[Federal Register Volume 85, Number 42 (Tuesday, March 3, 2020)]
[Notices]
[Pages 12595-12616]
[FR Doc No: 2020-04294]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88284; File No. SR-NYSEArca-2019-39]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1, To
Amend NYSE Arca Rule 8.201-E (Commodity-Based Trust Shares) and To List
and Trade Shares of the United States Bitcoin and Treasury Investment
Trust Under NYSE Arca Rule 8.201-E

February 26, 2020.

I. Introduction

    On June 12, 2019, NYSE Arca, Inc. (``NYSE Arca'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act

of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed
rule change to amend NYSE Arca Rule 8.201-E and to list and trade
shares (``Shares'') of the United States Bitcoin and Treasury
Investment Trust (``Trust'') under NYSE Arca Rule 8.201-E. The proposed
rule change was published for comment in the Federal Register on July
1, 2019.\3\ On August 12, 2019, pursuant to Section 19(b)(2) of the
Exchange Act,\4\ the Commission designated a longer period within which
to approve the proposed rule change, disapprove the proposed rule
change, or institute proceedings to determine whether to disapprove the
proposed rule change.\5\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 86195 (June 25,
2019), 84 FR 31373 (``Original Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 86631, 84 FR 42028
(Aug. 16, 2019). The Commission designated September 29, 2019, as
the date by which it should approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule
change.
---------------------------------------------------------------------------

    On September 24, 2019, the Commission instituted proceedings under
Section 19(b)(2)(B) of the Act \6\ to determine whether to approve or
disapprove the proposed rule change.\7\ On October 4, 2019, the
Exchange filed Amendment No. 1 to the proposed rule change, which
replaced and superseded the proposed rule change as originally
filed.\8\ The Commission published the proposed rule change, as
modified by Amendment No. 1, for comment in the Federal Register on
October 21, 2019.\9\ And on December 20, 2019, the Commission
designated a longer period for Commission action on the proposed rule
change.\10\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(2)(B).
    \7\ See Securities Exchange Act Release No. 87071, 84 FR 51646
(Sept. 30, 2019) (``Order Instituting Proceedings'').
    \8\ Amendment No. 1 is available at: https://www.sec.gov/comments/sr-nysearca-2019-39/srnysearca201939.htm.
    \9\ See Securities Exchange Act Release No. 87301 (Oct. 15,
2019), 84 FR 56219 (``Notice''). Comments received are available at
https://www.sec.gov/comments/sr-nysearca-2019-39/srnysearca201939.htm.
    \10\ See Securities Exchange Act Release No. 87813, 84 FR 71993
(Dec. 30, 2019).
---------------------------------------------------------------------------

    This order disapproves the proposed rule change, as modified by
Amendment No. 1. The Commission concludes that NYSE Arca has not met
its burden under the Exchange Act and the Commission's Rules of
Practice to demonstrate that its proposal is consistent with the
requirements of Exchange Act Section 6(b)(5), and, in particular, the
requirement that the rules of a national securities exchange be
``designed to prevent fraudulent and manipulative acts and practices''
and ``to protect investors and the public interest.'' \11\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    When considering whether NYSE Arca's proposal to list the Shares is
designed to prevent fraudulent and manipulative acts and practices, the
Commission applies the same standard used in its orders considering
previous proposals to list commodity-based exchange-traded products
(``ETPs''), including bitcoin \12\-based commodity trusts and bitcoin-
based trust issued receipts.\13\ As the Commission has explained,
exchanges that list ETPs can meet their obligations under Exchange Act
Section 6(b)(5) by demonstrating that there is a comprehensive
surveillance-sharing agreement with a regulated market of significant
size relating to the underlying assets.\14\ Neither NYSE Arca nor the
Sponsor challenges this standard.
---------------------------------------------------------------------------

    \12\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``Bitcoin Blockchain.'' The Bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. See, e.g.,
Notice, 84 FR at 56222.
    \13\ See Order Setting Aside Action by Delegated Authority and
Disapproving a Proposed Rule Change, as Modified by Amendments No. 1
and 2, To List and Trade Shares of the Winklevoss Bitcoin Trust,
Securities Exchange Act Release No. 83723 (July 26, 2018), 83 FR
37579 (Aug. 1, 2018) (SR-BatsBZX-2016-30) (``Winklevoss Order'');
Order Disapproving a Proposed Rule Change, as Modified by Amendment
No. 1, Relating to the Listing and Trading of Shares of the Bitwise
Bitcoin ETF Trust Under NYSE Arca Rule 8.201-E, Securities Exchange
Act Release No. 87267 (Oct. 9, 2019), 84 FR 55382 (Oct. 16, 2019)
(``Bitwise Order''). See also Order Disapproving a Proposed Rule
Change, as Modified by Amendment No. 1, Relating to the Listing and
Trading of Shares of the SolidX Bitcoin Trust Under NYSE Arca
Equities Rule 8.201, Securities Exchange Act Release No. 80319 (Mar.
28, 2017), 82 FR 16247 (Apr. 3, 2017) (SR-NYSEArca-2016-101)
(``SolidX Order''). The Commission also notes that orders were
issued by delegated authority on the following matters, which are
under review before the Commission: Order Disapproving a Proposed
Rule Change to List and Trade the Shares of the ProShares Bitcoin
ETF and the ProShares Short Bitcoin ETF, Securities Exchange Act
Release No. 83904 (Aug. 22, 2018), 83 FR 43934 (Aug. 28, 2018)
(NYSEArca-2017-139) (``ProShares Order''); Order Disapproving a
Proposed Rule Change Relating to Listing and Trading of the Direxion
Daily Bitcoin Bear 1X Shares, Direxion Daily Bitcoin 1.25X Bull
Shares, Direxion Daily Bitcoin 1.5X Bull Shares, Direxion Daily
Bitcoin 2X Bull Shares, and Direxion Daily Bitcoin 2X Bear Shares
Under NYSE Arca Rule 8.200-E, Securities Exchange Act Release No.
83912 (Aug. 22, 2018), 83 FR 43912 (Aug. 28, 2018) (SR-NYSEArca-
2018-02) (``Direxion Order''); Order Disapproving a Proposed Rule
Change to List and Trade the Shares of the GraniteShares Bitcoin ETF
and the GraniteShares Short Bitcoin ETF, Securities Exchange Act
Release No. 83913 (Aug. 22, 2018), 83 FR 43923 (Aug. 28, 2018) (SR-
CboeBZX-2018-001) (``GraniteShares Order'').
    \14\ See Winklevoss Order, 83 FR at 37580. See also id. at 37592
n.202 and accompanying text (discussing previous Commission
approvals of commodity-trust ETPs); GraniteShares Order, 83 FR at
43925-27 nn.35-39 and accompanying text (discussing previous
Commission approvals of commodity-futures ETPs). The Commission has
stated that it considers two markets that are members of the
Intermarket Surveillance Group to have a comprehensive surveillance-
sharing agreement with one another, even if they do not have a
separate bilateral surveillance-sharing agreement. See Winklevoss
Order, 83 FR at 37580 n.19.
---------------------------------------------------------------------------

    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.'' \15\ 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.\16\ 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.\17\
---------------------------------------------------------------------------

    \15\ Amendment to Rule Filing Requirements for Self-Regulatory
Organizations Regarding New Derivative Securities Products, Exchange
Act Release No. 40761 (Dec. 8, 1998), 63 FR 70952, 70959 (Dec. 22,
1998) (``NDSP Adopting Release''). See also Winklevoss Order, 83 FR
at 37594; ProShares Order, 83 FR at 43936; Direxion Order, 83 FR at
43914; GraniteShares Order, 83 FR at 43924; Bitwise Order, 84 FR
55383.
    \16\ See NDSP Adopting Release, 63 FR at 70959.
    \17\ See Winklevoss Order, 83 FR at 37592-93; Letter from
Brandon Becker, Director, Division of Market Regulation, Commission,
to Gerard D. O'Connell, Chairman, Intermarket Surveillance Group
(June 3, 1994), available at https://www.sec.gov/divisions/marketreg/mr-noaction/isg060394.htm.
---------------------------------------------------------------------------

    In the context of this standard, the terms ``significant market''
and ``market of significant size'' include a market (or group of
markets) as to which (a) there is a reasonable likelihood that a person
attempting to manipulate the ETP would also have to trade on that
market to successfully manipulate the ETP, so that a surveillance-
sharing agreement would assist in detecting and deterring misconduct,
and (b) it is unlikely that trading in the ETP would be the predominant
influence on prices in that

market.\18\ A surveillance-sharing agreement must be entered into with
a ``significant market'' to assist in detecting and deterring
manipulation of the ETP, because a person attempting to manipulate the
ETP is reasonably likely to also engage in trading activity on that
``significant market.''
---------------------------------------------------------------------------

    \18\ See Winklevoss Order, 83 FR at 37594. This definition is
illustrative and not exclusive. There could be other types of
``significant markets'' and ``markets of significant size,'' but
this definition is an example that will provide guidance to market
participants. See id.
---------------------------------------------------------------------------

    Consistent with this standard, for the commodity-trust ETPs
approved to date for listing and trading, there has been in every case
at least one significant, regulated market for trading futures on the
underlying commodity--whether gold, silver, platinum, palladium, or
copper--and the ETP listing exchange has entered into surveillance-
sharing agreements with, or held Intermarket Surveillance Group
(``ISG'') membership in common with, that market.\19\ Moreover, the
Commission notes that surveillance-sharing agreements have been
consistently present whenever it has approved the listing and trading
of derivative securities, even where the underlying securities were
also listed on national securities exchanges--such as options based on
an index of stocks traded on a national securities exchange--and were
thus subject to the Commission's direct regulatory authority.\20\
---------------------------------------------------------------------------

    \19\ See Winklevoss Order, 84 FR at 37593-94.
    \20\ See Bitwise Order, 84 FR at 55386, 55390 (citing Winklevoss
Order, 84 FR at 37593); Securities Exchange Act Release No. 33555
(Jan. 31, 1994), 59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28)
(order approving listing of options on American Depository
Receipts). The Commission has also required a surveillance-sharing
agreement in the context of index options even when (i) all of the
underlying index component stocks were either registered with the
Commission or exempt from registration under the Exchange Act; (ii)
all of the underlying index component stocks traded in the U.S.
either directly or as ADRs on a national securities exchange; and
(iii) effective international ADR arbitrage alleviated concerns over
the relatively smaller ADR trading volume, helped to ensure that ADR
prices reflected the pricing on the home market, and helped to
ensure more reliable price determinations for settlement purposes,
due to the unique composition of the index and reliance on ADR
prices. See Securities Exchange Act Release No. 26653 (Mar. 21,
1989), 54 FR 12705, 12708 (Mar. 28, 1989) (SR-Amex-87-25) (stating
that ``surveillance-sharing agreements between the exchange on which
the index option trades and the markets that trade the underlying
securities are necessary'' and that ``[t]he exchange of surveillance
data by the exchange trading a stock index option and the markets
for the securities comprising the index is important to the
detection and deterrence of intermarket manipulation.''). And the
Commission has required a surveillance-sharing agreement even when
approving options based on an index of stocks traded on a national
securities exchange. See Securities Exchange Act Release No. 30830
(June 18, 1992), 57 FR 28221, 28224 (June 24, 1992) (SR-Amex-91-22)
(stating that surveillance-sharing agreements ``ensure the
availability of information necessary to detect and deter potential
manipulations and other trading abuses'').
---------------------------------------------------------------------------

    Sponsors of proposed bitcoin-based ETPs in particular have
attempted to demonstrate that other means besides surveillance-sharing
agreements will be sufficient to prevent fraudulent and manipulative
acts and practices, including that the bitcoin market as a whole or the
relevant underlying bitcoin market is ``uniquely'' and ``inherently''
resistant to manipulation.\21\ For example, the Winklevoss Order
addressed an assertion that ``bitcoin and bitcoin [spot] markets''
generally, as well as one bitcoin trading platform specifically, have
unique resistance to fraud and manipulation; and the Bitwise Order
addressed the assertion that prices from at least certain bitcoin
trading platforms (``the `real' bitcoin spot market as opposed to the
`fake' and non-economic bitcoin spot market'') possessed such unique
resistance.\22\ While the listing exchanges there failed to satisfy
their burden to demonstrate the validity of these contentions, the
Commission agreed that if a listing exchange could establish that the
underlying market inherently possessed a unique resistance to
manipulation beyond the protections that are utilized by traditional
commodity or securities markets, it would not necessarily need to enter
into a surveillance-sharing agreement with a regulated significant
market.\23\ Such resistance to fraud and manipulation must be novel and
beyond those protections that exist in traditional commodity markets or
equity markets for which the Commission has long required surveillance-
sharing agreements in the context of listing derivative securities
products.\24\
---------------------------------------------------------------------------

    \21\ See Winklevoss Order, 84 FR at 37580, 37582-91; see also
Bitwise Order, 84 FR at 55383, 55385-406.
    \22\ See id.
    \23\ See id. The Commission has also recognized 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.
Winklevoss Order, 84 FR at 37580. The Commission is not applying a
``cannot be manipulated'' standard; instead, the Commission is
examining whether the proposal meets the requirements of the
Exchange Act and, pursuant to its Rules of Practice, places the
burden on the listing exchange to demonstrate the validity of its
contentions and to establish that the requirements of the Exchange
Act have been met. Id. at 37582.
    \24\ See supra notes 19 and 20.
---------------------------------------------------------------------------

