[Federal Register Volume 84, Number 200 (Wednesday, October 16, 2019)]
[Notices]
[Pages 55382-55414]
[FR Doc No: 2019-22486]

Vol. 84

Wednesday,

No. 200

October 16, 2019

Part II

Securities and Exchange Commission

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Self-Regulatory Organizations; NYSE Arca, Inc.; Order Disapproving a
Proposed Rule Change, as Modified by Amendment No. 1, Relating to the
Listing and Trading of Shares of the Bitwise Bitcoin ETF Trust Under
NYSE Arca Rule 8.201-E; Notice

Federal Register / Vol. 84 , No. 200 / Wednesday, October 16, 2019 /
Notices

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87267; File No. SR-NYSEArca-2019-01]

Self-Regulatory Organizations; NYSE Arca, Inc.; Order
Disapproving a Proposed Rule Change, as Modified by Amendment No. 1,
Relating to the Listing and Trading of Shares of the Bitwise Bitcoin
ETF Trust Under NYSE Arca Rule 8.201-E

October 9, 2019.

I. Introduction

    On January 28, 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 list
and trade shares (``Shares'') of the Bitwise Bitcoin ETF Trust
(``Trust'') under NYSE Arca Rule 8.201-E, Commodity-Based Trust Shares.
The proposed rule change was published for comment in the Federal
Register on February 15, 2019.\3\ On March 29, 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\ The
Commission received comment letters in response to the Original
Notice.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 85093 (Feb. 11,
2019), 84 FR 4589 (Feb. 15, 2019) (``Original Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 85461 (Mar. 29,
2019), 84 FR 13339 (Apr. 4, 2019). The Commission designated May 16,
2019, as the date by which it should approve, disapprove, or
institute proceedings to determine whether to disapprove the
proposed rule change.
    \6\ See Letters from Anonymous (Feb. 15, 2019) (``Anonymous
Letter I''); Roald Johansson (Feb. 15, 2019) (``Johansson Letter'');
Samantha Puddifoot (Feb. 17, 2019) (``Puddifoot Letter''); Paul
Jones (Feb. 17, 2019) (``Jones Letter''); Nayna Mallya (Feb. 18,
2019) (``Mallya Letter''); Chris (Feb. 18, 2019) (``Chris Letter'');
Avinash Shenoy (Feb. 18, 2019) (``Shenoy Letter I''); Sami dos
Santos (Feb. 18, 2019) (``Santos Letter''); Vineet Jain (Feb. 19,
2019) (``Jain Letter''); Adam Malkin (Feb. 19, 2019) (``Malkin
Letter''); James Perrott (Feb. 19, 2019) (``Perrott Letter''); Sarah
Malone (Mar. 6, 2019) (``Malone Letter''); Anthony Darwin (Mar. 6,
2019) (``Darwin Letter''); D. Barnwell (Mar. 6, 2019) (``Barnwell
Letter''); Dina Pinto (Mar. 6, 2019) (``Pinto Letter''); Louise
Fitzgerald (Mar. 19, 2019) (``Fitzgerald Letter I''); Hugh Neil
(Mar. 23, 2019) (``Neil Letter''); Martyn Denscombe (Mar. 23, 2019)
(``Denscombe Letter''); Carl Ross (Mar. 23, 2019) (``C. Ross
Letter''); Rob (Mar. 24, 2019) (``Rob Letter''); Emma Buckley (Mar.
25, 2019) (``Buckley Letter''); Paul Arssov (Mar. 27, 2019)
(``Arssov Letter''); Shravan Kumar (Mar. 29, 2019) (``Kumar
Letter''); John Monterio (Mar. 30, 2019) (``Monterio Letter''); Bill
Blake (Apr. 18, 2019) (``Blake Letter''). All comments on the
proposed rule change can be found at: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901.htm. Bitwise Asset Management
also provided the Commission with a written presentation at a
meeting on March 19, 2019. See Commission Staff Memorandum to File
re: Meeting with Bitwise Asset Management, NYSE Arca, Inc., and
Vedder Price P.C. (Mar. 20, 2019) (attaching Presentation to the
Commission by Bitwise Asset Management (``Bitwise Submission I'')),
available at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5164833-183434.pdf.
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    On May 7, 2019, NYSE Arca filed Amendment No. 1 to the proposed
rule change, which replaced and superseded the proposed rule change as
originally filed. On May 14, 2019, the Commission published the
proposed rule change, as modified by Amendment No. 1, for notice and
comment and instituted proceedings to determine whether to approve or
disapprove the proposed rule change, as modified by Amendment No. 1.\7\
And on August 12, 2019, the Commission designated a longer period for
Commission action on the proposed rule change.\8\ The Commission
received additional comment letters in response to the Notice and
OIP.\9\
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    \7\ See Securities Exchange Act Release No. 85854 (May 14,
2019), 84 FR 23125 (May 21, 2019) (``Notice and OIP'').
    \8\ See Securities Exchange Act Release No. 86629 (Aug. 12,
2019), 84 FR 42036 (Aug. 16, 2019).
    \9\ See Letters from Anonymous (May 14, 2019) (``Anonymous
Letter II''); Avinash Shenoy (May 15, 2019) (``Shenoy Letter II'');
Sam Ahn (May 15, 2019) (``Ahn Letter I''); Hu Liang, CEO, and Thomas
Eidt, General Counsel, Omniex Holdings, Inc. (May 16, 2019)
(``Omniex Letter''); John Bird (May 18, 2019) (``Bird Letter'');
John LeStarge (May 20, 2019) (``LeStarge Letter''); Justin Ross (May
20, 2019) (``J. Ross Letter''); Matthew Hougan, Hong Kim, and Micah
Lerner, Bitwise Asset Management (May 24, 2019) (``Bitwise
Submission II''); Louise Fitzgerald (May 31, 2019) (``Fitzgerald
Letter II''); Fan Xia (June 7, 2019) (``Xia Letter''); Kristin
Smith, Blockchain Association (June 10, 2019) (``Blockchain
Association Letter''); Stephen McKeon, Assoc. Professor of Finance,
University of Oregon, Partner, Collaborative Fund (June 11, 2019)
(``Collaborative Fund Letter''); Sam McIngvale, Chief Executive
Officer, Coinbase Custody Trust Company, LLC (June 11, 2019)
(``Coinbase Custody Letter''); James C. Wiandt, Donostia Ventures
LLC (June 11, 2019) (``Donostia Ventures Letter''); Matthew Hougan,
Hong Kim, and Micah Lerner, Bitwise Asset Management, Annotated
Commentary on the Winklevoss Order (June 11, 2019) (``Bitwise
Submission III); Matthew Hougan, Global Head of Research, Bitwise
Asset Management, CFE Futures Question (June 11, 2019) (``Bitwise
Submission IV''); Matthew Hougan, Global Head of Research, Bitwise
Asset Management, Bitfinex Question (June 11, 2019) (``Bitwise
Submission V''); Bart Mallon, Co-Managing Partner, Cole-Frieman &
Mallon LLP (June 12, 2019) (``Mallon Letter''); Robert (June 13,
2019) (``Robert Letter''); Sam Ahn (June 18, 2019) (``Ahn Letter
II''); Sam Ahn (June 20, 2019) (``Ahn Letter III''); Matthew P.
Walsh, Founding Partner, Castle Island Ventures (June 23, 2019)
(``Castle Island Ventures Letter''); Spencer Bogart, General
Partner, Blockchain Capital (June 24, 2019) (``Blockchain Capital
Letter''); Scott Page (July 5, 2019) (``Page Letter''); Bill Blake
(July 16, 2019) (``Blake Letter''); Tagomi Holdings Inc. (Sept. 18,
2019) (``Tagomi Letter''); Patrick Neal (Sept. 24, 2019) (``Neal
Letter''). All comments on the proposed rule change, as modified by
Amendment No. 1 can be found at: https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901.htm. Bitwise Asset Management also
provided the Commission with a written presentation at a meeting on
September 12, 2019. See Commission Staff Memorandum to File re:
Meeting with Bitwise Asset Management, Inc., NYSE Arca, Inc., Vedder
Price P.C., and Wilson Sonsini Goodrich & Rosati (Sept. 17, 2019)
(attaching Presentation to the Commission by Bitwise Asset
Management (``Bitwise Submission VI'')), available at https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-6135582-192240.pdf.
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    This order disapproves the proposed rule change, as modified by
Amendment No. 1. Although the Commission is disapproving this proposed
rule change, the Commission emphasizes that its disapproval does not
rest on an evaluation of whether bitcoin,\10\ 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 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.'' \11\
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    \10\ Bitcoins are digital assets that are issued and transferred
via a decentralized, open-source protocol used by a peer-to-peer
computer network through which transactions are recorded on a public
transaction ledger known as the ``Bitcoin Blockchain.'' The Bitcoin
protocol governs the creation of new bitcoins and the cryptographic
system that secures and verifies bitcoin transactions. The proposed
rule change, as modified by Amendment No. 1, describes the exchange-
traded product's underlying asset as a ``digital asset'' and as a
``commodity,'' see Notice and OIP, supra note 7, 84 FR at 23127-28,
and describes the exchange-traded product as a Commodity-Based
Trust. For the purpose of considering this proposal, this order
describes a bitcoin as a ``digital asset'' and as a commodity.
    \11\ 15 U.S.C. 78f(b)(5).
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    When considering whether NYSE Arca's proposal to list the Shares is
designed to prevent fraudulent and manipulative acts and practices, the
Commission has applied the same analysis used in its orders considering
previous proposals to list a bitcoin-based commodity trust--the
``Winklevoss Order''--and bitcoin-based trust issued receipts.\12\ For
example, in

