Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change To List and Trade Shares of SolidX Bitcoin Shares Issued by the VanEck SolidX Bitcoin Trust Under BZX Rule 14.11(e)(4), Commodity-Based Trust Shares, 48665-48669 [2018-20884]
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Federal Register / Vol. 83, No. 187 / Wednesday, September 26, 2018 / Notices
For the Commission, by the Division of
Investment Management, pursuant to
delegated authority.
Eduardo A. Aleman,
Assistant Secretary.
whether to approve or disapprove the
proposed rule change.
[FR Doc. 2018–20956 Filed 9–25–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–84231; File No. SR–
CboeBZX–2018–040]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove a Proposed
Rule Change To List and Trade Shares
of SolidX Bitcoin Shares Issued by the
VanEck SolidX Bitcoin Trust Under
BZX Rule 14.11(e)(4), CommodityBased Trust Shares
September 20, 2018.
On June 20, 2018, Cboe BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’)1 and Rule
19b–4 thereunder,2 a proposed rule
change to list and trade shares of SolidX
Bitcoin Shares (‘‘Shares’’) issued by the
VanEck SolidX Bitcoin Trust (‘‘Trust’’)
under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares. The
proposed rule change was published for
comment in the Federal Register on July
2, 2018.3
On August 7, 2018, pursuant to
Section 19(b)(2) of the 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 As of September
19, 2018, the Commission has received
more than 1,400 comment letters on the
proposed rule change.6 This order
institutes proceedings under Section
19(b)(2)(B) of the Act 7 to determine
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 83520
(June 26, 2018), 83 FR 31014 (July 2, 2018)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 83792
(Aug. 7, 2018), 83 FR 40112 (Aug. 13, 2018). The
Commission designated September 30, 2018, as the
date by which it should approve, disapprove, or
institute proceedings to determine whether to
disapprove the proposed rule change.
6 All comments on the proposed rule change are
available on the Commission’s website at https://
www.sec.gov/comments/sr-cboebzx-2018-040/
cboebzx2018040.htm.
7 15 U.S.C. 78s(b)(2)(B).
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I. Summary of the Proposal 8
The Exchange proposes to list and
trade the Shares under BZX Rule
14.11(e)(4), which governs the listing
and trading of Commodity-Based Trust
Shares on the Exchange.9 Each Share
will represent a fractional undivided
beneficial interest in the Trust’s net
assets. SolidX Management LLC will be
the sponsor of the Trust (‘‘Sponsor’’).
The Trust will be responsible for
custody of the Trust’s bitcoin. The Bank
of New York Mellon will be the
Administrator, transfer agent, and the
custodian, with respect to cash, of the
Trust. Foreside Fund Services, LLC will
be the marketing agent in connection
with the creation and redemption of
baskets of Shares. Van Eck Securities
Corporation will provide assistance in
the marketing of the Shares.10
According to the Exchange, the
investment objective of the Trust is for
the Shares to reflect the performance of
the price of bitcoin, less the expenses of
the Trust’s operations. The Trust is not
actively managed and will not engage in
activities designed to obtain a profit
from, or to ameliorate losses caused by,
changes in the price of bitcoin.11 The
Administrator will generally use the
closing price set for bitcoin by the MVIS
Bitcoin OTC Index (‘‘MVBTCO’’) to
calculate the Fund’s NAV on each
business day that the Exchange is open
for regular trading, as promptly as
practicable after 4:00 p.m. E.T.12
8 The Commission notes that additional
information regarding the Trust and the Shares,
including investment strategies, calculation of net
asset value (‘‘NAV’’) and intra-day indicative value
(‘‘IIV’’), creation and redemption procedures, and
additional background information about bitcoins
and the Bitcoin network, among other things, can
be found in the Notice (see supra note 3) and the
registration statement filed with the Commission on
Form S–1 (File No. 333–212479) under the
Securities Act of 1933 (‘‘Registration Statement’’),
as applicable.
9 See BZX Rule 14.11(e)(4) (permitting the listing
and trading of ‘‘Commodity-Based Trust Shares,’’
defined as a security (a) that is used by a trust
which 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).
10 See Notice, supra note 3, at 31015.
11 See id. at 31015.
12 See id. at 31020. In the event that the Sponsor
determines that this valuation method has failed,
the Sponsor will determine the bitcoin market price
on the valuation date according to a set of
alternative methods to be used in the following
order: (a) The mid-point price of the bid/ask spread
as of 4:00 p.m. E.T. obtained by the Sponsor from
any bitcoin OTC platform that is part of the
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48665
According to the Exchange, the
MVBTCO represents the value of one
bitcoin in U.S. dollars at any point in
time. The Exchange represents that the
MVBTCO calculates the intra-day price
of bitcoin every 15 seconds and a
closing price as of 4:00 p.m. E.T., each
weekday and that the intra-day levels of
the MVBTCO incorporate the real-time
price of bitcoin based on executable
bids and asks derived from constituent
bitcoin over-the-counter (‘‘OTC’’)
platforms that have entered into an
agreement with MV Index Solutions
GmbH (‘‘MVIS’’) to provide such
information. According to the Exchange,
the intra-day price and closing level of
the MVBTCO is calculated using a
proprietary methodology collecting
executable bid/ask spreads and
calculating a mid-point price from
several U.S.-based bitcoin OTC
platforms. The Exchange represents that
bitcoin OTC platforms included in the
MVBTCO are U.S.-based entities that are
well established institutions and
include entities that are regulated by the
Commission and the Financial Industry
Regulatory Authority (‘‘FINRA’’) as
registered broker-dealers and affiliates
of broker-dealers. According to the
Exchange, the logic utilized for the
derivation of the intra-day and daily
closing index level for the MVBTCO is
intended to analyze actual executable
bid/ask spread data, verify and refine
the data set, and yield an objective, fairmarket value of one bitcoin priced in
U.S. dollars.13 The Trust’s website will
provide an IIV per Share updated every
15 seconds, as calculated by the
Exchange or a third party financial data
provider during the Exchange’s Regular
Trading Hours (9:30 a.m. to 4:00 p.m.
E.T.).14
The Exchange states that the Trust
intends to achieve its investment
objective by investing substantially all
of its assets in bitcoin traded primarily
in the OTC markets, but that the Trust
may also invest in bitcoin traded on
domestic and international bitcoin
exchanges, depending on liquidity and
other factors at the Trust’s discretion.15
MVBTCO index; (b) the volume-weighted average
price over the 24-hour period ending at 4:00 p.m.
E.T. as published by a public data feed that is
calculated based upon a volume-weighted average
bitcoin price obtained from the major U.S. dollardenominated bitcoin exchanges and that the
Sponsor determines is reasonably reliable; and (c)
the Sponsor’s best judgment of a good faith estimate
of the bitcoin market price. Greater detail
concerning the alternative pricing procedures if the
MVBTCO cannot be utilized as the basis for NAV
calculations can be found in the Notice. See id. at
31019–20.
13 See id. at 31017–18.
14 See id. at 31023.
15 See id. at 31015.
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According to the Exchange, while the
Trust expects to conduct its trading
primarily on the OTC platforms that
comprise the MVBTCO, the Trust also
maintains an internal proprietary
database, which it does not share with
anyone, of potential OTC bitcoin trading
counterparties, including hedge funds,
family offices, private wealth managers,
and high-net-worth individuals. The
Exchange represents that all such
potential counterparties will be subject
to the Trust’s anti-money laundering
(‘‘AML’’) and know your customer
(‘‘KYC’’) compliance procedures.