    Here, Wilshire Phoenix Funds, LLC (``Sponsor'') would base the
pricing mechanism for the proposed ETP on the Chicago Mercantile
Exchange (``CME'') CF Bitcoin Reference Rate (``CME CF BRR'' or
``Bitcoin Reference Rate''). As discussed further below, the Bitcoin
Reference Rate is derived from trade prices of bitcoin on certain
bitcoin spot platforms (``Constituent Platforms''). NYSE Arca and the
Sponsor contend that the proposal satisfies the Commission's standard,
as set forth in its prior orders, because (1) the segment of the
bitcoin spot market represented by the spot bitcoin platforms that
contribute to the Bitcoin Reference Rate is uniquely and inherently
resistant to manipulation; and (2) NYSE Arca has entered into a
surveillance-sharing agreement with a regulated bitcoin market of
significant size.\25\ NYSE Arca also asserts that approval of the
proposal is consistent with Section 6(b)(5) of the Exchange Act because
it would protect investors and the public interest.\26\
---------------------------------------------------------------------------

    \25\ See Notice, 84 FR at 56225-26.
    \26\ See id. at 56230.
---------------------------------------------------------------------------

    In the analysis that follows, the Commission examines whether the
proposed rule change, as modified by Amendment No. 1, is consistent
with Section 6(b)(5) of the Exchange Act by addressing in Section
III.B.1 assertions that the relevant bitcoin market inherently
possesses a unique resistance to manipulation; addressing in Section
III.B.2 assertions that NYSE Arca has entered into a surveillance-
sharing agreement with a regulated market of significant size related
to bitcoin; and addressing in Section III.C assertions that the
proposal is consistent with the protection of investors and the public
interest. The Commission concludes that NYSE Arca has not established
that the relevant bitcoin market possesses a resistance to manipulation
that is unique beyond that of traditional security or commodity markets
such that it is inherently resistant to manipulation. The Commission
further concludes that NYSE Arca has not established that an actor
trying to manipulate the proposed ETP would be reasonably likely to
trade in the CME bitcoin futures market. And the Commission concludes
that NYSE Arca has not established that it has a surveillance-sharing
agreement with the Constituent Platforms or that the Constituent
Platforms constitute a regulated market, such that it has established
that it has entered into a surveillance-sharing agreement with a
regulated market of significant size with respect to bitcoin.
    The Commission emphasizes that its disapproval of this proposed
rule change does not rest on an evaluation of whether bitcoin, or
blockchain technology more generally, has utility or value as an
innovation or an investment. Rather, the Commission is disapproving
this proposed rule change because, as

discussed below, NYSE Arca has not met its burden to demonstrate that
its proposal is consistent with the requirements of Exchange Act
Section 6(b)(5).
    Finally, the Commission recognizes that over time, bitcoin-related
markets may develop in a way that would make it possible for a bitcoin-
based ETP to satisfy the requirements of the Exchange Act. For example,
existing or newly created bitcoin futures markets that are regulated
may achieve significant size, and an ETP listing exchange may be able
to demonstrate in a proposed rule change that it will be able to
address the risk of fraud and manipulation by sharing surveillance
information with a regulated market of significant size related to
bitcoin, as well as, where appropriate, with the relevant spot markets
underlying such bitcoin derivatives. Should these circumstances
develop, or conditions otherwise change in a manner that affects the
Exchange Act analysis, the Commission would then have the opportunity
to consider whether a particular bitcoin-based ETP would be consistent
with the requirements of the Exchange Act.

II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1

    As described in detail in the Notice, NYSE Arca proposes to amend
NYSE Arca Rule 8.201-E, which governs the listing and trading of
Commodity-Based Trust Shares on the Exchange,\27\ and to list and trade
Shares of the Trust under NYSE Arca Rule 8.201-E, as proposed to be
amended.
---------------------------------------------------------------------------

    \27\ NYSE Arca Rule 8.201-E defines the term ``Commodity-Based
Trust Shares'' as a security (a) that is issued by a trust that
holds a specified commodity deposited with the trust; (b) that is
issued by such trust in a specified aggregate minimum number in
return for a deposit of a quantity of the underlying commodity; and
(c) that, when aggregated in the same specified minimum number, may
be redeemed at a holder's request by such trust, which will deliver
to the redeeming holder the quantity of the underlying commodity.
---------------------------------------------------------------------------

Proposed Amendments to NYSE Arca Rule 8.201-E

    NYSE Arca Rule 8.201-E(c)(1) currently states that Commodity-Based
Trust Shares are issued by a trust in a specified aggregate minimum
number in return for a deposit of a quantity of the underlying
commodity, and may be redeemed in the same specified minimum number by
a holder for the quantity of the underlying commodity. NYSE Arca
proposes to amend Rule 8.201-E(c)(1) to provide that Commodity-Based
Trust Shares may be issued and redeemed for the underlying commodity
and/or cash. NYSE Arca further proposes to amend Rule 8.201-E(c)(2) to
state that the term ``commodity'' is defined in Section 1(a)(9) of the
Commodity Exchange Act.

Proposal To List and Trade Shares of the Trust

    The Shares would be issued by the Trust, a Delaware statutory
trust. The Trust would operate pursuant to a trust agreement between
the Sponsor and Delaware Trust Company. UMB Bank N.A. would act as
custodian for the Trust's cash and U.S. treasury assets (``Cash and
Treasury Custodian''), UMB Fund Services, Inc. would act as
administrator of the Trust, and Broadridge Corporate Issuer Solutions,
Inc. would act as the transfer agent for the Trust's Shares. Coinbase
Custody Trust Company, LLC would act as the Bitcoin custodian for the
Trust (``Bitcoin Custodian'').\28\
---------------------------------------------------------------------------

    \28\ See Notice, 84 FR at 56221.
---------------------------------------------------------------------------

    The investment objective of the Trust would be for the Shares to
closely reflect the Bitcoin Treasury Index (``Index''), less the
Trust's liabilities and expenses. The Trust would have no assets other
than (a) bitcoin and (b) short-term U.S. Treasury securities with a
maturity of less than one year (``T-Bills''). The Trust would also hold
U.S. dollars for short periods of time in connection with (i) the
maturity of any T-Bills, (ii) the purchase and sale of bitcoin and/or
T-Bills, and (iii) the payment of redemptions, if any, and fees and
expenses of the Trust. Bitcoin would be held by the Bitcoin Custodian
on behalf of the Trust, and T-Bills and U.S. dollars would be held by
the Cash and Treasury Custodian on behalf of the Trust. The amount of
bitcoin and T-Bills held by the Trust would be determined by the
Index.\29\
---------------------------------------------------------------------------

    \29\ See id.
---------------------------------------------------------------------------

    The Index is calculated and published by Solactive AG (``Index
Calculation Agent'').\30\ The level of the Index is published on each
business day at approximately 5:00 p.m. Eastern time and has two
components: (1) A notional component representing bitcoin (``Bitcoin
Component''); and (2) a notional component representing T-Bills
(``Treasury Component''). On a monthly basis, the Index rebalances its
weighting of the Bitcoin Component and the Treasury Component utilizing
a mathematically derived passive rules-based methodology that is based
on the daily volatility of the ``Bitcoin Price.'' The Bitcoin Price,
which will be the price of bitcoin used to determine the weighting of
the Bitcoin component and the Treasury Component of the Index, as well
as the value of bitcoin held by the Trust, would be based on the
Bitcoin Reference Rate. Following the calculation of the weighting of
the components of the Index, the Trust would rebalance its holdings in
bitcoin and T-Bills in order to closely replicate the Index.\31\
---------------------------------------------------------------------------

    \30\ According to the Exchange, the Index is a passive, rules-
based index, and the Index Calculation Agent provides calculation
services only. The Index Calculation Agent is not affiliated with
the Sponsor and has represented that it and its employees are
subject to market abuse laws and that the Index Calculation Agent
has established and maintains processes and procedures to prevent
the use and dissemination of material, non-public information
regarding the Index. See Notice, 84 FR at 56222 n.17.
    \31\ See id. at 56222.
---------------------------------------------------------------------------

    According to the proposal, the Trust may offer and sell Shares from
time to time through underwriters, placement agents, or distributors,
or such other means as the Sponsor may determine. The Sponsor also
reserves the right to issue Shares of the Trust from time to time
through direct placements. In addition, upon at least five business
days' prior written notice, a shareholder may redeem all or a portion
of its Shares on the last business day of each calendar month. All
redemptions will be based on the net asset value (``NAV'') of Shares
submitted for redemption, determined as of the last business day of the
applicable calendar month. In general, redemptions would be deemed to
occur on a ``first-in first-out'' basis among Shares held by a
particular shareholder.\32\
---------------------------------------------------------------------------

    \32\ See id. at 56224. Further details regarding the Trust and
the Shares, including investment strategies, calculation of the NAV
and indicative fund value, creation and redemption procedures, and
additional background information about bitcoins and the bitcoin
network, among other things, can be found in the Notice and the
registration statement filed with the Commission on Form S-1/A (File
No. 333-229187) under the Securities Act of 1933 (``Registration
Statement''), as applicable.
---------------------------------------------------------------------------

III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is
consistent with the Exchange Act. Section 6(b)(5) of the Exchange Act
requires, in relevant part, that the rules of a national securities
exchange be designed ``to prevent fraudulent and manipulative acts and
practices'' and ``to protect investors and the public interest.'' \33\
Under the Commission's

Rules of Practice, the ``burden to demonstrate that a proposed rule
change is consistent with the Exchange Act and the rules and
regulations issued thereunder . . . is on the self-regulatory
organization [`SRO'] that proposed the rule change.'' \34\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f(b)(5). Pursuant to Section 19(b)(2) of the
Exchange Act, 15 U.S.C. 78s(b)(2), the Commission must disapprove a
proposed rule change filed by a national securities exchange if it
does not find that the proposed rule change is consistent with the
applicable requirements of the Exchange Act. Exchange Act Section
6(b)(5) states that an exchange shall not be registered as a
national securities exchange unless the Commission determines that
``[t]he rules of the exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general,
to protect investors and the public interest; and are not designed
to permit unfair discrimination between customers, issuers, brokers,
or dealers, or to regulate by virtue of any authority conferred by
this title matters not related to the purposes of this title or the
administration of the exchange.'' 15 U.S.C. 78(f)(b)(5).
    \34\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
---------------------------------------------------------------------------

    The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\35\ and any failure of an
SRO to provide this information may result in the Commission not having
a sufficient basis to make an affirmative finding that a proposed rule
change is consistent with the Exchange Act and the applicable rules and
regulations.\36\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\37\
---------------------------------------------------------------------------

    \35\ See id.
    \36\ See id.
    \37\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
---------------------------------------------------------------------------

B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and
Practices

1. Assertions That the Bitcoin Market Is Inherently or Uniquely
Resistant to Manipulation
    In analyzing whether NYSE Arca has met its burden to demonstrate
that its proposal is consistent with Exchange Act Section 6(b)(5), the
Commission first examines whether the record supports the Sponsor's
assertions that the segment of the bitcoin spot market that the Sponsor
asserts is relevant for purposes of the proposed ETP is inherently
resistant to manipulation and fraudulent activity, such that a
surveillance-sharing agreement with a regulated market of significant
size is unnecessary. To do so, the Commission assesses whether the
record establishes that the relevant segment of the bitcoin spot market
possesses unique means to resist manipulation that are novel beyond
those protections found in traditional securities or commodities
markets.
    NYSE Arca and the Sponsor do not contest the general presence of
manipulation in the bitcoin spot market; however, the Sponsor states
that, for purposes of the proposed ETP, the relevant segment of the
bitcoin spot market is composed of the Constituent Platforms and that
an assessment of the trading activity on these platforms supports a
conclusion that they are inherently resistant to manipulation.\38\ In
addition, the Sponsor asserts that the regulation of the Constituent
Platforms further establishes they are inherently resistant to
manipulation.\39\ The Sponsor also states that the Bitcoin Reference
Rate, which serves as the proposed ETP's bitcoin pricing mechanism, is
inherently resistant to manipulation \40\ and that certain features of
the proposed ETP establish its inherent resistance to manipulation.\41\
---------------------------------------------------------------------------

    \38\ See Notice, 84 FR at 56224-25; Wilshire Phoenix Submission
II at 3-4, 8; Registration Statement at 32.
    \39\ See Wilshire Phoenix Submission II at 6-7, 12-13.
    \40\ See Wilshire Phoenix Submission I at 5.
    \41\ See Notice, 84 FR at 56228; Wilshire Phoenix Submission II
at 28-29.
---------------------------------------------------------------------------