the Winklevoss Order, the Commission explained that, although
surveillance-sharing agreements with markets relating to underlying
assets are not the exclusive means by which an exchange-traded product
(``ETP'') listing exchange can meet its obligations under Exchange Act
Section 6(b)(5), such agreements are a widely used means for exchanges
that list ETPs to meet their obligations, and the Commission has long
recognized their importance.\13\ The Commission found in the Winklevoss
Order and in orders considering bitcoin-based trust issued receipts,
that, if the listing exchange for an ETP fails to establish that the
underlying commodity market is inherently resistant to fraud and
manipulation,\14\ or that other means to prevent fraudulent and
manipulative acts and practices will be sufficient, the listing
exchange must enter into a surveillance-sharing agreement with a
regulated market of significant size relating to the underlying or
reference assets since ``[s]uch agreements provide a necessary
deterrent to manipulation because they facilitate the availability of
information needed to fully investigate a manipulation if it were to
occur.'' \15\
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    \12\ 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). 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''); and 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'').
    \13\ See Winklevoss Order, supra note 12, 83 FR at 37580. See
also id. at 37592 n.202 and accompanying text (discussing previous
Commission approvals of commodity-trust ETPs); GraniteShares Order,
supra note 12, 83 FR at 43925-27 nn.35-39 and accompanying text
(discussing previous Commission approvals of commodity-futures
ETPs). 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. See
Winklevoss Order, supra note 12, 83 FR at 37592-93.
    \14\ Winklevoss Order, supra note 12, 83 FR at 37582. While the
Commission has not applied a ``cannot be manipulated'' standard to
such proposals, the burden is on the listing exchange to demonstrate
the validity of its contention that the underlying market is
uniquely resistant to market manipulation and fraudulent activity
and to establish that the requirements of the Exchange Act have been
met. See id. In the Winklevoss Order, the Commission found that,
even if the record had supported the proposition that some features
of bitcoin and bitcoin markets mitigate some types of manipulation
to some degree, such mitigation would be insufficient to justify
dispensing with the detection and deterrence of fraud and
manipulation provided by surveillance-sharing agreements with
significant, regulated markets. See id. at 37586.
    \15\ Id. at 37580 (citing Amendment to Rule Filing Requirements
for Self-Regulatory Organizations Regarding New Derivative
Securities Products, Securities Exchange Act Release No. 40761 (Dec.
8, 1998), 63 FR 70952, 70954, 70959 (Dec. 22, 1998) (File No. S7-13-
98)). See also ProShares Order, supra note 12, 83 FR at 43936;
Direxion Order, supra note 12, 83 FR at 43914; GraniteShares Order,
supra note 12, 83 FR at 43924. 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,
supra note 12, 83 FR at 37580 n.19.
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    The listing exchange must enter into a surveillance-sharing
agreement with a regulated market of significant size relating to the
underlying or reference assets. In this context, the terms
``significant market'' and ``market of significant size'' include a
market (or group of markets) as to which (a) there is a reasonable
likelihood that a person attempting to manipulate the ETP would also
have to trade on that market to successfully manipulate the ETP, so
that a surveillance-sharing agreement would assist in detecting and
deterring misconduct, and (b) it is unlikely that trading in the ETP
would be the predominant influence on prices in that market.\16\ Thus,
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.'' Consistent with these principles, 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, and the ETP listing
exchange has entered into surveillance-sharing agreements with, or held
Intermarket Surveillance Group membership in common with, that
market.\17\
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    \16\ See Winklevoss Order, supra note 12, 83 FR at 37594. This
definition is illustrative and not exclusive. There could be other
types of ``significant markets'' and ``markets of significant
size,'' but this definition is an example that will provide guidance
to market participants. See id.
    \17\ See id.
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    As discussed further below, Bitwise Asset Management, Inc.
(collectively with its affiliates, ``the Sponsor'') \18\ argues that
the proposal addresses the Commission's analysis because (1) the
``real'' bitcoin spot market--as opposed to the ``fake'' and non-
economic bitcoin spot market--and the Trust's net asset value (``NAV'')
process are each uniquely resistant to market manipulation and
fraudulent activity; and (2) NYSE Arca has entered into a surveillance-
sharing agreement with a regulated bitcoin futures market of
significant size.\19\ As support for its propositions, the Sponsor has
presented an analysis of the bitcoin spot market that asserts that a
small set of identified platforms have ``real'' trading volume, unlike
the remaining 95% of the spot bitcoin market, which the Sponsor asserts
is dominated by fake and non-economic activity, such as wash
trades.\20\ The Sponsor would base its pricing mechanism for the
proposed ETP on this purportedly ``real'' segment of the market, and
the Sponsor's analyses and comments focus solely on this segment of the
market when asserting that the underlying bitcoin market is uniquely
resistant to manipulation.\21\ Additionally, NYSE Arca asserts that its
existing surveillance procedures are adequate to properly monitor
trading of the Shares and to detect and deter violations of NYSE Arca's
rules and federal securities laws,\22\ and that approval of the
proposal would be consistent with the protection of investors and the
public interest.\23\
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    \18\ Amendment No. 1 identifies Bitwise Investment Advisers, LLC
as the Sponsor, see Notice and OIP, supra note 7, 84 FR at 23126.
Bitwise Asset Management, Inc. authored the comment letters and
presentations submitted on behalf of the Sponsor in support of NYSE
Arca's proposal. For purposes of this Order, the Sponsor's affiliate
Bitwise Index Services, LLC will also be referred to as the Sponsor.
    \19\ See id. at 23128, 23134; Bitwise Submission I, supra note
6, at 84; Bitwise Submission III, supra note 9, at 51. With respect
to key elements of its proposal--such as several assertions about
the nature of the underlying bitcoin markets and their
susceptibility to manipulation--NYSE Arca conveys the position of
the Sponsor. This Order will therefore address statements in the
Notice and OIP that recount what the Sponsor asserts along with
other representations and comments by the Sponsor.
    \20\ See Bitwise Submission I, supra note 6, at 23, 60; Bitwise
Submission II, supra note 9, at 2, 34-36. See infra Section
III.B.1(c) for discussion of the Sponsor's methodology for
distinguishing ``real'' trading volume from fake and non-economic
activity.
    \21\ See Bitwise Submission I, supra note 6, at 67-69, 91, 118;
Bitwise Submission II, supra note 9, at 13.
    \22\ See Notice and OIP, supra note 7, 84 FR at 23136.
    \23\ See id.
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    Accordingly, the Commission examines below 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 below
assertions that

bitcoin and the relevant bitcoin market are uniquely resistant to
manipulation and fraudulent activity; addressing in Section III.B.2
below assertions that other means are available to prevent fraudulent
and manipulative activity in the Shares; addressing in Section III.B.3
below 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 below assertions that the
proposal is consistent with the protection of investors and the public
interest. Because, among other things, the Sponsor has asserted that
95% of the bitcoin spot market consists of fake and non-economic
activity, but has not established that it has in fact identified the
``real'' bitcoin market, or that the ``real'' bitcoin market is
isolated from the fraudulent and manipulative activity, we find, in
each case, that NYSE Arca has not met its burden to demonstrate that
its proposal is consistent with the requirements of Exchange Act
Section 6(b)(5), and therefore the Commission disapproves this proposed
rule change.

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

    As described in detail in the Notice and OIP,\24\ NYSE Arca
proposes to list and trade the Shares under NYSE Arca Rule 8.201-E,
which covers the listing and trading of Commodity-Based Trust Shares on
NYSE Arca.\25\ Bitwise Investment Advisers, LLC would be the Sponsor of
the Trust.\26\
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    \24\ See Notice and OIP, supra note 7.
    \25\ See NYSE Arca Rule 8.201-E (permitting the listing and
trading of ``Commodity-Based Trust Shares,'' defined 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).
    \26\ See Notice and OIP, supra note 7, 84 FR at 23126.
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    According to NYSE Arca, the investment objective of the Trust would
be to provide exposure to bitcoin at a price that reflects the
purportedly ``real'' bitcoin spot market--as opposed to the ``fake''
and non-economic bitcoin market \27\--where investors can purchase and
sell bitcoin, minus the expenses of the Trust's operation.\28\ The
Trust would use the Bitwise Daily Bitcoin Reference Price to calculate
its daily NAV, and the Sponsor would produce the Bitwise Daily Bitcoin
Reference Price once per day at 4:00 p.m. E.T., using the prices and
volume from selected platforms that trade bitcoin in the bitcoin spot
market (``platforms'' or ``trading platforms'') that the Sponsor
asserts currently account for substantially all of the ``real'' spot
global volume of bitcoin traded on such platforms, excluding trading in
capital-controlled countries.\29\ To calculate the Bitwise Daily
Bitcoin Reference Price, the Sponsor would examine six five-minute
periods leading up to 4:00 p.m. E.T., calculate the volume-weighted
median price of each of these periods, and then calculate an equal-
weighted average of the six volume-weighted median prices.\30\
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    \27\ See infra Section III.B.1(c)(i) (describing the Sponsor's
assertions about the nature and extent of ``fake'' and non-economic
trading in the bitcoin market).
    \28\ See Notice and OIP, supra note 7, 84 FR at 23126.
    \29\ 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 Sections 5 and 6 of
the Exchange Act, 15 U.S.C. 78e, 78f.
    \30\ See Notice and OIP, supra note 7, 84 FR at 23131. See also
id. at 23130 n.20 (describing the reduction in the number of
platforms used to calculate the Bitwise Daily Bitcoin Reference
Price from ten to nine).
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    NYSE Arca would also calculate an intraday indicative value
(``IIV'') every fifteen seconds during the core trading day, based on
the Bitwise Real-Time Bitcoin Price. The Sponsor would calculate the
Bitwise Real-Time Bitcoin Price from the same set of selected platforms
with purportedly ``real'' volume, using a volume-weighted price
methodology. Instead of equally weighting prices captured over six
five-minute periods, however, the Bitwise Real-Time Bitcoin Price would
use only the price from the last trade on each platform, and it would
use the trailing thirty-minute volume on those platforms as a weighting
factor.\31\
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    \31\ See id. at 23132. Further details regarding the Trust and
the Shares, including investment strategies, calculation of NAV and
IIV, creation and redemption procedures, and additional background
information about bitcoins and the Bitcoin network, among other
things, can be found in the Notice and OIP (see supra note 7) and
the registration statement filed with the Commission on Form S-1/A
(File No. 333-229180) under the Securities Act of 1933
(``Registration Statement''), as applicable.
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III. Discussion

A. The Applicable Standard for Review

    The Commission must consider whether NYSE Arca's proposal is
consistent with Exchange Act Section 6(b)(5), which 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.'' \32\ 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.'' \33\
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    \32\ 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).
    \33\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
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    The description of a proposed rule change, its purpose and
operation, its effect, and a legal analysis of its consistency with
applicable requirements must all be sufficiently detailed and specific
to support an affirmative Commission finding,\34\ 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.\35\ 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.\36\
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    \34\ See id.
    \35\ See id.
    \36\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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B. Whether NYSE Arca Has Met Its Burden To Demonstrate That the
Proposal Is Designed To Prevent Fraudulent and Manipulative Acts and
Practices

    In analyzing whether the NYSE Arca has met its burden to
demonstrate that its proposal is consistent with Exchange Act Section
6(b)(5), the Commission examines below whether the record supports the
Sponsor's assertions that bitcoin and the relevant bitcoin market are
uniquely resistant to manipulation

and fraudulent activity such that a sufficient surveillance-sharing
agreement is unnecessary. See infra Section III.B.1. The Commission
first addresses whether the record demonstrates that the inherent
properties of bitcoin would make the proposed ETP uniquely resistant to
manipulation. See infra Section III.B.1(a). The Commission next
addresses the Sponsor's contention that, based on its analysis, ``when
fake and/or non-economic data is removed, the remaining or `real'
market for bitcoin is significantly smaller, more orderly and more
regulated than commonly understood,'' \37\ and whether, focusing solely
on the asserted characteristics of the ``real'' market for bitcoin, the
record demonstrates that the nature of the ``real'' spot market for
bitcoin would make the proposed ETP uniquely resistant to manipulation.
See infra Section III.B.1(b). The Commission then addresses whether the
record demonstrates that the Sponsor, through its analysis, has shown
that the ``real'' spot market for bitcoin is isolated from other
trading platforms that may be dominated by fake or non-economic
trading, such that the proposed ETP based on those trading platforms in
the identified ``real'' market would be uniquely resistant to
manipulation. See infra Section III.B.1(c). The Commission also
considers whether the record demonstrates that any additional aspects
of the Trust and its methods for determining NAV, handling creations
and redemptions, and calculating fees (see infra Section III.B.1(d)),
or NYSE Arca's rules, including its surveillance procedures (see infra
Section III.B.2), would provide sufficient means to prevent fraud and
manipulation. The Commission concludes that NYSE Arca has not
demonstrated that a surveillance-sharing agreement with a significant,
regulated market is unnecessary.
---------------------------------------------------------------------------

    \37\ Notice and OIP, supra note 7, 84 FR at 23129.
---------------------------------------------------------------------------

    The Commission then examines whether the record supports the
Sponsor's assertion that the bitcoin futures market, as represented by
bitcoin futures listed and traded on the Chicago Mercantile Exchange
(``CME''), is a significant, regulated market, such that a
surveillance-sharing agreement with that market would provide a
necessary deterrent to manipulation because it would facilitate the
availability of information needed to fully investigate a manipulation
if it were to occur.\38\ See infra Section III.B.3. The Commission
addresses the Sponsor's comparison of the size of the bitcoin futures
and spot markets and the Sponsor's representations about the
correlation of prices between these markets, as well as whether the
record establishes that there is a reasonable likelihood that a person
attempting to manipulate the proposed ETP would also have to trade on
the bitcoin futures market to manipulate the proposed ETP. The
Commission concludes that--because NYSE Arca has not demonstrated that
the bitcoin futures market is ``significant,'' as the Commission has
interpreted that term in this context \39\--NYSE Arca has not met its
burden to demonstrate that its proposal is consistent with Exchange Act
Section 6(b)(5). Finally, the Commission addresses and rejects other
factors that the Sponsor contends support approval. See infra Section
III.B.4.
---------------------------------------------------------------------------

    \38\ The Sponsor's arguments address both trading on the CME and
the Cboe Futures Exchange (``CFE''), see, e.g., id. at 23134, but
the Commission notes that the CFE ceased offering new bitcoin
futures contracts as of March 2019. See New CFE Products Being Added
in March 2019--Update, Cboe (Mar. 14, 2019), available at https://markets.cboe.com/resources/product_update/2019/New-CFE-Products-Being-Added-in-March-2019-Update.pdf (last visited Oct. 7, 2019).
    \39\ See supra note 16 and accompanying text.
---------------------------------------------------------------------------

