[Federal Register Volume 87, Number 51 (Wednesday, March 16, 2022)]
[Notices]
[Pages 14932-14941]
[FR Doc No: 2022-05499]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94395; File No. SR-NYSEArca-2021-57]

Self-Regulatory Organizations; NYSE Arca, Inc.; 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)

March 10, 2022.

I. Introduction

    On June 30, 2021, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to list and trade shares (``Shares'') of the NYDIG Bitcoin ETF
(``Trust'') under NYSE Arca Rule 8.201-E (Commodity-Based Trust
Shares). The proposed rule change was published for comment in the
Federal Register on July 19, 2021.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 92395 (July 13,
2021), 86 FR 38129 (July 19, 2021) (``Notice''). Comments on the
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2021-57/srnysearca202157.htm.
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    On August 23, 2021, pursuant to Section 19(b)(2) of the Exchange
Act,\4\ the Commission designated a longer period within which to
approve the proposed rule change, disapprove the proposed rule change,
or institute proceedings to determine whether to disapprove the
proposed rule change.\5\ On September 29, 2021, the Commission
instituted proceedings under Section 19(b)(2)(B) of the Exchange Act
\6\ to determine whether to approve or disapprove the proposed rule
change.\7\ On January 4, 2022, the Commission designated a longer
period for Commission action on the proposed rule change.\8\
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    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 92722 (Aug. 23,
2021), 86 FR 48268 (Aug. 27, 2021).
    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 93191, 86 FR 55090
(Oct. 5, 2021).
    \8\ See Securities Exchange Act Release No. 93893, 87 FR 1238
(Jan. 10, 2022).
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    This order disapproves the proposed rule change. The Commission
concludes that NYSE Arca has not met its burden under the Exchange Act
and the Commission's Rules of Practice to demonstrate that its proposal
is consistent with the requirements of Exchange Act Section 6(b)(5),
and in particular, the requirement that the rules of a national
securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices'' and ``to protect investors and the
public interest.'' \9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list and trade the
Shares is designed to prevent fraudulent and manipulative acts and
practices, the Commission applies the same standard used in its orders
considering previous proposals to list bitcoin \10\-based commodity
trusts and bitcoin-based trust issued receipts.\11\ As the

Commission has explained, an exchange that lists bitcoin-based
exchange-traded products (``ETPs'') can meet its obligations under
Exchange Act Section 6(b)(5) by demonstrating that the exchange has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to the underlying or reference bitcoin
assets.\12\
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    \10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``bitcoin blockchain.'' The bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 86 FR at 38130.
    \11\ See 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,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
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,
Securities Exchange Act Release No. 88284 (Feb. 26, 2020), 85 FR
12595 (Mar. 3, 2020) (SR-NYSEArca-2019-39) (``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, Securities Exchange Act Release No. 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), Securities Exchange Act
Release No. 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, Securities Exchange Act Release No. 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 (Commodity-Based Trust Shares), Securities
Exchange Act Release No. 94006 (Jan. 20, 2022), 87 FR 3869 (Jan. 25,
2022) (SR-NYSEArca-2021-37) (``SkyBridge Order''); and 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, Securities Exchange Act Release No. 94080 (Jan.
27 2022), 87 FR 5527 (Feb. 1, 2022) (SR-CboeBZX-2021-039) (``Wise
Origin Order''). See also 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, Securities Exchange Act Release No. 80319 (Mar. 28, 2017), 82
FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101) (``SolidX Order'').
The Commission also notes that orders were issued by delegated
authority on the following matters: Order Disapproving a Proposed
Rule Change To List and Trade the Shares of the ProShares Bitcoin
ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act
Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018) (SR-
NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a
Proposed Rule Change To List and Trade the Shares of the
GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin ETF,
Securities Exchange Act Release No. 83913 (Aug. 22, 2018), 83 FR
43923 (Aug. 28, 2018) (SR-CboeBZX-2018-001) (``GraniteShares
Order''); 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, Securities Exchange Act Release No.
93559 (Nov. 12, 2021), 86 FR 64539 (Nov. 18, 2021) (SR-CboeBZX-2021-
019) (``VanEck Order'').
    \12\ See USBT Order, 85 FR at 12596. See also Winklevoss Order,
83 FR at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
83 FR at 43925-27 nn.35-39 and accompanying text (discussing
previous Commission approvals of commodity-futures ETPs).
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    The standard requires such surveillance-sharing agreements since
they ``provide a necessary deterrent to manipulation because they
facilitate the availability of information needed to fully investigate
a manipulation if it were to occur.'' \13\ The Commission has
emphasized that it is essential for an exchange listing a derivative
securities product to enter into a surveillance-sharing agreement with
markets trading the underlying assets for the listing exchange to have
the ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of exchange
rules and applicable federal securities laws and rules.\14\ The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading activity,
clearing activity, and customer identity; that the parties to the
agreement have reasonable ability to obtain access to and produce
requested information; and that no existing rules, laws, or practices
would impede one party to the agreement from obtaining this information
from, or producing it to, the other party.\15\
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    \13\ See Amendment to Rule Filing Requirements for Self-
Regulatory Organizations Regarding New Derivative Securities
Products, Securities Exchange Act Release No. 40761 (Dec. 8, 1998),
63 FR 70952, 70959 (Dec. 22, 1998) (``NDSP Adopting Release''). See
also Winklevoss Order, 83 FR at 37594; ProShares Order, 83 FR at
43936; GraniteShares Order, 83 FR at 43924; USBT Order, 85 FR at
12596.
    \14\ See NDSP Adopting Release, 63 FR at 70959.
    \15\ See Winklevoss Order, 83 FR at 37592-93; 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.
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    In the context of this standard, the terms ``significant market''
and ``market of significant size'' include a market (or group of
markets) as to which (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist 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.\16\ A surveillance-sharing
agreement must be entered into with a ``significant market'' to assist
in detecting and deterring manipulation of the ETP, because a person
attempting to manipulate the ETP is reasonably likely to also engage in
trading activity on that ``significant market.'' \17\
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    \16\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There 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. See id.
    \17\ See USBT Order, 85 FR at 12597.
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    Consistent with this standard, for the 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
(``ISG'') membership in common with, that market.\18\ Moreover, the
surveillance-sharing agreements have been consistently present whenever
the Commission has approved the listing and trading of derivative
securities, even where the underlying securities were also listed on
national securities exchanges--such as options based on an index of
stocks traded on a national securities exchange--and were thus subject
to the Commission's direct regulatory authority.\19\
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    \18\ See Winklevoss Order, 83 FR at 37594.
    \19\ See USBT Order, 85 FR at 12597; Securities Exchange Act
Release No. 33555 (Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994)
(SR-Amex-93-28) (order approving listing of options on American
Depository Receipts (``ADRs'')). The Commission has also required a
surveillance-sharing agreement in the context of index options even
when (i) all of the underlying index component stocks were either
registered with the Commission or exempt from registration under the
Exchange Act; (ii) all of the underlying index component stocks
traded in the U.S. either directly or as ADRs on a national
securities exchange; and (iii) effective international ADR arbitrage
alleviated concerns over the relatively smaller ADR trading volume,
helped to ensure that ADR prices reflected the pricing on the home
market, and helped to ensure more reliable price determinations for
settlement purposes, due to the unique composition of the index and
reliance on ADR prices. See Securities Exchange Act Release No.
26653 (Mar. 21, 1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-
87-25) (stating that ``surveillance-sharing agreements between the
exchange on which the index option trades and the markets that trade
the underlying securities are necessary'' and that ``[t]he exchange
of surveillance data by the exchange trading a stock index option
and the markets for the securities comprising the index is important
to the detection and deterrence of intermarket manipulation.''). And
the Commission has required a surveillance-sharing agreement even
when approving options based on an index of stocks traded on a
national securities exchange. See Securities Exchange Act Release
No. 30830 (June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-
Amex-91-22) (stating that surveillance-sharing agreements ``ensure
the availability of information necessary to detect and deter
potential manipulations and other trading abuses'').
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    Listing exchanges have also attempted to demonstrate that other
means besides surveillance-sharing agreements will be sufficient to
prevent fraudulent and manipulative acts and practices, including that
the bitcoin market as a whole or the relevant underlying bitcoin market
is ``uniquely'' and ``inherently'' resistant to fraud and
manipulation.\20\ In response, the Commission has agreed that, if a
listing exchange could establish that the underlying market inherently
possesses a unique resistance to manipulation beyond the protections
that are utilized by traditional commodity or securities markets, it
would not necessarily need to enter into a surveillance-sharing
agreement with a regulated significant market.\21\ Such resistance to
fraud and manipulation, however, must be novel and beyond those
protections that exist in traditional commodity markets or equity
markets for which the Commission has long required surveillance-sharing
agreements in the context of listing derivative securities
products.\22\ No listing exchange has satisfied its burden to make such
demonstration.\23\
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    \20\ See USBT Order, 85 FR at 12597.
    \21\ See Winklevoss Order, 83 FR at 37580, 37582-91 (addressing
assertions that ``bitcoin and bitcoin [spot] markets'' generally, as
well as one bitcoin trading platform specifically, have unique
resistance to fraud and manipulation); see also USBT Order, 85 FR at
12597.
    \22\ See USBT Order, 85 FR at 12597.
    \23\ See supra note 11.
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    Here, NYSE Arca contends that approval of the proposal is
consistent with Section 6(b)(5) of the Exchange Act, in particular
Section 6(b)(5)'s requirement that the rules of a national