    The Commission concludes that the record does not establish that
the segment of the bitcoin spot market made up of the Constituent
Platforms is inherently resistant to manipulation, and therefore does
not support the claim that the relevant underlying bitcoin market is
inherently and uniquely resistant to manipulation such that the
Commission should dispense with the need to require NYSE Arca to enter
into a surveillance-sharing agreement with a regulated market of
significant size. While mechanisms such as the use of the Bitcoin
Reference Rate serve to mitigate the potential for manipulation of the
proposed ETP, none of the Sponsor's assertions suggest that the
underlying market possesses any unique measures to resist manipulation
that are not present in other security or commodity markets, where the
Commission has long concluded that surveillance-sharing agreements are
necessary even when listing a derivative security whose underlying
components are securities listed on national securities exchanges.
Importantly, even if the Sponsor and NYSE Arca established each of the
contentions addressed below, such assertions would render the proposed
ETP as based on the relevant underlying bitcoin market no more
resistant to manipulation than derivative products based on traditional
commodities or securities markets. Thus, the record does not establish
that NYSE Arca may satisfy Section 6(b)(5) of the Exchange Act without
entering into a surveillance-sharing agreement with a regulated market
of significant size.
(a) Assertions About the Nature of the Bitcoin Spot Market
(i) Assertions Regarding Trading Characteristics
(A) Representations Made and Comments Received
    The Sponsor asserts that, when determining whether the market for
the asset underlying the proposed ETP is inherently resistant to
manipulation, the relevant ``market'' is the segment of the bitcoin
spot market formed by the Constituent Platforms, and that this spot
market segment is inherently resistant to manipulation.\42\ The Sponsor
states that its own analysis and an analysis performed by CME both show
that the Constituent Platforms consistently exhibit prices that are
closely aligned.\43\ The Sponsor asserts that this data implies the
presence of market participants on the Constituent Platforms that are
maintaining uniform pricing across the Constituent Platforms through
the near-simultaneous buying and selling of bitcoin on different
platforms to take advantage of any temporary price dislocations between
those platforms (i.e., market arbitrage).\44\ As a result, according to
the Sponsor, a would-be manipulator that places a trade on a
Constituent Platform would often see any price dislocation eliminated
by arbitrageurs that bring bitcoin prices on that platform in line with
bitcoin prices on the other Constituent Platforms.\45\ NYSE Arca also
asserts that the linkage between the bitcoin markets and the presence
of arbitrageurs in those markets means that the manipulation of the
price of bitcoin on any Constituent Platform would

likely require a large amount of capital to maintain a significant
presence on the Constituent Platforms and thus outweigh trading by
arbitrageurs who are potentially eliminating any pricing differences
across platforms.\46\ NYSE Arca further states, in describing the
Sponsor's analysis, that none of the Constituent Platforms exhibit a
statistically significant average difference from the Bitcoin Reference
Rate.\47\ The Constituent Platforms also show, according to NYSE Arca,
a substantially similar degree of price volatility.\48\ Therefore, the
Sponsor and NYSE Arca assert that the Sponsor's data supports the
conclusion that robust arbitrage trading and sufficient liquidity
provision occurs among the Constituent Platforms, which would reduce
the possibility of manipulation in that segment of the bitcoin
market.\49\
---------------------------------------------------------------------------

    \42\ See Notice, 84 FR at 56225; Letter from Wilshire Phoenix
Funds, LLC (Dec. 18, 2019) (``Wilshire Phoenix Submission II'') at
4-5. NYSE Arca, the Sponsor, and other commenters may refer to the
spot trading of bitcoin on ``exchanges.'' The platforms that trade
bitcoin in the bitcoin spot market are not registered with the
Commission as national securities exchanges. See 15 U.S.C. 78e, 78f.
    \43\ See Wilshire Phoenix Submission II at 8. See also Notice,
84 FR at 56225 (stating that, according to analysis performed by the
Sponsor, price discovery is substantially similar among each of the
Constituent Platforms).
    \44\ See Wilshire Phoenix Submission II at 8.
    \45\ See Wilshire Phoenix Submission II at 8.
    \46\ See Notice, 84 FR at 56225. See also Wilshire Phoenix
Submission II at 7-8 (asserting that the capital necessary to
maintain a significant presence on the Constituent Platforms renders
manipulative trading prohibitively expensive).
    \47\ See Notice, 84 FR at 56225. NYSE Arca also states that,
during one Bitcoin Reference Rate observation window, the volume of
bitcoin trading among the five Constituent Platforms ranged from
10.7% to 33.1%. See id.
    \48\ See Notice, 84 FR at 56225 (stating that the standard
deviation of the difference of prices at 4:00 p.m. London time on
the Constituent Platforms was 1.12% to 1.13% and that when prices
deviate from the Bitcoin Reference Rate, 86.5% of the time they
deviate in the same direction).
    \49\ See Wilshire Phoenix Submission II at 9. See also Notice,
84 FR at 56225.
---------------------------------------------------------------------------

    In addition, the administrator of the Bitcoin Reference Rate, CF
Benchmarks, Ltd. (``CF Benchmarks''), conducted an analysis of how
closely the Constituent Platforms tracked each other during the period
January 2018 through September 2019.\50\ CF Benchmarks states that the
analysis showed an average variance of between 0.000% and 0.008% when a
single Constituent Platform was omitted, and that this analysis seems
to support NYSE Arca's assertion that there is substantially similar
price discovery among the Constituent Platforms.\51\ In addition, CF
Benchmarks states that it conducted an analysis of the correlation of
prices observed among Constituent Platform pairs on a per minute basis
during the Bitcoin Reference Rate's observation window over the
previous twelve months.\52\ According to CF Benchmarks, this analysis
showed mean correlations from 85.45% to 90.72% and median correlations
from 90.25% to 94.73%, and these results indicate that the correlation
is very strong, which therefore supports NYSE Arca's view that the
degree of price volatility is substantially similar.\53\ The Sponsor
also asserts that CF Benchmarks' analysis supports the Sponsor's
conclusions regarding arbitrage and liquidity, which could reduce the
likelihood of manipulation on the Constituent Platforms.\54\
---------------------------------------------------------------------------

    \50\ See Letter from CF Benchmarks LTD (Oct. 28, 2019) (``CF
Benchmarks Letter'') at 5.
    \51\ See CF Benchmarks Letter at 5-6. This analysis also showed
a maximum variance of between 0.049% and 1.079% when one of the
Constituent Platforms was omitted. See id. at 6.
    \52\ See id. at 6.
    \53\ See CF Benchmarks Letter at 6.
    \54\ See Wilshire Phoenix Submission II at 9.
---------------------------------------------------------------------------

    The Sponsor also states that it is widely acknowledged that
numerous markets have historically been subject to manipulation by
``bad actors'' and that, despite continual efforts by regulators and
other market participants, it is highly unlikely that all such ``bad
actors'' and manipulation attempts can be fully mitigated in markets,
including in the bitcoin markets.\55\ NYSE Arca and the Sponsor cite to
the Commission's previous disapproval of proposals to list bitcoin-
based commodity trusts and bitcoin-based trust issued receipts, and
note that the Commission has expressed concern that the bitcoin market
at issue in such proposals may be subject to manipulation.\56\ In
addition, as NYSE Arca states, the Sponsor recognizes that some of the
Commission's concerns are that a significant portion of bitcoin trading
occurs on unregulated platforms and that there is a concentration of a
significant number of bitcoin in the hands of a small number of
holders.\57\ NYSE Arca asserts that these aspects are not unique to
bitcoin and are present in a number of markets, including commodity
markets.\58\
---------------------------------------------------------------------------

    \55\ See Wilshire Phoenix Submission II at 3. See also Notice,
84 FR at 56224 (stating that the Sponsor acknowledges that numerous
markets have historically been subject to manipulation).
    \56\ See Notice, 84 FR at 56224; Wilshire Phoenix Submission II
at 3.
    \57\ See Notice, 84 FR at 56225.
    \58\ See Notice 84 FR at 56225 (comparing bitcoin context to the
trading of gold bullion on unregulated OTC markets and citing
statistics that a significant percentage of gold is held by a
relatively small number of holders).
---------------------------------------------------------------------------

    Several other commenters also address manipulation in the bitcoin
market. One commenter states that ``[t]here is no doubt'' that the
bitcoin market is insecure and manipulated, even with the recent
introduction of a physically-settled futures product.\59\ Another
commenter asserts that the proposal should be rejected because it is
highly risky to build an ETP on bitcoin.\60\ A third commenter states
that the proposal has not comprehensively or convincingly addressed the
issues surrounding manipulation in the bitcoin market.\61\
---------------------------------------------------------------------------

    \59\ See Letter from Jenny Thompson (Oct. 12, 2019) (``Thompson
Letter'').
    \60\ See Letter from Robert Musgrove (Oct. 12, 2019).
    \61\ See Letter from Avinash Shenoy (Oct. 16, 2019) (stating
that there are similar problems in the traditional market).
---------------------------------------------------------------------------

(B) Analysis
    The record does not establish that the segment of the bitcoin spot
market made up of the Constituent Platforms is inherently and uniquely
resistant to manipulation. The Sponsor and other commenters state that
manipulation is present in the spot bitcoin market generally.\62\ The
Trust's Registration Statement concedes that ``the price of Bitcoin may
be influenced by fraud and manipulation for a number of reasons,''
including that ``many Bitcoin spot markets are not regulated or
supervised by a government agency.'' \63\ The Trust's Registration
Statement also states that a ``bad actor could manipulate the Bitcoin
Blockchain to adversely affect an investment in the Shares . . . if
such a bad actor were to obtain control of more than fifty percent
(50%) of the processing power on the Bitcoin Network.'' \64\ And the
Trust's Registration Statement recognizes that it is ``reasonably
likely'' that ``a small group of early Bitcoin adopters hold a
significant proportion of the Bitcoin that has thus far been created,''
``[t]here are no regulations in place that would prevent a large holder
of Bitcoin from selling their Bitcoin,'' and that such sales could
``affect the price of Bitcoin.'' \65\
---------------------------------------------------------------------------

    \62\ See supra notes 55, 59-61, and accompanying text
(discussing comments regarding bitcoin's susceptibility to
manipulation).
    \63\ Registration Statement at 32 (also stating that additional
reasons include that ``certain platforms may lack critical system
safeguards, including customer protections; volatile market price
swings or flash crashes; cyber risks, such as hacking customer
wallets; and/or platforms selling from their own accounts and
putting customers at an unfair disadvantage''). See also
Registration Statement at 18-19 (stating that the ``Trust may be the
target of malicious cyber-attacks'').
    \64\ Registration Statement at 26. See also supra note 57 and
accompanying text.
    \65\ Registration Statement at 29. See also id. at 49 (``because
the Bitcoin Blockchain records ownership of Bitcoin by reference to
the unique addresses of each Bitcoin `wallet,' a certain pseudo-
anonymity of ownership is created'').
---------------------------------------------------------------------------

    NYSE Arca and the Sponsor also do not contest the presence of
possible sources of fraud and manipulation in the bitcoin spot market
generally that the Commission has raised in previous orders, which have
included (1) ``wash'' trading, (2) persons with a dominant position in
bitcoin manipulating bitcoin pricing, (3) hacking of the bitcoin
network and trading platforms, (4) malicious control of the bitcoin
network, (5) trading based on material,

non-public information, including the dissemination of false and
misleading information, (6) manipulative activity involving Tether, and
(7) fraud and manipulation at Mt. Gox, a bitcoin trading platform.\66\
Instead, NYSE Arca and the Sponsor focus their analysis on the
Constituent Platforms, which the Sponsor asserts represent a segment of
the bitcoin spot market that is inherently resistant to
manipulation.\67\
---------------------------------------------------------------------------

    \66\ See supra note 56 and accompanying text; Winklevoss Order,
83 FR at 37585-86; Bitwise Order, 84 FR at 55391 n.140, 55402 &
n.331 (discussing pending litigation against a bitcoin trading
platform for fraudulent conduct relating to Tether). See also
Winklevoss Order, 83 FR at 37584-86 (discussing potential types of
manipulation in the bitcoin spot market); Bitwise Order, 84 FR at
55383 (stating that the sponsor of the proposed ETP presented an
analysis of the bitcoin spot market that asserts that 95% of the
spot market is dominated by fake and non-economic activity, such as
wash trades), 55391 (discussing possible sources of fraud and
manipulation in the bitcoin spot market). The Commission has also
noted that fraud and manipulation in the bitcoin spot market could
persist for a significant duration. See Bitwise Order, 84 FR at
55405 & n.379.
    \67\ See supra note 42. The Commission notes that an academic
paper, the ``Griffin-Shams Paper,'' suggesting that the price of
bitcoin was manipulated with Tether, that the Commission cited in
the Winklevoss Order and the Bitwise Order has recently been
updated. See Griffin, John M. and Shams, Amin, Is Bitcoin Really Un-
Tethered? (October 28, 2019), available at https://ssrn.com/abstract=3195066. See also Winklevoss Order, 83 FR at 37585-86;
Bitwise Order, 84 FR at 55405 n.379.
---------------------------------------------------------------------------

    Importantly, however, the record does not demonstrate that these
possible sources of fraud and manipulation in the broader bitcoin spot
market do not affect the Constituent Platforms that represent a slice
of the bitcoin spot market.\68\ In the Bitwise Order, the Commission
stated that, in the absence of a showing that fraudulent, manipulative,
fake, or otherwise non-economic trading in the broader bitcoin market
does not affect the smaller segment of the bitcoin market on which the
proposed ETP was based, the listing exchange and the proposal's sponsor
``will not be able to establish that the identified [segment of the]
bitcoin market is uniquely resistant to fraud and manipulation, because
prices based on fraudulent and manipulative activity on platforms with
fake or non-economic volume could be used to affect prices on the
identified . . . platforms.'' \69\ Similarly, with the current
proposal, to the extent that fraudulent and manipulative trading on the
broader bitcoin market could influence prices or trading activity on
the Constituent Platforms, the Constituent Platforms would not be
inherently resistant to manipulation.
---------------------------------------------------------------------------

