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Federal Register / Vol. 86, No. 149 / Friday, August 6, 2021 / Notices
jbell on DSKJLSW7X2PROD with NOTICES

filed a Form 10 registration statement, which the Staff of the Commission reviewed and which took effect automatically, and is now a reporting company.32 Established companies like Tesla, Inc.,33 MicroStrategy Incorporated,34 and Square, Inc.,35
among others, have recently announced substantial investments in bitcoin in amounts as large as $1.5 billion Tesla and $425 million MicroStrategy.
Suffice to say, bitcoin is on its way to gaining mainstream usage.
Despite these developments, access for U.S. retail investors to gain exposure to bitcoin via a transparent and regulated exchange-traded vehicle remains limited. As investors and advisors increasingly utilize ETPs to manage diversified portfolios including equities, fixed income securities, commodities, and currencies quickly, easily, relatively inexpensively, and without having to hold directly any of the underlying assets, options for bitcoin exposure for U.S. investors remain limited to: i Investing in overthe-counter bitcoin funds OTC Bitcoin Funds that are subject to high premium/discount volatility and high management fees to the advantage of more sophisticated investors that are able to create and potentially redeem shares at net asset value NAV
directly with the issuing trust; ii facing the technical risk, complexity and generally high fees associated with buying spot bitcoin; or iii purchasing shares of operating companies that they believe will provide proxy exposure to bitcoin with limited disclosure about the associated risks. Meanwhile, investors in many other countries, including Canada,36 are able to use more 32 See Letter from Division of Corporation Finance, Office of Real Estate & Construction to Barry E. Silbert, Chief Executive Officer, Grayscale Bitcoin Trust January 31, 2020 https
www.sec.gov/Archives/edgar/data/1588489/
000000000020000953/filename1.pdf.
33 See Form 10K submitted by Tesla, Inc. for the fiscal year ended December 31, 2020 at 23: https
www.sec.gov/ix?doc=/Archives/edgar/data/
1318605/000156459021004599/tsla-10k_
20201231.htm.
34 See Form 10Q submitted by MicroStrategy Incorporated for the quarterly period ended September 30, 2020 at 8: https www.sec.gov/
ix?doc=/Archives/edgar/data/1050446/
000156459020047995/mstr-10q_20200930.htm.
35 See Form 10Q submitted by Square, Inc. for the quarterly period ended September 30, 2020 at 51: https www.sec.gov/ix?doc=/Archives/edgar/
data/1512673/000151267320000012/sq20200930.htm.
36 The Exchange notes that the Purpose Bitcoin ETF, a retail physical bitcoin ETP recently launched in Canada, reportedly reached $421.8 million in assets under management AUM in two days, demonstrating the demand for a North American market listed bitcoin exchange-traded product ETP. The Purpose Bitcoin ETF also offers a class of units that is U.S. dollar denominated, which
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traditional exchange listed and traded products to gain exposure to bitcoin, disadvantaging U.S. investors and leaving them with riskier and more expensive means of getting bitcoin exposure.37
OTC Bitcoin Funds and Investor Protection Over the past year, U.S. investor exposure to bitcoin through OTC
Bitcoin Funds has grown into the tens of billions of dollars. With that growth, so too has grown the potential risk to U.S. investors. As described below, premium and discount volatility, high fees, insufficient disclosures, and technical hurdles are putting U.S.
investor money at risk on a daily basis that could potentially be eliminated through access to a bitcoin ETP. The Exchange understands the Commissions previous focus on potential manipulation of a bitcoin ETP
in prior disapproval orders, but now believes that such concerns have been sufficiently mitigated and that the growing and quantifiable investor protection concerns should be the central consideration as the Commission reviews this proposal. As such, the Exchange believes that approving this proposal and comparable proposals submitted hereafter provides the Commission with the opportunity to allow U.S. investors with access to bitcoin in a regulated and transparent exchange-traded vehicle that would act to limit risk to U.S. investors by: i Reducing premium and discount volatility; ii reducing management fees through meaningful competition; iii reducing risks associated with investing in operating companies that are imperfect proxies for bitcoin exposure;
and iv providing an alternative to custodying spot bitcoin.
i OTC Bitcoin Funds and Premium/
Discount Volatility OTC Bitcoin Funds are generally designed to provide exposure to bitcoin could appeal to U.S. investors. Without an approved bitcoin ETP in the U.S. as a viable alternative, U.S. investors could seek to purchase these shares in order to get access to bitcoin exposure. Given the separate regulatory regime and the potential difficulties associated with any international litigation, such an arrangement would create more risk exposure for U.S. investors than they would otherwise have with a U.S. exchange listed ETP.
37 The Exchange notes that securities regulators in a number of other countries have either approved or otherwise allowed the listing and trading of bitcoin ETPs. Specifically, these funds include the Purpose Bitcoin ETF, Bitcoin ETF, VanEck Vectors Bitcoin ETN, WisdomTree Bitcoin ETP, Bitcoin Tracker One, BTCetc bitcoin ETP, Amun Bitcoin ETP, Amun Bitcoin Suisse ETP, 21Shares Short Bitcoin ETP, and CoinShares Physical Bitcoin ETP.