securities exchange be designed to prevent fraudulent and manipulative
acts and practices and to protect investors and the public
interest.\24\ As discussed in more detail below, NYSE Arca asserts that
the proposal is consistent with Section 6(b)(5) of the Exchange Act
because the Exchange has a comprehensive surveillance-sharing agreement
with a regulated market of significant size,\25\ and because the
manipulation concerns previously articulated by the Commission have
been significantly mitigated.\26\ In addition, NYSE Arca asserts that
the proposal is consistent with Section 6(b)(5) of the Exchange Act
because it is designed to protect investors and the public
interest.\27\
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    \24\ See Notice, 86 FR at 38134.
    \25\ See id. at 38134-35.
    \26\ See id.
    \27\ See id. at 38134, 38136.
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    In the analysis that follows, the Commission examines whether the
proposed rule change is consistent with Section 6(b)(5) of the Exchange
Act by addressing: In Section III.B.1 assertions that other means
besides surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices; in Section III.B.2
assertions that NYSE Arca has entered into a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to bitcoin; and in Section III.C assertions that the
proposal is consistent with the protection of investors and the public
interest.
    Based on the analysis, the Commission concludes that NYSE Arca has
not established that other means to prevent fraudulent and manipulative
acts and practices are sufficient to justify dispensing with the
requisite surveillance-sharing agreement. The Commission further
concludes that NYSE Arca has not established that it has a
comprehensive surveillance-sharing agreement with a regulated market of
significant size related to bitcoin. As discussed further below, NYSE
Arca repeats various assertions made in prior bitcoin-based ETP
proposals that the Commission has previously addressed and rejected--
and more importantly, NYSE Arca does not respond to the Commission's
reasons for rejecting those assertions but merely repeats them. As a
result, the Commission is unable to find that the proposed rule change
is consistent with the statutory requirements of Exchange Act Section
6(b)(5).
    The Commission again emphasizes that its disapproval of this
proposed rule change does not rest on an evaluation of whether bitcoin,
or blockchain technology more generally, has utility or value as an
innovation or an investment. Rather, the Commission is disapproving
this proposed rule change because, as discussed below, NYSE Arca has
not met its burden to demonstrate that its proposal is consistent with
the requirements of Exchange Act Section 6(b)(5).

II. Description of the Proposed Rule Change

    As described in more detail in the Notice,\28\ the Exchange
proposes to list and trade the Shares of the Trust under NYSE Arca Rule
8.201-E, which governs the listing and trading of Commodity-Based Trust
Shares on the Exchange.\29\
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    \28\ See Notice, supra note 3. See also draft Registration
Statement on Form S-1, dated February 16, 2021, filed by the Trust
with the Commission (``Registration Statement''). The Registration
Statement is not yet effective.
    \29\ Although the name of the Trust is the NYDIG Bitcoin ETF,
the Trust is a commodity-based ETP. The Trust is not an exchange-
traded fund, i.e., an ``ETF,'' registered under the Investment
Company Act of 1940, as amended (``1940 Act''), and is not subject
to regulation under the 1940 Act.
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    The investment objective of the Trust is to reflect the performance
of the price of bitcoin less the expenses of the Trust's
operations.\30\ The Trust will not seek to reflect the performance of
any benchmark or index. In seeking to achieve its investment objective,
the Trust will only hold bitcoin.\31\ The Trust will value its assets
daily in accordance with Generally Accepted Accounting Principles
(``GAAP''), which generally value bitcoin by reference to orderly
transactions in the principal active market for bitcoin.\32\ The Trust
generally does not intend to hold cash or cash equivalents. However,
the Trust may hold cash and cash equivalents on a temporary basis to
pay extraordinary expenses.\33\
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    \30\ See Notice, 86 FR at 38129. NYDIG Asset Management LLC
(``Sponsor'') is the sponsor of the Trust. Delaware Trust Company is
the trustee of the Trust, U.S. Bancorp Fund Services, LLC
(``Administrator'') is the transfer agent and the administrator of
the Trust, and NYDIG Trust Company LLC (``Bitcoin Custodian'') is
the bitcoin custodian for the Trust. The Bitcoin Custodian is
chartered as a limited purpose trust company by the New York State
Department of Financial Services (``NYDFS'') and is authorized by
NYDFS to provide digital asset custody services. Both the Sponsor
and the Bitcoin Custodian are indirect wholly-owned subsidiaries of
New York Digital Investment Group LLC. See id.
    \31\ See id.
    \32\ See id.
    \33\ See id. at 38130. The Trust will enter into a cash custody
agreement with U.S. Bank N.A. under which U.S. Bank N.A. will act as
custodian of the Trust's cash and cash equivalents. See id.
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    The net asset value (``NAV'') of the Trust will be determined in
accordance with GAAP as the total value of bitcoin held by the Trust,
plus any cash or other assets, less any liabilities including accrued
but unpaid expenses.\34\ According to the Exchange, generally, GAAP
requires the fair value of an asset that is traded on a market to be
measured by reference to orderly transactions on an active market.
Among all active markets with orderly transactions, the market that is
used to determine the fair value of an asset is the principal market.
The Sponsor expects that the principal market will initially generally
be the NYDFS-regulated trading venue with the highest trading volume
and level of activity.\35\ The NAV of the Trust will typically be
determined as of 4:00 p.m. E.T. on each day that the Exchange is open
for regular trading (``Business Day''). The Trust's daily activities
will generally not be reflected in the NAV determined for the Business
Day on which the transactions are effected (the trade date), but rather
on the following Business Day. The NAV for the Trust's Shares will be
disseminated daily to all market participants at the same time.\36\
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    \34\ See id. at 38131.
    \35\ See id. at 38132.
    \36\ See id. at 38131-32.
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    The Trust will disseminate an intraday indicative value (``IIV'')
per Share updated every 15 seconds during the Exchange's Core Trading
Session (between 9:30 a.m. and 4:00 p.m. E.T.). The IIV will be
calculated by using the same methodology that the Trust uses to
determine NAV, which is to follow GAAP.\37\
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    \37\ See id. at 38132.
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    The Trust will create and redeem Shares from time to time in ``in-
kind'' transactions in blocks of 10,000 Shares (``Creation
Baskets'').\38\ Creation Baskets will only be made in exchange for
delivery to the Trust or the distribution by the Trust of the amount of
bitcoin represented by the Shares being created or redeemed, the amount
of which will be based on the quantity of bitcoin attributable to each
Share of the Trust (net of accrued but unpaid Sponsor fees,
extraordinary expenses, or liabilities) being created or redeemed
determined as of 4:00 p.m. E.T. on the day the order is properly
received.\39\
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    \38\ See id. at 38129-30.
    \39\ See id. at 38129-30, 38132.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act
requires, in relevant part, that the rules of a national securities
exchange be

designed ``to prevent fraudulent and manipulative acts and practices''
and ``to protect investors and the public interest.'' \40\ Under the
Commission's Rules of Practice, the ``burden to demonstrate that a
proposed rule change is consistent with the Exchange Act and the rules
and regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \41\
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    \40\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78f(b)(5).
    \41\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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    The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\42\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\43\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\44\
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    \42\ See id.
    \43\ See id.
    \44\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and
Practices