    \68\ In fact, NYSE Arca or the Sponsor did not discuss the
percentage of overall bitcoin spot market trading volume conducted
on the Constituent Platforms nor did they attempt to verify
previously established spot market volume figures showing the
percentage of trading conducted on the Constituent Platforms. See,
e.g., Bitwise Order, 84 FR at 55393.
    \69\ Bitwise Order, 84 FR at 55398.
---------------------------------------------------------------------------

    NYSE Arca, the Sponsor, and CF Benchmarks discuss evidence of a
correlation of bitcoin prices among the Constituent Platforms,\70\ but
do not address whether or not there is any lead/lag relationship
between prices on the Constituent Platforms and prices on other bitcoin
spot market platforms or where price formation occurs as between the
Constituent Platforms and the rest of the spot market.\71\ Absent any
evidence about the relationship between the Constituent Platforms and
the rest of the spot market, as in the Bitwise Order, NYSE Arca and the
Sponsor cannot establish that the Constituent Platforms are uniquely
resistant to manipulation.
---------------------------------------------------------------------------

    \70\ See supra notes 43-54 and accompanying text.
    \71\ Reinforcing the Commission's conclusion, a recent study
provides a preliminary indication that a significant degree of
bitcoin price formation may occur on spot market platforms other
than the Constituent Platforms. See An Analysis of Price Discovery
in Bitcoin Spot Markets (Jan. 15, 2020), available at https://medium.com/digitalassetresearch/an-analysis-of-price-discovery-in-bitcoin-spot-markets-7563fbf1c890.
---------------------------------------------------------------------------

    In addition, the record does not contain any evidence that
demonstrates that the asserted effectiveness of arbitrage in the
identified segment of the spot bitcoin market would, by itself, provide
unique resistance to manipulation sufficient to do away with the need
for a surveillance-sharing agreement with a significant, regulated
market.\72\ In the Bitwise Order, the Commission stated that its
reliance on surveillance-sharing agreements for derivative securities
products has not been limited to ETPs based on commodities, but has
also extended to equity options based on securities listed on national
securities exchanges.\73\ Accordingly, even efficient price arbitrage
may not eliminate the need for surveillance-sharing agreements. As in
the Bitwise Order, there is no evidence in the record here that
arbitrage in the Constituent Platforms is of such unique effectiveness
that it would essentially insulate the proposed ETP from attempts at
manipulation.\74\
---------------------------------------------------------------------------

    \72\ See Bitwise Order, 84 FR at 55390.
    \73\ See Bitwise Order, 84 FR at 55390 (citing Winklevoss Order,
84 FR at 37593; Securities Exchange Act Release No. 33555 (Jan. 31,
1994), 59 FR 5619, 5621 (Feb. 7, 1994) (SR-Amex-93-28) (order
approving listing of options on American Depository Receipts)). See
also supra note 20 and accompanying text.
    \74\ See Bitwise Order, 84 FR at 55391.
---------------------------------------------------------------------------

    Moreover, the record does not demonstrate that arbitrage among the
Constituent Platforms is as ``robust'' as the Sponsor claims. The
Sponsor and CF Benchmarks (the administrator of the Bitcoin Reference
Rate) provide certain metrics regarding price correlations, spread, and
volatility,\75\ but these figures alone present a selective and
incomplete analysis. The record does not provide any evidence about how
these figures compare to other markets or how they might vary over
time. Absent such context, the Commission concludes that these figures
represent an insufficient basis upon which to justify a conclusion
about a relevant market's inherent resistance to manipulation. Further,
even if the record demonstrated that the quality of arbitrage and the
depth of liquidity on the Constituent Platforms made manipulation more
difficult or costly than it would be otherwise, that would, as the
Commission stated in the Bitwise Order, speak to providing some
resistance to manipulation. However, the presence of these factors
would not be sufficient to establish a unique resistance to
manipulation that would justify dispensing with the standard
surveillance-sharing agreement with a significant, regulated
market.\76\
---------------------------------------------------------------------------

    \75\ See supra notes 43, 48, 50-53 and accompanying text.
    \76\ See Bitwise Order, 84 FR at 55391.
---------------------------------------------------------------------------

(ii) Assertions Regarding Regulation of the Constituent Platforms
(A) Representations Made and Comments Received
    NYSE Arca and the Sponsor assert that each of the Constituent
Platforms is regulated by various federal, state, and international
regulators that impose a variety of obligations designed to, among
other things, protect the Constituent Platforms from fraud and
manipulation.
    NYSE Arca states that all of the Constituent Platforms are
registered with the U.S. Department of the Treasury's Financial Crimes
Enforcement Network (``FinCEN'') as money services businesses
(``MSB''); three of the five Constituent Platforms have obtained state
money transmitter licenses; and the other two Constituent Platforms are
operated by trust companies chartered by the State of New York, which
subjects them to New York anti-money-laundering (``AML'') requirements
and enables them to operate in other states without separate money
transmitter licenses.\77\ NYSE Arca and the Sponsor state that, as
MSBs, the Constituent Platforms must fully comply with U.S. Bank
Secrecy Act (``BSA'') and AML requirements, which include developing,
implementing, and maintaining an

effective AML program.\78\ NYSE Arca represents that the Sponsor
concludes that the presence of robust AML and know-your-customer
(``KYC'') policies and procedures should lead to robust trading data
and may inhibit trading on the Constituent Platforms that is intended
to manipulate the Bitcoin Price.\79\
---------------------------------------------------------------------------

    \77\ See Notice, 84 FR at 56227 n.61.
    \78\ See id. at 56227; see also Wilshire Phoenix Submission II
at 12. According to the Sponsor, recent guidance issued by the
Financial Action Task Force (``FATF'') also requires the Constituent
Platforms to comply with AML regulations. See Wilshire Phoenix
Submission II at 6, 12.
    \79\ See Notice, 84 FR at 56227 n.64.
---------------------------------------------------------------------------

    In addition, the Sponsor asserts that by virtue of being
Constituent Platforms for calculation of the Bitcoin Reference Rate,
the CME and, in turn, the Commodity Futures Trading Commission
(``CFTC'') oversee the activity on the Constituent Platforms in a
manner that renders them inherently resistant to manipulation. The
Sponsor states that the CME CF Oversight Committee (``CME Committee'')
determines the membership of platforms used to calculate the Bitcoin
Reference Rate.\80\ NYSE Arca states that, according to the Sponsor,
CME's criteria for each of the Constituent Platforms requires that the
platform facilitate spot trading of the relevant cryptocurrency against
the corresponding fiat currency (``Relevant Pair'') and make trade data
and order data available through an Automatic Programming Interface
(``API'') with sufficient reliability, detail, and timeliness.\81\ In
addition, (1) the platform's Relevant Pair spot trading volume must
meet minimum thresholds; (2) the platform must publish policies to
ensure fair and transparent market conditions at all times and have
processes in place to identify and impede illegal, unfair, or
manipulative trading practices; (3) the platform must not impose undue
barriers to entry or restrictions on market participants, and utilizing
the platform must not expose market participants to undue credit risk,
operational risk, legal risk, or other risks; (4) the platform must
comply with applicable law and regulation, including, but not limited
to, capital markets regulations, money transmission regulations, client
money custody regulations, KYC regulations, and AML regulations; and
(5) the platform must cooperate with inquiries and investigations of
regulators and CF Benchmarks upon request and must execute data-sharing
agreements with CME.\82\ Furthermore, the Sponsor asserts that, as an
additional protection from fraud and manipulation, the Constituent
Platforms are required to maintain transparent and accurate trade and
order data, and that compliance with this requirement is under the
oversight of the CME Committee.\83\
---------------------------------------------------------------------------

    \80\ See Wilshire Phoenix Submission II at 6.
    \81\ See Notice, 84 FR at 56227.
    \82\ See Notice, 84 FR at 56227. See also Wilshire Phoenix
Submission II at 7. NYSE Arca states that the CME monitors the
Constituent Platforms to ensure compliance with its criteria and
removed two platforms in April 2017 for failing to meet its
criteria. See Notice, 84 FR at 56227 n.60.
    \83\ See Wilshire Phoenix Submission II at 7.
---------------------------------------------------------------------------

    The Sponsor also states that CF Benchmarks, among other things,
must establish appropriate monitoring processes and procedures designed
to identify any breaches of its practice standards and any attempted
manipulation or manipulative behavior and report any such incidents in
a timely manner.\84\ The Sponsor states that pursuant to this
authority, Constituent Platforms must make trade and order data
available through an API with sufficient reliability, detail, and
timeliness to meet CF Benchmarks' standards.\85\ Furthermore, according
to the Sponsor, Constituent Platforms must have processes to detect and
prevent manipulative trading.\86\
---------------------------------------------------------------------------

    \84\ See Wilshire Phoenix Submission II at 6, 16.
    \85\ See id. at 5, 7.
    \86\ See id. at 5, 6. The Sponsor argues that such rules, and
the review of such rules by CF Benchmarks, are comparable to those
used by a national securities exchanges or the futures exchanges
associated with the assets underlying the commodity-trust ETPs
approved to date. See id. at 14.
---------------------------------------------------------------------------

    Adherence to the membership eligibility criteria is monitored by CF
Benchmarks and the CME Committee, and the CME Committee may remove or
suspend a Constituent Platform from the Bitcoin Reference Rate in the
event such criteria are not being met.\87\ According to the Sponsor,
the CME Committee was established to protect the integrity of the
methodology and calculation process, and is responsible for reviewing
and ``providing challenge on'' all aspects of the methodology and
calculation process and providing effective oversight of CF Benchmarks
as it relates to the Bitcoin Reference Rate, including CF Benchmarks'
manipulation surveillance.\88\ In addition, the CME Committee is
responsible for reviewing reports on any complaints or concerns
regarding the Bitcoin Reference Rate's relevance, resistance to
manipulation, ``replicability,'' transparency and/or compliance with
the applicable methodology, and overseeing the related investigation
and remedial actions, if any.\89\ As such, the Sponsor states that the
CME Committee is responsible for reviewing and enforcing CF Benchmarks'
manipulation surveillance and enforcement as it relates to the
Constituent Platforms.\90\
---------------------------------------------------------------------------

    \87\ See Wilshire Phoenix Submission II at 6, 15.
    \88\ See Wilshire Phoenix Submission II at 16-17.
    \89\ See Wilshire Phoenix Submission II at 17.
    \90\ See Wilshire Phoenix Submission II at 17.
---------------------------------------------------------------------------

    The Sponsor further asserts that the CME, as a designated contract
market (``DCM''), is required, among other things, to ensure
appropriate mechanisms to surveil, detect, and share information
regarding any manipulation or price distortion on its market.\91\ The
Sponsor states that the CME uses a combination of real-time monitoring,
position limits, and information-sharing agreements with underlying
cash markets to prevent and detect manipulative practices.\92\ In
addition, the Sponsor states that as part of the CFTC staff's
heightened review of CME bitcoin futures, CME, among other things,
monitors data from cash markets with respect to price settlements and
other bitcoin prices more broadly, and identifies anomalies and
disproportionate moves in the cash markets as compared to the futures
markets.\93\ Lastly, NYSE Arca and the Sponsor assert that the CFTC, by
virtue of its oversight of the CME, has anti-fraud and anti-
manipulation authority over the spot bitcoin markets, including the
Constituent Platforms.\94\
---------------------------------------------------------------------------

    \91\ See Wilshire Phoenix Submission II at 23. The Sponsor
asserts that a DCM may not list a contract that is readily
susceptible to manipulation and that, pursuant to the Commodity
Exchange Act, ``a DCM must establish, monitor and enforce rules of
trading on its contract market, including access requirements, terms
and conditions for trading, and rules prohibiting manipulation on
the contract market.'' See Wilshire Phoenix Submission II at 23.
    \92\ See Wilshire Phoenix Submission II at 23-24.
    \93\ See id. at 24.
    \94\ See Notice, 84 FR at 56226 n.43; Wilshire Phoenix
Submission II at 12-13.
---------------------------------------------------------------------------

    Finally, the Sponsor states that surveillance of the Constituent
Platforms is further reinforced by the UK Financial Conduct Authority's
(``FCA'') oversight of CF Benchmarks and CF Benchmarks' obligations as
a benchmark administrator under European Union regulations.\95\
According to the Sponsor, under the EU Benchmark Regulation (``EU
BMR''), CF Benchmarks must establish adequate systems and effective
controls to detect any attempted manipulation on each of the
Constituent Platforms and report

any such attempts to the FCA.\96\ The Sponsor argues that, like the
Commission's regulation of national securities exchanges, the
requirements of the EU BMR are designed to detect and deter
manipulation on the Constituent Platforms and that, by requiring CF
Benchmarks to establish procedures to identify and report such
manipulation to the FCA, the EU BMR increases market surveillance and
deters would-be manipulators by mandating information sharing through
governmental oversight of the Bitcoin Reference Rate.\97\ According to
the Sponsor, the EU BMR also fosters information flow, cooperation, and
coordination between the Constituent Platforms, CME, and ultimately
NYSE Arca.\98\
---------------------------------------------------------------------------

