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Federal Register / Vol. 86, No. 160 / Monday, August 23, 2021 / Notices
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pension funds,30 and even historically bitcoin skeptical fund managers 31 are allocating to bitcoin. The largest overthe-counter bitcoin fund previously 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 25, 2021 available at: https www.bloomberg.com/
news/articles/2021-01-26/harvard-and-yaleendowments-among-those-reportedly-buyingcrypto.
30 See e.g., Virginia Police Department Reveals Why its Pension Fund is Betting on Bitcoin February 14, 2019 available at: https
finance.yahoo.com/news/virginia-policedepartment-reveals-why-194558505.html.
31 See e.g., Bridgewater: Our Thoughts on Bitcoin January 28, 2021 available at: https
www.bridgewater.com/research-and-insights/ourthoughts-on-bitcoin and Paul Tudor Jones says he likes bitcoin even more now, rally still in the first inning October 22, 2020 available at: https
www.cnbc.com/2020/10/22/-paul-tudor-jones-sayshe-likes-bitcoin-even-more-now-rally-still-in-thefirst-inning.html.
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.

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able to create and 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 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 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 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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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 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 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
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