1. Assertions That Bitcoin and the Bitcoin Market Are Uniquely
Resistant to Market Manipulation and Fraudulent Activity
(a) The Sponsor's Assertions About the Inherent Properties of Bitcoin
(i) Representations Made and Comments Received
    The Sponsor argues that the digital nature of bitcoin makes it
unique compared to other commodities in three important ways--
fungibility, transportability, and ``exchange tradability''--that
combine to provide unique protections against, and allow bitcoin to be
uniquely resistant to, attempts at price manipulation.\40\ The Sponsor
represents that bitcoin is a globally fungible commodity with low
transaction costs, near-zero transportation costs that allow nearly
instantaneous transportation, and low-to-zero storage costs.\41\
According to the Sponsor, bitcoin is globally fungible because a
bitcoin is the same anywhere in the world.\42\ In addition, a commenter
compares the fungibility of bitcoin to that of gold and states that
this fungibility reduces the overhead costs of evaluating the qualities
of each asset to arrive at a fair price.\43\
---------------------------------------------------------------------------

    \40\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission I, supra note 6, at 114; Bitwise Submission III, supra
note 9, at 47. See also Omniex Letter, supra note 9, at 4 (stating
that, as the Sponsor has detailed, the digital nature of bitcoin
makes it unique due to ``exchange-tradability,'' fungibility, and
transportability).
    \41\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise
Submission I, supra note 6, at 14.
    \42\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise
Submission I, supra note 6, at 15.
    \43\ See Blockchain Capital Letter, supra note 9, at 6.
---------------------------------------------------------------------------

    The Sponsor represents that bitcoin is inherently transportable at
a cost approaching zero and can be safely stored at established,
regulated third-party custodians, in a ``limitless'' amount, at costs
of 0% to 1.5% a year.\44\ A commenter states that bitcoin's portability
is a valuable and unprecedented attribute and states that bitcoin can
be quickly and easily transferred anywhere in the world.\45\ While the
Sponsor points to spreads of $0.01 on certain bitcoin platforms as
evidence of low transaction costs,\46\ when discussing the limitations
of arbitrage quality in the bitcoin market, the Sponsor also
acknowledges the presence of certain frictions, including trading fees,
withdrawal fees, withdrawal times and hedging costs, risk of default or
computer hacking, and difficulties operating across different countries
and fiat currencies.\47\
---------------------------------------------------------------------------

    \44\ See Notice and OIP, supra note 7, 84 FR at 23129; Bitwise
Submission I, supra note 6, at 17-18; Bitwise Submission II, supra
note 9, at 2.
    \45\ See Blockchain Capital Letter, supra note 9, at 5-6 (noting
that bitcoin's reduced transaction fees and accelerated transaction
timeframe lower barriers to enter the market).
    \46\ See Notice and OIP, supra note 7, 84 FR at 23129; Bitwise
Submission I, supra note 6, at 16.
    \47\ See Bitwise Submission II, supra note 9, at 65-66
(describing trading fees on two bitcoin platforms that range from
0.00% to 0.25% and withdrawal fees that ``can range from a little to
a lot,'' including 3% for substantial U.S. dollar withdrawals on one
bitcoin platform). The Sponsor represents that the U.S. dollar,
Euro, and Japanese Yen are examples of fiat currencies. See id. at
15.
---------------------------------------------------------------------------

    The Sponsor argues that having price discovery for bitcoin
conducted on the open market--bitcoin's purported ``exchange
tradability''--makes bitcoin unique as compared to other commodities
that have their prices set using off-market, ``coordinated fix
pricing.'' \48\ The Sponsor points to recent market manipulation
scandals that it states were driven by coordinated fix pricing,
including those related to the London Interbank Offered Rate
(``LIBOR'') in 2012, global forex in 2013, the gold fix in 2014, and
the Australian

Bank Bill Swap Rate in 2016.\49\ In addition, the Sponsor asserts that
bitcoin's lack of a physical delivery location makes it unique and
prevents cornering, a form of manipulation in the commodities
market.\50\
---------------------------------------------------------------------------

    \48\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission III, supra note 9, at 47, 137. The Sponsor acknowledges
that conducting price discovery in an open, transparent, online
setting introduces risks, but asserts that these risks must be
weighed against the benefits of open price discovery and can be
controlled through the design of the Trust. See Notice and OIP,
supra note 7, 84 FR at 23133; Bitwise Submission III, supra note 9,
at 137.
    \49\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission I, supra note 9, at 116; Bitwise Submission III, supra
note 9, at 137.
    \50\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission III, supra note 9, at 47. For example, Amendment No. 1
states that, in May 2011, the U.S. Commodity Futures Trading
Commission (``CFTC'') filed suit against trading firms for
attempting to manipulate the price of oil by cornering the market
for oil storage in Cushing, Oklahoma. See Notice and OIP, supra note
7, 84 FR at 23133. According to Amendment No. 1, a disconnect
between the size of the storage market in the reference price market
(Cushing) and the much larger real market for WTI crude oil created
an opportunity for individuals and firms to attempt to profit from
artificially manipulating the small market for storage while holding
larger positions in the underlying commodity. See id. at 23133.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that the record does not demonstrate that
bitcoin's asserted fungibility, transportability, and ``exchange-
tradability'' make bitcoin uniquely resistant to manipulation. The
manipulation of asset prices can occur through trading activity that
creates a false impression of supply or demand,\51\ and the Commission
concludes that the Sponsor's concessions that 95% of the reported
trading in bitcoin is ``fake'' or non-economic (including wash trading
or trading that is simply fabricated) \52\--and that the early bitcoin
market may have been subject to market manipulation \53\--effectively
concede that the properties of bitcoin do not make it inherently
resistant to manipulation.\54\
---------------------------------------------------------------------------

    \51\ See Winklevoss Order, supra note 12, 83 FR at 37585.
    \52\ See Bitwise Submission I, supra note 6, at 23; Bitwise
Submission II, supra note 9, at 2, 35-36. A ``wash trade'' is a
transaction such as a purchase and sale simultaneously or within a
short period of time, that involves no changes in beneficial
ownership, and is a means of creating artificial market activity.
See In re Silseth, Release No. 7317, 1996 WL 427988, at *1 & n.3
(July 30, 1996); Reddy v. CFTC, 191 F.3d 109, 115 (2d Cir. 1999).
Wash trading is manipulative and defrauds investors. See id.; Santa
Fe Indus., Inc. v. Green, 430 U.S. 462, 476-77 (1977); Ernst & Ernst
v. Hochfelder, 425 U.S. 185, 199 (1976).
    \53\ See Bitwise Submission III, supra note 9, at 49 (describing
reports of manipulation at the failed Mt. Gox platform in 2013).
    \54\ The Commission also notes that several commenters have
asserted that bitcoin prices can be manipulated. See infra notes 69-
73 and accompanying text.
---------------------------------------------------------------------------

    Moreover, contrary to the Sponsor's argument, the Commission does
not agree that the relative fungibility of an asset makes it inherently
resistant to manipulation and notes that fungible assets, such as
securities and exchange-traded derivatives, trade subject to
substantial regulatory oversight and surveillance-sharing agreements
that would be unnecessary if fungibility were sufficient protection
against manipulation.\55\ Further, transportation and storage costs for
bitcoin are not zero, contrary to the Sponsor's claims,\56\ as bitcoin
mining and recording transactions to the blockchain have costs. Bitcoin
mining involves significant costs for electrical power and computer
hardware, and the Sponsor acknowledges that bitcoin is subject to
transaction fees charged by trading platforms, withdrawal fees,
expenses for custody arrangements, and other factors that impose
frictions on trading.\57\ The Sponsor also points to the presence of a
spread on bitcoin platforms,\58\ which, even if small, indicates the
presence of trading costs. Therefore claims in the record about
bitcoin's fungibility and transportability do not suffice to establish
unique resistance to manipulation.\59\
---------------------------------------------------------------------------

    \55\ The Commission notes that, while the Sponsor asserts that
bitcoin is fungible to the degree that it is ``the same anywhere in
the world'' and that all bitcoin are treated equally, see supra
notes 40-43 and accompanying text, if a market participant seeks to
trade bitcoins on a trading platform that complies with Anti-Money
Laundering (``AML'') and Know Your Customer (``KYC'') standards,
those bitcoins may be subject to review regarding their provenance
and may not be accepted if they have previously been used for money
laundering, drug trades, human trafficking, or other criminal
purposes.
    \56\ See supra notes 44-47 and accompanying text.
    \57\ See supra notes 44, 47, and accompanying text. See also
Registration Statement, supra note 31, at 9, 12 (recognizing
transaction costs and fees).
    \58\ See supra note 46 and accompanying text.
    \59\ Contrary to the Sponsor's characterization that bitcoin is
available in a ``limitless'' amount, see supra note 44, the
Registration Statement represents that the Bitcoin protocol
currently ``limits both the total amount of bitcoin that will be
produced and the rate at which it is released'' such that the
``supply of bitcoin is programmatically limited to 21 million
bitcoin.'' Registration Statement, supra note 31, at 1, 19.
---------------------------------------------------------------------------

    While the Sponsor attempts to distinguish bitcoin from certain
commodities that have their prices set using off-market, coordinated
fix pricing and asserts that bitcoin's use of prices set in the open
market makes it uniquely resistant to certain forms of manipulation
that have been witnessed with such commodities,\60\ the Commission has
required the listing exchange for a derivatives securities product to
have a surveillance-sharing agreement even where the underlying was
exchange-traded.\61\ And, as discussed further below,\62\ NYSE Arca has
not demonstrated that the bitcoin market itself, or the segment of the
market used for the proposed ETP's pricing mechanism, is uniquely
resistant to manipulation. Thus, the Commission cannot conclude that
the nature of bitcoin itself would make the proposed ETP uniquely
resistant to manipulation, such that a surveillance-sharing agreement
with a significant, regulated market would not be required.
---------------------------------------------------------------------------

    \60\ See supra notes 48-50, and accompanying text.
    \61\ See infra note 135 and accompanying text (concerning equity
options).
    \62\ See infra Sections III.B.1(b) and III.B.1(c) for additional
discussion of the spot market for bitcoin.
---------------------------------------------------------------------------

(b) The Sponsor's Assertions About the Nature of the Spot Market for
Bitcoin
    The Sponsor contends that it has identified a ``real'' spot market
for bitcoin that is isolated from the remaining 95% of the bitcoin spot
market, which the Sponsor asserts is dominated by ``fake'' or non-
economic trading, and the Sponsors proffers its methodology for
distinguishing this ``real'' bitcoin trading from fake or non-economic
bitcoin trading. In this subsection of the order, the Commission
analyzes the Sponsor's claims regarding the ``real'' spot market as
identified by the Sponsor and examines whether the record demonstrates
that the nature of trading in, and the degree of regulation of, this
``real'' bitcoin spot market make it uniquely resistant to
manipulation. And, in the following subsection of this order,\63\ the
Commission analyzes the Sponsor's proffered methodology for isolating
``real'' bitcoin trading activity from fake or non-economic activity--
an analysis that bears on the nature of the spot market for bitcoin
considered in this section, because the purportedly ``real'' bitcoin
spot market that the Sponsor identifies cannot be uniquely resistant to
manipulation unless it is free from the influence of prices derived
from fake or non-economic trading, or fraudulent or manipulative
activity, in the broader bitcoin market.
---------------------------------------------------------------------------

    \63\ See infra Section III.B.1(c).
---------------------------------------------------------------------------

(i) Representations Made and Comments Received
(A) The Sponsor's Assertions Regarding Arbitrage and Efficiency in the
Bitcoin Spot Market
    The Sponsor asserts that, once fake and non-economic trading have
been removed, the remaining ``real'' market for bitcoin, as identified
by the Sponsor's research, is significantly smaller, more orderly, and
more regulated ``than commonly understood,'' and moreover, that this
``real'' market is uniquely resistant to manipulation.\64\ The Sponsor
asserts that bitcoin trades at a single price on ``real'' trading

platforms globally, that extremely effective arbitrage is in place
between those platforms, and that a distributed market has emerged in
which no single platform represents the majority of ``real'' trading
volume.\65\ The Sponsor asserts that these characteristics of the
``real'' bitcoin market provide unique resistance to manipulation
because an attempt to manipulate the market would need to involve a
non-trivial amount of bitcoin's total global liquidity and either be
coordinated simultaneously across multiple platforms or involve a
significant spike in volume on a single platform (which would trigger
review as part of the Sponsor's NAV process).\66\ Therefore, according
to the Sponsor, any attempt at manipulation would be relatively
difficult, risky, and costly to carry out.\67\ In addition, a commenter
asserts that bitcoin has a highly liquid secondary market that is
conducive to an efficient market and price discovery.\68\ Several
commenters generally assert that manipulation is present in the bitcoin
market \69\ or provide evidence of manipulation in the bitcoin market,
including Ponzi schemes; \70\ spoofing, layering, and front running;
\71\ trading by dominant market participants; \72\ and suspicious
trading patterns or price movements.\73\
---------------------------------------------------------------------------

