[Federal Register Volume 88, Number 137 (Wednesday, July 19, 2023)]
[Notices]
[Pages 46249-46285]
[FR Doc No: 2023-15267]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97899; File No. SR-CboeBZX-2023-044]

Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Notice of
Filing of a Proposed Rule Change, as Modified by Amendment No. 2, To
List and Trade Shares of the Wise Origin Bitcoin Trust Under BZX Rule
14.11(e)(4), Commodity-Based Trust Shares

July 13, 2023.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-114 thereunder,\2\ notice is hereby
given that on June 30, 2023, Cboe BZX Exchange, Inc. (the ``Exchange''
or ``BZX'') filed with the Securities and Exchange Commission
(``Commission'') 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. On July 11, 2023, the Exchange filed Amendment No. 1 to
the proposed rule change, which amended and replaced the proposed rule
change in its entirety. On July 13, 2023, the Exchange filed Amendment
No. 2 to the proposed rule change, which amended and replaced the
proposed rule change, as modified by Amendment No. 1, in its entirety.
The proposed rule change, as modified by Amendment No. 2, is described
in Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change, as modified by Amendment No. 2, from
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    Cboe BZX Exchange, Inc. (``BZX'' or the ``Exchange'') is filing
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
a proposed rule change to list and trade shares of the Wise Origin
Bitcoin Trust (the ``Trust''),\3\ under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares.
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    \3\ The Trust was formed as a Delaware statutory trust on March
17, 2021, and is operated as a grantor trust for U.S. federal tax
purposes. The Trust has no fixed termination date.
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    The text of the proposed rule change is also available on the
Exchange's website (http://markets.cboe.com/us/equities/regulation/rule_filings/bzx/), at the Exchange's Office of the Secretary, and at
the Commission's Public Reference Room.

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

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

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

1. Purpose
    This Amendment No. 2 to SR-CboeBZX-2023-044 amends and replaces in
its entirety the proposal as originally submitted on June 30, 2023 and
as amended by Amendment No. 1 on July 11, 2023. The Exchange submits
this Amendment No. 2 in order to clarify certain points and add
additional details to the proposal.
    The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4),\4\ which governs the listing and trading of Commodity-
Based Trust Shares on the Exchange.\5\ FD Funds Management LLC is the
sponsor of the Trust (``Sponsor''). The Shares will be registered with
the Commission by means of the Trust's registration statement on Form
S-1 (the ``Registration Statement'').\6\ Fidelity Digital Assets
Services, LLC (``FDAS''), a regulated custodian licensed by the New
York Department of Financial Services, will be responsible for custody
of the Trust's bitcoin (the ``Custodian''). The Trust is not permitted
or required to register under the Investment Company Act of 1940, as
amended (the ``1940 Act''), and therefore is not subject to regulation
under the 1940 Act.\7\ Further, the Registration Statement states that
the Trust will not hold or trade in commodity interests regulated by
the Commodity Exchange Act of 1936, as amended (the ``CEA''), and
therefore is not a commodity pool for purposes of the CEA.\8\ The
Exchange represents that the Shares satisfy the requirements of BZX
Rule 14.11(e)(4) and thereby qualify for listing on the Exchange.
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    \4\ The Commission approved BZX Rule 14.11(e)(4) in Securities
Exchange Act Release No. 65225 (August 30, 2011), 76 FR 55148
(September 6, 2011) (SR-BATS-2011-018).
    \5\ All statements and representations made in this filing
regarding (a) the description of the portfolio, (b) limitations on
portfolio holdings or reference assets, or (c) the applicability of
Exchange rules and surveillance procedures shall constitute
continued listing requirements for listing the Shares on the
Exchange.
    \6\ See draft Registration Statement on Form S-1, dated March
24, 2021, submitted to the Commission by the Sponsor on behalf of
the Trust. The descriptions of the Trust, the Shares, and the Index
(as defined below) contained herein are based, in part, on
information in the Registration Statement. The Registration
Statement is not yet effective, and the Shares will not trade on the
Exchange until such time that the Registration Statement is
effective.
    \7\ See above.
    \8\ See above.
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    As further discussed below, the Commission has historically
approved or disapproved exchange filings to list and trade series of
Trust Issued Receipts, including spot-based Commodity-Based Trust
Shares, on the basis of whether the listing exchange has in place a
comprehensive surveillance sharing agreement with a regulated market of
significant size related to the underlying commodity to be held.\9\
Prior orders from the Commission have pointed out that in every prior
approval order for Commodity-Based Trust Shares, there has been a
derivatives market that represents the regulated market of significant
size, generally a Commodity Futures Trading Commission (the ``CFTC'')
regulated futures market.\10\

Further to this point, the Commission's prior orders have noted that
the spot commodities and currency markets for which it has previously
approved spot ETPs are generally unregulated and that the Commission
relied on the underlying futures market as the regulated market of
significant size that formed the basis for approving the series of
Currency and Commodity-Based Trust Shares, including gold, silver,
platinum, palladium, copper, and other 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.'' \11\
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    \9\ 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'').
    \10\ 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).
    \11\ See Winklevoss Order at 37592.
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    As such, the regulated market of significant size test does not
require that the spot bitcoin market be regulated in order for the
Commission to approve this proposal, and precedent makes clear that an
underlying market for a spot commodity or currency being a regulated
market would actually be an exception to the norm. These largely
unregulated currency and commodity markets do not provide the same
protections as the markets that are subject to the Commission's
oversight, but the Commission has consistently looked to surveillance
sharing agreements with the underlying futures market in order to
determine whether such products were consistent with the Act. With this
in mind, the CME Bitcoin Futures market is the proper market to
consider in determining whether there is a related regulated market of
significant size.
    Further to this point, the Exchange notes that the Commission has
approved proposals related to the listing and trading of funds that
would primarily hold CME Bitcoin Futures that are registered under the
Securities Act of 1933.\12\ In the Teucrium Approval, the Commission
found the CME Bitcoin Futures market to be a regulated market of
significant size as it relates to CME Bitcoin Futures, an odd
tautological truth that is also inconsistent with prior disapproval
orders for ETPs that would hold actual bitcoin instead of derivatives
contracts (``Spot Bitcoin ETPs'') that use the exact same pricing
methodology as the CME Bitcoin Futures. As further discussed below,
both the Exchange and the Sponsor believe that this proposal and the
included analysis are sufficient to establish that the CME Bitcoin
Futures market represents a regulated market of significant size as it
relates both to the CME Bitcoin Futures market and to the spot bitcoin
market and that this proposal should be approved.
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    \12\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5,
2022) (collectively, with the Teucrium Approval, the ``Bitcoin
Futures Approvals'').
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    Finally, as discussed in greater detail below, by using
professional custodians and other service providers, the Trust provides
investors interested in exposure to bitcoin with important protections
that are not always available to investors that invest directly in
bitcoin, including protection against insolvency of non-qualified
custodians, cyber-attacks, and other risks. If U.S. investors had
access to vehicles such as the Trust for their bitcoin investments,
instead of directing their bitcoin investments into loosely regulated
offshore platforms (such as loosely regulated centralized exchanges
that have since faced bankruptcy proceedings or other insolvencies),
then countless investors could have protected their principal
investments in bitcoin and thus benefited.
Background
    Bitcoin is a digital asset based on the decentralized, open-source
protocol of the peer-to-peer computer network launched in 2009 that
governs the creation, movement, and ownership of bitcoin and hosts the
public ledger, or ``blockchain,'' on which all bitcoin transactions are
recorded (the ``Bitcoin Network'' or ``Bitcoin''). The decentralized
nature of the Bitcoin Network allows parties to transact directly with
one another based on cryptographic proof instead of relying on a
trusted third party. The protocol also lays out the rate of issuance of
new bitcoin within the Bitcoin Network, a rate that is reduced by half
approximately every four years with an eventual hard cap of 21 million.
It's generally understood that the combination of these two features--a
systemic hard cap of 21 million bitcoin and the ability to transact
trustlessly with anyone connected to the Bitcoin Network--gives bitcoin
its value.
    The first rule filing proposing to list an exchange-traded product
to provide exposure to bitcoin in the U.S. was submitted by the
Exchange on June 30, 2016.\13\ At that time, blockchain technology, and
digital assets that utilized it, were relatively new to the broader
public. The market cap of all bitcoin in existence at that time was
approximately $10 billion. No registered offering of digital asset
securities or shares in an investment vehicle with exposure to bitcoin
or any other cryptocurrency had yet been conducted, and the regulated
infrastructure for conducting a digital asset securities offering had
not begun to develop.\14\ Similarly, regulated U.S. bitcoin futures
contracts did not exist. The CFTC had determined that bitcoin is a
commodity,\15\ but had not engaged in significant enforcement actions
in the space. The New York Department of Financial Services (``NYDFS'')
adopted its final BitLicense regulatory framework in 2015, but had only
approved four entities to engage in activities relating to virtual
currencies (whether through granting a BitLicense or a limited-purpose
trust charter) as of

