribution amount relating to
a Creation Unit applicable for such business day.
    The redemption distribution due from the Trust will be delivered
once the Transfer Agent notifies the Bitcoin Custodian and the Sponsor
that the Authorized Participant has delivered the Shares represented by
the Creation Units to be redeemed to the Trust's DTC account. If the
Trust's DTC account has not been credited with all of the Shares of the
Creation Units to be redeemed, the redemption distribution will be
delayed until such time as the Transfer Agent confirms receipt of all
such Shares.
    Once the Transfer Agent notifies the Bitcoin Custodian and the
Sponsor that the Shares have been received in the Trust's DTC account,
the Sponsor will instruct the Bitcoin Custodian to transfer the
redemption bitcoin amount from the Trust Bitcoin Account to the
Authorized Participant's bitcoin custody account. All redemption orders
are processed in-kind. By placing a redemption order, an Authorized
Participant agrees to receive bitcoin. If an Authorized Participant
fails to consummate the foregoing, the order may be cancelled.
Fee Accrual
    According to the Registration Statement, the only ordinary expense
of the Trust is expected to be the Sponsor's fee, which shall accrue
daily in bitcoin and be payable monthly in bitcoin.
Impact of the Exclusive Use of In-Kind Creations, Redemptions and Fee
Accruals
    The Sponsor believes that the exclusive use of in-kind creations,
redemptions and fee accruals, in all situations except when the Trust
is required to liquidate or to pay extraordinary expenses, provides
long-term investors in the Trust with redundant but strong protection.
The in-kind structure ensures that the Trust maintains the appropriate
amount of bitcoin-per-Share in all scenarios, regardless of the US
Dollar calculation of NAV or the CME US Reference Rate.
Background
    The Commission has historically approved or disapproved exchange
filings to list and trade series of Trust Issued Receipts, including
spot based Commodity-Based Trust Shares, on the basis of whether the
listing exchange has in place a comprehensive surveillance sharing
agreement with a regulated market of significant size related to the
underlying commodity to be held.\15\ 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 regulated futures market.\16\ 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 and Commodity-Based Trust Shares, including gold,
silver, platinum, palladium, copper, and other commodities and
currencies. The Commission specifically noted in the Winklevoss Order
that the First Gold Approval Order ``was based on an assumption that
the currency market and the spot gold market were largely
unregulated.'' \17\
---------------------------------------------------------------------------

    \15\ 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'').
    \16\ 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).
    \17\ See Winklevoss Order at 37592.
---------------------------------------------------------------------------

    As such, the regulated market of significant size test does not
require that the spot bitcoin market be regulated in order for the
Commission to approve this proposal, and precedent makes clear that an
underlying market for a spot commodity or currency being a regulated
market would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to surveillance
sharing agreements with the underlying futures market in order to
determine whether such products were consistent with the Act. With this
in mind, the bitcoin futures market, as defined below, 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
recently approved proposals related to the listing and trading of funds
that would primarily hold bitcoin futures that are registered under the
Securities Act of 1933 instead of the 1940 Act.\18\ In the Teucrium
Approval Order, the Commission found the bitcoin futures market to be a
regulated market of significant size as it relates to bitcoin futures
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
bitcoin futures. As further discussed below, the bitcoin futures market
represents a regulated market of significant size as it relates both to
the bitcoin futures market and to the spot bitcoin market.
---------------------------------------------------------------------------

    \18\ See Exchange Act Release Nos. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval Order'') and 94853
(May 5, 2022) (collectively, with the Teucrium Approval, the
``Bitcoin Futures Approval Orders'').
---------------------------------------------------------------------------

Bitcoin Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the
launch of exchange-traded funds (``ETFs'') registered under the 1940
Act and the recent Bitcoin Futures Approval Orders that provide
exposure to bitcoin primarily through 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 Approval Orders, however, have created a logical
inconsistency in the application of the standard the Commission applies
when considering bitcoin ETP proposals.
    As discussed below, the standard applicable to bitcoin ETPs is
whether the listing exchange has in place a comprehensive surveillance
sharing agreement with a regulated market of significant size in the
underlying asset.\19\ 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.\20\ However, the Exchange notes that in the Teucrium
Approval Order, the Commission noted that the CME's surveillances 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:
---------------------------------------------------------------------------

    \19\ As further discussed below, the proposal satisfies this
standard because the bitcoin futures market represents a regulated
market of significant size.
    \20\ 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 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 the Commission
has in fact looked to such derivatives markets as the regulated
market of significant size because such spot commodities markets are
largely unregulated.

    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.\21\
---------------------------------------------------------------------------

    \21\ See Teucrium Approval Order, 87 FR at 21679.

    Bitcoin futures pricing is based on pricing from spot bitcoin
markets. If CME's surveillances can capture the effects of trading on
the relevant spot markets on the pricing of bitcoin futures, CME should
equally be able to capture the effects of trading on the relevant spot
markets on the pricing of Spot Bitcoin ETPs. Moreover, this strongly
suggests that the CME bitcoin futures market represents a regulated
market of significant size.
Standard for Approval
How the Exchange's Proposed Rule Conforms to the Requirements of the
Act
    To date, the Commission has considered and published disapproval
orders relating to numerous proposed Spot Bitcoin ETPs, including
multiple prior proposals in respect of the Trust.\22\ In each of these
disapprovals, the Commission determined that the filing failed to
demonstrate that the proposal was consistent with the requirements of

Section 6(b)(5) of the Act \23\ and, in particular, the requirement
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices.\24\
---------------------------------------------------------------------------