(1) Assertions That Other Means Besides Surveillance-Sharing Agreements
Will Be Sufficient To Prevent Fraudulent and Manipulative Acts and
Practices
    As stated above, the Commission has recognized that a listing
exchange could demonstrate that other means to prevent fraudulent and
manipulative acts and practices are sufficient to justify dispensing
with a comprehensive surveillance-sharing agreement with a regulated
market of significant size, including by demonstrating that the bitcoin
market as a whole or the relevant underlying bitcoin market is uniquely
and inherently resistant to fraud and manipulation.\45\ Such resistance
to fraud and manipulation must be novel and beyond those protections
that exist in traditional commodities or securities markets.\46\
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    \45\ See USBT Order, 85 FR at 12597 n.23. The Commission is not
applying a ``cannot be manipulated'' standard. Instead, the
Commission is examining whether the proposal meets the requirements
of the Exchange Act and, pursuant to its Rules of Practice, places
the burden on the listing exchange to demonstrate the validity of
its contentions and to establish that the requirements of the
Exchange Act have been met. See id.
    \46\ See id. at 12597.
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    NYSE Arca asserts that ``on the whole, the manipulation concerns
previously articulated by the Commission have since been significantly
mitigated, and do not exceed those that exist in the markets for other
commodities that underly [sic] securities listed on U.S. national
securities exchanges.'' \47\ Specifically, the Exchange asserts that
the ``significant increase in trading volume and open interest in the
bitcoin futures market, growth of liquidity in the spot market for
bitcoin, and certain features of the Shares mitigate the manipulation
concerns expressed by the Commission when it last reviewed exchange
proposals to list a bitcoin exchange-traded product.'' \48\
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    \47\ See Notice, 86 FR at 38134.
    \48\ See id.
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    NYSE Arca asserts that both the market for NYDFS-licensed bitcoin
trading and the market for the trading of bitcoin futures and options
on platforms regulated by the Commodity Futures Trading Commission
(``CFTC'') have developed substantially.\49\ According to NYSE Arca, in
the three months ending on April 30, 2021:
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    \49\ See id. at 38131.
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     With respect to the bitcoin spot market, six NYDFS-
licensed entities operated trading platforms with order books for spot
trading of bitcoin, with a total average daily trading volume of
approximately $2.5 billion; across these platforms, the average daily
deviation of prices was less than 0.08%; and the largest NYDFS-licensed
trading platform by volume had an average bid-ask spread during the
period of less than 0.05% for trades of $250,000; and
     with respect to the bitcoin derivatives markets, two CFTC-
regulated exchanges facilitated trading of bitcoin futures, with a
total average daily trading volume of approximately $2.9 billion; and
one CFTC-regulated exchange facilitated trading of options on bitcoin
futures, with average monthly trading volume of approximately $380
million.\50\
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    \50\ See id.
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    According to NYSE Arca, the average daily trading volume for
bitcoin across the three largest NYDFS-licensed platforms was
approximately $7.95 million in 2016, $215.44 million in 2017, $267.19
million in 2018, $216.97 million in 2019, $708.39 million in 2020, and
$2.56 billion in 2021 through April 30, 2021.\51\ In addition, the
Exchange states that the average daily trading volume and average daily
open interest (i.e., the average total bitcoin exposure of futures
contracts held by market participants at the end of each trading day)
for bitcoin futures contracts on the Chicago Mercantile Exchange
(``CME'') and the Intercontinental Exchange (``ICE'') was approximately
$41.10 million and $81.87 million, respectively, in 2016; $86.68
million and $126.90 million, respectively, in 2017; $172.60 million and
$246.62 million, respectively, in 2018; $561.78 million and $535.13
million, respectively, in 2020, and $2.51 billion and $2.94 billion,
respectively in 2021 through April 30, 2021.\52\
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    \51\ See id. The bitcoin data is for trading volumes of bitcoin
against U.S. dollars and excludes trading transactions of bitcoin
against other digital assets (e.g., Tether) or other fiat currencies
(e.g., euros). See id.
    \52\ See id.
---------------------------------------------------------------------------

    In addition, the Exchange asserts that ``increases in investor
participation in and institutional adoption of bitcoin have facilitated
the maturation of the bitcoin trading ecosystem'' such that
manipulation concerns have been largely mitigated.\53\
---------------------------------------------------------------------------

    \53\ See id. at 38135. NYSE Arca also states that, ``[b]eginning
in 2016, more institutional investors entered the bitcoin market.''
As a result, according to the Exchange, ``an increasing number of
transactions have occurred in over-the-counter (``OTC'') markets
instead of exchanges. This type of trading allows for bespoke
trading arrangements that may ease the burden of trade operations or
reduce direct types of risks (e.g., counterparty risk).'' See id. at
38131.

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

    NYSE Arca also asserts that ``[b]ecause the Shares can only be
created or redeemed in kind, and . . . because the Sponsor fee is
accrued with respect to the quantity of bitcoin held by the Trust and
paid in kind by the Trust, the Trust receives and holds only bitcoin.''
\54\ According to the Exchange, ``[t]his substantially reduces the
potential for manipulation of the number of Shares created or redeemed,
which therefore substantially reduces the potential for shareholders to
be harmed by manipulation.'' \55\
---------------------------------------------------------------------------

    \54\ See id. at 38135.
    \55\ See id.
---------------------------------------------------------------------------

    Based on assertions made and the information provided, the
Commission can find no basis to conclude that NYSE Arca has articulated
other means to prevent fraud and manipulation that are sufficient to
justify dispensing with the requisite surveillance-sharing agreement.
    The Exchange's assertions about the maturation and growth of the
bitcoin market do not constitute other means to prevent fraud and
manipulation sufficient to justify dispensing with the requisite
surveillance-sharing agreement. While the Exchange states that the
maturation of the bitcoin market mitigates against the Commission's
concerns about fraud and manipulation,\56\ such assertion is general
and conclusory, and NYSE Arca provides no analysis or evidence for how
such maturation serves to detect and deter potential fraud and
manipulation. As stated above, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\57\
---------------------------------------------------------------------------

    \56\ See supra notes 47, 48, and 53 and accompanying text. The
Exchange does not directly tie the asserted maturation of the
bitcoin market to an argument that such market evolution provides
sufficient means to justify dispensing with the requisite
surveillance sharing agreement.
    \57\ See supra note 44. The Commission has previously considered
and rejected similar arguments about the maturation of the bitcoin
market. See, e.g., Valkyrie Order, 86 FR at 74159.
---------------------------------------------------------------------------

    While NYSE Arca provides data regarding the size of the bitcoin
spot and derivatives markets, such information is not sufficient to
support the finding that other means besides surveillance-sharing
agreements exist to prevent fraud or manipulation. NYSE Arca, for
example, does not provide meaningful analysis pertaining to how these
figures compare to other markets or why one must conclude, based on the
numbers provided, that the concerns previously articulated by the
Commission relating to fraud and manipulation of the bitcoin market
have been mitigated. Further, although the Exchange states that an
increase in OTC transactions in the bitcoin spot market due to an
increase in institutional investor participation in that market reduces
risks,\58\ apart from counterparty risk, the Exchange does not
elaborate on what those risks are or how or why any such risks would be
reduced or how or why such reduction of risks, including counterparty
risk, would mitigate against fraud and manipulation.
---------------------------------------------------------------------------

    \58\ See supra note 53 and accompanying text.
---------------------------------------------------------------------------