    \64\ See Notice and OIP, supra note 7, 84 FR at 23129, 23133;
Bitwise Submission I, supra note 6, at 23.
    \65\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission I, supra note 6, at 117-118; Bitwise Submission III,
supra note 9, at 47. The Sponsor argues that these characteristics
of the bitcoin market arise from bitcoin's fungibility and
transportability, as discussed further above in Section I.A.1(a).
    \66\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission I, supra note 6, at 118.
    \67\ See Notice and OIP, supra note 7, 84 FR at 23133; Bitwise
Submission I, supra note 6, at 117; Bitwise Submission III, supra
note 9, at 33.
    \68\ See Blockchain Capital Letter, supra note 9, at 6
(asserting that these characteristics are partly a byproduct of
bitcoin's divisibility, fungibility, and portability).
    \69\ See Bird Letter, supra note 9 (asserting that bitcoin is
not immune to manipulation by a group, individual, or software);
Kumar Letter, supra note 6 (calling it ``common knowledge'' that the
bitcoin market is manipulated); Perrott Letter, supra note 6
(stating that we are still very much in a volatile and manipulated
market); Pinto Letter, supra note 6 (stating that the bitcoin market
is volatile and manipulated by the very few); C. Ross Letter, supra
note 6 (referring to manipulation as a ``prime issue''); Shenoy
Letter I, supra note 6 (incorporating letter from Avinash Shoney
(Sept. 29, 2018), regarding SR-CboeBZX-2018-040 (``Shenoy Letter
III''), at 1, available at https://www.sec.gov/comments/sr-cboebzx-2018-040/srcboebzx2018040-4460679-175814.pdf) (asserting that it is
a ``widely known fact'' that the bitcoin market is manipulated).
    \70\ See Kumar Letter, supra note 6 (arguing that Ponzi schemes
are common and referencing the recently shut down BitConnect
platform).
    \71\ See Shenoy Letter III, supra note 69, at 1, 8 (representing
that spoofing, layering, and front-running are prevalent; that pump-
and-dump schemes organized through messaging apps are ubiquitous and
make use of coordinated actions of trading bots and the speed at
which news spreads on social media; and that trading bots have been
known to artificially inflate the price of cryptocurrencies by up to
300%). See also Shenoy Letter II, supra note 9, at 1 (stating that
high-frequency traders have been using trading bots to front-run
other investors in the equity world for several decades). This
commenter asserts that, considering past manipulation of the markets
for LIBOR, foreign currencies, U.S. Treasuries, gold, and silver, it
would not be so hard to manipulate a smaller market such as the
market for bitcoin. See Shenoy Letter III, supra note 69, at 1.
    \72\ See Shenoy Letter III, supra note 69, at 1 (stating that
research by economists indicates that it is likely that past events
involved manipulation of bitcoin's price by just one or two major
players, and that miners, some of whom have a large concentration of
power and large bitcoin positions, have an interest in seeing the
price of bitcoin rise); Bird Letter, supra note 9 (asserting that
trading by a single entity recently caused the price of bitcoin to
drop more than $1,000 in minutes across the market, including on the
Sponsor's identified ``real'' platforms, and that this incident
disproves the assertion that bitcoin is uniquely resistant to
manipulation).
    \73\ One commenter asserts that an observed digital-asset-
trading pattern known as ``Bart'' frequently occurs around bitcoin
futures expiry and may be caused by high-frequency traders. See
Shenoy Letter III, supra note 69, at 1-2, 6, 7. This commenter
represents that it is common to see price movement that appears to
be market reaction to news before the news is released, which is
indicative of market manipulation and insider trading. See id. at 3-
5. This commenter also states that most bitcoin platforms do not
block masked VPN IP addresses, raising questions about the ability
of trading platforms to restrict access to authorized users only and
prevent manipulation. See id. at 2-3. Another commenter refers to an
apparent ``price pump'' of approximately $800 million for bitcoin in
under a week. See Perrott Letter, supra note 6. Another commenter
states that three small platforms lost over $200 million in investor
funds in 2019. See Blake Letter II, supra note 9.
---------------------------------------------------------------------------

    The Sponsor argues that the ``real'' bitcoin market is organized,
efficient, resilient, and robust, with ``extremely tight spreads and
effective arbitrage.'' \74\ The Sponsor asserts that spreads in the
``real'' bitcoin market make bitcoin one of the most tightly quoted
financial instruments in the world.\75\ For example, the Sponsor
represents that in April 2019, the average median spread on the ten
platforms that it identifies as ``real''--Binance, Bitfinex, Coinbase
Pro, Kraken, Bitstamp, bitFlyer, Gemini, itBit, Bittrex, and Poloniex
\76\--was $1.31 and the five most liquid ``real'' platforms had median
spreads ranging from $0.01 to $1.75, constituting a range of 0.01% to
0.03% as compared to bitcoin's trading price of around $5,000 that
month.\77\
---------------------------------------------------------------------------

    \74\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise
Submission II, supra note 9, at 13, 85; Bitwise Submission III,
supra note 9, at 147; Bitwise Submission VI, supra note 9, at 10.
See also Omniex Letter, supra note 9, at 4 (stating that the
Sponsor's study demonstrates that the actual market for bitcoin is
more orderly and efficient than commonly perceived and exhibits
robust price discovery and effective arbitrage).
    \75\ See Notice and OIP, supra note 7, 84 FR at 23129; Bitwise
Submission II, supra note 9, at 55-56. See also Notice and OIP,
supra note 7, 84 FR at 23128 (asserting that the current efficiency
of the spot bitcoin market matches or exceeds that of other major
financial markets).
    \76\ See Bitwise Submission II, supra note 9, at 34-35.
    \77\ See id. at 55-56. See also Notice and OIP, supra note 7, 84
FR at 23129 (describing that the bitcoin platform Coinbase Pro had a
median spread in March 2019 of $0.01, with bitcoin valued at
approximately $5,000); Bitwise Submission I, supra note 6, at 16
(stating that, on leading platforms, bitcoin commonly trades with a
$0.01 spread with a price of approximately $4,000), 28 (stating that
at the time of a December 12, 2018, snapshot, Coinbase Pro had a
spread of $0.01, or 0.0003% based on bitcoin's trading price of
$3,419), 111 (stating that average spreads on the ``real'' platforms
ranged from 0.01% to 0.10% and that two of these platforms had a
single tick as their median spread). But see Bitwise Submission II,
supra note 9, at 70 n.182 (referring to one platform (Poloniex) as
``too small and illiquid to support meaningful arbitrage trading''
and stating that another (Bitfinex) has a 3% fee on withdrawals that
``rais[es] certain challenges for institutional arbitrage
activity'').
---------------------------------------------------------------------------

    The Sponsor provides an analysis of arbitrage across the ten
identified platforms in the ``real'' bitcoin spot market and concludes
that prices on these platforms trade closely together and have their
disparities rapidly arbitraged away.\78\ According to the Sponsor, this
conclusion holds regardless of venue, currency pair, or any other
identifiable factor.\79\ For the purposes of its analysis, the Sponsor
has taken, once per second, the last-traded price on each of the ten
platforms and used an equal-weighted average to calculate a real-time
consolidated spot price (``consolidated price'').\80\ The Sponsor has
plotted the price of bitcoin on each of the ten platforms from January
2018 through mid-May 2019 on a chart, and concludes that it is
``difficult to see meaningful gaps'' between the prices on each
platform.\81\ The Sponsor has then calculated the average deviation
from the consolidated price for each of the ten platforms on a second-
by-second basis since January 2019 and finds that the average deviation
for any given platform ranged from 0.06% to 0.20% during that period,
with an average deviation across all platforms of 0.12%.\82\ The
Sponsor

asserts that these results show that the platforms trade ``incredibly
tightly,'' with average deviations at a level within the trading fees
on the platforms.\83\ Therefore, according to the Sponsor, the results
suggest that institutional-quality arbitrageurs and algorithmic
programs are at work to keep prices closely aligned.\84\
---------------------------------------------------------------------------

    \78\ See Bitwise Submission II, supra note 9, at 60-65; Bitwise
Submission III, supra note 9, at 31, 35.
    \79\ See Bitwise Submission III, supra note 9, at 37.
    \80\ See Bitwise Submission II, supra note 9, at 60 (stating
that the Sponsor chose to use equal-weighting to remove any
suggestion that one platform appears to trade closely to a
consolidated price only because it has an undue influence over the
consolidated price).
    \81\ See id. at 60-61. See also Bitwise Submission I, supra note
6, at 67 (showing graph of prices on the ten platforms from January
2018 through mid-March 2019, and stating that they form a
``singular'' price).
    \82\ See Bitwise Submission II, supra note 9, at 61-62. The
Sponsor provides an earlier analysis that shows average deviations
for each platform ranging from 0.13% to 0.25% from January 2018
through mid-March 2019. See Notice and OIP, supra note 7, 84 FR at
23131; Bitwise Submission I, supra note 6, at 68. See also Bitwise
Submission III, supra note 9, at 35 (representing that its earlier
analysis shows that the average deviation in price between each of
the ten platforms and the globally integrated price in April 2019
was between 0.06% and 0.19%).
    \83\ See Bitwise Submission II, supra note 9, at 62 (noting that
``taker'' trading fees on the ten platforms range from 0.04% to
0.35%, and that a market participant would need to incur these fees
on both sides of the trade to immediately capture the arbitrage
opportunity). See also Bitwise Submission I, supra note 6, at 68
(stating that average deviations are well within the expected
arbitrage band when taking into account platform-level fees of
around 30 basis points, volatility, and hedging costs).
    \84\ See Bitwise Submission II, supra note 9, at 62.
---------------------------------------------------------------------------

    In addition, the Sponsor has identified instances in which the
price of bitcoin on a particular ``real'' platform deviated by more
than 1% from the consolidated price during the 12 months starting in
April 2018.\85\ The Sponsor has then graphed the number of instances
where a platform had a price deviation greater than 1% away from the
consolidated price for a specific number of seconds, both across all
ten ``real'' platforms and for each platform.\86\ The Sponsor states
that, in the aggregate, the results show that more than 50% of all
pricing discrepancies greater than 1% were arbitraged away within 5
seconds and that more than 90% of all such pricing discrepancies were
arbitraged away within 34 seconds.\87\ According to the Sponsor, these
results were remarkably consistent across all platforms and show that
pricing discrepancies greater than 1% were rare and quickly arbitraged
away.\88\ The Sponsor also asserts that these results suggest that
bitcoin has a global network of spot platforms that are tightly
arbitraged and form a single, global price.\89\ The Sponsor states that
its conversations with leading market makers suggest that such market
makers maintain capital at multiple platforms to facilitate this
arbitrage.\90\
---------------------------------------------------------------------------

    \85\ See id.
    \86\ See id. at 62-64.
    \87\ See id. at 63; Bitwise Submission III, supra note 9, at 33,
35. In its earlier analysis, the Sponsor has examined deviations
greater than 1% that lasted more than 100 seconds. Based on a
provided histogram of these instances, the Sponsor concludes that
such sustained deviations were extremely rare and of diminished
frequency in recent months. See Notice and OIP, supra note 7, 84 FR
at 23131; Bitwise Submission I, supra note 6, at 69; Bitwise
Submission III, supra note 9, at 33, 35.
    \88\ See Bitwise Submission II, supra note 9, at 62-63.
    \89\ See id. at 65.
    \90\ See Bitwise Submission III, supra note 9, at 33.
---------------------------------------------------------------------------