    \22\ See, e.g., Order Disapproving a Proposed Rule Change, as
Modified by Amendments No. 1 and 2, to BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares, to List and Trade Shares Issued by the
Winklevoss Bitcoin Trust, Release No. 34-80206 (Mar. 10, 2017), 82
FR 14076 (March 16, 2017); Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, Relating to the Listing and
Trading of Shares of the SolidX Bitcoin Trust under NYSE Arca
Equities Rule 8.201, Release No. 34-80319 (Mar. 28, 2017), 82 FR
16247 (April 3, 2017); Order Setting Aside Action by Delegated
Authority and Disapproving a Proposed Rule Change, as Modified by
Amendments No. 1 and 2, to List and Trade Shares of the Winklevoss
Bitcoin Trust (``Second Winklevoss Order''), Release No. 34-83723
(July 26, 2018), 83 FR 37579 (August 1, 2018); Order Disapproving a
Proposed Rule Change to List and Trade the Shares of the ProShares
Bitcoin ETF and the ProShares Short Bitcoin ETF, Release No. 34-
83904 (Aug. 22, 2018), 83 FR 43934 (August 28, 2018); Order
Disapproving a Proposed Rule Change Relating to Listing and Trading
of the Direxion Daily Bitcoin Shares, Release No. 34-83912 (Aug. 22,
2018), 83 FR 43912 (August 28, 2018); Order Disapproving a Proposed
Rule Change to List and Trade the Shares of the GraniteShares
Bitcoin ETF and the GraniteShares Short Bitcoin ETF (``GraniteShares
Order''), Release No. 34-83913 (Aug. 22, 2018), 83 FR 43923 (August
28, 2018); Order Disapproving a Proposed Rule Change, as Modified by
Amendment No. 1, Relating to the Listing and Trading of Shares of
the Bitwise Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E (``First
Bitwise Order''), Release No. 34-87267 (Oct. 9, 2019), 84 FR 55382
(October 16, 2019) (subsequently withdrawn while the delegated
action was under review by the Commission on Jan. 13, 2020; see SR-
NYSEArca-2019-01, 85 FR 73819 (November 19, 2020); Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
to Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares) and
to List and Trade Shares of the United States Bitcoin and Treasury
Investment Trust Under NYSE Arca Rule 8.201-E, Release No. 34-88284
(February 26, 2020), 85 FR 12595 (March 3, 2020) (``USBT Order'');
Order Disapproving a Proposed Rule Change To List and Trade Shares
of the WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares, Release No. 34-93700 (Dec. 1, 2021),
86 FR 69322 (Dec. 7, 2021) (SR-CboeBZX-2021-024) (``WisdomTree
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the Valkyrie Bitcoin Fund Under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares), Release No. 34-93859 (Dec.
22, 2021), 86 FR 74156 (Dec. 29, 2021) (SR-NYSEArca-2021-31)
(``Valkyrie Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the Kryptoin Bitcoin ETF Trust Under BZX
Rule 14.11(e)(4), Commodity-Based Trust Shares, Release No. 34-93860
(Dec. 22, 2021), 86 FR 74166 (Dec. 29, 2021) (SR-CboeBZX-2021-029)
(``Kryptoin Order''); Order Disapproving a Proposed Rule Change To
List and Trade Shares of the First Trust SkyBridge Bitcoin ETF Trust
Under NYSE Arca Rule 8.201-E, Release No. 34-94006 (Jan. 20, 2022),
87 FR 3869 (Jan. 25, 2022) (SR-NYSEArca-2021-37) (``SkyBridge
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Release No. 34-94080
(Jan. 27, 2022), 87 FR 5527 (Feb. 1, 2022) (SR-CboeBZX-2021-039)
(``Wise Origin Order''); Order Disapproving a Proposed Rule Change
To List and Trade Shares of the NYDIG Bitcoin ETF Under NYSE Arca
Rule 8.201-E (Commodity-Based Trust Shares), Release No. 34-94395
(Mar. 10, 2022), 87 FR 14932 (Mar. 16, 2022) (SR-NYSEArca-2021-57)
(``NYDIG Order''); Order Disapproving a Proposed Rule Change To List
and Trade Shares of the Global X Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Release No. 34-94396
(Mar. 10, 2022), 87 FR 14912 (Mar. 16, 2022) (SR-CboeBZX-2021-052)
(``Global X Order''); Order Disapproving a Proposed Rule Change, as
Modified by Amendment No. 1, To List and Trade Shares of the ARK
21Shares Bitcoin ETF Under BZX Rule 14.11(e)(4), Commodity-Based
Trust Shares, Release No. 34-94571 (Mar. 31, 2022), 87 FR 20014
(Apr. 6, 2022) (SR-CboeBZX-2021-051) (``ARK 21Shares Order''); Order
Disapproving a Proposed Rule Change To List and Trade Shares of the
One River Carbon Neutral Bitcoin Trust Under NYSE Arca Rule 8.201-E
(Commodity-Based Trust Shares), Release No. 34-94999 (May 27, 2022),
87 FR 33548 (June 2, 2022) (SR-NYSEArca-2021-67) (``One River
Order''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the Bitwise Bitcoin ETP Trust Under NYSE Arca Rule
8.201-E (Commodity-Based Trust Shares), Release No. 34-95179 (June
29, 2022), 87 FR 40282 (July 6, 2022) (SR-NYSEArca-2021-89)
(``Second Bitwise Order''); Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, To List and Trade Shares of
Grayscale Bitcoin Trust under NYSE Arca Rule 8.201-E (Commodity-
Based Trust Shares), Release No. 34-95180 (June 29, 2022), 87 FR
40299 (July 6, 2022) (SR-NYSEArca-2021-90) (``Grayscale Order'');
Order Disapproving a Proposed Rule Change To List and Trade Shares
of the WisdomTree Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares, Release No. 34-96011 (Oct. 11, 2022),
87 FR 62466 (Oct. 14, 2022) (SR-CboeBZX-2022-006) (``WisdomTree
Order II''); Order Disapproving a Proposed Rule Change To List and
Trade Shares of the ARK 21Shares Bitcoin ETF Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares, Release No. 34-96751
(Jan. 26, 2023), 88 FR 6328 (Jan. 31, 2023) (SR-CboeBZX-2021-031)
(``ARK 21Shares Order II''); Order Disapproving 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, Release No. 34-
97102 (Mar. 10, 2023).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ In the Second Winklevoss Order, First Bitwise Order and
USBT Order, the Commission determined that the proposing exchange
had not established that bitcoin markets were uniquely resistant to
fraud or manipulation, which unique resistance might provide
protections such that the proposing exchange ``would not necessarily
need to enter into a surveillance sharing agreement with a regulated
significant market.'' Second Winklevoss Order 83 FR at 37591, First
Bitwise Order 84 FR at 55386, and USBT Order 85 FR at 12597. In the
Second Winklevoss Order, GraniteShares Order, First Bitwise Order
and USBT Order, the Commission determined that, while the existing,
regulated derivatives markets (including the CME Market) was a
regulated market, the proposing exchanges had not demonstrated that
the regulated derivatives markets had achieved significant size. See
Second Winklevoss Order 83 FR at 37601, First Bitwise Order 84 FR at
55410, and USBT Order 85 FR at 12597. In the Second Winklevoss
Order, First Bitwise Order and USBT Order, the Commission determined
that a proposing exchange had established neither that it had a
surveillance sharing agreement with a group of underlying bitcoin
trading platforms, nor that such bitcoin trading platforms
constituted regulated markets of significant size with respect to
bitcoin. See Second Winklevoss Order 83 FR 37590-37591, First
Bitwise Order 84 FR at 55407 and USBT Order 85 FR at 12615.
---------------------------------------------------------------------------

    The principal means by which a national securities exchange may
satisfy the requirements of Section 6(b)(5) of the Act \25\ is through
entry into comprehensive surveillance-sharing agreements that ``help to
ensure the availability of information necessary to detect and deter
potential manipulations and other trading abuses, thereby making [the
ETP] less readily susceptible to manipulation.'' \26\ These
comprehensive surveillance-sharing agreements enable the Exchange to
obtain information necessary to detect and deter market manipulation
and other trading abuses upon request of information from one party to
the other.\27\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b)(5).
    \26\ See Notice of Filing and Order Granting Immediate
Effectiveness of Proposed Rule Change by American Stock Exchange,
Incorporated Relating to the Listing of Commodity Indexed Preferred
or Debt Securities, Exchange Act Release No. 35518 (Mar. 21, 1995),
60 FR 15804, 15807, 15807 n.21 (Mar. 27, 1995) (SR-Amex-94-30). See
also Notice of Filing and Order Granting Immediate Effectiveness of
Proposed Rule Change by American Stock Exchange, Incorporated
Relating to the Listing of Commodity Indexed Preferred or Debt
Securities, Exchange Act Release No. 36885 (Feb. 26, 1996), 61 FR
8315, 8319 n.17 (Mar. 4, 1996) (SR-Amex-95-50).
    \27\ The Commission has described a comprehensive surveillance
sharing agreement as including an agreement under which a self-
regulatory organization may expressly obtain information on (i)
market trading activity, (ii) clearing activity and (iii) customer
identity, and where existing rules, laws or practices would not
impede access to such information. See Letter from Brandon Becker,
Director, Division of Market Regulation, Commission, to Gerard D.
O'Connell, Chairman, Intermarket Surveillance Group (June 3, 1994),
available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm (``ISG Letter''). The Commission has emphasized the
importance of surveillance sharing agreements, noting that ``[s]uch
agreements provide a necessary deterrent to manipulation because
they facilitate the availability of information needed to fully
investigate a manipulation if it were to occur.'' Amendment to Rule
Filing Requirements for Self-Regulatory Organizations Regarding New
Derivative Securities Products, Exchange Act Release No. 40761 (Dec.
8, 1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-
98) (``NDSP Adopting Release'').
---------------------------------------------------------------------------