    Moreover, while NYSE Arca asserts that the markets for NYDFS-
licensed spot bitcoin trading have developed substantially,\59\ the
level of regulation on the bitcoin spot platforms, including NYDFS-
licensed platforms, is not commensurate to the obligations, authority,
and oversight of national securities exchanges or futures exchanges.
National securities exchanges are required to have rules that are
``designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public
interest.'' \60\ Moreover, national securities exchanges must file
proposed rules with the Commission regarding certain material aspects
of their operations,\61\ and the Commission has the authority to
disapprove any such rule that is not consistent with the requirements
of the Exchange Act.\62\ Thus, national securities exchanges are
subject to Commission oversight of, among other things, their
governance, membership qualifications, trading rules, disciplinary
procedures, recordkeeping, and fees.\63\ NYDFS regulation therefore is
not a substitute for the Commission's regulation of the national
securities exchanges.\64\
---------------------------------------------------------------------------

    \59\ See supra note 49 and accompanying text.
    \60\ See 15 U.S.C. 78f(b)(5)
    \61\ 17 CFR 240.19b-4(a)(6)(i).
    \62\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated contract markets
(``DCMs'') (commonly called ``futures markets'') registered with and
regulated by the Commodity Futures Trading Commission (``CFTC'')
must comply with, among other things, a similarly comprehensive
range of regulatory principles and must file rule changes with the
CFTC. See, e.g., Designated Contract Markets (DCMs), CFTC, available
at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \63\ See Winklevoss Order, 83 FR at 37597. The Commission notes
that the NYDFS has issued ``guidance'' to supervised virtual
currency business entities, stating that these entities must
``implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing.'' See
Maria T. Vullo, Superintendent of Financial Services, NYDFS,
Guidance on Prevention of Market Manipulation and Other Wrongful
Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYDFS recognizes that it's
``guidance is not intended to limit the scope or applicability of
any law or regulation'' (id.), which would include the Exchange Act.
Nothing in the record evidences whether the bitcoin spot markets the
Exchange is referring to have complied with this NYDFS guidance.
    Further, there are substantial differences between the NYDFS and
the Commission's regulation. Anti-Money Laundering (``AML'') and
Know-Your-Customer (``KYC'') policies and procedures, for example,
have been referenced in other bitcoin-based ETP proposals as a
purportedly alternative means by which such ETPs would be uniquely
resistant to manipulation. The Commission has previously concluded
that such AML and KYC policies and procedures do not serve as a
substitute for, and are not otherwise dispositive in the analysis
regarding the importance of, having a surveillance sharing agreement
with a regulated market of significant size relating to bitcoin. For
example, AML and KYC policies and procedures do not substitute for
the sharing of information about market trading activity or clearing
activity and do not substitute for regulation of a national
securities exchange. See USBT Order, 85 FR at 12603 n.101.
    \64\ See, e.g., USBT Order, 85 FR at 12603-05; VanEck Order, 86
FR at 64545; Kryptoin Order, 86 FR at 74173.
---------------------------------------------------------------------------

    In addition, while the Commission recognizes that the CFTC
maintains some jurisdiction over the bitcoin spot market, under the
Commodity Exchange Act, the CFTC does not have regulatory authority
over bitcoin spot trading platforms.\65\ Except in certain limited
circumstances, bitcoin spot trading platforms are not required to
register with the CFTC, and the CFTC does not set standards for,
approve the rules of, examine, or otherwise regulate bitcoin spot
markets.\66\ As the CFTC itself stated, while the CFTC ``has an
important role to play,'' U.S. law ``does not provide for direct,
comprehensive Federal oversight of underlying Bitcoin or virtual
currency spot markets.'' \67\ In addition, while certain bitcoin
derivatives exchanges that trade bitcoin futures and options on bitcoin
futures are regulated by the CFTC, the CFTC's

regulations do not extend to the bitcoin spot platforms. And, with
respect to NYSE Arca's statements about the growth of the bitcoin
derivatives markets,\68\ although the Exchange claims that the CFTC-
regulated bitcoin derivative markets have developed substantially, the
Exchange has not explained why such development mitigates against the
Commission's concerns about fraud and manipulation such that it would
not be necessary for the Exchange to enter into a surveillance-sharing
agreement with a regulated market of significant size.\69\
---------------------------------------------------------------------------

    \65\ See USBT Order, 85 FR at 12604; WisdomTree Order, 86 FR at
69328; Valkyrie Order, 86 FR at 74162; SkyBridge Order, 87 FR at
3877.
    \66\ See id.
    \67\ See Winklevoss Order, 83 FR at 37599 n.288 (quoting CFTC
Backgrounder on Oversight of and Approach to Virtual Currency
Futures Markets (Jan. 4, 2018), at 1, available at https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/backgrounder_virtualcurrency01.pdf).
    \68\ See supra notes 49-50 and accompanying text.
    \69\ As discussed herein, the information in the record does not
establish that the CME bitcoin futures market is a ``market of
significant size'' related to bitcoin. See infra Section III.B.2.
---------------------------------------------------------------------------

    Moreover, NYSE Arca does not sufficiently contest the presence of
possible sources of fraud and manipulation in the bitcoin spot market
generally that the Commission has raised in previous orders, which have
included (1) ``wash'' trading, (2) persons with a dominant position in
bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin
network and trading platforms, (4) malicious control of the bitcoin
network, (5) trading based on material, non-public information (such as
plans of market participants to significantly increase or decrease
their holdings in bitcoin; new sources of demand for bitcoin; the
decision of a bitcoin-based investment vehicle on how to respond to a
``fork'' in the bitcoin blockchain), or trading based on the
dissemination of false and misleading information, (6) manipulative
activity involving the purported ``stablecoin'' Tether (USDT), and (7)
fraud and manipulation at bitcoin trading platforms.\70\
---------------------------------------------------------------------------

    \70\ See USBT Order, 85 FR at 12600-01 & nn.66-67 (discussing J.
Griffin & A. Shams, Is Bitcoin Really Untethered? (October 28,
2019), available at https://ssrn.com/abstract=3195066 and published
in 75 J. Finance 1913 (2020)); Winklevoss Order, 83 FR at 37585-86;
Valkyrie Order, 86 FR at 74160; SkyBridge Order, 87 FR at 3872.
---------------------------------------------------------------------------

    In addition, NYSE Arca does not address risk factors specific to
the bitcoin blockchain and bitcoin platforms, described in the Trust's
Registration Statement, that undermine the argument that the concerns
previously articulated by the Commission relating to fraud and
manipulation of the bitcoin market have been mitigated.\71\ For
example, the Registration Statement acknowledges that the ``venues
through which bitcoin trades are relatively new and may be more exposed
to operational problems or failure than trading venues for other
assets''; that ``[o]ver the past several years, a number of bitcoin
exchanges have been closed due to fraud, failure or security
breaches''; that the bitcoin blockchain could be vulnerable to a ``51%
attack,'' in which a bad actor (or actors) or botnet that controls a
majority of the processing power of the bitcoin network may be able to
alter the bitcoin blockchain on which the bitcoin network and bitcoin
transactions rely; and that ``[r]ecently, some digital asset networks
have been subject to malicious activity achieved through control over
50% of the processing power on the network.'' \72\
---------------------------------------------------------------------------

    \71\ See, e.g., SkyBridge Order, 87 FR at 3873.
    \72\ See Registration Statement at 14-15, 21.
---------------------------------------------------------------------------

    Finally, the Commission finds that NYSE Arca has not demonstrated
that in-kind creations and redemptions provide the Shares with a unique
resistance to manipulation. The Commission has previously addressed
similar assertions.\73\ As the Commission stated before, in-kind
creations and redemptions are a common feature of ETPs, and the
Commission has not previously relied on the in-kind creation and
redemption mechanism as a basis for excusing exchanges that list ETPs
from entering into surveillance-sharing agreements with significant,
regulated markets related to the portfolio's assets.\74\ Accordingly,
the Commission is not persuaded here that the Trust's in-kind creations
and redemptions afford it a unique resistance to manipulation.
---------------------------------------------------------------------------