According to the Exchange, the Trust
will begin trading with such potential
OTC counterparties as their trading
capabilities become viable; the Trust
will also add additional potential
counterparties to its internal proprietary
database as it becomes aware of
additional market participants; and the
Trust will decide which OTC
counterparties it will trade with based
on its ability to fill orders at the best
available price among OTC market
participants.16 The Exchange represents
that the Trust will provide information
regarding the Trust’s bitcoin holdings as
well as additional data regarding the
Trust. According to the Exchange,
investors and market participants will
be able throughout the trading day to
compare the market price of the Shares
to the Shares’ IIV.17
According to the Exchange, the Trust
will issue and redeem ‘‘Baskets,’’ each
equal to a block of 5 Shares.18 The
creation and redemption of a Basket will
require the delivery to the Trust, or
distribution by the Trust, of the number
of whole and fractional bitcoins or the
U.S. dollar equivalent represented by
each Basket being created or redeemed.
Only ‘‘Authorized Participants’’ may
place orders to create and redeem
Baskets.19 According to the Exchange,
the Trust will not normally hold cash or
any other assets, but may hold a very
limited amount of cash in connection
with the creation and redemption of
Baskets and to pay the Trust’s
expenses.20
The Exchange represents that, in
addition to its security system, the Trust
will maintain comprehensive insurance
coverage underwritten by various
insurance carriers. The purpose of the
insurance is to protect investors against
loss or theft of the Trust’s bitcoin. The
Exchange represents that the insurance
16 See
id. at 31017.
id. at 31021.
id. According to the Exchange, as of the
date of the Registration Statement, each Share
represents approximately 25 bitcoins. See id.
19 See id.
20 See id. at 31015.
17 See
18 See
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will cover loss of bitcoin by, among
other things, theft, destruction, bitcoin
in transit, computer fraud, and other
loss of the private keys that are
necessary to access the bitcoin held by
the Trust, subject to certain terms,
conditions, and exclusions that are
discussed in the Registration Statement.
According to the Exchange, the
insurance policy will carry initial limits
of $25 million in primary coverage and
$100 million in excess coverage, with
the ability to increase coverage
depending on the value of the bitcoin
held by the Trust. According to the
Exchange, to the extent the value of the
Trust’s bitcoin holdings exceeds the
total $125,000,000 of insurance
coverage, the Sponsor has made
arrangements for additional insurance
coverage with the goal of maintaining
insurance coverage at a one-to-one ratio
with the Trust’s bitcoin holdings valued
in U.S. dollars, such that for every
dollar of bitcoin held by the Trust there
is an equal amount of insurance
coverage.21
According to the Exchange, the Trust
currently expects that there will be at
least 100 Shares outstanding at the time
of commencement of trading on the
Exchange, which the Exchange asserts
to be sufficient to provide adequate
market liquidity. The Exchange states
that BZX Rules 14.11(e)(4)(E)(ii)(b) and
(c) provide that the Exchange will
commence delisting proceedings for a
series of Commodity-Based Trust Shares
where the applicable trust has fewer
than 50,000 receipts or the market value
of all receipts issued and outstanding is
less than $1,000,000, respectively,
following the initial 12 month period
following commencement of trading on
the Exchange. The Exchange is
proposing that BZX Rule
14.11(e)(4)(E)(ii)(b) would not apply to
the Shares because the Exchange
believes that such policy concerns are
otherwise mitigated. According to the
Exchange, the lower number of Shares
is merely a function of price that will
have no impact on the creation and
redemption process and the arbitrage
mechanism, and the Exchange proposes
that it would not commence delisting
proceedings for the Shares if the Shares
do not satisfy BZX Rule
14.11(e)(4)(E)(ii)(b).22
According to the Exchange, the
Sponsor expects that the dissemination
of information on the Trust’s website,
along with quotations for and last-sale
prices of transactions in the Shares and
the IIV and NAV of the Trust, will help
to reduce the ability of market
21 See
22 See
PO 00000
id. at 31019.
id. at 31024.
Frm 00082
Fmt 4703
participants to manipulate the bitcoin
market or the price of the Shares, and
that the Trust’s arbitrage mechanism
will facilitate the correction of price
discrepancies between bitcoin and the
Shares. The Exchange states that the
Sponsor believes that demand from
new, larger investors accessing bitcoin
through investment in the Shares will
broaden the investor base in bitcoin,
which could further reduce the
possibility of collusion among market
participants to manipulate the bitcoin
market, and that the Sponsor expects
that the Shares will be purchased
primarily by institutional and other
substantial investors (such as hedge
funds, family offices, private wealth
managers, and high-net-worth
individuals), which will provide
additional liquidity and transparency to
the bitcoin market in a regulated vehicle
such as the Trust.23
The Exchange also asserts that the
policy concerns related to an underlying
reference asset and its susceptibility to
manipulation are mitigated as it relates
to bitcoin because the very nature of the
bitcoin ecosystem makes manipulation
of bitcoin difficult. The Exchange argues
that, particularly, in the OTC markets,
the dual elements of principal-toprincipal trading combined with the
large size at which trades are effected
should effectively eliminate the ability
of market participants to manipulate the
market with small trades as may be the
case on any individual exchange. The
Exchange further asserts that the OTC
desks that comprise the MVBTCO with
which the Trust intends to effect
transactions are well established
institutions that comply with AML and
KYC regulatory requirements with
respect to trading counterparties and
include entities that are regulated by the
Commission and FINRA as registered
broker-dealers and affiliates of brokerdealers. According to the Exchange, it is
the Sponsor’s position that the OTC
desks have a better measure of the
market than any exchange-specific
reference price, whether individually or
indexed across multiple exchanges.24
The Exchange argues that the
geographically diverse and continuous
nature of bitcoin trading makes it
difficult and prohibitively costly to
manipulate the price of bitcoin and that,
in many instances, the bitcoin market is
generally less susceptible to
manipulation than the equity, fixed
income, and commodity-futures
markets. The Exchange submits a
number of arguments for why this is the
case, asserting that there is no inside
23 See
24 See
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id. at 31018.
id. at 31025.
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information about revenue, earnings,
corporate activities, or sources of
supply; that it is generally not possible
to disseminate false or misleading
information about bitcoin in order to
manipulate; that manipulation of the
price on any single venue would require
manipulation of the global bitcoin price
in order to be effective; that a
substantial OTC market provides
liquidity and shock-absorbing capacity;
that bitcoin’s 24/7/365 nature provides
constant arbitrage opportunities across
all trading venues; and that it is unlikely
that any one actor could obtain a
dominant market share.25
Further, the Exchange asserts that
bitcoin is arguably less susceptible to
manipulation than other commodities
that underlie exchange-traded products
(‘‘ETPs’’) because there may be inside
information relating to the supply of the
physical commodity (such as the
discovery of new sources of supply or
significant disruptions at mining
facilities that supply the commodity)
that simply are inapplicable to bitcoin.
Further, the Exchange asserts that the
fragmentation across bitcoin platforms,
the relatively slow speed of
transactions, and the capital necessary
to maintain a significant presence on
each trading platform make
manipulation of bitcoin prices through
continuous trading activity unlikely.
Moreover, according to the Exchange,
the linkage between the bitcoin markets
and the presence of arbitrageurs in those
markets means that the manipulation of
the price of bitcoin on any single venue
would require manipulation of the
global bitcoin price in order to be
effective. The Exchange argues that
arbitrageurs must have funds distributed
across multiple trading platforms in
order to take advantage of temporary
price dislocations, thereby making it
unlikely that there will be strong
concentration of funds on any particular
bitcoin exchange or OTC platform. As a
result, asserts the Exchange, the
potential for manipulation on a trading
platform would require overcoming the
liquidity supply of such arbitrageurs
who are effectively eliminating any
cross-market pricing differences.26
The Exchange asserts that its
surveillance procedures are adequate to
properly monitor the trading of the
Shares on the Exchange during all
trading sessions and to deter and detect
violations of Exchange rules and the
applicable federal securities laws.