    The Sponsor argues that the efficiency of the ``real'' bitcoin
market has improved dramatically over the past eighteen months and is
now approaching its practical limit, in that prices are ``nearly
perfectly'' arbitraged, spreads are ``incredibly tight,'' and the
market is liquid on a twenty-four hour, seven-day-a-week basis.\91\ In
particular, according to the Sponsor, the strength of arbitrage on the
bitcoin spot market and quality of that market has improved
significantly since December 2017.\92\ The Sponsor has charted the
average deviation of the price of bitcoin on the ten ``real'' spot
platforms, as measured against the consolidated price, monthly from
January 2018 through April 2019, and concludes that the data show a
pronounced downward trend, indicating increasingly efficient
arbitrage.\93\ The Sponsor attributes improvements in arbitrage on the
bitcoin platforms in part to the December 2017 introduction of the
bitcoin futures market, which allows arbitrageurs to gain short
exposure in bitcoin and created a two-sided market with easy hedging,
and to the growth of contract volume on that market.\94\ The Sponsor
also points to the February 2018 emergence and subsequent growth of the
institutional short lending market for bitcoin, which allows
arbitrageurs to capitalize on short term price dislocations in the
bitcoin market.\95\ The Sponsor further asserts that the 2018 entry of
well-established, institutional, and algorithmic market-makers into the
bitcoin market has brought increased order and efficiency to the
market.\96\ The Sponsor states that it ``does not discount the
possibility'' that the bitcoin market was susceptible to market
manipulation in 2013, prior to the development of material regulation
or the entry of large market participants, but asserts that concerns
raised about market conditions during that earlier period are mitigated
by the current existence of a well-functioning, distributed market with
multiple, significant platforms connected by efficient arbitrage.\97\
---------------------------------------------------------------------------

    \91\ See Notice and OIP, supra note 7, 84 FR at 23131; Bitwise
Submission I, supra note 6, at 111.
    \92\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise
Submission II, supra note 9, at 72; Bitwise Submission III, supra
note 9, at 3.
    \93\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise
Submission II, supra note 9, at 72. See also Bitwise Submission I,
supra note 6, at 106 (providing a graph of aggregate monthly price
deviation from December 2017 through mid-March 2019). In addition,
the Sponsor has provided an updated chart showing the average
deviation of the price of bitcoin on the ``real'' spot platforms, as
measured against the consolidated price, through August 2019,
showing similar average deviations in May through August 2019 as
compared to the earlier portion of 2019. See Bitwise Submission VI,
supra note 9, at 7, 24.
    \94\ See Bitwise Submission I, supra note 6, at 107; Bitwise
Submission II, supra note 9, at 82 (citing May 2018 letter from
Federal Reserve Bank of San Francisco that explains that the impact
of the futures market aligns with the impact the introduction of
futures has had on other markets); Bitwise Submission III, supra
note 9, at 3; Bitwise Submission VI, supra note 9, at 7. See also
Bitwise Submission III, supra note 9, at 145 (quoting May 2018
letter from Federal Reserve Bank of San Francisco that stated that
the rapid raise in the price of bitcoin, and subsequent price drop
following the issuance of bitcoin futures, is consistent with
pricing dynamics suggested elsewhere in financial theory and
previously observed trading behavior).
    \95\ See Bitwise Submission I, supra note 6, at 110; Bitwise
Submission II, supra note 9, at 82-83; Bitwise Submission III, supra
note 9, at 3; Bitwise Submission VI, supra note 9, at 7.
    \96\ See Notice and OIP, supra note 7, 84 FR at 23128; Bitwise
Submission I, supra note 6, at 108-109; Bitwise Submission II, supra
note 9, at 83; Bitwise Submission III, supra note 9, at 3; Bitwise
Submission VI, supra note 9, at 7. The Sponsor states that expansion
of the bitcoin custody market in 2018 and 2019, and emergence of a
strong market for insurance on custodied bitcoin assets, has also
increased efficiency of the market and enabled a larger number of
market makers to enter the market. See Bitwise Submission II, supra
note 9, at 84; Bitwise Submission III, supra note 9, at 3. See also
Bitwise Submission VI, supra note 9, at 8 (stating that bitcoin
custody has become ``fully institutional'' and detailing the
custodians for bitcoin that were regulated or had insurance in 2017,
2018, and 2019).
    \97\ See Bitwise Submission III, supra note 9, at 49 (describing
reports of manipulation at the failed Mt. Gox platform in 2013).
---------------------------------------------------------------------------

    The Sponsor asserts that efficient arbitrage exists despite the
apparent existence of arbitrage opportunities in the bitcoin market
(from apparent pricing discrepancies on different platforms), because
these apparent opportunities are usually driven by one of three
factors.\98\ First, the Sponsor represents that platforms that
exaggerate and fake their volume utilize algorithms that generally
display prices that mirror the ``real'' bitcoin spot market, but that
these algorithms rely on trend-following software rather than effective
arbitrage and thus deviate more from the consolidated price.\99\
Second, the Sponsor asserts that bitcoin prices on platforms in
capital-controlled markets may trade at significant sustained premiums
or discounts to the integrated global market because capital controls
make it difficult or impossible to conduct arbitrage.\100\ Third, the
Sponsor states that certain platforms conduct

trading in so-called cryptographic ``stablecoins,'' \101\ rather than
in the U.S. dollar.\102\ According to the Sponsor, while stablecoins
have values that fluctuate, many popular data aggregators assume that
these stablecoins maintain a stable price of $1.00, and therefore do
not incorporate the fluctuating nature of stablecoins when displaying
bitcoin prices, unlike arbitrageurs that do take this into
account.\103\
---------------------------------------------------------------------------

    \98\ See Bitwise Submission II, supra note 9, at 66-68.
    \99\ See id. at 67.
    \100\ See id. See also Bitwise Submission III, supra note 9, at
31 (stating that capital controls prevent arbitrage or make it
significantly more difficult, which is why the Bitwise Daily Bitcoin
Reference Price methodology excludes platforms domiciled in capital-
controlled countries).
    \101\ 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.
    \102\ See Bitwise Submission II, supra note 9, at 67.
    \103\ See id. at 67-68. For example, the Sponsor states that the
price of the stablecoin Tether (USDT) has fluctuated between $0.91
and $1.05 in the past year, but that coinmarketcap.com displays the
price of bitcoin-USDT on the Binance platform as if Tether is worth
$1, which makes it appear as though bitcoin is trading at a premium
on Binance. See id. See also Bitwise Submission I, supra note 6, at
72-74 (asserting that if you adjust for the price of Tether, prices
for bitcoin-USD and bitcoin-USDT trading pairs line up ``exactly'').
---------------------------------------------------------------------------

    Several commenters assert that there is effective arbitrage in the
bitcoin market.\104\ One commenter represents that, in recent years,
spreads in the bitcoin market have narrowed, arbitrage has improved,
and the market has become increasingly efficient, due to the entry of
large, established market makers; the launch and growth of a large,
regulated bitcoin derivatives market; the development of a short
lending market in bitcoin; and the emergence of algorithmically-driven
trading tools.\105\ Another commenter states that, through the use of
high-frequency trading or automated trading ``bots,'' global arbitrage
in the bitcoin market is very cost-effective and efficient.\106\ A
third commenter asserts that effective arbitrage exists among the
platforms with ``real'' volume.\107\ In addition, one commenter states
that the global bitcoin market is deep and robust, divided among
multiple spot platforms and futures exchanges, and supported by
institutional market makers, and that it is unlikely that an attempt to
manipulate the market could last long.\108\
---------------------------------------------------------------------------

    \104\ See Shenoy Letter III, supra note 69, at 9; Omniex Letter,
supra note 9, at 4; Castle Island Ventures Letter, supra note 9, at
3.
    \105\ See Castle Island Ventures Letter, supra note 9, at 3.
    \106\ See Shenoy Letter III, supra note 69, at 9.
    \107\ See Omniex Letter, supra note 9, at 4.
    \108\ See Donostia Ventures Letter, supra note 9, at 4.
---------------------------------------------------------------------------

    In contrast, one commenter asserts that the Sponsor's claims
regarding arbitrage and the expectation that bitcoin would trade at the
same price across platforms are not true because bitcoin trades at
different prices in different countries, such as what can be seen in
South Korea or what was seen in India during the peak at the end of
2017.\109\ This commenter adds that platforms that operate across
regions may be able to conduct arbitrage and circumvent some capital
controls, which creates the possibility that the existence of this
``channel'' adds noise to the estimation of capital controls.\110\ This
commenter also states that the bitcoin market is not orderly because
the supply is inelastic and the demand drivers are opaque.\111\
---------------------------------------------------------------------------

    \109\ See Fitzgerald Letter II, supra note 9.
    \110\ See id.
    \111\ See id.
---------------------------------------------------------------------------

(B) The Sponsor's Assertions Regarding Regulation of the Bitcoin Spot
Market
    The Sponsor asserts that the ``real'' bitcoin spot market is
``substantially more regulated'' than would be suggested by
``conventional wisdom.'' \112\ Specifically, the Sponsor argues that
the ten platforms in the ``real'' bitcoin market are more established,
more likely to be located in developed markets, more regulated, and
more likely to utilize sophisticated market surveillance tools than the
broader set of platforms that report significant volume.\113\ The
Sponsor represents that all ten of the ``real'' platforms are domiciled
or based in what it describes as ``developed'' markets.\114\ The
Sponsor further represents that nine of these ten platforms are
regulated by the U.S. Department of Treasury's Financial Crimes
Enforcement Network (``FinCEN'') division as Money Services Businesses
(``MSB'') and six are regulated by the New York State Department of
Financial Services (``NYSDFS'') under its BitLicense program.\115\
According to the Sponsor, the requirements for a BitLicense include
having to implement measures designed to detect, prevent, and respond
to fraud, attempted fraud, and similar wrongdoing, including market
manipulation, and to monitor, control, investigate, and report back to
the NYSDFS regarding any wrongdoing.\116\ The Sponsor states that five
of the ten ``real'' platforms have robust internal or third-party
market surveillance tools to monitor, report, and correct for abusive
trading behavior.\117\ According to the Sponsor, this trend toward
adopting market surveillance tools has been, in part, a response to the
MSB and BitLicense regulations.\118\
---------------------------------------------------------------------------

    \112\ See Bitwise Submission II, supra note 9, at 48.
    \113\ See Notice and OIP, supra note 7, 84 FR at 23130. See also
Bitwise Submission II, supra note 9, at 85 (stating that the bitcoin
market is supported by increasingly effective regulation on the spot
platforms); Bitwise Submission III, supra note 9, at 171 (stating
that many bitcoin spot platforms face significant regulation).
    \114\ See Notice and OIP, supra note 7, 84 FR at 23130. The
Sponsor states that approximately 30% of all ``real'' reported
volume takes place on platforms domiciled in the United States, with
the remainder domiciled in Malta, Hong Kong, the United Kingdom, and
Japan. See Bitwise Submission I, supra note 6, at 64; Bitwise
Submission II, supra note 9, at 47-48; Bitwise Submission III, supra
note 9, at 9, 67.
    \115\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise
Submission I, supra note 6, at 81; Bitwise Submission II, supra note
9, at 49; Bitwise Submission III, supra note 9, at 9. See also
Tagomi Letter, supra note 9, at 2. The Sponsor states that the MSB
license has associated obligations designed to ensure that FinCEN
can protect against money laundering, and include having an AML
policy, having customer identification and verification policies,
and filing Suspicious Activity Reports for suspicious customer
transactions. See Notice and OIP, supra note 7, 84 FR at 23130;
Bitwise Submission I, supra note 6, at 77-78; Bitwise Submission II,
supra note 9, at 50-51.
    \116\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise
Submission II, supra note 9, at 51-52; Bitwise Submission III, supra
note 9, at 73.
    \117\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise
Submission I, supra note 6, at 82; Bitwise Submission II, supra note
9, at 53; Bitwise Submission III, supra note 9, at 73.
    \118\ See Bitwise Submission II, supra note 9, at 52.
---------------------------------------------------------------------------

    One commenter states that BitLicense regulation has driven advances
in the bitcoin market and that, after the NYSDFS added guidelines in
2018 requiring surveillance and reporting of market manipulation, the
platforms with BitLicenses have implemented sophisticated market
surveillance tools that help foster a safer and more established
market.\119\ Another commenter states that, to obtain a BitLicense, the
platforms must demonstrate to the NYSDFS that they meet the
requirements for a BitLicense and must commit to ongoing review by the
NYSDFS, which, according to the commenter, means that these platforms
``have embraced the need for policies, procedures, and surveillance.''
\120\ This commenter asserts that it believes that all of the platforms
in which it participates, including those outside of New York, must
have a robust surveillance program and that the listed platforms meet
these standards and are continuing to develop these programs.\121\ This
commenter further asserts that these platforms typically employ
sophisticated third-party surveillance tools that use the qualities

of bitcoin to scrutinize transaction histories and conduct
surveillance.\122\
---------------------------------------------------------------------------