June 30, 2016.\16\ While the first over-the-counter bitcoin fund
launched in 2013, public trading was limited and the fund had only $60
million in assets.\17\ There were very few, if any, traditional
financial institutions engaged in the space, whether through investment
or providing services to digital asset companies. In January 2018, the
Staff of the Commission noted in a letter to the Investment Company
Institute and SIFMA that it was not aware, at that time, of a single
custodian providing fund custodial services for digital assets.\18\
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    \13\ See Winklevoss Order.
    \14\ Digital assets that are securities under U.S. law are
referred to throughout this proposal as ``digital asset
securities.'' All other digital assets, including bitcoin, are
referred to interchangeably as ``cryptocurrencies'' or ``virtual
currencies.'' The term ``digital assets'' refers to all digital
assets, including both digital asset securities and
cryptocurrencies, together.
    \15\ See ``In the Matter of Coinflip, Inc.'' (``Coinflip'')
(CFTC Docket 15-29 (September 17, 2015)) (order instituting
proceedings pursuant to Sections 6(c) and 6(d) of the CEA, making
findings and imposing remedial sanctions), in which the CFTC stated:
``Section 1a(9) of the CEA defines `commodity' to include, among
other things, `all services, rights, and interests in which
contracts for future delivery are presently or in the future dealt
in.' 7 U.S.C. 1a(9). The definition of a `commodity' is broad. See,
e.g., Board of Trade of City of Chicago v. SEC, 677 F. 2d 1137, 1142
(7th Cir. 1982). Bitcoin and other virtual currencies are
encompassed in the definition and properly defined as commodities.''
    \16\ A list of virtual currency businesses that are entities
regulated by the NYDFS is available on the NYDFS website. See
https://www.dfs.ny.gov/apps_and_licensing/virtual_currency_businesses/regulated_entities.
    \17\ Data as of March 31, 2016 according to publicly available
filings. See Bitcoin Investment Trust Form S-1, dated May 27, 2016,
available: https://www.sec.gov/Archives/edgar/data/1588489/000095012316017801/filename1.htm.
    \18\ See letter from Dalia Blass, Director, Division of
Investment Management, U.S. Securities and Exchange Commission to
Paul Schott Stevens, President & CEO, Investment Company Institute
and Timothy W. Cameron, Asset Management Group--Head, Securities
Industry and Financial Markets Association (January 18, 2018),
available at https://www.sec.gov/divisions/investment/noaction/2018/cryptocurrency-011818.htm.
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    Fast forward to today and the digital assets financial ecosystem,
including bitcoin, has progressed significantly. The development of a
regulated market for digital asset securities has significantly
evolved, with market participants having conducted registered public
offerings of both digital asset securities \19\ and shares in
investment vehicles holding bitcoin futures, including Bitcoin Futures
ETFs (as defined below). Additionally, licensed and regulated service
providers have emerged to provide fund custodial services for digital
assets, among other services. For example, in May 2021, the Staff of
the Commission released a statement permitting open-end mutual funds to
invest in cash-settled bitcoin futures; in December 2020, the
Commission adopted a conditional no-action position permitting certain
special purpose broker-dealers to custody digital asset securities
under Rule 15c3-3 under the Exchange Act (the ``Custody Statement'');
\20\ in September 2020, the Staff of the Commission released a no-
action letter permitting certain broker-dealers to operate a non-
custodial Alternative Trading System (``ATS'') for digital asset
securities, subject to specified conditions; \21\ in October 2019, the
Staff of the Commission granted temporary relief from the clearing
agency registration requirement to an entity seeking to establish a
securities clearance and settlement system based on distributed ledger
technology,\22\ and multiple transfer agents who provide services for
digital asset securities registered with the Commission.\23\
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    \19\ See Prospectus supplement filed pursuant to Rule 424(b)(1)
for INX Tokens (Registration No. 333-233363), available at: https://www.sec.gov/Archives/edgar/data/1725882/000121390020023202/ea125858-424b1_inxlimited.htm.
    \20\ See Securities Exchange Act Release No. 90788, 86 FR 11627
(February 26, 2021) (File Number S7-25-20) (Custody of Digital Asset
Securities by Special Purpose Broker-Dealers).
    \21\ See letter from Elizabeth Baird, Deputy Director, Division
of Trading and Markets, U.S. Securities and Exchange Commission to
Kris Dailey, Vice President, Risk Oversight & Operational
Regulation, Financial Industry Regulatory Authority (September 25,
2020), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2020/finra-ats-role-in-settlement-of-digital-asset-security-trades-09252020.pdf.
    \22\ See letter from Jeffrey S. Mooney, Associate Director,
Division of Trading and Markets, U.S. Securities and Exchange
Commission to Charles G. Cascarilla & Daniel M. Burstein, Paxos
Trust Company, LLC (October 28, 2019), available at: https://www.sec.gov/divisions/marketreg/mr-noaction/2019/paxos-trust-company-102819-17a.pdf.
    \23\ See, e.g., Form TA-1/A filed by Tokensoft Transfer Agent
LLC (CIK:<PHONE_NUMBER>) on January 8, 2021, available at: https://www.sec.gov/Archives/edgar/data/1794142/000179414219000001/xslFTA1X01/primary_doc.xml.
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    Outside the Commission's purview, the regulatory landscape has
changed significantly since 2016, and cryptocurrency markets have grown
and evolved as well. The market for bitcoin is approximately 100 times
larger, having at one point reached a market cap of over $1
trillion.\24\ According to the CME Bitcoin Futures Report, from
February 13, 2023 through March 27, 2023, CFTC regulated bitcoin
futures represented between $750 million and $3.2 billion in notional
trading volume on Chicago Mercantile Exchange (``CME'') (``Bitcoin
Futures'') on a daily basis and notional volume was never below $670
million.\25\ Open interest was over $1.4 billion for the entirety of
the period and at one point was over $2 billion. ETPs that primarily
hold CME Bitcoin Futures have raised over $1 billion dollars in assets.
The CFTC has exercised its regulatory jurisdiction in bringing a number
of enforcement actions related to bitcoin and against trading platforms
that offer cryptocurrency trading.\26\ As of February 14, 2023 the
NYDFS has granted no fewer than thirty-four BitLicenses,\27\ including
to established public payment companies like PayPal Holdings, Inc. and
Square, Inc., and limited purpose trust charters to entities providing
cryptocurrency custody services. In addition, the Treasury's Office of
Foreign Assets Control (``OFAC'') has brought enforcement actions over
apparent violations of the sanctions laws in connection with the
provision of wallet management services for digital assets.\28\
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    \24\ As of December 1, 2021, the total market cap of all bitcoin
in circulation was approximately $1.08 trillion.
    \25\ Data sourced from the CME Bitcoin Futures Report: 19 Nov
2021, available at: https://www.cmegroup.com/ftp/bitcoinfutures/Bitcoin_Futures_Liquidity_Report.pdf.
    \26\ The CFTC's annual report for Fiscal Year 2020 (which ended
on September 30, 2020) noted that the CFTC ``continued to
aggressively prosecute misconduct involving digital assets that fit
within the CEA's definition of commodity'' and ``brought a record
setting seven cases involving digital assets.'' See CFTC FY2020
Division of Enforcement Annual Report, available at: https://www.cftc.gov/media/5321/DOE_FY2020_AnnualReport_120120/download.
Additionally, the CFTC filed on October 1, 2020, a civil enforcement
action against the owner/operators of the BitMEX trading platform,
which was one of the largest bitcoin derivative exchanges. See CFTC
Release No. 8270-20 (October 1, 2020) available at: https://www.cftc.gov/PressRoom/PressReleases/8270-20.
    \27\ See https://www.dfs.ny.gov/virtual_currency_businesses.
    \28\ See U.S. Department of the Treasury Enforcement Release:
``OFAC Enters Into $98,830 Settlement with BitGo, Inc. for Apparent
Violations of Multiple Sanctions Programs Related to Digital
Currency Transactions'' (December 30, 2020) available at: https://home.treasury.gov/system/files/126/20201230_bitgo.pdf. See also U.S.
Department of the Treasury Enforcement Release: ``Treasury Announces
Two Enforcement Actions for over $24M and $29M Against Virtual
Currency Exchange, Bittrex, Inc.'' (October 11, 2022) available at:
https://home.treasury.gov/news/press-releases/jy1006. See also U.S.
Department of Treasure Enforcement Release ``OFAC Settles with
Virtual Currency Exchange Kraken for $362,158.70 Related to Apparent
Violations of the Iranian Transactions and Sanctions Regulations''
(November 28, 2022) available at: https://home.treasury.gov/system/files/126/20221128_kraken.pdf.
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    In addition to the regulatory developments laid out above, more
traditional financial market participants have become more active in
cryptocurrency: large insurance companies, asset managers, university
endowments, pension funds, and even historically bitcoin skeptical fund
managers \29\ have allocated to bitcoin. In June 2022, PwC estimated
that the number of crypto-specialist hedge funds was more than 300
globally, with $4.1 billion in assets under management. In addition, in
a survey PwC found that 38 percent of surveyed traditional hedge funds
were currently investing in `digital assets,' compared to 21 percent
the year prior.'' \30\ The largest over-the-

counter bitcoin fund previously filed a Form 10 registration statement,
which the Staff of the Commission reviewed and which took effect
automatically, and is now a reporting company.\31\ Established
companies like Tesla, Inc., MicroStrategy Incorporated, and Square,
Inc., among others, have made substantial investments in bitcoin. The
foregoing examples demonstrate that bitcoin has gained mainstream usage
and recognition.
---------------------------------------------------------------------------

    \29\ See e.g., ``Bridgewater: Our Thoughts on Bitcoin'' (January
28, 2021) available at: https://www.bridgewater.com/research-and-insights/our-thoughts-on-bitcoin and ``Paul Tudor Jones says he
likes bitcoin even more now, rally still in the `first inning'''
(October 22, 2020) available at: https://www.cnbc.com/2020/10/22/-paul-tudor-jones-says-he-likes-bitcoin-even-more-now-rally-still-in-the-first-inning.html.
    \30\ See the FSOC ``Report on Digital Asset Financial Stability
Risks and Regulation 2022'' (October 3, 2022) (at footnote 26) at
https://home.treasury.gov/system/files/261/FSOC-Digital-Assets-Report-2022.pdf.
    \31\ See Letter from Division of Corporation Finance, Office of
Real Estate & Construction to Barry E. Silbert, Chief Executive
Officer, Grayscale Bitcoin Trust (January 31, 2020) https://www.sec.gov/Archives/edgar/data/1588489/000000000020000953/filename1.pdf.
---------------------------------------------------------------------------

    Despite these developments, access for U.S. retail investors to
gain exposure to bitcoin via a transparent and U.S. regulated, U.S.
exchange-traded vehicle remains limited. Instead current options
include: (i) facing the counter-party risk, legal uncertainty,
technical risk, and complexity associated with accessing spot bitcoin;
(ii) over-the-counter bitcoin funds (``OTC Bitcoin Funds'') with high
management fees and potentially volatile premiums and discounts; \32\
(iii) purchasing shares of operating companies that they believe will
provide proxy exposure to bitcoin with limited disclosure about the
associated risks; \33\ or (iv) purchasing Bitcoin Futures ETFs, as
defined below, which represent a sub-optimal structure for long-term
investors that will cost them significant amounts of money every year
compared to Spot Bitcoin ETPs, as further discussed below. Meanwhile,
investors in many other countries, including Canada and Brazil, are
able to use more traditional exchange listed and traded products
(including exchange-traded funds holding physical bitcoin) to gain
exposure to bitcoin. Similarly, investors in Switzerland and across
Europe have access to Exchange Traded Products which trade on regulated
exchanges and provide exposure to a broad array of spot crypto assets.
U.S. investors, by contrast, are left with fewer and more risky means
of getting bitcoin exposure, as described above.\34\
---------------------------------------------------------------------------

    \32\ The largest OTC Bitcoin Fund has an AUM of $23 billion. The
premium and discount for OTC Bitcoin Funds is known to move rapidly.
For example, over the period of 12/21/20 to 1/21/20, the premium for
the largest OTC Bitcoin Fund went from 40.18% to 2.79%. While the
price of bitcoin appreciated significantly during this period and
NAV per share increased by 41.25%, the price per share increased by
only 3.58%. This means that investors are buying shares of a fund
that experiences significant volatility in its premium and discount
outside of the fluctuations in price of the underlying asset. Even
operating within the normal premium and discount range, it's
possible for an investor to buy shares of an OTC Bitcoin Fund only
to have those shares quickly lose 10% or more in dollar value
excluding any movement of the price of bitcoin. That is to say--the
price of bitcoin could have stayed exactly the same from market
close on one day to market open the next, yet the value of the
shares held by the investor decreased only because of the
fluctuation of the premium. As more investment vehicles, including
mutual funds and ETFs, seek to gain exposure to bitcoin, the easiest
option for a buy and hold strategy for such vehicles is often an OTC
Bitcoin Fund, meaning that even investors that do not directly buy
OTC Bitcoin Funds can be disadvantaged by extreme premiums (or
discounts) and premium volatility.
    \33\ A number of operating companies engaged in unrelated
businesses--such as Tesla (a car manufacturer) and MicroStrategy (an
enterprise software company)--have announced investments as large as
$5.3 billion in bitcoin. Without access to bitcoin exchange-traded
products, retail investors seeking investment exposure to bitcoin
may end up purchasing shares in these companies in order to gain the
exposure to bitcoin that they seek. In fact, mainstream financial
news networks have written a number of articles providing investors
with guidance for obtaining bitcoin exposure through publicly traded
companies (such as MicroStrategy, Tesla, and bitcoin mining
companies, among others) instead of dealing with the complications
associated with buying spot bitcoin in the absence of a bitcoin ETP.
See e.g., ``7 public companies with exposure to bitcoin'' (February
8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want to get
in the crypto trade without holding bitcoin yourself? Here are some
investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html. Such operating companies,
however, are imperfect bitcoin proxies and provide investors with
partial bitcoin exposure paired with a host of additional risks
associated with whichever operating company they decide to purchase.
Additionally, the disclosures provided by such operating companies
with respect to risks relating to their bitcoin holdings are
generally substantially smaller than the registration statement of a
bitcoin ETP, including the Registration Statement, typically
amounting to a few sentences of narrative description and a handful
of risk factors. In other words, investors seeking bitcoin exposure
through publicly traded companies are gaining only partial exposure
to bitcoin and are not fully benefitting from the risk disclosures
and associated investor protections that come from the securities
registration process.
    \34\ The Exchange notes that the list of countries above is not
exhaustive and that securities regulators in a number of additional
countries have either approved or otherwise allowed the listing and
trading of Spot Bitcoin ETPs.
---------------------------------------------------------------------------

