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Federal Register / Vol. 86, No. 160 / Monday, August 23, 2021 / Notices
significant and prolonged premiums and discounts with its open-ended nature as well as the ability of market participants i.e., market makers and authorized participants to create and redeem on a daily basis.
The Exchange also believes that this proposal is consistent with the requirements of Section 6b5 of the Act and that it has sufficiently demonstrated that, on the whole, the manipulation concerns previously articulated by the Commission are sufficiently mitigated to the point that they are outweighed by quantifiable investor protection issues that would be resolved by approving this proposal.
Specifically, the Exchange believes that the significant increase in trading volume in Bitcoin Futures, the growth of liquidity at the inside in the spot market for bitcoin, and certain features of the Shares mitigate potential manipulation concerns to the point that the investor protection issues that have arisen from the rapid growth of overthe-counter bitcoin funds since the Commission last reviewed an exchange proposal to list and trade a bitcoin ETP, including premium/discount volatility and management fees, should be the central consideration as the Commission determines whether to approve this proposal.

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i Designed To Prevent Fraudulent and Manipulative Acts and Practices In order to meet this standard in a proposal to list and trade a series of Commodity-Based Trust Shares, the Commission requires that an exchange demonstrate that there is a comprehensive surveillance-sharing agreement in place 72 with a regulated 72 As previously articulated by the Commission, The standard requires such surveillance-sharing agreements since they provide a necessary deterrent to manipulation because they facilitate the availability of information needed to fully investigate a manipulation if it were to occur. The Commission has emphasized that it is essential for an exchange listing a derivative securities product to enter into a surveillance-sharing agreement with markets trading underlying securities for the listing exchange to have the ability to obtain information necessary to detect, investigate, and deter fraud and market manipulation, as well as violations of exchange rules and applicable federal securities laws and rules. The hallmarks of a surveillancesharing agreement are that the agreement provides for the sharing of information about market trading activity, clearing activity, and customer identity;
that the parties to the agreement have reasonable ability to obtain access to and produce requested information; and that no existing rules, laws, or practices would impede one party to the agreement from obtaining this information from, or producing it to, the other party. The Commission has historically held that joint membership in ISG
constitutes such a surveillance sharing agreement.
See Wilshire Phoenix Disapproval. The Exchange also notes that it has surveillance sharing agreements in place with several spot bitcoin exchanges.

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market of significant size. Both the Exchange and CME are members of ISG.73 The only remaining issue to be addressed is whether the Bitcoin Futures market constitutes a market of significant size, which the Exchange believes that it does. 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 manipulate the ETP, so that a surveillance-sharing agreement would assist the listing exchange 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.74
The Commission has also recognized that the regulated market of significant size standard is not the only means for satisfying Section 6b5 of the act, specifically providing that a listing exchange could demonstrate that other means to prevent fraudulent and manipulative acts and practices are sufficient to justify dispensing with the requisite surveillance-sharing agreement.75
a Manipulation of the ETP
The significant growth in Bitcoin Futures across each of trading volumes, open interest, large open interest holders, and total market participants since the Wilshire Phoenix Disapproval was issued are reflective of that markets growing influence on the spot price, which according to the academic research cited above, was already leading the spot price in 2018 and 2019.
Where Bitcoin Futures lead the price in the spot market such that a potential manipulator of the bitcoin spot market would have to participate in the Bitcoin Futures market, it follows that a potential manipulator of the Shares would similarly have to transact in the Bitcoin Futures market because the NAV is based on the price of bitcoin on the principal market, which identified market must be an active market with orderly transactions. Further, the Trust only allows for in-kind creation and redemption, which, as further described 73 For a list of the current members and affiliate members of ISG, see www.isgportal.com.
74 See Wilshire Phoenix Disapproval.
75 See Winklevoss Order at 37580. The Commission has also specifically noted that it is not applying a cannot be manipulated standard;
instead, the Commission is examining whether the proposal meets the requirements of the Exchange Act and, pursuant to its Rules of Practice, places the burden on the listing exchange to demonstrate the validity of its contentions and to establish that the requirements of the Exchange Act have been met.
Id. at 37582.

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above, reduces the potential for manipulation of the Shares through manipulation of the Trusts methodology for calculating NAV or any of its individual constituents, again emphasizing that a potential manipulator of the Shares would have to manipulate the entirety of the bitcoin spot market, which is led by the Bitcoin Futures market. As such, the Exchange believes that part a of the significant market test outlined above is satisfied and that common membership in ISG
between the Exchange and CME would assist the listing exchange in detecting and deterring misconduct in the Shares.
b Predominant Influence on Prices in Spot and Bitcoin Futures The Exchange also believes that trading in the Shares would not be the predominant force on prices in the Bitcoin Futures market or spot market for a number of reasons, including the significant volume in the Bitcoin Futures market, the size of bitcoins market cap approximately $1 trillion, and the significant liquidity available in the spot market. In addition to the Bitcoin Futures market data points cited above, the spot market for bitcoin is also very liquid. According to data from CoinRoutes from February 2021, the cost to buy or sell $5 million worth of bitcoin averages roughly 10 basis points with a market impact of 30 basis points.76 For a $10 million market order, the cost to buy or sell is roughly 20 basis points with a market impact of 50 basis points. Stated another way, a market participant could enter a market buy or sell order for $10 million of bitcoin and only move the market 0.5%. More strategic purchases or sales such as using limit orders and executing through OTC bitcoin trade desks would likely have less obvious impact on the marketwhich is consistent with MicroStrategy, Tesla, and Square being able to collectively purchase billions of dollars in bitcoin. As such, the combination of Bitcoin Futures leading price discovery, the overall size of the bitcoin market, and the ability for market participants, including authorized participants creating and redeeming in-kind with the Trust, to buy or sell large amounts of bitcoin without significant market impact will help prevent the Shares from becoming the predominant force on pricing in either the bitcoin spot or Bitcoin 76 These statistics are based on samples of bitcoin liquidity in USD excluding stablecoins or Euro liquidity based on executable quotes on Coinbase Pro, Gemini, Bitstamp, Kraken, LMAX Exchange, BinanceUS, and OKCoin during February 2021.

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