    \95\ See Wilshire Phoenix Submission II at 17 (further noting
that CF Benchmarks was authorized by the United Kingdom FCA and was
granted permission to carry on the regulated activity of
administering a benchmark, and that, as a result, CF Benchmarks is
subject to regulatory oversight by the FCA).
    \96\ See Wilshire Phoenix Submission II at 13. According to CF
Benchmarks, any cases of suspected benchmark manipulation are
escalated through the appropriate regulatory channels in accordance
with its obligations under EU BMR. See CF Benchmarks Letter at 5.
    \97\ See Wilshire Phoenix Submission II at 13.
    \98\ See Wilshire Phoenix Submission II at 13.
---------------------------------------------------------------------------

(B) Analysis
    The record does not demonstrate that the level of regulation
present with respect to the Constituent Platforms makes that segment of
the bitcoin spot market inherently and uniquely resistant to fraud and
manipulation. The Sponsor concedes that, despite the efforts of
regulators or other market participants, bad actors and manipulation
attempts may continue to exist in the bitcoin markets.\99\ The Sponsor
likewise admits that the price of bitcoin may be influenced by fraud
and manipulation because, among other things, ``many bitcoin spot
markets are not regulated or supervised by a government agency,'' and
because ``certain platforms may lack critical system safeguards,
including customer protections.'' \100\
---------------------------------------------------------------------------

    \99\ See Wilshire Phoenix Submission II at 3. The Sponsor
acknowledges that any of the foregoing issues ``may adversely affect
an investment in the Shares.'' See id. See also Registration
Statement at 26 (acknowledging that a bad actor may be able to,
among other things, alter the bitcoin blockchain on which the
bitcoin network and most bitcoin transactions rely, control,
exclude, or modify the ordering of bitcoin transactions, ``double-
spend'' its own bitcoin (i.e., spend the same bitcoin in more than
one transaction) and prevent the confirmation of other users'
transactions).
    \100\ Registration Statement at 32.
---------------------------------------------------------------------------

    In addition, the record establishes that the level of regulation on
the Constituent Platforms is not equivalent to the obligations and
oversight of national securities exchanges or futures exchanges. While
the Sponsor points to the Constituent Platforms' registrations with
FinCEN as money services businesses, and two Constituent Platforms that
are chartered by New York, the Commission stated in the Bitwise Order
that there are substantial differences between FinCEN and New York
state regulation compared to the Commission's regulation of the
national securities exchanges.\101\ For example, while there may be
some overlap,\102\ national securities exchanges are also, among other
things, required to have rules that are ``designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.'' \103\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their operations,\104\ and the
Commission has the authority to disapprove any such rule that is not
consistent with the requirements of the Exchange Act.\105\ Thus,
national securities exchanges are subject to Commission oversight of,
among other things, their governance, membership qualifications,
trading rules, disciplinary procedures, recordkeeping, and fees.\106\
---------------------------------------------------------------------------

    \101\ See Bitwise Order, 84 FR at 55392 (``[t]here are
substantial differences between the NYSDFS and FinCEN regulation
versus the Commission's regulation of the national securities
exchanges.''). The Commission notes that AML and KYC policies and
procedures have been referenced in other bitcoin-based ETP proposals
as a purportedly alternative means by which such ETPs would be
uniquely resistant to manipulation. See, e.g., Bitwise Order, 84 FR
at 55386 n.55 & 55390. The Commission concludes here that such AML
and KYC policies and procedures do not serve as a substitute for,
and are not otherwise the dispositive factor in the analysis
regarding, the importance of having a surveillance-sharing agreement
with a regulated market of significant size relating to bitcoin. For
example, AML and KYC policies and procedures do not substitute for
the sharing of information about market trading activity or clearing
activity, and do not substitute for regulation of national
securities exchanges.
    \102\ See CFTC v. McDonnell, 287 F. Supp. 3d 213, 220-23, 228
(E.D.N.Y.), adhered to on denial of reconsideration, 321 F. Supp. 3d
366 (E.D.N.Y. 2018).
    \103\ 15 U.S.C. 78f(b)(5).
    \104\ 17 CFR 240.19b-4(a)(6)(i).
    \105\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. DCMs (commonly called ``futures
markets'') registered with and regulated by the CFTC must comply
with, among other things, a similarly comprehensive range of
regulatory principles and must file rule changes with the CFTC. See,
e.g., Designated Contract Markets (DCMs), CFTC, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/index.htm.
    \106\ See Winklevoss Order, 83 FR at 37597. The Commission notes
that the NYSDFS has issued ``guidance'' to supervised virtual
currency business entities, stating that these entities must
``implement measures designed to effectively detect, prevent, and
respond to fraud, attempted fraud, and similar wrongdoing.'' See
Maria T. Vullo, Superintendent of Financial Services, NYSDFS,
Guidance on Prevention of Market Manipulation and Other Wrongful
Activity (Feb. 7, 2018), available at https://www.dfs.ny.gov/docs/legal/industry/il180207.pdf. The NYSDFS recognizes that its
``guidance is not intended to limit the scope or applicability of
any law or regulation'' (id.), which would include the Exchange Act.
The Commission further notes that nothing in the record evidences
whether the Constituent Platforms have complied with this NYSDFS
guidance. FinCEN's guidance regarding the application of its
regulations to digital assets notes that its guidance does not
``affect the obligations of any of the participants described herein
under other regulatory frameworks,'' for example, obligations under
``federal securities law.'' FinCEN Guidance No. FIN-2019-G001:
Application of FinCEN's Regulation to Certain Business Models
Involving Convertible Virtual Currencies, at 24 n.75 (May 9, 2019),
available at https://www.fincen.gov/sites/default/files/2019-05/FinCEN%20Guidance%20CVC%20FINAL%20508.pdf. See also FinCEN Guidance
No. FIN-2013-G001: Application of FinCEN's Regulations to Persons
Administering, Exchanging, or Using Virtual Currencies, at 1 n.1
(Mar. 18, 2013), available at https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf (noting that FinCEN's guidance
``should not be interpreted as a statement by FinCEN about the
extent to which [certain] activities comport with other federal or
state statutes, rules, regulations, or orders'').
---------------------------------------------------------------------------

    The Commission finds that the Constituent Platforms are materially
different. While the Sponsor asserts that various regulatory entities
require the Constituent Platforms to adopt certain policies and
processes, such requirements are fundamentally different from the
Exchange Act's requirements for national securities exchanges, and it
is unclear the extent to which a federal regulator must approve or
disapprove of the rules of the Constituent Platforms and directly
oversee their implementation and enforcement. Thus, the Exchange Act
explicitly tasks the Commission with the responsibility of ensuring
that the rules of a national securities exchange, as an SRO, are fully
responsive to regulatory needs and that there is no decrement between
regulatory needs and SRO performance.\107\ Currently, there is no
regulatory authority that maintains similar obligations with respect to
any policies or processes adopted by bitcoin spot trading platforms.
Furthermore, unlike national

securities exchanges, the Constituent Platforms are not SROs and
therefore do not have authority to impose discipline upon their
participants. Accordingly, the Commission maintains that the level of
regulation on the Constituent Platforms, as asserted by the Sponsor, is
not equivalent to the obligations and oversight of national securities
exchanges, and the Commission likewise rejects the Sponsor's factual
assertion that this level of regulation present with respect to the
Constituent Platforms makes that segment of the bitcoin spot market
inherently or uniquely resistant to fraud and manipulation.
---------------------------------------------------------------------------

    \107\ See 15 U.S.C. 78s(b). See also S. Rep. No. 94-75, at 30
(1975).
---------------------------------------------------------------------------

    As to the Sponsor's contention that the self-certification of
bitcoin futures establishes the oversight of the Constituent Platforms
by the CFTC, as an initial matter, the Commission observed in the
Winklevoss Order, the CFTC's statutory authority to review new
derivative products differs substantially from the Commission's
authority, under Section 19(b) of the Exchange Act,\108\ with respect
to the review of proposed rule changes by SROs.\109\ For example, while
there are ``limited grounds'' for the CFTC to take affirmative action
to stay new product self-certifications,\110\ the Commission must, to
approve a proposed rule change, make an affirmative finding that the
proposed rule change is consistent with the Exchange Act, with the
burden of demonstrating consistency with the Exchange Act resting with
the SRO proposing the rule change.\111\ The Commission is also mindful
that the primarily institutional markets that the CFTC supervises are
materially different from the securities markets in which many retail
investors participate directly.\112\ The Exchange Act's requirements
for SROs, who serve as ``front-line'' regulators in the protection of
retail investors,\113\ to establish rules that protect investors and
promote the public interest reflects the extent of such retail
participation in our public equity markets. In contrast, the CFTC
acknowledges that ``[m]ost participants in the futures markets are
commercial or institutional commodities producers or consumers'' and
``[t]rading commodity futures and options is a volatile, complex and
risky venture that is rarely suitable for individual investors or
`retail customers.' '' \114\ The Commission concludes that the
Sponsor's assertions that oversight by the CFTC establishes that the
Constituent Platforms are regulated markets are not supported by the
record. While the Commission recognizes that the CFTC maintains some
jurisdiction over the bitcoin spot market, under the Commodity Exchange
Act, the CFTC does not have regulatory authority over bitcoin spot
trading platforms, including the Constituent Platforms.\115\ Except in
certain limited circumstances, bitcoin spot trading platforms are not
required to register with the CFTC, and the CFTC does not set standards
for, approve the rules of, examine, or otherwise regulate bitcoin spot
markets.\116\ As the CFTC itself stated, while the CFTC ``has an
important role to play,'' U.S. law ``does not provide for direct,
comprehensive Federal oversight of underlying Bitcoin or virtual
currency spot markets.'' \117\ Based on the foregoing differences in
the types and levels of regulations governing the bitcoin spot market,
the Commission cannot conclude that the record has adequately
demonstrated that the level of regulation present with respect to the
Constituent Platforms' segment of the bitcoin spot market renders such
segment of the spot market inherently or uniquely resistant to fraud
and manipulation.
---------------------------------------------------------------------------

    \108\ 15 U.S.C. 78s(b).
    \109\ See Winklevoss Order, 83 FR at 37587.
    \110\ See CFTC Backgrounder on Oversight of and Approach to
Virtual Currency Futures Markets (Jan. 4, 2018) at 2, available at
<EMAIL_ADDRESS>(``Virtual Currency
Backgrounder''). See also Winklevoss Order, 83 FR at 37587.
    \111\ See supra notes 33-34 and accompanying text. Compare 7
U.S.C. 7a-2(c) and 17 CFR 40.6 with 15 U.S.C. 78(b)(1) and 17 CFR
240.19b-4.
    \112\ See Winklevoss Order, 83 FR at 37587.
    \113\ See Securities Exchange Act Release No. 12737 (Aug. 25,
1976), 41 FR 38847, 38854 (Sept. 13, 1976); Securities Exchange Act
Release No. 50699 (Nov. 18, 2004), 69 FR 71126, 71132 (Dec. 8,
2004).
    \114\ Futures Market Basics, CFTC, available at http://www.cftc.gov/ConsumerProtection/EducationCenter/FuturesMarketBasics/index.htm. See also Winklevoss Order, 83 FR at 37587.
    \115\ See Written Testimony of J. Christopher Giancarlo,
Chairman, Commodity Futures Trading Commission, Before the Senate
Banking Committee (Feb. 6, 2018) (``Giancarlo Testimony''),
available at https://cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo37.
    \116\ See Winklevoss Order, 83 FR at 37599.
    \117\ See Winklevoss Order, 83 FR at 37599 n.288.
---------------------------------------------------------------------------

    The Commission similarly is not persuaded by the Sponsor's
assertions that oversight by CF Benchmarks establishes that the
Constituent Platforms are regulated markets. CF Benchmarks--the
administrator of the Bitcoin Reference Rate--does not itself exercise
governmental regulatory authority. Rather, CF Benchmarks is a
registered, privately-held company in England.\118\ CF Benchmarks'
relationship with the Constituent Platforms is based on the Constituent
Platforms' participation in the determination of CF Benchmarks'
reference rates, such as the Bitcoin Reference Rate. While CF
Benchmarks is regulated by the FCA as a benchmark administrator, FCA
regulations do not extend to the Constituent Platforms by virtue of
their trade prices serving as the input data underlying the Bitcoin
Reference Rate.\119\
---------------------------------------------------------------------------

    \118\ See https://www.cfbenchmarks.com/legal (stating that CF
Benchmarks is authorized and regulated by the UK FCA as a registered
Benchmark Administrator (FRN 847100) under the EU BMR, and further
noting that CF Benchmarks is a member of the Crypto Facilities group
of companies which is in turn a member of the Payward, Inc. group of
companies, and Payward, Inc. is the owner and operator of the Kraken
Exchange, a venue that facilitates the trading of cryptocurrencies).
The Commission notes that the Kraken Exchange is a source of input
data for CF Benchmarks indices and is one of the Constituent
Platforms underlying the Bitcoin Reference Rate.
    \119\ CF Benchmarks is also not required to apply certain
provisions of EU benchmark regulation to the Constituent Platforms
because the Bitcoin Reference Rate's input data is not
``contributed.'' See Benchmark Statement, at 4 available at https://www.cryptofacilities.com/cms/storage/resources/cme-cf-benchmark-statement.pdf.
---------------------------------------------------------------------------