    To this point, the lack of a Spot Bitcoin ETP exposes U.S. investor
assets to significant risk because investors that would otherwise seek
crypto asset exposure through a Spot Bitcoin ETP are forced to find
alternative exposure through generally riskier means. For instance,
many U.S. investors that held their digital assets in accounts at
FTX,\35\ Celsius Network LLC,\36\ BlockFi Inc.\37\ and Voyager Digital
Holdings, Inc.\38\ have become unsecured creditors in the insolvencies
of those entities. If a Spot Bitcoin ETP was available, it is likely
that at least a portion of the billions of dollars tied up in those
proceedings would still reside in the brokerage accounts of U.S.
investors, having instead been invested in a transparent, regulated,
and well-understood structure--a Spot Bitcoin ETP. To this point,
approval of a Spot Bitcoin ETP would represent a major win for the
protection of U.S. investors in the cryptoasset space. As further
described below, the Trust, like all other series of Commodity-Based
Trust Shares, is designed to protect investors against the risk of
losses through fraud and insolvency that arise by holding digital
assets, including bitcoin, on centralized platforms.
---------------------------------------------------------------------------

    \35\ See FTX Trading Ltd., et al., Case No. 22-11068.
    \36\ See Celsius Network LLC, et al., Case No. 22-10964.
    \37\ See BlockFi Inc., Case No. 22-19361.
    \38\ See Voyager Digital Holdings, Inc., et al., Case No. 22-
10943.
---------------------------------------------------------------------------

    Additionally, investors in other countries, specifically Canada,
generally pay lower fees than U.S. retail investors that invest in OTC
Bitcoin Funds due to the fee pressure that results from increased
competition among available bitcoin investment options. Without an
approved and regulated Spot Bitcoin ETP in the U.S. as a viable
alternative, U.S. investors could seek to purchase shares of non-U.S.
bitcoin vehicles in order to get access to bitcoin exposure. Given the
separate regulatory regime and the potential difficulties associated
with any international litigation, such an arrangement would create
more risk exposure for U.S. investors than they would otherwise have
with a U.S. exchange listed ETP. Further to this point, the lack of a
U.S.-listed Spot Bitcoin ETP is not preventing U.S. funds from gaining
exposure to bitcoin--several U.S. exchange-traded funds are using
Canadian bitcoin ETPs to gain exposure to spot bitcoin. In addition to
the benefits to U.S. investors articulated throughout this proposal,
approving this proposal (and others like it) would provide U.S.
exchange-traded funds and mutual funds with a U.S.-listed and regulated
product to provide such access rather than relying on either flawed
products or products listed and primarily regulated in other countries.
Bitcoin Futures ETFs
    The Exchange and Sponsor applaud the Commission for allowing the
launch of ETFs registered under the 1940 Act and the Bitcoin Futures
Approvals that provide exposure to bitcoin primarily through CME
Bitcoin Futures (``Bitcoin Futures ETFs''). Allowing such products to
list and trade is a productive first step

in providing U.S. investors and traders with transparent, exchange-
listed tools for expressing a view on bitcoin. The Bitcoin Futures
Approvals, however, have created a logical inconsistency in the
application of the standard the Commission applies when considering
bitcoin ETP proposals.
    As discussed further below, the standard applicable to bitcoin ETPs
is whether the listing exchange has in place a comprehensive
surveillance sharing agreement with a regulated market of significant
size in the underlying asset. Previous disapproval orders have made
clear that a market that constitutes a regulated market of significant
size is generally a futures and/or options market based on the
underlying reference asset rather than the spot commodity markets,
which are often unregulated.\39\ Leaving aside the analysis of that
standard until later in this proposal,\40\ the Exchange believes that
the following rationale the Commission applied to a Bitcoin Futures ETF
should result in the Commission approving this and other Spot Bitcoin
ETP proposals:
---------------------------------------------------------------------------

    \39\ See Winklevoss Order at 37593, specifically footnote 202,
which includes the language from numerous approval orders for which
the underlying futures markets formed the basis for approving series
of ETPs that hold physical metals, including gold, silver,
palladium, platinum, and precious metals more broadly; and 37600,
specifically where the Commission provides that ``when the spot
market is unregulated--the requirement of preventing fraudulent and
manipulative acts may possibly be satisfied by showing that the ETP
listing market has entered into a surveillance-sharing agreement
with a regulated market of significant size in derivatives related
to the underlying asset.'' As noted above, the Exchange believes
that these citations are particularly helpful in making clear that
the spot market for a spot commodity ETP need not be ``regulated''
in order for a spot commodity ETP to be approved by the Commission,
and in fact that it's been the common historical practice of the
Commission to rely on such derivatives markets as the regulated
market of significant size because such spot commodities markets are
largely unregulated.
    \40\ As further outlined below, both the Exchange and the
Sponsor believe that the Bitcoin Futures market represents a
regulated market of significant size and that this proposal and
others like it should be approved on this basis.

    The CME ``comprehensively surveils futures market conditions and
price movements on a real-time and ongoing basis in order to detect
and prevent price distortions, including price distortions caused by
manipulative efforts.'' Thus, the CME's surveillance can reasonably
be relied upon to capture the effects on the CME bitcoin futures
market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures
contracts, whether that attempt is made by directly trading on the
CME bitcoin futures market or indirectly by trading outside of the
CME bitcoin futures market. As such, when the CME shares its
surveillance information with Arca, the information would assist in
detecting and deterring fraudulent or manipulative misconduct
related to the non-cash assets held by the proposed ETP.\41\
---------------------------------------------------------------------------

    \41\ See Teucrium Approval at 21679.

    CME Bitcoin Futures pricing is based on pricing from spot bitcoin
markets. The statement from the Teucrium Approval that ``CME's
surveillance can reasonably be relied upon to capture the effects on
the CME bitcoin futures market caused by a person attempting to
manipulate the proposed futures ETP by manipulating the price of CME
bitcoin futures contracts . . . indirectly by trading outside of the
CME bitcoin futures market,'' makes clear that the Commission believes
that CME's surveillance can capture the effects of trading on the
relevant spot markets on the pricing of Bitcoin Futures. If CME is able
to detect such attempts at manipulation in the complex and
interconnected spot bitcoin market, how would such an ability to detect
attempted manipulation and the utility in sharing that information with
the listing exchange apply only to Bitcoin Futures ETFs and not Spot
Bitcoin ETPs? Stated a different way, given that there is significant
trading volume on numerous bitcoin exchanges that are not part of the
CME CF Bitcoin Reference Rate and that arbitrage opportunities across
bitcoin exchanges means that such trading volume will influence spot
bitcoin prices across the market and, despite this, the Commission
still believes that CME can detect attempted manipulation of the
Bitcoin Futures through ``trading outside of the CME bitcoin futures
market,'' it is clear that such ability would apply equally to both
Bitcoin Futures ETFs and Spot Bitcoin ETPs. To take it a step further,
such an ability would also seem to be a strong indication that the CME
Bitcoin Futures market represents a regulated market of significant
size. The Exchange agrees with the Commission on this point and notes
that the pricing mechanism applicable to the Shares is similar to that
of the CME CF Bitcoin Futures.
    Further to this point, a Bitcoin Futures ETF is potentially more
susceptible to potential manipulation than a Spot Bitcoin ETP that
offers only in-kind creation and redemption because settlement of CME
Bitcoin Futures pricing (and thus the value of the underlying holdings
of a Bitcoin Futures ETF) occurs at a single price derived from spot
bitcoin pricing, while shares of a Spot Bitcoin ETP would represent
interest in bitcoin directly and authorized participants for a Spot
Bitcoin ETP (as proposed herein) would be able to source bitcoin from
any exchange and create or redeem with the applicable trust regardless
of the price of the underlying index. It is not logically possible to
conclude that the CME Bitcoin Futures market represents a significant
market for a futures-based product, but also conclude that the CMR
Bitcoin Futures market does not represent a significant market for a
spot-based product.
    In addition to potentially being more susceptible to manipulation
than a Spot Bitcoin ETP, the structure of Bitcoin Futures ETFs provides
negative outcomes for buy and hold investors as compared to a Spot
Bitcoin ETP.\42\ Specifically, the cost of rolling CME Bitcoin Futures
contracts will cause the Bitcoin Futures ETFs to lag the performance of
bitcoin itself and, at over a billion dollars in assets under
management, would cost U.S. investors significant amounts of money on
an annual basis compared to Spot Bitcoin ETPs. Such rolling costs would
not be required for Spot Bitcoin ETPs that hold bitcoin. Further,
Bitcoin Futures ETFs could potentially hit CME position limits, which
would force a Bitcoin Futures ETF to invest in non-futures assets for
bitcoin exposure and cause potential investor confusion and lack of
certainty about what such Bitcoin Futures ETFs are actually holding to
try to get exposure to bitcoin, not to mention completely changing the
risk profile associated with such an ETF. While Bitcoin Futures ETFs
represent a useful trading tool, they are clearly a sub-optimal
structure for U.S. investors that are looking for long-term exposure to
bitcoin that will, based on the calculations above, unnecessarily cost
U.S. investors significant amounts of money every year compared to Spot
Bitcoin ETPs and the Exchange believes that any proposal to list and
trade a Spot Bitcoin ETP should be reviewed by the Commission with this
important investor protection context in mind.
---------------------------------------------------------------------------

    \42\ See e.g., ``Bitcoin ETF's Success Could Come at
Fundholders' Expense,'' Wall Street Journal (October 24, 2021),
available at: https://www.wsj.com/articles/bitcoin-etfs-success-could-come-at-fundholders-expense-11635080580; ``Physical Bitcoin
ETF Prospects Accelerate,'' ETF.com (October 25, 2021), available
at: https://www.etf.com/sections/blog/physical-bitcoin-etf-prospects-shine?nopaging=1&__cf_chl_jschl_tk__=pmd_JsK.fjXz9eAQW9zol0qpzhXDrrlpIVdoCloLXbLjl44-1635476946-0-gqNtZGzNApCjcnBszQql.
---------------------------------------------------------------------------

    Based on the foregoing, the Exchange and Sponsor believe that any
objective review of the proposals to list Spot Bitcoin ETPs compared to
the Bitcoin Futures ETFs and the Bitcoin Futures Approvals would lead
to the conclusion that Spot Bitcoin ETPs should be

available to U.S. investors and, as such, this proposal and other
comparable proposals to list and trade Spot Bitcoin ETPs should be
approved by the Commission. Stated simply, U.S. investors will continue
to lose significant amounts of money from holding Bitcoin Futures ETFs
as compared to Spot Bitcoin ETPs, losses which could be prevented by
the Commission approving Spot Bitcoin ETPs. Additionally, any concerns
related to preventing fraudulent and manipulative acts and practices
related to Spot Bitcoin ETPs would apply equally to the spot markets
underlying the futures contracts held by a Bitcoin Futures ETF. While
the 1940 Act does offer certain investor protections, those protections
do not relate to mitigating potential manipulation of the holdings of
an ETF in a way that warrants distinction between Bitcoin Futures ETFs
and Spot Bitcoin ETPs. To be clear, both the Exchange and Sponsor
believe that the Bitcoin Futures market is a regulated market of
significant size and that such manipulation concerns are mitigated as
described throughout this proposal. After issuing the Bitcoin Futures
Approvals which conclude the CME Bitcoin Futures market is a regulated
market of significant size as it relates to Bitcoin Futures, the only
consistent outcome would be approving Spot Bitcoin ETPs on the basis
that the CME Bitcoin Futures market is also a regulated market of
significant size as it relates to the bitcoin spot market. Given the
current landscape, approving this proposal (and others like it) and
allowing Spot Bitcoin ETPs to be listed and traded alongside Bitcoin
Futures ETFs would establish a consistent regulatory approach, provide
U.S. investors with choice in product structures for bitcoin exposure,
and offer flexibility in the means of gaining exposure to bitcoin
through transparent, regulated, U.S. exchange-listed vehicles.
Spot and Proxy Exposure to Bitcoin
    Exposure to bitcoin through an ETP also presents certain advantages
for retail investors compared to buying spot bitcoin directly. The most
notable advantage from the Sponsor's perspective is the elimination of
the need for an individual retail investor to either manage their own
private keys or to hold bitcoin through a cryptocurrency exchange that
lacks sufficient protections. Typically, retail exchanges hold most, if
not all, retail investors' bitcoin in ``hot'' (internet-connected)
storage and do not make any commitments to indemnify retail investors
or to observe any particular cybersecurity standard. Meanwhile, a
retail investor holding spot bitcoin directly in a self-hosted wallet
may suffer from inexperience in private key management (e.g.,
insufficient password protection, lost key, etc.), which could cause
them to lose some or all of their bitcoin holdings. Thus, with respect
to custody of the Trust's bitcoin assets, the Trust presents advantages
from an investment protection standpoint for retail investors compared
to owning spot bitcoin directly.
    Finally, as described in the Background section above, a number of
operating companies largely engaged in unrelated businesses--such as
Tesla (a car manufacturer) and MicroStrategy (an enterprise software
company)--have announced significant investments in bitcoin. Without
access to bitcoin exchange-traded products, retail investors seeking
investment exposure to bitcoin may end up purchasing shares in these
companies in order to gain the exposure to bitcoin that they seek.\43\
In fact, mainstream financial news networks have written a number of
articles providing investors with guidance for obtaining bitcoin
exposure through publicly traded companies (such as MicroStrategy,
Tesla, and bitcoin mining companies, among others) instead of dealing
with the complications associated with buying spot bitcoin in the
absence of a bitcoin ETP.\44\ Such operating companies, however, are
imperfect bitcoin proxies and provide investors with partial bitcoin
exposure paired with a host of additional risks associated with
whichever operating company they decide to purchase. Additionally, the
disclosures provided by the aforementioned operating companies with
respect to risks relating to their bitcoin holdings are generally
substantially smaller than the registration statement of a bitcoin ETP,
including the Registration Statement, typically amounting to a few
sentences of narrative description and a handful of risk factors.\45\
In other words, investors seeking bitcoin exposure through publicly
traded companies are gaining only partial exposure to bitcoin and are
not fully benefitting from the risk disclosures and associated investor
protections that come from the securities registration process.
---------------------------------------------------------------------------