According to the Exchange, trading of
the Shares through the Exchange will be
subject to the Exchange’s surveillance
procedures for derivative products,
including Commodity-Based Trust
Shares. The Exchange further represents
that, pursuant to its obligations under
Section 19(g)(1) of the Act, the Exchange
will surveil for compliance with the
continued listing requirements and that,
if the Trust or the Shares are not in
compliance with the applicable listing
requirements, the Exchange will
commence delisting procedures under
BZX Rule 14.12.27
The Exchange represents that it may
obtain information regarding trading in
the Shares and listed bitcoin derivatives
via the Intermarket Surveillance Group
(‘‘ISG’’), from other exchanges who are
members or affiliates of the ISG, or with
which the Exchange has entered into a
comprehensive surveillance sharing
agreement. In addition, the Exchange
represents that it may obtain
information about bitcoin transactions,
trades, and market data from bitcoin
exchanges with which the Exchange has
entered into a comprehensive
surveillance sharing agreement as well
as certain additional information that is
publicly available through the Bitcoin
blockchain. The Exchange notes that it
has entered into a comprehensive
surveillance sharing agreement with the
Gemini Exchange.28
II. Proceedings To Determine Whether
To Approve or Disapprove SR–
CboeBZX–2018–040 and Grounds for
Disapproval Under Consideration
The Commission is instituting
proceedings pursuant to Section
19(b)(2)(B) of the Act 29 to determine
whether the proposed rule change
should be approved or disapproved.
Institution of such proceedings is
appropriate at this time in view of the
legal and policy issues raised by the
proposed rule change. Institution of
proceedings does not indicate that the
Commission has reached any
conclusions with respect to any of the
issues involved. Rather, as described
below, the Commission seeks and
encourages interested persons to
provide comments on the proposed rule
change.
Pursuant to Section 19(b)(2)(B) of the
Act,30 the Commission is providing
notice of the grounds for disapproval
under consideration. The Commission is
instituting proceedings to allow for
additional analysis of the proposed rule
change’s consistency with Section
6(b)(5) of the Act, which requires,
among other things, that the rules of a
27 See
id. at 31024–25.
id. at 31025.
29 15 U.S.C. 78s(b)(2)(B).
30 Id.
national securities exchange be
‘‘designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade,’’ and ‘‘to protect investors and the
public interest.’’ 31
The Commission asks that
commenters address the sufficiency of
the Exchange’s statements in support of
the proposal, which are set forth in the
Notice,32 in addition to any other
comments they may wish to submit
about the proposed rule change. In
particular, the Commission seeks
comment on the following:
1. What are commenters’ views of the
Exchange’s assertions that bitcoin is
arguably less susceptible to
manipulation than other commodities
that underlie ETPs; that the
geographically diverse and continuous
nature of bitcoin trading makes it
difficult and prohibitively costly to
manipulate the price of bitcoin; that
trading on inside information regarding
bitcoin is unlikely; that the
fragmentation across bitcoin markets,
the relatively slow speed of
transactions, and the capital necessary
to maintain a significant presence on
each trading platform make
manipulation of bitcoin prices through
continuous trading activity unlikely;
that manipulation of the price on any
single venue would require
manipulation of the global bitcoin price
to be effective; that a substantial OTC
bitcoin market provides liquidity and
shock-absorbing capacity; that bitcoin’s
‘‘24/7/365 nature’’ provides constant
arbitrage opportunities across all trading
venues; and that it is unlikely that any
one actor could obtain a dominant
market share?
2. What are commenters’ views on the
Sponsor’s assertion, described by the
Exchange in the Notice, that ‘‘the OTC
desks have a better measure of the
market than any exchange-specific
reference price, whether individually or
indexed across multiple exchanges’’?
What are commenters’ views on the
Exchange’s representation that, in the
OTC markets, the dual elements of
principal-to-principal trading combined
with the large size at which trades are
effected should effectively eliminate the
ability of market participants to
manipulate the market with small trades
as may be the case on any individual
exchange? What is the current typical
number and volume of transactions on
the OTC market? What are commenters’
views on whether the liquidity of the
OTC bitcoin market, which would be
used as the reference market for pricing
28 See
25 See
26 See
id.
id.
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19:21 Sep 25, 2018
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31 15
U.S.C. 78f(b)(5).
Notice, supra note 3.
32 See
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48667
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the proposed ETP’s holdings, is
sufficient for efficient bitcoin price
discovery? What are commenters’ views
on whether the liquidity of the OTC
bitcoin market is sufficient to support
efficient arbitrage between the price of
the Shares and the spot price of bitcoin?
What are the numbers of active traders,
market makers, and other liquidity
providers on the OTC bitcoin market?
To what extent is trading in the OTC
bitcoin market subject to regulation?
3. The Exchange asserts that the
dissemination of information on the
Trust’s website, along with quotations
for and last-sale prices of transactions in
the Shares and the IIV and NAV of the
Trust, will help to reduce the ability of
market participants to manipulate the
bitcoin market or the price of the Shares
and that the Trust’s arbitrage
mechanism will facilitate the correction
of price discrepancies in bitcoin and the
Shares. In addition, the Exchange
asserts that demand from new, larger
investors accessing bitcoin through
investment in the Shares will broaden
the investor base in bitcoin, which
could further reduce the possibility of
collusion among market participants to
manipulate the bitcoin market. The
Exchange further states that the
exploitation of arbitrage opportunities
by Authorized Participants and their
clients and customers will tend to cause
the public trading price to track NAV
per Share closely over time. What are
commenters’ views regarding these
statements? For example, do
commenters agree or disagree with the
assertion that Authorized Participants
and other market makers will be able to
engage in arbitrage and to make efficient
and liquid markets in the Shares at
prices generally in line with the NAV?
4. What are commenters’ views,
generally, on whether the proposed ETP
would be susceptible to manipulation?
5. What are commenters’ views on
whether and to what extent bitcoin
futures markets generally, and current
volume on those markets specifically,
affect the susceptibility of bitcoin to
manipulation? What are commenters’
views on whether and to what extent
other listed bitcoin derivatives, and the
current volume on the markets for those
derivatives, affect the susceptibility of
bitcoin to manipulation?
6. What are commenters’ views on the
Trust’s proposal to value its bitcoin
holdings based on an index—the
MVBTCO—that is calculated through a
proprietary, non-public methodology
that uses the privately reported bid/ask
spreads of an unidentified set of U.S.based market-makers in the OTC
marketplace, which, the Exchange says,
has no formal structure and no open-
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19:21 Sep 25, 2018
Jkt 244001
outcry meeting place? Is the use of a
non-public proprietary index to value
holdings based on OTC activity an
appropriate means to calculate the NAV
of an ETP? What are commenters’ views
on whether determining NAV based on
the index value at 4:00 p.m. E.T. might,
or might not, create an opportunity for
manipulation of the NAV or of the
Shares?
7. What are commenters’ views on the
statement in the Notice that, according
to the Sponsor, the MVBTCO’s
methodology decreases the influence on
the MVBTCO of any particular OTC
platform that diverges from the rest of
the data points used by the MVBTCO,
which reduces the possibility of an
attempt to manipulate the price of
bitcoin as reflected by the MVBTCO?