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in a manner similar to the Shares.
However, unlike the Shares, OTC
Bitcoin Funds are unable to freely offer creation and redemption in a way that incentivizes market participants to keep their shares trading in line with their NAV 38 and, as such, frequently trade at a price that is out of line with the value of their assets held. Historically, OTC
Bitcoin Funds have traded at a significant premium to NAV.39
Trading at a premium or a discount is not unique to OTC Bitcoin Funds and is not in itself problematic, but the size of such premiums/discounts and volatility thereof highlight the key differences in operations and market structure of OTC
Bitcoin Funds as compared to ETPs.
This, combined with the significant increase in AUM for OTC Bitcoin Funds over the past year, has given rise to significant and quantifiable investor protection issues, as further described below. In fact, the largest OTC Bitcoin Fund has grown to $38.3 billion in AUM 40 and has historically traded at a premium of between roughly five and 40%, though it has seen premiums at times above 100%.41 Recently, however, it has traded at a discount. As of June 18, 2021, the discount was approximately 11%, representing around $4.1 billion in market value less than the bitcoin actually held by the fund. If premium/discount numbers 38 Because OTC Bitcoin Funds are not listed on an exchange, they are also not subject to the same transparency and regulatory oversight by a listing exchange as the Shares would be. In the case of the Trust, the existence of a surveillance-sharing agreement between the Exchange and the Bitcoin Futures market results in increased investor protections compared to OTC Bitcoin Funds.
39 The inability to trade in line with NAV may at some point result in OTC Bitcoin Funds trading at a discount to their NAV, which has occurred more recently with respect to one prominent OTC Bitcoin Fund. While that has not historically been the case, and it is not clear whether such discounts will continue, such a prolonged, significant discount scenario would give rise to nearly identical potential issues related to trading at a premium as described below.
40 As of March 31, 2021. See Form 10Q
submitted by on behalf of the Grayscale Bitcoin Trust for the quarterly period ended March 31, 2021
at 4: https grayscale.com/wp-content/uploads/
sites/3/2021/05/gbtc_q1-2021_10q_as-filed.pdf.
Compare to an AUM of approximately $2.6 billion on February 26, 2020, the date on which the Commission issued the most recent disapproval order for a bitcoin ETP. See Securities Exchange Act Release No. 88284 February 26, 2020, 85 FR 12595
March 3, 2020 SRNYSEArca201939 the Wilshire Phoenix Disapproval. While the price of one bitcoin has increased approximately 400%
in the intervening period, the total AUM has increased by approximately 1240%, indicating that the increase in AUM was created beyond just price appreciation in bitcoin.
41 See Traders Piling Into Overvalued Crypto Funds Risk a Painful Exit February 4, 2021
available at: https www.bloomberg.com/news/
articles/2021-02-04/bitcoin-one-big-risk-wheninvesting-in-crypto-funds.

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