    \43\ In August 2017, the Commission's Office of Investor
Education and Advocacy warned investors about situations where
companies were publicly announcing events relating to digital coins
or tokens in an effort to affect the price of the company's publicly
traded common stock. See https://www.sec.gov/oiea/investor-alerts-and-bulletins/ia_icorelatedclaims.
    \44\ See, e.g., ``7 public companies with exposure to bitcoin''
(February 8, 2021) available at: https://finance.yahoo.com/news/7-public-companies-with-exposure-to-bitcoin-154201525.html; and ``Want
to get in the crypto trade without holding bitcoin yourself? Here
are some investing ideas'' (February 19, 2021) available at: https://www.cnbc.com/2021/02/19/ways-to-invest-in-bitcoin-without-holding-the-cryptocurrency-yourself-.html.
    \45\ See, e.g., Tesla 10-K for the year ended December 31, 2020,
which mentions bitcoin just nine times: https://www.sec.gov/ix?doc=/Archives/edgar/data/1318605/000156459021004599/tsla-10k_20201231.htm.
---------------------------------------------------------------------------

Bitcoin Futures
    CME began offering trading in Bitcoin Futures in 2017. Each
contract represents five bitcoin and is based on the CME CF Bitcoin
Reference Rate.\46\ The contracts trade and settle like other cash-
settled commodity futures contracts. Nearly every measurable metric
related to Bitcoin Futures has generally trended up since launch,
although certain notional volume calculations have decreased roughly in
line with the decrease in the price of bitcoin. For example, there were
143,215 Bitcoin Futures contracts traded in April 2023 (approximately
$20.07 billion) compared to 193,182 ($5 billion), 104,713 ($3.9
billion) 118714 ($42.7b billion), and 111,964 ($23.2b billion)
contracts traded in April 2019, April 2020, and April 2021, and April
2022, respectively.\47\
---------------------------------------------------------------------------

    \46\ The CME CF Bitcoin Reference Rate is based on a publicly
available calculation methodology based on pricing sourced from
several crypto exchanges and trading platforms, including Bitstamp,
Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
    \47\ Source: CME, Yahoo Finance 4/30/23.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TN19JY23.167

    The number of large open interest holders \48\ and unique accounts
trading Bitcoin Futures have both increased, even in the face of
heightened Bitcoin price volatility.
---------------------------------------------------------------------------

    \48\ 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] TN19JY23.168

[GRAPHIC] [TIFF OMITTED] TN19JY23.169

BILLING CODE 8011-01-C
    The Sponsor further believes that publicly available research,
including research done as part of rule filings proposing to list and
trade shares of Spot Bitcoin ETPs, corroborates the overall trend
outlined above and supports the thesis that the Bitcoin Futures pricing
leads the spot market and, thus, a person attempting to manipulate the
Shares would also have to trade on that market to manipulate the ETP.
Specifically, the Sponsor believes that such research indicates that
bitcoin futures lead the bitcoin spot market in price formation.\49\
---------------------------------------------------------------------------

    \49\ See Exchange Act Releases No. 94080 (January 27, 2022), 87
FR 5527 (April 12, 2022) (specifically ``Amendment No. 1 to the
Proposed Rule Change To List and Trade Shares of the Wise Origin
Bitcoin Trust Under BZX Rule 14.11(3)(4), Commodity-Based Trust
Shares''); 94982 (May 25, 2022), 87 FR 33250 (June 1, 2022); 94844
(May 4, 2022), 87 FR 28043 (May 10, 2022); and 93445 (October 28,
2021), 86 FR 60695 (November 3, 2021). See also Hu, Y., Hou, Y. and
Oxley, L. (2019). ``What role do futures markets play in Bitcoin
pricing? Causality, cointegration and price discovery from a time-
varying perspective'' (available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC7481826/). This academic research paper concludes
that ``There exist no episodes where the Bitcoin spot markets
dominates the price discovery processes with regard to Bitcoin
futures. This points to a conclusion that the price formation
originates solely in the Bitcoin futures market. We can, therefore,
conclude that the Bitcoin futures markets dominate the dynamic price
discovery process based upon time-varying information share
measures. Overall, price discovery seems to occur in the Bitcoin
futures markets rather than the underlying spot market based upon a
time-varying perspective.''
---------------------------------------------------------------------------

Section 6(b)(5) and the Applicable Standards
    The Commission has approved numerous series of Trust Issued
Receipts,\50\ including Commodity-Based Trust Shares,\51\ to be listed
on U.S. national securities exchanges. In order for any proposed rule
change from an exchange to be approved, the Commission must determine
that, among other things, the proposal is consistent with the
requirements of Section 6(b)(5) of the Act, specifically including: (i)
the requirement that a national securities exchange's rules are
designed to prevent fraudulent and manipulative acts and practices;
\52\ and (ii) the requirement that an exchange proposal be designed, in
general, to protect investors and the public interest. The Exchange
believes that this proposal is consistent with the requirements of
Section 6(b)(5) of the Act and that this filing sufficiently
demonstrates that the CME Bitcoin Futures market represents a regulated
market of significant size and that, on the whole, the manipulation
concerns previously articulated by the Commission are sufficiently
mitigated to the point that they are outweighed by quantifiable
investor protection issues that would be resolved by approving this
proposal.
---------------------------------------------------------------------------

    \50\ See Exchange Rule 14.11(f).
    \51\ Commodity-Based Trust Shares, as described in Exchange Rule
14.11(e)(4), are a type of Trust Issued Receipt.
    \52\ As the Exchange has stated in a number of other public
documents, it continues to believe that bitcoin is resistant to
price manipulation and that ``other means to prevent fraudulent and
manipulative acts and practices'' exist to justify dispensing with
the requisite surveillance sharing agreement. The geographically
diverse and continuous nature of bitcoin trading render it difficult
and prohibitively costly to manipulate the price of bitcoin. The
fragmentation across bitcoin platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin
prices through continuous trading activity challenging. To the
extent that there are bitcoin exchanges engaged in or allowing wash
trading or other activity intended to manipulate the price of
bitcoin on other markets, such pricing does not normally impact
prices on other exchange because participants will generally ignore
markets with quotes that they deem non-executable. Moreover, the
linkage between the bitcoin markets and the presence of arbitrageurs
in those markets means that the manipulation of the price of bitcoin
price on any single venue would require manipulation of the global
bitcoin price in order to be effective. Arbitrageurs must have funds
distributed across multiple trading platforms in order to take
advantage of temporary price dislocations, thereby making it
unlikely that there will be strong concentration of funds on any
particular bitcoin exchange or OTC platform. As a result, the
potential for manipulation on a trading platform would require
overcoming the liquidity supply of such arbitrageurs who are
effectively eliminating any cross-market pricing differences.
---------------------------------------------------------------------------

(i) Designed To Prevent Fraudulent and Manipulative Acts and Practices
    In order to meet this standard in a proposal to list and trade a
series of Commodity-Based Trust Shares, the Commission requires that an
exchange demonstrate that there is a comprehensive surveillance-sharing
agreement in place \53\ with a regulated

market of significant size. Specifically, the Commission has previously
stated that:
---------------------------------------------------------------------------

    \53\ As previously articulated by the Commission, ``The standard
requires such surveillance-sharing agreements since ``they provide a
necessary deterrent to manipulation because they facilitate the
availability of information needed to fully investigate a
manipulation if it were to occur.'' The Commission has emphasized
that it is essential for an exchange listing a derivative securities
product to enter into a surveillance- sharing agreement with markets
trading underlying securities for the listing exchange to have the
ability to obtain information necessary to detect, investigate, and
deter fraud and market manipulation, as well as violations of
exchange rules and applicable federal securities laws and rules. The
hallmarks of a surveillance-sharing agreement are that the agreement
provides for the sharing of information about market trading
activity, clearing activity, and customer identity; that the parties
to the agreement have reasonable ability to obtain access to and
produce requested information; and that no existing rules, laws, or
practices would impede one party to the agreement from obtaining
this information from, or producing it to, the other party.'' The
Commission has historically held that joint membership in the
Intermarket Surveillance Group (``ISG'') constitutes such a
surveillance sharing agreement. See Securities Exchange Act Release
No. 88284 (February 26, 2020), 85 FR 12595 (March 3, 2020) (SR-
NYSEArca-2019-39) (the ``Wilshire Phoenix Disapproval'').

. . . 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.
That is because, where a market of significant size exists with
respect to derivatives on the asset underlying the commodity-trust
ETP, the Commission believes that there is a reasonable likelihood
that a person attempting to manipulate the ETP by manipulating the
underlying spot market would also have to trade in the derivatives
market in order to succeed, since arbitrage between the derivative
and spot markets would tend to counter an attempt to manipulate the
spot market alone.\54\
---------------------------------------------------------------------------

    \54\ Self-Regulatory Organizations; Bats BZX Exchange, Inc.;
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, 83 FR 37579, 37600
(Aug 1, 2018).