    According to the Sponsor, the oversight performed by CF Benchmarks
of the Constituent Platforms is contractual in nature and is for the
purpose of CF Benchmarks satisfying its obligations under EU
regulations designed to ensure the accuracy and integrity of
benchmarks.\120\ Such oversight serves a fundamentally different
purpose as compared to the regulation of national securities exchanges
and the mandates of the Exchange Act, because, as the Sponsor explains,
the purpose of oversight by a benchmark administrator is to ensure that
the data provided to calculate the benchmark rate accurately reflects
the prices that were traded, or available to trade, on trading
venues.\121\ While the Commission recognizes that this may be an
important function in ensuring the integrity of reference rates, such
requirements do not imbue either CF Benchmarks or the Constituent
Platforms with regulatory authority similar to that the Exchange Act
confers upon SROs such as national securities exchanges.\122\
---------------------------------------------------------------------------

    \120\ See supra note 95 and accompanying text.
    \121\ See infra note 207 and accompanying text.
    \122\ See 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    The Sponsor also asserts that CF Benchmarks reviews the ``rules''
(meaning policies and procedures, rather than regulatory obligations)
of the Constituent Platforms in a manner comparable to the Commission's
oversight of national securities exchanges. However, neither the
Sponsor nor NYSE Arca has provided evidence establishing matters such
as the specific regulatory requirements applicable to the Constituent
Platforms' rules, the process for codifying such

rules, the requirement of a regulatory body to approve or disapprove
rules pursuant to a statutory mandate, and the ability of Constituent
Platforms and regulatory authorities to enforce such rules.\123\
National securities exchanges are entities that possess governmental
authority such that they must carry out their self-regulatory
responsibilities effectively and fairly while protecting investors and
promoting the public trust.\124\ Accordingly, the Exchange Act subjects
the rules of national securities exchanges to the same standards of
policy justification as those which apply to the Commission and also
specifically requires the Commission to approve or disapprove rules in
accordance with articulated statutory mandates.\125\ The record does
not establish that, due to CF Benchmarks' oversight, the Constituent
Platforms are subject to a regulatory regime that includes, at a
minimum, requirements comparable to these core elements of national
securities exchange regulation such that Constituent Platforms are
regulated markets.
---------------------------------------------------------------------------

    \123\ See Registration Statement at 31-32 (describing the
Sponsor's own acknowledgement of the lack of regulation and
transparency with respect to bitcoin spot markets, specifically
noting that many bitcoin spot markets ``are not regulated or
supervised by a government agency,'' and that ``certain platforms
may lack critical system safeguards, including customer
protections'').
    \124\ 15 U.S.C. 78f(b)(5). See also S. Rep. No. 94-75, at 29-30
(1975).
    \125\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    Furthermore, because the purported oversight by CF Benchmarks, does
not represent a unique measure to resist manipulation beyond mechanisms
that exist in securities or commodities markets, the record does not
establish that the Constituent Platforms are inherently resistant to
manipulation such that it would justify dispensing with a surveillance-
sharing agreement with a significant, regulated market.\126\ Other
commodity-based and equity index ETPs approved by the Commission for
listing and trading utilize reference rates or indices administered by
similar benchmark administrators and the Commission did not dispense
with the need for a surveillance-sharing agreement with a significant,
regulated market in those instances.\127\ Thus, while measures such as
those represented by the Sponsor may facilitate detection or perhaps
even deterrence of fraud and manipulation, they do not render those
markets inherently or uniquely resistant to manipulation.
---------------------------------------------------------------------------

    \126\ See also supra notes 101-107 and accompanying text finding
that the purported oversight by NYSDFS and FinCEN does not establish
that the Constituent Platforms are inherently or uniquely resistant
to manipulation.
    \127\ See, e.g., Securities Exchange Act Release No. 80840 (June
1, 2017) 82 FR 26534 (June 7, 2017) (NYSEArca-2017-33) (approving
the listing and trading of shares of the Euro Gold Trust, Pound Gold
Trust, and the Yen Gold Trust); Securities Exchange Act Release No.
83046 (Apr. 13, 2018) 83 FR 17462 (Apr. 19, 2018) (Nasdaq-2018-012)
(approving the listing and trading of shares of an exchange-traded
fund that seeks to track an equity index, the CBOE Russell 2000 30-
Delta BuyWrite V2 Index).
---------------------------------------------------------------------------

    The Commission also notes that NYSE Arca has not stated that it has
entered into surveillance-sharing agreements with each of the
individual Constituent Platforms that utilize surveillance tools.
Moreover, even if NYSE Arca did enter into such agreements, it is not
clear what ability NYSE Arca would have to compel the sharing of
surveillance data, and NYSE Arca has not established that it would be
able to compel such sharing. Unlike national securities exchanges, the
bitcoin spot platforms are not self-regulatory organizations, and
therefore do not have authority to impose discipline upon their
participants.
    The Commission thus concludes that the record does not demonstrate
that the current oversight of the Constituent Platforms renders the
bitcoin spot market uniquely resistant to manipulation, such that a
surveillance-sharing agreement with a significant, regulated market
would not be needed to adequately deter and detect fraud and
manipulation.
(b) Assertions About the Design of the Bitcoin Reference Rate (the CME
CF BRR)
(i) Representations Made and Comments Received
    The Sponsor asserts that the Bitcoin Reference Rate methodology
makes the Bitcoin Reference Rate inherently resistant to
manipulation.\128\ The Sponsor and NYSE Arca state that CME's own
analysis and an independent examination of the Bitcoin Reference Rate
methodology support this assertion.\129\ In particular, NYSE Arca and
the Sponsor state that the Bitcoin Reference Rate aggregates the
bitcoin-to-U.S. dollar trade flow of its Constituent Platforms during a
one-hour calculation window, partitions that window into twelve, five-
minute intervals, calculates a volume-weighted median price for each
partition, and then calculates an equally-weighted average of the
volume-weighted median of all partitions.\130\ The Sponsor argues that,
because of these design choices, influencing the Bitcoin Reference Rate
would require price manipulation on multiple exchanges over an extended
period of time, which, according to the Sponsor, would be unreasonably
costly and operationally intensive.\131\ Further, NYSE Arca states that
the Bitcoin Reference Rate's use of a volume-weighted average median
price, determined over twelve five-minute windows in a specific 60-
minute period, and the capital necessary to maintain a significant
presence on any Constituent Platform would make any attempted
manipulation of the Bitcoin Reference Rate unlikely.\132\
---------------------------------------------------------------------------

    \128\ The Sponsor provided the Commission with a written
presentation at a meeting on October 16, 2019. See Commission Staff
Memorandum to File re: Meeting with Wilshire Phoenix, Mayer Brown
LLP, NYSE Arca, Inc., and Seward & Kissel LLP (Oct. 16, 2019)
(attaching Presentation to the Commission by Wilshire Phoenix
(``Wilshire Phoenix Submission I'')), available at https://www.sec.gov/comments/sr-nysearca-2019-39/srnysearca201939-6297119-193433.pdf. See Wilshire Phoenix Submission I at 5. According to the
Sponsor, development of the Bitcoin Reference Rate relied on
recognized best principles for financial benchmarks and the expert
oversight committee oversees the scope of the Index to ensure it
remains relevant and robust. See Wilshire Phoenix Submission I at 5.
    \129\ See Wilshire Phoenix Submission I at 8 (citing Wilshire
Phoenix Submission I at Appendix 1); Notice, 84 FR at 56225 (citing
Andrew Paine and William J. Knottenbelt, Analysis of the CME CF
Bitcoin Reference Rate and Real Time Index, Section 2.2.2, Oct.
2016, available at https://www.cmegroup.com/trading/files/bitcoin-white-paper.pdf (``Paine & Knottenbelt'')). The Sponsor includes in
its first submission an analysis of the Bitcoin Reference Rate
written by the CME Group that describes the Bitcoin Reference Rate
and its methodology, and analyzes the degree to which Bitcoin
Reference Rate is representative of the underlying spot market that
it tracks. See Wilshire Phoenix Submission I at 11-57.
    \130\ See Notice, 84 FR at 56223, 56225; Wilshire Phoenix
Submission I at 5.
    \131\ See Wilshire Phoenix Submission I at 5. See also Notice,
84 FR at 56225 (citing Paine & Knottenbelt, Section 2.2.2) (`` `The
chosen specification makes the [Bitcoin Reference Rate] highly
resistant against manipulation. . . . Influencing the [Bitcoin
Reference Rate] would therefore require price manipulation . . .
over an extended period of time.' ''); Wilshire Phoenix Submission I
at 12.
    \132\ See Notice, 84 FR at 56225. The Sponsor asserts that the
interconnectivity required to be eligible to be a Constituent
Platform, combined with the volume and depth of liquidity among the
Constituent Platforms and capital necessary to maintain a
significant presence on the Constituent Platforms, makes
manipulation prohibitively expensive because a would be manipulator
would need to influence multiple platforms. See Wilshire Phoenix
Submission II at 8.
---------------------------------------------------------------------------

    In addition, CF Benchmarks states that, while ``[a]ll benchmarks
are susceptible to manipulation,'' the design of the Bitcoin Reference
Rate methodology provides several benefits related to manipulation
resistance.\133\ According to CF Benchmarks, the use of partitions, as
well as the use of equal-weighting instead of volume-weighting among
the partitions, limits the influence of individual trades of large size
or a cluster of trades in a short period of time because such trades
would only influence the level of the

volume-weighted mean for the partition or partitions in which they were
conducted and as such would not have undue influence on the overall
benchmark price.\134\
---------------------------------------------------------------------------

    \133\ See CF Benchmarks Letter at 3-4.
    \134\ See CF Benchmarks Letter at 4. CF Benchmarks also cites
the use of volume-weighted medians (instead of volume-weighted
means), the arithmetic mean of the partitions, and equal weighting
of Constituent Platforms as preventing the undue influence of trades
at outlier prices or large trades and the ability of potential
manipulators from targeting one platform. See id. In addition, CF
Benchmarks states that the Bitcoin Reference Rate methodology will
identify a Constituent Platform with trades over a certain deviation
from the volume-weighted median and exclude transactions from such
Constituent Platform from the benchmark calculation. See id. at 5.
---------------------------------------------------------------------------

    CF Benchmarks also asserts that, due to the Bitcoin Reference Rate
methodology ``certain types of manipulative trading would have little
or no impact on the level of the [Bitcoin Reference Rate].'' \135\ As
examples, CF Benchmarks states that the influence of a single large
volume trade placed during the observation window would be confined due
to the averaging component of the methodology, and that the influence
of twelve large-volume trades placed in each five-minute partition
during the observation window would be nullified due to the use of
volume-weighted means.\136\ CF Benchmarks further asserts that, to be
sure to have a meaningful impact on the Bitcoin Reference Rate, a
trader would need to be responsible for more than 50% of the volume of
a partition through trades executed at a significant deviation to the
prevailing price, for a period of 45 minutes--in other words, for nine
of the twelve partitions--to overcome the averaging effect of the
methodology.\137\ CF Benchmarks estimates that the capital required to
manipulate the Bitcoin Reference Rate would likely exceed $20 million,
and asserts that the presence of arbitrageurs would likely require the
commitment of additional capital depending on the degree of impact the
manipulator sought to make.\138\ CF Benchmarks also asserts that a
manipulator would need to maintain a significant presence across all
Constituent Platforms.\139\
---------------------------------------------------------------------------

    \135\ CF Benchmarks Letter at 2.
    \136\ See CF Benchmarks Letter at 2-3.
    \137\ See CF Benchmarks Letter at 3.
    \138\ See CF Benchmarks Letter at 3.
    \139\ See CF Benchmarks Letter at 3. Cf. Notice, 84 FR at 56225.
---------------------------------------------------------------------------

    In addition, according to CF Benchmarks, use of the Bitcoin
Reference Rate would mitigate against potential manipulation that could
arise if an alternative pricing source or index used a wider set of
markets and trading pairs that did not offer the traceability of the
Bitcoin Reference Rate.\140\ CF Benchmarks states that only
manipulation of the bitcoin-U.S. dollar markets operated by the
Constituent Platforms can impact the integrity of the Bitcoin Reference
Rate, because the benchmark exclusively uses transaction data in
bitcoin-U.S. dollar trading pairs from the Constituent Platforms and
does not use transaction data from transactions conducted in parallel
markets, such as bitcoin trading against ``stablecoins'' or other
cryptocurrencies.\141\
---------------------------------------------------------------------------

    \140\ See CF Benchmarks Letter at 1-2.
    \141\ See id. at 1. CF Benchmarks states that bitcoin-U.S.
dollar markets rely on traditional banking operators to facilitate
deposits and withdrawals of U.S. dollars, and that this facilitation
requires disclosure of users' personal information. See id. at 1-2.
According to CF Benchmarks, this disclosure requirement would act as
a deterrent to manipulation that would likely be absent where
alternative trading pairs that utilize ``stablecoins'' and other
cryptocurrencies are utilized as input data to the calculations. See
id. at 2. The term ``stablecoin'' is a marketing term broadly used
in the industry to refer to a digital asset that purports to
minimize price volatility. However, the Commission notes that the
use of the term to refer to a digital asset does not mean that the
asset does in fact exhibit stability. See Bitwise Order, 84 FR at
55389 n.101.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that NYSE Arca and the Sponsor have not
demonstrated that the design of the Bitcoin Reference Rate makes the
underlying market of the proposed ETP inherently and uniquely resistant
to manipulation. The Commission recognizes that the Bitcoin Reference
Rate is the U.S. dollar rate used to settle the CME's cash-settled
bitcoin futures contracts, and that the Commodity Exchange Act and CFTC
regulations require futures contracts and their cash-settlement
processes to not be ``readily susceptible to manipulation.'' \142\ The
Commission does not assert that the Bitcoin Reference Rate fails to
meet that standard. Rather, the Commission finds that the record does
not establish that the underlying market is uniquely and inherently
resistant to manipulation such that it would be consistent with the
Exchange Act for NYSE Arca to dispense with entering into a
surveillance-sharing agreement with a regulated market of significant
size.
---------------------------------------------------------------------------