    \73\ See Winklevoss Order, 83 FR at 37589-90; USBT Order, 85 FR
at 12607-08; VanEck Order, 86 FR at 64546; WisdomTree Order, 86 FR
at 69329; Kryptoin Order, 86 FR at 74174; SkyBridge Order, 87 FR at
3874; Wise Origin Order, 87 FR at 5533.
    \74\ See, e.g., iShares COMEX Gold Trust, Securities Exchange
Act Release No. 51058 (Jan. 19, 2005), 70 FR 3749, 3751-55 (Jan. 26,
2005) (SR-Amex-2004-38); iShares Silver Trust, Securities Exchange
Act Release No. 53521 (Mar. 20, 2006), 71 FR 14969, 14974 (Mar. 24,
2006) (SR-Amex-2005-072).
---------------------------------------------------------------------------

(2) Assertions That NYSE Arca Has Entered Into a Comprehensive
Surveillance-Sharing Agreement With a Regulated Market of Significant
Size
    As NYSE Arca has not demonstrated that other means besides
surveillance-sharing agreements will be sufficient to prevent
fraudulent and manipulative acts and practices, the Commission next
examines whether the record supports the conclusion that NYSE Arca has
entered into a comprehensive surveillance-sharing agreement with a
regulated market of significant size relating to the underlying assets.
In this context, the term ``market of significant size'' includes a
market (or group of markets) as to which (i) 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 in detecting and
deterring misconduct, and (ii) it is unlikely that trading in the ETP
would be the predominant influence on prices in that market.\75\
---------------------------------------------------------------------------

    \75\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that provides guidance to market
participants. See id.
---------------------------------------------------------------------------

    As the Commission has stated in the past, it considers two markets
that are members of the ISG to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a separate
bilateral surveillance-sharing agreement.\76\ Accordingly, based on the
common membership of NYSE Arca and the CME in the ISG,\77\ NYSE Arca
has the equivalent of a comprehensive surveillance-sharing agreement
with CME. However, while the Commission recognizes that the CFTC
regulates the CME futures market,\78\ including the CME bitcoin futures
market, and thus such market is ``regulated,'' in the context of the
proposed ETP, the record does not, as explained further below,
establish that the CME bitcoin futures market is a ``market of
significant size'' as that term is used in the context of the
applicable standard here.
---------------------------------------------------------------------------

    \76\ See id. at 37580 n.19.
    \77\ See Notice, 86 FR at 38135.
    \78\ While the Commission recognizes that the CFTC regulates the
CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying bitcoin spot market. See Winklevoss
Order, 83 FR at 37587, 37599. See also supra notes 65-67 and
accompanying text.
---------------------------------------------------------------------------

(a) Whether There Is a Reasonable Likelihood That a Person Attempting
To Manipulate the ETP Would Also Have To Trade on the CME Bitcoin
Futures Market To Successfully Manipulate the ETP
    The first prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that there is a reasonable likelihood that a person
attempting to manipulate the ETP would have to trade on the CME bitcoin
futures market to successfully manipulate the ETP.
    As discussed above, NYSE Arca states that the market for trading of
bitcoin futures has developed substantially \79\ and argues that
``[t]he significant growth in trading volumes, open interest, large
open interest holders, and total market participants in the bitcoin
futures market since the [USBT Order] was issued is reflective of that
market's

growing influence on the spot price of bitcoin.'' \80\
---------------------------------------------------------------------------

    \79\ See supra notes 49-52 and accompanying text.
    \80\ See Notice, 86 FR at 38135.
---------------------------------------------------------------------------

    NYSE Arca further states that some academic research ``suggests
that the bitcoin futures market has been leading bitcoin spot market
price discovery since as early as 2018.'' \81\ NYSE Arca also states
that the Sponsor has developed ``more recent proprietary research,
including lead-lag analyses, that demonstrates that prices in the CME
bitcoin futures market do indeed lead prices in the bitcoin spot
market, including non-U.S. bitcoin spot markets.'' \82\ NYSE Arca
asserts that the Sponsor's finding ``supports the thesis that a market
participant attempting to manipulate the Shares would have to trade on
that market to manipulate the ETP.'' \83\
---------------------------------------------------------------------------

    \81\ See id. at 38135 & n.18 (citing Y. Hu, Y. Hou & L. Oxley,
What role do futures markets play in Bitcoin pricing? Causality,
cointegration and price discovery from a time-varying perspective,
72 Int'l Rev. of Fin. Analysis 101569 (2020) (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/) (``Hu, Hou &
Oxley'')).
    \82\ See Notice, 86 FR at 38135.
    \83\ See id.
---------------------------------------------------------------------------

    NYSE Arca also states that the Sponsor's research ``shows that the
bitcoin futures market is one of the primary venues that market
participants use to transact large exposures to bitcoin.'' \84\
According to the Exchange, this ``can be attributed to multiple
factors, such as institutional familiarity with futures margining and
settlement processes, the simplicity of cash settlement instead of
physical settlement in a novel asset, and the efficient leverage
offered by exchange margining.'' \85\
---------------------------------------------------------------------------

    \84\ Id.
    \85\ See id.
---------------------------------------------------------------------------

    The Exchange states that, ``[i]n contrast to the efficient leverage
offered through the futures market, many bitcoin spot trading venues
require full pre-funding of trading, which means it would be highly
capital intensive to `spoof' or `layer' order books on spot trading
venues.'' \86\ According to the Exchange, this ``further supports [the
Sponsor's] conclusion that if a market participant intended to
manipulate the price of bitcoin, and thereby the Shares, the bitcoin
futures market is the one that would be manipulated first.\87\
---------------------------------------------------------------------------

    \86\ See id.
    \87\ See id.
---------------------------------------------------------------------------

    The record does not demonstrate that there is a reasonable
likelihood that a person attempting to manipulate the proposed ETP
would have to trade on the CME bitcoin futures market to successfully
manipulate it. NYSE Arca's assertions about the general upward trends
in trading volume and open interest of, and in the number of large open
interest holders and number of unique accounts trading in, bitcoin
futures do not establish that the CME bitcoin futures market is a
market of significant size.\88\ While NYSE Arca provides data showing
absolute growth in the size of the CME and ICE bitcoin futures markets,
it provides no data relative to the concomitant growth in either the
bitcoin spot markets or other bitcoin futures markets (including
unregulated futures markets). Moreover, even if the CME has grown in
relative size, as the Commission has previously articulated, the
interpretation of the term ``market of significant size'' or
``significant market'' depends on the interrelationship between the
market with which the listing exchange has a surveillance-sharing
agreement and the proposed ETP.\89\ Accordingly, NYSE Arca's recitation
of data reflecting the size of two bitcoin futures market, either
currently or in relation to previous years, is not sufficient to
establish an interrelationship between the CME bitcoin futures market
and the proposed ETP.\90\
---------------------------------------------------------------------------

    \88\ See also supra note 69 and accompanying text.
    \89\ See USBT Order, 85 FR at 12611.
    \90\ See id. at 12612. The Commission has previously considered
and rejected similar arguments. See VanEck Order, 86 FR at 64547;
Kryptoin Order, 86 FR 74175-76; SkyBridge Order, 87 FR 3875-76; Wise
Origin Order, 87 FR at 5534-35. Moreover, it is unclear how the data
provided by the Exchange supports the assertion that the CME is a
market of significant size, as it appears to be aggregate data for
bitcoin futures contracts trading on both the CME and the ICE. See
supra note 52 and accompanying text.
---------------------------------------------------------------------------