    In the Second Winklevoss Order, the Commission laid out both the
importance and definition of a surveilled, regulated market of
significant size. Specifically, the Commission explained that:
    [for all] commodity-trust ETPs approved to date for listing and
trading, there has been in every case at least one significant,
regulated market for trading futures on the underlying commodity--
whether gold, silver, platinum, palladium, or copper--and the ETP
listing exchange has entered into surveillance-sharing agreements with,
or held Intermarket Surveillance Group membership in common with, that
market.\28\
---------------------------------------------------------------------------

    \28\ Second Winklevoss Order, 83 FR 37594.
---------------------------------------------------------------------------

    Further, on an illustrative and not exclusive basis, the Commission
interpreted the terms `significant market' and `market of significant
size' to 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 successfully manipulate
the ETP, so that a surveillance-sharing agreement would assist the ETP
listing market 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.\29\
---------------------------------------------------------------------------

    \29\ Id. The Commission further noted that ``[t]here could be
other types of ``significant markets'' and ``markets of significant
size,'' but this definition is an example that will provide guidance
to market participants.''
---------------------------------------------------------------------------

    This two-prong definition of the term ``significant market'' came
to be known as the ``Winklevoss Standard,'' and will be referred to as
such in this proposal. In the First Bitwise Order, the Commission built
upon the Winklevoss Standard and provided important additional guidance
on how a listing exchange might demonstrate that a bitcoin derivatives
market meets the Commission's definition of ``significant'':

    [T]he lead-lag relationship between the bitcoin futures market
and the spot market ... is central to understanding whether it is
reasonably likely that a would-be manipulator of the ETP would need
to trade on the bitcoin futures market to successfully manipulate
prices on those spot platforms that feed into the proposed ETP's
pricing mechanism. In particular, if the spot market leads the
futures market, this would indicate that it would not be necessary
to trade on the futures market to manipulate the proposed ETP, even
if arbitrage worked efficiently, because the futures price would
move to meet the spot price.\30\
---------------------------------------------------------------------------

    \30\ First Bitwise Order, 84 FR at 55411. See also USBT Order 85
FR at 12612.

    In response to this, in the rule proposal disapproved in the USBT
Order, the sponsor and listing exchange attempted to establish that the
CME Market satisfied the requirements of a regulated market of
significant size as laid out in the First Bitwise Order. The rule
change proposal referenced, among other items, a statistical analysis
conducted by the Sponsor examining whether the CME Market led the
bitcoin spot market from a price discovery perspective. The Commission
rejected this argument for specific reasons, noting (among other
---------------------------------------------------------------------------
things) that:

    the [s]ponsor has not provided sufficient details supporting
this conclusion, and unquestioning reliance by the Commission on
representations in the record is an insufficient basis for approving
a proposed rule change in circumstances where, as here, the
proponent's assertion would form such an integral role in the
Commission's analysis and the assertion is subject to several
challenges. For example, the [s]ponsor has not provided sufficient
information explaining its underlying analysis, including detailed
information on the analytic methodology used, the specific time
period analyzed, or any information that would enable the Commission
to evaluate whether the findings are statistically significant or
time varying.

    Nonetheless, the Commission made it clear that a future ETP
application could potentially meet the Winklevoss Standard through
identifying a regulated market of significant size. Specifically, the
Commission noted that an existing or new bitcoin futures market could
achieve significant size such that an Exchange might demonstrate,
through a surveillance sharing agreement, that a proposed rule change
could satisfy the requirements of the Act.\31\
---------------------------------------------------------------------------

    \31\ In past disapproval orders for bitcoin ETPs, the Commission
acknowledged that the CME, and therefore the CME Market, is
regulated by the CFTC, but that the proposing exchanges had not
demonstrated that the CME Market represented a significant market.
See note 24, supra.
---------------------------------------------------------------------------

    As discussed in detail below, the Sponsor's analysis demonstrates
that the Exchange can meet the burden presented by Section 6(b)(5) of
the Act and, in particular, the requirement that

the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices by demonstrating that
the CME Market (i) is a regulated market; (ii) participates in a
surveillance sharing agreement with the Exchange; and (iii) satisfies
the Commission's ``significant market'' definition under the Winklevoss
Standard.
The CME Market
    The CME Group announced the planned launch of bitcoin futures on
October 31, 2017, the trading of which began on December 17, 2017.\32\
The futures are cash-settled based on the CME UK Reference Rate, the
methodology of which is described above. 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
143,215 bitcoin futures contracts traded in April 2023 (approximately
$20.7 billion) compared to 193,182 ($5 billion), 104,713 ($3.9
billion), 118,714 ($42.7 billion), and 111,964 ($23.2 billion)
contracts traded in April 2019, April 2020, April 2021, and April 2022,
respectively.\33\
---------------------------------------------------------------------------

    \32\ ``CME Group Announces Launch of Bitcoin Futures,'' October
31, 2017, available at https://www.cmegroup.com/media-room/press-releases/2017/10/31/cme_group_announceslaunchofbitcoinfutures.html.
At the same time as the launch of the CME Market, the Cboe Futures
Exchange, LLC announced and subsequently launched Cboe bitcoin
futures. See ``CFE to Commence Trading in Cboe Bitcoin (USD) Futures
Soon,'' December 01, 2017, available at cdn.cboe.com/resources/release_notes/2017/Cboe-Bitcoin-USD-Futures-Launch-Notification.pdf.
Each future was cash settled, with the CME Market tracking the CME
UK Reference Rate and the Cboe bitcoin futures tracking a bitcoin
trading platform daily auction price. The Cboe Futures Exchange, LLC
subsequently discontinued its bitcoin futures market effective June
2019. ``Cboe put the brakes on bitcoin futures,'' March 15, 2019,
available at https://www.reuters.com/article/us-cboe-bitcoin/cboe-puts-the-brakes-on-bitcoin-futures-idUSKCN1QW261. The Trust uses the
CME US Reference Rate to calculate its NAV.
    \33\ Source: CME, Yahoo Finance 4/30/23.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN18JY23.000

    The number of large open interest holders \34\ and unique accounts
trading bitcoin futures have both increased, even in the face of
heightened bitcoin price volatility.
---------------------------------------------------------------------------

    \34\ 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 $29,268.81 per bitcoin on
4/30/2023, more than 100 firms had outstanding positions of greater
than $3.65 million in bitcoin futures.

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

[GRAPHIC] [TIFF OMITTED] TN18JY23.001

BILLING CODE 8011-01-C
    The Commission has previously recognized that the CME Market
qualifies as a regulated market \35\ and that surveillance-sharing
agreements are in place with the CME by virtue of common membership in
the Intermarket Surveillance Group (``ISG'').\36\ Both the Exchange and
the CME are members of the ISG.\37\
---------------------------------------------------------------------------

    \35\ See First Bitwise Order, 84 FR at 55410, n. 456 (``the
Commission recognizes that the CFTC comprehensively regulates CME .
. .''). See also Second Winklevoss Order, 83 FR at 37594 & at note
202, GraniteShares Order 83 FR at 43929, and USBT Order, 85 FR at
12597.
    \36\ As the Commission explained in the First Bitwise Order,
common membership between a proposing exchange and a futures market
such as the CME (and therefore the CME Market) in the ISG functions
as ``the equivalent of a comprehensive surveillance sharing
agreement.'' See First Bitwise Order, 84 FR at 55410, n.456.
    \37\ A list of the current members of ISG is available at
https://www.isgportal.org.
---------------------------------------------------------------------------

The CME Market Meets the Commission's Definition of a ``Significant
Market''
    As the following analysis based on the Sponsor's research
demonstrates, the CME Market satisfies the Commission's definition of a
``significant market.'' \38\ Specifically, the Sponsor's analysis shows
that prices on the CME Market consistently lead prices on the bitcoin
spot market and the unregulated bitcoin futures market, such that it is
reasonably likely that a would-be manipulator of the ETP would need to
trade bitcoin futures on the CME Market. The Sponsor's analysis also
demonstrates that it is unlikely that trading in the ETP would be the
predominant influence on prices in the CME Market.
---------------------------------------------------------------------------