8. What are commenters’ views on
each of the set of alternative means by
which the Trust proposes to value its
holdings in the event that the Sponsor
determines that the MVBTCO, or
another alternate pricing mechanism,
has failed or is unavailable?
9. The Exchange represents that,
while the Trust intends to conduct the
majority of its trading in the OTC
market on the OTC platforms that
comprise the MVBTCO, the Trust also
will maintain an internal proprietary
database, which it will not share with
anyone, of potential OTC bitcoin trading
counterparties, including hedge funds,
family offices, private wealth managers,
and high-net-worth individuals. The
Exchange further states that OTC bitcoin
trading is typically private and not
regularly reported, and that the Trust
does not intend to report its OTC
trading. What are commenters’ views on
how the Trust’s unreported OTC trades
may affect the calculation of the Trust’s
NAV and the ability of market makers
to engage in arbitrage?
10. What are commenters’ views on
the relationship between trading in the
OTC bitcoin market and the wider
global bitcoin market? What are
commenters’ views on the
circumstances pursuant to which the
OTC bitcoin market may trade at a
premium or discount to the global
bitcoin market? What are commenters’
views on whether or not the OTC
bitcoin market would provide a measure
of insulation from erratic or dislocated
trading in the global bitcoin market?
11. What are commenters’ views on
the cost and the efficiency of arbitrage
across the various global markets for
bitcoin? What are commenters’ views
generally with respect to the liquidity
and transparency of the bitcoin market,
the bitcoin markets’ susceptibility to
manipulation, and thus the suitability of
PO 00000
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Fmt 4703
Sfmt 4703
bitcoin as an underlying asset for an
ETP?
12. What are commenters’ views on
the Exchange’s representation that the
Sponsor estimates that the U.S. dollar
OTC bitcoin trading volume globally
represents on average approximately
50% of the trading volume of bitcoin
traded globally in U.S. dollars on U.S.dollar-denominated bitcoin exchanges?
Is the volume of U.S. dollar trading of
bitcoin—which excludes bitcoin trading
against other sovereign currencies or
digital assets—a meaningful or
appropriate measure of bitcoin market
volume? Why or why not?
13. What are commenters’ views on
whether the Exchange has entered into
a surveillance-sharing agreement with a
regulated market of significant size
related to bitcoin? What are
commenters’ views on the current
regulation of bitcoin-related markets?
What are commenters’ views on
whether markets for listed bitcoin
derivatives—such as bitcoin futures
markets— are markets of significant
size? What are commenters’ views on
whether there is a reasonable likelihood
that a person attempting to manipulate
the proposed ETP would also have to
trade on a regulated bitcoin-related
market with which the Exchange has a
surveillance sharing agreement? What
are commenters’ views on whether
trading in the proposed ETP would be
the predominant influence on prices in
a regulated, bitcoin-related market with
which the Exchange has a surveillancesharing agreement?
14. The Exchange represents that it
has entered into a comprehensive
surveillance-sharing agreement with the
Gemini Exchange. What are
commenters’ views on whether the
Gemini Exchange is a market of
significant size? What are commenters’
views on whether there is a reasonable
likelihood that a person attempting to
manipulate the proposed ETP would
also have to trade on the Gemini
Exchange? What are commenters’ views
on whether trading in the proposed ETP
would be the predominant influence on
prices in the Gemini Exchange?
15. According to the Exchange, the
Shares will be purchased primarily by
institutional and other substantial
investors (such as hedge funds, family
offices, private wealth managers, and
high-net-worth individuals), which will
provide additional liquidity and
transparency to the bitcoin market in a
regulated vehicle such as the Trust. The
Exchange asserts that, with an estimated
initial per-share price equivalent to 25
bitcoins, the Shares will be costprohibitive for smaller retail investors
while allowing larger and generally
E:\FR\FM\26SEN1.SGM
26SEN1
daltland on DSKBBV9HB2PROD with NOTICES
Federal Register / Vol. 83, No. 187 / Wednesday, September 26, 2018 / Notices
more sophisticated institutional
investors to gain exposure to the price
of bitcoin through a regulated product,
eliminating the complications and
reducing the risk associated with buying
and holding bitcoin. What are
commenters’ views of the Exchange’s
assertions that transacting in the Shares
will be geared toward more
sophisticated institutional investors and
will be cost-prohibitive for smaller retail
investors? What are commenters’ views
regarding whether broker-dealers are
likely to offer fractional shares in the
Trust to retail investors, permitting
retail investment with a smaller
financial commitment? What are
commenters’ views of the Exchange’s
assertions that the Sponsor believes that
demand from new, larger investors
accessing bitcoin through investment in
the Shares will broaden the investor
base in bitcoin, which could further
reduce the possibility of collusion
among market participants to
manipulate the bitcoin market, in light
of the possibility that broker-dealers
may offer fractional shares to their
customers?
16. The Exchange represents that
there will be at least 100 Shares
outstanding at the time of
commencement of trading on the
Exchange and that this amount of
Shares outstanding at the
commencement of trading will be
sufficient to provide adequate market
liquidity. What are commenters’ views
on the Exchange’s assertion that a
minimum of 100 Shares outstanding at
the time of commencement of trading
will be sufficient to provide adequate
market liquidity? What are commenters’
views on whether the 100-share
minimum would affect the arbitrage
mechanism?
17. What are commenters’ views on
the Exchange’s assertion that, even
though the Trust would not comply
with the minimum number of shares
outstanding required by Exchange rules,
the policy concerns underlying that
requirement would be otherwise
mitigated in the case of the Trust,
because the lower number of Shares is
merely a function of the price of the
Shares and will have no effect on the
creation and redemption process or on
arbitrage?
18. The Exchange states that the Trust
will maintain crime, excess crime, and
excess vault risk insurance coverage
underwritten by various insurance
carriers that will cover the entirety of
the Trust’s bitcoin holdings. The
Exchange further states that, while the
Trust is confident in its system for
securing its bitcoin, insurance coverage
of all of the Trust’s bitcoin holdings
VerDate Sep<11>2014
19:21 Sep 25, 2018
Jkt 244001
eliminates exposure to the risk of loss to
investors through fraud or theft, which
in turn eliminates most of the custodial
issues associated with a series of
Commodity-Based Trust Shares based
on bitcoin. What are commenters’ views
of whether the proposed insurance
coverage would affect trading in the
Shares or in the underlying bitcoins?
What are commenters’ views regarding
the Trust’s proposed security, control,
and insurance measures?
III. Procedure: Request for Written
Comments
The Commission requests that
interested persons provide written
submissions of their views, data, and
arguments with respect to the issues
identified above, as well as any other
concerns they may have with the
proposal. In particular, the Commission
invites the written views of interested
persons concerning whether the
proposal is consistent with Section
6(b)(5) or any other provision of the Act,
and the rules and regulations
thereunder. Although there do not
appear to be any issues relevant to
approval or disapproval that would be
facilitated by an oral presentation of
views, data, and arguments, the
Commission will consider, pursuant to
Rule 19b-4, any request for an
opportunity to make an oral
presentation.33
Interested persons are invited to
submit written data, views, and
arguments regarding whether the
proposal should be approved or
disapproved by October 17, 2018. Any
person who wishes to file a rebuttal to
any other person’s submission must file
that rebuttal by October 31, 2018.
Comments may be submitted by any
of the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CboeBZX–2018–040 on the subject line.
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeBZX–2018–040. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeBZX–2018–040 and
should be submitted by October 17,
2018. Rebuttal comments should be
submitted by October 31, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Brent J. Fields,
Secretary.