    \119\ See Castle Island Ventures Letter, supra note 9, at 2-3.
    \120\ See Tagomi Letter, supra note 9, at 2 (representing that
the BitLicense requirements mostly relate to the prevention of money
laundering and to the security of the platforms' systems).
    \121\ See id.
    \122\ See id.
---------------------------------------------------------------------------

    The Sponsor acknowledges that the Trust's Registration Statement
represents that the platforms on which bitcoin trades are ``relatively
new and, in some cases, largely unregulated, and, therefore may be more
exposed to fraud and security breaches than established, regulated
exchanges for other financial assets or instruments, which could have a
negative impact on the performance of the Trust.'' \123\ The Sponsor
states that regulation of bitcoin platforms varies and is not
equivalent to the regulation of national securities exchanges, but that
many bitcoin spot platforms face significant regulation and are well-
capitalized, and that the design of the Trust would mitigate the impact
of the failure of any individual platform.\124\ Further, the Sponsor
states that the regulations surrounding MSB licenses and BitLicenses,
while not as extensive as the obligations of and oversight for national
securities exchanges and futures exchanges, provide business oversight
and regulatory compliance requirements and thus convey certain critical
protections.\125\
---------------------------------------------------------------------------

    \123\ See Bitwise Submission III, supra note 9, at 171 (quoting
Registration Statement, supra note 31, at 7).
    \124\ See id. (acknowledging that regulation of bitcoin trading
platforms is ``not pari passu with the regulation of national
securities exchanges''); Registration Statement, supra note 31, at
15 (``The trading for spot bitcoin occurs on multiple trading
venues'' that are ``not regulated in the same manner as traditional
stock and bond exchanges''); Bitwise Submission I, supra note 6, at
76 (``We acknowledge that we're using the term `regulated' loosely
here. We are not implying that bitcoin spot exchanges are `regulated
markets' or that they are on an equal legal status with national
securities exchanges or futures exchanges, but rather that the 10
bitcoin spot exchanges highlighted earlier interface with other
forms of regulation.''). For additional discussion about the
Sponsor's arguments that the design of the Trust would make the
proposed ETP uniquely resistant to manipulation, see infra Section
III.B.1(d).
    \125\ See Notice and OIP, supra note 7, 84 FR at 23130; Bitwise
Submission II, supra note 9, at 49.
---------------------------------------------------------------------------

    The Sponsor states that, out of the ten identified ``real''
platforms, Binance is the only one not registered as an MSB and Kraken
is the only significant U.S.-based platform that has not pursued a
BitLicense, and that both platforms have expressed a strong preference
for self-regulation and voiced concerns about regulatory
overreach.\126\ The Sponsor asserts that Binance and Kraken have been
aggressive in adopting internal tools to address AML, KYC, and other
concerns through the use of technology.\127\ Further, the Sponsor
attributes the ``conventional wisdom'' that the bitcoin platforms are
almost entirely unregulated to characterizations of the ``fake''
platforms that dominate the reported trading volume, rather than the
ten platforms with ``real'' trading volume.\128\
---------------------------------------------------------------------------

    \126\ See Bitwise Submission II, supra note 9, at 53-54. The
Sponsor states that Bittrex pursued a BitLicense, but was denied by
the NYSDFS. See id. at 54 n.140.
    \127\ See id. at 54.
    \128\ See id. at 48-49.
---------------------------------------------------------------------------

    Several commenters assert that there is a lack of regulation in the
bitcoin market.\129\ One commenter states that while regulation of the
bitcoin market is improving through the Commission's efforts to root
out bad actors, it still is not comparable to the traditional markets,
and that bitcoin platforms lack real-time and historical surveillance
capabilities to identify and stop suspicious trading activities.\130\
Another commenter states that, while most platforms have AML and KYC
requirements for transactions between fiat currencies and digital
assets, many allow participants to open accounts to trade between
digital assets and other digital assets with only a name and email
address, bypassing AML and KYC requirements.\131\
---------------------------------------------------------------------------

    \129\ See Kumar Letter, supra note 6 (calling it ``common
knowledge'' that the bitcoin market is unregulated and manipulated);
Page Letter, supra note 9 (referring to the bitcoin sector as
unregulated); Shenoy Letter II, supra note 9, at 1 (suggesting that
currently the bitcoin market does not have precise regulation or
apparent external oversight).
    \130\ See Shenoy Letter III, supra note 69, at 1, 10.
    \131\ See Fitzgerald Letter II, supra note 9.
---------------------------------------------------------------------------

(ii) Analysis
    The Commission concludes that the record does not demonstrate that
the identified characteristics of the ``real'' spot market, such as the
claimed effectiveness of arbitrage and the presence of some degree of
regulation, establish that the segment of the market that the Sponsor
identifies--or that NAV and IIV pricing based on that segment--are
uniquely resistant to manipulation sufficient to justify dispensing
with the detection and deterrence of fraud and manipulation provided by
surveillance-sharing agreements with significant, regulated markets.
While the Sponsor asserts that the ``real'' bitcoin market is ``more
orderly and more regulated than commonly understood,'' \132\
characteristics of the identified ``real'' segment of the bitcoin
market that differ from the common understanding of the broader bitcoin
market do not establish that the ``real'' bitcoin market is uniquely
resistant to manipulation. Moreover, as discussed further below in
Section III.B.1(c), the Sponsor asserts that 95 percent of the spot
bitcoin market consists of fake and non-economic activity,\133\ but has
not established that the ``real'' bitcoin market is isolated from that
fraudulent and manipulative activity.\134\
---------------------------------------------------------------------------

    \132\ See supra note 64 and accompanying text.
    \133\ See supra note 52 and accompanying text.
    \134\ See infra Section 0 for discussion about the Sponsor's
assertions that it has separated the ``real'' bitcoin spot market
from the rest of the market that is dominated by fake and non-
economic trading, and that fake volume does not impact price
discovery on the ``real'' bitcoin spot market. The Commission
emphasizes that, as discussed further below, if prices on the
identified ``real'' spot market are affected by manipulative
activity on other platforms, then it would fundamentally undercut
any claims that the ``real'' market is uniquely resistant to
manipulation.
---------------------------------------------------------------------------

(A) Arbitrage and Efficiency in the Bitcoin Spot Market
    The record does not establish that the effectiveness of arbitrage
in the ``real'' spot bitcoin market would, by itself, protect against
the influence of fake and non-economic trading in the broader bitcoin
market or provide unique resistance to manipulation sufficient to do
away with the need for a surveillance-sharing agreement with a
significant, regulated market. The Commission also notes 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.\135\

Accordingly, even efficient price arbitrage does not eliminate the need
for surveillance-sharing agreements. There is no evidence in the record
that arbitrage in the bitcoin market is of such unique effectiveness
that it would essentially insulate the proposed ETP from attempts at
manipulation in a way beyond that of existing derivative securities
products that trade on highly regulated markets.
---------------------------------------------------------------------------

    \135\ See Winklevoss Order, supra note 12, 84 FR at 37593
(citing 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 Depositary 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''). See also Registration Statement, supra note 31, at 2
(stating that the ``real'' bitcoin spot market ``is now operating at
a level of efficiency and scale similar in material respects to
established global equity, fixed income and commodity markets'').
---------------------------------------------------------------------------

    Further, even if the record showed that the quality of available
arbitrage in the ``real'' bitcoin market makes manipulation more
difficult, costly, and risky to carry out than it would be
otherwise,\136\ that would speak to providing some resistance to
manipulation, rather than a unique resistance to manipulation that
would justify dispensing with a surveillance-sharing agreement with a
significant, regulated market. Similarly, the Commission concludes that
claims by the Sponsor and a commenter that the ``real'' spot bitcoin
market is organized, efficient, resilient, or robust, or has tight
spreads,\137\ do not suffice to distinguish the proposed ETP from other
derivative securities products, such as equity options, where the
Commission required surveillance-sharing agreements with a significant,
regulated market even though effective arbitrage exists among the
relevant markets.
---------------------------------------------------------------------------

    \136\ See supra notes 66-67 and accompanying text.
    \137\ See supra notes 68, 74-77, and accompanying text.
---------------------------------------------------------------------------

    The Sponsor ``does not discount the possibility'' that the early
bitcoin market may have been subject to market manipulation,
particularly with respect to reports of manipulation regarding the
failed Mt. Gox platform in 2013.\138\ Rather, the Sponsor points to
improvements in the strength of arbitrage and overall market quality in
the bitcoin spot market since December 2017.\139\ The Commission
concludes that the Sponsor's acknowledgement of past fraud and
manipulation in the bitcoin spot market, combined with the Sponsor's
reliance on changes in the market within just the last two years,
effectively concedes that bitcoin and the bitcoin spot market are not
inherently resistant to manipulation.\140\
---------------------------------------------------------------------------

    \138\ See Bitwise Submission III, supra note 9, at 49.
    \139\ See supra notes 91-97 and accompanying text.
    \140\ In the Winklevoss Order, the Commission concluded that
there was an insufficient basis in the record before it to decide
that the bitcoin spot market is inherently resistant to
manipulation. See Winklevoss Order, supra note 12, 83 FR at 37585-86
(noting that possible sources of fraud and manipulation in the
bitcoin spot market 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 or
misleading information, (6) manipulative activity involving Tether,
and (7) fraud and manipulation at Mt. Gox, a bitcoin trading
platform).
---------------------------------------------------------------------------

    The Commission also believes that arbitrage in the ``real'' bitcoin
market would not prevent manipulation by, for example, an actor with a
dominant ownership position in bitcoin. The existence of concentrated
holdings in an asset presents a meaningful risk of manipulation. An
actor or group of actors acting in concert who obtain or have a pre-
existing dominant ownership position in actual bitcoin would not
necessarily find it prohibitively expensive to engage in manipulation
across the trading platforms the Sponsor identifies, despite efficient
arbitrage on the identified ``real'' bitcoin market.\141\ Furthermore,
there are other possible sources of fraud and manipulation in the
purportedly ``real'' bitcoin market,\142\ including hacking of the
trading platforms the Sponsor uses for its pricing mechanism,\143\
malicious control of the Bitcoin Network,\144\ and trading based on
material non-public information.\145\ Accordingly, the Commission
cannot conclude that the ``real'' bitcoin market is uniquely resistant
to manipulation.
---------------------------------------------------------------------------

    \141\ See id. at 37584, 37586-87, 37591. The Commission is
unconvinced by the Sponsor's assertions that no dominant market
position can be exploited to manipulate bitcoin prices. See Bitwise
Submission III, supra note 9, at 31 (discussing ``The Not-So-Killer
Whales of Bitcoin,'' Chainalysis, Oct. 10, 2018, available at
https://blog.chainalysis.com/reports/bitcoin-whales-oct). Indeed,
the analysis that the Sponsor cites concludes that bitcoin ``trading
whales certainly have the capability of executing transactions large
enough to move the market.'' ``The Not-So-Killer Whales of
Bitcoin,'' Chainalysis, Oct. 10, 2018. The cited analysis also
concludes that a group of only 15 early bitcoin adopters hold over
33% of all outstanding bitcoin (id.), and the Sponsor has not
demonstrated that these early adopters are unable to manipulate
prices if they so choose. The cited analysis also concedes that
12.5% of the outstanding bitcoin is owned by what it characterizes
as ``criminal whales'' (id.), and the Sponsor has not demonstrated
that these ``criminals'' are unable to manipulate prices. This
analysis fails to consider that persons who would together own a
dominant market share can collude to manipulate bitcoin prices. See
Winklevoss Order, supra note 12, 83 FR at 37586-87. And this
analysis fails to consider that ``pseudonymous bitcoin account
holding means, among other things, that the number of accounts or
number of trades would not reveal whether a person or group has a
dominant ownership position in bitcoin, or is using or attempting to
use a dominant ownership position to manipulate bitcoin pricing.''
Id. at 37591.
    \142\ See Winklevoss Order, supra note 12, 83 FR at 37585-86.
See also notes 69-73 and accompanying text (summarizing comments
asserting that Ponzi schemes, spoofing, layering, front running,
market domination, and suspicious trading patterns or price
movements occur in bitcoin markets).
    \143\ See Winklevoss Order, supra note 12, 83 FR at 37585. The
Sponsor recognizes that the risk that a profit-motivated hacker can
manipulate bitcoin prices up or down by hacking some trading venues
while trading on other trading venues is ``still a concern today.''
Bitwise Submission III, supra note 9, at 45. See also Registration
Statement, supra note 31, at 7 (``The nature of the assets held at
bitcoin exchanges makes them appealing targets for hackers'' and
``[n]o bitcoin exchange is immune from these risks.'').
    \144\ See Winklevoss Order, supra note 12, 83 FR at 37585-86.
The Sponsor recognizes that ``[t]here is a theoretical risk that a
malicious actor could attempt to exert control over the Bitcoin
Network by conducting a so-called 51% attack, which would involve
becoming the dominant source of mining power on the network,'' and
that ``51% attacks can theoretically allow you to double spend
bitcoin you already own or censor transactions of others.'' Bitwise
Submission III, supra note 9, at 45.
    \145\ See Winklevoss Order, supra note 12, 83 FR at 37585-86.
The Sponsor ``agree[s] with the Commission's argument that the
potential for material nonpublic information about bitcoin exists.''
Bitwise Submission III, supra note 9, at 43.
---------------------------------------------------------------------------