    \38\ This proposal details the data sources, time periods, and
statistical methods used by the Sponsor to demonstrate that the CME
Market qualifies as a significant market relative to the Trust. As
such, the surveillance sharing agreement, in place through common
membership in the ISG, will allow the Exchange to detect and deter
potential manipulations and other misconduct and to satisfy its
obligations under Section 6(b)(5) of the Act. See 15 U.S.C.
78f(b)(5).
---------------------------------------------------------------------------

Data Sources for Evaluating the Bitcoin Market
    In evaluating whether the CME Market qualifies as a significant
market, the Sponsor has engaged in an extensive research effort to
evaluate the lead-lag relationship between the CME Market and both the
bitcoin spot market and the unregulated bitcoin futures market. Given
that lead-lag and price discovery research is sensitive to data
quality, it was critical from the beginning that the Sponsor gather
high-quality bitcoin trading data on a historical and an ongoing basis.
    Bitcoin trading platforms exist in multiple countries and operate
under a variety of regulatory regimes. There are generally no
requirements for these platforms to provide data on their trading
activity in a uniform fashion to a centralized database. As a result,
there currently is no equivalent to the Consolidated Tape Association
(``CTA'') in the US, which offers a single source of agreed upon
trading data for publicly traded equities in the US.
    Over the years, however, a variety of private data providers have
emerged that consolidate trading data from large numbers of bitcoin
trading platforms. The Sponsor undertook a detailed survey of these
data providers in May 2020, evaluating them on metrics including data
quality, trading platform coverage, cost, service quality, and
reputation. The goal of this survey was to determine which provider or
set of providers the Sponsor would use in its research.
    The Sponsor cataloged bitcoin data providers commonly referenced in
the industry, and supplemented this list by conducting broad web
searches to identify additional bitcoin data providers and by
consulting a third-party survey.\39\ Aggregating these steps resulted
in a total of 29 firms examined by the Sponsor, of which 14 offered the
specific type of data (bitcoin tick data) needed to conduct lead-lag
analysis. The Sponsor evaluated these 14 firms on four separate
criteria:
---------------------------------------------------------------------------

    \39\ See The Block, ``The State of Digital Asset Data and
Infrastructure,'' May 14, 2020, available at https://www.theblockcrypto.com/post/63689/research-report-the-state-of-the-digital-asset-data-and-infrastructure-commissioned-by-blockset.
---------------------------------------------------------------------------

     Data coverage. All else equal, more trading platforms are
better than fewer.
     Data quality. Data gathered by third-party providers
should match the actual activity that takes place on each trading
platform, with as few errors as possible.
     Cost. The cost of licensing the data from a given provider
should be reasonable.
     Corporate Factors. Available facts should give confidence
that the provider in question will continue to operate in a robust
manner over a meaningful period of time.
    Data quality was weighted heavily in the assessment of data
providers, as it has a direct impact on the output of price discovery
research. Still, the other three factors were important as well. Based
on this analysis, the Sponsor

elected to use Coin Metrics as the core data provider. At the time,
Coin Metrics offered coverage of 26 trading platforms, and had
exceptionally high data quality based on the statistical analysis
performed by the Sponsor.\40\
---------------------------------------------------------------------------

    \40\ For instance, in one portion of the study, the Sponsor
downloaded the full record of trades (2,523,481 trades) directly
from Bitfinex, a spot bitcoin trading platform, for the month of
March 2020. It then compared these trades with data pulled from
participating data providers, looking for three types of data
errors: duplicated trades, erroneous trades, and missing trades.
Coin Metrics had zero data errors; its competitors had between two
and 4,929 errors in their data samples. The Sponsor repeated the
analysis using trade data from Coinbase and LBank, two additional
bitcoin trading platforms; Coin Metrics again had zero data errors.
---------------------------------------------------------------------------

    To supplement Coin Metrics' data, the Sponsor evaluated data
providers that covered a large number (>100) of bitcoin trading
platforms. Of these providers, CoinAPI scored the best on its four-
factor evaluation system, including scoring well on data quality. Based
on this analysis, the Sponsor elected to use CoinAPI data to supplement
Coin Metrics data where necessary to conduct its analysis.
    Data on the CME Market was obtained directly from the CME Group.
Winklevoss Standard Prong 1: Reasonable Likelihood
    The first prong of the Winklevoss Standard requires demonstrating a
reasonable likelihood that a person attempting to manipulate a bitcoin
ETP would also have to trade on the CME Market.\41\ In prior
disapproval orders, the Commission stated that demonstrating a ``lead-
lag relationship'' between prices on the CME Market and the underlying
bitcoin spot market is ``central'' to understanding this reasonable
likelihood.\42\
---------------------------------------------------------------------------

    \41\ See note 22 [sic], supra, and accompanying text.
    \42\ See note 23 [sic], supra, and accompanying text.
---------------------------------------------------------------------------

    As detailed below, through extensive statistical analysis and
careful consideration of third-party evaluations of these markets, the
Sponsor has demonstrated that the CME Market leads the bitcoin spot
market and the unregulated bitcoin futures market, such that it is
reasonably likely that a person attempting to manipulate the ETP would
also have to trade on the CME Market, thus satisfying the first prong
of the Winklevoss Standard.
The Statistical Approaches to Demonstrating a Lead-Lag Relationship
    The Sponsor conducted a detailed review of both academic and
practitioner papers that focus on lead-lag relationships in financial
markets. The literature review revealed that there are two primary
approaches to conducting such analysis:
     Information Share (IS)/Component Shares (CS) Price
Discovery Analysis. This type of analysis is based on the principle
that there is a common ``efficient'' price for any asset being traded
on multiple platforms. It allows you to construct a model of the
relationship between different platforms by comparing their price
series against this common efficient price, and testing which price
series is faster to incorporate new information; and
     Time-Shift Lead-Lag Analysis (TSLL). TSLL is a more
intuitive approach to evaluating lead-lag relationships between
markets. It involves taking two time series of price data and
offsetting (or ``shifting'') them against each other to determine what
offset, or ``lag,'' produces the highest cross-correlation between the
two series.
    Both IS/CS price discovery analysis and TSLL have an extensive
history in the financial literature, and each comes with its own
strengths and weaknesses. As such, the Sponsor has evaluated the CME
Market using both of the major academic approaches.

IC/CS Price Discovery Research on the Bitcoin Spot Market vs. the CME
Market

    Information share (IS) and component share (CS) are two variants of
a core analytical approach to price discovery research that traces its
roots back to 1995.\43\ It is sometimes referred to in the literature
as ``common efficient price''-based analysis, ``fundamental price''-
based analysis, or simply ``price discovery'' analysis.
---------------------------------------------------------------------------

    \43\ Hasbrouck, J. (1995), One security, many markets:
Determining the contributions to price discovery. The Journal of
Finance, 5050(4), 1175-1199. Gonzalo, J., and Granger, C. (1995),
Estimation of common long-memory components in cointegrated systems.
Journal of Business & Economic Statistics, 13(1), 27-35.
---------------------------------------------------------------------------

    Price discovery analysis is based on the idea that, in a perfectly
efficient market, new information should be reflected simultaneously in
the price of an asset as it trades on different platforms. In practice,
however, this is not the case; some platforms move before others. In
addition, some market moves are simply ``noise'' that do not reflect a
change in the fundamental price at all. Price discovery analysis
attempts to measure the speed and accuracy with which each trading
platform incorporates new information into its price. Platforms that
are faster to incorporate new information while being better at
avoiding noise are considered to have a ``higher share'' of price
discovery.
    Despite the paired nature of IS/CS values, the convention in the
literature is to present only one value in the results tables, leaving
the other implied. The Sponsor followed that convention, only reporting
the IS/CS value of the CME Market, as it is compared to each spot
bitcoin trading platform. Therefore, an IS/CS value above 50% indicates
that the CME Market leads price discovery compared with the spot
bitcoin trading platform in question.
    The Sponsor's review of the historical literature surrounding IS/CS
price discovery analysis comparing the CME Market and the bitcoin spot
market identified ten academic and practitioner studies evaluating the
two markets, which are itemized and summarized in the table below (a
single long horizontal table has been divided here into two parts).\44\
---------------------------------------------------------------------------

    \44\ This table is replicated from material previously provided
to the Commission. See Matthew Hougan, Hong Kim and Satyajeet Pal,
Price discovery in the modern bitcoin market: Examining lead-lag
relationships between the bitcoin spot and bitcoin futures market,
February 16, 2021, as amended and supplemented (``Bitwise Prong One
Paper'').