[FR Doc. 2018–20884 Filed 9–25–18; 8:45 am]
BILLING CODE 8011–01–P
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
33 Section 19(b)(2) of the Act, as amended by the
Securities Act Amendments of 1975, Public Law
94–29 (June 4, 1975), grants the Commission
flexibility to determine what type of proceeding—
either oral or notice and opportunity for written
comments—is appropriate for consideration of a
particular proposal by a self-regulatory
organization. See Securities Act Amendments of
1975, Senate Comm. on Banking, Housing & Urban
Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 30
(1975).
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]]>Agencies
[Federal Register Volume 83, Number 187 (Wednesday, September 26, 2018)]
[Notices]
[Pages 48665-48669]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-20884]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84231; File No. SR-CboeBZX-2018-040]
Self-Regulatory Organizations; Cboe BZX Exchange, Inc.; Order
Instituting Proceedings To Determine Whether To Approve or Disapprove a
Proposed Rule Change To List and Trade Shares of SolidX Bitcoin Shares
Issued by the VanEck SolidX Bitcoin Trust Under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares
September 20, 2018.
On June 20, 2018, Cboe BZX Exchange, Inc. (``BZX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
list and trade shares of SolidX Bitcoin Shares (``Shares'') issued by
the VanEck SolidX Bitcoin Trust (``Trust'') under BZX Rule 14.11(e)(4),
Commodity-Based Trust Shares. The proposed rule change was published
for comment in the Federal Register on July 2, 2018.\3\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 83520 (June 26,
2018), 83 FR 31014 (July 2, 2018) (``Notice'').
---------------------------------------------------------------------------
On August 7, 2018, pursuant to Section 19(b)(2) of the 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\ As of September 19, 2018, the Commission has received more
than 1,400 comment letters on the proposed rule change.\6\ This order
institutes proceedings under Section 19(b)(2)(B) of the Act \7\ to
determine whether to approve or disapprove the proposed rule change.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78s(b)(2).
\5\ See Securities Exchange Act Release No. 83792 (Aug. 7,
2018), 83 FR 40112 (Aug. 13, 2018). The Commission designated
September 30, 2018, as the date by which it should approve,
disapprove, or institute proceedings to determine whether to
disapprove the proposed rule change.
\6\ All comments on the proposed rule change are available on
the Commission's website at https://www.sec.gov/comments/sr-cboebzx-2018-040/cboebzx2018040.htm.
\7\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
I. Summary of the Proposal \8\
---------------------------------------------------------------------------
\8\ The Commission notes that additional information regarding
the Trust and the Shares, including investment strategies,
calculation of net asset value (``NAV'') and intra-day indicative
value (``IIV''), creation and redemption procedures, and additional
background information about bitcoins and the Bitcoin network, among
other things, can be found in the Notice (see supra note 3) and the
registration statement filed with the Commission on Form S-1 (File
No. 333-212479) under the Securities Act of 1933 (``Registration
Statement''), as applicable.
---------------------------------------------------------------------------
The Exchange proposes to list and trade the Shares under BZX Rule
14.11(e)(4), which governs the listing and trading of Commodity-Based
Trust Shares on the Exchange.\9\ Each Share will represent a fractional
undivided beneficial interest in the Trust's net assets. SolidX
Management LLC will be the sponsor of the Trust (``Sponsor''). The
Trust will be responsible for custody of the Trust's bitcoin. The Bank
of New York Mellon will be the Administrator, transfer agent, and the
custodian, with respect to cash, of the Trust. Foreside Fund Services,
LLC will be the marketing agent in connection with the creation and
redemption of baskets of Shares. Van Eck Securities Corporation will
provide assistance in the marketing of the Shares.\10\
---------------------------------------------------------------------------
\9\ See BZX Rule 14.11(e)(4) (permitting the listing and trading
of ``Commodity-Based Trust Shares,'' defined as a security (a) that
is used by a trust which 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).
\10\ See Notice, supra note 3, at 31015.
---------------------------------------------------------------------------
According to the Exchange, the investment objective of the Trust is
for the Shares to reflect the performance of the price of bitcoin, less
the expenses of the Trust's operations. The Trust is not actively
managed and will not engage in activities designed to obtain a profit
from, or to ameliorate losses caused by, changes in the price of
bitcoin.\11\ The Administrator will generally use the closing price set
for bitcoin by the MVIS Bitcoin OTC Index (``MVBTCO'') to calculate the
Fund's NAV on each business day that the Exchange is open for regular
trading, as promptly as practicable after 4:00 p.m. E.T.\12\
---------------------------------------------------------------------------
\11\ See id. at 31015.
\12\ See id. at 31020. In the event that the Sponsor determines
that this valuation method has failed, the Sponsor will determine
the bitcoin market price on the valuation date according to a set of
alternative methods to be used in the following order: (a) The mid-
point price of the bid/ask spread as of 4:00 p.m. E.T. obtained by
the Sponsor from any bitcoin OTC platform that is part of the MVBTCO
index; (b) the volume-weighted average price over the 24-hour period
ending at 4:00 p.m. E.T. as published by a public data feed that is
calculated based upon a volume-weighted average bitcoin price
obtained from the major U.S. dollar-denominated bitcoin exchanges
and that the Sponsor determines is reasonably reliable; and (c) the
Sponsor's best judgment of a good faith estimate of the bitcoin
market price. Greater detail concerning the alternative pricing
procedures if the MVBTCO cannot be utilized as the basis for NAV
calculations can be found in the Notice. See id. at 31019-20.
---------------------------------------------------------------------------
According to the Exchange, the MVBTCO represents the value of one
bitcoin in U.S. dollars at any point in time. The Exchange represents
that the MVBTCO calculates the intra-day price of bitcoin every 15
seconds and a closing price as of 4:00 p.m. E.T., each weekday and that
the intra-day levels of the MVBTCO incorporate the real-time price of
bitcoin based on executable bids and asks derived from constituent
bitcoin over-the-counter (``OTC'') platforms that have entered into an
agreement with MV Index Solutions GmbH (``MVIS'') to provide such
information. According to the Exchange, the intra-day price and closing
level of the MVBTCO is calculated using a proprietary methodology
collecting executable bid/ask spreads and calculating a mid-point price
from several U.S.-based bitcoin OTC platforms. The Exchange represents
that bitcoin OTC platforms included in the MVBTCO are U.S.-based
entities that are well established institutions and include entities
that are regulated by the Commission and the Financial Industry
Regulatory Authority (``FINRA'') as registered broker-dealers and
affiliates of broker-dealers. According to the Exchange, the logic
utilized for the derivation of the intra-day and daily closing index
level for the MVBTCO is intended to analyze actual executable bid/ask
spread data, verify and refine the data set, and yield an objective,
fair-market value of one bitcoin priced in U.S. dollars.\13\ The
Trust's website will provide an IIV per Share updated every 15 seconds,
as calculated by the Exchange or a third party financial data provider
during the Exchange's Regular Trading Hours (9:30 a.m. to 4:00 p.m.
E.T.).\14\
---------------------------------------------------------------------------
\13\ See id. at 31017-18.
\14\ See id. at 31023.
