Subject: SR-NYSEArca-2021-90
From: Jay Lineberry
Affiliation:

Feb. 15, 2022

 

Ms.  Vanessa Countryman 
Secretary 
Securities and Exchange Commission 
100 F Street NE Washington, D.C. 20549-0609 
 
RE: Notice of Filing of Proposed Rule Change to List and  Trade Shares of Grayscale Bitcoin Trust (BTC) under NYSE  Arca Rule 8.201-E 
File No.: SR-NYSEArca-2021-90 
Release No.: 34-93504 
 
Dear Ms. Countryman:
Introduction
I write in support of the proposal by NYSE Arca, Inc. (“Arca”) pursuant to Rule 19b-4 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to list shares of Grayscale Bitcoin Trust (“GBTC”) under NYSE Arca Rule 8.201-E as an exchange-traded product (“ETP”). My goal in this letter is to provide additional context for the Securities and Exchange Commission (the “Commission”) in reviewing Arca’s proposal, as I believe that the Commission should allow retail investors access to a spot Bitcoin ETP.
About Me
A little bit about myself.  I am a self-employed entrepreneur.  I am not a professional trader or money manager, but a hobbiest at best.  The majority of my family’s savings is in a self managed IRA custodial by Charles Schwab .  When I learned of Bitcoin and it’s superior value to the dollar, I naturally inquired about holding it in my IRA.  I was disappointed to find out that I could not hold this digital asset in my account.  Thus, I did the next best thing.  I moved the majority of my savings into GBTC since it was as close as I could get to an ETF. 
Statement in Support of  Arca’s Proposal
I believe investors should have access to GBTC in an ETP format because it offers a tried and tested way for retail investors to gain exposure to Bitcoin at prices that closely reflect spot Bitcoin trading prices without holding it themselves. Shares of GBTC are currently offered to accredited investors within the meaning of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”). Once such investors have held their shares for the requisite holding period pursuant to Rule 144 under the Securities Act, they have the ability to resell them through transactions on the OTCQX Best Market (“OTCQX”), an over-the-counter marketplace operated by OTC Markets Group (“OTCMG”) that is not registered with the Commission as a national securities exchange, but is operated through OTCMG’s alternative trading system, OTC 1 Link® ATS. GBTC shares are more broadly available through broker transactions and are held in more than 600,000 retail and institutional brokerage accounts in all 50 states. In fact, in 2019, it 2 was reported that GBTC was the fifth largest holding in millennial retirement accounts, ahead of companies like Berkshire Hathaway,  Walt Disney, and Microsoft.
Until recently, GBTC was the only product that retail investors could use to access Bitcoin through a traditional brokerage account. However, despite GBTC’s appeal and wide availability, it is not yet eligible to offer continuous share redemptions and creations, which is the mechanism ETPs employ to align share trading prices with underlying asset prices. As a result, GBTC shares can trade at premiums or discounts to its net-asset value (i.e., the value of the Bitcoin it holds). Such premiums and discounts can be dramatic: GBTC has traded over-the-counter at a premium to its net-asset value that has ranged as high as 142% and a discount to its net-asset value of 21%. If Arca’s proposal is approved, GBTC will be able to use the ETP mechanics that 4 minimize the variations between its share trading prices and the net-asset value (“NAV”) of its Bitcoin holdings, and as a result, U.S. retail investors will be able to gain access to the Bitcoin market through the familiar ETP structure and at trading prices that stay more closely aligned with spot Bitcoin trading prices. The Commission’s acceptance of a product that reduces 5 significant discrepancies between trading market prices and the NAV is in the public interest and advances one part of the Commission’s mission, protection of investors.
Arca’s proposal addresses the risks of fraud and manipulation
The Commission’s recent approval of the listing and trading of ETPs that hold Bitcoin futures contracts signifies a significant development in the Bitcoin ETP market space. We believe that the approval of a futures-based ETP, consistent with requirements of Section 6(b)(5) of the Exchange Act, should allow for the Commission to approve Arca’s proposal because, among other things, both products ultimately rely on Bitcoin’s underlying price in the spot markets. Section 6(b)(5), 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.” As noted above, because a futures-based ETP and spot Bitcoin ETP are both reliant on Bitcoin’s underlying price, I believe ETPs that invest in Bitcoin futures contracts present substantially similar risk of manipulation as a spot Bitcoin ETP. Moreover, Arca’s proposal notes that although “Bitcoin is not itself inherently resistant to fraud and manipulation, the Index represents an effective means to prevent fraudulent and manipulative acts and practices.” As a 6 result, the Commission’s approval of a Bitcoin futures ETP leads me to believe that as a matter of public interest and protection of investors, the Commission was able to get comfortable that the underlying Bitcoin market is resistant to manipulation or at least that the Bitcoin market is subject to sufficient oversight by Commodities Futures Trading Commission (“CFTC”) such that any manipulation would be addressed by the CFTC. For these same reasons, I believe that the Commission’s concern with respect to fraud and manipulation have been adequately addressed for purposes of Arca’s proposal. Moreover, and as research shows, introduction of an ETP with a robust create and redeem arbitrage process can improve the price efficiency of an underlying asset, and thus further increase the resilience of Bitcoin trading in the spot market. As noted in 7 Arca’s proposal, trading in the shares of GBTC will be subject to the existing trading surveillance administered by Arca, as well as cross-market surveillance administered by FINRA on behalf of Arca, which are designed to detect violations of exchange rules and applicable federal securities laws. Accordingly, Arca believes that these procedures are adequate to properly-monitor exchange trading of the GBTC shares in all trading sessions and to deter and detect violations of exchange rules and federal securities laws applicable to trading on the exchange.