----------------------------------------------------------------------------------------------------------------
               No.                               Title                    Year                 Authors
----------------------------------------------------------------------------------------------------------------
1................................  Bitcoin futures--What use are               2018  Corbet, Lucey, et al.
                                    they? \1\.
2................................  Price discovery in bitcoin spot             2019  Baur and Dimpfl.
                                    or futures? \2\.
3................................  An analysis of price discovery              2019  Kapar and Olmo.
                                    between bitcoin futures and
                                    spot markets \3\.
4................................  Price discovery, high-frequency             2019  Alexander and Heck.
                                    trading and jumps in bitcoin
                                    markets \4\.
5................................  What role do futures markets                2019  Hu, Hou, and Oxley.
                                    play in bitcoin pricing?
                                    Causality, cointegration and
                                    price discovery from a time-
                                    varying perspective \5\.
6................................  The development of bitcoin                  2019  Akyildirim, Corbet, et al.
                                    futures: Exploring the
                                    interactions between
                                    cryptocurrency derivatives \6\.
7................................  Price discovery in bitcoin                  2020  Fassas, Papadamou, and
                                    futures \7\.                                      Koulis.
8................................  The determinants of price                   2020  Entrop, Frijns, and
                                    discovery on bitcoin markets                      Seruset.
                                    \8\.

9................................  Bitcoin spot and futures market             2020  Aleti and Mizrach.
                                    microstructure \9\.
10...............................  Efficient price discovery in the            2020  Chang, Herrmann, and Cai.
                                    bitcoin markets \10\.
----------------------------------------------------------------------------------------------------------------
\1\ Corbet, S., Lucey, B., Peat, M., and Vigne, S. (2018), Bitcoin futures--What use are they? Economics Letters
  (172), 23-27.
\2\ Baur, D.G., and Dimpfl, T. (2019), Price discovery in bitcoin spot or futures? The Journal of Futures
  Markets (39)7, 803-817.
\3\ Kapar, B., and Olmo, J. (2019). An analysis of price discovery between bitcoin futures and spot markets.
  Economics Letters, (174), 62-64.
\4\ Alexander, C., and Heck, D. (2019), Price discovery, high-frequency trading and jumps in bitcoin markets.
  SSRN Electronic Journal.
\5\ Hu, Y., Hou, Y.G., Oxley, L. (2020), What role do futures markets play in bitcoin pricing? Causality,
  cointegration and price discovery from a time-varying perspective. International Review of Financial Analysis
  (72).
\6\ Akyildirim, E., Corbet, S., Katsiampa, P., Kellard, N., and Sensoy, A. (2020), The development of bitcoin
  futures: Exploring the interactions between cryptocurrency derivatives. Finance Research Letters (34).
\7\ Fassas, A., Papadamou, S., Koulis, A. (2020), Price discovery in bitcoin futures. Research in International
  Business and Finance (52).
\8\ Entrop, O., Frijns B., Seruset, M. (2020), The determinants of price discovery on bitcoin markets. The
  Journal of Futures Markets, (40)5, 816-837.
\9\ Aleti, S., and Mizrach, B. (2020), Bitcoin spot and futures market microstructure. The Journal of Futures
  Markets (41)2, 194-225.
\10\ Chang, A., Herrmann, W, and Cai, W. (2020), Efficient price discovery in the bitcoin markets. Wilshire
  Phoenix, October 14, 2020, available at https://www.wilshirephoenix.com/efficient-price-discovery-in-the-bitcoin-markets/.

--------------------------------------------------------------------------------------------------------------------------------------------------------
           No.                    Authors          CME IS (%)      CME CS (%)              Intervals                Time period             Result
--------------------------------------------------------------------------------------------------------------------------------------------------------
1........................  Corbet, Lucey, et                 15              18  1 min........................  \1\................  Spot leads.
                            al..
2........................  Baur and Dimpfl.....              14              14  15 min.......................  12/18/2017-10/18/    Spot leads.
                                                                                2018.
3........................  Kapar and Olmo......              89  ..............  1 day........................  12/18/2017-05/16/    Futures lead.
                                                                                2018.
4........................  Alexander and Heck..              66              73  30 min.......................  12/18/2017-06/30/    Futures lead.
                                                                                2019.
5........................  Hu, Hou, and Oxley..              55  ..............  1 day........................  12/18/2017-06/16/    Futures lead.
                                                                                2019.
6........................  Akyildirim, Corbet,            91-97           67-87  1/5/10/15/30/60 min..........  12/18/2017-02/26/    Futures lead.
                            et al.                                                                               2018.
7........................  Fassas, Papadamou,                97              77  1 hour.......................  01/01/2018-12/31/    Futures lead.
                            and Koulis.                                                                          2018.
8........................  Entrop, Frijns, and               50              53  1 min........................  12/18/2017-03/31/    Mixed.
                            Seruset.                                                                             2019.
9........................  Aleti and Mizrach...           53-55           68-91  5 min........................  01/02/2019-02/28/    Futures lead.
                                                                                2019.
10.......................  Chang, Herrmann, and  ..............              63  1 min........................  07/01/2019-12/31/    Futures lead.
                            Cai.                                                                                2019.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Corbet et al. (2018) do not specify the time period of the price discovery analysis presented. See note 49 [sic], infra, and accompanying text.

    As the above table indicates, a majority of papers support the
notion that the CME Market leads price discovery using IS and/or CS
when compared to the bitcoin spot market. Because the methodologies and
findings of each paper are nuanced, the Sponsor examined each paper in
detail. The analysis begins with the majority opinion that the CME
Market leads the bitcoin spot market:
     Kapar and Olmo (2019) was the first paper to assert that,
contrary to the two studies that came before it (Corbet et al. (2018)
and Baur and Dimpfl (2019)), the data ``clearly reflect the leadership
of the Bitcoin futures markets with respect to the spot market.'' The
paper attributed 89% of IS to the futures market.
    Kapar and Olmo (2019) relies on daily price data, which means the
study may not capture intraday information flow. Still, long-run
relationships are relevant in holistically describing the relative
strength one market has compared with another. The authors illustrated
the importance of long-run relationships, saying, ``when the market is
in contango we can expect increases in the spot price in the next
period. In contrast, when the market is in backwardation, the VECM
suggests a fall in spot prices to correct departures from
equilibrium.'' In other words, the authors found that if there is a gap
between the spot and futures price on a given day, the spot price is
more likely to correct toward the futures price than vice versa.
     Alexander and Heck (2019) similarly found that there was
``strong evidence that both CME and CBOE futures have played the
leading role in price discovery.'' Unlike Kapar and Olmo (2019),
Alexander and Heck (2019) used intraday data with a 30-minute timing
interval. Their analysis ran from December 18, 2017 to June 30, 2019,
the longest time period among the ten studies the Sponsor discovered.
It showed that the CME Market led the bitcoin spot market with 66% of
IS and 73% of CS during that time.
    Interestingly, the authors noted strong price leadership from the
CME Market during Q2 2019, the last quarter they studied. In fact, Q2
2019 boosted the overall IS from the study from 57% to 66%, and CS from
50% to 73%. This increase in the CME Market's contribution to price
discovery aligned with significant growth in volume on the CME Market
after Q1 2019.\45\
---------------------------------------------------------------------------