    The Commission has provided illustrative guidance in interpreting
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 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.'' \55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

    The Commission has stated in a prior disapproval order that ``the
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.''
\56\ The Commission further noted that ``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.'' \57\
---------------------------------------------------------------------------

    \56\ Self-Regulatory Organizations; NYSE Arca, Inc.; 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, 84-FR 55382, 55411 (Oct 16,
2019).
    \57\ Id.
---------------------------------------------------------------------------

    The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\58\
---------------------------------------------------------------------------

    \58\ See Winklevoss Order at 37580. The Commission has also
specifically noted that it ``is not applying a `cannot be
manipulated' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.''
Id. at 37582.
---------------------------------------------------------------------------

    The Exchange believes that this proposal is consistent with the
requirements of Section 6(b)(5) of the Act and that the Sponsor's
analysis demonstrates that the Exchange can meet such requirements in
that the CME Bitcoin Futures Market (i) is a regulated market; (ii) has
a comprehensive surveillance-sharing agreement with the Exchange; and
(iii) satisfies the Commission's ``significant market'' definition.
1.The CME Bitcoin Futures Market Is a Regulated Market and ISG Member
    The CME is regulated by the CFTC and is a member of the Intermarket
Surveillance Group (``ISG''), which was established to provide a
framework for sharing information and coordinating regulatory efforts
among exchanges trading securities and related products and to address
potential intermarket manipulations and trading abuses. The Commission
has previously stated that membership by a regulated futures exchange
in ISG is sufficient to meet the surveillance-sharing requirement.\59\
Both the Exchange and CME are members of the Intermarket Surveillance
Group (the ``ISG'').\60\
---------------------------------------------------------------------------

    \59\ See Winklevoss Order at 37594.
    \60\ For a list of the current members and affiliate members of
ISG, see www.isgportal.com.
_____________________________________-

2.The CME Bitcoin Futures Market Is a Market of Significant Size
    Based on the Commission's prior guidance, Sponsor conducted a
detailed price discovery study through its lead-lag analysis of bitcoin
spot and futures trading across markets located globally. As discussed
below, Sponsor's analysis concludes that the CME Bitcoin Futures market
is consistently the leading market for price discovery across USD
bitcoin markets located globally, including bitcoin spot markets and
offshore, unregulated bitcoin futures markets. Thus, Sponsor's analysis
supports the conclusion that there is a reasonable likelihood that a
person attempting to manipulate the Shares would also have to trade on
the CME Bitcoin Futures market to manipulate the Trust. Sponsor also
conducted an additional lead-lag analysis including data from a
recently launched bitcoin futures-based ETF to evaluate the likelihood
of whether trading in the Trust could become the predominant influence
on prices in the CME Bitcoin Futures market and concluded that it is
unlikely that trading in the Trust would be the predominant influence
on prices in the CME Bitcoin Futures market.
    Sponsor's analysis on price discovery in the Bitcoin spot and
futures markets is described below.
Data Description and Sources
    Sponsor obtained tick level trade data for Bitcoin spot prices and
futures prices used in its analysis from Coin Metrics for the period
spanning from January 1, 2019, to March 31, 2021. Table 1 summarizes
the dataset by exchange, market type, and quote currency.
    Sponsor aggregated the tick level trades to the one second floor
level using a volume weighted average price (VWAP) approach. Compared
to the daily/minute level granularity of timestamps, Sponsor believes
the second level can capture more intra-day price dynamics and is more
useful here to investigate price discovery, as both arbitrage and
manipulative activities can occur within a matter of seconds. To
preprocess the tick level trade data to second level granularity, two
typical methods are often used. One is to use the last observed trade
price within a second, and the other is to use VWAP within a second.
Since multiple trades can occur with simultaneous timestamps but with
different transaction prices, a VWAP can represent the price
information from each trade instead of randomly selecting the last
price. It is worth mentioning that although the price time series' have
second level resolution (timestamped to seconds), this does not mean
that the price time series' values are evenly spaced at each second
since a market may not have trades within every second. Given this non-
synchronous nature of trading and the potential model issues arising
from utilizing data

with numerous imputed values, Sponsor's analysis leverages a method
that eliminates the need for imputation for the timestamps without
trades. This approach allows the model inputs of price time series from
different markets to stay non-synchronous without further data
processing.
    In order to exclude any impacts caused by exchange rate movements,
Sponsor limited the dataset to BTC-USD and BTC-USDT trades. Markets
with an average correlation lower than 0.1 to other bitcoin markets, in
any given quarter, were removed from the analysis. For futures markets,
Sponsor included both ordinary futures and perpetuals. Contract
frequencies were validated and recorded via respective exchange
websites, and, for CME data, the sponsor compared data from the
exchange directly with data provided by Coin Metrics to verify
accuracy.
    Within the ordinary futures market, one exchange, quote and
contract lifespan combination can often have same-day trading on
contracts with different expiration dates. To remove price gaps in this
market, Sponsor constructed a continuous time-series of prices by
choosing the contract with the highest volume per day within an
exchange, quote, and contract lifespan combination. For each
combination, successive contracts are backwards adjusted using the
price difference between the two contracts at the time of rollover.
BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TN19JY23.170

Research Design
    Price discovery between spot and futures markets plays an important
role in financial research due to its association with market maturity.
In theory, the futures market is expected to lead price discovery in
established asset classes due to its inherent features, such as lower
transaction fees, built-in leverage, unconstrained short-selling, and
greater transparency. Since bitcoin futures contracts began trading on
regulated exchanges in December 2017, several academic and market
research papers have studied spot-futures price discovery in bitcoin
markets. Sponsor started its research by reviewing the existing
literature. Table 2 summarizes the metrics, data ranges, frequency
levels, and conclusions for thirteen papers.

[GRAPHIC] [TIFF OMITTED] TN19JY23.171

[GRAPHIC] [TIFF OMITTED] TN19JY23.172

BILLING CODE 8011-01-C
    Sponsor noted that each of the studies reviewed used metrics
derived from the Vector Error Correction Model (VECM) or an extension
of VECM to examine price discovery. Within the column of metrics,
Information Share (IS) proposed by Hasbrouk (1995) and Component Share
(CS) pioneered by Gonzalo and Granger (1995) are mostly used. Hasbrouk
transforms the VECM into a vector moving average with a common factor
component and transitory component and defines the metric IS to measure
the proportion of the variance of the permanent component of prices
coming from each market with Cholesky factorization. The IS is not
unique if switching the order of input price data of the underlying two
markets. To overcome it, Lien and Shrestha (2009) use eigenvalue
decomposition instead of Cholesky factorization--this metric is called
Modified Information Share. Both Information Share and Modified
Information Share are used for pair-wise analysis. The extension of
Modified Information Share to more than two markets is called
Generalized Information Share (Lien and Shrestha, 2014). Component
Share is calculated from the normalized orthogonal coefficients to the
vector of the lagged error correlation term in the VECM. Fractional
Component Share is derived similarly to CS but from a version of VECM
that uses a fractional difference operator instead of the first order
difference operator. Information Leadership Share (Yan and Zivot, 2010)
and Information Leadership Share (Putnins, 2013) combine Information
Share and Component Share non-linearly.
    Although the metrics used in reviewed studies are similar, the
conclusions from these papers are mixed as to which markets lead or lag
in price discovery. Buccheri (2021) \61\ discussed the limitations for
VECM derived metrics and noted that when price observations are sparse
(See CME price observations in Figure 1 as an example), a lot of zero
returns are produced through imputation; therefore, the time series of
prices strongly deviate from the standard semi-martingale assumption
and sample covariances can be downward biased. The authors in Buccheri
(2021) conclude that when the prices have a high level of sparsity, the
VECM is clearly mis-specified and the estimates are potentially biased.
---------------------------------------------------------------------------

    \61\ Buccheri, Giuseppe, Giacomo Bormetti, Fulvio Corsi, and
Fabrizio Lillo. ``Comment on: Price discovery in high resolution.''
Journal of Financial Econometrics 19, no. 3 (2021): 439-451. https://doi.org/10.1093/jjfinec/nbz008. The authors comment on the
limitations of using information share within markets with trades on
high resolution frequencies. The paper illustrates why the
application of a VECM methodology like information share would be
mis-specified and the OLS estimates could be biased because of high
sparsity in the data.

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

[GRAPHIC] [TIFF OMITTED] TN19JY23.173

    This conclusion in Buccheri (2021) provides theorical support on
why VECM derived metrics are not suitable to use when the underlying
data has high level of sparsity but does not quantify the actual impact
in practice. In ``Suitable Price Discovery Measurement of Bitcoin Spot
and Futures Markets'' \62\ (Robertson and Zhang, 2022), the authors
demonstrate that the conclusions of Buccheri (2019) are of high
importance by quantifying the impact of sparsity. within bitcoin
markets.
---------------------------------------------------------------------------

    \62\ Robertson, Kevin, and Jiani Zhang. (2022) ``Suitable Price
Discovery Measurement of Bitcoin Spot and Futures Markets.''
Available at SSRN: https://ssrn.com/abstract=4012165 or http://dx.doi.org/10.2139/ssrn.4012165.
---------------------------------------------------------------------------

    The authors show IS and CS are sensitive to input data's level of
sparsity with numerical experiments. When the sparsity level is about
10% for a designed-to-lead market, IS and CS show the known-leading
market clearly contributes a majority to price discovery. However, as
the sparsity is increased, the known-leading market begins to
contribute less to price discovery and, when the level of sparsity is
higher than 30%, using IS and CS produces mixed results or the opposite
conclusion of what is true.
    Buccheri explains the effect of using VECM based metrics with
violation of model assumptions from theorical perspective, and
Robertson and Zhang show the effect with numerical experiments and
provide empirical evidence about to what extent using VECM can give
unreliable results. Both emphasize that sparsity level is important
regarding price discovery measurement using VECM based metrics.
    Although Robertson and Zhang state that the choice of market to
create the experiment data does not change the conclusion, Sponsor
replicated their experiment using a different market to provide
additional evidence on the impact of sparsity on VECM based metrics.
Sponsor calculates the IS and CS every day from Q1 2019 through Q1 2021
(821 days) between the artificially leading (by 3 seconds) version of
the BitMEX USD perpetual futures market at 9 different levels of
sparsity (measured by the percent of random data removed, 10%
increments starting at 10% and ending at 90%) and the original BitMEX
USD perpetual futures market. To satisfy the VECM assumption that
prices/returns are synchronous, Sponsor used the typical and commonly
used form of forward filling using previous second values. Figure 2
shows the distributions of daily IS and CS values for the designed-to-
lead market. The x axis is the sparsity level, and the y axis is IS/CS.
The plotted results show that, as the level of sparsity is increased,
the known leading market begins to contribute less to price discovery
causing mixed results (both IS and CS dropped from above 0.8 to less
than 0.2) and the opposite conclusion of what is true. The market is
considered leading when IS/CS is above 0.5.

[GRAPHIC] [TIFF OMITTED] TN19JY23.174

    The observations from Sponsor's experiment confirm the conclusions
of Buccheri (2019) and Robertson and Zhang (2022) that VECM derived
metrics are sensitive to the level of sparsity within market data.
    Robertson and Zhang (2022) show that only about half of the markets
included in the quarter of 2021 have trades for every second increment.
Taking the CME USD futures market, Coinbase USD spot market, and BitMEX
USD perpetual futures markets as representatives of bitcoin futures
market, spot market, and perpetual market, Table 3 shows their
comparison in average time in seconds between trades in each quarter.
In the first quarter of 2019, on average, CME records a trade every 111
seconds (~2 minutes) while Coinbase records a trade every 3 seconds. In
more recent time periods, the sparsity level decreases for CME, but is
still 25 times higher than the Coinbase USD spot market and BitMEX USD
perpetual futures market in the first quarter of 2021.
[GRAPHIC] [TIFF OMITTED] TN19JY23.175

    Due to the high sparsity of CME Bitcoin futures data, the Sponsor
attributes the ``mixed results'' in previous academic studies that have
failed to demonstrate that the CME bitcoin futures market constitutes a
market of significant size to the problems associated with using
econometric models without considering the suitability. When analyzing
information flow with daily data that has low sparsity level, the
analysis using metrics derived from VECM (e.g., Hu, et al., 2019) is
convincing. However, for analyzing intraday information flow and
accounting for the varying levels of sparsity among the bitcoin market,
the sponsor believes the framework of correlation-based lead-lag
analysis using the Hayashi-Yoshida (HY) estimator \63\ to compute
correlation and its extension by other academic researchers, including
Hoffman (2013) \64\ and Huth (2011),\65\ to obtain the lead-lag seconds
and lead-lag ratio is more suitable.
---------------------------------------------------------------------------