---------------------------------------------------------------------------
The Exchange states that the Trust intends to achieve its
investment objective by investing substantially all of its assets in
bitcoin traded primarily in the OTC markets, but that the Trust may
also invest in bitcoin traded on domestic and international bitcoin
exchanges, depending on liquidity and other factors at the Trust's
discretion.\15\
[[Page 48666]]
According to the Exchange, while the Trust expects to conduct its
trading primarily on the OTC platforms that comprise the MVBTCO, the
Trust also maintains an internal proprietary database, which it does
not share with anyone, of potential OTC bitcoin trading counterparties,
including hedge funds, family offices, private wealth managers, and
high-net-worth individuals. The Exchange represents that all such
potential counterparties will be subject to the Trust's anti-money
laundering (``AML'') and know your customer (``KYC'') compliance
procedures. According to the Exchange, the Trust will begin trading
with such potential OTC counterparties as their trading capabilities
become viable; the Trust will also add additional potential
counterparties to its internal proprietary database as it becomes aware
of additional market participants; and the Trust will decide which OTC
counterparties it will trade with based on its ability to fill orders
at the best available price among OTC market participants.\16\ The
Exchange represents that the Trust will provide information regarding
the Trust's bitcoin holdings as well as additional data regarding the
Trust. According to the Exchange, investors and market participants
will be able throughout the trading day to compare the market price of
the Shares to the Shares' IIV.\17\
---------------------------------------------------------------------------
\15\ See id. at 31015.
\16\ See id. at 31017.
\17\ See id. at 31021.
---------------------------------------------------------------------------
According to the Exchange, the Trust will issue and redeem
``Baskets,'' each equal to a block of 5 Shares.\18\ The creation and
redemption of a Basket will require the delivery to the Trust, or
distribution by the Trust, of the number of whole and fractional
bitcoins or the U.S. dollar equivalent represented by each Basket being
created or redeemed. Only ``Authorized Participants'' may place orders
to create and redeem Baskets.\19\ According to the Exchange, the Trust
will not normally hold cash or any other assets, but may hold a very
limited amount of cash in connection with the creation and redemption
of Baskets and to pay the Trust's expenses.\20\
---------------------------------------------------------------------------
\18\ See id. According to the Exchange, as of the date of the
Registration Statement, each Share represents approximately 25
bitcoins. See id.
\19\ See id.
\20\ See id. at 31015.
---------------------------------------------------------------------------
The Exchange represents that, in addition to its security system,
the Trust will maintain comprehensive insurance coverage underwritten
by various insurance carriers. The purpose of the insurance is to
protect investors against loss or theft of the Trust's bitcoin. The
Exchange represents that the insurance will cover loss of bitcoin by,
among other things, theft, destruction, bitcoin in transit, computer
fraud, and other loss of the private keys that are necessary to access
the bitcoin held by the Trust, subject to certain terms, conditions,
and exclusions that are discussed in the Registration Statement.
According to the Exchange, the insurance policy will carry initial
limits of $25 million in primary coverage and $100 million in excess
coverage, with the ability to increase coverage depending on the value
of the bitcoin held by the Trust. According to the Exchange, to the
extent the value of the Trust's bitcoin holdings exceeds the total
$125,000,000 of insurance coverage, the Sponsor has made arrangements
for additional insurance coverage with the goal of maintaining
insurance coverage at a one-to-one ratio with the Trust's bitcoin
holdings valued in U.S. dollars, such that for every dollar of bitcoin
held by the Trust there is an equal amount of insurance coverage.\21\
---------------------------------------------------------------------------
\21\ See id. at 31019.
---------------------------------------------------------------------------
According to the Exchange, the Trust currently expects that there
will be at least 100 Shares outstanding at the time of commencement of
trading on the Exchange, which the Exchange asserts to be sufficient to
provide adequate market liquidity. The Exchange states that BZX Rules
14.11(e)(4)(E)(ii)(b) and (c) provide that the Exchange will commence
delisting proceedings for a series of Commodity-Based Trust Shares
where the applicable trust has fewer than 50,000 receipts or the market
value of all receipts issued and outstanding is less than $1,000,000,
respectively, following the initial 12 month period following
commencement of trading on the Exchange. The Exchange is proposing that
BZX Rule 14.11(e)(4)(E)(ii)(b) would not apply to the Shares because
the Exchange believes that such policy concerns are otherwise
mitigated. According to the Exchange, the lower number of Shares is
merely a function of price that will have no impact on the creation and
redemption process and the arbitrage mechanism, and the Exchange
proposes that it would not commence delisting proceedings for the
Shares if the Shares do not satisfy BZX Rule 14.11(e)(4)(E)(ii)(b).\22\
---------------------------------------------------------------------------
\22\ See id. at 31024.
---------------------------------------------------------------------------
According to the Exchange, the Sponsor expects that the
dissemination of information on the Trust's website, along with
quotations for and last-sale prices of transactions in the Shares and
the IIV and NAV of the Trust, will help to reduce the ability of market
participants to manipulate the bitcoin market or the price of the
Shares, and that the Trust's arbitrage mechanism will facilitate the
correction of price discrepancies between bitcoin and the Shares. The
Exchange states that the Sponsor believes that demand from new, larger
investors accessing bitcoin through investment in the Shares will
broaden the investor base in bitcoin, which could further reduce the
possibility of collusion among market participants to manipulate the
bitcoin market, and that the Sponsor expects that the Shares will be
purchased primarily by institutional and other substantial investors
(such as hedge funds, family offices, private wealth managers, and
high-net-worth individuals), which will provide additional liquidity
and transparency to the bitcoin market in a regulated vehicle such as
the Trust.\23\
---------------------------------------------------------------------------
\23\ See id. at 31018.
---------------------------------------------------------------------------
The Exchange also asserts that the policy concerns related to an
underlying reference asset and its susceptibility to manipulation are
mitigated as it relates to bitcoin because the very nature of the
bitcoin ecosystem makes manipulation of bitcoin difficult. The Exchange
argues that, particularly, in the OTC markets, the dual elements of
principal-to-principal trading combined with the large size at which
trades are effected should effectively eliminate the ability of market
participants to manipulate the market with small trades as may be the
case on any individual exchange. The Exchange further asserts that the
OTC desks that comprise the MVBTCO with which the Trust intends to
effect transactions are well established institutions that comply with
AML and KYC regulatory requirements with respect to trading
counterparties and include entities that are regulated by the
Commission and FINRA as registered broker-dealers and affiliates of
broker-dealers. According to the Exchange, it is the Sponsor's position
that the OTC desks have a better measure of the market than any
exchange-specific reference price, whether individually or indexed
across multiple exchanges.\24\
---------------------------------------------------------------------------
\24\ See id. at 31025.
---------------------------------------------------------------------------
The Exchange argues that the geographically diverse and continuous
nature of bitcoin trading makes it difficult and prohibitively costly
to manipulate the price of bitcoin and that, in many instances, the
bitcoin market is generally less susceptible to manipulation than the
equity, fixed income, and commodity-futures markets. The Exchange
submits a number of arguments for why this is the case, asserting that
there is no inside
[[Page 48667]]
information about revenue, earnings, corporate activities, or sources
of supply; that it is generally not possible to disseminate false or
misleading information about bitcoin in order to manipulate; that
manipulation of the price on any single venue would require
manipulation of the global bitcoin price in order to be effective; that
a substantial OTC market provides liquidity and shock-absorbing
capacity; that bitcoin's 24/7/365 nature provides constant arbitrage
opportunities across all trading venues; and that it is unlikely that
any one actor could obtain a dominant market share.\25\
---------------------------------------------------------------------------
\25\ See id.
