# 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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2019-22486

## Record

- **Collection:** Federal Register
- **Document type:** Notice
- **Published:** October 16, 2019
- **Citation:** 84 FR 55382

## Text

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

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.

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

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.

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

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).

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

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.

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

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.

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

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.

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

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.

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

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).

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

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.

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

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).

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

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).

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 data collection process in connection with the Sponsor's earlier analysis); Bitwise Submission I,
supra
note 6, at 41.

193

See
Bitwise Submission II,
supra
note 9, at 18. According to the Sponsor, the data collection process would break if the html structure of the web page being scraped changed in any meaningful way, which was a common occurrence.
See id.

194

See id.

Several commenters raise concerns about the Sponsor's data collection methods. One commenter claims that accessing data through trading

platforms' websites is more appropriate for illustration than research because these websites are not updated in real time, or even within a quarter of a second, and therefore this collection method can access only a fraction of the trades.
195

Another commenter asserts that it is plausible that a group of bad of actors have used trading bots to manipulate the data on the other platforms to secure approval of an ETP.
196

This commenter also states that it has concerns about the data presented, because a single organization conducted the study, the methodology and data source are unclear, and the traffic data are only collected from a single source.
197

A third commenter questions whether the data used to identify the platforms reporting fake volume are reliable.
198

195

See
Arssov Letter,
supra
note 6.

196

See
Denscombe Letter,
supra
note 6.

197

See id.

198

See
C. Ross Letter,
supra
note 6.

The Sponsor states that it has selected the platforms to analyze by creating a list of 83 platforms that represent the top bitcoin trading pairs on
coinmarketcap.com
as of December 5, 2018.
199

The Sponsor adds that it has considered all trading pairs where bitcoin is the base currency, or where the quote currency is either a fiat currency or a stablecoin.
200

Further, the Sponsor argues that, while new platforms with astronomical volumes have appeared every week on
coinmarketcap.com
, leading the list of platforms representing the top bitcoin trading pairs to become stale quickly, that list is sufficiently consistent that the core analysis remains relevant.
201

199

See
Bitwise Submission II,
supra
note 9, at 15. With respect to the Sponsor's earlier analysis, the Sponsor represents that it has generated a list of 81 platforms to analyze at that time by looking at all platforms reporting more than $1 million in average daily volume for bitcoin-fiat and bitcoin-stablecoin pairs to
coinmarketcap.com
on December 5, 2018.
See
Notice and OIP,
supra
note 7, 84 FR at 23129; Bitwise Submission I,
supra
note 6, at 41.

200

See
Bitwise Submission II,
supra
note 9, at 15.

201

See id.
at 18.

With respect to the bitcoin over-the-counter (“OTC”) market, the Sponsor claims that its “[c]onversations with leading market makers” suggest that very little bitcoin OTC volume is crossed internally and that most volume is settled on the spot platforms.
202

The Sponsor asserts that any incremental volume in the OTC or dark pool market is not a significant fraction of the global spot market for bitcoin, and that counting these trades separately would mostly lead to double counting.
203

202

See
Bitwise Submission III,
supra
note 9, at 133.

203

See id.
In this context, the term “dark pool” is used as described in the registration statement for the Winklevoss Bitcoin Trust, which described “dark pools” as bitcoin trading platforms that do not publicly report limit order book data.
See
Winklevoss Bitcoin Trust, Form S-1/A (File No. 333-189752), at 62.

Several commenters question the Sponsor's selection of certain bitcoin platforms for its analysis, to the exclusion of other platforms and the OTC market. One commenter argues that the Sponsor selectively analyzed data, excluding many factors.
204

This commenter states that the Sponsor excluded platforms from South Korea on the basis of capital controls, but included platforms from China and Hong Kong

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2019-22486. Public record. Not legal advice.