    Moreover, even to the extent that the spot market has evolved as
the Sponsor asserts, NYSE Arca and the Sponsor have not demonstrated
that these changes will endure and thus have not demonstrated that the
relevant market is inherently resistant to manipulation. As the Trust's
Registration Statement acknowledges, bitcoin platforms are ``relatively
new . . . and may be more exposed to fraud and security breaches than
established, regulated exchanges for other financial assets or
instruments.'' \146\ The Sponsor also argues that ``many bitcoin spot
exchanges face significant regulation and are well-capitalized'' and
that the Trust is designed in a way that would mitigate the impact that
a failure of an individual platform would have on the Trust or its NAV
or holdings.\147\ This argument, however, focuses on the presence of
some regulation and design features of the Trust, and does not
demonstrate that the nature of the spot platforms makes them inherently
resistant to manipulation.
---------------------------------------------------------------------------

    \146\ See supra note 123 and accompanying text. Furthermore, the
nature of trading in bitcoin markets could change over time as
market participants gain more experience. For example, institutional
market-makers and short-term lenders could decide to pull back from
the bitcoin market, or bitcoin futures contract volume could
decrease and make hedging more difficult and expensive, affecting
the spot market. Moreover, the use or adoption of bitcoin could
contract, leading to a lower demand for bitcoin in the spot market
and a subsequent impact on volumes and volatility.
    \147\ See supra notes 124-125 and accompanying text.
---------------------------------------------------------------------------

    The Sponsor has made sweeping claims that up to 95% of the volume
reported by bitcoin platforms is wash trading or simply fabricated,
while asking the Commission to approve the

listing of a bitcoin ETP based upon a small segment of the market that
it asserts is uniquely resistant to the influence of this
activity.\148\ These claims, when combined with statements regarding
the relatively new state of the bitcoin market and, as discussed
further below, the proposed ETP's pricing mechanism,\149\ suggest that
further development of the market is needed to establish that the
Sponsor's representations remain sound.
---------------------------------------------------------------------------

    \148\ See infra Section III.B.1(c).
    \149\ See infra note 369 and accompanying text (quoting
statements in the Registration Statement that the Bitwise Daily
Bitcoin Reference Price ``is based on a new and untested calculation
methodology''). In addition, see discussion infra note 465 and
accompanying text regarding statements in the Registration Statement
regarding the bitcoin futures market.
---------------------------------------------------------------------------

    Further, the record does not demonstrate that arbitrage in the
``real'' spot market is as effective as the Sponsor claims.\150\ While
the Sponsor describes its analysis on arbitrage in the ``real'' spot
market,\151\ it provides a selective and incomplete analysis. For
example, the Sponsor presents the average deviation from the
consolidated price over an approximately five-month period as a single
data point for each platform,\152\ which may obscure transient events.
The Sponsor's analysis of the duration of 1% price deviations from the
consolidated price also lumps together all deviations over 1%,
regardless of size,\153\ and thus obscures whether some deviations were
quite large and how long a large deviation persists.\154\
---------------------------------------------------------------------------

    \150\ Because the Sponsor does not include any markets in
capital-controlled countries within its identified set of ``real''
platforms, based on difficulties in conducting arbitrage with
platforms in such countries, the Commission does not consider the
quality of arbitrage between the ``real'' platforms and such
markets. See supra notes 100, 109-110, and accompanying text.
    \151\ See supra notes 78-90, 93, and accompanying text. The
Sponsor also describes its earlier analysis utilizing similar
metrics over slightly different time periods. See supra notes 81-82,
87, and 93, and accompanying text.
    \152\ See supra note 82 and accompanying text.
    \153\ See supra notes 85-88 and accompanying text.
    \154\ In addition, the Sponsor ignores that on the platform-
level histograms, the scaling of the ``y'' axis that displays the
deviation count varies considerably, reflecting the finding that on
some of the platforms (e.g., bitFlyer) the 1% price deviations are
more than ten times more frequent than on other platforms (e.g.,
Bitfinex). The Sponsor's histograms compare deviation counts on the
``y'' axis of up to 120 for Binance and 700 for bitFlyer to
deviation counts on the ``y'' axis of 20 for Bitfinex. See Bitwise
Submission II, supra note 9, at 63-64. In addition, the Sponsor has
generated a line graph showing the price of bitcoin on the ten
``real'' platforms for an approximately seventeen-month period and
concludes that it is ``difficult to see meaningful gaps'' between
each line. See supra note 81 and accompanying text. Yet, given the
scaling used, in which grid lines represent an increase in the price
of bitcoin by 2,000 USD, a deviation would need to be very large to
produce perceptible gaps.
---------------------------------------------------------------------------

    Moreover, in a separate context where the Sponsor attempts to
explain why a particular market participant does not track prices for
two of its identified ``real'' platforms, the Sponsor refers to one of
these ``real'' platforms (Poloniex) as ``too small and illiquid to
support meaningful arbitrage trading'' and states that another
(Bitfinex) has a 3% fee on withdrawals that ``rais[es] certain
challenges for institutional arbitrage activity.'' \155\ In addition,
statements by commenters that assert that arbitrage on the spot
platforms is effective are conclusory and not supported with data.\156\
---------------------------------------------------------------------------

    \155\ See supra note 77.
    \156\ See supra notes 104-108 and accompanying text. But see
supra notes 109-111 (questioning the effectiveness of arbitrage on
the bitcoin spot markets).
---------------------------------------------------------------------------

(B) Regulation of the Spot Market
    Even if the Commission assumes that the arbitrage among these
``real'' platforms is effective, the record does not demonstrate that
the level of regulation present in the ``real'' bitcoin spot market
provides a unique ability to deter and detect fraud and
manipulation.\157\ The Sponsor has not demonstrated that its selected
platforms with ``real'' volumes are ``regulated markets'' comparable to
a national securities exchange or futures exchange, although they may
be registered with FinCEN or NYSDFS.\158\
---------------------------------------------------------------------------

    \157\ With respect to the assertion that all of the ``real''
platforms are domiciled or based in what the Sponsor terms
``developed'' markets (see supra note 114 and accompanying text),
nothing in the record explains how this characteristic would make
the platforms resistant to fraud and manipulative activity.
    \158\ See supra note 115-116 and accompanying text. See also
supra notes 119-122 and accompanying text.
---------------------------------------------------------------------------

    The Commission concludes, and the Sponsor itself expressly
acknowledges, that the level of regulation on bitcoin spot platforms
``varies'' and is not equivalent to the obligations and oversight of
national securities exchanges or futures exchanges.\159\ The Sponsor
does not argue that state or other federal regulation of the bitcoin
spot platforms is a substitute for federal securities law standards,
including the requirements of the Exchange Act. Indeed, the Sponsor
agrees with the Commission that, irrespective of other applicable
regulations, the Exchange Act here requires a comprehensive
surveillance-sharing agreement with a regulated market of significant
size relating to the underlying or reference assets.\160\
---------------------------------------------------------------------------

    \159\ See supra notes 123-125.
    \160\ The Sponsor ``believe[s] that the Commission has correctly
identified the need for, value of, and definition of surveilled
derivatives market of significant size,'' but argues that the CME
futures market is ``significant in size'' compared to the ``real''
spot market it identifies. Bitwise Submission III, supra note 9, at
151. See also id. at 97 (stating that the Sponsor ``agree[s] with
the Commission and recognize[s] the importance of comprehensive
surveillance-sharing agreements to detect and deter fraudulent and
manipulative activity,'' and asserting that the CME bitcoin futures
market is ``significant'' based on the Sponsor's ``understanding of
the true size of the bitcoin spot market''). The argument that the
CME bitcoin futures market is ``significant'' is addressed in
Section III.B.3 below.
---------------------------------------------------------------------------

    Furthermore, there are substantial differences between the NYSDFS
and FinCEN regulation versus the Commission's regulation of the
national securities exchanges. While there may be overlap between the
Commission's regulation and the NYSDFS's and FinCEN's regulation of
digital assets,\161\ 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.'' \162\ Moreover, national
securities exchanges must file proposed rules with the Commission
regarding certain material aspects of their operations,\163\ and the
Commission has the authority to disapprove any such rule that is not
consistent with the requirements of the Exchange Act.\164\ Thus,
national securities exchanges are subject to

Commission oversight of, among other things, their governance,
membership qualifications, trading rules, disciplinary procedures,
recordkeeping, and fees.\165\
---------------------------------------------------------------------------

    \161\ 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).
    \162\ 15 U.S.C. 78f(b)(5).
    \163\ 17 CFR 240.19b-4(a)(6)(i).
    \164\ Section 6 of the Exchange Act, 15 U.S.C. 78f, requires
national securities exchanges to register with the Commission and
requires an exchange's registration to be approved by the
Commission, and Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b),
requires national securities exchanges to file proposed rules
changes with the Commission and provides the Commission with the
authority to disapprove proposed rule changes that are not
consistent with the Exchange Act. Designated Contract Markets
(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.
    \165\ See Winklevoss Order, supra note 12, 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. One commenter asserts that, since the NYSDFS
issued this guidance, ``BitLicense exchanges have implemented
sophisticated market surveillance tools from reputable firms like
NICE Actimize, Irisium and NASDAQ, helping to foster a safer and
more established crypto asset market.'' Castle Island Ventures
Letter, supra note 9, at 3. However, the commenter provides no
additional information in support of these assertions, and the
Commission cannot fully evaluate the NYSDFS guidance because, among
other things, there is nothing further in the record before the
Commission regarding how the NYSDFS guidance has been implemented
either by the NYSDFS or by the purportedly ``real'' bitcoin trading
platforms that hold BitLicenses. 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.'').
---------------------------------------------------------------------------

    In any event, the Commission also finds persuasive several
commenters that describe the deficiencies of regulation of the
purportedly ``real'' spot market the Sponsor utilizes.\166\
Significantly, Binance, based in Malta and the single largest bitcoin
trading platform among the platforms the Sponsor identifies as
``real''--representing 39% of the purportedly ``real'' bitcoin volume
\167\--has not registered with either FinCEN or the NYSDFS; four of the
ten platforms the Sponsor utilizes--representing 69% of the purportedly
``real'' bitcoin volume \168\--do not have a BitLicense from the
NYSDFS; and half of the bitcoin platforms the Sponsor utilizes lack
internal or third-party market surveillance tools.\169\
---------------------------------------------------------------------------

    \166\ See supra notes 129-131 and accompanying text.
    \167\ See Bitwise Submission II, supra note 9, 35 (based on
April 2019 volume).
    \168\ See Bitwise Submission III, supra note 9, at 125.
    \169\ See supra notes 115, 117-122, and accompanying text. The
Sponsor's discussion about what protections the platforms Binance
and Kraken have in place in the absence of FinCEN or BitLicense
registration, see supra notes 126-128 and accompanying text,
arguably infers the presence of some of the protections that might
otherwise be provided by these specific registrations, rather than
show a unique level of protection. In addition, the Sponsor notes
that one platform (Bittrex) pursued a BitLicense but was denied by
the NYSDFS, see supra note 126, but does not explain how the mere
fact that this platform applied for a BitLicense is relevant to the
consideration of whether that platform is regulated.
---------------------------------------------------------------------------