    Further, the econometric evidence in the record for this proposal
also does not support the conclusion that an interrelationship exists
between the CME bitcoin futures market and the bitcoin spot market such
that it is reasonably likely that a person attempting to manipulate the
proposed ETP would also have to trade on the CME bitcoin futures market
to successfully manipulate the proposed ETP.\91\ While NYSE Arca states
that CME bitcoin futures pricing has been leading bitcoin spot market
price discovery since 2018,\92\ it relies on the findings of a price
discovery analysis in one section of a single academic paper to support
the overall thesis.\93\ However, the findings of that paper's Granger
causality analysis, which is widely used to formally test for lead-lag
relationships, are concededly mixed.\94\ In addition, the Commission
considered an unpublished version of the paper in the USBT Order, as
well as a comment letter submitted by the authors on that record.\95\
In the USBT Order, as part of the Commission's conclusion that ``mixed
results'' in academic studies failed to demonstrate that the CME
bitcoin futures market constitutes a market of significant size, the
Commission noted the paper's inconclusive evidence that CME bitcoin
futures prices lead spot prices--in particular that the months at the
end of the paper's sample period showed that the spot market was the
leading market--and stated that the record did not include evidence to
explain why this would not indicate a shift towards prices in the spot
market leading the futures market that would be expected to persist
into the future.\96\ The Commission also stated that the paper's use of
daily price data, as opposed to intraday prices, may not be able to
distinguish which market incorporates new information faster.\97\ NYSE
Arca has not addressed either issue here.\98\
---------------------------------------------------------------------------

    \91\ See USBT Order, 85 FR at 12611. Listing exchanges have
attempted to demonstrate such an ``interrelationship'' by presenting
the results of various econometric ``lead-lag'' analyses. The
Commission considers such analyses to be central to understanding
whether it is reasonably likely that a would-be manipulator of the
ETP would need to trade on the CME bitcoin futures market. See id.
at 12612. See also VanEck Order, 86 FR at 64547; WisdomTree Order,
86 FR 69330-31; Kryptoin Order, 86 FR 74176; SkyBridge Order, 87 FR
at 3876; Wise Origin Order, 87 FR at 5535.
    \92\ See Notice, 86 FR at 38135.
    \93\ See supra note 81 and accompanying text. NYSE Arca
references the following conclusion from the ``time-varying price
discovery'' section of Hu, Hou & Oxley: ``There exist no episodes
where the Bitcoin spot markets dominates the price discovery
processes with regard to Bitcoin futures. This points to a
conclusion that the price formation originates solely in the Bitcoin
futures market. We can, therefore, conclude that the Bitcoin futures
markets dominate the dynamic price discovery process based upon
time-varying information share measures. Overall, price discovery
seems to occur in the Bitcoin futures markets rather than the
underlying spot market based upon a time-varying perspective . . .''
See Notice, 86 FR at 38135 n.18.
    \94\ The paper finds that the CME bitcoin futures market
dominates the spot markets in terms of Granger causality, but that
the causal relationship is bi-directional, and a Granger causality
episode from March 2019 to June/July 2019 runs from bitcoin spot
prices to CME bitcoin futures prices. The paper concludes: ``[T]he
Granger causality episodes are not constant throughout the whole
sample period. Via our causality detection methods, market
participants can identify when markets are being led by futures
prices and when they might not be.'' See Hu, Hou & Oxley, supra note
81.
    \95\ See USBT Order, 85 FR at 12609.
    \96\ See id. at 12613 n.244.
    \97\ See id.
    \98\ See VanEck Order, 86 FR at 64547; WisdomTree Order, 86 FR
at 69331; Kryptoin Order, 86 FR 74176; Wise Origin Order, 87 FR
5535.
---------------------------------------------------------------------------

    Moreover, while NYSE Arca asserts that the Sponsor has conducted
proprietary research, including lead-lag analyses, to demonstrate that
the CME bitcoin futures market prices lead the bitcoin spot market, the
Exchange does not provide any information relating to its proprietary
research, including any

assumptions, parameters, or methodologies used, or furnish any data or
analysis to support such a conclusion. Accordingly, the Exchange's
unsupported representations constitute an insufficient basis for
approving a proposed rule change in circumstances where, as here, the
Exchange's assertion would form such an integral role in the
Commission's analysis and the assertion is subject to several
challenges.\99\ In this context, NYSE Arca's reliance on a single
paper, whose own lead-lag results are inconclusive, and its own
proprietary research that it has not provided is especially lacking
because the academic literature on the lead-lag relationship and price
discovery between bitcoin spot and futures markets is unsettled.\100\
In the USBT Order, the Commission responded to multiple academic papers
that were cited and concluded that, in light of the mixed results
found, the exchange there had not demonstrated that it is reasonably
likely that a would-be manipulator of the proposed ETP would transact
on the CME bitcoin futures market.\101\ Likewise, here, given the body
of academic literature to indicate to the contrary, the Commission
concludes that the information that NYSE Arca provides is not a
sufficient basis to support a determination that it is reasonably
likely that a would-be manipulator of the proposed ETP would have to
trade on the CME bitcoin futures market.\102\
---------------------------------------------------------------------------

    \99\ See Susquehanna, 866 F.3d at 447.
    \100\ See, e.g., D. Baur & T. Dimpfl, Price discovery in bitcoin
spot or futures?, 39 J. Futures Mkts. 803 (2019) (finding that the
bitcoin spot market leads price discovery); O. Entrop, B. Frijns &
M. Seruset, The determinants of price discovery on bitcoin markets,
40 J. Futures Mkts. 816 (2020) (finding that price discovery
measures vary significantly over time without one market being
clearly dominant over the other); J. Hung, H. Liu & J. Yang, Trading
activity and price discovery in Bitcoin futures markets, 62 J.
Empirical Finance 107 (2021) (finding that the bitcoin spot market
dominates price discovery); B. Kapar & J. Olmo, An analysis of price
discovery between Bitcoin futures and spot markets, 174 Econ.
Letters 62 (2019) (finding that bitcoin futures dominate price
discovery); E. Akyildirim, S. Corbet, P. Katsiampa, N. Kellard & A.
Sensoy, The development of Bitcoin futures: Exploring the
interactions between cryptocurrency derivatives, 34 Fin. Res.
Letters 101234 (2020) (finding that bitcoin futures dominate price
discovery); A. Fassas, S. Papadamou, & A. Koulis, Price discovery in
bitcoin futures, 52 Res. Int'l Bus. Fin. 101116 (2020) (finding that
bitcoin futures play a more important role in price discovery)
(``Fassas et al''); S. Aleti & B. Mizrach, Bitcoin spot and futures
market microstructure, 41 J. Futures Mkts. 194 (2021) (finding that
relatively more price discovery occurs on the CME as compared to
four spot exchanges); J. Wu, K. Xu, X. Zheng & J. Chen, Fractional
cointegration in bitcoin spot and futures markets, 41 J. Futures
Mkts. 1478 (2021) (finding that CME bitcoin futures dominate price
discovery). See also C. Alexander & D. Heck, Price discovery in
Bitcoin: The impact of unregulated markets, 50 J. Financial
Stability 100776 (2020) (finding that, in a multi-dimensional
setting, including the main price leaders within futures,
perpetuals, and spot markets, CME bitcoin futures have a very minor
effect on price discovery; and that faster speed of adjustment and
information absorption occurs on the unregulated spot and
derivatives platforms than on CME bitcoin futures).
    \101\ See USBT Order, 85 FR at 12613 nn.239-244 and accompanying
text.
    \102\ In addition, the Exchange fails to address the
relationship (if any) between prices on other bitcoin futures
markets and the CME bitcoin futures market and/or the bitcoin spot
market, or where price formation occurs when the entirety of bitcoin
futures markets, not just CME, is considered. See VanEck Order, 86
FR at 64547-8; WisdomTree Order, 86 FR at 69331; Kryptoin Order, 86
FR 74176; Wise Origin Order, 87 FR 5535.
---------------------------------------------------------------------------

    The Exchange also asserts that the Sponsor's research shows that
the bitcoin futures market is one of the primary venues that market
participants use to transact large exposures to bitcoin.\103\ However,
as previously mentioned, NYSE Arca does not provide information
relating to the Sponsor's research or furnish any data or analysis to
support these conclusions. Nor does the Exchange explain the
significance of its assertion in the overall analysis of whether there
is a reasonable likelihood that a person attempting to manipulate the
ETP would have to trade on the CME bitcoin futures market to
successfully manipulate the ETP, as opposed to other bitcoin futures
markets.
---------------------------------------------------------------------------

    \103\ See id.
---------------------------------------------------------------------------