    \45\ The monthly ADV in the CME Market grew from $60 million in
March 2019 to $230 million in April 2019, according to data from the
CME Group. In Q3 2020, the CME Market had a $365 million ADV.
---------------------------------------------------------------------------

    In 2020, Alexander and Heck published a second paper in which the
authors highlight the role unregulated futures and perpetual swaps from
trading platforms such as Bitmex, Huobi, and OKEx play in the bitcoin
market.\46\ The analysis involves a complex, multidimensional approach
to price discovery analysis conducted across eight different markets
and four different exposure types (unregulated futures, regulated
futures, perpetual swaps, and spot markets), each with different levels
of microstructure friction and data integrity. These

complications make it difficult to draw a direct comparison of this
paper's results with the ten studies included in the table above.\47\
---------------------------------------------------------------------------

    \46\ Alexander, C., and Heck, D. (2020), Price discovery in
bitcoin: the impact of unregulated markets. Journal of Financial
Stability (50), Article Number 100776.
    \47\ The direct question around whether the CME Market leads or
lags price discovery compared to the unregulated bitcoin futures
market is explored in detail in a following sub-section titled
``Examining Lead-Lag Relationships Between The Unregulated Bitcoin
Futures Market And The CME Bitcoin Futures Market.''
---------------------------------------------------------------------------

     Hu et al. (2020) added to the literature, saying, ``What
we contribute to this literature here, especially compared to Alexander
& Heck (2019), is that we consider price discovery in the Bitcoin
futures markets that allow for time-varying approaches,'' noting that
cointegrating relationships can be interrogated more comprehensively
using time-varying approaches. The authors conclude that, ``Bitcoin
futures markets dominate the price discovery process using a time-
varying version of an information share measures of the IS and GIS
types.'' This finding provides additional clarity around the time-
dependency of other price discovery analytical results.
     Akyildirim, Corbet et al. (2019) conducted its analysis in
five-, ten-, 15-, 30-, and 60-min price data intervals to reach a range
of IS and CS outcomes in order to test robustness across different data
time intervals. The finding that the CME Market led the bitcoin spot
market was consistent across all studied time intervals.
     Fassas et al. (2020) added another record to the body of
literature finding that the CME Market led the bitcoin spot market,
saying, ``Our study confirms [the] Akyildirim et al. (2019), Alexander
et al. (2019) and Kapar and Olmo (2019) conclusion that bitcoin futures
markets, while in their relative youth, have portrayed evidence of
price discovery leadership compared to the spot market.'' Fassas et al.
(2020) arrives at this conclusion after applying price discovery
measures to the entire year of 2018 with hourly price data.
     Aleti and Mizrach (2020) explores the market
microstructure of four spot trading platforms (Bitstamp, Coinbase,
Kraken, and itBit) and the CME Market over a relatively narrow two-
month time period (January 2, 2019 to February 28, 2019). The paper
reports separate CME Market IS values for each of the four spot trading
platforms, ranging from 53% versus itBit to 55% versus Bitstamp, and
four CME Market CS values ranging from 68% versus itBit to 91% versus
Kraken. All of these tests find that the CME Market led price discovery
against each of the spot trading platforms.
     Chang et al. (2020) explored a more recent time period
(the ``second half of 2019'') and found that the CME Market led the
spot market in price discovery with a CS of 63%.
    It is worth noting that--as explored in Putnins (2013) \48\--IS and
CS price discovery metrics can face challenges when comparing markets
that differ by tick size, trade frequency, and other microstructure
frictions. Specifically, these measures bias against finding price
formation in markets like the CME Market that have larger tick sizes or
less frequent trades. In spite of these headwinds, a majority of the
studies in the table above found the CME Market led price discovery
against bitcoin spot market.\49\
---------------------------------------------------------------------------

    \48\ Putnins, T., What do price discovery metrics really
measure? Journal of Empirical Finance, 23 (9), September 2013.
    \49\ The Commission has previously cited mixed or unsettled
academic literature on lead-lag analysis in its bitcoin ETP
disapproval orders. See USBT Order, 84 FR at 12613. Of course, the
existence of variable results in IS/CS analysis, either within one
study or a group of studies, is not in isolation sufficient to
determine that a commodity futures market does not satisfy the
concerns of the Act. There are multiple commodity markets where the
Commission has approved ETPs based in part on the existence of a
regulated derivatives market of significant size where select IS/CS
studies find that the related derivatives market is not the main
source of price discovery. For instance, Dimpfl et al. (2017) found
that futures markets account for less than 10% of IS price discovery
in markets like corn, wheat, soybeans, cattle, and lean hogs.
Dimpfl, T., Flad, M., and Jung, R. (2017), Price discovery in
agricultural commodity markets in the presence of futures
speculation. Journal of Commodity Markets, March 2017. Similarly,
Narayan and Sharma (2018), examined data on 15 commodities markets
from 1977 to 2012, found that spot led futures in nine commodities
(canola, cocoa, coffee, corn, gold, platinum, silver, soybean oil,
and soybean yellow), and that futures dominated in just six
commodities (copper, crude oil, platinum, soybean meal, sugar and
wheat). Narayan, P. and Sharma, S. (2018), An analysis of time-
varying commodity market price discovery. International Review of
Financial Analysis, May 2018.
---------------------------------------------------------------------------

    The Sponsor also evaluated three studies where the authors noted
that the spot market led the CME Market or had mixed results:
     Corbet et al. (2018) is the earliest study examining
whether the futures or spot market lead in the bitcoin market. It
reached the conclusion that the spot market led, with IS and CS values
assigned to the CME Market of just 15% and 18%, respectively. The time
period of the price discovery analysis is not clear from the paper, and
it is possible that, being the earliest paper, the period was very
short. Akyildirim, Corbet, et al. (2019), a study that shares the same
co-author (Corbet) but examines different data sets, arrived at the
opposite conclusion, as noted above, determining that the futures
market had the dominant share of price discovery. Discussing the
difference between the two papers, Akyildirim, Corbet, et al. (2019)
notes that Corbet et al. (2018) was based on a shorter time period, and
for that reason, could have found a relationship that has since
reversed.\50\
---------------------------------------------------------------------------

    \50\ Akyildirim, Corbet, et al. (2019) notes that ``in contrast
to results based on a shorter period as in Corbet et al. (2018a), it
appears that as the new cryptocurrency futures markets developed,
they presented substantial leadership in price discovery over spot
Bitcoin markets.'' This view is repeated in the conclusion, which
says, ``while earlier research found that information flows and
price discovery were transmitted from spot to futures markets, this
research verifies that this relationship has since reversed, most
likely explained by the influx of institutional and sophisticated
investors.''
---------------------------------------------------------------------------

     Baur and Dimpfl (2019) is the other study that found the
bitcoin spot market led the bitcoin futures market. This paper,
however, has an important methodological flaw that led the CME Market
contribution to appear artificially low: the authors conducted their
price discovery analysis on a per-lifetime-of-each-contract basis,
rather than a standard rolling-contract basis.
    Alexander and Heck (2019) explore this issue extensively, going as
far as running a similar per-lifetime-of-each-contract analysis to
observe how much lower the futures market contribution can appear. The
authors concluded that ``[t]his apparently leading role of the spot
market is not surprising since, during the first few months after the
introduction of a contract, there is always another contract with a
nearer maturity where almost all trading activity occurs. So any
finding that the spot market dominates the price discovery process is
merely an artefact of very low trading volumes when the contract is
first issued.''
    Baur and Dimpfl (2019) acknowledge this issue and run a rolling-
futures model of the same analysis for contracts traded on the Cboe,
using a fairly standard methodology where the studied contract is
rolled over one day prior to maturity. This led to a significantly
higher share of price discovery for the Cboe contract, albeit one that
still did not dominate the bitcoin spot market. Unfortunately, the
authors were unable to do the same analysis for CME futures, noting
that the continuous price data approach was ``only feasible for the
Cboe futures as there are short gaps in our CME data.''
    It is not clear why such data gaps existed, as CME data is readily
available. Additionally, it is not appropriate to assume that, if the
authors had studied a rolling-futures version of the CME analysis, the
result would also have aligned with the findings of the rolling-futures
version of the Cboe analysis. There were fewer