    \63\ Hayashi, Takaki, and Nakahiro Yoshida. ``On covariance
estimation of non-synchronously observed diffusion processes.''
Bernoulli 11, no. 2 (2005): 359-379. http://www.jstor.org/stable/3318933. The authors proposed a novel method (HY estimator) of
estimating the covariance of two diffusion processes when they are
observed only at discrete times in a non-synchronous manner. This
methodology addresses the issue that the traditional realized
covariance estimator encounters, which is that the choice of regular
interval size and data interpolation scheme can lead to unreliable
estimation. The new method Hayashi and Yoshida introduced in this
paper is free from any interpolation and therefore avoids the bias
and other problems caused by it.
    \64\ Hoffmann, Marc, Mathieu Rosenbaum, and Nakahiro Yoshida.
``Estimation of the lead-lag parameter from non-synchronous data.''
Bernoulli 19, no. 2 (2013): 426-461. http://www.jstor.org/stable/23525731. The authors propose a methodology for modeling the lead-
lag effect between two financial assets with non-synchronous data
based on Hayashi and Yoshida's work (2015). It has been applied in
various price discovery research publications. The Sponsor's
analysis utilized this methodology to obtain pairwise lead-lag
seconds between two markets.
    \65\ Huth, Nicolas, and Fr[eacute]d[eacute]ric Abergel. ``High
frequency lead/lag relationships--empirical facts.'' Journal of
Empirical Finance 26 (2014): 41-58. https://doi.org/10.1016/j.jempfin.2014.01.003.
---------------------------------------------------------------------------

    Lead-lag seconds and lead-lag ratio are the typical output metrics
in correlation-based lead-lag analysis. The former measures the
relative time in lead or lag between two markets and the latter
measures the relative strength of the lead-lag relationship between two
markets. They are both free from any imputation or sampling within non-
synchronous and/or infrequent data and have proven to be useful in
price discovery research in other markets. Dao (2018) \66\ applied the
Hayashi-Yoshida estimator in a lead-lag framework with these two
metrics on price discovery

research of the S&P 500 index and the two most liquid ETFs that track
it. This academic study is the first to analyze the effect of
information arrival on the lead-lag relationship among related spot
instruments and concludes that sophisticated investors have a more
significant effect on the lead-lag relationship. The analysis from this
study confirms that using the Hayashi-Yoshida estimator in a lead-lag
framework is suitable for analyzing high frequency, tick level, non-
synchronous data even timestamped to milliseconds. Sponsor notes that
there is academic research studying high-frequency lead-lag
relationships between multiple bitcoin spot markets using the Hayashi-
Yoshida estimator with lead-lag seconds and lead-lag ratio from Schei
(2019).\67\ The suitability test performed by Robertson and Zhang
(2022) shows that these two metrics are not sensitive to the level of
sparsity within markets. Their experiment shows that the accuracy of
lead-lag seconds is consistent across the varying levels of sparsity
and the lead-lag ratio moves closer to 1 (i.e., provides less certainty
about the result) when the level of sparsity increases. Lead-lag ratio
quantifies how strong the relationship is, and the strength can be
considered as the confidence level associated with the conclusion that
one market leads or lags another. The closer the lead-lag ratio is to
1, the less certain one can conclude the relationship is of one
market's lead/lag over the other market.
---------------------------------------------------------------------------

    \66\ Dao, Thong Minh, Frank McGroarty, and Andrew Urquhart.
``Ultra-high-frequency lead-lag relationship and information
arrival.'' Quantitative Finance 18, no. 5 (2018): 725-735. https://doi.org/10.1080/14697688.2017.1414484.
    \67\ Schei, Norheim Schei. ``High Frequency Lead-Lag
Relationships in the Bitcoin Market.'' (unpublished master's thesis,
2019). Copenhagen Business School, Copenhagen, Denmark.
---------------------------------------------------------------------------

    Again, Sponsor replicated the suitability test using the HY
estimator in a lead-lag framework performed by Robertson and Zhang
(2022) but on the BitMEX USD perpetual futures market. As mentioned by
the authors, no interpolation is needed in this version of the
experiment because the HY estimator computes directly from non-
synchronous data. Figure 3 shows the distribution of daily lead-lag
seconds and daily lead-lag ratios between the artificially leading and
sparse versions of the BitMEX USD perpetual futures market and the
original BitMEX USD perpetual futures market.
[GRAPHIC] [TIFF OMITTED] TN19JY23.176

    The observations from Sponsor's experiment match those of Robertson
and Zhang (2022) that the HY estimator used in a lead-lag framework is
not sensitive to the level of sparsity within market data. The
distribution of lead-lag seconds shows that the time shift parameter
that maximizes the HY estimator is consistently +3 seconds--which is
the amount of time the artificial market was advanced by. The
distribution of the lead-lag ratios are consistently above 1, showing
that the leading relationship of the artificial market over the
original is strong. As Robertson and Zhang also noted, the lead-lag
ratios decay towards the level of 1 with increasing levels of sparsity,
which matches the expectation that the lead-lag relationship becomes
weak when one of the markets rarely has data.
    Sponsor's analysis expands the research of Schei by using the
Hayashi-Yoshida estimator with a lead-lag framework and the same
metrics but on both bitcoin spot and futures markets. It is worth
mentioning, the lead-lag framework is different than a VECM based
approach. A VECM based approach, for example IS, measures the
proportion of the variance of the permanent component of prices coming
from each market and the total variance and the variance proportion
change when the number of markets included changes. Therefore,
``omitting substantial information flows from other markets [by using a
two-dimensional methodology] can produce misleading results'', which
Alexander and Heck (2020) \68\ state in their study as the motivation
to use Generalized Information Share instead of the original
Information Share metric. This is a limitation for two-dimensional VECM
based metrics and does not apply to Sponsor's correlation-based lead-
lag analysis. This is because VECM based metrics measure the proportion
of price discovery among markets while a lead-lag framework measures
how much time one market leads/lags another without the need to compute
the total variance of the permanent component of prices.
---------------------------------------------------------------------------

    \68\ C. Alexander & D. Heck ``Price discovery in Bitcoin: The
impact of unregulated markets'', 50 J. Financial Stability 100776
(2020).
---------------------------------------------------------------------------

Lead-Lag Analysis
    In the lead-lag analysis, Sponsor examined the pairwise lead-lag
relationship within the spot market and futures market, as well as
across them. For each pair, Sponsor computed the correlation
coefficients using the HY estimator between one market price time
series and a second market price time series as well as timestamp-
adjusted (leading/lagging) versions of the second market to find the
time delta that maximizes their correlation. The range of time deltas
is from -N seconds to N seconds in one second increments. In the
Sponsor's analysis, the parameter N is set as 15. In the Sponsor's
analysis, the parameter N is set as 15. For illustration below, Sponsor
uses the pair of CME USD Futures (denoted as price

time series X) and Coinbase USD Spot (denoted as price time series Y)
as an example to describe the process.
    Step 1: Fix the timestamp of CME and adjust the timestamps of
Coinbase from N seconds lagging to N seconds leading. Figure 4 shows
this process with time deltas equal to 1 and -1 for illustration
purpose.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TN19JY23.177

    Step 2: Compute the correlation coefficients between CME price time
series and each of timestamp-adjusted time series of Coinbase with l
seconds (l [isin] [-N, N]) lead/lag using HY estimator. The correlation
coefficient is defined as (Hayashi & Yoshida 2005):
[GRAPHIC] [TIFF OMITTED] TN19JY23.178

    The numerator of p is the covariance between CME and Coinbase,
which equates to the sum pf every product of price changes that share a
time overlap. Figure 5 shows this process with a simple example.

[GRAPHIC] [TIFF OMITTED] TN19JY23.179

    Step 3: Collect the correlation coefficients with different lead-
lag seconds as a correlation curve and search for the value lmax from -
N to N that maximizes their correlation. Meanwhile, compute the lead-
lag ratio between CME and Coinbase, llr, to measure the strength of the
lead-lag relationship (Huth & Abergel 2012). It is defined as
[GRAPHIC] [TIFF OMITTED] TN19JY23.180

    The further the llr is from 1, the stronger the relationship is of
one market's lead/lag over the other market. The llr is used in
conjuntion with the HY correlation coefficient and the lead-lag seconds
to provide a more comprehensive analysis. If llr [isin] [0.95, 1.05] or
lmax is zero, we conclude neither market leads. If llr is not in the
range [0.95, 1.05] and lmax is positive, CME leads Coinbase by lmax
seconds and vice versa. Figure 6 shows an example of the correlation
curve.
[GRAPHIC] [TIFF OMITTED] TN19JY23.181

    These three steps provide the pairwise lead-lag seconds between two
markets. To measure a market's overall price discovery leadership, the
results are aggregated by taking the average

lead-lag seconds it has with all other markets included in a quarter.
Conclusion of Reasonable Likelihood-Lead Lag Analysis
    Sponsor's results suggest that, out of the 20 spot markets and 26
futures markets analyzed, the CME bitcoin futures market plays the most
important role in price discovery during each quarter spanning from the
first quarter of 2019 to the first quarter of 2021. Figure 7 shows the
average pairwise lead-lag seconds between CME bitcoin futures and other
bitcoin markets with 95% confidence intervals using the calculations
introduced in previous session. The blue dots represent the CME's
average leading time in seconds and the black line represents the
confidence interval. All the blue dots are above 0 and only 6 markets
have lower confidence bounds slightly below 0; therefore, Sponsor
concludes the CME bitcoin futures market leads all other markets
included in the analysis.
[GRAPHIC] [TIFF OMITTED] TN19JY23.182

    Table 4 lists the detailed results for every pair of CME against
other markets with lead-lag seconds used to create Figure 7 along with
lead-lag ratios.

[GRAPHIC] [TIFF OMITTED] TN19JY23.183

    Additionally, Sponsor compared the CME bitcoin futures market's
leadership with other markets by aggregating each market's lead-lag by
taking the average of each markets lead-lag seconds over all other
markets in a quarter.
    Figure 8 shows that, while other category leaders can change rank
each quarter, they consistently rank below CME futures in average
seconds leading. This consistency, along with the Sponsor's inclusion
standards of strict overall average market correlations and
demonstrative lead-lag ratios, speaks to the strength of CME futures'
leadership

across spot and futures markets globally.\69\
---------------------------------------------------------------------------

    \69\ For more information, see Memorandum from the Division of
Trading and Markets regarding a September 8, 2021 meeting with
representatives from Fidelity Digital Assets, et al. (Sept. 8, 2021)
available at https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
[GRAPHIC] [TIFF OMITTED] TN19JY23.185

    Figure 9 shows the average lead over all other markets for each
market category leader by quarter. For example, the market leader
within the USD Futures category (which is consistently CME) leads all
other markets by an average of 5.8 seconds in Q1 2019.
[GRAPHIC] [TIFF OMITTED] TN19JY23.186

    Another observation from Figure 9 is that there is a clear decline
in seconds-leading through time for these market category leaders. As
discussed further below (Figure 10 & 11), this declining lead-lag time
does not mean that a particular market category leader's strength in
leadership is deteriorating, as it is not only evident for market
category leaders, but all markets, and suggests efficiency within the
bitcoin markets has continued to improve.
    The lead-lag relationships between and among bitcoin futures and
spot markets provide insights into the directional influences of
markets on price discovery, with the CME Bitcoin futures market playing
the most

important role in price discovery during each quarter spanning from the
first quarter of 2019 to the first quarter of 2021, as noted above.
Arbitrage between the CME Bitcoin futures market and spot markets would
tend to counter an attempt to manipulate the spot market alone. Thus,
the Sponsor's analysis supports the conclusion that there is a
reasonable likelihood that a person attempting to manipulate the Shares
would also have to trade on the CME Bitcoin futures market to
manipulate the ETP.
    Figure 10 shows that the absolute average of every market's overall
lead-lag seconds (average lead-lag seconds over all other markets) has
steadily decreased from the first quarter of 2019 to the first quarter
of 2021. This suggests that the efficiency within bitcoin markets has
continued to improve, and the window of arbitrage opportunity has
closed with increasing speed.
[GRAPHIC] [TIFF OMITTED] TN19JY23.187

    While average lead/lag among markets has decreased over time, this
does not mean that relative leadership among markets has decreased over
time. To understand relative leadership among markets during different
time periods, Sponsor standardizes each market's average lead/lag with
other markets by dividing the market's average lead with other markets
by the average of every market's absolute average lead with other
markets. This relative leadership score (RLS) of market x is defined
as:
[GRAPHIC] [TIFF OMITTED] TN19JY23.188

    The RLS of the CME bitcoin futures market indicates that the
strength of CME leadership has not deteriorated, shown in Figure 11.
The RLS for the CME USD futures market is relatively stable--indicating
that there is no deterioration in the strength of this market and even
a slight increase in strength during the last three quarters observed--
even the average lead/lag (the denominator of RLS plotted in Figure 10)
among markets has decreased over time.