---------------------------------------------------------------------------
Further, the Exchange asserts that bitcoin is arguably less
susceptible to manipulation than other commodities that underlie
exchange-traded products (``ETPs'') because there may be inside
information relating to the supply of the physical commodity (such as
the discovery of new sources of supply or significant disruptions at
mining facilities that supply the commodity) that simply are
inapplicable to bitcoin. Further, the Exchange asserts that the
fragmentation across bitcoin platforms, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin prices
through continuous trading activity unlikely. Moreover, according to
the Exchange, the linkage between the bitcoin markets and the presence
of arbitrageurs in those markets means that the manipulation of the
price of bitcoin on any single venue would require manipulation of the
global bitcoin price in order to be effective. The Exchange argues that
arbitrageurs must have funds distributed across multiple trading
platforms in order to take advantage of temporary price dislocations,
thereby making it unlikely that there will be strong concentration of
funds on any particular bitcoin exchange or OTC platform. As a result,
asserts the Exchange, the potential for manipulation on a trading
platform would require overcoming the liquidity supply of such
arbitrageurs who are effectively eliminating any cross-market pricing
differences.\26\
---------------------------------------------------------------------------
\26\ See id.
---------------------------------------------------------------------------
The Exchange asserts that its surveillance procedures are adequate
to properly monitor the trading of the Shares on the Exchange during
all trading sessions and to deter and detect violations of Exchange
rules and the applicable federal securities laws. According to the
Exchange, trading of the Shares through the Exchange will be subject to
the Exchange's surveillance procedures for derivative products,
including Commodity-Based Trust Shares. The Exchange further represents
that, pursuant to its obligations under Section 19(g)(1) of the Act,
the Exchange will surveil for compliance with the continued listing
requirements and that, if the Trust or the Shares are not in compliance
with the applicable listing requirements, the Exchange will commence
delisting procedures under BZX Rule 14.12.\27\
---------------------------------------------------------------------------
\27\ See id. at 31024-25.
---------------------------------------------------------------------------
The Exchange represents that it may obtain information regarding
trading in the Shares and listed bitcoin derivatives via the
Intermarket Surveillance Group (``ISG''), from other exchanges who are
members or affiliates of the ISG, or with which the Exchange has
entered into a comprehensive surveillance sharing agreement. In
addition, the Exchange represents that it may obtain information about
bitcoin transactions, trades, and market data from bitcoin exchanges
with which the Exchange has entered into a comprehensive surveillance
sharing agreement as well as certain additional information that is
publicly available through the Bitcoin blockchain. The Exchange notes
that it has entered into a comprehensive surveillance sharing agreement
with the Gemini Exchange.\28\
---------------------------------------------------------------------------
\28\ See id. at 31025.
---------------------------------------------------------------------------
II. Proceedings To Determine Whether To Approve or Disapprove SR-
CboeBZX-2018-040 and Grounds for Disapproval Under Consideration
The Commission is instituting proceedings pursuant to Section
19(b)(2)(B) of the Act \29\ to determine whether the proposed rule
change should be approved or disapproved. Institution of such
proceedings is appropriate at this time in view of the legal and policy
issues raised by the proposed rule change. Institution of proceedings
does not indicate that the Commission has reached any conclusions with
respect to any of the issues involved. Rather, as described below, the
Commission seeks and encourages interested persons to provide comments
on the proposed rule change.
---------------------------------------------------------------------------
\29\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------
Pursuant to Section 19(b)(2)(B) of the Act,\30\ the Commission is
providing notice of the grounds for disapproval under consideration.
The Commission is instituting proceedings to allow for additional
analysis of the proposed rule change's consistency with Section 6(b)(5)
of the Act, which requires, among other things, that the rules of a
national securities exchange be ``designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade,'' and ``to protect investors and the public
interest.'' \31\
---------------------------------------------------------------------------
\30\ Id.
\31\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission asks that commenters address the sufficiency of the
Exchange's statements in support of the proposal, which are set forth
in the Notice,\32\ in addition to any other comments they may wish to
submit about the proposed rule change. In particular, the Commission
seeks comment on the following:
---------------------------------------------------------------------------
\32\ See Notice, supra note 3.
---------------------------------------------------------------------------
1. What are commenters' views of the Exchange's assertions that
bitcoin is arguably less susceptible to manipulation than other
commodities that underlie ETPs; that the geographically diverse and
continuous nature of bitcoin trading makes it difficult and
prohibitively costly to manipulate the price of bitcoin; that trading
on inside information regarding bitcoin is unlikely; that the
fragmentation across bitcoin markets, the relatively slow speed of
transactions, and the capital necessary to maintain a significant
presence on each trading platform make manipulation of bitcoin prices
through continuous trading activity unlikely; that manipulation of the
price on any single venue would require manipulation of the global
bitcoin price to be effective; that a substantial OTC bitcoin market
provides liquidity and shock-absorbing capacity; that bitcoin's ``24/7/
365 nature'' provides constant arbitrage opportunities across all
trading venues; and that it is unlikely that any one actor could obtain
a dominant market share?
2. What are commenters' views on the Sponsor's assertion, described
by the Exchange in the Notice, that ``the OTC desks have a better
measure of the market than any exchange-specific reference price,
whether individually or indexed across multiple exchanges''? What are
commenters' views on the Exchange's representation that, in the OTC
markets, the dual elements of principal-to-principal trading combined
with the large size at which trades are effected should effectively
eliminate the ability of market participants to manipulate the market
with small trades as may be the case on any individual exchange? What
is the current typical number and volume of transactions on the OTC
market? What are commenters' views on whether the liquidity of the OTC
bitcoin market, which would be used as the reference market for pricing
[[Page 48668]]
the proposed ETP's holdings, is sufficient for efficient bitcoin price
discovery? What are commenters' views on whether the liquidity of the
OTC bitcoin market is sufficient to support efficient arbitrage between
the price of the Shares and the spot price of bitcoin? What are the
numbers of active traders, market makers, and other liquidity providers
on the OTC bitcoin market? To what extent is trading in the OTC bitcoin
market subject to regulation?
3. The Exchange asserts that the dissemination of information on
the Trust's website, along with quotations for and last-sale prices of
transactions in the Shares and the IIV and NAV of the Trust, will help
to reduce the ability of market participants to manipulate the bitcoin
market or the price of the Shares and that the Trust's arbitrage
mechanism will facilitate the correction of price discrepancies in
bitcoin and the Shares. In addition, the Exchange asserts that demand
from new, larger investors accessing bitcoin through investment in the
Shares will broaden the investor base in bitcoin, which could further
reduce the possibility of collusion among market participants to
manipulate the bitcoin market. The Exchange further states that the
exploitation of arbitrage opportunities by Authorized Participants and
their clients and customers will tend to cause the public trading price
to track NAV per Share closely over time. What are commenters' views
regarding these statements? For example, do commenters agree or
disagree with the assertion that Authorized Participants and other
market makers will be able to engage in arbitrage and to make efficient
and liquid markets in the Shares at prices generally in line with the
NAV?
4. What are commenters' views, generally, on whether the proposed
ETP would be susceptible to manipulation?
5. What are commenters' views on whether and to what extent bitcoin
futures markets generally, and current volume on those markets
specifically, affect the susceptibility of bitcoin to manipulation?
What are commenters' views on whether and to what extent other listed
bitcoin derivatives, and the current volume on the markets for those
derivatives, affect the susceptibility of bitcoin to manipulation?
6. What are commenters' views on the Trust's proposal to value its
bitcoin holdings based on an index--the MVBTCO--that is calculated
through a proprietary, non-public methodology that uses the privately
reported bid/ask spreads of an unidentified set of U.S.-based market-
makers in the OTC marketplace, which, the Exchange says, has no formal
structure and no open-outcry meeting place? Is the use of a non-public
proprietary index to value holdings based on OTC activity an
appropriate means to calculate the NAV of an ETP? What are commenters'
views on whether determining NAV based on the index value at 4:00 p.m.
E.T. might, or might not, create an opportunity for manipulation of the
NAV or of the Shares?