    The Exchange further asserts that the efficient leverage offered
through the futures market in contrast to the spot market, where it
would be highly capital intensive to ``spoof'' or ``layer'' order books
on spot trading venues, supports the conclusion that that would-be
manipulators of bitcoin prices would attempt to do so in the bitcoin
futures market.\104\ Again, the Exchange does not provide any
additional data or analysis to support its conclusions or any examples
that would demonstrate that such assertion is reasonable, especially as
it relates to the CME. In other words, even assuming that the
Commission concurred with the Exchange's premise that it is reasonably
likely that a would-be manipulator would attempt to manipulate the ETP
by trading on the bitcoin futures market, the Exchange does not explain
why such manipulator would do so specifically on the CME bitcoin
futures market. Furthermore, the NYSE Arca does not provide any
information on the actual leverage provided by trading CME futures
contracts versus unregulated bitcoin futures markets or why would-be
manipulators would be likely to trade on the CME rather than other
bitcoin futures platforms that may have lower margin requirements.\105\
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    \104\ See Notice, 86 FR at 38135.
    \105\ For example, CME bitcoin futures currently have a 50%
margin requirement. See https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.margins.html (last visited December
1, 2021). On the other hand, the contract specifications for bitcoin
futures contracts on BitMex, Deribit, and Binance specify initial
margin requirements of 1%, 1%, and 2%, respectively. See https://www.bitmex.com/app/contract/XBTUSD (last visited Dec. 1, 2021);
https://legacy.deribit.com/pages/docs/futures (last visited Dec. 1,
2021); and https://www.binance.com/en/support/announcement/34801a0c405a4b058f9ae18a1a34cad3 (last visited Dec. 1, 2021). Thus,
it would appear to require less capital commitment to manipulate the
bitcoin price using bitcoin futures traded on BitMex or other
unregulated futures platforms rather than the CME, given the lower
margin requirements on such unregulated platforms. The Exchange does
not address this. See SkyBridge Order, 87 FR at 3876.
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    The Commission accordingly concludes that the information provided
in the record for this proposal does not establish a reasonable
likelihood that a would-be manipulator of the proposed ETP would have
to trade on the CME bitcoin futures market to successfully manipulate
the proposed ETP. Therefore, the information in the record also does
not establish that the CME bitcoin futures market is a ``market of
significant size'' with respect to the proposed ETP.
(b) Whether It Is Unlikely That Trading in the Proposed ETP Would Be
the Predominant Influence on Prices in the CME Bitcoin Futures Market
    The second prong in establishing whether the CME bitcoin futures
market constitutes a ``market of significant size'' is the
determination that it is unlikely that trading in the proposed ETP
would be the predominant influence on prices in the CME bitcoin futures
market.\106\
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    \106\ See Winklevoss Order, 83 FR at 37594; USBT Order, 85 FR at
12596-97.
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    NYSE Arca asserts that trading in the Shares would not be the
predominant force on prices in the bitcoin futures market (or spot
market) because of the significant volume in the bitcoin futures market
(in excess of $2.5 billion in average daily volume as of April 30,
2021), the size of bitcoin's market capitalization (in excess of $1
trillion as of April 30, 2021), and the significant liquidity available
in the spot market (in excess of $2.5 billion in average daily volume
as of April 30, 2021).\107\
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    \107\ See Notice, 86 FR at 38136.
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    In addition, NYSE Arca states that, based on the Sponsor's
analysis, considering a small subset of spot bitcoin trading platforms,
the cost to buy or sell $5 million worth of bitcoin and $10 million
worth of bitcoin averages roughly 20 basis points and 40

basis points, respectively.\108\ NYSE Arca explains that this is
comparable to the liquidity of existing commodity-based ETPs and that
using more sophisticated execution strategies and additional liquidity
sources would likely result in a lower cost to trade.\109\ Thus, NYSE
Arca concludes that the overall size of the bitcoin market and the
ability for market participants (including authorized participants
creating and redeeming in-kind with the Trust) to buy or sell large
amounts of bitcoin without significant market impact supports the
reasoning that the Shares are unlikely to become a predominant force on
pricing in either the bitcoin spot or the bitcoin futures market.\110\
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    \108\ See id. According to NYSE Arca, these statistics are based
on three random daily samples of bitcoin liquidity in U.S. dollars
(excluding stablecoins or Euro liquidity) based on executable quotes
on Coinbase Pro, Bitstamp, and itBit from January 1, 2021, to April
30, 2021. See id. at n.20.
    \109\ See id. at 38136.
    \110\ See id.
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    The record, however, does not demonstrate that it is unlikely that
trading in the proposed ETP would be the predominant influence on
prices in the CME bitcoin futures market. NYSE Arca's assertions about
the potential effect of trading in the Shares on the CME bitcoin
futures market and bitcoin spot market are general and conclusory,
repeating the aforementioned trade volume of the bitcoin futures market
and the size and liquidity of the bitcoin spot market, as well as the
market impact of a large transaction, without analysis or evidence to
support these assertions. For example, there is no limit on the amount
of mined bitcoin that the Trust may hold. Yet NYSE Arca does not
provide any information on the expected growth in the size of the Trust
and the resultant increase in the amount of bitcoin held by the Trust
over time, or on the overall expected number, size, and frequency of
creations and redemptions--or how any of the foregoing could (if at
all) influence prices in the CME bitcoin futures market. Thus, the
Commission cannot conclude, based on NYSE Arca's statements alone and
absent any evidence or analysis in support of NYSE Arca's assertions,
that it is unlikely that trading in the ETP would be the predominant
influence on prices in the CME bitcoin futures market.\111\
---------------------------------------------------------------------------

    \111\ See VanEck Order, 86 FR at 64548-59; WisdomTree Order, 86
FR at 69332-33; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87
FR at 3879; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    The Commission also is not persuaded by NYSE Arca's assertions
about the minimal effect a large market order to buy or sell bitcoin
would have on the bitcoin market.\112\ While NYSE Arca surmises by way
of a $10 million market order example that buying or selling large
amounts of bitcoin would have insignificant market impact, the
conclusion does not analyze the extent of any impact on the CME bitcoin
futures market, the market that the Exchange, in the proposal, argues
is the significant market under consideration. Even assuming, however,
that NYSE Arca is suggesting that a single $10 million order in bitcoin
would have immaterial impact on the prices in the CME bitcoin futures
market, this prong of the ``market of significant size'' determination
concerns the influence on prices from trading in the proposed ETP,
which is broader than just trading by the proposed ETP. While
authorized participants of the Trust might only transact in the bitcoin
spot market as part of their creation or redemption of Shares, the
Shares themselves would be traded in the secondary market on NYSE Arca.
The record does not discuss the expected number or trading volume of
the Shares, or establish the potential effect of the Shares' trade
prices on CME bitcoin futures prices. For example, NYSE Arca does not
provide any data or analysis about the potential effect the quotations
or trade prices of the Shares might have on market-maker quotations in
CME bitcoin futures contracts and whether those effects would
constitute a predominant influence on the prices of those futures
contracts.\113\
---------------------------------------------------------------------------

    \112\ See supra notes 108-110 and accompanying text.
    \113\ See VanEck Order, 86 FR at 64549; WisdomTree Order, 86 FR
at 69333; Kryptoin Order, 86 FR at 74177; SkyBridge Order, 87 FR at
3879; Wise Origin Order, 87 FR at 5537.
---------------------------------------------------------------------------

    Thus, because NYSE Arca has not provided sufficient information to
establish both prongs of the ``market of significant size''
determination, the Commission cannot conclude that the CME bitcoin
futures market is a ``market of significant size'' such that NYSE Arca
would be able to rely on a surveillance-sharing agreement with the CME
to provide sufficient protection against fraudulent and manipulative
acts and practices.
    The requirements of Section 6(b)(5) of the Exchange Act apply to
the rules of national securities exchanges. Accordingly, the relevant
obligation for a comprehensive surveillance-sharing agreement with a
regulated market of significant size, or other means to prevent
fraudulent and manipulative acts and practices that are sufficient to
justify dispensing with the requisite surveillance-sharing agreement,
resides with the listing exchange. Because there is insufficient
evidence in the record demonstrating that NYSE Arca has satisfied this
obligation, the Commission cannot approve the proposed ETP for listing
and trading on NYSE Arca.