Spot  Bitcoin  ETPs  should  not  be  treated  differently  than  futures-based  ETPs
Section 6(b)(5) forbids exchanges from maintaining rules that unfairly discriminate between issuers. We are of the view that a rejection of Arca’s proposal would be in direct conflict with Section 6(b)(5) of the Exchange Act. As noted in Arca’s proposal, the reference rate used to price Bitcoin contracts underlying futures-based ETPs is subject to the same pricing quality risks as the index used to price spot Bitcoin and calculate net-asset value in spot ETPs. According to 8 Arca, both products would pull data from largely-overlapping or identical trading platforms. However, while the Commission has concluded that Bitcoin futures ETPs use pricing data that is sufficiently protected from fraud and manipulation, to date, it has been unwilling to reach the same conclusion with respect to a spot ETP. As conveyed below, the Commission’s resistance to 9 making such a conclusion with respect to a spot ETP does not appear warranted by public interest and investor protection policy considerations. We are of the view that spot Bitcoin ETPs should be subject to the same regulatory standards as applied to futures-based ETPs. We submit that if the Commission, however, applies a standard for a futures contract Bitcoin ETP that is different from the standard applied to a spot Bitcoin ETP, such disparate treatment may undermine confidence in the Commission as a neutral administrator, a consequence that may stifle innovation in our securities markets. The Commission’s three-part mission of: protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation, is best served when the Commission makes clear to the market that it welcomes innovation and that it will not impose unnecessary regulatory obstacles on market participants innovating within the Commission’s regulatory framework. The Commission, however, will not satisfy its mission if it adopts standards that compel market participants to access innovative products anywhere but within markets under the Commission’s purview. Furthermore, the Commission would not promote fair, orderly, or efficient markets if 10 for reasons not grounded in its mission it prevents market participants from bringing products to market that reflect their expertise and knowledge. Finally, the Commission fulfills its mission when it treats similar products consistently and advances competition. Today, when market participants compare the Commission’s evaluation and approval of a futures-based Bitcoin ETP to its treatment of spot ETP proposals, they will see a lack of well-defined criteria and inconsistent application of the criteria. The lack of consistency in evaluating two competing products that are based on the same underlying market will not only deter future developments in the Bitcoin marketplace, but may result in lack of innovation in other areas subject to the Commission’s oversight. Market participants should not be left guessing about what criteria the Commission will employ when reviewing a specific product, nor should market participants be left in the dark with respect to what evidence is necessary to gather and present to the Commission when seeking approval for a novel product. This lack of consistency seems to me, unfair and is without policy justification.
The Commission’s mission does not include merit regulation
In assessing Arca’s proposal, I believe that the Commission’s role is not to evaluate the characteristics and quality of the underlying Bitcoin market but instead to evaluate the ETP, and the role that Arca would play in monitoring trading in shares of the ETP. For the reasons outlined above, and in Arca’s proposal, I believe that a spot Bitcoin ETP satisfies the criteria set out by the Commission in approving a futures-based ETP. We are further of the view that the Commission should look to Arca to establish the necessary protocols to protect investors and the public interest. We are of the view that Arca would exercise the responsibilities entrusted to it as a self-regulatory organization consistent with FINRA supervision. In exercising these responsibilities, Arca has powerful regulatory and business incentives to ensure the integrity of the products that it lists for trading on the exchange. Nothing in Arca’s proposal suggests that Arca is unwilling or unable to fulfill its responsibilities under the Exchange Act. Furthermore, as a regulated exchange, Arca is subject to the Commission’s regulatory oversight. As a result, I believe that Arca would play a critical role in the required regulatory oversight of GBTC and in doing so would satisfy the criteria set out in Section 6(b)(5) of the Exchange Act. In addition to Arca, the Commission should rely on the CFTC to exercise its traditional fraud authority to ensure the underlying bitcoin market is free of manipulation. As a result, just like with respect to a futures-based ETP, these safeguards should satisfy the Commission in its approval of Arca’s proposal. We believe that a disapproval of Arca’s proposal would lead to the Commission picking winners based on its preferential treatment of one product over another.
Conclusion
I appreciate the Commission’s attention to this important matter and for allowing me an opportunity to present my views.