7. What are commenters' views on the statement in the Notice that,
according to the Sponsor, the MVBTCO's methodology decreases the
influence on the MVBTCO of any particular OTC platform that diverges
from the rest of the data points used by the MVBTCO, which reduces the
possibility of an attempt to manipulate the price of bitcoin as
reflected by the MVBTCO?
8. What are commenters' views on each of the set of alternative
means by which the Trust proposes to value its holdings in the event
that the Sponsor determines that the MVBTCO, or another alternate
pricing mechanism, has failed or is unavailable?
9. The Exchange represents that, while the Trust intends to conduct
the majority of its trading in the OTC market on the OTC platforms that
comprise the MVBTCO, the Trust also will maintain an internal
proprietary database, which it will not share with anyone, of potential
OTC bitcoin trading counterparties, including hedge funds, family
offices, private wealth managers, and high-net-worth individuals. The
Exchange further states that OTC bitcoin trading is typically private
and not regularly reported, and that the Trust does not intend to
report its OTC trading. What are commenters' views on how the Trust's
unreported OTC trades may affect the calculation of the Trust's NAV and
the ability of market makers to engage in arbitrage?
10. What are commenters' views on the relationship between trading
in the OTC bitcoin market and the wider global bitcoin market? What are
commenters' views on the circumstances pursuant to which the OTC
bitcoin market may trade at a premium or discount to the global bitcoin
market? What are commenters' views on whether or not the OTC bitcoin
market would provide a measure of insulation from erratic or dislocated
trading in the global bitcoin market?
11. What are commenters' views on the cost and the efficiency of
arbitrage across the various global markets for bitcoin? What are
commenters' views generally with respect to the liquidity and
transparency of the bitcoin market, the bitcoin markets' susceptibility
to manipulation, and thus the suitability of bitcoin as an underlying
asset for an ETP?
12. What are commenters' views on the Exchange's representation
that the Sponsor estimates that the U.S. dollar OTC bitcoin trading
volume globally represents on average approximately 50% of the trading
volume of bitcoin traded globally in U.S. dollars on U.S.-dollar-
denominated bitcoin exchanges? Is the volume of U.S. dollar trading of
bitcoin--which excludes bitcoin trading against other sovereign
currencies or digital assets--a meaningful or appropriate measure of
bitcoin market volume? Why or why not?
13. What are commenters' views on whether the Exchange has entered
into a surveillance-sharing agreement with a regulated market of
significant size related to bitcoin? What are commenters' views on the
current regulation of bitcoin-related markets? What are commenters'
views on whether markets for listed bitcoin derivatives--such as
bitcoin futures markets-- are markets of significant size? What are
commenters' views on whether there is a reasonable likelihood that a
person attempting to manipulate the proposed ETP would also have to
trade on a regulated bitcoin-related market with which the Exchange has
a surveillance sharing agreement? What are commenters' views on whether
trading in the proposed ETP would be the predominant influence on
prices in a regulated, bitcoin-related market with which the Exchange
has a surveillance-sharing agreement?
14. The Exchange represents that it has entered into a
comprehensive surveillance-sharing agreement with the Gemini Exchange.
What are commenters' views on whether the Gemini Exchange is a market
of significant size? What are commenters' views on whether there is a
reasonable likelihood that a person attempting to manipulate the
proposed ETP would also have to trade on the Gemini Exchange? What are
commenters' views on whether trading in the proposed ETP would be the
predominant influence on prices in the Gemini Exchange?
15. According to the Exchange, the Shares will be purchased
primarily by institutional and other substantial investors (such as
hedge funds, family offices, private wealth managers, and high-net-
worth individuals), which will provide additional liquidity and
transparency to the bitcoin market in a regulated vehicle such as the
Trust. The Exchange asserts that, with an estimated initial per-share
price equivalent to 25 bitcoins, the Shares will be cost-prohibitive
for smaller retail investors while allowing larger and generally
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more sophisticated institutional investors to gain exposure to the
price of bitcoin through a regulated product, eliminating the
complications and reducing the risk associated with buying and holding
bitcoin. What are commenters' views of the Exchange's assertions that
transacting in the Shares will be geared toward more sophisticated
institutional investors and will be cost-prohibitive for smaller retail
investors? What are commenters' views regarding whether broker-dealers
are likely to offer fractional shares in the Trust to retail investors,
permitting retail investment with a smaller financial commitment? What
are commenters' views of the Exchange's assertions that the Sponsor
believes that demand from new, larger investors accessing bitcoin
through investment in the Shares will broaden the investor base in
bitcoin, which could further reduce the possibility of collusion among
market participants to manipulate the bitcoin market, in light of the
possibility that broker-dealers may offer fractional shares to their
customers?
16. The Exchange represents that there will be at least 100 Shares
outstanding at the time of commencement of trading on the Exchange and
that this amount of Shares outstanding at the commencement of trading
will be sufficient to provide adequate market liquidity. What are
commenters' views on the Exchange's assertion that a minimum of 100
Shares outstanding at the time of commencement of trading will be
sufficient to provide adequate market liquidity? What are commenters'
views on whether the 100-share minimum would affect the arbitrage
mechanism?
17. What are commenters' views on the Exchange's assertion that,
even though the Trust would not comply with the minimum number of
shares outstanding required by Exchange rules, the policy concerns
underlying that requirement would be otherwise mitigated in the case of
the Trust, because the lower number of Shares is merely a function of
the price of the Shares and will have no effect on the creation and
redemption process or on arbitrage?
18. The Exchange states that the Trust will maintain crime, excess
crime, and excess vault risk insurance coverage underwritten by various
insurance carriers that will cover the entirety of the Trust's bitcoin
holdings. The Exchange further states that, while the Trust is
confident in its system for securing its bitcoin, insurance coverage of
all of the Trust's bitcoin holdings eliminates exposure to the risk of
loss to investors through fraud or theft, which in turn eliminates most
of the custodial issues associated with a series of Commodity-Based
Trust Shares based on bitcoin. What are commenters' views of whether
the proposed insurance coverage would affect trading in the Shares or
in the underlying bitcoins? What are commenters' views regarding the
Trust's proposed security, control, and insurance measures?
III. Procedure: Request for Written Comments
The Commission requests that interested persons provide written
submissions of their views, data, and arguments with respect to the
issues identified above, as well as any other concerns they may have
with the proposal. In particular, the Commission invites the written
views of interested persons concerning whether the proposal is
consistent with Section 6(b)(5) or any other provision of the Act, and
the rules and regulations thereunder. Although there do not appear to
be any issues relevant to approval or disapproval that would be
facilitated by an oral presentation of views, data, and arguments, the
Commission will consider, pursuant to Rule 19b-4, any request for an
opportunity to make an oral presentation.\33\
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\33\ Section 19(b)(2) of the Act, as amended by the Securities
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants the
Commission flexibility to determine what type of proceeding--either
oral or notice and opportunity for written comments--is appropriate
for consideration of a particular proposal by a self-regulatory
organization. See Securities Act Amendments of 1975, Senate Comm. on
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st
Sess. 30 (1975).
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Interested persons are invited to submit written data, views, and
arguments regarding whether the proposal should be approved or
disapproved by October 17, 2018. Any person who wishes to file a
rebuttal to any other person's submission must file that rebuttal by
October 31, 2018.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CboeBZX-2018-040 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CboeBZX-2018-040. This
file number should be included on the subject line if email is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-CboeBZX-2018-040 and should be submitted
by October 17, 2018. Rebuttal comments should be submitted by October
31, 2018.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(57).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-20884 Filed 9-25-18; 8:45 am]
BILLING CODE 8011-01-P