CME bitcoin futures contracts in the data set than in the Cboe data set
(four versus seven), and each of the CME contracts had a longer
lifetime (or ``Sample Period,'' as shown in Table 1 of the paper),
likely leading to a stronger bias from this methodological flaw.
    Therefore, the Sponsor concluded that Baur and Dimpfl (2019) failed
to address whether the CME Market as a whole leads price discovery
versus the bitcoin spot market.
     Entrop et al. (2020) arrives at a mixed result. In
aggregate, the paper finds that the CME Market leads, noting that the
futures exchange has an average IS value of 50% and average CS value of
53%. The paper also found that the CME Market led price discovery in a
majority of months studied, noting, ``We find that, on average, the
futures market leads the price formation process in 9 (contract)
months, while the spot market is the leader in the remaining (6)
months.'' The paper, however, does note that the spot market led the
CME Market in a statistically significant way in the last two months of
the study (February and March 2019), and in nonsignificant ways in
select other months. These findings led the authors to the claim that
``the leading market has changed.'' The Sponsor noted that Aleti and
Mizrach (2020) and Alexander and Heck (2019) explored price discovery
in overlapping time periods and reached a different conclusion.
    In summary, the Sponsor concluded that the majority of academic and
practitioner papers support the view that the CME Market leads price
discovery as compared with the bitcoin spot market. Of the ten
available papers, seven clearly find that the CME Market leads, and an
eighth (Entrop et al. (2020)) has aggregate results in favor of the CME
Market leading. Of the two papers that conclude that the spot market
leads, one was an early paper that potentially studied a very limited
time period (Corbet et al. (2018)) and the other (Baur and Dimpfl
(2019)) has an important methodological flaw that limits its
applicability to the question at hand.
    In addition to the literature review above, the Sponsor conducted
its own analysis of IS/CS price discovery between the CME Market and
the bitcoin spot market. In preparing its analysis, the Sponsor
considered that the academic literature on bitcoin price discovery does
not have a single approach to defining ``the bitcoin spot market.''
Many studies, such as Baur and Dimpfl (2019), use a single bitcoin
trading platform as a proxy for all existing spot platforms; others,
such as Aleti and Mizrach (2020), evaluate a small number (typically
two to five) of bitcoin trading platforms as representative of the
bitcoin spot market; still others, like Kapar and Olmo (2019), use an
aggregated price (in their case, the Coindesk Bitcoin USD Price Index,
which draws on a screened subset of global bitcoin trading platforms).
    The Sponsor evaluated the CME Market and ten bitcoin trading
platforms, more than the number used in other studies encountered in
the Sponsor's academic literature review. These trading platforms
included all five Constituent Platforms represented in the CME U.S.
Reference Rate and the CME UK Reference Rate (Bitstamp, Coinbase,
Gemini, itBit and Kraken), along with five additional bitcoin trading
platforms with high reported trading volume (Binance, Bitfinex, Huobi,
LBank, and OKEx). These trading platforms include both the largest USD-
BTC Pair trading platform by reported volume (Coinbase) and the largest
tether-BTC pair trading platform by reported volume (Binance).\51\
---------------------------------------------------------------------------

    \51\ While reported volumes on bitcoin trading platforms need to
be considered with caution, Coinbase and Binance regularly appear as
the top trading platform for the USD-BTC Pair and tether-BTC pair,
respectively, on CoinMarketcap.com (https://coinmarketcap.com/currencies/bitcoin/markets/). Tether is a digital asset used as a
``stablecoin'' that has an intended value of $1.
---------------------------------------------------------------------------

    The Sponsor used available trade data, from the inception of the
CME bitcoin futures contract on December 18, 2017 through the end of
September 30, 2020. The results aligned with the majority of academic
and practitioner research in finding that the CME Market leads the
bitcoin spot market. The results are statistically significant for all
ten trading platforms when evaluated from both an IS and a CS
perspective.
    The Sponsor presents the results in both full time period and
monthly formats. Academic literature commonly presents results as full
time period results; however, the Sponsor noted that shorter time
periods such as the monthly results may be more appropriate given the
potential for time variation in the bitcoin trading market.
    The table below shows the IS and CS for the CME Market versus each
of the ten spot trading platforms averaged across the entire time
period (December 18, 2017 to September 30, 2020), along with a 95%
confidence interval for those results. The * indicates that the results
are statistically significant (p-value <0.05). Note that all of the IS
and CS values and their confidence intervals are above the 50% mark,
indicating that CME Market led all of the ten spot trading platforms
across this time period.

----------------------------------------------------------------------------------------------------------------
                                                                    Confidence                      Confidence
                                                    CME IS (%)     interval (%)     CME CS (%)     interval (%)
----------------------------------------------------------------------------------------------------------------
Binance.........................................         * 58.32     56.78-59.86         * 57.38     55.45-59.32
Bitfinex........................................         * 65.75     64.22-67.29         * 65.08     63.28-66.89
Bitstamp........................................         * 64.10     62.74-65.47         * 68.03     66.21-69.86
Coinbase........................................         * 60.60     59.20-62.00         * 60.88     58.99-62.77
Gemini..........................................         * 56.44     55.03-57.84         * 56.73     54.73-58.72
Huobi...........................................         * 60.91     59.34-62.49         * 58.97     56.96-60.98
itBit...........................................         * 53.33     51.91-54.75         * 52.97     50.93-55.00
Kraken..........................................         * 63.17     61.58-64.76         * 63.24     61.29-65.19
LBank...........................................         * 66.03     63.95-68.11         * 63.51     61.34-65.68
OKEx............................................         * 56.19     54.74-57.64         * 53.60     51.73-55.47
----------------------------------------------------------------------------------------------------------------

    To provide additional context to this finding, the Sponsor also
examined each market on a calendar-month-by-calendar-month basis. This
calendar-month-segmented approach allowed the Sponsor to evaluate the
potential for time variation in price discovery leadership between the
CME Market and the bitcoin spot market over shorter periods.
    The table below displays the percentage of months that the CME
Market led price discovery versus each of the ten evaluated spot
trading platforms since the launch of the CME

bitcoin futures contract in December 2017. The exact numbers vary by
exchange, but on average, the CME Market has led spot trading platforms
from an IS perspective in 89% of evaluated months, and from a CS
perspective in 80% of evaluated months.