    \142\ 7 U.S.C. 7(d)(3); 17 CFR 38.200.
---------------------------------------------------------------------------

    The Commission's conclusion on this point is consistent with the
CFTC's actions with respect to bitcoin futures products. CFTC
regulations require a designated contract market (DCM) like CME's cash-
settled bitcoin futures market to enter into information-sharing
agreements with settlement rate providers to detect and deter
manipulative behavior.\143\ Specifically with respect to bitcoin
futures products, the CFTC further requires such DCMs to enter into
information-sharing agreements with spot market platforms that make up
the underlying settlement price index to allow DCMs access to pertinent
trade and trader data.\144\ Accordingly, in the case of bitcoin futures
products, not only has the CFTC employed its traditional standards of
entering into information-sharing agreements with settlement rate
providers, but it also has required DCMs to enter into data-sharing
agreements with spot market platforms to facilitate the detection and
deterrence of manipulative behavior.
---------------------------------------------------------------------------

    \143\ See 17 CFR 38.253; Appendix C to Part 38 of CFTC's
regulations.
    \144\ See Giancarlo Testimony; Virtual Currency Backgrounder at
3.
---------------------------------------------------------------------------

    The Commission concludes that the CFTC's heightened review specific
to bitcoin futures, including the information-sharing requirements that
it imposes despite the use of the Bitcoin Reference Rate, underscore
that the Bitcoin Reference Rate does not possess unique characteristics
such that a surveillance-sharing agreement would not be necessary to
list the proposed ETP in a manner that satisfies the requirements of
the Exchange Act.\145\ While the methodologies of the Bitcoin Reference
Rate could provide protections that mitigate the potential effects of
certain types of manipulation, as identified by CF Benchmarks, the
Commission concludes that neither the evidence in the record, nor the
actions of the CFTC, establish that either the Bitcoin Reference Rate
or the relevant segment of the bitcoin spot market maintains a unique
resistance to manipulation such that there would be no need to enter
into a surveillance-sharing agreement with a regulated significant
market to detect and deter fraudulent and manipulative activity.\146\
---------------------------------------------------------------------------

    \145\ See Giancarlo Testimony (explaining that heightened review
included ``a set of enhanced monitoring and risk management steps''
to ensure that the bitcoin futures products and their cash-
settlement processes were not readily susceptible to manipulation);
Virtual Currency Backgrounder at 3 (listing the terms and conditions
of heightened review, including DCMs entering into agreements with
spot market platforms to allow access to trade and trader data).
    \146\ The Commission concludes that the methodologies of the
Bitcoin Reference Rate as other means of preventing fraud and
manipulation taken by itself or in combination with any of the other
means described in this Order are not sufficient to dispense with
the need for a comprehensive surveillance-sharing agreement with a
regulated market of significant size relating to the underlying
assets.
---------------------------------------------------------------------------

    In any event, the Commission is unpersuaded that CF Benchmarks'
assertions about the Bitcoin Reference

Rate's resistance to manipulation dispense with the need for the
requisite surveillance-sharing agreement. As analyzed above in Section
III.B.1.(a)(i)(B), the record does not establish that the Constituent
Platforms are inherently or uniquely resistant to fraud and
manipulation because the record does not address the influence of the
broader bitcoin spot market--where various kinds of fraud and
manipulation from a variety of sources may be present and persist for a
substantial duration--on the Constituent Platforms.\147\
---------------------------------------------------------------------------

    \147\ See supra note 66 and accompanying text.
---------------------------------------------------------------------------

(c) Other Features of the Trust
(i) Representations Made and Comments Received
    According to NYSE Arca, the Sponsor maintains that certain aspects
of the Trust enhance its resistance to market manipulation.
Specifically, NYSE Arca represents that the Trust was created as a way
for market participants to gain reasonable exposure to bitcoin through
a vehicle that mitigates the volatility that has historically been
associated with bitcoin.\148\ NYSE Arca states the Trust will have no
assets other than (a) bitcoin and (b) T-Bills in proportions that seek
to closely replicate the Index, which is calculated and published by
the Index Calculation Agent.\149\ NYSE Arca asserts that T-Bills are
among the most liquid and widely traded assets in the world and are
deemed to be risk free.\150\ According to the Sponsor, the selection of
T-Bills as a constituent of the Trust will dampen the volatility of
bitcoin as it relates to the Trust, and consequently the Shares.\151\
The Sponsor states that, because bitcoin is not the only constituent of
the Trust (and the other constituent, T-Bills, has historically been a
stable and risk-free investment), any potential manipulation of the
Trust and the Shares would be extremely difficult and therefore
unlikely.\152\
---------------------------------------------------------------------------

    \148\ See Notice, 84 FR at 56228.
    \149\ See id.
    \150\ See id.
    \151\ See id.
    \152\ See id.
---------------------------------------------------------------------------

    The Sponsor also asserts that the ability of a holder of Shares to
redeem only monthly affects the Shares' resistance to manipulation
because (i) of the significant passage of time between when a
redemption request must be submitted and when the redemption is priced
and distributed and (ii) it limits the window during which someone
could successfully manipulate the Shares in order to profit from such
redemption.\153\ The Sponsor further argues that this redemption method
also reduces operational risk, counterparty risk, and other risks thus
increasing investor protection.\154\
---------------------------------------------------------------------------

    \153\ See Wilshire Phoenix Submission II at 28-29. The Sponsor
states that it is critical that the redemption order cutoff time,
which is five (5) business days prior to the applicable redemption
date, be prior to any of the daily valuation determination times of
the assets of the Trust (i.e., bitcoin and T-Bills). If this is not
the case, the Sponsor asserts that a potential manipulator could
redeem the Trust's Shares at the prior price at the time of the
asset value determination versus the current trading price, which
would allow the potential manipulator to reap a benefit to the
detriment of others. If the redemption order cut-off is properly set
before any asset value determination times, then there is no
possibility of redeeming Shares of the Trust after any of the asset
valuation times, regardless of when NAV itself is actually
published. The Sponsor concludes that this is accomplished in the
Trust's case because the redemption order cut-off is five (5)
business days before the determination of the NAV on the redemption
date. See Wilshire Phoenix Submission II at 27.
    \154\ See Wilshire Phoenix Submission II at 29.
---------------------------------------------------------------------------

(ii) Analysis
    NYSE Arca has not demonstrated that these additional features of
the Trust, such as its T-Bills holdings and its redemption method,
would render the relevant segment of the underlying bitcoin market
uniquely resistant to manipulation, such that it would be consistent
with the Exchange Act to dispense with the need for the listing
exchange to enter into a surveillance-sharing agreement with a
significant regulated market to detect and deter fraudulent and
manipulative activity.
    While the proposed ETP would hold T-Bills in addition to bitcoin,
this aspect is insufficient to support a finding that the bitcoin held
in the Trust would be inherently or uniquely resistant to manipulation.
Previously disapproved bitcoin-based ETP proposals, including proposals
to list and trade bitcoin futures-based ETPs, have contemplated
holdings in similarly liquid instruments, such as government securities
and cash.\155\ There is nothing in the record to suggest that including
holdings in assets more liquid than bitcoin would render the bitcoin
assets to be inherently or uniquely resistant to manipulation, such
that there would be no need for a surveillance-sharing agreement with a
regulated market of significant size. Furthermore, even if the Sponsor
were correct in its assertion that holding T-Bills might make the
proposed ETP more resistant to volatility,\156\ there is nothing in the
record to suggest that the percentage of the Trust's holdings comprised
of bitcoin would be of such size that it would meaningfully reduce the
potential to manipulate the Trust.
---------------------------------------------------------------------------

    \155\ See, e.g., SolidX Order, 82 FR at 16247 (describing the
holdings to include bitcoin and cash); Notice of Filing of Proposed
Rule Change To List and Trade the Shares of the ProShares Bitcoin
ETF and the ProShares Short Bitcoin ETF Under NYSE Arca Rule 8.200-
E, Commentary .02, Securities Exchange Act Release No. 82350 (Dec.
19, 2017), 82 FR 61100, 61102 (Dec. 26, 2017) (SR-NYSEArca-2017-139)
(describing the holdings to include, in addition to bitcoin futures
contracts, cash or cash equivalents and/or U.S. Treasury securities
or other high credit quality, short-term fixed-income or similar
securities); Notice of Filing of Proposed Rule Change Relating to
Listing and Trading of the Direxion Daily Bitcoin Bear 1X Shares,
Direxion Daily Bitcoin 1.25X Bull Shares, Direxion Daily Bitcoin
1.5X Bull Shares, Direxion Daily Bitcoin 2X Bull Shares and Direxion
Daily Bitcoin 2X Bear Shares Under NYSE Arca Rule 8.200-E,
Securities Exchange Act Release No. 82532 (Jan. 18, 2018), 83 FR
3380, 3383 (Jan. 24, 2018) (SR-NYSEArca-2018-02) (describing the
holdings to include, in addition to bitcoin futures contracts, cash
or cash equivalents, such as U.S. Treasury Securities or other high
credit quality short-term fixed-income or similar securities); and
Notice of Filing of a Proposed Rule Change To List and Trade Shares
of the GraniteShares Bitcoin ETF and the GraniteShares Short Bitcoin
ETF, a Series of the GraniteShares ETP Trust, Under Rule
14.11(f)(4), Trust Issued Receipts, Securities Exchange Act Release
No. 82484 (Jan. 11, 2018), 83 FR 2704, 2705-06 (Jan.18, 2018) (SR-
CboeBZX-2018-001) (describing the holdings to include, in addition
to bitcoin futures contracts, cash and cash equivalents).
    \156\ See supra note 151 and accompanying text.
---------------------------------------------------------------------------

    With respect to redemption of the Shares, the Sponsor's assertions
that the proposed ETP's redemption method positively affects the
Shares' resistance to manipulation do not support a finding that the
bitcoin held in the Trust would be inherently or uniquely resistant to
manipulation. The proposed ETP's monthly redemption method is not
novel. Previously, the Commission has approved the listing and trading
of several commodity-based trust ETPs with a monthly redemption
feature.\157\ However, in each instance the Commission noted that the
listing

market had a surveillance-sharing agreement in place, or had common
membership in ISG, with a regulated market of significant size related
to the underlying commodity or commodities.\158\ Moreover, establishing
a period of time, whether it be significant or not, between the time of
receipt of the redemption request and the time of pricing of the
redemption is not a unique feature that would distinguish the proposed
ETP from other bitcoin-related ETP proposals where the Commission
likewise did not find the underlying market to be inherently or
uniquely resistant to manipulation.\159\
---------------------------------------------------------------------------

    \157\ See, e.g., Notice of Filing of Amendment No. 2 and Order
Approving on an Accelerated Basis a Proposed Rule Change, as
Modified by Amendment No. 2, To List and Trade Shares of the Sprott
Physical Gold and Silver Trust Under NYSE Arca Rule 8.201-E,
Securities Exchange Act Release No. 82448 (Jan. 5, 2018), 83 FR 1428
(Jan. 11, 2018) (SR-NYSEArca-2017-131) (``Gold and Silver Order'');
Order Approving a Proposed Rule Change, as Modified by Amendment No.
1, To List and Trade Units of the Sprott Physical Platinum and
Palladium Trust Pursuant to NYSE Arca Equities Rule 8.201,
Securities Exchange Act Release No. 68430 (Dec. 13, 2012), 77 FR
75239 (Dec. 19, 2012) (SR-NYSEArca-2012-111) (``Platinum and
Palladium Order''); Notice of Filing and Order Granting Accelerated
Approval of a Proposed Rule Change To List and Trade Shares of the
Sprott Physical Silver Trust, Securities Exchange Act Release No.
63043 (Oct. 5, 2010), 75 FR 62615 (Oct. 12, 2010) (SR-NYSEArca-2010-
84) (``Silver Order''); and Order Granting Approval of a Proposed
Rule Change To List and Trade the Sprott Physical Gold Trust,
Securities Exchange Act Release No. 61496 (Feb. 4, 2010), 75 FR 6758
(Feb. 10, 2010) (SR-NYSEArca-2009-113) (``Gold Order'').
    \158\ See, e.g., Gold and Silver Order, 83 FR at 1436 & n.43;
Platinum and Palladium Order, 77 FR at 75240-21 n.21; Silver Order,
75 FR at 62621; and Gold Order, 75 FR at 6760 & n.18.
    \159\ See, e.g., Notice of Filing of a Proposed Rule Change to
BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, To List and
Trade Winklevoss Bitcoin Shares Issued by the Winklevoss Bitcoin
Trust, Securities Exchange Act Release No. 78262 (July 8, 2016), 81
FR 45554, 45569 (July 14, 2016) (SR-BatsBZX-2016-30) (describing the
redemption settlement to be no more than five business days
following the redemption order date).
---------------------------------------------------------------------------