[GRAPHIC] [TIFF OMITTED] TN19JY23.189

    To summarize, the top rank in average leading seconds and the
pairwise leading results with confidence intervals for the CME bitcoin
futures market, support the conclusion that there is a reasonable
likelihood that a person attempting to manipulate the Shares would also
have to trade on the CME bitcoin futures market to manipulate the ETP.
The RLS of the CME bitcoin futures market provides evidence that that
likelihood has stayed consistent while the efficiency within the
bitcoin markets has continued to improve.
3. Trading in the Shares Unlikely to be Predominant Influence on Prices
in CME Bitcoin Futures Market
    As described above, the Commission requires the Exchange to
conclude that it is unlikely that trading in the Shares would become
the predominant influence on prices in the CME Bitcoin Futures market.
In a recent approval order \70\ of a bitcoin-futures ETP, the
Commission concluded that it is unlikely that trading in the proposed
bitcoin-futures ETP would be the predominant influence on prices in the
CME bitcoin futures market. The Commission specifies as reasons for its
conclusion ``the maturation of the CME bitcoin futures market since its
inception in 2017-including, but not limited to, the overall size,
volume, liquidity, and number of years of trading in the CME bitcoin
futures market and evidence from the 1940 Act-registered Bitcoin
Futures ETFs''. Sponsor agrees with the Commission's remarks on the
maturation of the CME bitcoin futures market and would also add ``price
discovery leadership'', as discussed above, to the list of maturation
evidence. As evidence from the 1940 Act-registered Bitcoin Futures
ETFs, the Commission states it ``has neither observed any disruption to
the CME bitcoin futures market, nor any evidence that the Bitcoin
Futures ETFs have exerted dominant influence on CME bitcoin futures
prices.'' Through its own analysis, Sponsor again agrees with the
Commission's remarks and, as discussed below, also found that the level
of price discovery leadership associated with the CME bitcoin futures
market remained unchanged since the launch of Bitcoin Futures ETFs.
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    \70\ See Exchange Act Release No. 94620 (April 6, 2022), 87 FR
21676 (April 12, 2022) (the ``Teucrium Approval'') and 94853 (May 5,
2022) (collectively, with the Teucrium Approval, the ``Bitcoin
Futures Approvals'').
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    In considering the question of whether the proposed bitcoin-spot
ETP would be the predominant influence on prices in the CME bitcoin
futures market, Sponsor conducted a numerical experiment to best
estimate the effect since it is not feasible to directly evaluate the
effect for the proposed ETP before its existence. The experiment is
designed to observe whether the price discovery leadership of the CME
bitcoin futures market can be changed by a new market (specifically an
ETP) entering with high trade activity. If it is, it is reasonable to
assume that the proposed bitcoin-spot ETP could be the predominant
influence on prices in the CME bitcoin futures market if it has high
trade activity. However, if it is not, it is also reasonable to assume
that the proposed bitcoin-spot ETP would not be the predominant
influence. From the numerical experiment, Sponsor aims to demonstrate
that high trade activity or volume is not the key factor in price
discovery.
    Sponsor used trade data from a recently launched bitcoin futures-
based ETF, ProShares Bitcoin Strategy ETF (``BITO''), which caused high
trading activity after its launch, as the model in its experiment. BITO
is a Commission-registered ETF that is listed and traded on a U.S.
regulated national securities exchange and was launched on October 18,
2021. As described in its prospectus, BITO seeks to invest primarily in
CME Bitcoin futures contracts.
    Sponsor selected two periods, representing a regular period with
normal trading activity and a period with new information and
heightened trading activity (from approximately $15 billion to $34
billion) in the CME Bitcoin futures market as seen from Figure 12. The
experiment is to compare whether the leadership of CME increased during
the second period. If not, it is reasonable to conclude the heightened
trading activity in the futures market did not increase the leadership
of the futures market. With that same logic, the potential heightened
trading activity in the spot market would not increase the leadership
of the spot market.
    Sponsor obtained tick level data from Coin Metrics for all markets
included in the lead-lag analysis described above spanning two specific
periods: 11 days before the launch of BITO (10/8/2021--10/18/2021) and
11 days after the launch (10/19/2021-10/29/2021). For the 11 days after
the launch of BITO, Sponsor obtained tick-level trade data on BITO via
Bloomberg and aggregated to the one second floor level using the same
method described above.

[GRAPHIC] [TIFF OMITTED] TN19JY23.190

    Sponsor examined the pairwise lead-lag relationship between CME
bitcoin futures and all other markets included. For each pair, Sponsor
computed the correlation coefficients using the same lead-lag framework
and HY estimator between CME bitcoin futures and the second market
price timeseries as well as timestamp-adjusted (leading/lagging)
versions of the second market to find the time delta that maximized
their correlation. The only differences between Sponsor's BITO analysis
and the quarterly analysis spanning Q1 2019 through Q1 2021 discussed
above are the timeframes and a stricter average correlation threshold
(.2 instead of.1) in the BITO analysis given the shorter timeframe.
    The results of this experiment in Figure 13 show the CME bitcoin
futures market leading all markets for the period of 11 days prior to
the launch of BITO. The price discovery leadership of the CME bitcoin
futures market still leads after BITO's launch in the period of 10/19/
2021 to 10/29/2020, but CME's leadership does not become stronger even
though the trading volume increased significantly.

[GRAPHIC] [TIFF OMITTED] TN19JY23.191

    Given that the CME bitcoin futures market did not see an increase
in price discovery leadership even during a period of heightened
activity (trading volume increased from 15 billion to 34 billion) on
that market after BITO's launch, Sponsor believes it would be
unreasonable to assume that the level of the spot markets' leadership
would increase (CME bitcoin futures market price leadership would
deteriorate) due to the potential heightened trade activity in the spot
markets after the proposed spot-based ETP launch. This dynamic is
illustrated in Figure 14.
[GRAPHIC] [TIFF OMITTED] TN19JY23.192

BILLING CODE 8011-01-C
    Based on the experiment, Sponsor concludes the inherent features of
futures are more important factors in price discovery and allow this
market to dominate even with lower or changing levels of volume. This
conclusion is also supported in academic research \71\

studying similar patterns in other asset classes. It is worth
mentioning that it is not feasible to directly evaluate the effect for
the proposed ETP before its existence. The numerical experiment above
is to best estimate the effect and eliminate the concern on the
potential high trade activity in spot markets caused by the proposed
ETP.
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    \71\ Futures with much smaller trading volumes compared to the
underlying spot market can still dominate price discovery. See
Hauptfleisch, Martin, Talis J. Putni[ncedil][scirc], and Brian
Lucey. ``Who sets the price of gold?'' ``London or New York.''
Journal of Futures Markets 36, no. 6 (2016): 564-586. https://doi.org/10.1002/fut.21775 for more information.
---------------------------------------------------------------------------

    Moreover, Sponsor believes that there will be no material effect of
the Shares' trade prices on CME bitcoin futures prices from secondary
market trading activities. To estimate this effect, Sponsor uses BITO
in its analysis as the first ETP launched in U.S. and a reasonable
example of a general ETP. Sponsor examined the pairwise lead-lag
relationship between BITO and all other markets included in previous
analysis. As seen in Table 5, only four markets have a lead-lag ratio
(the strength measurement of the lead-lag relationship) outside the
range of [.95,1.05] and non-zero lead-lag seconds to conclude they are
leading or lagging. Sponsor interprets this result as BITO's lead-lag
relationship with other bitcoin markets is not significant.

    Table 5--Markets With Significant Lead/Lag Relationships to BITO
------------------------------------------------------------------------
                                               BITO
                                            leadership
                                             (lead-lag    Lead-lag ratio
                                             seconds)
------------------------------------------------------------------------
CME USD Ordinary Futures................              -1           0.909
Kraken USD Ordinary Futures.............              -1           0.926
Huobi USD Ordinary Futures (Bi-                       -1           0.933
 Quarterly).............................
CEX.IO USD Spot.........................              12           1.067
------------------------------------------------------------------------

    Regarding BITO's price discovery contribution measured by lead-lag
seconds, it does not lead any bitcoin markets except CEX.IO USD spot
market, which not only lags BITO but also lags all other bitcoin
markets. More importantly, the CME bitcoin futures market leads BITO
with the highest level of certainty as seen from the lead-lag ratio. As
such, Sponsor concludes that the proposed ETP would have no material
impact on CME bitcoin futures prices.
    The gold market shares certain characteristics with the bitcoin
market--both gold and bitcoin have a finite supply, are traded globally
in various market venues against various currency pairs and have a
robust futures market. In addition, many investors view bitcoin as a
form of digital gold and in looking to determine the potential impact
of price discovery in trading in the ETP shares on the secondary
market, the Sponsor looks to the gold market as an analogous market to
bitcoin when looking to determine the impact of price discovery.
According to a previous study \72\ the Sponsor reviewed, the authors
analyzed intraday data on gold prices from 1997-2014 and concluded that
futures markets tend to lead price discovery in the gold market despite
the spot market having ten times more volume than the U.S. futures
market. A second \73\ study that the sponsor analyzed, came to the same
conclusion that futures are the global leader in price discovery for
gold, with a growing influence of ETPs.
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    \72\ See Hauptfleisch, et. al.
    \73\ Sehgal, Sanjay, Neharika Sobti, and Florent Diesting. ``Who
leads in intraday gold price discovery and volatility connectedness:
Spot, futures, or exchange-traded fund?'' Journal of Futures Markets
41, no. 7 (2021): 1092-1123. https://doi.org/10.1002/fut.22208.
---------------------------------------------------------------------------

    Further, Sponsor believes that Shares of the Trust trading on the
secondary market could have a positive impact on the CME Bitcoin
Futures market leading position. Sponsor believes this due to the use
of CME Bitcoin Futures in hedging activities by market participants.
One such example, is when Authorized Participants transact on both the
secondary and primary markets. In order to arbitrage or fulfill large
basket trades on behalf of clients, Authorized Participants may
transact in the primary market with the ETP by creating and/or
redeeming and then immediately offsetting that transaction in the
secondary market. Because the primary market is settled in-kind
(meaning the exchange of shares and bitcoin) and the secondary market
is settled in cash (meaning the exchange of shares and fiat currency),
the Authorized Participant needs to transact in the bitcoin spot
market. Given there is a lag between the secondary market transaction,
the striking of the NAV per Share in the primary market and the
settlement of the primary market transaction, the Authorized
Participants will look to hedge their exposure to the bitcoin market
using bitcoin futures. For the reasons discussed throughout this
document such as the transparency, low fees, and leverage capabilities,
many market participants look to hedge themselves using futures and
Sponsor believes that will be the case with Authorized Participant
transactions in respect of the Trust as well.
    The Exchange also believes that trading in the Shares would not be
the predominant force on prices in the Bitcoin Futures market (or spot
market) for several additional reasons, including the significant
volume in the Bitcoin Futures market, the size of bitcoin's market cap
(approximately $1 trillion), and the significant liquidity available in
the spot market. According to the Sponsor's analysis, in the second
quarter of 2021, bitcoin futures volume greatly exceeded volumes in the
spot markets. The volume of the bitcoin futures market was
approximately $7.1 trillion where the volume of the bitcoin spot
markets was approximately $1.4 trillion.\74\ In addition to the Bitcoin
Futures market data points cited above, the spot market for bitcoin is
also very liquid. According to data from CoinRoutes from February 2021,
the cost to buy or sell $5 million worth of bitcoin averages roughly 10
basis points with a market impact of 30 basis points.\75\ For a $10
million market order, the cost to buy or sell is roughly 20 basis
points with a market impact of 50 basis points. Stated another way, a
market participant could enter a market buy or sell order for $10
million of bitcoin and only move the market 0.5%. More strategic
purchases or sales (such as using limit orders and executing through
OTC bitcoin trade desks) would

likely have less obvious impact on the market--which is consistent with
MicroStrategy, Tesla, and Square being able to collectively purchase
billions of dollars in bitcoin. As such, the combination of Bitcoin
Futures leading price discovery, the overall size of the bitcoin
market, and the ability for market participants, including authorized
participants creating and redeeming with the Trust, to buy or sell
large amounts of bitcoin without significant market impact will help
prevent the Shares from becoming the predominant force on pricing in
either the bitcoin spot or Bitcoin Futures markets, satisfying part (b)
of the test outlined above.
---------------------------------------------------------------------------

