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Federal Register / Vol. 86, No. 172 / Thursday, September 9, 2021 / Notices The table above unequivocally demonstrates that the Bitcoin Futures market has grown at an accelerating pace since the prior disapproval orders, likely as a result of the entry of institutional participants into both the Bitcoin Futures market and the spot bitcoin market e.g., Tesla, MicroStrategy, etc. have taken substantial bitcoin positions.
Accordingly, the Exchange maintains that because the Bitcoin Futures market has grown to resemble other futures markets, a lead-lag relationship that exists in other mature futures markets has also likely developed between the Bitcoin Futures market and the bitcoin spot market.36 Such a relationship is demonstrated through analytical models or other methods that show that the activities in one market cause the price formation on the other market, and there is an emerging consensus among academics that such a lead-lag relationship in fact exists.
Recent Statements by the Staff of the Commission The Staff of the Commissions Division of Investment Management recently issued its Staff Statement on Funds Registered under the Investment Company Act Investing in the Bitcoin Futures Market.37 In that statement, the Staff stated that mutual funds registered under the Investment Company Act of 1940 could invest in the Bitcoin Futures market so long as the fund had an appropriate investment strategy and its prospectus contained full disclosure of material risks. In reaching such a determination, the Staff noted that while previously the Bitcoin Futures market was in a nascent state with limited trading volume, the Bitcoin futures market has developed since then, with increased trading volumes and open-interest positions. In addition, the Bitcoin futures market consistently has produced a reportable price for Bitcoin futures. The Bitcoin futures market also has not presented the custody challenges associated with some cryptocurrency-based investing because the futures are cash-settled. 38
In support of this finding, the Staff cited to the same CME data cited above regarding trading volumes and openinterest.39 While the statement did not
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36 While
the Exchange believes that the size of the bitcoin futures market relative to the spot market has also grown, data on the global bitcoin exchanges is difficult to state with certainty.
37 See Staff Statement on Funds Registered Under the Investment Company Act Investing in the Bitcoin Futures Market May 11, 2021, available at https www.sec.gov/news/public-statement/staffstatement-investing-bitcoin-futures-market_ftnref5.
38 Id.
39 Id at n. 4.

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go so far as to reach a conclusion that the Bitcoin Futures market is a significant market or market of significant size related to bitcoin in the context of the requirements of Exchange Act Section 6b5, the Staffs own observations regarding the maturity of the Bitcoin Futures market is strong evidence that concerns previously raised regarding price manipulation in that market have been significantly reduced.
Third-Party Research In the most recent denial order, the Commission found that academic evidence on whether a lead-lag relationship between the Bitcoin Futures market and spot market was mixed and could not conclude based on that research that a would-be manipulator of a proposed ETP would transact on the CME Bitcoin Futures market.40 The Commission critiqued the choices made by the authors of such research regarding time period, futures contracts, spot market platforms, spot market prices, and analytic methodologies. The Exchange notes that the studies cited in that denial order generally analyzed data sets covering the first several years of the Bitcoin Futures markets existence and therefore may not be indicative of current market behavior. While scholarship stating the price discovery takes place in the bitcoin spot market continues to be produced,41 the majority of the academic literature, including more recent studies with more recent data sets, supports the proposition that price discovery does take place in the Bitcoin Futures market and therefore a lead-lag relationship exists between the spot and futures markets.
In What Role do Futures Markets Play in Bitcoin Pricing? Causality, Cointegration and Price Discovery from a Time-Varying Perspective?,42 the authors investigated the existence of causal relationships, cointegration and price discovery between bitcoin spot 40 See
Wilshire Phoenix Order at 1261213.
e.g., Jui-Cheng Hung, Hung-Chun Liu, and J. Jimmy Yang, Trading Activity and Price Discovery in Bitcoin Futures Markets March 2021. The Exchange maintains that the vector error correction model and the modified information shares model used in this study are inferior to the Granger and Hasbrouck models used in other studies for determining price-discovery over longer periods. Even so, the authors of this study find that Bitcoin futures contracts launched by the CME
exhibit superior competitiveness in the price discovery relative to those by CBOE.
42 Yang Hu, Yang Greg Hou and Les Oxley, International Review of Financial Analysis 72
September 2020. The Exchange notes that while the Commission has reviewed a working draft of this study in a previous denial order, the study has since been peer-reviewed and published.
41 See,
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and futures markets from December 2017 to June/July 2019 from a timevarying perspective. The studys authors applied both a time-varying Granger causality approach and Hasbrouck information share approach to explore the causal relationship between bitcoin spot and futures markets.43 As the authors explain therein, the timevarying approach taken for this study is an important distinction from other studies that have reached an opposite conclusion, as it is now well known in econometrics literature that some possible cointegration relationships may be missed if the underlying model formulation is constrained to be time invariant.44 This study, like others before it, reached the conclusion that the CME futures market, apart from some short-period exceptions, appears to dominate the underlying spot market under both a Granger and Hasbrouck analysis.
In Fractional Cointegration in Bitcoin Spot and Futures Markets, the authors concluded that, with the exception of the extraordinary market events in early months of the Covid-19
pandemic period, the futures market dominates in the price discovery for bitcoin. 45 The dataset reviewed in that analysis involved 1-min intraday data of bitcoin spot and futures prices in the US
dollar from December 18, 2017 to July 31, 2020. Unlike other research previously reviewed by the Commission that used Granger and/or Hasbrouck analysis to determine price formation, the authors of this study used a fractionally cointegrated vector autoregressive model FCVAR to determine which of the spot and futures price contributes more to price discovery. According to the study, the FCVAR model is more general than the CVAR model and less restricted when analyzing the relationship between different variables in that it allows for fractional values for the order of cointegration, whereas a CVAR model allows only integers. The study found that while studies using a nonfractional CVAR model significantly overestimate the price discovery of the futures market, the FCVAR model still 43 Id at 3. According to the study, Granger causality is widely used to formally test for leadlag relationships temporal ordering to determine which market the spot or the futures prices leads the other. The time-varying procedures employed in assessing the Granger causality allowed the study to determine whether the causal relationship varies over the time studied.
44 Id at 2.
45 Jinhong Wu et al., Fractional Cointegration in Bitcoin Spot and Futures Markets, Journal of Futures Markets, 117 April 2021.

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