    The Commission also notes that NYSE Arca has not stated that it has
entered or will enter into surveillance-sharing agreements with those
``real'' spot 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. Unlike national securities exchanges, the bitcoin spot platforms
are not self-regulatory organizations, and therefore do not have legal
power to impose discipline upon their participants.
    Therefore, the Commission concludes that the record does not
demonstrate that the identified ``real'' market is 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.
(c) The Sponsor's Methodology for Distinguishing the ``Real'' Volume on
the Bitcoin Spot Market From Fake or Non-Economic Trading Volume
    In the previous section, the Commission examines the Sponsor's
identified ``real'' spot market for bitcoin and asserted
characteristics of that market, such as the presence of arbitrage and
regulation, and considers whether the record establishes that this
segment of the market is uniquely resistant to manipulation.\170\ And,
as discussed further in the next section, the Sponsor generally
proposes to use prices and volumes from its identified ``real''
platforms to calculate the Bitwise Bitcoin Daily Reference Price, which
the Trust will use for NAV and IIV pricing.\171\ Yet, for the
Commission to determine that effective arbitrage and regulation make
this ``real'' segment of the market uniquely resistant to manipulation,
the Commission would have to conclude that the Sponsor's analysis
correctly identifies the segment of the market that represents ``real''
volume and establishes that this segment is not affected by trading in
other segments of the market that the Sponsor concedes is fake or non-
economic. Therefore, the Commission examines below the Sponsor's
analysis of the bitcoin market to identify ``real'' versus fake or non-
economic trading and the reliability of the Sponsor's claims that its
ten identified platforms represent the ``real'' volume on the spot
bitcoin market. Further, the Commission examines whether the Sponsor
has shown that prices on the broader bitcoin market do not influence
price discovery on the identified ``real'' platforms.
---------------------------------------------------------------------------

    \170\ See supra Section III.B.1(b).
    \171\ See infra Section III.B.1(d).
---------------------------------------------------------------------------

(i) Representations Made and Comments Received
    The Sponsor argues that through its research, it has identified
certain platforms that represent substantially all of the ``real''
global spot market for bitcoin, as distinguished from the approximately
95% of the bitcoin spot market that the Sponsor identifies as rife with
trading that is fake or non-economic in nature.\172\ In this context,
the Sponsor considers as ``fake volume'' any reported trading volume
that does not reflect legitimate price discovery, including wash
trading and reports of trades that did not occur.\173\ The Sponsor
states that it has analyzed 83 platforms using three tests, described
further below, and claims that, based on its analysis, the following
ten platforms have ``real'' volume--Binance, Bitfinex, Coinbase Pro,
Kraken, Bitstamp, bitFlyer, Gemini, itBit, Bittrex, and Poloniex.\174\
The Sponsor states that the average daily volume on these platforms for
April 2019 was $554,488,345.\175\ According to the Sponsor, these
results suggest that $10.5 billion of the $11 billion in reported
average daily spot bitcoin volume, or roughly 95% of all reported
volume, is fake volume or wash trading.\176\
---------------------------------------------------------------------------

    \172\ See Notice and OIP, supra note 7, 84 FR at 23129-30;
Bitwise Submission I, supra note 6, at 60; Bitwise Submission II,
supra note 9, at 34-35. The Sponsor states that the goal of its
research was to identify those platforms with a significant
prevalence of fake volume in a repeatable, data-driven manner. See
Bitwise Submission II, supra note 9, at 19.
    \173\ See Bitwise Submission II, supra note 9, at 19;
Registration Statement, supra note 31, at 3, 23-24. The Sponsor
describes transactions that are reported by a platform without
corresponding trading taking place as ``fraudulent prints.'' See
Bitwise Submission II, supra note 9, at 19.
    \174\ See Bitwise Submission II, supra note 9, at 34-35.
    \175\ See id. at 35.
    \176\ See id.
---------------------------------------------------------------------------

    The Sponsor represents that platforms inflate or exaggerate trade
volume in several ways, including by fraudulently

printing trades, engaging directly in wash trading on their own
platforms, and paying market makers to engage in wash trading.\177\ The
Sponsor further asserts that platforms have two powerful motives for
exaggerating volume--attracting trader attention by appearing higher on
data aggregators' league tables (i.e., rankings for trading platforms)
and attracting listings and attendant listing fees from initial coin
offerings.\178\ In addition to the Sponsor's efforts to distinguish
platforms with predominantly fake or non-economic trading from
platforms with ``real'' volume,\179\ the Sponsor provides other
evidence of fake or non-economic trading in the bitcoin market.\180\
---------------------------------------------------------------------------

    \177\ See id. at 36-37. The Sponsor also represents that
platforms economically incentivize trading activity by paying
traders to trade and offer lower fee tiers or preferential trading
to traders that attain high volumes of trade. See id. at 37. One
commenter states that proprietary trading is standard on most
platforms and makes up 20% of trading on some platforms. See Shenoy
Letter III, supra note 69, at 1.
    \178\ See Bitwise Submission II, supra note 9, at 37.
    \179\ See infra Section III.B.1(c).
    \180\ See Notice and OIP, supra note 7, 84 FR at 23129
(describing that, in connection with the Sponsor's initial analysis,
the Sponsor has identified several widespread, superficial
indicators of fake or non-economic trading volume, including
perfectly consistent, alternating buy and sell orders of roughly
equal size, relatively large reported spreads on platforms that
report large volumes, relatively small real-world footprints for
platforms with large reported volumes, multiple hours and days with
zero volume not correlated with factors such as business hours or
volatility, and roughly identical volume every hour of every day);
Bitwise Submission I, supra note 6, at 24-39 (comparing Coinbase
Pro, as a platform with a BitLicense that is generally well-known,
with platforms CoinBene, RightBTC, and CHAOEX, and describing
trading characteristics of the ``suspicious'' platform); Bitwise
Submission II, supra note 9, at 6-12 (asserting that the current
reported data on bitcoin trading volume is surprising and describing
the history of concerns around data reliability in the bitcoin
market).
---------------------------------------------------------------------------

    The Sponsor claims that the results of its analysis are consistent
with the findings from a previous similar study by the Sponsor using
data from an earlier time period that identified the same ten platforms
as having ``actual volume.'' \181\ The Sponsor asserts that after the
findings from its earlier study became public, it received extensive
media coverage and support from social media and thought leaders.\182\
According to the Sponsor, the results were also widely embraced by
leading data providers in the digital asset market, with several
displaying volume statistics based on the ten identified ``real''
platforms or admitting that concerns about reported data are ``valid''
and subsequently working to improve data transparency.\183\ The Sponsor
represents that nine of the platforms identified as having fake or non-
economic volume reported a drop in volume of over 90% after the
Sponsor's analysis became public.\184\ In addition, the Sponsor asserts
that data patterns on certain platforms rapidly shifted to match the
real-world patterns identified by the Sponsor.\185\ Further, the
Sponsor asserts that its findings are consistent with the ``common
institutional understanding'' of the actual market.\186\
---------------------------------------------------------------------------

    \181\ See Bitwise Submission I, supra note 6, at 60; Bitwise
Submission II, supra note 9, at 35. The earlier study focused on
data from March 4, 2019, through March 9, 2019, and the later study
focused on data from April 28, 2019, through May 5, 2019. See
Bitwise Submission II, supra note 9, at 19, 35. The Sponsor states
that the earlier study showed that the ``real'' average daily spot
bitcoin volume was $273 million, as compared to $6 billion in
reported volume, indicating that roughly 95% of the volume was fake.
See id. at 35. See also Notice and OIP, supra note 7, 84 FR at
23129-30; Bitwise Submission I, supra note 6, at 61. The Sponsor
further represents that, in the earlier study, it excluded South
Korean platforms from its analysis because they are an isolated
market due to capital controls and that one additional platform
passed all tests but was too small, with less than $1 million
average daily volume, to include as an identified ``real'' platform.
See Bitwise Submission I, supra note 6, at 60.
    \182\ See Bitwise Submission II, supra note 9, at 35-36. See
also Bitwise Submission VI, supra note 9, at 13.
    \183\ See Bitwise Submission II, supra note 9, at 103-104;
Bitwise Submission III, supra note 9, at 131. See also Bitwise
Submission VI, supra note 9, at 14 (asserting that coinmarketcap.com
confirmed that concerns raised in the report were ``valid'' and
launched an initiative to improve its metrics, two digital asset
data providers adopted the ten identified ``real'' platforms as
representing the market, and one digital asset data provider
launched transparency ratings that require verified data feeds for
platforms with volume claims).
    \184\ See Bitwise Submission VI, supra note 9, at 15 (comparing
average daily volume from March 2019 and August 2019). The Sponsor
also represents that only three of the 73 platforms that it named as
having fake or non-economic volume responded to the Sponsor's
research. See id. at 16.
    \185\ See id. at 18-21.
    \186\ Bitwise Submission I, supra note 6, at 70. The Sponsor
asserts that (1) every regulated digital asset product that has
launched has drawn prices entirely, or almost entirely, from a
subset of the ten ``real'' platforms; (2) the ten ``real'' platforms
dominated the list of thirteen platforms that the New York Attorney
General contacted as part of its Virtual Markets Integrity
Initiative; (3) the Blockchain Transparency Institute identified 56
platforms suspected of having fake volume, none of which are among
the ten ``real'' platforms; and (4) other media-level investigations
have reached similar conclusions. See id. at 70-71.
---------------------------------------------------------------------------

    Several commenters question the Sponsor's findings, which were made
public after its initial study.\187\ One commenter argues that the
Sponsor's analysis raises more questions than it answers and that, with
manipulation a prime issue, if 95% of the platforms are reporting fake
volume, then it is unwise to base an ETP on the remaining 5%.\188\
Another commenter asserts that articles about the Sponsor's initial
study on online media were not a coincidence because online media has a
financial interest in priming, or manipulating, the public to enhance
its image, to poach customers, or to drive sales through fear of
missing out on an investment.\189\ One commenter states that issues
about manipulation on the platforms, as discussed in articles about the
Sponsor's initial study, have not been satisfactorily resolved.\190\
---------------------------------------------------------------------------

    \187\ See Arssov Letter, supra note 6 (stating that he disputes
and disagrees with most of the statements and findings in the
Sponsor's initial analysis and that the Sponsor does not know what
market manipulation in digital assets looks like); Denscombe Letter,
supra note 6 (stating that the report is inaccurate, misleading, and
unfair).
    \188\ See C. Ross Letter, supra note 6. See also Buckley Letter,
supra note 6 (suggesting that the Sponsor is asking the Commission
to grant approval based on its word that, while 95% of the bitcoin
volume is manipulated, the other 5% is not).
    \189\ See Denscombe Letter, supra note 6.
    \190\ See Fitzgerald Letter I, supra note 6.
---------------------------------------------------------------------------

    The Sponsor describes that, to gather data for its analysis, it has
built its own data collection system using the live trading information
available on the bitcoin spot platforms' websites about the current
order book and recent trades.\191\ The Sponsor represents that its data
collection process scrapes data from these websites four times a
second, collecting price, trade size, and on-screen timestamp for
ongoing trades, and bid/ask price, order amount, and timestamp of
recording the data for order book entries.\192\ The Sponsor states that
it was common for the data collection process to break down, and that
it monitored its data collection process to stop problems with the data
scrapers and prepared fixes, but there were gaps in the data that it
has accounted for in the analytical phase.\193\ In addition, the
Sponsor states that it has acquired historical bitcoin trade data from
third parties for parts of the analysis that require a continuous
historical data set.\194\
---------------------------------------------------------------------------

    \191\ See Bitwise Submission II, supra note 9, at 14. The
Sponsor states that the inability to gather granular market data
from a comprehensive set of bitcoin platforms has made proving the
existence of fake volume on platforms difficult. See id. The Sponsor
asserts that it created and now maintains a website that captures
the ``real'' spot bitcoin trading volume on an ongoing basis. See
Bitwise Submission III, supra note 9, at 131.
    \192\ See Bitwise Submission II, supra note 9, at 16. See also
Notice and OIP, supra note 7, 84 FR at 23129 (describing a similar