Jay Lineberry 



References 
1 BTC 2020 Annual Report at 3, 66; see also Fast Answers, National Securities Exchanges, SEC (July 14, 2021), https://www.sec.gov/fastanswers/divisionsmarketregmrexchangesshtml.html (last visited Nov. 25, 2021) (not listing OTCQX on list  of  registered  national  securities  exchanges). 
2 Broadridge  Financial  Solutions,  Inc.  share  range  analysis  conducted  by  Grayscale  for  GBTC,  finding approximately  630,000  account  holders  as  of  September  30,  2021,  as  cited  in  the  Letter  from  Congressmen  Tom Emmer  and  Darren  Soto  to  Chair  Gensler  (Nov.  3,  2021) https://emmer.house.gov/_cache/files/b/6/b6170d87-c56c-40a3-960a-60a619c02b65/63C9D652A62FF6119A2D0B1 17D655732.congressional-letter-tosec-on-bitcoin-etfs.pdf;  see  also  SDBA  Indicators  Q3  2021  Report  4,  Charles Schwab  (Sept.  30,  2021),  https://workplacefinancialservices.schwab.com/resource/sdba-indicators-q3-2021-report. 
3 “Schwab  Report:  Self-Directed  401(k)  Balances  Hold  Steady;  Millennials  Allocate  More  to  ETFs  and  Cash  Than Gen  X,  Boomers,”  Dec.  4,  2019,” https://www.bloomberg.com/press-releases/2019-12-04/schwab-report-self-directed-401-k-balances-hold-steady-mil lennials-allocate-more-to-etfs-and-cash-than-gen-x-boomers  (last  visited  Dec.  14,  2021). 
4 See Grayscale Bitcoin Trust, Quarterly Report for the Quarter Ended Oct. 31, 2021 (Form 10-Q), at 19-20 (Nov. 5, 2021). 
5 The  authorized  participant  (“AP”)  can  easily  arbitrage  any  discrepancies  between  the  ETP’s  market  value  and  the NAV during  the  course  of  the  trading  day.  If  the  market  value  is  too  high  in  comparison  to  the  NAV  based  on underlying  spot  market  prices,  the  AP  can  step  in  and  buy  the  ETP’s  Bitcoin  while  simultaneously  selling  ETP shares.  Such  arbitrage  activity  helps  reduce  the  discrepancies  between  the  market  value  and  the  NAV  during  the course  of  the  trading  day. 
6 Notice  of  Filing  of  Proposed  Rule  Change  to  List  and  Trade  Shares  of  Grayscale  Bitcoin  Trust  (BTC)  under  NYSE Arca  Rule  8.201-E,  Securities  and  Exchange  Act  Release  93504  (Nov.  2,  2021),  86  Fed.  Reg.  61,804,  61,805  at  45 (Nov.  8,  2021)  (SR-NYSEArca-2021-90). 
7 Glosten,  Lawrence  R.  and  Nallareddy,  Suresh  and  Zou,  Yuan,  ETF Activity  and  Informational  Efficiency  of Underlying  Securities  (December  1,  2016),  Columbia  Business  School  Research  Paper  No.  16-71, available at SSRN: https://ssrn.com/abstract=2846157 or http://dx.doi.org/10.2139/ssrn.2846157. 
8 Arca’s  proposal  notes  that  ETPs  that  hold  Bitcoin  futures  would  be  priced  by  referencing  the  CME  CF  Bitcoin Reference  Rate  (“BRR”),  which  itself  references  the  Digital  Asset  Markets:  Bitstamp,  Coinbase,  Gemini,  itBit,  and Kraken.    Similarly,  Bitcoin-based  ETPs,  would  be  “priced  by  referencing  Digital  Asset  Markets  included  in  the BRR,  such  as  through  the  Index.    As  a  result,  the  Sponsor  believes  that  any  potential  fraud  or  manipulation  in  the underlying  Digital  Asset  Market  would  impact  both  types  of  ETP  proposals.” 
9 See  Order  Disapproving  a  Proposed  Rule  Change  to  List  and  Trade  Shares  of  the  VanEck  Bitcoin  Trust  under  BZX Rule  14.11(e)(4),  Commodity-Based  Trust  Shares,  Securities  Exchange  Act  Release  No.  93559  (Nov.  12,  2021),  86 Fed.  Reg.  64,539  (Nov.  18,  2021)  (SR–CboeBZX–2021–019). 
10 See,  e.g.,  Zhiyuan  Sun,  Fidelity  Canada  officially  launches  Bitcoin  ETF  and  Bitcoin  Mutual  Fund,  Cointelegraph (December  2,  2021), https://cointelegraph.com/news/fidelity-canada-officially-launches-bitcoin-etf-and-bitcoin-mutual-fund. 
11 The Commission appears to signal that it is currently comfortable with an ETP registered under the Investment Company Act of 1940, as amended (“Investment Company Act”) because it believes that the Investment Company Act provides additional investor protections. See, Gary Gensler, Chair, SEC, Remarks Before the Aspen Security Forum,  SEC  (Aug.  3,  2021),  https://www.sec.gov/news/public-statement/gensler-aspensecurityforum-2021-08-03. We, however, are of the view that in this instance, the Investment Company Act would not afford additional protections to investors in an ETP registered under the Investment Company Act versus an ETP registered under the Securities Act. The reason for this view is because both products ultimately look to the underlying Bitcoin market and the Investment Company Act is not designed to address market manipulation and fraud  in  the  underlying  Bitcoin  market.