    \74\ For more information, see Memorandum from the Division of
Trading and Markets regarding a September 8, 2021 meeting with
representatives from Fidelity Digital Assets, et al. (Sept. 8, 2021)
available at https://www.sec.gov/comments/sr-cboebzx-2021-039/srcboebzx2021039-250110.pdf.
    \75\ These statistics are based on samples of bitcoin liquidity
in USD (excluding stablecoins or Euro liquidity) based on executable
quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange,
BinanceUS, and OKCoin during February 2021.
---------------------------------------------------------------------------

(b) SEC Approval of Bitcoin Futures ETFs and CME Surveillance
    Bitcoin Futures represent a growing influence on pricing in the
spot bitcoin market as has been laid out above and in other proposals
to list and trade Spot Bitcoin ETPs. Pricing in Bitcoin Futures is
based on pricing from spot bitcoin markets. As noted above, the
statement from the Teucrium Approval that ``CME's surveillance can
reasonably be relied upon to capture the effects on the CME bitcoin
futures market caused by a person attempting to manipulate the proposed
futures ETP by manipulating the price of CME bitcoin futures contracts
. . . indirectly by trading outside of the CME bitcoin futures
market,'' makes clear that the Commission believes that CME's
surveillance can capture the effects of trading on the relevant spot
markets on the pricing of Bitcoin Futures. While the Commission makes
clear in the Teucrium Approval that the analysis only applies to the
Bitcoin Futures market as it relates to an ETP that invests in Bitcoin
Futures as its only non-cash or cash equivalent holding, if CME's
surveillance is sufficient to mitigate concerns related to trading in
Bitcoin Futures for which the pricing is based directly on pricing from
spot bitcoin markets, it's not clear how such a conclusion could apply
only to ETPs based on Bitcoin Futures and not extend to Spot Bitcoin
ETPs.
    Additionally, a Bitcoin Futures ETF is actually potentially more
susceptible to manipulation than a Spot Bitcoin ETP where the
underlying trust offers only in-kind creation and redemption.
Specifically, the pricing of Bitcoin Futures is based on prices from
spot bitcoin markets, while shares of a Spot Bitcoin ETP would
represent an interest in bitcoin directly and authorized participants
for a Spot Bitcoin ETP would be able to source bitcoin from any
exchange and create or redeem with the applicable trust regardless of
the price of the underlying index. Potential manipulation of a Bitcoin
Futures ETF would require manipulation on the spot markets on which the
pricing for Bitcoin Futures are based while the in-kind creation and
redemption process and fungibility of bitcoin means that a would be
manipulator of a Spot Bitcoin ETP would need to manipulate the price
across all bitcoin markets or risk simply providing arbitrage
opportunities for authorized participants. Further to this point, this
arbitrage opportunity also acts to reduce any incentives to manipulate
the price of a Spot Bitcoin ETP because the underlying trust will
create and redeem shares at set rates of bitcoin per share without
regard to the price that the ETP is trading at in the secondary market
or the price of the underlying index. As such, the Exchange believes
that part (a) of the significant market test outlined above is
satisfied and that common membership in ISG between the Exchange and
CME would assist the listing exchange in detecting and deterring
misconduct in the Shares.
    Recently, the Commission allowed three ETFs primarily invested in
CME Bitcoin futures to register and list on a national securities
exchange (``Bitcoin Futures ETFs'').\76\ As described in its
prospectus, BITO does not invest directly in bitcoin but rather seeks
to provide capital appreciation primarily through managed exposure to
cash-settled bitcoin futures contracts traded on commodity exchanges
registered with the Commodity Futures Trading Commission (``CFTC'').
Currently, the only such contracts that are traded on, or subject to
the rules of, the CME. CME Bitcoin futures are cash-settled in U.S.
dollars based on the CME DF Bitcoin Reference Rate (``BRR''), which is
a volume-weighted composite of U.S. dollar-bitcoin trading activity on
certain constituent exchanges including Bitstamp, Coinbase, Gemini,
itBit, Kraken, and LMAX Digital.\77\
---------------------------------------------------------------------------

    \76\ ProShares Bitcoin Strategy ETF (BITO); VanEck Bitcoin
Strategy ETF (XBTF); Valkyrie Bitcoin Strategy ETF (BTF).
    \77\ See CME CF Bitcoin Reference Rate Index data at https://www.cmegroup.com/trading/cryptocurrency-indices/cf-bitcoin-reference-rate.html.
---------------------------------------------------------------------------

    The CME reference rate is based on substantially the same pricing
data from digital asset trading platforms as the Index used by the
Trust. The Index is designed to reflect the performance of bitcoin in
U.S. dollars and the current constituent exchange composition of the
Index is Bitstamp, Coinbase, Gemini, itBit, Kraken, and LMAX Digital.
As noted recently by a commenter on another Rule 19b-4 application for
a bitcoin spot ETP, Bitcoin Futures ETFs and the Trust are exposed to
the same underlying pricing data and the same risks of
manipulation.\78\
---------------------------------------------------------------------------

    \78\ See Letter from Joseph A. Hall et al. to Vanessa Countryman
on SR-NYSE-Arca-2021-90 (Nov. 29, 2021).
---------------------------------------------------------------------------

    There is no basis, in law or in fact, for determining that the
Bitcoin Futures ETFs satisfy the standards of Section 6(b)(5) of the
Exchange Act while the Trust does not. Bitcoin pricing, whether in the
spot market or the futures market, is determined in the digital asset
trading platforms where supply and demand interact; and there is almost
complete overlap in the underlying digital asset trading platforms that
supply pricing information for the reference indices used by both the
CME Bitcoin futures market and the Trust.
    Just three weeks after the Bitcoin Futures ETFs began trading, the
Commission again rejected a 19b-4 application filed by a spot bitcoin
ETP on the grounds that the listing exchange had failed to demonstrate
satisfaction of the Section 6(b)(5) standard.\79\ The Commission
specifically disagreed with the exchange's premises that (i) it is
inconsistent with the Section 6(b)(5) standard for the Commission to
permit a Bitcoin Futures ETF registered under the 1940 Act to launch
but to disapprove the approval of a bitcoin spot ETP; (ii) it is
inconsistent for the Commission to approve a Bitcoin Futures ETF that
trades exclusively in CME Bitcoin Futures contracts and conclude that
the CME Bitcoin Futures market is not a ``market of significant size''
under the Section 6(b)(5) standard; and (iii) there is no basis of fact
or law that the 1940 Act is designed to prevent market manipulation in
the markets in which the Bitcoin Futures ETF trades. Instead, the
Commission stated that it considers each proposed rule change on its
own merits and noted that the proposed rule did not relate to a product
regulated under the 1940 Act and did not relate to the same underlying
holdings as the Bitcoin Futures ETFs. In practice, however, the
Commission did not address why a bitcoin spot ETP fails to satisfy the
Section 6(b)(5) standard when it is exposed to the same underlying
risks of manipulation as the CME Bitcoin Futures contracts primarily
held by Bitcoin Futures ETFs, which have been allowed to register and
list.
---------------------------------------------------------------------------

    \79\ 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-
2019)(``VanEck Order'').

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

    As recently as 2020, the Commission approved new exchange listing
rules permitting ETFs registered under the 1940 Act, including Bitcoin
Futures ETFs, to list under an exchange's generic listing standards
without having to submit separate rule filing pursuant to Section
19(b).\80\ In determining that the rule change was reasonably designed
to help prevent fraudulent and manipulative acts and practice, the SEC
stated that ETFs would be required to disclose its portfolio holdings
under the 1940 Act and that the exchange rule included requirements
relating to fire walls and procedures to prevent the use and
dissemination of material, non-pubic information regarding the
applicable ETF index and portfolio.\81\ Importantly, with regard to
surveillance, the Commission stated only that the rule change required
the exchange to implement and maintain written surveillance procedures
for ETF shares and noted that the exchange would use its existing
surveillance procedures applicable to derivative products to monitor
trading in ETF shares. In approving the generic listing standards, the
SEC did not require in-depth analyses into any particular markets or
index components.\82\ While noting the ability of an exchange to rely
on FINRA for information related to certain securities held by ETPs,
the Commission focused its determination on the exchange's surveillance
of the market for ETF shares. As a result, Bitcoin Futures ETFs are
permitted to list and trade under generic listing standards based
solely on the oversight of the underlying futures by the CFTC and
futures exchanges with no acknowledgement or assessment by the
Commission of the actual risk of fraud or manipulation related to
underlying bitcoin spot markets referenced by such bitcoin futures--
even when such bitcoin markets mirror those proposed as reference
markets in the Index used by the Trust and other spot bitcoin ETP
listing proposals.
---------------------------------------------------------------------------

    \80\ Self-Regulatory Organizations, NYSE Arca, Inc.; Notice of
Filing of Amendment No. 2 and Order Granting Accelerated Approval of
a Proposed Rule Change, as Modified by Amendment No. 2, to Adopt
NYSE Arca Rule 5.2-E(j)(8) Governing the Listing and Trading of
Exchange-Traded Fund Shares (Apr. 13, 2020) (SR-NYSE-Arca-2019-81).
    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

    Because (i) the risks of manipulation in the bitcoin markets
impacting the Trust are thus indistinguishable from those same risks
impacting Bitcoin Futures ETFs; (ii) the Trust will have the same
pricing sources, and (iii) the Trust will be subject to the same risks
of manipulation as shares of Bitcoin Futures ETFs; the Exchange
believes that the proposed rule change is sufficiently designed to
prevent fraudulent and manipulative acts and practice. Approving this
change is consistent with the treatment of substantially similar
products, and the Exchange believes that any finding to the contrary
would result in arbitrarily disparate treatment to the Trust.
(c) Other Means To Prevent Fraudulent and Manipulative Acts and
Practices
    The Commission has also recognized that the ``regulated market of
significant size'' standard is not the only means for satisfying
Section 6(b)(5) of the act, specifically providing that a listing
exchange could demonstrate that ``other means to prevent fraudulent and
manipulative acts and practices'' are sufficient to justify dispensing
with the requisite surveillance-sharing agreement.\83\
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    \83\ See Winklevoss Order at 37580. The Commission has also
specifcally noted that it ``is not applying a ``cannot be
manipulated'' standard; instead, the Commission is examining whether
the proposal meets the requirements of the Exchange Act and,
pursuant to its Rules of Practice, places the burden on the listing
exchange to demonstrate the validity of its contentions and to
establish that the requirements of the Exchange Act have been met.
Id. at 37582.
---------------------------------------------------------------------------

    The Exchange believes that such conditions are present.
Specifically, the significant liquidity in the spot market and the
impact of market orders on the overall price of bitcoin mean that
attempting to move the price of bitcoin is costly and has grown more
expensive over the past year. In January 2020, for example, the cost to
buy or sell $5 million worth of bitcoin averaged roughly 30 basis
points (compared to 10 basis points in 2/2021) with a market impact of
50 basis points (compared to 30 basis points in 2/2021).\84\ For a $10
million market order, the cost to buy or sell was roughly 50 basis
points (compared to 20 basis points in 2/2021) with a market impact of
80 basis points (compared to 50 basis points in 2/2021). As the
liquidity in the bitcoin spot market increases, it follows that the
impact of $5 million and $10 million orders will continue to decrease
the overall impact in spot price.
---------------------------------------------------------------------------