------------------------------------------------------------------------
                                            % of months     % of months
                                            CME led IS      CME led CS
------------------------------------------------------------------------
Binance.................................              85              79
Bitfinex................................              94              91
Bitstamp................................              94              91
Coinbase................................              91              85
Gemini..................................              82              76
Huobi...................................              94              84
itBit...................................              79              62
Kraken..................................              94              91
LBank...................................              90              80
OKEX....................................              85              65
Average.................................              89              80
------------------------------------------------------------------------

    Taken together, these findings support the conclusion that the CME
Market leads price discovery compared with the bitcoin spot market, and
that leadership is generally persistent across the full time period.
Time-Shift Lead-Lag Analysis on the Bitcoin Spot Market vs. the CME
Market
    The Sponsor also examined time-shift lead-lag analysis (TSLL), the
other popular academic approach to investigating market leadership.
TSLL is an attempt to find the direction and length of the lead-lag
relationship between two price series that maximizes the predictive
strength of one price series against another. The analysis is performed
by shifting one price series forward or backward in time relative to
another series and calculating the cross-correlation between the two
series and is repeated for many different lag periods to see which
amount of lag of one price series results in the highest cross-
correlation between the two price series. The amount of lead or lag
that results in the highest cross-correlation is referred to as ``lead-
lag time.''
    The Sponsor analyzed the TSLL relationship between the CME Market
and the same ten bitcoin spot trading platforms evaluated using IS/CS
price discovery analysis. The analysis utilized available trade data
from the inception of the CME bitcoin futures contract on December 18,
2017 through the end of the study on September 30, 2020.
    The results of the Sponsor's TSLL analysis align with the results
of its IS/CS analysis and demonstrate that the CME Market leads all
evaluated spot trading platforms over the duration of the study.
    The table below shows the lead-lag time (the amount of lead or lag
that results in the highest cross-correlation between two price series)
for the CME Market versus each of the ten spot trading platforms,
calculated daily, and averaged across the entire time period (December
18, 2017 to September 30, 2020). The table also shows the 95%
confidence interval for those results. A positive value indicates the
CME Market leading by that amount of seconds. A negative value would
indicate CME Market lagging by that amount of seconds. The * indicates
the result being statistically significant (p-value <0.05), meaning the
lead-lag time for the entire time period lies squarely within the
positive (or negative) value territory.

------------------------------------------------------------------------
                                                            Confidence
                                           Lead-lag time     interval
                                             (seconds)       (seconds)
------------------------------------------------------------------------
Binance.................................          * 7.28       6.53-8.03
Bitfinex................................          * 9.03       8.33-9.73
Bitstamp................................          * 6.52       5.96-7.08
Coinbase................................          * 8.42       7.65-9.18
Gemini..................................          * 6.51       5.91-7.11
Huobi...................................          * 7.57       6.96-8.18
itBit...................................          * 8.63       7.89-9.37
Kraken..................................         * 17.19     16.00-18.38
Lbank...................................         * 16.62     15.37-17.87
OKEx....................................          * 8.27       7.41-9.13
------------------------------------------------------------------------

    The lead-lag times vary slightly by trading platform, but are all
contained within a positive value band of 6.51-17.19 seconds,
indicating CME leading. All results are statistically significant.
    The results of our TSLL analysis support the conclusion of our IS/
CS analysis, showing that the CME Market leads each of the ten
evaluated spot trading platforms in a statistically significant manner
over the duration of the study.
    These findings across both types of statistical analysis are,
perhaps, unsurprising. Futures markets often lead price discovery when
compared to spot markets. As described in papers like Garbade and
Silver (1983),\52\ Chan (1992),\53\ and Fleming et al. (1996),\54\
futures benefit from leverage, lower transaction costs, and access to
short exposure. In addition, in the bitcoin market, the regulated
nature of the CME

Market may attract more professional investors than unregulated spot
markets. These professional investors may have advantages over retail
investors from an available capital, technology, information flow, and
trading speed perspective. Such conditions may be expected to continue
into the future, particularly as bitcoin sees continued and expanded
adoption as an investable asset among professional and institutional
investors.
---------------------------------------------------------------------------

    \52\ Garbade, K. and Silber, W. (1983), Price movements and
price discovery in futures and cash markets. The Review of Economics
and Statistics 65(2), 289-297.
    \53\ Chan, K. (1992), A further analysis of the lead-lag
relationship between the cash market and stock index futures market.
The Review of Financial Studies (5)1, 123-152.
    \54\ Fleming et al. (1996), Trading Costs and the relative rates
of price discovery in stock, futures, and option markets. Journal of
Futures Markets 16(4), 353-387.
---------------------------------------------------------------------------

Examining Lead-Lag Relationships Between the Unregulated Bitcoin
Futures Market and the CME Bitcoin Futures Market
    After completing its analysis showing that the CME Market leads
price discovery compared to the bitcoin spot market, the Sponsor
considered whether the CME Market leads price discovery compared to the
unregulated bitcoin futures market.
    A number of unregulated bitcoin futures trading platforms
(``Unregulated Futures Platforms'') exist, so the first step in this
analysis was to determine which Unregulated Futures Platforms to
consider.
    The Sponsor gathered data from CoinGecko, a popular crypto data
provider, which maintains an extensive list of Unregulated Futures
Platforms and their futures contracts.\55\ CoinGecko tracks two
categories of contracts: perpetual futures and quarterly futures.
Perpetual futures are cash-settled futures that do not have an
expiration date, while quarterly futures settle on a calendar basis and
must be rolled forward to maintain exposure. Aggregating these two
categories generated a list of 33 Unregulated Futures Platforms. The
Sponsor elected to evaluate the seven largest Unregulated Futures
Platforms based on open interest: Binance, BitMEX, Bybit, Deribit,
Huobi and OKEx. Together, these Unregulated Futures Platforms accounted
for approximately 80% of all open interest captured by CoinGecko at the
time of the analysis on May 4, 2021.
---------------------------------------------------------------------------

    \55\ CoinGecko (https://www.coingecko.com/en/coins/bitcoin#markets). Navigate to the ``Perpetuals'' (perpetual futures)
and ``Futures'' (predominantly quarterly futures) sub tabs within
the ``Markets'' tab.
---------------------------------------------------------------------------

    Because some offer both perpetual and quarterly contracts, the
Sponsor selected from each Unregulated Futures Platform the contract
type and specific contract with the highest level of open interest:
perpetual futures for Binance, BitMEX, Bybit and Deribit, and quarterly
futures for Huobi and OKEx.
    The Sponsor used the full period of data available for each
Unregulated Futures Platform, through the end of Q1, 2021. The data
start month for each Unregulated Futures Platform was:
     Binance: September 2019
     BitMEX: December 2017 \56\
---------------------------------------------------------------------------

    \56\ BitMEX was the only platform that existed and has data
available from the inception of the CME bitcoin futures market on
December 17, 2017. OKEx claims to have launched bitcoin futures
trading as early as June 2013, but historical data for OKEx is not
available before October 2018. Binance, Bybit, Deribit and Huobi all
launched bitcoin futures trading after the inception of the CME
bitcoin futures market, between 2018 and 2019.
---------------------------------------------------------------------------

     Bybit: October 2019
     Deribit: August 2018
     Huobi: August 2019
     OKEx: October 2018
    As with the CME Market's monthly futures contract, Huobi and OKEx's
quarterly futures contracts were rolled one day prior to expiration in
order to create a continuous price series.
    The table below highlights key statistics for the highest open
interest contract on each of the evaluated Unregulated Futures
Platforms, plus the CME Market, for the month of May 2021: Open
Interest, Trading Volume, and Required Margin. The CME Market row is
highlighted in gray.
[GRAPHIC] [TIFF OMITTED] TN18JY23.002

    The contracts differ significantly along each of these tracked
metrics. For instance, Bybit perpetual futures have the highest open
interest, while Binance perpetual futures have the highest trading
volume.
    The Sponsor noted the stark difference in required margin between
the CME Market and all of the evaluated Unregulated Futures Platforms.
The Unregulated Futures Platforms in this study offer clients leverage
at ratios ranging from 100-to-1 to 125-to-1,

meaning the required margin is 1% or less of the notional value of open
contract positions. By comparison, the maximum leverage ratio for the
CME bitcoin futures contract is 3-to-1, meaning a 33% required margin
ratio.
    While traders on a given Unregulated Futures Platform do not always
make use of the full amount of potential leverage, industry reports
suggest that the level of realized leverage on Unregulated Futures
Platforms is high. For instance, a 2019 report from BitMEX found that