C. Whether NYSE Arca Has Met Its Burden To Demonstrate That the
Proposal Is Designed To Protect Investors and the Public Interest

    NYSE Arca contends that, if approved, the proposed ETP would
protect investors and the public interest. However, the Commission must
consider these potential benefits in the broader context of whether the
proposal meets each of the applicable requirements of the Exchange
Act.\114\ Because NYSE Arca has not demonstrated that its proposed rule
change is designed to prevent fraudulent and manipulative acts and
practices, the Commission must disapprove the proposal.
---------------------------------------------------------------------------

    \114\ See Winklevoss Order, 83 FR at 37602. See also
GraniteShares Order, 83 FR at 43931; ProShares Order, 83 FR at
43941; USBT Order, 85 FR at 12615.
---------------------------------------------------------------------------

    NYSE Arca asserts that the proposed rule change is designed to
protect investors and the public interest because an investment in the
Trust would provide investors with exposure to bitcoin in a manner that
may be more efficient, more convenient, and more regulated than the
purchase of bitcoin or other investment products that provide exposure
to bitcoin.\115\ For example, the Sponsor notes that OTC bitcoin funds,
which have attracted significant investor interest, offer exposure to
bitcoin in a similar manner as the Trust.\116\ However, according to
the Exchange, the OTC bitcoin funds do not offer a creation or
redemption mechanism that would keep their shares trading in line with
their NAVs and, as a result, OTC bitcoin funds have historically traded
at significant premiums or discounts compared to their NAVs.\117\ NYSE
Arca asserts that, in contrast, if the Trust's Shares were to trade at
a premium or discount compared to their NAV, creation or redemption
could be facilitated by authorized participants to drive the value of
the Shares towards their NAV.\118\ The Exchange states that investors
in OTC bitcoin funds also have historically borne significantly higher
fees and expenses than those that would be borne by investors in the
Trust.\119\
---------------------------------------------------------------------------

    \115\ See Notice, 86 FR at 38134.
    \116\ See id.
    \117\ See id.
    \118\ See id.
    \119\ See id.

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

    NYSE Arca further asserts that, with the growth of OTC bitcoin
funds, so too has grown the potential risk to U.S. investors.\120\
Specifically, NYSE Arca argues that significant and prolonged premiums
and discounts, significant premium/discount volatility, high fees,
insufficient disclosures, limited liquidity to trade or borrow shares,
and the lack of surveillance and oversight through a listed exchange
place U.S. investor money at risk in ways that could potentially be
eliminated through access to the Shares.\121\ As such, the Exchange
believes that the proposal would act to limit risk to U.S. investors
that are increasingly seeking exposure to bitcoin, while providing
benefits such as the elimination of significant and prolonged premiums
and discounts, the reduction of significant premium/discount
volatility, the reduction of management fees through meaningful
competition, the avoidance of risks associated with investing in
operating companies that are imperfect proxies for bitcoin exposure,
and substantially greater surveillance and regulatory oversight.\122\
---------------------------------------------------------------------------

    \120\ See id. at 38136.
    \121\ See id. For example, NYSE Arca states that the largest
U.S. OTC bitcoin fund returned 46.41% year-to-date through April 30,
2021, while spot bitcoin returned 95.61% over the same period. NYSE
Arca asserts that the deviation in price performance can be
attributed to the fluctuation in NAV of this fund. See id.
    \122\ See id.
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    Additionally, the Exchange states that investors holding bitcoin
through a cryptocurrency trading platform often face credit risk to the
platform for cash balances, and often face risk of loss or theft of
their bitcoin as a result of the platform using internet-connected
storage (i.e., ``hot'' wallets) and/or having poor private key
management (e.g., insufficient password protection, lost key,
etc.).\123\ The Exchange states that, on the other hand, through use of
the Bitcoin Custodian, the Trust would hold bitcoin in 100% ``cold''
storage, meaning the entire storage process would be done completely
offline, with a regulated and licensed entity (i.e., the Bitcoin
Custodian) applying industry best practices.\124\
---------------------------------------------------------------------------

    \123\ See id. at 38134.
    \124\ See id. See also supra note 30.
---------------------------------------------------------------------------

    In essence, NYSE Arca argues that the risky nature of direct
investment in the underlying bitcoin and the unregulated markets on
which bitcoin and OTC bitcoin funds trade compel approval of the
proposed rule change. The Commission disagrees. Pursuant to Section
19(b)(2) of the Exchange Act, the Commission must approve a proposed
rule change filed by a national securities exchange if it finds that
the proposed rule change is consistent with the applicable requirements
of the Exchange Act--including the requirement under Section 6(b)(5)
that the rules of a national securities exchange be designed to prevent
fraudulent and manipulative acts and practices--and it must disapprove
the filing if it does not make such a finding.\125\ Thus, even if a
proposed rule change purports to protect investors from a particular
type of investment risk--such as the susceptibility of an asset to loss
or theft--the proposed rule change may still fail to meet the
requirements under the Exchange Act.\126\
---------------------------------------------------------------------------

    \125\ See Exchange Act Section 19(b)(2)(C), 15 U.S.C.
78s(b)(2)(C).
    \126\ See SolidX Order, 82 FR at 16259; VanEck Order, 86 FR at
54550-51; WisdomTree Order, 86 FR at 69334; Kryptoin Order, 86 FR at
74179; Valkyrie Order, 86 FR at 74163; SkyBridge Order, 87 FR at
3881; Wise Origin Order, 87 FR at 5538.
---------------------------------------------------------------------------

    Here, even if it were true that, compared to trading in unregulated
bitcoin spot markets or trading in OTC bitcoin funds, trading in a
bitcoin-based ETP on a national securities exchange provides some
additional protection to investors, the Commission must consider this
potential benefit in the broader context of whether the proposal meets
each of the applicable requirements of the Exchange Act.\127\ As
explained above, for bitcoin-based ETPs, the Commission has
consistently required that the listing exchange have a comprehensive
surveillance-sharing agreement with a regulated market of significant
size related to bitcoin, or demonstrate that other means to prevent
fraudulent and manipulative acts and practices are sufficient to
justify dispensing with the requisite surveillance-sharing agreement.
The listing exchange has not met that requirement here. Therefore, the
Commission is unable to find that the proposed rule change is
consistent with the statutory standard.
---------------------------------------------------------------------------

    \127\ See supra note 114.
---------------------------------------------------------------------------

    Pursuant to Section 19(b)(2) of the Exchange Act, the Commission
must disapprove a proposed rule change filed by a national securities
exchange if it does not find that the proposed rule change is
consistent with the applicable requirements of the Exchange Act--
including the requirement under Section 6(b)(5) that the rules of a
national securities exchange be designed to prevent fraudulent and
manipulative acts and practices.\128\
---------------------------------------------------------------------------

    \128\ See 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    For the reasons discussed above, NYSE Arca has not met its burden
of demonstrating that the proposal is consistent with Exchange Act
Section 6(b)(5),\129\ and, accordingly, the Commission must disapprove
the proposal.\130\
---------------------------------------------------------------------------

    \129\ 15 U.S.C. 78f(b)(5).
    \130\ In disapproving the proposed rule change, the Commission
has considered its impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

D. Other Comments

    The Commission received a comment letter that addressed the general
nature and intrinsic value of bitcoin.\131\ Ultimately, however,
additional discussion of these topics is unnecessary, as they do not
bear on the basis for the Commission's decision to disapprove the
proposal.
---------------------------------------------------------------------------

    \131\ See Letter from Sam Ahn (July 21, 2021).
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find,
pursuant to Section 19(b)(2) of the Exchange Act, that the proposed
rule change is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to a national
securities exchange, and in particular, with Section 6(b)(5) of the
Exchange Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act, that proposed rule change SR-NYSEArca-2021-57 be, and
hereby is, disapproved.

    By the Commission.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2022-05499 Filed 3-15-22; 8:45 am]
BILLING CODE 8011-01-P