2. Assertions That NYSE Arca Has Entered Into a Surveillance-Sharing
Agreement With a Regulated Market of Significant Size
    The Commission next examines whether the record supports the
assertion by NYSE Arca and the Sponsor that NYSE Arca has entered into
a surveillance-sharing agreement with a regulated market of significant
size by virtue of NYSE Arca's surveillance-sharing agreement with the
CME bitcoin futures market.\160\ As was the case in the Bitwise Order,
based on the common membership of NYSE Arca and CME in the ISG,\161\
NYSE Arca has the equivalent of a comprehensive surveillance-sharing
agreement with CME.\162\ While the Commission recognizes that the CFTC
regulates the CME futures market,\163\ the record does not, as
explained further below, establish that the CME bitcoin futures market
is a ``market of significant size'' in the context of the proposed
ETP.\164\
---------------------------------------------------------------------------

    \160\ See Notice, 84 FR at 56225-26; Wilshire Phoenix Submission
II at 19-24.
    \161\ See Notice, 84 FR at 56226; Wilshire Phoenix Submission II
at 24.
    \162\ See supra note 14. See also Notice, 84 FR at 56226 & n.43;
Wilshire Phoenix Submission II at 23-24.
    \163\ While the Commission recognizes that the CFTC regulates
the CME, the CFTC is not responsible for direct, comprehensive
regulation of the underlying bitcoin spot market. See Bitwise Order,
84 FR at 55410 n.456; Winklevoss Order, 83 FR at 37587, 37599.
    \164\ The Commission notes that the ICE Futures U.S. exchange
began offering bitcoin futures contracts as of September 2019. See
Bakkt Bitcoin (USD) Monthly And Daily Futures Contracts Trading to
Begin on Monday, September 23, 2019, ICE Futures U.S. (Aug. 16,
2019), available at https://www.theice.com/publicdocs/futures_us/exchange_notices/ICE_Futures_US_BTC_Launch2019_20190816.pdf (last
visited Jan. 14, 2020). However, the record contains no information
about the volume of ICE Futures U.S.'s bitcoin futures product or
whether the Sponsor has a relevant surveillance-sharing agreement
with ICE Futures U.S. Also, the CME began offering options on
bitcoin futures contracts as of January 13, 2020. See FAQ: CME
Options on Bitcoin Futures (Oct. 29, 2019), available at https://www.cmegroup.com/trading/cryptocurrency-indices/cme-options-bitcoin-futures-frequently-asked-questions.html. Trading began after the
comment period for this proposed rule change ended and there is no
data in the record regarding such options trading.
---------------------------------------------------------------------------

    In addition, the Sponsor points to the group of Constituent
Platforms as providing an avenue for the proposal to satisfy the
requirement that NYSE Arca enter into a surveillance-sharing agreement
with a regulated market of significant size.\165\ According to NYSE
Arca, while it has not entered into a surveillance-sharing agreement
with any spot bitcoin platform, each Constituent Platform has entered
into a data-sharing agreement with CME.\166\ The Sponsor asserts that
CME can share any information that it receives from the Constituent
Platforms with NYSE Arca.\167\ However, as discussed below, this
arrangement does not satisfy the standard articulated by the Commission
in its prior orders that the listing exchange for a proposed ETP may
satisfy its obligations under Section 6(b)(5) of the Exchange Act by
entering into bilateral surveillance-sharing agreements with regulated
markets of significant size relating to underlying assets.\168\
Moreover, the record does not support a conclusion that the regulation
of the Constituent Platforms is comparable to the obligations and
oversight of national securities exchanges or futures exchanges.\169\
Given that the record does not establish that NYSE Arca has a
surveillance-sharing agreement with the Constituent Platforms or that
the Constituent Platforms constitute a ``regulated market,'' the
Commission does not reach the question of whether the Constituent
Platforms represent a market of significant size.
---------------------------------------------------------------------------

    \165\ See Wilshire Phoenix Submission II at 11-19.
    \166\ See Notice, 84 FR at 56225 n.41. See also Wilshire Phoenix
Submission II at 15 (stating that each Constituent Platform must
enter into surveillance-sharing agreements with CME).
    \167\ See Wilshire Phoenix Submission II at 15-16.
    \168\ See supra notes 14, 19-20 and accompanying text. For a
discussion about why the surveillance-sharing agreements between CME
and the Constituent Platforms, along with NYSE Arca's and the CME's
common membership in the ISG, do not suffice to make the spot
bitcoin market inherently or uniquely resistant to manipulation, see
supra Section III.B.1(a)(ii).
    \169\ See supra Section III.B.1(a)(ii). See also Winklevoss
Order, 83 FR at 37597 (``The record, however, does not support a
conclusion that the Gemini Exchange is a `regulated market'
comparable to a national securities exchange or to the futures
exchanges that are associated with the underlying assets of the
commodity-trust ETPs approved to date.''). For a discussion about
why regulation of the Constituent Platforms does not suffice to make
the spot bitcoin market inherently or uniquely resistant to
manipulation, see supra Section III.B.1(a)(ii).
---------------------------------------------------------------------------

(a) Representations Made and Comments Received
(i) CME as a Regulated Market of Significant Size
    NYSE Arca and the Sponsor assert that the CME bitcoin futures
market is a regulated market of significant size with which NYSE Arca
has a surveillance-sharing agreement.\170\ NYSE Arca and the Sponsor
assert that the CME bitcoin futures market is a market of significant
size because it is the main market for bitcoin futures and compares
favorably to other markets that were deemed to be markets of
significant size in previous approvals of commodity-based trust
ETPs.\171\ In particular, the Sponsor argues that the size of the
bitcoin futures market as a percentage of bitcoin spot trading
represented by trading on the Constituent Platforms is larger than the
size of the gold futures market as a percentage of the gold OTC
market.\172\ According to NYSE Arca, the Sponsor also represents that
the volume of the bitcoin futures market is comparable with volumes on
other markets deemed to be markets of significant size in a previous
approval order by the Commission.\173\
---------------------------------------------------------------------------

    \170\ See Notice, 84 FR at 56226; Wilshire Phoenix Submission II
at 10-11, 19-24. NYSE Arca and the Sponsor state that NYSE Arca and
the CME are both members of the ISG. See Notice, 84 FR at 56226;
Wilshire Phoenix Submission II at 24. NYSE Arca and the Sponsor also
state that the CME is regulated by the CFTC. See Notice, 84 FR at
56226; Wilshire Phoenix Submission II at 23-24.
    \171\ See Notice, 84 FR at 56226. NYSE Arca states that on
September 12, 2019, the CME notified the CFTC that it was increasing
the spot month position limits for bitcoin futures contracts from
1,000 to 2,000 net contracts, or a notionally deliverable quantity
of 10,000 bitcoins. See id. at 56226 n.48.
    \172\ See Notice, 84 FR at 56226 (stating that in 2016 the daily
trading volume of gold futures on the COMEX was $28.9 billion and
the daily trading volume on gold OTC markets was $167.9 billion, for
a ratio of 17.2%; and that from October 1, 2018 to March 31, 2019,
the daily trading volume of bitcoin futures on the CME was $90.4
million and the daily trading volume of bitcoin-U.S. dollar spot was
$149.5 million, for a ratio of 60.5%); Wilshire Phoenix Submission
II at 19-20 (also stating the cited bitcoin-U.S. dollar spot volume
is based on the Constituent Platforms).
    \173\ See Notice, 84 FR at 56226 n.56. The Sponsor made a third
submission in which it sought to compare the size, liquidity, and
transparency of the CME bitcoin futures market to other futures
markets on which the underlying components of approved ETPs trade.
See Letter from Marlon Q. Paz, Partner, Mayer Brown (Feb. 20, 2020)
(``Wilshire Phoenix Submission III'').

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

    The Sponsor acknowledges that the Commission's interpretation of
the term ``market of significant size'' depends on the
interrelationship between the market with which the listing exchange
has a surveillance-sharing agreement and the proposed ETP.\174\ This
interrelationship must be such that there is a reasonable likelihood
that a person attempting to manipulate the proposed ETP would also have
to trade on that market to successfully manipulate the ETP.\175\ To
demonstrate the existence of an interrelationship between the CME and
the Constituent Platforms, the Sponsor states that it conducted an
independent analysis of bitcoin price discovery and that this analysis,
along with the findings of multiple publications, shows that the
contribution from CME bitcoin futures to price formation is greater
than the contribution from the Constituent Platforms and has increased
over time.\176\ Said another way, the Sponsor asserts that in most
instances prices on the CME bitcoin futures market lead prices on the
Constituent Platforms, and that this underscores that a would-be
manipulator of the Trust would need to trade on the CME bitcoin futures
market to successfully manipulate prices on the Constituent Platforms,
which are used to price the Trust's bitcoin.\177\
---------------------------------------------------------------------------

    \174\ See id. at 19.
    \175\ See id. at 19 (citing Winklevoss Order, 83 FR at 37594;
Bitwise Order, 84 FR at 55410).
    \176\ See Wilshire Phoenix Submission II at 20-21.
    \177\ See Wilshire Phoenix Submission II at 23.
---------------------------------------------------------------------------

    The Sponsor states that for its analysis it has used CME bitcoin
futures trades and the CME CF Bitcoin Real Time Index (``CME CF
BRTI''), which is a real-time intraday spot rate constructed from the
real-time spot prices on the Constituent Platforms.\178\ According to
the Sponsor, using a two-component model of futures and spot markets,
the component share of CME bitcoin futures contracts as compared to the
CME CF BRTI spot rate to bitcoin price formation was 62.69% in the
second half of 2019, ``indicating that futures contracts contributed
more to price formation than spot.'' \179\
---------------------------------------------------------------------------

    \178\ See Wilshire Phoenix Submission II at 20. The Sponsor
states that market data for bitcoin futures, the Bitcoin Reference
Rate, and the CME CF BRTI are available via the CME DataMine market
data facility. See id. at 20 n.90. The Sponsor also states that
rolling futures trade prices and CME CF BRTI levels are aggregated
into 1-minute intervals using the respective median value in each
interval during trading hours, with previous values used if data is
unavailable. See id.
    \179\ See Wilshire Phoenix Submission II at 21. The Sponsor
states that the methodology that it has used to analyze the
contribution of the futures and the spot markets to bitcoin price
formation is based on the price discovery methodology utilized in
other bitcoin price formation studies. See id. at 20-21 (citing
Edwin Hu, Securities and Exchange Commission Department of Economic
Risk Analysis, Intentional Access Delays, Market Quality, and Price
Discovery: Evidence from IEX Becoming an Exchange, Mar. 15, 2019; S.
Ozturk et al., Intraday Price Discovery in Fragmented Markets, 32 J.
Fin. Markets 28 (2017); F. De Jong & P. Schotman, Price discovery in
fragmented markets, 8 J. Fin. Econometrics 1 (2010); Jesus Gonzalo &
Clive Granger, Estimation of common long-memory components in
cointegrated systems, 13 J. Bus. & Econ. Stat. 27 (1995), available
at https://www.jstor.org/stable/1392518).
---------------------------------------------------------------------------

    The Sponsor asserts that its finding corroborates several recent
journal articles that also have found that the CME bitcoin futures have
a larger component share contribution to bitcoin price formation than
the bitcoin spot market.\180\ According to the Sponsor, this research
confirms that the majority of price discovery for bitcoin takes place
in the futures market.\181\ The Sponsor states that research indicates
that the bitcoin futures market often leads the spot market due to
inherent leverage, low transaction costs, the absence of short-selling
transactions, and greater transparency.\182\ The Sponsor also states
that research suggests that a majority of long run price information is
derived from the futures market and that price movements in the futures
market are often accompanied or followed by price movements of the spot
market in the same direction.\183\ And the Sponsor points to
conclusions that the CME futures market has become a major driver of
bitcoin spot prices and that high-volume trades from large
institutional investor clients effectively arbitrage away spikes in the
basis within seconds or minutes.\184\
---------------------------------------------------------------------------

    \180\ See id. (citing Bruce Mizrach & Saketh Aleti, Bitcoin Spot
and Futures Market Microstructure, Sept. 24, 2019, available at
https://ssrn.com/abstract=3459111) (``Mizrach & Aleti''); Carol
Alexander & Daniel F. Heck, Price Discovery, High-Frequency Trading
and Jumps in Bitcoin Markets, May 5, 2019, available at https://ssrn.com/abstract=3383147 (``Alexander & Heck''); Oliver Entrop et
al., The Determinants of Price Discovery on Bitcoin Markets, July
2019, available at https://acfr.aut.ac.nz/_data/assets/pdf_file/0009/296424/B-Frijns-Bitcoin_Paper.pdf (``Entrop et al.''); Burcu
Kapar & Jose Olmo, An analysis of price discovery between Bitcoin
futures and spot markets, 174 Econ. Letters 62 (2019), available at
https://www.sciencedirect.com/science/article/pii/S0165176518304440
(``Kapar & Olmo''); Erdinc Akyildirim et al., The development of
Bitcoin futures: Exploring the interactions between cryptocurrency
derivatives, Fin. Res. Letters, July 10, 2019, available at https://www.sciencedirect.com/science/article/pii/S1544612319304714;
Athanasios P. Fassas et al., Price discovery in bitcoin futures, 52
Res. Int'l Bus. Fin. 101116 (2020), available at https://www.sciencedirect.com/science/article/abs/pii/S0275531919305628).
    \181\ See id. at 21-22. The Sponsor also asserts that its